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, 1997
------------------
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: 6,734,939 shares of common
stock, $1 par value, excluding treasury stock, as of September 30, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
==============================
ITEM I. FINANCIAL STATEMENTS.
<TABLE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
-----------------------------------------------
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
----------------------------------------
($000 Omitted)
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
------
Cash and temporary cash investments,
including escrow deposits and restricted
cash of $776 in 1997 and $981 in 1996...............$ 819 $ 907
---------- ---------
Contracts receivable for land sales - net............ 8,101 6,965
---------- ---------
Mortgages and other receivables - net................ 322 384
---------- ---------
Inventories (b):
Land and land improvements.......................... 9,860 10,287
Other............................................... 99 99
---------- ---------
Total inventories........................... 9,959 10,386
---------- ---------
Property, plant, and equipment at cost - net......... 381 413
---------- ---------
Prepaid expenses and other........................... 287 367
---------- ---------
Total.......................................$ 19,869 $ 19,422
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-----------------------------------------------------
Mortgages and similar debt(c):
Mortgage notes payable..............................$ 18,845 $ 18,707
Other loans ........................................ 3,661 3,661
---------- ---------
Total mortgages and similar debt.................. 22,506 22,368
Accounts payable, accrued expenses,
customers' deposits................................. 9,670 7,169
Allowance for Marco permit costs (d)................. 0 0
Deferred revenue..................................... 6,800 7,764
---------- ---------
Total liabilities........................... 38,976 37,301
---------- ---------
Commitments and contingencies (d):
Stockholders' equity (deficiency):
Common stock, $1 par value - authorized
15,000,000 shares; outstanding: 1997
and 1996 - 6,734,939 shares and 6,734,572
shares (excluding 12,228 shares held
in treasury in 1997 and 1996)...................... 6,735 6,734
Capital surplus..................................... 44,715 44,714
Accumulated deficit................................. (70,557) (69,327)
---------- ---------
Total stockholders' (deficiency)............ (19,107) (17,879)
---------- ---------
Total..............................$ 19,869 $ 19,422
========== =========
</TABLE>
2
<PAGE>
<TABLE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
---------------------------------------------------------
FOR THE PERIODS INDICATED
-------------------------
($000 Omitted Except Per Share Amounts)
<CAPTION>
Nine Months Ended Three Months Ended
---------------------------- ----------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues (a):
Net land sales.....................$ 2,947 $ 3,526 $ 856 $ 1,405
House and apartment sales.......... 787 875 225 267
Recognized improvement
revenue/ prior period
sales............................. 908 874 147 227
Interest income.................... 1,009 1,083 330 546
Other revenues..................... 343 518 73 162
--------- --------- --------- ---------
Total.......................... 5,994 6,876 1,631 2,607
--------- --------- --------- ---------
Costs and expenses (a):
Cost of sales and
improvements...................... 1,770 2,076 505 725
Selling, general and
administrative and other
expenses.......................... 4,068 4,244 1,285 1,580
Interest expense (c)(e)............ 1,386 1,316 468 453
--------- --------- --------- ---------
Total.......................... 7,224 7,636 2,258 2,758
--------- --------- --------- ---------
Loss from operations before
extraordinary item......... (1,230) (760) (627) (151)
--------- --------- --------- ---------
Extraordinary Item:
Gain on settlement related to the
Marco refund obligation.......... 0 331 0 331
--------- --------- --------- ---------
Net Income (Loss)...................$ (1,230) $ (429) $ (627) $ 180
========= ========= ========= =========
Earning (Loss) per share:
From operations....................$ (.18) $ (.11) $ (.09) $ (.02)
--------- --------- --------- ---------
From extraordinary item............$ 0 $ .05 $ 0 $ .05
--------- --------- --------- ---------
Net Income (Loss)...................$ (.18) $ (.06) $ (.09) $ .03
========= ========= ========= =========
Number of common and common
equivalent shares..................6,734,928 6,728,157 6,734,939 6,732,341
========= ========= ========= =========
<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>
<TABLE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
-----------------------------------------
($000 Omitted)
<CAPTION>
Nine Months Ended
----------------------
Sept. 30, Sept. 30,
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities.............. $ (227) $ (1,871)
-------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment................................... 3 5
Payment for acquisition and construction
of property plant and equipment................. (2) (5)
-------- --------
Net cash provided by (used in) investing
activities....................................... 1 0
-------- --------
Cash flows from financing activities:
New borrowings.................................. 138 1,918
Repayment of borrowings......................... 0 (6)
-------- --------
Net cash provided by (used in) financing
activities....................................... 138 1,912
-------- --------
Net increase (decrease) in cash and
temporary cash investments (including
escrow deposits and restricted cash)............. (88) 41
Cash and temporary cash investments at
December 31, 1996 and December 31, 1995.......... 907 982
-------- --------
Cash and temporary cash investments at
September 30, 1997 and September 30, 1996........ $ 819 $ 1,023
======== ========
Supplemental disclosure of non cash
investing and financing activities:
Common Stock issued for Marco Settlement.......... $ 1 $ 31
======== ========
<FN>
See Notes to Unaudited Condensed Consolidated Financial Statements.
