SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ending September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to _______
Commission file number 1-4719
---------------------
THE DELTONA CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-0997584
- -------------------------------------------------------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
999 Brickell Avenue, Suite 700, Miami, Florida 33131
- -------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (305) 579-0999
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [__]
Indicate the number of shares outstanding of the issuer's classes of common
stock, as of the latest practicable date: 6,734,572 shares of common stock, $1
par value, excluding treasury stock, as of September 30, 1996.
<PAGE>
PART I FINANCIAL INFORMATION
============================
ITEM 1. FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
-----------------------------------------------
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
----------------------------------------
($000 Omitted)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Cash and temporary cash investments,
including escrow deposits and restricted
cash of $981 in 1996 and $855 in 1995........... $ 1,024 $ 982
---------- ---------
Contracts receivable for land sales - net........ 6,855 5,602
---------- ---------
Mortgages and other receivables - net............ 260 413
---------- ---------
Inventories (b):
Land and land improvements...................... 10,392 11,131
Other........................................... 101 104
---------- ---------
Total inventories......................... 10,493 11,235
---------- ---------
Property, plant, and equipment at cost - net..... 469 510
---------- ---------
Prepaid expenses and other....................... 356 438
---------- ---------
Total..................................... $ 19,457 $ 19,180
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Mortgages and similar debt(c):
Mortgage notes payable.......................... $ 18,629 $ 16,717
Other loans .................................... 3,661 3,661
---------- ---------
Total mortgages and similar debt.............. 22,290 20,378
Accounts payable, accrued expenses,
customers' deposits............................. 6,681 5,701
Allowance for Marco permit costs (d)............. -0- 1,349
Deferred revenue................................. 7,897 8,765
---------- ---------
Total liabilities........................... 36,868 36,192
---------- ---------
Commitments and contingencies (d):
Stockholders' equity (deficiency):
Common stock, $1 par value -
authorized 15,000,000 shares;
outstanding: 1996 and 1995 -
6,734,572 shares and 6,719,244
shares (excluding 12,228 shares held
in treasury in 1996 and 1995).................. 6,735 6,719
Capital surplus................................. 44,714 44,699
Accumulated deficit............................. (68,860) (68,431)
---------- ----------
Total stockholders' (deficiency)............ (17,411) (17,013)
---------- ----------
Total.................................. $ 19,457 $ 19,180
========== ==========
</TABLE>
2
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
---------------------------------------------------------
FOR THE PERIODS INDICATED
-------------------------
($000 Omitted Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended Ended
------------------- -------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues (a):
Net land sales.................. $ 3,526 $ 1,423 $ 1,405 $ 436
House and apartment sales....... 875 1,251 267 253
Recognized improvement
revenue/ prior period
sales.......................... 874 933 227 162
Interest income................. 1,083 655 546 232
Other revenues.................. 518 706 162 135
------- -------- --------- ---------
Total....................... 6,876 4,968 2,607 1,218
------- -------- --------- ---------
Costs and expenses (a):
Cost of sales and
improvements.................... 2,076 1,985 725 420
Selling, general and
administrative and other
expenses........................ 4,244 3,539 1,580 1,130
Interest expense (c)(e).......... 1,316 1,217 453 411
------- -------- --------- ---------
Total........................ 7,636 6,741 2,758 1,961
------- -------- --------- ---------
Loss from operations before
extraordinary item............... (760) (1,773) (151) (743)
Extraordinary Item:
Gain on settlement related
to the Marco refund
obligation...................... 331 702 331 -0-
------- -------- --------- ---------
Net Income (Loss)................. $ (429) $ (1,071) $ 180 $ (743)
======= ======== ========= =========
Earning (Loss) per share:
From operations.................. $ (.11) $ (.26) $ (.02)$ (.11)
Extraordinary item............... .05 .10 .05 -0-
------- -------- --------- ---------
Net Income (Loss)................. $ (.06) $ (.16) $ .03 $ (.11)
======= ======== ========= =========
Number of common and common
equivalent shares................ 6,728,157 6,693,341 6,732,341 6,699,344
========= ========= ========= =========
<FN>
No dividends have been paid on Common Stock.
Results of operations for the first nine months may not be indicative of results
which may be expected for the full year.
See Notes to Unaudited Condensed Consolidated Financial Statements.
See Management's Analysis of Quarterly Statements of Operations included herein.
Certain amounts have been reclassified for comparative purposes.
</FN>
</TABLE>
3
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
-----------------------------------------
($000 Omitted)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
Sept. 30, Sept. 30,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities.............. $ (1,871) $ (3,045)
--------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment................................... 5 29
Payment for acquisition and construction
of property plant and equipment................. (5) (35)
--------- --------
Net cash provided by (used in) investing
activities....................................... -0- (6)
--------- --------
Cash flows from financing activities:
New borrowings.................................. 1,918 1,942
Repayment of borrowings......................... (6) (5)
--------- --------
Net cash provided by (used in) financing
activities....................................... 1,912 1,937
--------- --------
Net increase (decrease) in cash and
temporary cash investments (including
escrow deposits and restricted cash)............. 41 (1,114)
Cash and temporary cash investments at
December 31, 1995 and December 31, 1994.......... 982 2,440
--------- --------
Cash and temporary cash investments at
September 30,1996 and September 30, 1995......... $ 1,023 $ 1,326
========= ========
Supplemental disclosure of non cash
investing and financing activities:
Common Stock issued for Marco Settlement.......... $ 31 $ 71
========= ========
Interest and debt reduction in exchange
for Land and Property Plant and Equipment....... $ -0- $ 2,599
========= ========
<FN>
See Notes to Unaudited Condensed Consolidated Financial Statements.
Certain amounts have been reclassified for comparative purposes.
</FN>
</TABLE>
4
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
-----------------------------------------
($000 Omitted)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
Sept. 30, Sept. 30,
1996 1995
--------- ---------
<S> <C> <C>
Reconciliation of net income (loss)
to net cash provided by (used in)
operating activities:
Net loss.......................................... $ (429) $ (1,071)
--------- --------
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization..................... 40 46
Provision for estimated uncollectible sales-net... 1,394 532
Contract valuation discount, net of amortization.. 249 74
Net Gain on sale of property, plant &
equipment....................................... (5) (29)
Gain on settlement related to the Marco refund
obligation..................................... (331) (702)
Net change in assets and liabilities.............. (2,789) (1,895)
--------- --------
Total adjustments.............................. $ (1,442) $ (1,974)
--------- --------
Net cash provided by (used in) operating
activities..................................... $ (1,871) $ (3,045)
========= ========
</TABLE>
5
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------
SEPTEMBER 30, 1996
------------------
(a) SIGNIFICANT ACCOUNTING POLICIES
The condensed unaudited financial statements of the Company have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to Commission rules and regulations. The
information furnished reflects, in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for
a fair statement of the results for the interim periods presented. These
condensed consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K.
(b) INVENTORIES
Information with respect to the classification of inventory of land and
improvements is as follows (in thousands):
Land and Improvements
---------------------
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Unimproved land......................... $ 444 $ 444
Land in various stages of
development............................ 4,014 4,014
Fully improved land..................... 5,934 6,673
--------- --------
Total.............................. $ 10,392 $ 11,131
========= ========
</TABLE>
Land and land improvements include approximately $202,000 of land placed
in the Marco Island and Marco Shores trusts for the Marco refund program
as of September 30, 1996 and December 31, 1995. Other inventories
consists primarily of vacation ownership units completed.
(c) MORTGAGES AND SIMILAR DEBT
On June 19, 1992, Selex International, B.V., a Netherlands corporation
("Selex") loaned the Company the sum of $3,000,000 pursuant to the First
Selex Loan. The First Selex Loan is collateralized by a first mortgage on
certain of the Company's unsold, undeveloped property in its St. Augustine
Shores, Florida community . The Loan matures on June 15, 1996 and provides
for principal to be repaid at 50% of the net proceeds per lot for lots
requiring release from the mortgage, with the entire unpaid balance
becoming due and payable at the end of the four year term. It initially
bears interest at the rate of 10% per annum, with payment of interest
deferred for the initial 18 months of the Loan and interest payments due
quarterly thereafter. As part of the Selex transaction, Selex was granted
an option, approved by the holders of a majority of the outstanding shares
of the Company's Common Stock at the Company's 1992 Annual Meeting, which,
modified, enabled Selex to convert the First Selex Loan, or any portion
thereof, into a maximum of 600,000 shares of the Company's Common Stock at
a per share conversion price equal to the greater of (i) $1.25 or (ii) 95%
of the market price of the Company's Common Stock at the time of
conversion, but in no event greater than $4.50 per share (the "Option"). On
February 17, 1994, Selex exercised the Option, in full, at a conversion
price of $1.90 per share, such that $1,140,000 in principal was repaid
under the First Selex Loan through such conversion. As of September 30,
1996, the Company was in default of the First Selex Loan.
