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, 1999
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, 1999.
<PAGE>
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE DELTONA CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
($000 Omitted)
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Cash and cash equivalents, including escrow deposits
and restricted cash of $498 in 1999 and $667 in 1998... $ 684 $ 721
Contracts receivable for land sales - net............... 1,403 2,173
---------- ---------
Mortgages and other receivables - net................... 103 194
---------- ---------
Inventories (b):
Land and land improvements............................. 8,143 7,579
Other.................................................. 76 76
---------- ---------
Total inventories................................ 8,219 7,655
---------- ---------
Property, plant, and equipment at cost - net............ 488 467
---------- ---------
Prepaid expenses and other.............................. 910 705
---------- ---------
Total............................................ $ 11,807 $ 11,915
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Mortgages and similar debt(c):
Mortgage notes payable................................. $ 6,670 $ 6,670
Other loans ........................................... 4,700 1,895
---------- ---------
Total mortgages and similar debt..................... 11,370 8,565
Accounts payable, accrued expenses,
customers' deposits.................................... 6,842 8,786
Deferred revenue........................................ 2,482 2,824
---------- ---------
Total liabilities....................................... 20,694 20,175
---------- ---------
Commitments and contingencies (d):
Stockholders' equity (deficiency):
Common stock, $1 par value - authorized
15,000,000 shares; outstanding: 1999 and
1998 - 13,544,277 shares (excluding 12,228 shares
held in treasury in 1999 and 1998).................... 13,544 13,544
Capital surplus........................................ 51,613 51,440
Accumulated deficit.................................... (74,044) (73,244)
---------- ---------
Total stockholders' (deficiency)................. (8,887) (8,260)
---------- ---------
Total..................................... $ 11,807 $ 11,915
========== =========
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
THE DELTONA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
FOR THE PERIODS INDICATED
($000 Omitted Except Per Share Amounts)
Nine Months Ended Three Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues (a):
Net land sales.................... $ 2,805 $ 2,238 $ 1,012 $ 718
House and apartment sales......... 2,615 949 570 289
Recognized improvement revenue /
prior period sales............... 293 845 106 161
Interest income................... 390 433 179 119
Other revenues.................... 400 197 179 51
---------- ----------- ----------- ---------
Total......................... 6,503 4,663 2,046 1,338
---------- ----------- ----------- ---------
Costs and expenses (a):
Cost of sales and improvements.... 3,004 1,776 790 565
Selling, general and administrative
and other expenses............... 3,789 4,461 1,362 1,843
Interest expense (c)(e)........... 510 620 174 199
---------- ----------- ----------- ---------
Total......................... 7,303 6,857 2,326 2,607
---------- ----------- ----------- ---------
Loss from operations .............. (800) (2,194) (280) (1,269)
---------- ----------- ----------- ---------
Net Income (Loss).................. $ (800) $ (2,194) $ (280) $ (1,269)
========== =========== =========== =========
Basic Earnings (Loss) per common
and common equivalent share:
From operations................... $ (.06) $ (.16) $ (.02) $ (.09)
---------- ----------- ----------- ---------
Net Income (Loss).................. $ (.06) $ (.16) $ (.02) $ (.09)
========== =========== =========== =========
Number of common and common
equivalent shares................. 13,544,277 13,544,277 13,544,277 13,544,277
========== ========== ========== ==========
<FN>
No dividends have been paid on Common Stock.
Results of operations for the first nine months may not be indicative of results
which may be expected for the full year. See Notes to Unaudited Condensed
Consolidated Financial Statements.
See Management's Analysis of Quarterly Statements of Operations included herein.
Certain amounts have been reclassified for comparative purposes.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
THE DELTONA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
($000 Omitted)
Nine Months Ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities.................... $ (5,934) $ (430)
---------- ---------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment... 3 0
Payment for acquisition and construction
of property plant and equipment....................... (81) (68)
---------- ---------
Net cash provided by (used in) investing activities..... (78) (68)
---------- ---------
Cash flows from financing activities:
New borrowings........................................ 5,975 0
Repayment of borrowings............................... 0 0
---------- ---------
Net cash provided by (used in) financing activities..... 5,975 0
---------- ---------
Net increase (decrease) in cash and cash equivalents
(including escrow deposits and restricted cash)........ (37) (498)
Cash and cash equivalents at December 31, 1998 and
December 31, 1997...................................... 721 1,397
---------- ---------
Cash and cash equivalents at September 30, 1999 and
September 30, 1998..................................... $ 684 $ 899
========== =========
<FN>
See Notes to Unaudited Condensed Consolidated Financial Statements.