Certain amounts have been reclassified for comparative purposes.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
-----------------------------------------
($000 Omitted)
<CAPTION>
Nine Months Ended
--------------------------
Sept. 30, Sept. 30,
1997 1996
---------- ---------
<S> <C> <C>
Reconciliation of net income (loss)
to net cash provided by (used in)
operating activities:
Net loss.......................................... $ (1,230) $ (429)
-------- --------
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization..................... 52 40
Provision for estimated uncollectible sales-net... 1,068 1,394
Contract valuation discount, net of amortization.. 178 249
Net Gain on sale of property, plant &
equipment....................................... (3) (5)
Net Gain on settlement related to Marco
refund obligation............................... 0 (331)
Net change in assets and liabilities.............. (292) (2,789)
-------- --------
Total adjustments.......................... $ 1,003 $ (1,442)
-------- --------
Net cash provided by (used in) operating
activities................................. $ (227) $ (1,871)
======== ========
</TABLE>
5
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------
SEPTEMBER 30, 1997
------------------
(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 including land held for sale or transfer is as follows (in
thousands):
<TABLE>
<CAPTION>
Land and Improvements
---------------------
September 30, December 31,
1997 1996
------------- -----------
<S> <C> <C>
Unimproved land.............................$ 415 $ 421
Land in various stages of
development................................ 3,880 3,708
Fully improved land......................... 5,565 6,159
-------- --------
Total..............................$ 9,860 $ 10,288
======== ========
</TABLE>
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 matured on June
15, 1996, with the entire unpaid balance now due and payable and
bearing interest at the rate of 10% per annum. 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. As of September 30, 1997, 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. Namely, (i)
$416,000 was used to acquire 48 undeveloped condominium units (twelve
4 unit building sites) and
6
<PAGE>
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 served 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 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 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, 1997); 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, 1997, $6,759,000 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").
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, which closed on May 22, 1995, provided a reduction of
the debt due and payable under the Third Selex Loan. As of September
30, 1997, the remaining balance of $4,408,000 in principal and 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, 1997, an aggregate amount of $6,149,500
had been advanced to the Company under the Second Yasawa Loan and the
balance of $7,256,500 in principal and 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 served 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 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. Through September 30, 1997, $1,380,900 in principal was
repaid under the First Selex Loan through the exercise of the above
described Option, the Second Selex Loan was repaid in full, $1,380,900
in principal was repaid under the Third Selex Loan, and $135,900 in
principal and $346,000 in accrued interest was repaid under the Yasawa
loan. As of September 30, 1997, the Company had loans outstanding from
Selex, Yasawa and their affiliates in the aggregate amount of
approximately $25,670,000, including interest, all of which are in
default, including approximately $4,329,700, which is owed to Selex,
including accrued and unpaid interest of approximately $1,135,500 (10%
per annum on the First Selex Loan, 11% per annum on the Third Selex
Loan and 12% per annum on the Empire Note assigned to Selex);
8
<PAGE>
approximately $14,015,600, which is owed to Yasawa, including accrued
and unpaid interest of approximately $1,708,800 (11% per annum on the
Yasawa Loan and 8% per annum on the Second Yasawa Loan); and
approximately $2,324,500, which is owed to an affiliate of Yasawa,
including accrued and unpaid interest of approximately $319,500 (12%
per annum). The loans from Selex, Yasawa and their affiliates are
secured by substantially all of the assets of the Company.
On November 4, 1997, the Company's stockholders approved an
Agreement to reduce its $25.3 million debt obligation with its lenders
(the "August 19, 1997 Agreement"). See Part II, Item 5. Other
Information.
(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
improvement 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, 1997 was approximately $5,086,000.
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 of Florida Land Sales, Condominiums and Mobile Homes (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 a Consent Order with the
Division, which replaced and superseded the original Consent Order, as
amended and restated (the "1992 Consent Order"). 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 receivables 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, 1997, approximately
84% of the customers whose lots are currently undeveloped have opted to
exchange or were otherwise resolved. 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) under the 1992
Consent Order through this exchange program. All remaining maintenance
and improvements obligations in Citrus Springs were settled through a
final agreement with Citrus County. Pursuant
9
<PAGE>
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.