One million dollars of the proceeds from the First Selex Loan was used by
the Company to acquire certain commercial and multi-family properties at
the Company's St. Augustine Shores community at their net appraised value,
from Marcellus H.B. Muyres and certain entities affiliated with Cornelis
L.J.J. Zwaans and Mr. Muyres.
6
<PAGE>
Namely, (i) $416,000 was used to acquire 48 undeveloped condominium
units (twelve 4 unit building sites) and 4 completed (and rented)
condominium units from Conquistador Development Corporation
("Conquistador"), in which Messrs. Zwaans and Muyres serve as directors, as
well as President and Secretary/Treasurer, respectively; (ii) $485,000 was
used to acquire 4 commercial lots from Swan Development Corporation
("Swan"), in which Messrs. Zwaans and Muyres also serve as directors, as
well as President and Secretary, respectively; and (iii) approximately
$99,000 was used to reacquire, from Mr. Muyres, all of his rights, title
and interest in that certain contracts with the Company for the purchase of
a commercial tract in St. Augustine Shores, Florida. None of the commercial
and multi-family property acquired by the Company from Mr. Muyres and
certain entities affiliated with Messrs. Zwaans and Muyres collateralizes
the First Selex Loan. In March, 1994, Conquistador exercised its right to
repurchase certain multi-family property from the Company (which right had
been granted in connection with the June, 1992 Selex transaction) at a
price of $312,000, of which $260,000 was paid in cash to the Company and
$52,000 was applied to reduce interest due to Selex under the Second Selex
Loan (the "First Conquistador Acquisition").
On December 2, 1992, the Company entered into various agreements relating
to certain of its assets and the restructuring of its debt with Yasawa
Holding N.V., a Netherlands Antilles corporation ("Yasawa"), which is
beneficially owned by Mr. Antony Gram. The consummation of these
agreements, which are further described below, was conditioned upon the
acquisition by Gram of the Company's outstanding bank loan.
On December 4, 1992, Gram entered into an agreement with the lenders,
pursuant to which he acquired the bank loan of approximately $25,150,000
(including interest and fees) for a price of $10,750,000. In conjunction
with such transaction, the lenders transferred to Gram the warrants which
they held that entitled the holder to purchase an aggregate of 289,637
shares of the Company's Common Stock at an exercise price of $1.00 per
share. Immediately after the acquisition of the bank loan, Gram transferred
all of his interest in the bank loan, including the warrants, to Yasawa.
On December 11, 1992, the Company consummated the December 2, 1992
agreements with Yasawa. Under these agreements, Yasawa, its affiliates and
the Company agreed as follows: (i) the Company sold certain property at its
Citrus Springs community to an affiliate of Yasawa in exchange for
approximately $6,500,000 of debt reduction credit; (ii) an affiliate of
Yasawa and the Company entered into a joint venture agreement with respect
to the Citrus Springs property, providing for the Company to market such
property and receive an administration fee from the venture (in March,
1994, the Company and the affiliate agreed to terminate the venture); (iii)
the Company sold certain contracts receivable at face value to an affiliate
of Yasawa for debt reduction credit of approximately $10,800,000; (iv) the
Company sold the Marco Shores Country Club and Golf Course to an affiliate
of Yasawa for an aggregate sales price of $5,500,000, with the affiliate
assuming an existing first mortgage of approximately $1,100,000 and the
Company receiving debt reduction credit of $2,400,000, such that the
Company obtained cash proceeds from this transaction of $2,000,000, which
amount was used for working capital; (v) an affiliate of Yasawa agreed to
lease the Marco Shores Country Club and Golf Course to the Company for a
period of approximately one year; (vi) an affiliate of Yasawa and the
Company agreed to amend the terms of the warrants to increase the number of
shares issuable upon their exercise from 277,387 shares to 289,637 shares
and to adjust the exercise price to an aggregate of approximately $314,000;
(vii) Yasawa exercised the warrants in exchange for debt reduction credit
of approximately $314,000; (viii) Yasawa released certain collateral held
for the bank loan; (ix) an affiliate of Yasawa agreed to make an additional
loan of up to $1,500,000 to the Company, thus providing the Company with a
future line of credit (all of which was drawn and outstanding as of
September 30, 1996); and (x) Yasawa agreed to restructure the payment terms
of the remaining $5,106,000 of the bank loan as a loan from Yasawa (the
"Yasawa Loan").
The Yasawa Loan bears interest at the rate of 11% per annum, with payment
of interest deferred until December 31, 1993, at which time only accrued
interest became payable. Commencing January 31, 1994, principal and
interest became payable monthly, with all unpaid principal and accrued
interest being due and payable on December 31, 1997. As of September 30,
1996, $6,228,000 in principal and accrued interest was in default under the
Yasawa Loan.
7
<PAGE>
On April 30, 1993 Selex loaned the Company an additional $1,000,000
collateralized by a first mortgage on certain of the Company's property in
its Marion Oaks, Florida community (the "Second Selex Loan"). The Second
Selex Loan bears interest at 11% per annum, with interest deferred until
December 31, 1993. The Second Selex Loan provides for principal to be
repaid at $3,000 per lot for lots requiring release from the mortgage, with
the entire unpaid principal balance and interest accruing from January 1,
1994 to April 30, 1994 due and payable on April 30, 1994. Although Selex
had certain conversion rights under the Second Selex Loan in the event the
Company sold any Common Stock or Preferred Stock prior to payment in full
of all amounts due to Selex under the Second Selex Loan, such rights were
voided. The Second Selex Loan was satisfied on May 22, 1995 through the
closing of the Second Conquistador Acquisition, discussed below.
From July 9, 1993 through December 31, 1993, Selex loaned the Company an
additional $4,400,000 collateralized by a second mortgage on certain of the
Company's property on which Selex and/or Yasawa hold a first mortgage
pursuant to a Loan Agreement dated July 14, 1993 and amendments thereto
(the "Third Selex Loan"). The Third Selex Loan bears interest at 11% per
annum, with interest deferred until December 31, 1993. Principal is to be
repaid at $3,000 per lot for lots requiring release from the mortgage, with
the entire unpaid principal balance and interest accruing from January 1,
1994 to April 30, 1994 due and payable on April 30, 1994. The Second
Conquistador Acquisition, discussed below, closed on May 22, 1995, provided
a reduction of the debt due and payable under the Third Selex Loan. As of
September 30, 1996, the remaining principal and accrued interest of
$4,074,.000 remained unpaid and in default.
In February, 1994, Yasawa loaned the Company an additional amount of
approximately $514,900 at an interest rate of 8% per annum (the "Second
Yasawa Loan"). Since May, 1994, additional amounts were advanced to the
Company under the Second Yasawa Loan to enable the Company to pay certain
essential expenses, including payment of certain real estate taxes, and
effectuate settlements with the Company's principal creditors. As of
September 30, 1996, an aggregate amount of $5,930,000 had been advanced to
the Company under the Second Yasawa Loan, which remained unpaid and in
default.
On May 22, 1995, the Company closed a transaction with Conquistador (the
"Second Conquistador Acquisition") for the sale of an administration
building and multi-family site in the Company's St. Augustine Shores
community as well as the remaining lot inventory in the Company's Feather
Nest community at Marion Oaks in consideration for the satisfaction of
$2,599,300 of principal and accrued interest on the Second and Third Selex
Loans. In a separate transaction, which also closed on the same date, the
Company sold to Conquistador (the "Third Conquistador Acquisition") four
single family residential lots in the St. Augustine Shores community for
$100,000 in cash. These transactions were accounted for in accordance with
generally accepted accounting principals for these types of related party
transactions. Accordingly, the resulting gain of $1,900,000 was treated as
a contribution of capital and recorded directly to capital surplus.
As previously stated, Messrs. Muyres and Zwaans also serve as directors and
executive officers of M&M First Coast Realty Inc. ("M&M"). The Company had
leased certain office space to M&M at its St. Augustine Shores community
pursuant to a Lease Agreement dated August 10, 1990. A payment of
approximately $21,300 in delinquent rental payments was made on May 22,
1995 upon the closing of the Second Conquistador Acquisition, which
included the sale of the St. Augustine Shores Administration Building.
