SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ending March 31, 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
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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 March 31, 1997.
<PAGE>
PART I FINANCIAL INFORMATION
============================
ITEM 1. FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
-----------------------------------------------
MARCH 31, 1997 AND DECEMBER 31, 1996
------------------------------------
($000 Omitted)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Cash and temporary cash investments,
including escrow deposits and restricted
cash of $811 in 1997 and $845 in 1996...............$ 877 $ 907
--------- ---------
Contracts receivable for land sales - net............ 7,461 6,965
--------- ---------
Mortgages and other receivables - net................ 343 384
--------- ---------
Inventories (b):
Land and land improvements.......................... 10,155 10,287
Other............................................... 99 99
--------- ---------
Total inventories........................... 10,254 10,386
--------- ---------
Property, plant, and equipment at cost - net......... 404 413
--------- ---------
Prepaid expenses and other........................... 298 367
--------- ---------
Total.......................................$ 19,637 $ 19,422
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Mortgages and similar debt(c):
Mortgage notes payable..............................$ 18,707 $ 18,707
Other loans ........................................ 3,661 3,661
--------- ---------
Total mortgages and similar debt.................. 22,368 22,368
Accounts payable, accrued expenses,
customers' deposits................................. 8,015 7,169
Allowance for Marco permit costs (d)................. 0 0
Deferred revenue..................................... 7,560 7,764
--------- ---------
Total liabilities........................... 37,943 37,301
--------- ---------
Commitments and contingencies (d):
Stockholders' equity (deficiency):
Common stock, $1 par value -
authorized 15,000,000 shares;
outstanding: 1997 and 1996 -
6,734,939 shares and 6,734,572
shares (excluding 12,228 shares held
in treasury in 1997 and 1996)...................... 6,735 6,734
Capital surplus..................................... 44,715 44,714
Accumulated deficit................................. (69,756) (69,327)
--------- --------
Total stockholders' (deficiency)............ (18,306) (17,879)
--------- --------
Total..............................$ 19,637 $ 19,422
========= ========
</TABLE>
2
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
---------------------------------------------------------
FOR THE PERIODS INDICATED
-------------------------
($000 Omitted Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Revenues (a):
Net land sales....................... $ 1,129 $ 1,048
House and apartment sales............ 321 364
Recognized improvement
revenue/ prior period
sales............................... 184 131
Interest income...................... 330 244
Other revenues....................... 108 230
--------- ---------
Total............................ 2,072 2,017
--------- ---------
Costs and expenses (a):
Cost of sales and
improvements........................ 628 667
Selling, general and
administrative and other
expenses............................ 1,417 1,332
Interest expense (c)(e).............. 456 422
--------- ---------
Total............................ 2,501 2,421
--------- ---------
Loss from operations ................. (429) (404)
--------- ---------
Net Income (Loss)..................... $ (429) $ (404)
========= =========
Earning (Loss) per share:
From operations...................... (.06) (.06)
--------- ---------
Net Income (Loss)..................... $ (.06) $ (.06)
========= =========
Number of common and common
equivalent shares.................... 6,734,906 6,722,942
========= =========
<FN>
No dividends have been paid on Common Stock.
Results of operations for the first three months may not be indicative of
results which may be expected for the full year.
See Notes to Unaudited Condensed Consolidated Financial Statements.
See Management's Analysis of Quarterly Statements of Operations included herein.
Certain amounts have been reclassified for comparative purposes.
</FN>
</TABLE>
3
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 1997 AND MARCH 31, 1996
---------------------------------
($000 Omitted)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities.............. $ (31) $ (219)
--------- --------
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) 0
--------- --------
Net cash provided by (used in) investing
activities....................................... 1 5
--------- --------
Cash flows from financing activities:
New borrowings.................................. 0 100
Repayment of borrowings......................... 0 0
--------- --------
Net cash provided by (used in) financing
activities....................................... 0 100
--------- --------
Net increase (decrease) in cash and
temporary cash investments (including
escrow deposits and restricted cash)............. (30) (114)
Cash and temporary cash investments at
December 31, 1996 and December 31, 1995.......... 907 982
--------- --------
Cash and temporary cash investments at
March 31, 1997 and March 31, 1996................ $ 877 $ 868
========= ========
Supplemental disclosure of non cash
investing and financing activities:
Common Stock issued for Marco Settlement......... $ 1 $ 19
========= ========
<FN>
See Notes to Unaudited Condensed Consolidated Financial Statements.