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 year ended December 31, 1996, 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 $1,386,000
and $1,316,000, none was capitalized for the nine months ended
September 30, 1997 and September 30, 1996, 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, 1997 and September
30, 1996 were $(1,230,000) and $(429,000) and 6,734,928 and 6,728,157,
respectively, and for the third quarters of 1997 and 1996 were
$(627,000) and $180,000 and 6,734,939 and 6,732,341, 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 International
B.V., a Netherlands corporation ("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. Mr. 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. In November,
1995, Messrs. Muyres, van de Peppel, Nipshagen and Zwaans resigned their board
seats.
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 September 30,
1997).
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 served 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. The
principal balance of the Yasawa Loan is $5,829,000 as of September 30, 1997. 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. The Second Selex
Loan has been satisfied and principal of $1,380,900 has been repaid under the
Third Selex Loan through September 30, 1997. As of September 30, 1997, Yasawa
has loaned the Company an additional sum of $6,149,500 pursuant to the Second
Yasawa Loan. As a consequence of these transactions, as of September 30, 1997,
the Company had loans outstanding from Selex, Yasawa and their affiliates in the
aggregate amount of approximately $25,670,000, including interest.
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.
On March 10, 1994, the Company was advised that Selex filed an Amendment to its
Schedule 13D with the Securities and Exchange Commission (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, 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 $6,149,500 as of September 30, 1997, to meet the
Company's minimum working capital requirements, to pay a portion of delinquent
real estate taxes, to pay settlements with certain trade creditors and to settle
certain litigation.
On November 4, 1997, the Company's stockholders approved an Agreement to reduce
its $25.3 million debt obligation with its lenders (the "August 19, 1997
Agreement"). See Part II, Item 5. Other Information.
12
<PAGE>
The Company will continue to seek third party financing to meet its working
capital requirements. As part of the August 19, 1997 Agreement, approved by the
Board of Directors and subsequently the stockholders on November 4, 1997, the
lenders agreed to purchase future contracts receivable at 65% of face value,
with recourse, as a source of working capital for the Company. See Part II,
Item 5. Other Information.
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 $3,120,000 as of September 30, 1997; non-payment of
these delinquent taxes may adversely affect the financial condition of the
Company. As part of the August 19, 1997 Agreement, the Company will use a
portion of the proceeds of the $7,500,000 sale of contracts receivable to pay a
majority of the delinquent real estate taxes.
RESULTS OF OPERATIONS
- ---------------------
For the nine months ended September 30, 1997 and September 30, 1996.
Revenues
- --------
Total revenues were $5,994,000 for the first nine months of 1997 compared to
$6,876,000 for the comparable 1996 period. For the third quarter of 1997 total
revenues were $1,631,000 compared to $2,607,000 for the comparable 1996 period.
Gross land sales were $4,402,000 for the first nine months of 1997 versus
$5,569,000 for the first nine months of 1996. Net land sales (gross land sales
less estimated uncollectible installment sales and contract valuation discount)
decreased to $2,947,000 for the first nine months of 1997 from $3,526,000 for
the first nine months of 1996. For the three months ended September 30, 1997 net
land sales decreased to $856,000 from $1,405,000 for the comparable year ago
period.
There were no bulk land sales for the first nine months of 1997 or 1996. 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".
Housing revenues were $787,000 for the nine months ended September 30, 1997
compared to $875,000 for the same period in 1996. Housing revenues decreased due
to the lack of working capital to fund an advertising and promotional program.
Revenues are not recognized from housing sales until the completion of
construction and passage of title.
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,
1997 1996 1997 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Gross Land Sales:
Retail Sales* $ 4,402 $ 5,569 $ 1,236 $ 2,295
--------- ------- --------- -------
Housing Sales:
Vacation Ownership 0 8 0 0
Single Family 787 867 225 267
--------- ------- --------- -------
Total 787 875 225 267
--------- ------- --------- -------
Total Real Estate $ 5,189 $ 6,444 $ 1,461 $ 2,562
========= ======= ========= =======
<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, 1997 and
September 30, 1996 were $4,085,000 and $5,576,000, respectively, and
$1,228,000 and $1,838,000 for the third
13
<PAGE>
quarters of 1997 and 1996, respectively. The Company had a
backlog of approximately $1,546,000 in unrecognized sales as of
September 30, 1997. 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 $907,000 for the first nine months of 1997
($147,000 for the third quarter 1997), as compared to $874,000 for the first
nine months of 1996 ($227,000 for the third quarter 1996). Due to the Company's
financial condition, the Company has done minimal development work in the last
two years.
Interest income was $1,009,000 for the first nine months of 1997 as compared to
$1,083,000 for the first nine months of 1996. For the third quarters of 1997 and
1996, interest income was $330,000 and $546,000, respectively.
