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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _________.
COMMISSION FILE NUMBER 1-9885
LEGEND PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3465359
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1420 FIFTH AVENUE, SUITE 4200,
SEATTLE, WASHINGTON 98101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (206) 464-0123
---------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the 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 [x].
Shares of common stock outstanding as of August 10, 1997: 6,290,874.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1997 and December 31, 1996......................3
Consolidated Statements of Operations for the Six Months Ended June 30,
1997 and 1996...........................................................................4
Consolidated Statements of Operations for the Three Months Ended June 30,
1997 and 1996...........................................................................5
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1997 and 1996...........................................................................6
Notes to Consolidated Financial Statements..............................................8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..............................................................................12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................22
Item 2. Changes in Securities...................................................................24
Item 3. Defaults Upon Senior Securities.........................................................24
Item 4. Submission of Matters to a Vote of Security Holders.....................................24
Item 6. Exhibits and Reports of Form 8-K........................................................25
Signatures .......................................................................................27
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEGEND PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
==================================================================================================================
1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
------
Real estate inventory $ 101,204,964 103,762,798
Assets held for sale 25,451,424 25,436,375
Cash and cash equivalents 1,961,290 1,529,898
Restricted cash and investments 19,564,069 22,491,305
Accounts and notes receivable 1,533,706 1,893,838
Receivables from related parties 1,781,584 1,987,481
Property and equipment, net 22,823,405 19,860,865
Intangible assets, net 2,331,342 2,325,406
Other assets, net 4,694,295 4,822,163
--------------- ----------------
$ 181,346,079 184,110,129
--------------- ----------------
Liabilities and Stockholders' Equity
------------------------------------
Notes payable to banks and others 80,965,706 86,700,617
Payables to related parties 63,423,553 47,609,097
Accounts payable 3,058,688 5,655,401
Other notes and liabilities 9,072,974 12,662,828
Minority interests 240,194 492,910
Stockholders' equity :
Common stock, $.01 par value. Authorized 10,000,000 shares;
issued 6,311,678 and 6,277,548 shares and outstanding 6,290,874
and 6,276,744 shares at June 30, 1997 and December 31, 1996,
respectively
63,117 62,776
Additional paid-in capital 44,171,993 43,793,708
Accumulated deficit (19,528,830) (12,855,892)
Treasury stock, 20,804 and 804 shares of common stock at June 30, 1997
and December 31, 1996, respectively (121,316) (11,316)
--------------- ---------------
Total stockholders' equity 24,854,964 30,989,276
Commitments and contingencies
- --------------------------------------------------------------------------------------------------------------------
$ 181,346,079 184,110,129
====================================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
3
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LEGEND PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
===============================================================================================================
1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Real estate sales $ 17,304,362 13,178,354
Club operations 3,429,894 3,174,461
Patient service 1,353,459 1,288,125
Rent 1,250,752 1,244,675
Other 337,010 404,151
-------------- ------------
Total revenues 23,675,477 19,289,766
-------------- ------------
Costs and expenses:
Real estate 13,297,818 9,249,477
Club operations 2,789,797 2,527,596
Patient service direct costs 716,041 664,742
Rental operations 197,631 200,341
Other 65,767 44,896
Selling, general and administrative 7,637,485 3,813,520
Depreciation and amortization 765,857 661,320
-------------- ------------
Total costs and expenses 25,470,396 17,161,892
-------------- ------------
Operating income (loss) (1,794,919) 2,127,874
-------------- ------------
Other income (expense):
Interest income 798,574 376,817
Interest income, related party 72,537 72,537
Interest expense, including loan cost amortization (3,837,860) (2,599,580)
Interest expense, related party (2,500,922) (326,805)
Other, net 336,936 126,194
-------------- ------------
Net other expense (5,130,735) (2,350,837)