Certain amounts have been reclassified for comparative purposes.
</FN>
</TABLE>
4
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 1997 AND MARCH 31, 1996
---------------------------------
($000 Omitted)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Reconciliation of net income (loss)
to net cash provided by (used in)
operating activities:
Net loss.......................................... $ (429) $ (404)
--------- --------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 14 13
Provision for estimated uncollectible sales-net... 412 389
Contract valuation discount, net of amortization.. 74 75
Net Gain on sale of property, plant &
equipment....................................... (3) (5)
Net change in assets and liabilities.............. (79) (287)
--------- --------
Total adjustments........................... $ 398 $ 185
--------- --------
Net cash provided by (used in) operating
activities.................................. $ (31) $ (219)
========= ========
</TABLE>
5
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------
MARCH 31, 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):
Land and Improvements
---------------------
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- -----------
<S> <C> <C>
Unimproved land............................. $ 415 $ 421
Land in various stages of
development................................ 3,724 3,708
Fully improved land......................... 6,016 6,159
-------- --------
Total.............................. $ 10,155 $ 10,288
======== ========
</TABLE>
Other inventories consists primarily of vacation ownership units completed.
(c) MORTGAGES AND SIMILAR DEBT
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 March
31, 1997, the Company was in default of the First Selex Loan.
6
<PAGE>
One million dollars of the proceeds from the First Selex Loan was used
by the Company to acquire certain commercial and multi-family properties at
the Company's St. Augustine Shores community at their net appraised value,
from Marcel Muyres and certain entities affiliated with Mr. Muyres and
Cornelis Zwaans. 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, in which Messrs. Zwaans and
Muyres also serve as directors, as well as President and Secretary,
respectively; and (iii) approximately $99,000 was used to reacquire, from
Mr. Muyres, all of his rights, title and interest in that certain contracts
with the Company for the purchase of a commercial tract in St. Augustine
Shores, Florida. None of the commercial and multi-family property acquired
by the Company from Mr. Muyres and certain entities affiliated with Messrs.
Zwaans and Muyres collateralizes the First Selex Loan. In March, 1994,
Conquistador exercised its right to repurchase certain multi-family
property from the Company (which right had been granted in connection with
the June, 1992 Selex transaction) at a price of $312,000, of which $260,000
was paid in cash to the Company and $52,000 was applied to reduce interest
due to Selex under the Second Selex Loan (the "First Conquistador
Acquisition").
On December 2, 1992, the Company entered into various agreements
relating to certain of its assets and the restructuring of its debt with
Yasawa, which is beneficially owned by Mr. Antony Gram. The consummation of
these agreements, which are further described below, was conditioned upon
the acquisition by Mr. Gram of the Company's outstanding bank loan.
On December 4, 1992, Mr. Gram entered into an agreement with the
lenders, pursuant to which he acquired the bank loan of approximately
$25,150,000 (including interest and fees) for a price of $10,750,000. In
conjunction with such transaction, the lenders transferred to Mr. Gram the
warrants which they held that entitled the holder to purchase an aggregate
of 277,387 shares of the Company's Common Stock at an exercise price of
$1.00 per share. Immediately after the acquisition of the bank loan, Mr.
Gram transferred all of his interest in the bank loan, including the
warrants, to Yasawa.
On December 11, 1992, the Company consummated the December 2, 1992
agreements with Yasawa. Under these agreements, Yasawa, its affiliates and
the Company agreed as follows: (i) the Company sold certain property at its
Citrus Springs community to an affiliate of Yasawa in exchange for
approximately $6,500,000 of debt reduction credit; (ii) an affiliate of
Yasawa and the Company entered into a joint venture agreement with respect
to the Citrus Springs property, providing for the Company to market such
property and receive an administration fee from the venture (in March,
1994, the Company and the affiliate agreed to terminate the venture); (iii)
the Company sold certain contracts receivable at face value to an affiliate
of Yasawa for debt reduction credit of approximately $10,800,000; (iv) the
Company sold the Marco Shores Country Club and Golf Course to an affiliate
of Yasawa for an aggregate sales price of $5,500,000, with the affiliate
assuming an existing first mortgage of approximately $1,100,000 and the
Company receiving debt reduction credit of $2,400,000, such that the
Company obtained cash proceeds from this transaction of $2,000,000, which
amount was used for working capital; (v) an affiliate of Yasawa agreed to
lease the Marco Shores Country Club and Golf Course to the Company for a
period of approximately one year; (vi) an affiliate of Yasawa and the
Company agreed to amend the terms of the warrants to increase the number of
shares issuable upon their exercise from 277,387 shares to 289,637 shares
and to adjust the exercise price to an aggregate of approximately $314,000;
(vii) Yasawa exercised the warrants in exchange for debt reduction credit
of approximately $314,000; (viii) Yasawa released certain collateral held
for the bank loan; (ix) an affiliate of Yasawa agreed to make an additional
loan of up to $1,500,000 to the Company, thus providing the Company with a
future line of credit (all of which was drawn and outstanding as of March
31, 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
7
<PAGE>
December 31, 1997. As of March 31, 1997, $6,493,000 in principal and
accrued interest was in default under the Yasawa Loan.