Other revenues were $342,000 as compared to $518,000 for the nine months ended
September 30, 1997 and September 30, 1996, respectively. For the third quarters
of 1997 and 1996, other revenues were $73,000 and $162,000, respectively. Other
revenues for 1997 were generated principally by the Company's title insurance
and real estate brokerage subsidiaries. Included in the 1996 results is an
extraordinary gain of $331,000 resulting from the final settlement of the Marco
Class action litigation. In 1996, the Company also recorded a gain of
approximately $136,000 representing contract receivables returned to the Company
from a previous sale of receivables.
Costs and Expenses
- ------------------
Costs and expenses for the first nine months of 1997 were $7,224,000 compared to
$7,636,000 for the same period in 1996. For the third quarters of 1997 and 1996,
costs and expenses totaled $2,258,000 and $2,758,000, respectively. Cost of
sales totaled $1,770,000 for the nine months ended September 30, 1997 compared
to $2,076,000 for the nine months ended September 30, 1996. For the third
quarters of 1997 and 1996, cost of sales were $505,000 and $725,000
respectively.
Commissions, advertising and other selling expenses totaled $1,786,000 for the
nine months ended September 30, 1997 compared to $1,952,000 for the nine months
ended September 30, 1996. This decrease is the result of lower commission
expenses. Advertising and promotional expenditures decreased to $83,000 from
$90,000 for the nine month period of 1997 versus 1996. For the third quarter of
1997, commissions, advertising and other selling expenses totaled $536,000,
compared to $822,000 for the 1996 third quarter. Advertising and promotional
expenditures decreased to $26,000 from $36,000 for the third quarter period of
1997 versus 1996.
General and administrative expenses were $1,291,000 for the first nine months of
1997 compared to $1,352,000 for the first nine months of 1996. For the third
quarter of 1997, general and administrative expenses were $401,000 compared to
$447,000 in 1996. General and administrative expenses have remained constant
from period to period.
Real estate tax expense was $990,000 for the first nine months of 1997 and
$939,000 for the same period of 1996. Real estate tax expense for the third
quarter of 1997 was $348,000 versus $312,000 for the third quarter of 1996.
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 1997 was $1,386,000, compared to
$1,316,000 for the first nine months of 1996. Interest expense for the third
quarter of 1997 was $468,000, compared to $453,000 for the third quarter of
1996. No interest has been capitalized since the first quarter of 1994 since the
Company did minimal land development work at its communities.
14
<PAGE>
Net Income (Loss)
- -----------------
The Company reported a net loss of $1,230,000 for the nine months ended
September 30, 1997 as compared to a net loss of $429,000 for the nine months
ended September 30, 1996. For the third quarter of 1997, a net loss of $627,000
was reported compared to a profit of $180,000 for the third quarter of 1996.
Included in the nine months ended September 30, 1996 and the third quarter for
1996 is an extraordinary gain of $331,000 resulting from 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.
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 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,
1996, $4,200,000 of accrued interest was reclassified as non-interest bearing
principal. The loans were also modified to formalize the elimination of the
default interest rate provisions in each of the applicable loan agreements.
15
<PAGE>
The following table presents information with respect to mortgages and similar
debt (in thousands):
<TABLE>
<CAPTION>
Years Ended
------------------------------
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Mortgage Notes Payable........ $ 18,845 $ 18,707
Other Loans................... 3,661 3,661
-------- --------
Total Mortgages and
Similar Debt.................. $ 22,506 $ 22,368
======== ========
</TABLE>
Included in Mortgage Notes Payable is the First Selex Loan of $2,722,000, the
Third Selex Loan of $3,816,000, the Yasawa Loan of $5,829,000 and the Second
Yasawa Loan of $6,478,000. 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
30,1997 due to the non-payment of principal and interest. The lenders have not
taken any other 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. As of September
30,1997, 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 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
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 served 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.
16
<PAGE>
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 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, 1997); 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, 1997, $6,759,000 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, 1997, the remaining balance of
$4,408,000 in principal and 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
17
<PAGE>
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, 1997, an aggregate amount
of $6,149,500 had been advanced to the Company under the Second Yasawa Loan and
the balance of $7,256,500 in principal and 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 served 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
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, 1997, the Company had loans outstanding from Selex, Yasawa and
their affiliates in the aggregate amount of approximately $25,670,000, including
interest, all of which are in default, including approximately $9,329,700, which
is owed to Selex, including accrued and unpaid interest of approximately
$1,135,500 (10% per annum on the First Selex Loan, 11% per annum on the Third
Selex Loan and 12% per annum on the Empire Note assigned to Selex);
approximately $14,015,600, which is owed to Yasawa, including accrued and unpaid
interest of approximately $1,708,800 (11% per annum on the Yasawa Loan and 8%
per annum on the Second Yasawa Loan); and approximately $2,324,500, which is
owed to an affiliate of Yasawa, including accrued and unpaid interest of
approximately $319,500 (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") totaling $6,149,500 as of September 30, 1997, to meet the
Company's minimum working capital requirements, to pay a portion of delinquent
real estate taxes, to pay settlements with certain trade creditors and to settle
certain litigation.
