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, 1998
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)
8014 SW 135 STREET ROAD, OCALA, FLORIDA 34473
- ------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (352)307-8100
-------------
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: 13,544,277 shares of common
stock, $1 par value, excluding treasury stock, as of September 30, 1998.
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
($000 Omitted)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Cash and temporary cash investments,
including escrow deposits and restricted
cash of $591 in 1998 and $1293 in 1997...... $ 899 $ 1,397
---------- ---------
Contracts receivable for land sales - net.... 1,956 2,698
---------- ---------
Mortgages and other receivables - net........ 64 1,291
---------- ---------
Inventories (b):
Land and land improvements.................. 7,354 7,449
Other....................................... 99 99
---------- ---------
Total inventories................ 7,453 7,548
---------- ---------
Property, plant, and equipment at cost - net. 409 374
---------- ---------
Prepaid expenses and other................... 588 252
---------- ---------
Total............................ $ 11,369 $ 13,560
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Mortgages and similar debt(c):
Mortgage notes payable....................... $ 6,670 $ 6,693
Other loans ................................. 1,430 2,294
---------- ---------
Total mortgages and similar debt........... 8,100 8,987
Accounts payable, accrued expenses,
customers' deposits.......................... 8,466 6,676
Deferred revenue.............................. 2,666 3,511
---------- ---------
Total liabilities................. 19,232 19,174
---------- ---------
Commitments and contingencies (d):
Stockholders' equity (deficiency):
Common stock, $1 par value - authorized
15,000,000 shares; outstanding: 1998 and
1997 - 13,544,277 shares and 6,734,939 shares
(excluding 12,228 shares held in treasury
in 1998 and 1997)............................ 13,544 13,544
Capital surplus............................... 51,441 51,495
Accumulated deficit........................... (72,848) (70,653)
---------- ---------
Total stockholders' (deficiency)... (7,863) (5,614)
---------- ---------
Total.................. $ 11,369 $ 13,560
========== =========
</TABLE>
2
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE PERIODS INDICATED
($000 Omitted Except Per Share Amounts)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September September September September
30, 1998 30, 1997 30, 1998 30, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues (a):
Net land sales............. $ 2,238 $ 2,947 $ 718 $ 856
House and apartment sales.. 949 787 289 225
Recognized improvement
revenue/ prior period
sales..................... 845 908 161 147
Interest income............ 433 1,009 119 330
Other revenues............. 197 343 51 73
-------- -------- -------- --------
Total.................. 4,663 5,994 1,338 1,631
-------- -------- -------- --------
Costs and expenses (a):
Cost of sales and
improvements.............. 1,776 1,770 565 505
Selling, general and
administrative and other
expenses.................. 4,461 4,068 1,843 1,285
Interest expense (c)(e).... 620 1,386 199 468
-------- -------- -------- --------
Total.................. 6,857 7,224 2,607 2,258
-------- -------- -------- --------
Loss from operations ....... (2,194) (1,230) (1,269) (627)
-------- -------- -------- --------
Net Income (Loss)........... $ (2,194) $ (1,230) $ (1.269) $ (627)
======== ======== ======== ========
Earning (Loss) per share:
From operations............ $ (.16) $ (.18) $ (.09) $ (.09)
-------- -------- -------- --------
Net Income (Loss)........... $ (.16) $ (.18) $ (.09) $ (.09)
======== ======== ======== ========
Number of common and common
equivalent shares.......... 13,544,277 6,734,928 13,544,277 6,734,939
======== ======== ======== ========
<FN>
No dividends have been paid on Common Stock.
Results of operations for the first six months may not be indicative of results
which may be expected for the full year. See Notes to Unaudited Condensed
Consolidated Financial Statements.
See Management's Analysis of Quarterly Statements of Operations included herein.
Certain amounts have been reclassified for comparative purposes.
</FN>
</TABLE>
3
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
($000 Omitted)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, September 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities.............. $ (430) $ (227)
---------- ---------
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment................................... 0 3
Payment for acquisition and construction
of property plant and equipment................. (68) (2)
---------- ---------
Net cash provided by (used in) investing
activities....................................... (68) 1
---------- ---------
Cash flows from financing activities:
New borrowings.................................. 0 138
Repayment of borrowings......................... 0 0
---------- ---------
Net cash provided by (used in) financing
activities....................................... 0 138
---------- ---------
Net increase (decrease) in cash and
temporary cash investments (including
escrow deposits and restricted cash)............. (498) (88)
Cash and temporary cash investments at
December 31, 1997 and December 31, 1996.......... 1,397 907
---------- ---------
Cash and temporary cash investments at
September 30, 1998 and September 30, 1997........ $ 899 $ 819
========== =========
<FN>
See Notes to Unaudited Condensed Consolidated Financial Statements.