On April 30, 1993 Selex loaned the Company an additional $1,000,000
collateralized by a first mortgage on certain of the Company's property in
its Marion Oaks, Florida community (the "Second Selex Loan"). Interest
under the Second Selex Loan was 11% per annum, deferred until December 31,
1993, and principal was to be repaid at $3,000 per lot for lots requiring
release from the mortgage, with the entire unpaid principal balance and
interest accruing from January 1, 1994 to April 30, 1994 due and payable on
April 30, 1994. Although Selex had certain conversion rights under the
Second Selex Loan in the event the Company sold any Common Stock or
Preferred Stock prior to payment in full of all amounts due to Selex under
the Second Selex Loan, such rights were voided. The Second Selex Loan was
satisfied on May 22, 1995 through the closing of the Second Conquistador
Acquisition, discussed below.
From July 9, 1993 through December 31, 1993, Selex loaned the Company
an additional $4,400,000 collateralized by a second mortgage on certain of
the Company's property on which Selex and/or Yasawa hold a first mortgage
pursuant to a Loan Agreement dated July 14, 1993 and amendments thereto
(the "Third Selex Loan"). The Third Selex Loan bears interest at 11% per
annum, with interest deferred until December 31, 1993. Principal is to be
repaid at $3,000 per lot for lots requiring release from the mortgage, with
the entire unpaid principal balance and interest accruing from January 1,
1994 to April 30, 1994 due and payable on April 30, 1994. The Second
Conquistador Acquisition, discussed below, closed on May 22, 1995, provided
a reduction of the debt due and payable under the Third Selex Loan. As of
March 31, 1997, the remaining balance of $4,238,000 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 March
31, 1997, an aggregate amount of $6,012,000 had been advanced to the
Company under the Second Yasawa Loan and the balance of $6,873,000 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 serve as
directors and executive officers of M&M First Coast Realty ("M&M"). The
Company had leased certain office space to M&M at its St. Augustine Shores
community pursuant to a Lease Agreement dated August 10, 1990. A payment of
approximately $21,300 in delinquent rental payments was made on May 22,
1995 upon the closing of the Second Conquistador Acquisition, which
included the sale of the St. Augustine Administration Building to which the
lease pertained.
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 March 31, 1997, $1,140,000 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 March 31, 1997,
the Company had loans outstanding from Selex, Yasawa and their affiliates
in the aggregate amount of approximately $24,603,000, including
8
<PAGE>
interest, all of which are in default, including approximately
$9,005,000, which is owed to Selex, including accrued and unpaid interest
of approximately $810,000 (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 $13,365,000, which is owed to Yasawa, including
accrued and unpaid interest of approximately $1,196,000 (11% per annum on
the Yasawa Loan and 8% per annum on the Second Yasawa Loan); and
approximately $2,233,000, which is owed to an affiliate of Yasawa,
including accrued and unpaid interest of approximately $228,000 (12% per
annum). The loans from Selex, Yasawa and their affiliates are secured by
substantially all of the assets of the Company.
(d) COMMITMENTS AND CONTINGENCIES
Homesite sales contracts provide for the return of all monies paid in
(including paid-in interest) should the Company be unable to meet its
contractual obligations after the use of reasonable diligence. If a refund
is made, the Company will recover the related homesite and any 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 March 31, 1997 was
approximately $5,205,000.