On November 4, 1997, the Company's stockholders approved an Agreement to
reduce its $25.3 million debt obligation with its lenders (the "August 19, 1997
Agreement"). See Part II, Item 5. Other Information.
18
<PAGE>
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 $3,120,000 as of September 30, 1997; non-payment of
these delinquent taxes may adversely affect the financial condition of the
Company. As part of the August 19, 1997 Agreement, the Company will use a
portion of the proceeds of the $7,500,000 sale of contracts receivable to pay a
majority of the delinquent real estate taxes.
The Company will continue to seek third party financing to meet its working
capital requirements. As part of the August 19, 1997 Agreement, approved by the
Board of Directors and subsequently, the stockholders on November 4, 1997, the
lenders agreed to purchase future contracts receivable at 65% of face value,
with recourse, as a source of working capital for the Company. See Part II,
Item 5. Other Information.
During 1996, $993,000 of the amount loaned by Yasawa was used to satisfy the
remaining obligation on the Marco class action settlement agreement resulting in
an extraordinary gain of $313,000. 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.
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, 1997, the balance of the holdback account
was approximately $119,000.
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 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. In 1996,
the Company replaced $293,000 in delinquent receivables. As of September 30,
1997, $1,138,000 were delinquent.
The Company was the guarantor of approximately $8,048,000 of contracts
receivable sold or transferred as of September 30, 1997, for the transactions
described above, and had $119,000 on deposit with purchasers of the receivables
as security to assure collectibility as of such date. A provision has been
established for the Company's obligation under
19
<PAGE>
the recourse provisions of which $1,208,000 remains at September 30, 1997.
The Company has been in compliance with all receivable transactions since the
consummation of sales.
The Company will continue to seek third party financing to meet its working
capital requirements. As part of the August 19, 1997 Agreement, approved by the
Board of Directors and subsequently, the stockholders on November 4, 1997, the
lenders agreed to purchase future contracts receivable at 65% of face value,
with recourse, as a source of work capital for the Company. See Part II, Item
5. Other Information.
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 a Consent Order with the Division, which
replaced and superseded the original Consent Order, as amended and restated (the
"1992 Consent Order"). 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 receivables 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, 1997, approximately 84% of the
customers whose lots are currently undeveloped have opted to exchange or were
otherwise resolved. 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) under the 1992 Consent
Order through this exchange program. All remaining maintenance and improvements
obligations in Citrus Springs were settled through a final agreement with Citrus
County. 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.
The Company's continuing liquidity problems have precluded the timely payment of
the full amount of its real estate taxes. On properties where customers have
contractually assumed the obligation to pay into a tax escrow maintained by the
Company, the Company has and will continue to pay delinquent real estate taxes
as monies are collected from customers. Delinquent real estate taxes aggregated
approximately $3,120,000 as of September 30, 1997. As part of the August 19,
1997 Agreement, the Company will use a portion of the proceeds of the $7,500,000
sale of contracts receivable to pay a majority of the delinquent real estate
taxes.
20
<PAGE>
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.
On September 30, 1988, the Company entered into an agreement with Citrus County,
Florida to establish the procedure for transferring final maintenance
responsibilities for roads in the Company's Citrus Springs subdivision to Citrus
County. The agreement obligated the Company to complete certain remedial work on
previously completed improvements within the Citrus Springs subdivision by June
1, 1991. The Company was unable to complete this work by the specified date and
negotiated another agreement with Citrus County for the transfer of final
maintenance responsibility for the roads to the County. This final agreement was
entered into in May 1995. All payments to Citrus County required under the final
agreement were completed in May, 1997.
The Company had placed certain properties in trust to meet its refund
obligations 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 a 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. During 1996,
$993,000 of the amount loaned by Yasawa was used to satisfy the remaining
obligation on the Marco class action settlement agreement resulting in an
extraordinary gain of $313,000. 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 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.
21
<PAGE>
In an attempt to offset the negative cash effects of installment land
sales, the Company is attempting to direct its marketing efforts to its housing
product in which a house and lot are sold as a package. The success of this
direction will be dependent upon the Company's dealer recruiting program and
availability of funds for a national advertising and promotion program.
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. See Note 1 to Consolidated Financial Statements.
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, all of which
is drawn and outstanding as of December 31, 1996. During 1993, Selex loaned the
Company an additional $5,400,000 pursuant to the Second and Third Selex Loans.
