<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000027984
<NAME> The Deltona Corporation
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 868
<SECURITIES> 0
<RECEIVABLES> 8,473
<ALLOWANCES> (2,599)
<INVENTORY> 11,024
<CURRENT-ASSETS> 494
<PP&E> 2,841
<DEPRECIATION> (2,344)
<TOTAL-ASSETS> 19,091
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 6,729
0
0
<OTHER-SE> (24,126)
<TOTAL-LIABILITY-AND-EQUITY> 19,091
<SALES> 1,641
<TOTAL-REVENUES> 2,017
<CGS> 606
<TOTAL-COSTS> 667
<OTHER-EXPENSES> 1,332
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 422
<INCOME-PRETAX> (404)
<INCOME-TAX> 0
<INCOME-CONTINUING> (404)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (404)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
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 March 31, 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: 6,729,142 shares of common
stock, $1 par value, excluding treasury stock, as of March 31, 1996.
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE DELTONA CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
($000 Omitted)
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Cash and temporary cash investments,
including escrow deposits and restricted
cash of $824 in 1996 and $855 in 1995............. $ 868 $ 982
--------- ---------
Contracts receivable for land sales - net.......... 5,874 5,602
--------- ---------
Mortgages and other receivables - net.............. 334 413
--------- ---------
Inventories (b):
Land and land improvements........................ 10,920 11,131
Other............................................. 104 104
--------- ---------
Total inventories......................... 11,024 11,235
--------- ---------
Property, plant, and equipment at cost - net....... 497 510
--------- ---------
Prepaid expenses and other......................... 494 438
--------- ---------
Total..................................... $ 19,091 $ 19,180
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Mortgages and similar debt(c):
Mortgage notes payable............................ $ 16,817 $ 16,717
Other loans ...................................... 3,661 3,661
--------- ---------
Total mortgages and similar debt................ 20,478 20,378
Accounts payable, accrued expenses,
customers' deposits............................... 6,026 5,701
Allowance for Marco permit costs (d)............... 1,349 1,349
Deferred revenue................................... 8,635 8,765
--------- ---------
Total liabilities......................... 36,488 36,192
--------- ---------
Commitments and contingencies (d):
Stockholders' equity (deficiency):
Common stock, $1 par value - authorized
15,000,000 shares; outstanding: 1996
and 1995 - 6,729,142 shares and 6,719,244
shares (excluding 12,228 shares held
in treasury in 1996 and 1995).................... 6,729 6,719
Capital surplus................................... 44,709 44,699
Accumulated deficit............................... ( 68,835) (68,431)
---------- ---------
Total stockholders' (deficiency).......... ( 17,397) (17,013)
---------- ---------
Total............................ $ 19,091 $ 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>
Three Months
Ended
March 31, March 31,
1996 1995
--------- ---------
<S> <C> <C>
Revenues (a):
Net land sales....................... $ 1,048 $ 432
House and apartment sales............ 364 732
Recognized improvement
revenue/ prior period
sales............................... 131 217
Interest income...................... 244 229
Other revenues....................... 230 219
--------- ---------
Total............................ 2,017 1,829
--------- ---------
Costs and expenses (a):
Cost of sales and
improvements........................ 667 893
Selling, general and
administrative and other
expenses............................ 1,332 1,156
Interest expense (c)(e).............. 422 447
--------- ---------
Total............................ 2,421 2,496
--------- ---------
Loss from operations before
extraordinary item................... (404) (667)
Extraordinary Item:
Gain on settlement related
to the Marco refund
obligation.......................... -0- 702
--------- ---------
Net Income (Loss)..................... $ (404) 35
========= =========
Earning (Loss) per share:
From operations...................... (.06) (.10)
Extraordinary item................... -0- .10
--------- ---------
Net Income (Loss)..................... (.06) $ -0-
========= =========
Number of common and common
equivalent shares.................... 6,722,942 6,685,166
========= =========
<FN>
No dividends have been paid on Common Stock.