At December 31, 1995, $4,200,000 of accrued interest due to Selex,
Yasawa and their affiliates was reclassified as non-interest bearing
principal. As of September 30, 1996, the Company had loans outstanding from
Selex, Yasawa and their affiliates in the aggregate amount of approximately
$23,604,000, including interest, all of which are in default, including
approximately $8,686,000, which is owed to Selex; approximately
$12,776,000, which is owed to Yasawa; and approximately $2,142,000, which
is owed to an affiliate of Yasawa. The loans from Selex, Yasawa and their
affiliates are secured by substantially all of the assets of the Company.
8
<PAGE>
(d) COMMITMENTS AND CONTINGENCIES
Homesite sales contracts provide for the return of all monies paid in
(including paid-in interest) should the Company be unable to meet its
contractual obligations after the use of reasonable diligence. If a refund
is made, the Company will recover the related homesite and any improvements
thereto. The aggregate amount of all monies paid in (including paid-in
interest) on all homesite contracts having outstanding contractual
obligations (primarily to complete improvements) at September 30, 1996 was
approximately $5,064,000.
As a result of the delays in completing the land improvements to certain
property sold in certain of its Central and North Florida communities, the
Company fell behind in meeting its contractual obligations to its
customers. In connection with these delays, the Company, in February, 1980,
entered into a Consent Order with the Division which provided a program for
notifying affected customers. The Consent Order, which was restated and
amended, provided a program for notifying affected customers of the
anticipated delays in the completion of improvements (or, in the case of
purchasers of unbuildable lots in certain areas of the Company's Sunny
Hills community, the transfer of development obligations to core growth
areas of the community); various options which may be selected by affected
purchasers; a schedule for completing certain improvements; and a deferral
of the obligation to install water mains until requested by the purchaser.
Under an agreement with Topeka Group Incorporated ("Topeka"), which
purchased the Company's utilities in 1989, Topeka's utility companies have
agreed to furnish utility service to the future residents of the Company's
communities on substantially the same basis as such services were provided
by the Company. The Consent Order also required the establishment of an
improvement escrow account as assurance for completing such improvement
obligations.
In June, 1992, the Company entered into the 1992 Consent Order with the
Division, which replaced and superseded the original Consent Order, as
amended and restated. Among other things, the 1992 Consent Order
consolidated the Company's development obligations and provided for a
reduction in its required monthly escrow obligation to $175,000 from
September, 1992 through December, 1993. Beginning January, 1994 and until
development is completed or the 1992 Consent Order is amended, the Company
is required to deposit $430,000 per month into the escrow account. As part
of the assurance program under the 1992 Consent Order, the Company and its
lenders granted the Division a lien on certain contracts receivable
(approximately $10,100,000 as of September 30, 1996) and future
receivables. The Company defaulted on its obligation to escrow $430,000 per
month for the period of January, 1994 through the present and, in
accordance with the 1992 Consent Order, collections on Division receivables
were escrowed for the benefit of purchasers from March 1, 1994 through
April 30, 1994. In May, 1994 the Company implemented a program to exchange
purchasers who contracted to purchase property which is undeveloped to
property which is developed. As of September 30, 1996, approximately 83% of
the customers whose lots are currently undeveloped have opted to exchange.
Consequently, the Division has allowed the Company to utilize collections
on receivables since May 1, 1994. Because of the Company's default, the
Division could also exercise other available remedies under the 1992
Consent Order, which remedies entitle the Division, among other things, to
halt all sales of registered property.
The Company's goal is to eliminate its development obligation (with the
exception of its maintenance obligation in Marion Oaks and Sunny Hills)
under the 1992 Consent Order through this exchange program, completion of
two commercial areas in Marion Oaks, sale of its second Citrus Springs Golf
Course and settlement of all remaining maintenance and improvements
obligations in Citrus Springs through a final agreement with Citrus County
(entered into in May 1995). Pursuant to the 1992 Consent Order, the Company
has limited the sale of single-family lots to lots which front on a paved
street and are ready for immediate building.
Based upon the Company's experience with affected customers, the Company
believes that the total refunds arising from delays in completing
improvements will not materially exceed the amount provided for in the
consolidated financial statements. Approximately $7,000 of the provision
for the total refunds relating to the delays of improvements remained in
accrued expenses and other at September 30, 1996.
The Company's corporate performance bonds to assure the completion of
development at its St. Augustine Shores community expired in March and
June, 1993. Such bonds cannot be renewed due to a change in the policy of
the
9
<PAGE>
Board of County Commissioners of St. Johns County which precludes
allowing any developer to secure the performance of development obligations
by the issuance of corporate bonds. In the event that St. Johns County
elects to undertake the completion of such development work, the Company
would be obligated with respect to 1,000 unimproved lots at St. Augustine
Shores in the amount of approximately $6,200,000. The Company intends to
submit an alternative assurance program for the completion of such
development and improvements to the County for its approval.
In addition to the matters discussed above and in Note 9 to the Company's
Consolidated Financial Statements included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995, the Company is a
party to other litigation relating to the conduct of its business which is
routine in nature and, in the opinion of management, should have no
material effect upon the Company's operation.
(e) CAPITALIZED INTEREST
The Company capitalizes interest cost incurred during a project's
construction period. Of the total interest cost incurred of $1,316,000 and
$1,217,000, none was capitalized for the nine months ended September 30,
1996 and September 30, 1995, respectively.
(f) EARNINGS OR LOSS PER SHARE
Earnings (loss) per common and common equivalent share were computed by
dividing net income (loss) by the weighted average number of shares of
Common Stock and common stock equivalents outstanding during each period.
The earnings (loss) and the average number of shares of Common Stock and
common stock equivalents used to calculate earnings (loss) per share for
the nine months ended September 30, 1996 and September 30, 1995 were
$(429,000) and $(1,071,000) and 6,728,157 and 6,693,341, respectively, and
for the third quarters of 1996 and 1995 were $180,000 and $(743,000) and
6,732,341 and 6,699,344, respectively.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On June 19, 1992, the Company completed a transaction with Selex, which resulted
in a change in control of the Company. Under the transaction, Selex loaned the
Company $3,000,000 collateralized by a first mortgage on certain of the
Company's property in its St. Augustine Shores, Florida community (the "First
Selex Loan"). The First Selex Loan initially bears interest at the rate of 10%
per annum with a term of four years and payment of interest deferred for the
first 18 months.
In conjunction with the First Selex Loan: (i) Empire of Carolina, Inc.
("Empire") sold Selex its 2,220,066 shares of the Company's Common Stock and
assigned Selex its $1,000,000 Note from the Company, with $225,000 of interest
accrued thereon; (ii) Maurice A. Halperin, Chairman of the Board of Empire and
former Chairman of the Board of the Company, forgave payment of the $200,000
salary due him for the period of April, 1990 through April, 1991, which was in
arrears; and (iii) certain changes occurred in the composition of the Company's
Board of Directors. Namely, the six directors serving on the Company's Board who
were previously designated by Empire resigned and four Selex designees (Messrs.
Marcellus H.B. Muyres, Antony Gram, Cornelis van de Peppel and Cornelis L.J.J.
Zwaans) were elected to serve as directors in their stead. Marcellus H.B. Muyres
was appointed Chairman of the Board and Chief Executive Officer of the Company.
These directors, as well as Leonardus G.M. Nipshagen, a Selex designee, were
then elected as directors at the Company's 1992 Annual Meeting and re-elected at
the Company's 1993 Annual Meeting.
As part of the Selex transaction, Selex was granted an option, approved by the
holders of a majority of the outstanding shares of the Company's Common Stock at
the Company's 1992 Annual Meeting, to convert the Selex Loan, or any portion
thereof, into a maximum of 850,000 shares of the Company's Common Stock at a per
share conversion price equal to the greater of (i) $1.25 or (ii) 95% of the
market price of the Company's Common Stock at the time of conversion, but in no
event greater than $4.50 per share (the "Option"). However, on September 14,
1992, Selex formally waived and relinquished its right to exercise the Option as
to 250,000 shares of the Company's Common Stock to enable the Company to settle
certain litigation involving the Company through the issuance of approximately
250,000 shares of the Company's Common Stock to the claimants, without
jeopardizing the utilization of the Company's net operating loss carryforward.
On February 17, 1994, Selex exercised the remaining full 600,000 share Option at
a conversion price of $1.90 per share, such that $1,140,000 in principal was
repaid under the First Selex Loan through such conversion. As a consequence of
such conversion, Selex holds 2,820,066 shares of the Company's Common Stock
(41.87% of the outstanding shares of Common Stock of the Company based upon the
number of shares of the Company's Common Stock outstanding as of September 30,
1996).