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") totaling $6,149,500 as of September 30, 1997, to meet the
Company's minimum working capital requirements, to pay a portion of delinquent
real estate taxes, to pay settlements with certain trade creditors and to settle
certain litigation.
On November 4, 1997, the Company's stockholders approved an Agreement to
reduce its $25.3 million debt obligation with its lenders (the "August 19, 1997
Agreement"). See Part II, Item 5. Other Information.
22
<PAGE>
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 $3,120,000 as of September 30, 1997; non-payment
of these delinquent taxes may adversely affect the financial condition of the
Company. As part of the August 19, 1997 Agreement, the Company will use a
portion of the proceeds of the $7,500,000 sale of contracts receivable to pay a
majority of the delinquent real estate taxes.
The Company will continue to seek third party financing to meet its working
capital requirements. As part of the August 19, 1997 Agreement, approved by the
Board of Directors and subsequently, the stockholders on November 4, 1997, the
lenders agreed to purchase future contracts receivable at 65% of face value,
with recourse, as a source of working capital for the Company. See Part II, Item
5. Other Information.
23
<PAGE>
PART II - OTHER INFORMATION
===========================
ITEM 5. OTHER INFORMATION.
On August 19, 1997, the Board of Directors of the Company announced it had
reached an Agreement, in principle, with its lenders (Selex, Yasawa and their
affiliates) to reduce its $25.3 million debt obligation (the "August 19, 1997
Agreement"). The $25.3 million represents the total amount of principal and
interest outstanding as of July 31, 1997. The August 19, 1997 Agreement,
approved by the Board of Directors and the lenders, is subject to approval by
the stockholders and the Division of Florida Land Sales, Condominiums and Mobile
Homes (the "Division). The Division must approve the August 19, 1997 Agreement
since the Company is a Registrant with that agency, a portion of the property
involved in the proposal is located in a registered subdivision and the Division
presently has a first lien on the contracts receivable contemplated for sale.
During preliminary discussions with the Division, they approved the August 19,
1997 Agreement in principle.
The August 19, 1997 Agreement would result in a reduction in the Company's
outstanding debt obligation through the conveyance of all remaining land
inventory and obligations in the Company's St. Augustine Shores Subdivision and
the issuance of approximately 6.8 million shares of Common Stock at $1.00 per
share (par value). Additionally, the August 19, 1997 Agreement provides for the
lenders to purchase $7.5 million in contracts receivable from the Company to
generate working capital and further reduce the debt obligation. If the Company
succeeds in obtaining the required approvals, the Company's remaining debt
obligation would be reduced to approximately $11 million payable on restructured
terms. Additionally, the lenders have agreed that should the stockholders and
the Division approve the proposal, the outstanding debt as of July 31, 1997 will
not accrue interest until the debt is restructured. Specifically:
1. Selex, Yasawa and their affiliates would convert $6,809,338 of
the Company's outstanding debt into 6,809,338 shares of Common
Stock to be issued by the Company at a per share conversion
price of One Dollar ($1.00), which is equal to par value. As a
consequence, Mr. Antony Gram's beneficial ownership would
increase from 3,109,703 shares (46.17% of the outstanding
shares of Common Stock of the Company as of July 31, 1997) to
9,919,041 shares (73.23% of the outstanding shares of Common
Stock of the Company once the transaction is consummated).
2. Selex, Yasawa and their affiliates would reduce the Company's
outstanding debt by $5,529,501 in exchange for a conveyance of
all of the Company's remaining land inventory and obligations
in its St. Augustine Shores Subdivision to their affiliate,
Swan Development Corporation ("Swan"). The price, based upon
appraised value, was adjusted to take into account the
development obligations on sold lots to be assumed by Swan,
subject to Division approval.
3. Selex, Yasawa and their affiliates would purchase
approximately $7.5 million in contracts receivable from the
Company at seventy-five percent (75%) of face value with
recourse for non-performing contracts. This would generate
approximately $5.6 million, $1,982,457 of which would be used
to reduce outstanding debt. The balance would be used by the
Company to pay a portion of the delinquent real estate taxes,
to implement its marketing programs and to meet the Company's
minimum working capital requirements.
4. The remaining debt obligation to Selex, Yasawa and their
affiliates, assuming consummation of the above transactions
would be approximately $11 million . The terms of repayment of
this debt would be $110,375 in principal payable monthly in
cash or with contracts receivable at 100% of face value, plus
interest payable monthly on the declining balance at the rate
of 9.6% per annum in cash or with contracts receivable at 65%
of face value.
24
<PAGE>
5. In the future, if the Company elects to do so, Selex, Yasawa
and their affiliates have agreed to purchase future contracts
receivable at 65% of face value, with recourse, to meet the
Company ongoing capital requirements.