Results of operations for the first three 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 THREE MONTHS ENDED
MARCH 31, 1996 AND MARCH 31, 1995
($000 Omitted)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities.............. $ (219) $ (1,617)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment................................... 5 -0-
Payment for acquisition and construction
of property plant and equipment................. -0- (3)
--------- ---------
Net cash provided by (used in) investing
activities....................................... 5 (3)
--------- ---------
Cash flows from financing activities:
New borrowings.................................. 100 700
Repayment of borrowings......................... -0- (5)
--------- ---------
Net cash provided by (used in) financing
activities....................................... 100 695
--------- ---------
Net increase (decrease) in cash and
temporary cash investments (including
escrow deposits and restricted cash)............. (114) (925)
Cash and temporary cash investments at
December 31, 1995 and December 31, 1994.......... 982 2,440
--------- ---------
Cash and temporary cash investments at
March 31, 1996 and March 31, 1995................ $ 868 $ 1,515
========= =========
Supplemental disclosure of non cash investing
and financing activities:
Common Stock issued for reduction of
mortgage note payable........................... $ -0- $ -0-
========= =========
Common Stock issued for Marco Settlement......... $ 19 $ 48
========= =========
<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 THREE MONTHS ENDED
MARCH 31, 1996 AND MARCH 31, 1995
($000 Omitted)
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1996 1995
--------- ---------
<S> <C> <C>
Reconciliation of net income (loss)
to net cash provided by (used in)
operating activities:
Net loss............................... $ (404) $ 35
--------- --------
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization.......... 13 18
Provision for estimated uncollectible
sales-net............................. 389 166
Contract valuation discount, net of
amortization.......................... 75 9
Net Gain on sale of property, plant &
equipment............................ (5) -0-
Gain on settlement related to the Marco
refund obligation.................... -0- (702)
Net change in assets and liabilities... (287) (1,143)
--------- --------
Total adjustments............... $ 185 $ (1,652)
--------- --------
Net cash provided by (used in) operating
activities...................... $ (219) $ (1,617)
========= ========
</TABLE>
5
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Unimproved land.................... $ 444 $ 444
Land in various stages of
development....................... 4,014 4,014
Fully improved land................ 6,462 6,673
-------- --------
Total..................... $ 10,920 $ 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 March 31, 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 March 31, 1996, the
Company was in default of the First Selex Loan.
6
<PAGE>
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. 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 277,387 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 March
7
<PAGE>
31, 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 March 31, 1996, $5,961,000 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"). 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 March 31, 1996,
the remaining principal and accrued interest of $3,910,000 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 March 31, 1996, an aggregate amount of $4,112,000 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 genrally 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
8
<PAGE>
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 March 31, 1996, the Company had loans outstanding from
Selex, Yasawa and their affiliates in the aggregate amount of
approximately $20,899,000, including interest, all of which are in
default, including approximately $ 8,366,000, which is owed to Selex;
approximately $10,483,000; and approximately $2,050,000, 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.
(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 March 31, 1996 was approximately $4,952,000.
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 $10,004,000 as of March 31, 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
March 31, 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.
9
<PAGE>
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 (with the buyer assuming the development
obligation) 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 $14,000 of
the provision for the total refunds relating to the delays of
improvements remained in accrued expenses and other at March 31, 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.
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 $422,000
and $447,000, none was capitalized for the three months ended March 31,
1996 and March 31, 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 per share
for the three months ended March 31, 1996 and March 31, 1995 were
($404,000) and $35,000 and 6,722,942 and 6,685,166, 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
(41.9% 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 March 31,
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").
11
<PAGE>
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
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. Principal of
$1,000,000 had been repaid under the Second Selex Loan and $1,371,000 under the
Third Selex Loan through March 31, 1996. As of March 31, 1996, Yasawa has loaned
the Company an additional sum of $4,112,000 pursuant to the Second Yasawa Loan.
As a consequence of these transactions, the Company had loans outstanding from
Selex, Yasawa and their affiliates on March 31, 1996 in the aggregate amount of
approximately $20,478,000. 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") totalling $4,112,000 as of March 31, 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
12
<PAGE>
make required payments under loans from Selex, Yasawa and their affiliates.
