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, 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)
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 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 March 31, 1998.
<PAGE>
PART I FINANCIAL INFORMATION
============================
ITEM 1. FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
-----------------------------------------------
MARCH 31, 1998 AND DECEMBER 31, 1997
------------------------------------
($000 Omitted)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Cash and temporary cash investments,
including escrow deposits and restricted
cash of $814 in 1998 and $1293 in 1997..................... $ 918 $ 1,397
---------- ---------
Contracts receivable for land sales - net................... 2,640 2,698
---------- ---------
Mortgages and other receivables - net....................... 693 1,291
---------- ---------
Inventories (b):
Land and land improvements................................. 7,521 7,449
Other...................................................... 99 99
---------- ---------
Total inventories...................................... 7,620 7,548
---------- ---------
Property, plant, and equipment at cost - net................ 366 374
---------- ---------
Prepaid expenses and other.................................. 188 252
---------- ---------
Total.................................................. $ 12,425 $ 13,560
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Mortgages and similar debt(c):
Mortgage notes payable.................................... $ 6,670 $ 6,693
Other loans .............................................. 2,030 2,294
---------- ---------
Total mortgages and similar debt........................ 8,700 8,987
Accounts payable, accrued expenses,
customers' deposits....................................... 6,770 6,676
Allowance for Marco permit costs (d)....................... 0 0
Deferred revenue........................................... 3,246 3,511
---------- ---------
Total liabilities..................................... 18,716 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....................................... (71,276) (70,653)
---------- ----------
Total stockholders' (deficiency)...................... (6,291) (5,614)
---------- ----------
Total............................................ $ 12,425 $ 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>
Three Months Ended
------------------------
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Revenues (a):
Net land sales...................................... $ 644 $ 1,129
House and apartment sales........................... 219 321
Recognized improvement
revenue/ prior period
sales.............................................. 266 184
Interest income..................................... 169 330
Other revenues...................................... 81 108
--------- ---------
Total........................................... 1,379 2,072
--------- ---------
Costs and expenses (a):
Cost of sales and
improvements....................................... 497 628
Selling, general and
administrative and other
expenses........................................... 1,290 1,417
Interest expense (c)(e)............................. 214 456
--------- ---------
Total........................................... 2,001 2,501
--------- ---------
Loss from operations ................................ (622) (429)
--------- ---------
Net Income (Loss).................................... $ (622) $ (429)
========= =========
Basic earnings (Loss) per common and
common equivalent shares:
From operations..................................... (.05) (.06)
--------- ---------
Net Income (Loss).................................... $ (.05) $ (.06)
========= =========
Number of common and common
equivalent shares................................... 13,544,277 6,734,906
========== =========
</TABLE>
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.
3
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 1998 AND MARCH 31, 1997
---------------------------------
($000 Omitted)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities.............. $ (476) $ (31)
--------- ---------
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................. (3) (2)
--------- ---------
Net cash provided by (used in) investing
activities....................................... (3) 1
--------- ---------
Cash flows from financing activities:
New borrowings.................................. 0 0
Repayment of borrowings......................... 0 0
--------- ---------
Net cash provided by (used in) financing
activities....................................... 0 0
--------- ---------
Net increase (decrease) in cash and
temporary cash investments (including
escrow deposits and restricted cash)............. (479) (30)
Cash and temporary cash investments at
December 31, 1997 and December 31, 1996.......... 1,397 907
--------- ---------
Cash and temporary cash investments at
March 31, 1998 and March 31, 1997................ $ 918 $ 877
========= =========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
Certain amounts have been reclassified for comparative purposes.
4
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 1998 AND MARCH 31, 1997
---------------------------------
($000 Omitted)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Reconciliation of net income (loss)
to net cash provided by (used in)
operating activities:
Net loss.......................................... $ (622) $ (429)
--------- --------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 12 14
Provision for estimated uncollectible sales-net... 241 412
Contract valuation discount, net of amortization.. 54 74
Net Gain on sale of property, plant &
equipment....................................... 0 (3)
Net change in assets and liabilities.............. (161) (79)
--------- --------
Total adjustments.............................. $ 146 $ 398
--------- --------
Net cash provided by (used in) operating
activities..................................... $ (476) $ (31)
========= ========
Supplemental disclosure of non cash
investing and financing activities:
Common Stock issued for Marco Settlement......... $ 0 $ 1
========= ========
Reduction of debt as a result of the conveyance
of contracts receivable....................... $ 287 $ 0
========= ========
</TABLE>
5
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------
MARCH 31, 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
---------------------
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Unimproved land................................... $ 420 $ 420
Land in various stages of
development...................................... 2,027 1,888
Fully improved land............................... 5,074 5,141
-------- --------
Total........................................ $ 7,521 $ 7,449
======== ========
</TABLE>
Other inventories consists primarily of vacation ownership units completed.