Certain amounts have been reclassified for comparative purposes.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
THE DELTONA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
($000 Omitted)
Nine Months Ended
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net loss.............................................. $ (800) $ (2,194)
--------- --------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 37 33
Provision for estimated uncollectible sales-net....... 653 797
Contract valuation discount, net of amortization...... 3 132
Net Gain on sale of property, plant & equipment....... 3 0
Net change in assets and liabilities.................. (5,830) (802)
--------- --------
Total adjustments............................... $ (5,134) $ 1,764
--------- --------
Net cash provided by (used in) operating activities... $ (5,934) $ (430)
========= ========
Supplemental disclosure of non cash investing
and financing activities:
Reduction of debt as a result of the conveyance
of contracts receivable......................... $ 3,170 $ 887
========= ========
</TABLE>
5
<PAGE>
THE DELTONA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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
---------------------
September 30, December 31,
1999 1998
------------- ------------
Unimproved land........................ $ 429 $ 420
Land in various stages of development.. 3,554 2,287
Fully improved land.................... 4,169 4,872
-------- --------
Total............................. $ 8,143 $ 7,579
======== ========
Other inventories consists primarily of completed vacation ownership units.
(c) MORTGAGES AND SIMILAR DEBT
The following table presents information with respect to mortgages and
similar debt (in thousands):
September 30, December 31,
1999 1998
------------- ------------
Mortgage Notes Payable .................. $ 6,670 $ 6,670
Other Loans............................... 4,700 1,895
--------- -------
Total mortgages and similar debt........ $ 11,370 $ 8,565
========= =======
Included in Mortgage Notes Payable is the Yasawa loan ($6,670,000 at
September 30, 1999); included in Other Loans is the Scafholding loan
($230,000 as of September 30, 1999) and the Swan loan ($4,470,000) as of
September 30, 1999).
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's outstanding debt
to Scafholding is secured by a first lien on the Company's receivables; the
Company's outstanding debt to Yasawa is secured by a second lien on the
Company's receivables and a mortgage on all of the Company's property; and
the Company's outstanding debt to Swan is secured by a third lien on the
Company's receivables.
The terms of repayment of the Yasawa and Scafholding debt 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. Effective January
1, 1999, Yasawa and Scafholding agreed to reduce the annual percentage rate
on their existing loans to the Company from 9.6% to 6% per annum. Yasawa
and Scafholding have not required the Company to make monthly interest
payments for the period September 1, 1998 to September 30, 1999. As of
September 30, 1999, the total amount of interest accrued is approximately
$591,000.
6
<PAGE>
From October 9, 1998 through the present, Swan has advanced the Company
funds to meet its working capital requirements. The Company's outstanding
debt to Swan, which is secured by a third lien on the Company's
receivables, is approximately $4,170,000 as of September 30, 1999. The
Company signed a promissory note to Swan in March 1999 which provides that
funds advanced by Swan will be paid back by the Company monthly in
contracts receivables at 90% of face value, with recourse. There will be no
interest for the first six months after an advance of money is received
from Swan by the Company; thereafter the interest shall be 6% per annum on
the outstanding balance of the advance. The amount of each monthly payment
will vary and will be dependent upon the amount of contracts receivable in
the Company's portfolio, excluding contracts receivable held as collateral
for prior receivable sales. Pursuant to the terms of the promissory note,
the Company is required to transfer to Swan monthly as debt repayment all
current contracts receivable in the Company's portfolio in excess of the
aggregate sum of $500,000. Funds advanced by Swan were used by the Company
to pay approximately $2,567,000 in outstanding real estate taxes for unsold
properties with the balance to meet the Company's working capital
requirements. Included in the interest expense for the nine months ending
September 30, 1999 is $173,000 for interest imputed on the Swan debt, which
was treated as a contribution to capital, and $3,000 for interest accrued
on the Swan debt.