As a result of the delays in completing the land improvements to
certain property sold in certain of its Central and North Florida
communities, the Company fell behind in meeting its contractual obligations
to its customers. In connection with these delays, the Company, in
February, 1980, entered into a Consent Order with the Division which
provided a program for notifying affected customers. The Consent Order,
which was restated and amended, provided a program for notifying affected
customers of the anticipated delays in the completion of improvements (or,
in the case of purchasers of unbuildable lots in certain areas of the
Company's Sunny Hills community, the transfer of development obligations to
core growth areas of the community); various options which may be selected
by affected purchasers; a schedule for completing certain improvements; and
a deferral of the obligation to install water mains until requested by the
purchaser. Under an agreement with Topeka Group Incorporated ("Topeka"),
which purchased the Company's utilities in 1989, Topeka's utility companies
have agreed to furnish utility service to the future residents of the
Company's communities on substantially the same basis as such services were
provided by the Company. The Consent Order also required the establishment
of an improvement escrow account as assurance for completing such
improvement obligations.
In June, 1992, the Company entered into the 1992 Consent Order with
the Division, which replaced and superseded the original Consent Order, as
amended and restated. Among other things, the 1992 Consent Order
consolidated the Company's development obligations and provided for a
reduction in its required monthly escrow obligation to $175,000 from
September, 1992 through December, 1993. Beginning January, 1994 and until
development is completed or the 1992 Consent Order is amended, the Company
is required to deposit $430,000 per month into the escrow account. As part
of the assurance program under the 1992 Consent Order, the Company and its
lenders granted the Division a lien on certain 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 March 31, 1997, approximately 85% 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 and settlement of all remaining
maintenance and improvements obligations in Citrus Springs through a final
agreement with Citrus County
9
<PAGE>
(entered into in May 1995). Pursuant to the 1992 Consent Order, the
Company has limited the sale of single-family lots to lots which front on a
paved street and are ready for immediate building.
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 $456,000 and
$422,000, none was capitalized for the three months ended March 31, 1997
and March 31, 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 per share for the three
months ended March 31, 1997 and March 31, 1996 were $(429,000) and
$(404,000) and 6,734,906 and 6,722,942, respectively.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On June 19, 1992, the Company completed a transaction with Selex, which resulted
in a change in control of the Company. Under the transaction, Selex loaned the
Company $3,000,000 collateralized by a first mortgage on certain of the
Company's property in its St. Augustine Shores, Florida community (the "First
Selex Loan"). The First Selex Loan initially bears interest at the rate of 10%
per annum with a term of four years and payment of interest deferred for the
first 18 months.
In conjunction with the First Selex Loan: (i) Empire of Carolina, Inc.
("Empire") sold Selex its 2,220,066 shares of the Company's Common Stock and
assigned Selex its $1,000,000 Note from the Company, with $225,000 of interest
accrued thereon; (ii) Maurice A. Halperin, Chairman of the Board of Empire and
former Chairman of the Board of the Company, forgave payment of the $200,000
salary due him for the period of April, 1990 through April, 1991, which was in
arrears; and (iii) certain changes occurred in the composition of the Company's
Board of Directors. Namely, the six directors serving on the Company's Board who
were previously designated by Empire resigned and four Selex designees (Messrs.
Marcellus H.B. Muyres, Antony Gram, Cornelis van de Peppel and Cornelis L.J.J.
Zwaans) were elected to serve as directors in their stead. Marcellus H.B. Muyres
was appointed Chairman of the Board and Chief Executive Officer of the Company.
These directors, as well as Leonardus G.M. Nipshagen, a Selex designee, were
then elected as directors at the Company's 1992 Annual Meeting. 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 March 31,
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 serve as directors, as well as President and Secretary/Treasurer,
respectively; (ii) $485,000 was used to acquire 4 commercial lots from Swan
Development Corporation ("Swan"), in which Messrs. Zwaans and Muyres also serve
as directors, as well as President and Secretary, respectively; and (iii)
approximately $99,000 was used to reacquire, from Mr. Muyres, all of his rights,
title and interest in a certain contract with the Company for the purchase of a
commercial tract in St. Augustine Shores, Florida. None of the commercial land
and multi-family property acquired by the Company from Mr. Muyres and certain
entities affiliated with Messrs. Zwaans and Muyres collateralizes the First
Selex Loan. In March, 1994, Conquistador exercised its right to repurchase
certain of the multi-family property from the Company (which right had been
granted in connection with the June, 1992 transaction) at a price of $312,000,
of which $260,000 was paid in cash to the Company and $52,000 was applied to
reduce interest due to Selex under the Second Selex Loan (the "First
Conquistador Acquisition").