The August 19, 1997 Agreement outlined above was approved by a majority of
the holders of the outstanding shares of Common Stock voting in person or by
proxy at the Company's Annual Meeting held on November 4, 1997. The 3,109,703
shares of Common Stock beneficially owned by Antony Gram were voted in the same
proportion as other shareholder votes. When the August 19, 1997 Agreement
outlined above is closed Antony Gram will be deemed to be the beneficial owner
of 9,919,041 shares of Common Stock of the Company (73.23%).
Prior to November 4, 1997 and independent of the August 19, 1997
Agreement outlined above, Selex and Yasawa agreed to forgive $2,050,818 in
accrued interest on their debt.
Selex, Yasawa and their affiliates has advised the Company that they
may acquire additional shares of Common Stock solely for their own account and
that they will not dispose of the shares in violation of the registration
requirements of the Securities Act of 1933, as amended. The Company has no
present plans to undertake the registration of the shares to be issued.
25
<PAGE>
The following unaudited pro forma consolidated balance sheet of the Company
as of September 30, 1997 and the unaudited pro forma consolidated statement of
operations for the nine months ended September 30, 1997 and for the year ended
December 31, 1996 have been prepared to reflect the effect on the Company's
financial condition and results of operations from the August 19, 1997 Agreement
to satisfy a portion of the Company's debt.
The unaudited pro forma consolidated balance sheet has been prepared as if
the August 19, 1997 Agreement occurred on September 30, 1997 and the unaudited
pro forma consolidated statements of operations have been prepared as if the
August 19, 1997 Agreement occurred on the first day of the periods presented.
The unaudited pro forma financial statements have been prepared in accordance
with the accounting policies outlined in the historical financial statements.
The following pro forma consolidated financial information should be read
in conjunction with the Company's consolidated financial statements and notes
thereto, Management's Discussion and Analysis of Financial Condition and Results
of Operations included in the Company's 1996 Annual Report on Form 10K and other
information included elsewhere in this document. The unaudited pro forma
consolidated financial information do not necessarily reflect what the results
of operations and financial position would have been had the August 19, 1997
Agreement occurred as assumed in preparing the unaudited pro forma financial
statements, nor do they necessarily reflect the future results or financial
position of the Company.
<TABLE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
----------------------------------------------
AS OF SEPTEMBER 30, 1997
------------------------
(in thousands)
<CAPTION>
Historical Pro Forma Pro Forma
Adjustments
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS
- ------
Cash and temporary cash investments,
including escrow deposits of $776..........$ 819 $ 1,426 (1) $ 2,245
---------- --------- ----------
Contracts receivable for land sales - net... 8,101 (5,250) (1) 2,851
---------- --------- ----------
Mortgages and other receivables - net....... 322 0 322
---------- --------- ----------
Inventories:
Land and land improvements................. 9,860 (1,953) (2) 7,907
Other...................................... 99 0 99
---------- --------- ----------
Total inventories.................. 9,959 (1,953) 8,006
---------- --------- ----------
Property, plant, and equipment at cost - net 381 0 381
---------- --------- ----------
Prepaid expenses and other.................. 287 0 287
---------- --------- ----------
Total..............................$ 19,869 $ (5,777) $ 14,092
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
- -------------------------------------------------
Mortgages and similar debt:
Mortgage notes payable.....................$ 18,845 $ (12,152)(1)(2)(3) $ 6,693
Other loans ............................... 3,661 (1,367)(3) 2,294
---------- --------- ----------
Total mortgages and similar debt......... 22,506 (13,519) 8,987
---------- --------- ----------
Accounts payable, accrued expenses,
customers' deposits........................ 9,670 (3,956)(1)(2)(3) 5,714
---------- --------- ----------
Deferred revenue............................ 6,800 (1,901)(2) 4,899
---------- --------- ----------
Total liabilities.................. 38,976 (19,376) 19,600
---------- --------- ----------
Stockholders' equity (deficiency):
Common stock, $1 par value - authorized
15,000,000 shares......................... 6,735 6,809 (3) 13,544
Capital surplus............................ 44,715 6,790 (1)(2) 51,505
Retained earnings.......................... (70,557) 0 (70,557)
--------- --------- ----------
Total stockholders' equity (deficiency). (19,107) 13,599 (5,508)
--------- --------- ----------
Total.....................$ 19,869 $ (5,777) $ 14,092
========= ========= ==========
<FN>
See accompanying notes to pro forma consolidated financial information.