(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, in 1980 the Company entered
into a Consent Order with the Division which provided a program for
notifying affected customers. Since 1980, the Consent Order was restated
and amended several times, culminating in the 1992 Deltona Consent Order.
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 formally terminated on April 13, 1998.
As of September 30, 1999, the Company had estimated development obligations
of approximately $25,000 on sold property, an estimated liability to
provide title insurance and deeding costs of $170,000 and an estimated cost
of street maintenance, prior to assumption of such obligations by local
governments of $600,000, all of which are included in deferred revenue. The
total cost to complete improvements as of September 30, 1999, including the
previously mentioned obligations, was estimated to be approximately
$795,000. 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.
In addition to the matters discussed above and in Item 3 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998, 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 $510,000 and $
620,000, none was capitalized for the nine months ended September 30, 1999
and September 30,1998, respectively.
7
<PAGE>
(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, 1999 and September 30, 1998 were $(800,000) and
$(2,194,000) and 13,544,277 and 13,544,277, respectively.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
From June 19, 1992 through November 4, 1997, the Company had entered into loan
agreements with Selex International B.V., a Netherlands corporation ("Selex"),
Yasawa Holdings, N.V., a Netherlands Antilles Corporation ("Yasawa"), and
related parties. 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.
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,
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 Development Corporation ("Swan"), an affiliate of Selex and Yasawa,
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 B.V. ("Scafholding"), an affiliate of Selex and Yasawa,
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 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.
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, 1999).
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.
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:
9
<PAGE>
Approximate Contracts
Date of Purchase Receivable 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
From October 9, 1998 through the present, Swan has advanced the Company funds to
meet its working capital requirements. The Company signed a promissory note to
Swan in March 1999 which provides that funds advanced by Swan will be paid back
by the Company monthly in contracts receivables at 90% of face value, with
recourse. There will be no interest for the first six months after an advance of
money is received from Swan by the Company; thereafter the interest shall be 6%
per annum on the outstanding balance of the advance. The amount of each monthly
payment will vary and will be dependent upon the amount of contracts receivable
in the Company's portfolio, excluding contracts receivable held as collateral
for prior receivable sales. Pursuant to the terms of the promissory note, the
Company is required to transfer to Swan monthly as debt repayment all current
contracts receivable in the Company's portfolio in excess of the aggregate sum
of $500,000. Funds advanced by Swan were used by the Company to pay
approximately $2,567,000 in outstanding real estate taxes for unsold properties
with the balance to meet the Company's working capital requirements. As of
September 30, 1999, the Company's outstanding debt to Swan was $4,470,000
secured by a third lien on the Company's receivables.
As of September 30, 1999, the Company's outstanding debt to Scafholding was
$230,000, 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. 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 did not require the Company to make
interest payments for the period September 1, 1998 to the present. As of
September 30, 1999, the total amount of interest accrued is approximately
$591,000. Effective January 1, 1999, Yasawa and Scafholding agreed to reduce the
annual percentage rate for their existing loans to the Company from 9.6% to 6%
per annum.
During 1998, the Company transferred 14 lots and 4 tracts of land to Swan. In
return, Swan built an office complex on part of the land for use by the Company
for a period of 54 months, renewable thereafter. The Company valued the land
transferred at approximately $440,000 and recorded the net present value of the
use of the office complex of approximately $375,000 as prepaid rent. The
difference between the net present value of the rent and the cost of the land of
approximately $290,000 is recorded as deferred profit at December 31, 1998.
RESULTS OF OPERATIONS
- ---------------------
For the nine months ended September 30, 1999 and September 30, 1998.
Revenues
Total revenues were $6,503,000 for the first nine months of 1999 ($2,046,000 for
the quarter ending September 30, 1999) compared to $4,663,000 for the comparable
1998 period ($1,338,000 for the quarter ending September 30, 1998).
Gross land sales were $3,618,000 for the first nine months of 1999 versus
$3,245,000 for the comparable 1998 period. Net land sales (gross land sales less
estimated uncollectible installment sales and contract valuation discount)
increased to $2,805,000 the first nine months of 1999 from $2,238,000 for the
first nine months of 1998. For the three months ended September 30, 1999, net
land sales increased to $1,012,000 from $718,000 for the comparable 1998 period.