11
<PAGE>
In December, 1992, Mr. Gram, a director of the Company and beneficial owner of
the Common Stock of the Company held by Selex, acquired all of the Company's
outstanding bank debt and then assigned same to Yasawa, of which Mr. Gram is
also the beneficial owner. Yasawa simultaneously completed a series of
transactions with the Company which involved the transfer of certain assets to
Yasawa or its affiliated companies, the acquisition by Yasawa of 289,637 shares
of the Company's Common Stock through the exercise of warrants previously held
by the banks, the provision of a $1,500,000 line of credit to the Company and
the restructuring of the remaining debt as a $5,106,000 Yasawa Loan. The
principal balance of the Yasawa Loan is $4,765,000 as of March 31, 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 $1,381,000 has been repaid under the
Third Selex Loan through March 31, 1997. As of March 31, 1997, Yasawa has loaned
the Company an additional sum of $6,012,000 pursuant to the Second Yasawa Loan.
As a consequence of these transactions, as of March 31, 1997, the Company had
loans outstanding from Selex, Yasawa and their affiliates in the aggregate
amount of approximately $24,603,000, 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 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 $6,012,000 as of March 31, 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.
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
12
<PAGE>
delinquent real estate taxes which aggregate approximately $3,000,000 as of
March 31, 1997; non-payment of these delinquent taxes may adversely affect the
financial condition of the Company.
The Company is continuing to seek third parties to provide financing. There can
be no assurance, however, that additional financing will be obtained,
accordingly, the Company's Board of Directors is also considering other
appropriate action given the severity of the Company's liquidity position
including, but not limited, to filing for protection under the federal
bankruptcy laws.
RESULTS OF OPERATIONS
- ---------------------
For the three months ended March 31, 1997 and March 31, 1996.
Revenues
- --------
Total revenues were $2,072,000 for the first quarter of 1997 compared to
$2,017,000 for the comparable 1996 period.
Gross land sales were $1,682,000 for the first quarter of 1997 versus $1,567,000
for the first quarter of 1996. Net land sales (gross land sales less estimated
uncollectible installment sales and contract valuation discount) increased to
$1,129,000 for the first three months of 1996 from $1,048,000 for the first
three months of 1996.
There were no bulk land sales for the first quarter 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 $321,000 for the three months ended March 31, 1997
compared to $364,000 for the same period in 1996. Housing revenues decreased in
both quarters of 1997 and 1996 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>
Three Months Ended
------------------------
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Gross Land Sales:
Retail Sales* $ 1,682 $ 1,567
-------- -------
Housing Sales:
Single Family 321 364
-------- -------
Total Real Estate $ 2,003 $ 1,931
======== =======
<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 three months ended March 31, 1997 and March
31, 1996 were $1,688,000 and $1,735,000, respectively. The Company had
a backlog of approximately $1,841,000 in unrecognized sales as of March
31, 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 $184,000 for the first quarter of 1997 as compared to $131,000
for the first quarter of 1996. Due to the Company's financial condition, the
Company has done minimal development work in the last two year.
13
<PAGE>
Interest income was $330,000 for the first three months of 1997 as compared to
$244,000 for the first three months of 1996. This increase is the result of
higher contracts receivable balances.
Other revenues were $108,000 as compared to $230,000 for the three months ended
March 31, 1997 and March 31, 1996, respectively. Other revenues for 1997 were
generated principally by the Company's title insurance and real estate brokerage
subsidiaries. In 1996 the Company recorded a gain of approximately $136,000
representing contracts receivables returned to the Company from a previous sale
of receivables.
Costs and Expenses
- ------------------
Costs and expenses for the first three months of 1997 were $2,501,000 compared
to $2,421,000 for the same period in 1996. Cost of sales totaled $628,000 for
the three months ended March 31, 1997 compared to $667,000 for the three months
ended March 31, 1996.
Commissions, advertising and other selling expenses totaled $649,000 for the
three months ended March 31, 1997 compared to $545,000 for the three months
ended March 31, 1996. This increase is the result of higher retail sales levels.
Advertising and promotional expenditures increased to $30,000 from $27,000 for
the three month period of 1997 versus 1996. Other selling expenses increased to
$167,000 for the three months period of 1997 versus $132,000 for 1996.