(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>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Mortgage Notes Payable ............................... $ 6,670 $ 6,693
Other Loans........................................... 2,030 2,294
-------- --------
Total mortgages and similar debt.................. $ 8,700 $ 8,987
======== ========
</TABLE>
6
<PAGE>
Included in Mortgage Notes Payable is the Yasawa Loan ($6,670,000 as of
March 31, 1998); included in Other Loans is the Scafholding Loan
($2,030,000 as of March 31, 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 March 31, 1998, loans outstanding to Yasawa and
Scafholding totaled $8,700,000. 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.
(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 March 31, 1998, approximately 85% 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.
7
<PAGE>
As of March 31, 1998, the Company had estimated development obligations of
approximately $25,000 on sold property, an estimated liability to provide
title insurance and deeding costing $557,000 and an estimated cost of
street maintenance, prior to assumption of such obligations by local
governments, of $429,000, all of which are included in deferred revenue.
The total cost to complete improvements at March 31, 1998, including the
previously mentioned obligations, was estimated to be approximately
$1,011,000. As of March 31, 1998 the Company had in escrow approximately
$50,000 specifically for maintenance and improvements at certain of its
Central and North Florida communities. 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 $1,689,000 as of March 31, 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 $1,689,000 in delinquent real estate taxes, approximately
$48,000 relates to sold lots on which the customer has assumed the
obligation to pay but has not done so.
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 $214,000 and
$456,000, none was capitalized for the three months ended March 31, 1998
and March 31, 1997, respectively.
(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 three
months ended March 31, 1998 and March 31, 1997 were $(622,000) and
$(429,000) and 13,544,277 and 6,734,906, respectively.
8
<PAGE>
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) will be 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.
As of March 31, 1998, the Company's outstanding debt to Scafholding was
$2,029,709, secured by a first lien on the Company's receivables; the Company's
outstanding debt to Yasawa was $6,670,291 secured by a second lien on the
Company's receivables and a mortgage on all of the Company's property. As of
March 31, 1998, loans outstanding to Yasawa and Scafholding totaled $8,700,000.
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.
In the future, if the Company elects to do so, Yasawa and Scafholding have
agreed to purchase contracts receivable at 65% of face value, with recourse, to
meet the Company's ongoing capital requirements.
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.
9
<PAGE>
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 March 20, 1998).
As a consequence of its liquidity position, the Company has not paid delinquent
real estate taxes which aggregate approximately $1,689,000 as of March 31, 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 their obligation to
construct an office building to house the Company's corporate office and
TimberWalk sales center. The sales price will provide rent credits for
approximately four and one-half years to the Company.
RESULTS OF OPERATIONS
- ---------------------
For the three months ended March 31, 1998 and March 31, 1997.
Revenues
- --------
Total revenues were $1,379,000 for the first quarter of 1998 compared to
$2,072,000 for the comparable 1997 period.
Gross land sales were $966,000 for the first quarter of 1998 versus $1,682,000
for the first quarter of 1997. Net land sales (gross land sales less estimated
uncollectible installment sales and contract valuation discount) decreased to
$644,000 for the first three months of 1998 from $1,129,000 for the first three
months of 1997. The decrease in sales reflects lower sales from the Company's
independent dealer network.
There were no bulk land sales for the first quarter 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".
Housing revenues were $219,000 for the three months ended March 31, 1998
compared to $321,000 for the same period in 1997. Revenues are not recognized
from housing sales until the completion of construction and passage of title.
Housing revenues decreased as of result of lower sales from the Company's
independent dealer network. The backlog of houses under construction was
$1,206,000 and $409,000 for the three months ended March 31, 1998 and March 31,
1997, respectively. The Company in the process of developing TimberWalk, a new
housing community in Ocala, Florida, which is anticipated to open in June, 1998.
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,
1998 1997
--------- ---------
<S> <C> <C>
Gross Land Sales:
Retail Sales<F1> $ 966 $ 1,682
-------- -------
Housing Sales:
Single Family 219 321
-------- -------
Total Real Estate $ 1,185 $ 2,003
======== =======
10
<PAGE>
<FN>
- ---------------------
<F1> 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, 1998 and March 31, 1997
were $769,000 and $1,688,000, respectively. The Company had a backlog of
approximately $794,000 in unrecognized sales as of March 31, 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 $265,000 for the first quarter of 1998 as compared to $184,000
for the first quarter of 1997.