The increase in sales reflects higher sales by the Company's independent
dealers.
Housing revenues were $2,615,000 for the first nine months of 1999 versus
$949,000 for the comparable 1998 period. Revenues are not recognized from
housing sales until the completion of construction and passage of title. Housing
revenues
10
<PAGE>
increased as of result of higher sales by the Company's independent dealer
network. The backlog of houses under contract was $2,466,000 and $3,420,000 as
of September 30, 1999 and September 30, 1998, respectively.
The following table reflects the Company's real estate product mix for the
periods indicated (in thousands):
Nine Months Ended Three Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Gross Land Sales:
Retail Sales* $ 3,618 $ 3,245 $ 1,333 $ 1,075
-------- --------- ---------- -------
Housing Sales:
Single Family 2,615 949 570 289
-------- --------- ---------- -------
Total Real Estate $ 6,233 $ 4,194 $ 1,903 $ 1,364
======== ========= ========== =======
- -------------------------
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, 1999 and September
30, 1998 were $4,903,000 and $3,216,000, respectively, and $2,217,000 and
$1,135,000 for the third quarters of 1999 and 1998, respectively. The
Company had a backlog of approximately $1,969,000 in unrecognized sales
as of September 30, 1999. 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.
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 $293,000 or the first nine months of 1999 ($106,000 for the
third quarter of 1999) versus $845,000 for the comparable 1998 period ($161,000
for the third quarter of 1998).
Interest income was $390,000 for the first nine months of 1999 versus $433,000
for the comparable period in 1998. The decrease is the result of a decrease in
the Company's contracts receivable, resulting from the sale and assignment of
contracts receivable to the Company's lenders.
Other revenues were $400,000 for the nine months of 1999 ($179,000 for the third
quarter of 1999) versus $197,000 for the comparable period in 1998 ($51,000 for
the third quarter of 1998). Other revenues are principally generated by the
Company's title insurance and real estate brokerage subsidiaries, as well as
fees paid to the Company by Scafholding to administer their property holdings.
Costs and Expenses
- ------------------
Costs and expenses were $7,303,000 for the first nine months of 1999 ($2,326,000
or the third quarter of 1999) versus $6,857,000 for the comparable period in
1998 ($2,607,000 for the third quarter of 1998). Cost of sales were $3,004,000
for the first nine months of 1999 ($790,000 for the third quarter of 1999),
versus $1,776,000 for the comparable period in 1998 ($565,000 for the third
quarter of 1998). The increase reflects higher sales by the Company's
independent dealers.
Commissions, advertising and other selling expenses totaled $2,278,000 for
the nine months of 1999 versus $1,899,000 for the comparable period in 1998
($817,000 for the third quarter of 1999 versus $629,000 for the third quarter of
1998). Higher retail sales resulted in increased commission expense. Other
selling expense increased to $833,000 for the first nine months of 1999 versus
$798,000 for the comparable period in 1998 ($269,000 for the third quarter of
1999 versus $277,000 for the third quarter of 1998) as a result of higher
jobsite expenses. Advertising and promotional expenses increased to $269,000 for
the first nine months of 1999 versus $42,000 for the comparable period in 1998
($126,000 for the third quarter of 1999 versus $7,000 for the third quarter of
1998).
General and administrative expenses were $993,000 for the first nine months of
1999 ($383,000 for the third quarter of 1999) versus $1,792,000 for the
comparable period in 1998 ($955,000 for the third quarter of 1998). General and
administrative expenses decreased primarily due to reduced overhead expenses.
Included in 1998 expenses was termination expenses due to the resignation of two
officers who resigned effective October 1998.
11
<PAGE>
Real estate tax expenses were $519,000 for the first nine months of 1999
($163,000 for the third quarter of 1999) versus $771,000 for the comparable
period in 1998 ($257,000 for the third quarter of 1998). Included in real estate
tax expense is any interest and administrative fees on delinquent taxes, which
accrue interest at 18% per annum.