General and administrative expenses were $462,000 for the first three months of
1997 compared to $473,000 for the first three months of 1996. General and
administrative expenses have remained constant from period to period.
Real estate tax expense was $305,000 for the period ended March 31, 1997 as
compared to $315,000 for the period ended March 31, 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 three months of 1997 was $456,000, compared to
$422,000 for the first three months of 1996. No interest has been capitalized
since the first quarter of 1994 since the Company did minimal land development
work at its communities.
Net Income (Loss)
- -----------------
The Company reported a net loss of $429,000 for the three months ended March 31,
1997 as compared to a net loss of $404,000 for the three months ended March 31,
1996.
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
14
<PAGE>
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.
The following table presents information with respect to mortgages and similar
debt (in thousands):
<TABLE>
<CAPTION>
Years Ended
-----------
March 31, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Mortgage Notes Payable........ $ 18,707 $ 18,707
Other Loans................... 3,661 3,661
-------- --------
Total Mortgages and
Similar Debt.................. $ 22,368 $ 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 $6,340,000. 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 March 31,1997
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
15
<PAGE>
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 March 31,1997, 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, in which Messrs.
Zwaans and Muyres also serve as directors, as well as President and Secretary,
respectively; and (iii) approximately $99,000 was used to reacquire, from Mr.
Muyres, all of his rights, title and interest in that certain contracts with the
Company for the purchase of a commercial tract in St. Augustine Shores, Florida.
None of the commercial and multi-family property acquired by the Company from
Mr. Muyres and certain entities affiliated with Messrs. Zwaans and Muyres
collateralizes the First Selex Loan. In March, 1994, Conquistador exercised its
right to repurchase certain multi-family property from the Company (which right
had been granted in connection with the June, 1992 Selex transaction) at a price
of $312,000, of which $260,000 was paid in cash to the Company and $52,000 was
applied to reduce interest due to Selex under the Second Selex Loan (the "First
Conquistador Acquisition").
On December 2, 1992, the Company entered into various agreements relating to
certain of its assets and the restructuring of its debt with Yasawa, which is
beneficially owned by Mr. Antony Gram. The consummation of these agreements,
which are further described below, was conditioned upon the acquisition by Mr.
Gram of the Company's outstanding bank loan.
On December 4, 1992, Mr. Gram entered into an agreement with the lenders,
pursuant to which he acquired the bank loan of approximately $25,150,000
(including interest and fees) for a price of $10,750,000. In conjunction with
such transaction, the lenders transferred to Mr. Gram the warrants which they
held that entitled the holder to purchase an aggregate of 277,387 shares of the
Company's Common Stock at an exercise price of $1.00 per share. Immediately
after the acquisition of the bank loan, Mr. Gram transferred all of his interest
in the bank loan, including the warrants, to Yasawa.
On December 11, 1992, the Company consummated the December 2, 1992 agreements
with Yasawa. Under these agreements, Yasawa, its affiliates and the Company
agreed as follows: (i) the Company sold certain property at its Citrus Springs
community to an affiliate of Yasawa in exchange for approximately $6,500,000 of
debt reduction credit; (ii) an affiliate of Yasawa and the Company entered into
a joint venture agreement with respect to the Citrus Springs property, providing
for the Company to market such property and receive an administration fee from
the venture (in March, 1994, the Company and the affiliate agreed to terminate
the venture); (iii) the Company sold 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
16
<PAGE>
loan; (ix) an affiliate of Yasawa agreed to make an additional loan of up to
$1,500,000 to the Company, thus providing the Company with a future line of
credit (all of which was drawn and outstanding as of March 31, 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 March 31, 1997, $6,493,000 in principal and accrued
interest was in default under the Yasawa Loan.
On April 30, 1993 Selex loaned the Company an additional $1,000,000
collateralized by a first mortgage on certain of the Company's property in its
Marion Oaks, Florida community (the "Second Selex Loan"). Interest under the
Second Selex Loan was 11% per annum, deferred until December 31, 1993, and
principal was to be repaid at $3,000 per lot for lots requiring release from the
mortgage, with the entire unpaid principal balance and interest accruing from
January 1, 1994 to April 30, 1994 due and payable on April 30, 1994. Although
Selex had certain conversion rights under the Second Selex Loan in the event the
Company sold any Common Stock or Preferred Stock prior to payment in full of all
amounts due to Selex under the Second Selex Loan, such rights were voided. The
Second Selex Loan was satisfied on May 22, 1995 through the closing of the
Second Conquistador Acquisition, discussed below.