-------------- -----------
Loss before minority interests (6,925,654) (222,963)
Minority interests in losses of consolidated subsidiaries 252,716 39,223
-------------- ------------
Net loss $ (6,672,938) (183,740)
============== ============
Net loss per share $ (1.06) $ (.04)
============== ============
Weighted average number of common shares outstanding 6,281,695 4,386,986
===============================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
4
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LEGEND PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
===============================================================================================================
1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Real estate sales $ 6,973,724 6,817,306
Club operations 1,356,045 1,302,119
Patient service 679,535 654,409
Rent 619,726 625,872
Other 61,026 279,245
-------------- ------------
Total revenues 9,690,056 9,678,951
-------------- ------------
Costs and expenses:
Real estate 5,574,156 4,518,355
Club operations 1,201,383 1,295,405
Patient service direct costs 359,806 338,961
Rental operations 98,218 108,620
Other 41,682 24,460
Selling, general and administrative 3,817,322 1,977,424
Depreciation and amortization 347,059 269,012
-------------- ------------
Total costs and expenses 11,439,626 8,532,237
-------------- ------------
Operating income (loss) (1,749,570) 1,146,714
-------------- ------------
Other income (expense):
Interest income 324,734 257,425
Interest income, related party 36,469 35,968
Interest expense, including loan cost amortization (2,198,343) (1,395,796)
Interest expense, related party (1,382,654) (201,712)
Other, net 146,768 8,849
-------------- ------------
Net other expense (3,073,026) (1,295,266)
-------------- ------------
Loss before minority interests (4,822,596) (148,552)
Minority interests in losses of consolidated subsidiaries 265,095 5,547
-------------- ------------
Net loss $ (4,557,501) (143,005)
============== ============
Net loss per share $ (.72) $ (.03)
============== ============
Weighted average number of common shares outstanding 6,286,591 4,386,986
===============================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
5
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LEGEND PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
==================================================================================================================
1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,672,938) (183,740)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,436,275 831,612
Related party interest expense not paid 2,398,185 326,805
Related party interest income not collected (72,537) (301,606)
Minority interests in losses (252,716) (39,223)
Change in certain assets and liabilities, net of effect of
acquisitions:
Decrease (increase) in real estate inventory 2,557,834 (1,607,908)
Increase in accounts and notes receivable
and other assets (325,071) (114,842)
Increase (decrease) in accounts payable and
other notes and liabilities (6,186,567) 863,884
--------------- --------------
Net cash used in operating
activities (7,117,535) (225,018)
--------------- --------------
Cash flows from investing activities:
Decrease (increase) in restricted cash and investments 2,927,236 (8,978,696)
Purchase of property and equipment (3,606,729) (3,997,291)
Loans to related parties (20,000) (74,400)
Collection of loans to related parties 298,434 546,834
Investments and acquisitions, net of cash acquired - (326,565)
--------------- --------------
Net cash used in investing (401,059) (12,830,118)
activities
--------------- --------------
Subtotal, carried forward (7,518,594) (13,055,136)
--------------- --------------
</TABLE>
6
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<TABLE>
<CAPTION>
====================================================================================================================
1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Subtotal, brought forward $ (7,518,594) (13,055,136)
------------------ -----------------
Cash flows from financing activities:
Proceeds from notes payable to bank and others 14,833,266 27,796,481
Repayment of notes payable to bank and others (20,568,177) (21,901,068)
Proceeds from loans from related parties 13,416,271 10,543,381
Repayment of contract payable - (1,500,000)
Payment of loan fees - (1,096,016)
Sale of common shares 400,003 -
Purchase of common shares (131,377) -
------------------ ---------------
Net cash provided by
financing activities 7,949,986 13,842,778
------------------ ---------------
Net increase in cash and
cash equivalents 431,392 787,642
Cash and cash equivalents at beginning of period 1,529,898 578,906
------------------ ---------------
Cash and cash equivalents at end of period $ 1,961,290 1,366,548
================== ===============
Contribution to equity of notes and interest payable from
stockholder, net of receivable - 21,663,015
==================================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements and management's
discussion and analysis of financial condition and results of operations.