Interest income was $168,800 for the first three months of 1998 as compared to
$330,000 for the first three 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.
Other revenues were $81,000 as compared to $108,000 for the three months ended
March 31, 1998 and March 31, 1997, respectively. Other revenues are generated
principally by the Company's title insurance and real estate brokerage
subsidiaries.
Costs and Expenses
- ------------------
Costs and expenses for the first three months of 1998 were $2,001,000 compared
to $2,501,000 for the same period in 1997. Cost of sales totaled $497,000 for
the three months ended March 31, 1998 compared to $628,000 for the three months
ended March 31, 1997.
Commissions, advertising and other selling expenses totaled $609,000 for the
three months ended March 31, 1998 compared to $649,000 for the three months
ended March 31, 1997. The lower retail sales levels resulting in reduced
commission expense however other selling expenses increased to $277,000 for the
three months period of 1998 versus $167,000 for 1997 as a result of start up
costs incurred in preparation of the Company's new housing community in
TimberWalk. Advertising and promotional expenditures decreased to $16,000 from
$30,000 for the three month period of 1998 versus 1997.
General and administrative expenses were $424,000 for the first three months of
1998 compared to $462,000 for the first three months of 1997. General and
administrative expenses have remained constant from period to period.
Real estate tax expense was $257,000 for the period ended March 31, 1998 as
compared to $305,000 for the period ended March 31, 1997. 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 1998 was $214,000, compared
to $456,000 for the first three months 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.
11
<PAGE>
Net Income (Loss)
- -----------------
The Company reported a net loss of $622,000 for the three months ended March 31,
1998 as compared to a net loss of $429,000 for the three months ended March 31,
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 a mortgage and loan agreements is collateralized by
substantially all of the Company's assets, including stock of certain
wholly-owned subsidiaries.
12
<PAGE>
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):
<TABLE>
<CAPTION>
Years Ended
-----------------------
March 31, December 31,
1998 1997
--------- -------------
<S> <C> <C>
Mortgage Notes Payable........ $ 6,670 $ 6,693
Other Loans................... 2,030 2,294
-------- --------
Total Mortgages and
Similar Debt.................. $ 8,700 $ 8,987
======== ========
</TABLE>
Included in Mortgage Notes Payable is the Yasawa Loan ($6,670,000 as of March
31, 1997); included in Other Loans is the Scafholding Loan ($2,030,000 as of
March 31, 1997).
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 $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. During the first
quarter of 1998, the Company did not replace any delinquent receivables. As of
March 31, 1998 and 1997, $1,302,000 and $1,271,000 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 March 31, 1998, the balance of the holdback account as
approximately $121,000.
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
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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.
The Company was the guarantor of approximately $13,673,000 of contracts
receivable sold or transferred as of March 31, 1997, for the transactions
described above and had $121,000 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 of which
$3,188,000 remains at March 31, 1998. The Company has been in compliance with
all receivable transactions since the consummation of receivable sales.
In the future, if the Company elects to do so, Yasawa and Scafholding have
agreed to purchase contracts receivable at 65% of face value, with recourse, to
meet the Company's ongoing capital requirements.
OTHER OBLIGATIONS
As of March 31, 1998, the Company had estimated development obligations of
approximately $25,000 on sold property, an estimated liability to provide title
insurance and deeding costing $557,000 and an estimated cost of street
maintenance, prior to assumption of such obligations by local governments, of
$429,000, all of which are included in deferred revenue. The total cost to
complete improvements at March 31, 1998 was estimated to be approximately
$1,011,000. As of March 31, 1998 the Company had in escrow approximately $50,000
specifically for land improvements at certain of its Central and North Florida
communities. 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 $1,689,000 as of March 31, 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 $1,689,000 in
delinquent real estate taxes, approximately $48,000 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 will feature a model home center
with models built by three premier central Florida home builders. At TimberWalk,
home buyers will enjoy the benefits of Deltona's newest design concept,
"Everything Included", which includes features that are often considered extra
cost upgrades and options by other home builders but are included in
TimberWalk's basic prices. Models will 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.
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
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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.
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.
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PART II - OTHER INFORMATION
===========================
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.
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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: May 15, 1998 By: /s/Donald O. McNelley
------------ ------------------------------
Donald O. McNelley
Treasurer
(Principal Financial Officer)
17