Certain amounts have been reclassified for comparative purposes.
</FN>
</TABLE>
4
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
($000 Omitted)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
Reconciliation of net income (loss)
to net cash provided by (used in)
operating activities:
Net loss............................... $ (2,194) $ (429)
--------- --------
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 33 52
Provision for estimated uncollectible
sales-net............................. 797 1,068
Contract valuation discount, net of
amortization.......................... 132 178
Net Gain on sale of property, plant &
equipment............................ 0 (3)
Net change in assets and liabilities... 802 (292)
--------- --------
Total adjustments............ $ 1,764 $ 1,003
--------- --------
Net cash provided by (used in) operating
activities........................... $ (430) $ (227)
========= ========
Supplemental disclosure of non cash
investing and financing activities:
Reduction of debt as a result of the
conveyance of contracts receivable... $ 887 $ 0
========= ========
</TABLE>
5
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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,
1998 1997
------------- ------------
<S> <C> <C>
Unimproved land......................... $ 420 $ 420
Land in various stages of development... 2,756 1,888
Fully improved land..................... 4,178 5,141
--------- --------
Total....................... $ 7,354 $ 7,449
========= ========
</TABLE>
Other inventories consists primarily of completed vacation ownership
units.
(c) MORTGAGES AND SIMILAR DEBT
Indebtedness under a mortgage and loan agreements is collateralized
by substantially all of the Company's assets, including stock of
certain wholly-owned subsidiaries.
The following table presents information with respect to mortgages
and similar debt (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Mortgage Notes Payable .................. $ 6,670 $ 6,693
Other Loans.............................. 1,430 2,294
--------- --------
Total mortgages and similar debt...... $ 8,100 $ 8,987
========= ========
</TABLE>
Included in Mortgage Notes Payable is the Yasawa Loan ($6,670,000 as
of September 30, 1998); included in Other Loans is the Scafholding
Loan ($1,430,000 as of September 30, 1998). The Scafholding Loan is
secured by a first lien on the Company's receivables. The Yasawa
Loan is secured by a second lien on the Company's receivables and a
mortgage on all of the Company's property. As of September 30, 1998,
loans outstanding to Yasawa and Scafholding totaled $8,100,000. The
terms of repayment of this debt have been restructured to provided
for a monthly payment of principal in the amount of $100,000 payable
monthly in cash or with contracts receivable at 100% of face value,
plus interest payable monthly on the declining balance of the rate
of 9.6% per annum in cash or with contracts receivable at 65% of
face value. Yasawa and Scafholding have not required the company to
pay interest for the period September 1, 1998 to the present.
6
<PAGE>
(d) COMMITMENTS AND CONTINGENCIES
Homesite sales contracts provide for the return of all monies paid
in (including paid-in interest) should the Company be unable to meet
its contractual obligations after the use of reasonable diligence.
If a refund is made, the Company will recover the related homesite
and any improvement thereto.
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, Topeka's
utility companies 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 was 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 had
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 November
1997. 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 have customers who had contracted to
purchase property which is undeveloped exchange such property for
developed property. As of September 30, 1998, approximately 87% of
such customers have opted to exchange or have had their situations
otherwise resolved.
On December 30, 1997, the Division approved the formation of a Lot
Exchange Trust into which the Company conveyed sufficient exchange
inventory to provide exchanges to customers with undeveloped lots.
Concurrently, the Division released its lien on the Company's
contracts receivable, satisfied its mortgage on the Company's
property and approved a settlement of all remaining issues under the
1992 Deltona Consent Order. The 1992 Deltona Consent Order was
terminated on April 13, 1998.
As of September 30, 1998, the Company had estimated development
obligations of approximately $25,000 on sold property, an estimated
liability to provide title insurance and deeding costing $390,000
and an estimated cost of street maintenance, prior to assumption of
such obligations by local governments, of $335,000 , all of which
are included in deferred revenue. The total cost to complete
improvements as of September 30, 1998, including the previously
mentioned obligations, was estimated to be approximately $750,000.