From July 9, 1993 through December 31, 1993, Selex loaned the Company an
additional $4,400,000 collateralized by a second mortgage on certain of the
Company's property on which Selex and/or Yasawa hold a first mortgage pursuant
to a Loan Agreement dated July 14, 1993 and amendments thereto (the "Third Selex
Loan"). The Third Selex Loan bears interest at 11% per annum, with interest
deferred until December 31, 1993. Principal is to be repaid at $3,000 per lot
for lots requiring release from the mortgage, with the entire unpaid principal
balance and interest accruing from January 1, 1994 to April 30, 1994 due and
payable on April 30, 1994. The Second Conquistador Acquisition, discussed below,
closed on May 22, 1995, provided a reduction of the debt due and payable under
the Third Selex Loan. As of March 31, 1997, the remaining balance of $4,238,000
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 March 31, 1997, an aggregate amount of
$6,012,000 had been advanced to the Company under the Second Yasawa Loan and the
balance of $6,873,000 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 serve as directors and
executive officers of M&M First Coast Realty ("M&M"). The Company had leased
certain office space to M&M at its St. Augustine Shores community pursuant to a
Lease Agreement dated August 10, 1990. A payment of approximately $21,300 in
delinquent rental payments was made on May 22, 1995 upon the closing of the
Second Conquistador Acquisition, which included the sale of the St.
Augustine Administration Building to which the lease pertained.
At December 31, 1995, $4,200,000 of accrued interest due to Selex, Yasawa and
their affiliates was reclassified as non-interest bearing principal. As of March
31, 1997, the Company had loans outstanding from Selex, Yasawa and their
17
<PAGE>
affiliates in the aggregate amount of approximately $24,603,000, including
interest, all of which are in default, including approximately $9,005,000, which
is owed to Selex, including accrued and unpaid interest of approximately
$810,000 (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 $13,365,000, which is owed to Yasawa, including accrued and unpaid
interest of approximately $1,196,000 (11% per annum on the Yasawa Loan and 8%
per annum on the Second Yasawa Loan); and approximately $2,233,000, which is
owed to an affiliate of Yasawa, including accrued and unpaid interest of
approximately $228,000 (12% per annum). The loans from Selex, Yasawa and their
affiliates are secured by substantially all of the assets of the Company.
On March 10, 1994, the Company was advised that Selex filed an Amendment to its
Schedule 13D filed with the Commission. In the Amendment, Selex reported that
it, together with Yasawa and their affiliates, were uncertain as to whether they
would provide any further funds to the Company. The Amendment further stated
that Selex, Yasawa and their affiliates were seeking third parties to provide
financing for the Company and that as part of any such transaction, they would
be willing to sell or restructure all or a portion of their loans and Common
Stock in the Company.
The Company has stated in previous filings with the Commission and elsewhere
herein that the obtainment of additional funds to implement its marketing
program and achieve the objectives of its business plan is essential to enable
the Company to maintain operations and continue as a going concern. Since
December, 1992, the Company has been dependent on loans and advances from Selex,
Yasawa and their affiliates in order to implement its marketing program and
assist in meeting its working capital requirements. As previously stated, during
the last nine months of 1993, Selex, Yasawa and their affiliates loaned the
Company an aggregate of $4,400,000 pursuant to Third Selex Loan. Funds advanced
under the Third Selex Loan enabled the Company to commence implementation of the
majority of its marketing program in the third quarter of 1993. The full
benefits of the program were not realized in 1993 and the Company was unable to
secure financing in 1994 to meet its working capital requirements and continue
its marketing program. Commencing in 1994, Yasawa advanced additional funds (the
"Second Yasawa Loan") totaling $6,012,000 as of March 31, 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.
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 $3,000,000 as of March 31, 1997; non-payment of these
delinquent taxes may adversely affect the financial condition of the Company.
The Company is continuing to seek third parties to provide financing. There can
be no assurance, however, that additional financing will be obtained,
accordingly, the Company's Board of Directors is also considering other
appropriate action given the severity of the Company's liquidity position
including, but not limited, to filing for protection under the federal
bankruptcy laws.