Pursuant to the Selex transaction, $1,000,000 of the proceeds from the First
Selex Loan was used by the Company to acquire certain commercial and
multi-family properties at the Company's St. Augustine Shores community at their
net appraised value, from Mr. Muyres and certain entities affiliated with
Messrs. Zwaans and Muyres. Namely, (i) $416,000 was used to acquire 48
undeveloped condominium units (twelve 4 unit building sites) and 4 completed
(and rented) condominium units from Conquistador, in which Messrs. Zwaans and
Muyres serve as directors, as well as President and Secretary/Treasurer,
respectively; (ii) $485,000 was used to acquire 4 commercial lots from Swan
Development Corporation ("Swan"), in which Messrs. Zwaans and Muyres also serve
as directors, as well as President and Secretary, respectively; and (iii)
approximately $99,000 was used to reacquire, from Mr. Muyres, all of his rights,
title and interest in a certain contract with the Company for the purchase of a
commercial tract in St. Augustine Shores, Florida. None of the commercial land
and multi-family property acquired by the Company from Mr. Muyres and certain
entities affiliated with Messrs. Zwaans and Muyres collateralizes the First
Selex Loan. In March, 1994, Conquistador exercised its right to repurchase
certain of the multi-family property from the Company (which right had been
granted in connection with the June, 1992 transaction) at a price of $312,000,
of which $260,000 was paid in cash to the Company and $52,000 was applied to
reduce interest due to Selex under the Second Selex Loan (the "First
Conquistador Acquisition").
In December, 1992, Mr. Gram, a director of the Company and beneficial owner of
the Common Stock of the Company held by Selex, acquired all of the Company's
outstanding bank debt and then assigned same to Yasawa, of which Mr. Gram is
11
<PAGE>
also the beneficial owner. Yasawa simultaneously completed a series of
transactions with the Company which involved the transfer of certain assets to
Yasawa or its affiliated companies, the acquisition by Yasawa of 289,637 shares
of the Company's Common Stock through the exercise of warrants previously held
by the banks, the provision of a $1,500,000 line of credit to the Company and
the restructuring of the remaining debt as a $5,106,000 Yasawa Loan. On April
30, 1993, Selex loaned the Company an additional amount of $1,000,000 pursuant
to the Second Selex Loan and since July 1, 1993 made further loans to the
Company aggregating $4,400,000 under the Third Selex Loan. As of September 30,
1996, Yasawa has loaned the Company an additional sum of $5,930,000 pursuant to
the Second Yasawa Loan. As a consequence of these transactions, the Company had
loans outstanding from Selex, Yasawa and their affiliates on September 30, 1996
in the aggregate amount of approximately $22,290,000. On May 22, 1995, the
Company closed a transaction with Conquistador (the "Second Conquistador
Acquisition") for the sale of an administration building and a multi-family site
in the Company's St. Augustine Shores community as well as the remaining lot
inventory in the Company's FeatherNest community at Marion Oaks in consideration
for the satisfaction of $2,599,300 of principal and accrued interest on the
Second and Third Selex Loans. On that same date, but in a separate transaction,
the Company also sold to Conquistador Development Corporation (the "Third
Conquistador Acquisition") four single family residential lots in the St.
Augustine Shores community for $100,000 in cash. These transactions were
accounted for in accordance with generally accepted accounting principals for
these types of related party transactions. Accordingly, the resulting gain of
$1,900,000 was treated as a contribution of capital and recorded directly to
capital surplus. The loans from Selex, Yasawa and their affiliates are secured
by substantially all of the assets of the Company. See Note 5 to Consolidated
Financial Statements.
The Company, Selex and Yasawa entered into loan modification agreements in which
all accrued interest was converted into non-interest bearing principal at the
earlier of the maturity date or the default date. Accordingly, at December 31,
1995, $4,200,000 of accrued interest was reclassified as principal. The loans
were also modified to formalize the elimination of the default interest rate
provisions in each of the applicable loan agreements.
The Company has stated in previous filings with the Commission and elsewhere
herein that the obtainment of additional funds to implement its marketing
program and achieve the objectives of its business plan is essential to enable
the Company to maintain operations and continue as a going concern. Since
December, 1992, the Company has been dependent on loans and advances from Selex,
Yasawa and their affiliates in order to implement its marketing program and
assist in meeting its working capital requirements. As previously stated, during
the last nine months of 1993, Selex, Yasawa and their affiliates loaned the
Company an aggregate of $4,400,000 pursuant to Third Selex Loan. Funds advanced
under the Third Selex Loan enabled the Company to commence implementation of the
majority of its marketing program in the third quarter of 1993. The full
benefits of the program were not realized in 1993 and the Company was unable to
secure financing in 1994 to meet its working capital requirements and continue
its marketing program. Commencing in 1994, Yasawa advanced additional funds (the
"Second Yasawa Loan") totaling $5,930,000 as of September 30, 1996, to meet the
Company's minimum working capital requirements, to pay delinquent real estate
taxes, to pay settlements with certain trade creditors and to settle certain
litigation.
On March 10, 1994, the Company was advised that Selex filed an Amendment to its
Schedule 13D with the Commission. In the Amendment, Selex reported that it,
together with Yasawa and their affiliates, were uncertain as to whether they
would provide any further funds to the Company. The Amendment further stated
that Selex, Yasawa and their affiliates were seeking third parties to provide
financing for the Company and that as part of any such transaction, they would
be willing to sell or restructure all or a portion of their loans and Common
Stock in the Company.
As a consequence of its liquidity position, the Company has defaulted on certain
obligations, including its previously described escrow obligations to the
Division pursuant to the Company's 1992 Consent Order and its obligation to make
required payments under loans from Selex, Yasawa and their affiliates.
Furthermore, the Company has not paid delinquent real estate taxes which
aggregate approximately $2,265,000 as of September 30, 1996; non-payment of
these delinquent taxes may adversely affect the financial condition of the
Company. On April 16, 1996, Yasawa loaned the Company $1,000,000 which was used
to pay approximately $979,000 of delinquent real estate taxes.
The Company is continuing to seek third parties to provide financing. There can
be no assurance, however, that any financing will be obtained. Accordingly, the
Company's Board of Directors is also considering other appropriate action given
12
<PAGE>
the severity of the Company's liquidity position including, but not limited, to
filing for protection under the federal bankruptcy laws.
RESULTS OF OPERATIONS
- ---------------------
For the nine months and three months ended September 30, 1996 and September 30,
1995.
Revenues
- --------
Total revenues were $6,876,000 for the first nine months of 1996 compared to
$4,968,000 for the comparable 1995 period. For the third quarter of 1996 total
revenues were $2,607,000 compared to $1,219,000 for the comparable 1995 period.
Gross land sales were $5,569,000 for the first nine months of 1996 versus
$2,195,000 for 1995. Net land sales (gross land sales less estimated
uncollectible installment sales and contract valuation discount) increased to
$3,526,000 for the first nine months of 1996 from $1,423,000 for the first nine
months of 1995. For the three months ended September 30, 1996 net land sales
increased to $1,405,000 from $436,000 for the comparable year ago period.
There were no bulk land sales for the first nine months of 1996 or 1995. In
light of the Company's diminished bulk land sales inventory it is anticipated
that the Company will produce a negligible volume of bulk land sales. See
"Liquidity and Capital Resources -- Mortgages and Similar Debt".
The Company re-entered the single-family housing business in December, 1992.
Revenues are not recognized from housing sales until the completion of
construction and passage of title. Housing revenues were $875,000 for the nine
months ended September 30, 1996 compared to $1,251,000 for the same period in
1995. The decrease in housing revenues is directly related to the reduction in
the Company's housing advertising and promotional programs for housing due to
limited working capital.
The following table reflects the Company's real estate product mix for the
periods indicated (in thousands):
<TABLE>
<CAPTION>
Nine Months ended Three Months Ended
------------------------ -------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Gross Land Sales:
Retail Sales* $ 5,569 $ 2,195 $ 2,295 $ 685
------- ------- ------- -------
Housing Sales:
Single Family 867 1,201 267 210
Vacation ownership 8 50 -0- 43
------- ------- ------- -------
Total 875 1,251 267 253
------- ------- ------- -------
Total Real Estate $ 6,444 $ 3,446 $ 2,562 $ 938
======= ======= ======= =======
<FN>
- ---------------------
* New retail land sales contracts entered into, including deposit sales on
which the Company has received less than 20% of the sales price, net of
cancellations, for the nine months ended September 30, 1996 and September
30, 1995 were $5,576,000 and $3,466,000, respectively and $1,838,000 and
$1,398,000 for the third quarters of 1996 and 1995, respectively. The
Company had a backlog of approximately $2,333,000 in unrecognized sales as
of September 30, 1996. Such contracts are not included in retail land sales
until the applicable rescission period has expired and the Company has
received payments totaling 20% of the contract sales price.