Interest expense was $510,000 for the first nine months of 1999 ($174,000 for
the third quarter of 1999) versus $620,000 for the comparable period in 1998
($199,000 for the third quarter of 1998). The decrease in interest expense is a
result of lower interest rates on outstanding debt. For the nine months ending
September 30, 1999, $173,000 is included in interest expense for interest
imputed on the Swan debt and $3,000 is included in interest expense for interest
accrued on the Swan debt.
Net Income (Loss)
The Company reported a net loss of $800,000 for the first nine months of
1999($280,000 for the third quarter of 1999) versus a loss of $2,194,000 for the
comparable period in 1998 ($1,269,000 for the third quarter of 1998).
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 by agreeing, for example, to make improvements, construct
public facilities and dedicate certain property for public use, the increased
regulation has lengthened the development process and added to development
costs.
The implementation of the Florida Growth Management Act of 1985 (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 completed in certain of these communities). Thus, the
Company's 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.
The Company's land sales activities are further subject to the jurisdiction of
the laws of various states in which the Company's properties are offered for
sale. In addition, Florida and other jurisdictions in which the Company's
properties are offered for sale have strengthened, or are considering
strengthening, their regulation of subdividers and subdivided lands in order to
provide further assurances to the public. 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 the 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
Effective December 30, 1997, the Company and its lenders consummated several
transactions that 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 $7,500,000 in contracts receivable
from the Company to generate working capital and further reduce the debt
obligation. Selex sold its remaining debt ($2,664,736), including the
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Empire note, to Yasawa and the Company owes no further duty or obligation to
Selex, which provided the Company with 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. 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. 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 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. 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.
The terms of repayment of the Yasawa and Scafholding 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. Effective January 1,
1999, Yasawa and Scafholding agreed to reduce the annual percentage rate on
their existing loans to the Company from 9.6% to 6% per annum. Yasawa and
Scafholding have not required the Company to make monthly interest payments for
the period September 1, 1998 to the present. As of September 30, 1999, the total
amount of interest accrued is approximately $591,000.
From October 9, 1998 through the present, Swan has advanced the Company funds to
meet its working capital requirements. The Company's outstanding debt to Swan,
which is secured by a third lien on the Company's receivables, is approximately
$4,470,000 as of September 30, 1999. The Company signed a promissory note to
Swan in March 1999 which provides that funds advanced by Swan will be paid back
by the Company monthly in contracts receivables at 90% of face value, with
recourse. There will be no interest for the first six months after an advance of
money is received from Swan by the Company; thereafter the interest shall be 6%
per annum on the outstanding balance of the advance. The amount of each monthly
payment will vary and will be dependent upon the amount of contracts receivable
in the Company's portfolio, excluding contracts receivable held as collateral
for prior receivable sales. Pursuant to the terms of the promissory note, the
Company is required to transfer to Swan monthly as debt repayment all current
contracts receivable in the Company's portfolio in excess of the aggregate sum
of $500,000. Funds advanced by Swan were used by the Company to pay
approximately $2,567,000 in outstanding real estate taxes for unsold properties
with the balance to meet the Company's working capital requirements. Included in
the interest expense for the nine months ending September 30, 1999 is $173,000
for interest imputed on the Swan debt, which was treated as a contribution to
capital, and $3,000 for interest accrued on the Swan debt.
The following table presents information with respect to mortgages and similar
debt (in thousands):
September 30, December 31,
1999 1998
------------- ------------
Mortgage Notes Payable .................. $ 6,670 $ 6,670
Other Loans............................... 4,700 1,895
--------- -------
Total mortgages and similar debt........ $ 11,370 $ 8,565
========= =======
- -------------------
Included in Mortgage Notes Payable is the Yasawa loan ($6,670 at September
30, 1999); included in Other Loans is the Scafholding loan ($230,000 as of
September 30, 1999) and the Swan loan ($4,470,000) as of September 30,
1999).
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's outstanding debt to Scafholding
is secured by a first lien on the Company's receivables; the Company's
outstanding debt to Yasawa is secured by a second lien on the Company's
receivables and a mortgage on all of the Company's property; and the Company's
outstanding debt to Swan is secured by a third lien on the Company's
receivables.