CONTRACTS AND MORTGAGES RECEIVABLE SALES
In December, 1992, as described above, the Company sold $10,800,000 of contracts
and mortgages receivable to an affiliate of Yasawa at face value, applying the
proceeds therefrom to reduce the Bank Loan acquired by Yasawa.
In March, 1993 the Company transferred $1,600,000 in contracts and mortgages
receivable generating approximately $1,059,000 in proceeds to the Company, which
was used for working capital and the creation of a holdback account in the
amount $150,000. As of March 31, 1997, the balance of the holdback account was
approximately $118,000.
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,
18
<PAGE>
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 March 31, 1997 and 1996, $1,271,000 and $591,000
in receivables were delinquent, respectively.
The Company was the guarantor of approximately $10,048,900 of contracts
receivable sold or transferred as of March 31, 1997, for the transactions
described above, and had $118,000 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 the recourse provisions which
$857,000 remains at March 31, 1997. The Company has been in compliance with all
receivable transactions since the consummation of sales.
The Company anticipates that it will be necessary to complete additional
financings of a portion of its receivables in 1996. There can be no assurance,
however, that such sales and/or financings can be accomplished.
OTHER OBLIGATIONS
As a result of the delays in completing the land improvements to certain
property sold in certain of its Central and North Florida communities, the
Company fell behind in meeting its contractual obligations to its customers. In
connection with these delays, the Company, in February, 1980, entered into a
Consent Order with the Division which provided a program for notifying affected
customers. The Consent Order, which was restated and amended, provided a program
for notifying affected customers of the anticipated delays in the completion of
improvements (or, in the case of purchasers of unbuildable lots in certain areas
of the Company's Sunny Hills community, the transfer of development obligations
to core growth areas of the community); various options which may be selected by
affected purchasers; a schedule for completing certain improvements; and a
deferral of the obligation to install water mains until requested by the
purchaser. Under an agreement with Topeka Group Incorporated ("Topeka"), which
purchased the Company's utilities in 1989, Topeka's utility companies have
agreed to furnish utility service to the future residents of the Company's
communities on substantially the same basis as such services were provided by
the Company. The Consent Order also required the establishment of an improvement
escrow account as assurance for completing such improvement obligations.
In June, 1992, the Company entered into the 1992 Consent Order with the
Division, which replaced and superseded the original Consent Order, as amended
and restated. Among other things, the 1992 Consent Order consolidated the
Company's development obligations and provided for a reduction in its required
monthly escrow obligation to $175,000 from September, 1992 through December,
1993. Beginning January, 1994 and until development is completed or the 1992
Consent Order is amended, the Company is required to deposit $430,000 per month
into the escrow account. As part of the assurance program under the 1992 Consent
Order, the Company and its lenders granted the Division a lien on certain
receivables and future receivables. The Company defaulted on its obligation to
escrow $430,000 per month
19
<PAGE>
for the period of January, 1994 through the present and, in accordance with the
1992 Consent Order, collections on Division receivables were escrowed for the
benefit of purchasers from March 1, 1994 through April 30, 1994. In May, 1994
the Company implemented a program to exchange purchasers who contracted to
purchase property which is undeveloped to property which is developed. As of
March 31, 1997, approximately 85% 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 and settlement of all remaining maintenance
and improvements obligations in Citrus Springs through a final agreement with
Citrus County (entered into in May 1995). Pursuant to the 1992 Consent Order,
the Company has limited the sale of single-family lots to lots which front on a
paved street and are ready for immediate building.
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 $3,000,000 as of March 31, 1997.
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.
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.
20
<PAGE>
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.
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.
21
<PAGE>
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 $6,012,000 as of March 31, 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.
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 $3,000,000 as of March 31, 1997; non-payment of these
delinquent taxes may adversely affect the financial condition of the Company.
The Company is continuing to seek third parties to provide financing. There
can be no assurance, however, that additional financing will be obtained,
accordingly, the Company's Board of Directors is also considering other
appropriate action given the severity of the Company's liquidity position
including, but not limited, to filing for protection under the federal
bankruptcy laws.
22
<PAGE>
PART II - OTHER INFORMATION
===========================
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by the Company
during the quarter ended March 31, 1997.
23
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE DELTONA CORPORATION
Date: May 12, 1997 By: /s/Donald O. McNelley
------------ ----------------------
Donald O. McNelley
Treasurer
(Principal Financial Officer)
24
<PAGE>
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