</FN>
</TABLE>
Improvement revenues result from recognition of revenues deferred from prior
period sales. Recognition occurs as development work proceeds on the previously
sold property or customers are exchanged to a developed lot. Improvement
revenues totaled $874,000 for the first nine months of 1996 ($227,000 for the
third quarter of 1996), as compared to $993,000 for the first nine months of
1995 ($162,000 for the third quarter of 1995). Due to the Company's financial
condition the Company has done minimal development work in the last two years.
13
<PAGE>
Interest income was $1,083,000 for the first nine months of 1996 as compared to
$655,000 for the same period of 1995. This increase is the result of higher
contracts receivable balances. For the third quarters of 1996 and 1995, interest
income was $546,000 and $233,000, respectively.
Other revenues were $518,000 as compared to $706,000 for the nine months ended
September 30, 1996 and 1995, respectively. For the third quarters of 1996 and
1995, other revenues were $162,000 and $135,000, respectively. Other revenues
are generated by the Company's title insurance and real estate brokerage
subsidiaries.
Costs and Expenses
- ------------------
Costs and expenses for the first nine months of 1996 were $7,636,000 compared to
$6,741,000 for the same period in 1995. For the third quarters of 1996 and 1995,
costs and expenses totaled $2,758,000 and $1,961,000, respectively. Cost of
sales totaled $2,076,000 for the nine month ended September 30, 1996 compared to
$1,984,000 for the 1995 period. For the third quarters of 1996 and 1995, cost of
sales were $725,000 and $420,000, respectively.
Commissions, advertising and other selling expenses totaled $1,952,000 for the
nine months ended September 30, 1996 compared to $1,222,000 for the same 1995
period. This increase is the result of higher retail sales levels. Advertising
and promotional expenditures increased to $90,000 from $87,000 for the nine
month period of 1996 versus 1995. For the third quarter of 1996, commission,
advertising and other selling expenses totaled $822,000, compared to $402,000
for the 1995 third quarter. Advertising and promotional expenditures increased
to $36,000 from $32,000 for the third quarter period of 1996 versus 1995. These
increases are the result of the increase in the Company's retail land sales.
General and administrative expenses were $1,352,000 for the first nine months of
1996 and $1,458,000 for the same period of 1995. For the third quarter of 1996,
general and administrative expenses were $447,000 compared to $432,000 in 1995.
Real estate tax expense was $939,000 for the first nine months of 1996 and
$859,000 for the same period of 1995. Real estate tax expense for the third
quarter of 1996 was $312,000 versus $296,000 for the second quarter of 1995.
Included in real estate tax expense is interest and administrative fees on
delinquent taxes, which accrue interest at 18% per annum.
Interest expense for the first nine months of 1996 was $1,316,000, compared to
$1,217,000 for the first nine months of 1995. Interest expense for the third
quarter of 1996 was $453,000, compared to $411,000 for the third quarter of
1995. Total interest cost (none of which represents capitalized interest) was
$1,316,000 and $1,217,000 for the first nine months ended of 1996 and 1995,
respectively. For the third quarter of 1996, total interest cost (none of which
represents capitalized interest) was $453,000, compared to $411,000 for the
second quarter of 1995. No interest has been capitalized since the first quarter
of 1994 since the Company has done minimal land development work at its
communities.
Net Income (Loss)
- -----------------
The Company reported a net loss of $429,000 for the nine months ended September
30, 1996 as compared to a net loss of $1,071,000 for the nine months ended
September 30, 1995. For the third quarter of 1996, a profit of $180,000 was
reported compared to a net loss of $743,000 for the third quarter of 1995.
Included in the nine months ended September 30, 1996 and the third quarter is an
extraordinary gain of 331,000 resulting from the final settlement of the Marco
class action litigation. The nine months ending September 30, 1995 included an
extraordinary gain of $702,000 resulting from a reduction in the allowance for
the guarantee pursuant to the final settlement of the Marco class action
litigation.
Regulatory Developments which may affect Future Operations
- ----------------------------------------------------------
In Florida, as in many growth areas, local governments have sought to limit or
control population growth in their communities through restrictive zoning,
density reduction, the imposition of impact fees and more stringent development
requirements. Although the Company has taken such factors into consideration in
its master plans, the increased regulation has lengthened the development
process and added to development costs.
14
<PAGE>
On a statewide level, the Florida Legislature adopted and implemented the
Florida Growth Management Act of 1985 (the "Act") to aid local governments
efforts to discourage uncontrolled growth in Florida. The Act precludes the
issuance of development orders or permits if public facilities such as
transportation, water and sewer services will not be available concurrent with
development. Development orders have been issued for, and development has
commenced in, the Company's existing communities (with development being
virtually completed in certain of these communities). Thus, such communities are
less likely to be affected by the new growth management policies than future
communities. Any future communities developed by the Company will be strongly
impacted by new growth management policies. Since the Act and its implications
are consistently being re-examined by the State, together with local governments
and various state and local governmental agencies, the Company cannot further
predict the timing or the effect of new growth management policies, but
anticipates that such policies may increase the Company's permitting and
development costs.
In addition to Florida, other jurisdictions in which the Company's properties
are offered for sale have recently strengthened, or are considering
strengthening, their regulation of subdividers and subdivided lands in order to
provide further assurances to the public, particularly given the adverse
publicity surrounding the industry which existed in 1990. The Company has
attempted to take appropriate steps to modify its marketing programs and
registration applications in the face of such increased regulation, but has
incurred additional costs and delays in the marketing of certain of its
properties in certain states and countries. For example, the Company has
complied with regulations of certain states which require that the Company sell
its properties to residents of those states pursuant to a deed and mortgage
transaction, regardless of the amount of the down payment. The Company intends
to continue to monitor any changes in statutes or regulations affecting, or
anticipated to affect, the sale of its properties and intends to take all
necessary and reasonable action to assure that its properties and its proposed
marketing programs are in compliance with such regulations, but there can be no
assurance that the Company will be able to timely comply with all regulatory
changes in all jurisdictions in which the Company's properties are presently
offered for sale to the public.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Mortgages and Similar Debt
- --------------------------
Indebtedness under various purchase money mortgages and loan agreements is
collateralized by substantially all of the Company's assets, including stock of
certain wholly-owned subsidiaries.
The following table presents information with respect to mortgages and similar
debt (in thousands):
<TABLE>
<CAPTION>
Years Ended
----------------------------
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Mortgage Notes Payable........ $ 18,629 $ 16,717
Other Loans................... 3,661 3,661
-------- --------
Total Mortgages and
Similar Debt.................. $ 22,290 $ 20,378
======== ========
</TABLE>
As of December 31, 1995, $4,200,000 of accrued interest due to Selex, Yasawa and
their affiliates was reclassified as non-interest bearing principal. Included in
Mortgage Notes Payable is the $3,000,000 First Selex Loan ($2,722,000 as of
September 30, 1996), the $4,400,000 Third Selex Loan ($3,820,000 as of September
30, 1996), the $4,900,000 Yasawa Loan ($5,829,000 as of September 30, 1996) and
the Second Yasawa Loan ($6,220,000 as of September 30, 1996). Other loans
include the $1,656,000 Empire note and the $2,005,000 Scafholding Loan.
These mortgage notes payable and other loans are in default as of September 30,
1996 due to the non-payment of principal. The lenders have not taken any action
as a result of these defaults.
On June 19, 1992, Selex loaned the Company the sum of $3,000,000 pursuant to the
First Selex Loan. The First Selex Loan is collateralized by a first mortgage on
certain of the Company's unsold, undeveloped property in its St. Augustine
Shores,
15
<PAGE>
Florida community. The Loan matures on June 15, 1996 and provides for
principal to be repaid at 50% of the net proceeds per lot for lots requiring
release from the mortgage, with the entire unpaid balance becoming due and
payable at the end of the four year term. It initially bears interest at the
rate of 10% per annum, with payment of interest deferred for the initial 18
months of the Loan and interest payments due quarterly thereafter. As part of
the Selex transaction, Selex was granted an option, approved by the holders of a
majority of the outstanding shares of the Company's Common Stock at the
Company's 1992 Annual Meeting, which, as modified, enabled Selex to convert the
First Selex Loan, or any portion thereof, into a maximum of 600,000 shares of
the Company's Common Stock at a per share conversion price equal to the greater
of (i) $1.25 or (ii) 95% of the market price of the Company's Common Stock at
the time of conversion, but in no event greater than $4.50 per share (the
"Option"). On February 17, 1994, Selex exercised the Option, in full, at a
conversion price of $1.90 per share, such that $1,140,000 in principal was
repaid under the First Selex Loan through such conversion.