The Company's development obligation was substantially reduced in
1997 by the consummation of the Agreement approved by the
stockholders on November 4, 1997. Approximately $7,400,000 of the
development obligation at St. Augustine Shores was assumed by Swan.
In addition, the creation of a Lot Exchange Trust reduced the
development obligation at Marion Oaks and Sunny Hills by
approximately $5,800,000.
The Company's continuing liquidity problems have precluded the
timely payment of the full amount of certain real estate taxes.
Delinquent real estate taxes aggregated approximately $1,864,000 as
of September 30, 1998. 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.
Of the $1,864,000 in delinquent real estate taxes, approximately
$28,000 relates to sold lots on which the customer has assumed the
obligation to pay but has not done so.
7
<PAGE>
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,
1997, 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 the 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, none was capitalized for the nine months ended September
30, 1997. Of the total interest cost incurred of $620,000, none was
capitalized for the nine months ended September 30, 1998.
(f) EARNINGS OR LOSS PER SHARE
Basic 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 nine months ended September
30, 1998 and September 30, 1997 were $(2,194,000) and $(1,230,000)
and 13,544,277 and 6,734,928, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On November 4, 1997, at the 1997 Annual Meeting, the Company's stockholders
approved an Agreement between the Company and its lenders that would
substantially reduce the Company's outstanding debt obligation of $25.3 million
(the "Agreement"). The Agreement, consummated effective December 30, 1997 upon
approval of the Division of Florida Land Sales, Condominiums and Mobile Homes,
resulted 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 lenders
purchased $7.5 million in contracts receivable from the Company to generate
working capital and further reduce the debt obligation.
Specifically:
1. Selex sold its remaining debt ($2,664,736), including the Empire
note, to Yasawa and the Company owes no further duty or obligation to Selex,
which provided the Company a release. The debt purchased by Yasawa was satisfied
through Yasawa's purchase of 2,664,736 shares of Common Stock issued by the
Company at a per share conversion price of One Dollar ($1.00), which is equal to
par value.
2. Swan had previously acquired $5,529,501 of the Company's debt
from Selex. This $5,529,501 was satisfied through the Company's conveyance of
all of the Company's remaining land inventory and obligations in its St.
Augustine Shores Subdivision to Swan . The price, based upon appraised value,
was adjusted to take into account the development obligations on sold lots
assumed by Swan.
3. Scafholding purchased 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 sale generated approximately $5.6
million, $1,982,457 of which was used to reduce outstanding debt to Yasawa. The
balance (of which $1 million is in the form of a promissory note from
Scafholding to the Company) has been used by the Company to pay a portion of the
delinquent real estate taxes, to implement its marketing programs, to initiate
development of TimberWalk and to meet the Company's working capital
requirements.
4. A $4,144,602 portion of the Company's debt to Yasawa was
satisfied through Yasawa's purchase of 4,144,602 shares of Common Stock issued
by the Company at a per share conversion price of One Dollar ($1.00), which is
equal to par value.
8
<PAGE>
As of September 30, 1998, the Company's outstanding debt to Scafholding was
$1,430,000, secured by a first lien on the Company's receivables; the Company's
outstanding debt to Yasawa was $6,670,000 secured by a second lien on the
Company's receivables and a mortgage on all of the Company's property. As of
September 30, 1998, loans outstanding to Yasawa and Scafholding totaled
$8,100,000. The terms of repayment of this debt have been restructured to
provide for monthly payments of principal in the amount of $100,000 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. Yasawa and
Scafholding have not required the company to pay interest for the period
September 1, 1998 to the present.
Prior to November 4, 1997 and independent of the Agreement outlined above, Selex
and Yasawa agreed to forgive $2,050,818 in accrued interest on the Company's
debt to them.
Through Yasawa's acquisition of the 6,809,338 shares of Common Stock of the
Company referenced above, Mr. Antony Gram's beneficial ownership increased from
3,109,703 shares to 9,919,041 shares (73.23% of the outstanding shares of Common
Stock of the Company as of September 30, 1998).
As a consequence of its liquidity position, the Company has not paid delinquent
real estate taxes which aggregate approximately $1,864,000 as of September 30,
1998. Non-payment of these delinquent taxes may adversely affect the financial
condition of the Company.