Furthermore, the Company has not paid delinquent real estate taxes which
aggregate approximately $3,040,000 as of March 31, 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. As part of
any such transaction, Selex, Yasawa and their affiliates have indicated that
they are willing to sell or restructure all or a portion of their loans and
Common Stock in the Company. They have also indicated that they are willing to
sell their interests in the Company at a significant discount. Consummation of
any such transaction may result in a change in control of the Company. There can
be no assurance, however, that such transaction will result or 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.
RESULTS OF OPERATIONS
- ---------------------
For the three months ended March 31, 1996 and March 31, 1995.
Revenues
- --------
Total revenues were $2,017,000 for the first quarter of 1996 compared to
$1,829,000 for the comparable 1995 period.
Gross land sales were $1,567,000 for the first quarter of 1996 versus $665,000
for the first quarter of 1995. Net land sales (gross land sales less estimated
uncollectible installment sales and contract valuation discount) increased to
$1,048,000 for the first three months of 1996 from $432,000 for the first three
months of 1995.
There were no bulk land sales for the first quarter 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 $364,000 for the three
months ended March 31, 1996 compared to $725,000 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):
Three months ended
March 31, March 31,
1996 1995
--------- ------
Gross Land Sales:
Retail Sales* $ 1,567 $ 665
-------- -------
Housing Sales:
Single Family 364 725
Vacation ownership -0- 7
Total 364 732
-------- -------
Total Real Estate $ 1,931 $ 1,397
======== =======
- ---------------------
* 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 three months ended March 31, 1996 and March
31, 1995 were $1,735,000 and $1,055,000, respectively. The Company had
a backlog of approximately $3,300,000 in unrecognized sales as of March
31, 1996. Such contracts are not included in retail land sales until
the applicable rescission period has expired and the Company has
received payments totalling 20% of the contract sales price.
13
<PAGE>
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 totalled $131,000 for the first quarter of 1996 as compared to $217,000
for the first quarter of 1995. The decrease was due to the Company's financial
condition which caused the Company to stop development work.
Interest income was $244,000 for the first three months of 1996 as compared to
$229,000 for the first three months of 1995. This increase is the result of
higher contracts receivable balances.
Other revenues were $230,000 as compared to $219,000 for the three months ended
March 31, 1996 and March 31, 1995, 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 three months of 1996 were $2,421,000 compared
to $2,496,000 for the same period in 1995. Cost of sales totalled $667,000 for
the three months ended March 31, 1996 compared to $893,000 for the three months
ended March 31, 1995. The decrease is primarily the result of lower housing
sales in 1996.
Commissions, advertising and other selling expenses totalled $545,000 for the
three months ended March 31, 1996 compared to $408,000 for the three months
ended March 31, 1995. This increase is the result of higher retail sales levels.
Advertising and promotional expenditures decreased to $160,000 from $194,000 for
the three month period of 1996 versus 1995.
General and administrative expenses were $473,000 for the first three months of
1996 compared to $469,000 for the first three months of 1995.
Real estate tax expense was $315,000 for the period ended March 31, 1996 as
compared to $278,000 for the period ended March 31, 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 three months of 1996 was $ 422,000, compared to
$447,000 for the first three months of 1995. Total interest cost (none of which
represents capitalized interest) was $422,000 and $447,000 for the first three
months of 1996 and 1995, respectively. No interest has been capitalized since
the first quarter of 1994 since the Company had stopped land development work at
its communities.
Net Income (Loss)
- -----------------
The Company reported a net loss of $404,000 for the three months ended March 31,
1996 as compared to a first quarter net income of $35,000 for the three months
ended March 31, 1995. The three months ending March 31, 1995 included an
extraordinary gain of $702,000 resulting from a reduction in the allowance for
the guarantee pursuant to a settlement of the Marco class action.