One million dollars of the proceeds from the First Selex Loan was used by the
Company to acquire certain commercial and multi-family properties at the
Company's St. Augustine Shores community at their net appraised value, from Mr.
Muyres and certain entities affiliated with Messrs. Zwaans and Muyres. Namely,
(i) $416,000 was used to acquire 48 undeveloped condominium units (twelve 4 unit
building sites) and 4 completed (and rented) condominium units from
Conquistador, in which Messrs. Zwaans and Muyres serve as directors, as well as
President and Secretary/Treasurer, respectively; (ii) $485,000 was used to
acquire 4 commercial lots from Swan, in which Messrs. Zwaans and Muyres also
serve as directors, as well as President and Secretary, respectively; and (iii)
approximately $99,000 was used to reacquire, from Mr. Muyres, all of his rights,
title and interest in that certain contracts with the Company for the purchase
of a commercial tract in St. Augustine Shores, Florida. None of the commercial
and multi-family property acquired by the Company from Mr. Muyres and certain
entities affiliated with Messrs. Zwaans and Muyres collateralizes the First
Selex Loan. In March, 1994, Conquistador exercised its right to repurchase
certain multi-family property from the Company (which right had been granted in
connection with the June, 1992 Selex transaction) at a price of $312,000, of
which $260,000 was paid in cash to the Company and $52,000 was applied to reduce
interest due to Selex under the Second Selex Loan (the "First Conquistador
Acquisition").
On December 2, 1992, the Company entered into various agreements relating to
certain of its assets and the restructuring of its debt with Yasawa, which is
beneficially owned by Mr. Antony Gram. The consummation of these agreements,
which are further described below, was conditioned upon the acquisition by Mr.
Gram of the Company's outstanding bank loan.
On December 4, 1992, Mr. Gram entered into an agreement with the lenders,
pursuant to which he acquired the bank loan of approximately $25,150,000
(including interest and fees) for a price of $10,750,000. In conjunction with
such transaction, the lenders transferred to Mr. Gram the warrants which they
held that entitled the holder to purchase an aggregate of 289,637 shares of the
Company's Common Stock at an exercise price of $1.00 per share. Immediately
after the acquisition of the bank loan, Mr. Gram transferred all of his interest
in the bank loan, including the warrants, to Yasawa.
On December 11, 1992, the Company consummated the December 2, 1992 agreements
with Yasawa. Under these agreements, Yasawa, its affiliates and the Company
agreed as follows: (i) the Company sold certain property at its Citrus Springs
community to an affiliate of Yasawa in exchange for approximately $6,500,000 of
debt reduction credit; (ii) an affiliate of Yasawa and the Company entered into
a joint venture agreement with respect to the Citrus Springs property, providing
for the Company to market such property and receive an administration fee from
the venture (in March, 1994, the Company and the affiliate agreed to terminate
the venture); (iii) the Company sold certain contracts receivable at face value
to an affiliate of Yasawa for debt reduction credit of approximately
$10,800,000; (iv) the Company sold the Marco Shores Country Club and Golf Course
to an affiliate of Yasawa for an aggregate sales price of $5,500,000, with the
affiliate assuming an existing first mortgage of approximately $1,100,000 and
the Company receiving debt reduction credit of $2,400,000, such that the Company
obtained cash proceeds from this transaction of $2,000,000, which amount was
used for working capital; (v) an affiliate of Yasawa agreed to lease the Marco
Shores Country Club and Golf Course to the Company for a period of approximately
one year; (vi) an affiliate of Yasawa and the Company agreed to amend the terms
of the warrants to increase the number of shares issuable upon their exercise
from 277,387 shares to 289,637 shares and to adjust the exercise price to an
aggregate of approximately $314,000; (vii) Yasawa exercised the warrants in
exchange for debt reduction credit of approximately $314,000; (viii) Yasawa
released certain collateral held for the bank loan; (ix) an affiliate of Yasawa
agreed to make an additional loan of up to $1,500,000 to the Company, thus
providing the Company
16
<PAGE>
with a future line of credit (all of which was drawn and outstanding as of
September 30, 1996); and (x) Yasawa agreed to restructure the payment terms of
the remaining $5,106,000 of the bank loan as a loan from Yasawa (the "Yasawa
Loan").
The Yasawa Loan bears interest at the rate of 11% per annum, with payment of
interest deferred until December 31, 1993, when only accrued interest became
payable. Commencing January 31, 1994, principal and interest became payable
monthly, with all unpaid principal and accrued interest being due and payable on
December 31, 1997. As of September 30, 1996, $6,228,000 in principal and accrued
interest was in default under the Yasawa Loan.
On April 30, 1993 Selex loaned the Company an additional $1,000,000
collateralized by a first mortgage on certain of the Company's property in its
Marion Oaks, Florida community (the "Second Selex Loan"). Interest under the
Second Selex Loan was 11% per annum, deferred until December 31, 1993, and
principal was to be repaid at $3,000 per lot for lots requiring release from the
mortgage, with the entire unpaid principal balance and interest accruing from
January 1, 1994 to April 30, 1994 due and payable on April 30, 1994. Although
Selex had certain conversion rights under the Second Selex Loan in the event the
Company sold any Common Stock or Preferred Stock prior to payment in full of all
amounts due to Selex under the Second Selex Loan, such rights were voided. The
Second Selex Loan was satisfied on May 22, 1995 through the closing of the
Second Conquistador Acquisition, discussed below.
From July 9, 1993 through December 31, 1993, Selex loaned the Company an
additional $4,400,000 collateralized by a second mortgage on certain of the
Company's property on which Selex and/or Yasawa hold a first mortgage pursuant
to a Loan Agreement dated July 14, 1993 and amendments thereto (the "Third Selex
Loan"). The Third Selex Loan bears interest at 11% per annum, with interest
deferred until December 31, 1993. Principal is to be repaid at $3,000 per lot
for lots requiring release from the mortgage, with the entire unpaid principal
balance and interest accruing from January 1, 1994 to April 30, 1994 due and
payable on April 30, 1994. The Second Conquistador Acquisition, discussed below,
closed on May 22, 1995, provided a reduction of the debt due and payable under
the Third Selex Loan. As of September 30, 1996, the remaining balance of
$4,074,000 including accrued interest remained unpaid and in default.
In February, 1994, Yasawa loaned the Company an additional amount of
approximately $514,900 at an interest rate of 8% per annum (the "Second Yasawa
Loan"). Since May, 1994, additional amounts were advanced to the Company under
the Second Yasawa Loan to enable the Company to pay certain essential expenses,
including payment of certain real estate taxes, and effectuate settlements with
the Company's principal creditors. As of September 30, 1996, an aggregate amount
of $5,930,000 had been advanced to the Company under the Second Yasawa Loan and
the balance of $6,548,000 including accrued interest remains unpaid.
On May 22, 1995, the Company closed a transaction with Conquistador (the "Second
Conquistador Acquisition") for the sale of an administration building and a
multi-family site in the Company's St. Augustine Shores community as well as the
remaining lot inventory in the Company's FeatherNest community at Marion Oaks in
consideration for the satisfaction of $2,599,300 of principal and accrued
interest on the Second and Third Selex Loans. In a separate transaction which
also closed on the same date, the Company sold to Conquistador (the "Third
Conquistador Acquisition") four single family residential lots in the St.
Augustine Shores community for $100,000 in cash. These transactions were
accounted for in accordance with generally accepted accounting principals for
these types of related party transactions. Accordingly, the resulting gain of
$1,900,000 was treated as a contribution of capital and recorded directly to
capital surplus.
As previously stated, Messrs. Muyres and Zwaans also serve as directors and
executive officers of M&M First Coast Realty ("M&M"). The Company had leased
certain office space to M&M at its St. Augustine Shores community pursuant to a
Lease Agreement dated August 10, 1990. A payment of approximately $21,300 in
delinquent rental payments was made on May 22, 1995 upon the closing of the
Second Conquistador Acquisition, which included the sale of the St. Augustine
Administration Building to which the lease pertained.
As of December 31, 1995, $4,200,000 of accrued interest due to Selex, Yasawa and
their affiliates was reclassified as non-interest bearing principal. As of
September 30, 1996, the Company had loans outstanding from Selex, Yasawa and
their affiliates in the aggregate amount of approximately $23,604,000, including
interest, all of which are in default, including approximately $8,868,000, which
is owed to Selex; approximately $12,776,000, which is owed to Yasawa, including
17
<PAGE>
accrued and unpaid interest; and approximately $2,142,000, which is owed to an
affiliate of Yasawa, including accrued and unpaid interest. The loans from
Selex, Yasawa and their affiliates are secured by substantially all of the
assets of the Company.