</FN>
</TABLE>
26
<PAGE>
<TABLE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED PRO FORMA STATEMENTS OF CONSOLIDATED OPERATIONS
---------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------
(in thousands, except per share data)
<CAPTION>
Historical Pro Forma Pro Forma
Adjustments
---------- ----------- ---------
<S> <C> <C> <C>
REVENUES:
Net land sales.....................$ 2,947 $ 0 $ 2,947
Sales - house and apartments....... 787 0 787
Recognized improvement
revenue/ prior period
sales............................. 908 0 908
Interest income.................... 1,009 (784) (1) 225
Sales - other than real estate..... 343 0 343
--------- --------- ---------
TOTAL.......................... 5,994 (784) 5,210
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales and
improvements......................$ 1,770 $ 0 $ 1,770
Selling, general and
administrative and other
expenses.......................... 4,068 (370) (1)(2) 3,698
Interest expense................... 1,386 (771)(1)(2)(3) 615
--------- --------- ---------
TOTAL.......................... 7,224 (1,141) 6,083
--------- --------- ---------
Loss from operations ...............$ (1,230) $ 357 $ (873)
========= ========= =========
Net Income..........................$ (1,230) $ 357 $ (873)
========= ========= =========
Earning per share:
From operations....................$ (.18) (4) $ (.03)
--------- ---------
Net Income (Loss)...................$ (.18) $ (.03)
========= =========
Number of common and common
equivalent shares.................. 6,735 (4) 13,544
========= =========
<FN>
See accompanying notes to pro forma consolidated financial information.
</FN>
</TABLE>
27
<PAGE>
<TABLE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED PRO FORMA STATEMENTS OF CONSOLIDATED OPERATIONS
---------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------
(in thousands, except per share data)
<CAPTION>
Historical Pro Forma Pro Forma
Adjustments
---------- ----------- ---------
<S> <C> <C> <C>
REVENUES:
Net land sales....................... $ 4,296 $ 0 $ 4,296
Sales - house and apartments......... 1,202 0 1,202
Recognized improvement
revenue/ prior period
sales............................... 1,008 0 1,008
Interest income...................... 1,464 (1,039) (1) 425
Sales - other than real estate....... 680 0 680
--------- --------- ---------
TOTAL............................ 8,650 (1,039) 7,611
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales and
improvements........................ $ 2,673 $ 0 $ 2,673
Selling, general and
administrative and other
expenses............................ 5,423 (493) (1)(2) 4,930
Interest expense..................... 1,781 (973)(1)(2)(3) 808
--------- --------- ---------
TOTAL............................ 9,877 (1,466) 8,411
--------- --------- ---------
Loss from operations before
extraordinary item........... $ (1,227) $ 427 $ (800)
Extraordinary Item:
Gain on settlement related to the
Marco refund obligation........... $ 331 $ 0 $ 331
-------- --------- ---------
Net Income............................ $ (896) $ 427 $ (469)
======== ========= =========
Earning per share:
From operations...................... $ (.18) (4) $ (.06)
--------- ---------
From extraordinary item.............. $ .05 $ .02
--------- ---------
Net Income (Loss)..................... $ (.13) $ (.04)
========= =========
Number of common and common
equivalent shares.................... 6,729 (4) 13,539
========= =========
<FN>
See accompanying notes to pro forma consolidated financial information.
</FN>
</TABLE>
The Deltona Corporation
Notes To Pro Forma Consolidated Financial Information
(1) Represents the entries to reflect the sale of receivables from the
Company to its lenders and the repayment of a portion of its debt and a
portion of its delinquent real estate taxes.
(2) Represents the entries to reflect the conveyance of the Company's
remaining land inventory at its St. Augustine Shores subdivision in
exchange for certain debt reduction.
(3) Represents the conversion of a portion of the Company's debt
to Common Stock and the restructuring of the remaining debt
into new debt.
(4) Earnings per share have been calculated using the average number of
common shares and common equivalent shares outstanding since the
lenders will receive 6,809,338 of newly issued common stock.
28
<PAGE>
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, 1997.
29
<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 13, 1997 By: /s/Donald O. McNelley
----------------- ---------------------
Donald O. McNelley
Treasurer
(Principal Financial Officer)
30
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000027984
<NAME> THE DELTONA CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 819
<SECURITIES> 0
<RECEIVABLES> 11739
<ALLOWANCES> (3315)
<INVENTORY> 9959
<CURRENT-ASSETS> 288
<PP&E> 1803
<DEPRECIATION> (1422)
<TOTAL-ASSETS> 19869
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 6735
0
0
<OTHER-SE> (25843)
<TOTAL-LIABILITY-AND-EQUITY> 19869
<SALES> 4077
<TOTAL-REVENUES> 5994
<CGS> 1612
<TOTAL-COSTS> 3115
<OTHER-EXPENSES> 2281
<LOSS-PROVISION> (1068)
<INTEREST-EXPENSE> 1386
<INCOME-PRETAX> (1230)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1230)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