On March 10, 1998, the Company entered into a related party agreement with Swan
Development Corporation ("Swan") whereby Swan acquired approximately $375,000 in
property in Marion Oaks in exchange for its obligation to construct an office
building to house the Company's corporate office and TimberWalk sales center.
The sales contract provides for rent credits for approximately four and one-half
years to the Company.
As part of the Agreement, if the Company elects to do so, Scafholding agreed to
purchase contracts receivable at 65% of face value, with recourse, to meet the
Company's ongoing capital requirements. Scafholding purchased the following
contracts receivables from the Company to generate working capital for the
Company:
Approximate
Date of Purchase Amount Purchased
---------------- ----------------
June 30, 1998 $200,100
July 15, 1998 $115,200
July 31, 1998 $179,900
August 31, 1998 $250,400
September 10, 1998 $153,400
September 29, 1998 $497,100
RESULTS OF OPERATIONS
- ---------------------
For the nine months ended September 30, 1998 and September 30, 1997.
Revenues
- --------
Total revenues were $4,663,000 for the first nine months of 1998 compared to
$5,994,000 for the comparable 1997 period.
Gross land sales were $3,245,000 for the first nine months of 1998 versus
$4,402,000 for the comparable 1997 period. Net land sales (gross land sales less
estimated uncollectible installment sales and contract valuation discount)
decreased to $2,238,000 for the first nine months of 1998 from $2,947,000 for
the first nine months of 1997. For the three months ended September 30, 1998,
net land sales decreased to $718,000 from $856,000 for the comparable 1997
period. The decrease in sales reflects lower sales by the Company's independent
dealer network.
There were no bulk land sales for the first nine months of 1998 or 1997. 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".
9
<PAGE>
Housing revenues were $949,000 for the nine months ended June 30, 1998 compared
to $787,000 for the same period in 1997. Revenues are not recognized from
housing sales until the completion of construction and passage of title. Housing
revenues increased as of result of higher sales by the Company's independent
dealer network. The backlog of houses under contract was $3,420,000 and $874,000
as of September 30, 1998 and September 30, 1997, respectively. The Company
recently opened TimberWalk, a new housing community in Ocala, Florida.
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
September September September September
30, 1998 30, 1997 30, 1998 30, 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Gross Land Sales:
Retail Sales* $ 3,245 $ 4,402 $ 1,075 $ 1,236
------- ------- ------- -------
Housing Sales:
Single Family 949 787 289 225
------- ------- ------- -------
Total Real Estate $ 4,194 $ 5,189 $ 1,364 $ 1,461
======= ======= ======= =======
<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, 1998 and September 30,
1997 were $3,216,000 and $4,085,000, respectively, and $1,135,000 and $1,228,000
for the third quarters of 1998 and 1997, respectively. The Company had a backlog
of approximately $923,000 in unrecognized sales as of September 30, 1998. 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 $845,000 for the first nine months of 1998 ($161,000 for the
third quarter of 1998), as compared to $907,000 for the first nine months of
1997 ($147,000 for the third quarter 1997).
Interest income was $433,000 for the first nine months of 1998 as compared to
$1,009,000 for the first nine months of 1997. The decrease is the result of a
decrease in the Company's contracts receivable, resulting from the sale of
$7,500,000 in contracts receivable for the fourth quarter 1997 and subsequent
sales.
Other revenues were $197,000 for the first nine months of 1998 ($51,000 for the
third quarter of 1998), as compared to $342,000 for the first nine months of
1997 ($73,000 for the third quarter of 1997). Other revenues for the first nine
months of 1997 included $154,000 of revenue from timbering operations (none for
the third quarter of 1997). Other revenues are currently generated principally
by the Company's title insurance and real estate brokerage subsidiaries.
Costs and Expenses
- ------------------
Costs and expenses were $6,857,000 for the first nine months of 1998 ($2,607,000
for the third quarter of 1998), as compared to $7,224,000 for the first nine
months of 1997 ($2,258,000 for the third quarter of 1997). Cost of sales were
$1,776,000 for the first nine months of 1998 ($565,000 for the third quarter of
1998), as compared to $1,770,000 for the first nine months of 1997 ($505,000 for
the third quarter of 1997).