On March 10, 1994, the Company was advised that Selex filed an Amendment to its
Schedule 13D filed with the Commission. In the Amendment, Selex reported that
it, together with Yasawa and their affiliates, were uncertain as to whether they
would provide any further funds to the Company. The Amendment further stated
that Selex, Yasawa and their affiliates were seeking third parties to provide
financing for the Company and that as part of any such transaction, they would
be willing to sell or restructure all or a portion of their loans and Common
Stock in the Company.
The Company has stated in previous filings with the Commission and elsewhere
herein that the obtainment of additional funds to implement its marketing
program and achieve the objectives of its business plan is essential to enable
the Company to maintain operations and continue as a going concern. Since
December, 1992, the Company has been dependent on loans and advances from Selex,
Yasawa and their affiliates in order to implement its marketing program and
assist in meeting its working capital requirements. As previously stated, during
the last nine months of 1993, Selex, Yasawa and their affiliates loaned the
Company an aggregate of $4,400,000 pursuant to Third Selex Loan. Funds advanced
under the Third Selex Loan enabled the Company to commence implementation of the
majority of its marketing program in the third quarter of 1993. The full
benefits of the program were not realized in 1993 and the Company was unable to
secure financing in 1994 to meet its working capital requirements and continue
its marketing program. Commencing in 1994, Yasawa advanced additional funds (the
"Second Yasawa Loan") totaling $5,930,000 as of September 30, 1996, to meet the
Company's minimum working capital requirements, to pay delinquent real estate
taxes, to pay settlements with certain trade creditors and to settle certain
litigation.
As a consequence of its liquidity position, the Company has defaulted on certain
obligations, including its previously described escrow obligations to the
Division pursuant to the Company's 1992 Consent Order and its obligation to make
required payments under loans from Selex, Yasawa and their affiliates.
Furthermore, the Company has not paid delinquent real estate taxes which
aggregate approximately $2,265,000 as of September 30, 1996; non-payment of
these delinquent taxes may adversely affect the financial condition of the
Company. On April 16, 1996, Yasawa loaned the Company $1,000,000 which was used
to pay approximately $979,000 of delinquent real estate taxes. On September 6,
1996, Yasawa loaned the Company $818,000 which was used to satisfy the remaining
obligation on the Marco class action settlement agreement. Additionally, as part
of the settlement agreement, Swan Development Corporation, an affiliate of
Yasawa, acquired four condominium units from the class action trustee for
$182,000, the same value that the trustee attributed to the units on September
14, 1992.
The Company is continuing to seek third parties to provide financing. There can
be no assurance, however, that any financing will be obtained. Accordingly, the
Company's Board of Directors is also considering other appropriate action given
the severity of the Company's liquidity position including, but not limited, to
filing for protection under the federal bankruptcy laws.
CONTRACTS AND MORTGAGES RECEIVABLE SALES
In December, 1992, as described above, the Company sold $10,800,000 of contracts
and mortgages receivable to an affiliate of Yasawa at face value, applying the
proceeds therefrom to reduce the Bank Loan acquired by Yasawa.
In March, 1993 the Company transferred $1,600,000 in contracts and mortgages
receivable generating approximately $1,059,000 in proceeds to the Company, which
was used for working capital and the creation of a holdback account in the
amount $150,000. As of September 30, 1996, the balance of the holdback account
was approximately $116,000.
In June, 1992 and February, 1990, the Company completed sales of contracts and
mortgages receivable totaling $13,500,000 and $17,000,000, respectively, which
generated approximately $8,000,000 and $13,900,000 respectively, in net proceeds
to the Company. The anticipated costs of the June, 1992 transaction were
included in the extraordinary loss from debt restructuring for 1991 since the
restructuring was dependent on the sale. The Company recorded a loss of $600,000
on
18
<PAGE>
the February, 1990 sale. In conjunction with these sales the Company granted
the purchaser a security interest in certain additional contracts receivable of
approximately $2,700,000 and conveyed all of its rights, title and interest in
the property underlying such contracts to a collateral trustee. In addition,
these transactions, among other things require that the Company replace or
repurchase any receivable that becomes 90 days delinquent upon the request of
the purchaser. Such requirement can be satisfied from contracts in which the
purchaser holds a security interest (approximately $1,388,000 as of December 31,
1995). The purchaser of these receivables experienced financial difficulty and
filed in 1994 for protection under Chapter 11 of the Federal Bankruptcy Code. In
November 1995, the purchaser of these receivables sold the portfolio to Finova
Capital Corporation. The Company is unable to determine what effect this will
have, if any, on future cancellations, since it is unable to determine how the
bankruptcy or the subsequent sale of the portfolio will impact servicing and
collection procedures and the customers' determination to continue to pay under
those contracts. The Company has fully reserved for the amount of the holdback
account and the estimated future cancellations based on the Company's historical
experience for receivables the Company services. However, due to the uncertainty
noted above, the Company does not feel there is sufficient information to
estimate future cancellations and is unable to determine the adequacy of its
reserves to replace or repurchase receivables that become delinquent. The
Company was unable to replace or repurchase $1,148,000 in delinquent contracts
in 1994 and $524,000 in delinquent contracts in 1995, which amounts were
deducted from the deposit held by the purchaser of the receivables as security.
In addition, the Company was unable to replace or repurchase $613,000 in
delinquent receivables in 1995; however, a replacement of $293,000 in
receivables was made in January, 1996.
The Company was the guarantor of approximately $12,100,000 of contracts
receivable sold or transferred as of September 30, 1996, for the transactions
described above, and had $116,000 on deposit with purchasers of the receivables
as security to assure collectibility as of such date. A provision of $650,000
was established for the Company's obligation under the recourse provisions of
which $547,000 remains at September 30, 1996. The Company has been in compliance
with all receivable transactions since the consummation of sales.
The Company anticipates that it will be necessary to complete additional
financings of a portion of its receivables in 1996. There can be no assurance,
however, that such sales and/or financings can be accomplished.
OTHER OBLIGATIONS
As a result of the delays in completing the land improvements to certain
property sold in certain of its Central and North Florida communities, the
Company fell behind in meeting its contractual obligations to its customers. In
connection with these delays, the Company, in February, 1980, entered into a
Consent Order with the Division which provided a program for notifying affected
customers. The Consent Order, which was restated and amended, provided a program
for notifying affected customers of the anticipated delays in the completion of
improvements (or, in the case of purchasers of unbuildable lots in certain areas
of the Company's Sunny Hills community, the transfer of development obligations
to core growth areas of the community); various options which may be selected by
affected purchasers; a schedule for completing certain improvements; and a
deferral of the obligation to install water mains until requested by the
purchaser. Under an agreement with Topeka Group Incorporated ("Topeka"), which
purchased the Company's utilities in 1989, Topeka's utility companies have
agreed to furnish utility service to the future residents of the Company's
communities on substantially the same basis as such services were provided by
the Company. The Consent Order also required the establishment of an improvement
escrow account as assurance for completing such improvement obligations.
In June, 1992, the Company entered into the 1992 Consent Order with the
Division, which replaced and superseded the original Consent Order, as amended
and restated. Among other things, the 1992 Consent Order consolidated the
Company's development obligations and provided for a reduction in its required
monthly escrow obligation to $175,000 from September, 1992 through December,
1993. Beginning January, 1994 and until development is completed or the 1992
Consent Order is amended, the Company is required to deposit $430,000 per month
into the escrow account. As part of the assurance program under the 1992 Consent
Order, the Company and its lenders granted the Division a lien on certain
contracts receivable (approximately $10,100,000 as of September 30, 1996) and
future receivables. The Company defaulted on its obligation to escrow $430,000
per month for the period of January, 1994 through the present and, in accordance
with the 1992 Consent Order, collections on Division receivables were escrowed
for the benefit of purchasers from March 1,
19
<PAGE>
1994 through April 30, 1994. In May, 1994 the Company implemented a program to
exchange purchasers who contracted to purchase property which is undeveloped to
property which is developed. As of September 30, 1996, approximately 83% of the
customers whose lots are currently undeveloped have opted to exchange.
Consequently, the Division has allowed the Company to utilize collections on
receivables since May 1, 1994. Because of the Company's default, the Division
could also exercise other available remedies under the 1992 Consent Order, which
remedies entitle the Division, among other things, to halt all sales of
registered property.