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
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Mortgage Notes Payable........ $ 16,817 $16,717
Other Loans................... 3,661 3,661
-------- -------
Total Mortgages and
Similar Debt.................. $ 20,478 $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
March 31, 1996), the $4,400,000 Third Selex Loan ($3,825,000 as of March 31,
1996), the $4,900,000 Yasawa Loan ($5,829,000 as of March 31, 1996) and the
Second Yasawa Loan ($4,441,000 as of March 31, 1996). Other loans include the
$1,656,000 Empire note and the $2,050,000 Scafholding Loan.
15
<PAGE>
These mortgage notes payable and other loans are in default as of March 31, 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, 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 277,387 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
16
<PAGE>
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 March 31, 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 March 31, 1996, $5,961,000 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 March 31, 1996, the remaining principal balance of
$3,825,000 and accrued interest of $85,000 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 March 31, 1996, an aggregate amount of
$4,112,000 been advanced to the Company under the Second Yasawa Loan and the
principal balance of $4,441,000 and accrued interest of $81,000 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
17
<PAGE>
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 March
31, 1996, the Company had loans outstanding from Selex, Yasawa and their
affiliates in the aggregate amount of approximately $20,899,000, including
interest, all of which are in default, including approximately $8,366,000, which
is owed to Selex, including accrued and unpaid interest of approximately
$162,000 (10% per annum on the First Selex Loan, 11% per annum on the Third
Selex Loan and 12% per annum on the $1,000,000 Empire Note assigned to Selex);
approximately $10,483,000, which is owed to Yasawa, including accrued and unpaid
interest of approximately $214,000 (11% per annum on the Yasawa Loan and 8% per
annum on the Second Yasawa Loan); and approximately $2,050,000, which is owed to
an affiliate of Yasawa, including accrued and unpaid interest of approximately
$46,000 (12% per annum). 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") totalling $4,112,000 as of March 31, 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 $3,040,000 as of March 31, 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 $980,000 of delinquent real estate taxes.
The Company is continuing to seek third parties to provide financing. As part of
any such transaction, Selex, Yasawa and their affiliates have indicated that
they are willing to sell or restructure all or a portion of their loans
18
<PAGE>
and Common Stock in the Company. They have also indicated that they are willing
to sell their interests in the Company at a significant discount. Consummation
of any such transaction may result in a change in control of the Company. There
can be no assurance, however, that such transaction will result or 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 March 31, 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 totalling $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 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 $15,081,000 of contracts
receivable sold or transferred as of March 31, 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
has been established for the Company's obligation under the recourse provisions
of which $473,000 remains at March 31, 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.
19
<PAGE>
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 $10,004,000 as of March 31, 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
March 31, 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
(with the buyer assuming the development obligation) 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 $14,000 of the provision for the total refunds
relating to the delays of improvements remained in accrued expenses and other at
March 31, 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
20
<PAGE>
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. At March 31, 1996,
$ 1,349,000 remained in the allowance for Marco permit costs, including $39,000
relating to interest accrued on such obligations. Based upon the Company's
experience with affected customers, the Company believes that its total
obligations to the three remaining affected customers will not materially exceed
the amount provided for in the accompanying Consolidated Financial Statements.
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 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
21
<PAGE>
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 $4,112,000,
pursuant to the Second Yasawa Loan, as of March 31, 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 totalling $4,112,000 as of March 31, 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 interest payments under loans from Selex, Yasawa and their affiliates.
Furthermore, the Company has not paid delinquent real estate taxes which
aggregate approximately $3,040,000 as of March 31, 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. As part of
any such transaction, Selex, Yasawa and their affiliates have indicated that
they are willing to sell or restructure all or a portion of their loans and
Common Stock in the Company. They have also indicated that they are willing to
sell their interests in the Company at a significant discount. Consummation of
any such transaction may result in a change in control of the Company. There can
be no assurance, however, that such transaction will result or 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 March 31, 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: By: /s/Donald O. McNelley
- ------------------------------ ------------------------------
Donald O. McNelley
Treasurer
(Principal Financial Officer)
24
<PAGE>