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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 $1,917,000 as of September
30, 1999). 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 has fully reserved for the estimated
future cancellations based on the Company's historical experience for
receivables the Company services and believes these reserves to be adequate. In
1998, the Company did not replace any delinquent receivables. As of September
30, 1999 and 1998, $1,036,000 and $1,298,000 in receivables were delinquent,
respectively.
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. In 1998, the balance of the monies in the holdback account
were withdrawn by the contracts receivable purchaser pursuant to the purchase
agreement and the holdback account was terminated.
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 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.
During 1998, Scafholding purchased approximately $1,400,000 in contracts and
mortgages receivable from the Company at sixty-five percent (65%) of face value
with recourse for non-performing contracts. These sales generated approximately
$900,000 used to meet the Company's working capital requirements.
From October 9, 1998 through the present, Swan has advanced the Company funds to
meet its working capital requirements. The Company signed a promissory note to
Swan in March 1999 which provides that funds advanced by Swan will be paid back
by the Company monthly in contracts receivables at 90% of face value, with
recourse. There will be no interest for the first six months after an advance of
money is received from Swan by the Company; thereafter the interest shall be 6%
per annum on the outstanding balance of the advance. The amount of each monthly
payment will vary and will be dependent upon the amount of contracts receivable
in the Company's portfolio, excluding contracts receivable held as collateral
for prior receivable sales. Pursuant to the terms of the promissory note, the
Company is required to transfer to Swan monthly as debt repayment all current
contracts receivable in the Company's portfolio in excess of the aggregate sum
of $500,000.
The Company was the guarantor of approximately $12,740,000 of contracts
receivable sold or transferred as of September 30, 1999, for the transactions
described above. There are no funds 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 $4,073,000 remains at September 30, 1999. The Company has been in
compliance with all receivables transactions since the consummation of
receivable sales.
The Company has an agreement with Scafholding and Citony Development Corporation
for the servicing of their receivable portfolios and other administration
performed on their behalf. During 1999, the Company entered into a similiar
agreement with Swan Development Corporation, although the Swan agreement does
not provide a fee for servicing of its receivables. During 1998, the Company
received approximately $82,000 in revenue pursuant to these agreements. Revenue
under these agreements for the first nine months of 1999 was $141,000 ($33,000
for the third quarter of 1999).
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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. The
Company has an agreement with Swan whereby Swan will loan the Company funds to
be repaid with contracts receivable at 90% of face value, with recourse.
OTHER OBLIGATIONS
As of September 30, 1999, the Company had estimated development obligations of
approximately $25,000 on sold property, an estimated liability to provide title
insurance and deeding costs of $170,000 and an estimated cost of street
maintenance, prior to assumption of such obligations by local governments of
$600,000, all of which are included in deferred revenue. The total cost to
complete improvements as of September 30, 1999, including the previously
mentioned obligations, was estimated to be approximately $795,000. 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.
LIQUIDITY
Retail land sales have traditionally produced negative cash flow through the
point of sale as a result of a 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
flow effects of installment land sales, the Company is directing a greater
portion of its marketing efforts to the sale of lots with homes and has just
begun offering lots for sale in compulsory building areas where a lot purchaser
must complete payments for the lot and construct a home within a limited period
of time.
The Company has been dependent on its ability to sell or otherwise finance its
contracts receivable and/or secure other financing to meet its cash
requirements. Since 1992, the Company has been largely dependent on Yasawa and
related parties for the financing of its operations. Although Scafholding has
purchased contracts receivables at the rate of 65% of face value, with recourse,
and Swan has loaned the Company additional funds to be paid back with contracts
receivable at the rate of 90% of face value, with recourse, there can be no
guarantee that the Company will be able to generate sufficient receivables to
obtain sufficient financing in the future or that Yasawa, Scafholding, Swan and
other related parties will continue to make loans to 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 received assurances from third party servicing agents that
systems being used in conjunction with the Company's business are or will be
Year 2000 compliant on a timely basis. 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 the 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
None.
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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 12, 1999 By: /s/Donald O. McNelley
----------------- ---------------------
Donald O. McNelley
Treasurer
(Principal Financial Officer)
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