The Company's goal is to eliminate its development obligation (with the
exception of its maintenance obligation in Marion Oaks and Sunny Hills) under
the 1992 Consent Order through this exchange program, completion of two
commercial areas in Marion Oaks, sale of its second Citrus Springs Golf Course
and settlement of all remaining maintenance and improvements obligations in
Citrus Springs through a final agreement with Citrus County (entered into in May
1995). Pursuant to the 1992 Consent Order, the Company has limited the sale of
single-family lots to lots which front on a paved street and are ready for
immediate building.
Based upon the Company's experience with affected customers, the Company
believes that the total refunds arising from delays in completing improvements
will not materially exceed the amount provided for in the consolidated financial
statements. Approximately $7,000 of the provision for the total refunds relating
to the delays of improvements remained in accrued expenses and other at
September 30, 1996.
The Company's corporate performance bonds to assure the completion of
development at its St. Augustine Shores community expired in March and June,
1993. Such bonds cannot be renewed due to a change in the policy of the Board of
County Commissioners of St. Johns County which precludes allowing any developer
to secure the performance of development obligations by the issuance of
corporate bonds. In the event that St. Johns County elects to undertake the
completion of such development work, the Company would be obligated with respect
to 1,000 unimproved lots at St. Augustine Shores in the amount of approximately
$6,200,000. The Company intends to submit an alternative assurance program for
the completion of such development and improvements to the County for its
approval.
The Company placed certain properties in trust to meet its refund obligation to
Marco customers affected by the permit denials. On September 14, 1992, the
Circuit Court of Dade County, Florida approved a settlement of certain class
action litigation instituted by customers affected by the Marco permit denials,
under the terms of which the Company was required, among other things, to convey
more than 120 acres of multi-family and commercial land that had been placed in
trust to the trustee of the 809 member class. As part of the settlement, the
Company guaranteed the amount to be realized from the sale of the conveyed
property, not to exceed $2,000,000. Such settlement enabled the Company to
resolve the claims of an additional 12.7% of its affected customers and
re-evaluate the allowance for Marco permit costs. As a result of such analysis,
the Company was able to reduce such allowance by $12,200,000, resulting in a
$3,983,000 extraordinary gain in 1992 and a $500,000 credit to accrued expenses
to be credited to paid-in capital following issuance of 250,000 shares of
restricted Common Stock of the Company to the class members. Following the
closing on the majority of the property conveyed to the trust, the Company
recorded an extraordinary gain of $702,000 resulting from a reduction in the
amount of its guarantee pursuant to the settlement agreement. On September 6,
1996, Yasawa loaned the Company $818,000 which was used to satisfy the remaining
obligation on the Marco class action settlement agreement resulting in an
extraordinary gain of $331,000. Additionally, as part of the settlement
agreement, Swan Development Corporation, an affiliate of Yasawa, acquired four
condominium units from the class action trustee for $182,000, the same value
that the trustee attributed to the units on September 14, 1992.
LIQUIDITY
Since 1986, the Company has directed its marketing efforts to rebuilding retail
land sales in an attempt to obtain a more stable income stream and achieve a
balanced growth of retail land sales and bulk land sales. Retail land sales
typically have a higher gross profit margin than bulk land sales and the
contracts receivable generated from retail land sales provide a continuing
source of income. However, retail land sales also have traditionally produced
negative cash flow through the point of sale. This is because the marketing and
selling expenses have generally been paid prior to or shortly after the point
20
<PAGE>
of sale, while the land is generally paid for in installments. The Company's
ability to rebuild retail land sales has been substantially dependent on its
ability to sell or otherwise finance contracts receivable and/or secure other
financing sources to meet its cash requirements.
To alleviate the negative cash flow impact arising from retail land sales while
attempting to rebuild its sales volume, the Company implemented several new
marketing programs which, among other things, adjusted the method of commission
payments and required larger down payments. However, the nationwide economic
recession, which was especially pronounced in the real estate industry, adverse
publicity surrounding the industry which existed in 1990, the resulting, more
stringent regulatory climate, and worldwide economic uncertainties have severely
depressed retail land sales beginning in mid-1990 and continuing thereafter,
resulting in a continuing liquidity crisis.
Because of this severe liquidity crisis, the Company ceased development work
late in the third quarter of 1990 and did not resume development work until the
third quarter of 1992. From September 29, 1990 through the fourth quarter of
1991, when the Company ceased selling undeveloped lots, sales of undeveloped
lots were accounted for using the deposit method. Under this method, all
payments were recorded as a customer deposit liability. In addition, because of
the increasing trend in delinquencies during 1990, since the beginning of 1991,
the Company has not recognized any sale until 20% of the contract sales price
has been received. As a result, the reporting and recognition of revenues and
profits on a portion of the Company's retail land sales contracts is being
delayed.
The continued economic recession and the increasing adverse effects of such
recession on the Florida real estate industry not only resulted in the Company's
sales remaining at depressed levels, but caused greater contract cancellations
in 1991, particularly in the second half of the year, than were anticipated.
Such cancellations required the Company to record an additional provision to its
allowance for uncollectible sales of approximately $12,200,000 in the 1991 third
quarter, impacting net income by approximately $8,900,000. While the Company is
making every effort to reduce its cancellations, the Company could be required
to record additional provisions in the future.
In December, 1992, the Company's bank debt was acquired by Mr. Gram and assigned
to Yasawa. Through the sale of certain assets to Yasawa and its affiliates,
including certain contracts receivable, and the exercise of the warrants by
Yasawa, the Company was able to reduce such remaining debt from approximately
$25,150,000 (including interest and fees) to approximately $5,106,000. During
1994, the Yasawa Loan was reduced to 4,764,600. The agreement with Yasawa also
provided the Company with a future line of credit of $1,500,000, all of which is
drawn and outstanding as of March 31, 1996. During 1993, Selex loaned the
Company an additional $5,400,000 pursuant to the Second and Third Selex Loans.
Beginning in 1994, Yasawa has loaned the Company an additional $5,930,000,
pursuant to the Second Yasawa Loan, as of September 30, 1996. The loans from
Selex, Yasawa and their affiliates are collateralized by substantially all of
the Company's assets.
On March 10, 1994, the Company was advised that Selex filed an Amendment to its
Schedule 13D with the Commission. In the Amendment, Selex reported that it,
together with Yasawa and their affiliates, were uncertain as to whether they
would provide any further funds to the Company. The Amendment further stated
that Selex, Yasawa and their affiliates were seeking third parties to provide
financing for the Company and that as part of any such transaction, they would
be willing to sell or restructure all or a portion of their loans and Common
Stock in the Company.
The Company has stated in previous filings with the Commission and elsewhere
herein that the obtainment of additional funds to implement its marketing
program and achieve the objectives of its business plan is essential to enable
the Company to maintain operations and continue as a going concern. Since
December, 1992, the Company has been dependent on loans and advances from Selex,
Yasawa and their affiliates in order to implement its marketing program and
assist in meeting its working capital requirements. As previously stated, during
the last nine months of 1993, Selex, Yasawa and their affiliates loaned the
Company an aggregate of $4,400,000 pursuant to Third Selex Loan. Funds advanced
under the Third Selex Loan enabled the Company to commence implementation of the
majority of its marketing program in the third quarter of 1993. The full
benefits of the program were not realized in 1993 and the Company was unable to
secure financing in 1994 to meet its working capital requirements and continue
its marketing program. Commencing in 1994, Yasawa advanced additional funds (the
"Second Yasawa Loan") a totaling $5,930,000 as of September 30, 1996, to meet
the Company's minimum
21
<PAGE>
working capital requirements, to pay delinquent real estate taxes, to pay
settlements with certain trade creditors and to settle certain litigation.
As a consequence of its liquidity position, the Company has defaulted on certain
obligations, including its previously described escrow obligations to the
Division pursuant to the Company's 1992 Consent Order and its obligation to make
required interest payments under loans from Selex, Yasawa and their affiliates.
Furthermore, the Company has not paid delinquent real estate taxes which
aggregate approximately $2,265,000 as of September 30, 1996; non-payment of
these delinquent taxes may adversely affect the financial condition of the
Company.
The Company is continuing to seek third parties to provide financing. There can
be no assurance, however, that any financing will be obtained. Accordingly, the
Company's Board of Directors is also considering other appropriate action given
the severity of the Company's liquidity position including, but not limited, to
filing for protection under the federal bankruptcy laws.
22
<PAGE>
PART II - OTHER INFORMATION
===========================
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company during the
quarter ended September 30, 1996.
23
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE DELTONA CORPORATION
Date: November 7, 1996 By: /s/Donald O. McNelley
----------------------
Donald O. McNelley
Treasurer
(Principal Financial Officer)
24
<PAGE>
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