Commissions, advertising and other selling expenses totaled $1,899,000 for the
nine months ended September 30, 1998 compared to $1,786,000 for the nine months
ended September 30, 1997 ($629,000 for the third quarter of 1998 as compared to
$536,000 for the third quarter of 1997). Advertising and promotional expenses
increased to $840,000 for the nine month period ended September 30, 1998 versus
$523,000 for the same nine month period in 1997 ($284,000 for the third quarter
of 1998 as compared to $174,000 for the third quarter of 1997) as a result of
increased marketing efforts for the Company's new housing community in
TimberWalk.
General and administrative expenses were $1,792,000 for the first nine months of
1998 ($955,000 for the third quarter of 1998), as compared to $1,291,000 for the
first nine months of 1997 ($401,000 for the third quarter of 1997). General and
administrative expenses have remained constant from period to period. Included
in the third quarter of 1998 is approximately
10
<PAGE>
$569,000 relating to compensation to be paid pursuant to the resignation of the
former President and Senior Vice President of Marketing Administration.
Real estate tax expenses were $771,000 for the first nine months of 1998
($257,000 for the third quarter of 1998), as compared to $990,000 for the first
nine months of 1997 ($348,000 for the third quarter of 1997). Included in real
estate tax expense is interest and administrative fees on delinquent taxes,
which accrue interest at 18% per annum.
Interest expense was $620,000 for the first nine months of 1998 ($199,000 for
the second quarter of 1998), as compared to $1,386,000 for the first nine months
of 1997 ($468,000 for the second quarter of 1997). The decrease in interest
expense is the result of a lower outstanding debt resulting from the debt
reduction accomplished in the fourth quarter of 1997.
Net Income (Loss)
- -----------------
The Company reported a net loss of $2,194,000 for the first nine months of 1998
($1,269,000 for the third quarter of 1998), as compared to $1,230,000 for the
first nine months of 1997 ($627,000 for the third quarter of 1997).
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 mortgage and loan agreements is collateralized by
substantially all of the Company's assets, including stock of certain
wholly-owned subsidiaries.
The loan modifications consummated on December 31, 1997, satisfied all Company
obligations to Selex and the outstanding loans to Scafholding and Yasawa were
restructured. The following table presents information with respect to mortgages
and similar debt (in thousands):
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<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Mortgage Notes Payable .................. $ 6,670 $ 6,693
Other Loans.............................. 1,430 2,294
--------- --------
Total mortgages and similar debt...... $ 8,100 $ 8,987
========= ========
</TABLE>
Included in Mortgage Notes Payable is the Yasawa Loan ($6,670,000 as of
September 30, 1998); included in Other Loans is the Scafholding Loan ($1,430,000
as of September 30, 1998).
CONTRACTS AND MORTGAGES RECEIVABLE SALES
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 $2,424,000 as of September
30, 1998). 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. During the first nine
months of 1998, the Company did not replace any delinquent receivables. As of
September 30, 1998 and 1997, $1,287,000 and $1,138,000 in receivables were
delinquent, respectively.
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 of $150,000. As of September , 1998, the holdback account was terminated
with a $0 balance.
In December 1997, Scafholding purchased approximately $7,500,000 in contracts
receivable from the Company at seventy-five percent (75%) of face value with
recourse for non-performing contracts. This sale generated approximately $5.6
million, $1,982,457 of which was used to reduce outstanding debt to Yasawa. The
balance (of which $1 million is in the form of a promissory note from
Scafholding to the Company expected to be satisfied by mid-1998) was used by the
Company to pay a portion of the delinquent real estate taxes, to implement its
marketing programs, to initiate development of TimberWalk and to meet the
Company's working capital requirements.
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The Company sold to Scafholding and Scafholding agreed to purchase contracts
receivable at 65% of face value, with recourse, to meet the Company's ongoing
capital requirements. Scafholding purchased the following contracts receivables
from the Company to generate working capital for the Company:
Approximate
Date of Purchase Amount Purchased
---------------- ----------------
June 30, 1998 $200,100
July 15, 1998 $115,200
July 31, 1998 $179,900
August 31, 1998 $250,400
September 10, 1998 $153,400
September 29, 1998 $497,100
The Company was the guarantor of approximately $8,503,000 of contracts
receivable sold or transferred as of September 30, 1998, for the transactions
described above and had no money 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 of which
$1,445,000 remains at September 30, 1998. The Company has been in compliance
with all receivable transactions since the consummation of receivable sales.
OTHER OBLIGATIONS
As of September 30, 1998, the Company had estimated development obligations of
approximately $25,000 on sold property, an estimated liability to provide title
insurance and deeding costing $390,000 and an estimated cost of street
maintenance, prior to assumption of such obligations by local governments, of
$335,000 , all of which are included in deferred revenue. The total cost to
complete improvements at September 30, 1998 was estimated to be approximately
$750,000. The Company's development obligation was substantially reduced in 1997
by the consummation of the Agreement approved by the stockholders on November 4,
1997. Approximately $7,400,000 of the development obligation at St. Augustine
Shores was assumed by Swan. In addition, the creation of a Lot Exchange Trust
reduced the development obligation at Marion Oaks and Sunny Hills by
approximately $ 5,800,000.
The Company's continuing liquidity problems have precluded the timely payment of
the full amount of its real estate taxes. Delinquent real estate taxes
aggregated approximately $1,864,000 as of September 30, 1998. 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. Of the
$1,864,000 in delinquent real estate taxes, approximately $28,000 relates to
sold lots on which the customer has assumed the obligation to pay but has not
done so.
LIQUIDITY
Retail land sales have traditionally produced negative cash flow through the
point of sale as a result of the regulatory requirement to sell fully developed
lots and the additional requirement to pay marketing and selling expenses prior
to or shortly after the point of sale. In an effort to offset the negative cash
effects of installment land sales, the Company is now attempting to direct its
marketing efforts to selling homes and lots together. The success of this
direction will be dependent upon the Company's dealer recruiting program and the
availability of funds for an advertising and promotion program.
In December 1997, the Company announced the start of construction on its newest
housing development: TimberWalk. TimberWalk features a model home center with
models built by three premier central Florida home builders. At TimberWalk, home
buyers enjoy the benefits of Deltona's newest design concept, "Everything
Included", with features that are often considered extra cost upgrades and
options by other home builders but are included in TimberWalk's basic prices.
Models range from one to two story homes with two, three or four bedrooms
ranging in size from 1,200 square feet to over 2,200 square feet of living
space.
13
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Due to its liquidity problems over the last five years, the Company has been
forced to delay payment of certain real estate taxes. The Company's ability to
continue retail land sales and re-establish itself in the housing business will
be substantially dependent on its ability to sell or otherwise finance contracts
receivable and/or secure other financing sources to meet its cash requirements.
Since 1992, the Company has been largely dependent upon Yasawa and related
parties for financing of its operations. Although Yasawa and Scafholding have
committed to provide the Company with financing of its contracts receivables at
the rate of 65% of face value, with recourse, there can be no guarantee that the
Company will be able to generate sufficient receivables to meet its cash flow
requirements.
In October 1998, the Company received a loan in the amount of $500,000 from
parties related to Antony Gram. In addition, in November 1998, Citony
Development Corporation advanced $200,000 to the Company for sales and marketing
services to be rendered by the Company.
YEAR 2000
The Company utilizes a number of software systems in conjunction with its
community development, contract processing and contract servicing operations.
The Company has and will continue to make certain investments in its software
systems and applications to ensure the Company is Year 2000 compliant. The
financial impact of becoming Year 2000 compliant has not been and is not
expected to be material to the Company's financial position or results of
operations in a given year.
14
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PART II - OTHER INFORMATION
- ---------------------------
Item 5. OTHER MATERIALLY IMPORTANT EVENTS.
On September 29, 1998, Earle D. Cortright, Jr. and the Company agreed to
terms for his resignation as President of the Company effective October 1, 1998.
Mr. Cortright will receive the sum of $400,000 as compensation for termination
of his Employment Agreement: $200,000 of which was paid in October 1998 and the
remaining $200,000 to be paid in January 1999.
In addition, on September 29, 1998, David M. Harden and the Company agreed to
terms for his resignation as Senior Vice President - Marketing Administration of
the Company effective October 1, 1998.
On October 2, 1998, the Board of Directors appointed Mr. Antony Gram to the
position of President of the Company , in addition to his position as Chairman
of the Board and Chief Executive Officer. On October 2, 1998, the Board of
Directors promoted Sharon J. Hummerhielm from her position as Vice President and
Corporate Secretary to the position of Executive Vice President and Corporate
Secretary.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
A Report on Form 8-K was filed by the Company on
April 7, 1998.
15
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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, 1998 By: /s/Donald O. McNelley
----------------- ---------------------
Donald O. McNelley
Treasurer
(Principal Financial Officer)
16
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