7
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LEGEND PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. BASIS OF PRESENTATION
Legend Properties, Inc., formerly known as Banyan Mortgage Investment Fund
(Banyan), is the surviving corporation from the December 31, 1996 merger (the
Merger) with RGI U.S. Holdings (RGI/US) (see note 2).
For financial reporting purposes, the Merger was treated as a recapitalization
of RGI/US, with RGI/US as the acquirer of Banyan; which changed its name to
Legend Properties, Inc. upon the effectiveness of the Merger. Therefore, as of
December 31, 1996, the historical consolidated financial statements of Legend
Properties, Inc. are those of RGI/US. Prior to the Merger, RGI/US was a
wholly-owned subsidiary of RGI Holdings, Inc. (Holdings). As of June 30, 1997,
Holdings owns approximately 79% of the outstanding common shares of Legend
Properties, Inc.
The consolidated financial statements include the accounts of Legend Properties,
Inc. and its subsidiaries (Legend or the Company). In the opinion of management,
the accompanying unaudited interim consolidated financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
the periods presented. Certain financial statement items from the prior year
have been reclassified to be consistent with the current year financial
statement presentation. All significant intercompany accounts and transactions
have been eliminated in consolidation.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and the related disclosures contained in the
Company's Annual Report on Form 10-K/A for the year ended December 31, 1996,
filed with the Securities and Exchange Commission.
The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full fiscal year.
2. ACQUISITION OF BANYAN
On April 12, 1996, an Agreement and Plan of Merger was executed among RGI/US,
Holdings, and Banyan. Effective December 31, 1996, RGI/US was merged with and
into Banyan. Banyan's certificate of incorporation was amended to convert each
twenty-five shares of Banyan's issued and outstanding common stock into one
issued and outstanding share (Reverse Split). Additionally, the name of Banyan
was changed to Legend Properties, Inc. After giving effect to the Reserve Split,
all outstanding shares of RGI/US were converted into 4,386,986 shares of
Banyan's common stock. For accounting purposes, the merger was treated as a
recapitalization of RGI/US, with RGI/US as the acquirer of Banyan.
The purchase price of Banyan by RGI/US was calculated as follows:
<TABLE>
<S> <C>
Banyan common shares outstanding at December 31, 1996 47,307,527
Fair market value per share on or about April 12, 1996 $ 0.46875
-------------
Purchase price $22,175,403
==============
</TABLE>
The business combination was accounted for under the purchase method of
accounting, wherein the purchase price was allocated to the assets acquired and
liabilities assumed based upon their relative fair values. Results of operations
of this acquired company have been included in the consolidated financial
statements from the acquisition date.
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The purchase price related to the acquisition was allocated as follows:
<TABLE>
<S> <C>
Real estate inventory $50,835,299
Assets held for sale 7,991,701
Cash 477,000
Other 2,215,000
-----------
Fair value of assets acquired 61,519,000
Less liabilities 39,344,000
------------
$22,175,000
============
</TABLE>
The allocation of the purchase price is preliminary, and is based upon fair
values that were determinable, and estimates of fair values that were not yet
determinable. In particular, the values assigned to real estate inventory were
based upon appraisals and discounted estimated future cash flows, when
appraisals were not available. The calculated fair values of the real estate
inventory were adjusted downward on a pro rata basis to arrive at the
"allocated" fair value of real estate inventory. Finalization of the appraisals
will likely result in adjustments to the allocation of the purchase price to the
net assets acquired.
The unaudited pro forma consolidated statement of operations that follow give
effect to the acquisition as if it had been consummated on January 1, 1996. The
unaudited pro forma consolidated statement of operations is presented for
informational purposes only and does not purport to represent what Legend's
results of operations for the six months ended June 30, 1996 would have actually
been had the acquisition, in fact, occurred on January 1, 1996, or Legend's
results of operations for any future period.
<TABLE>
<S> <C>
Total revenues $19,521,860
Total costs and expenses 20,725,485
-------------
Operating loss (1,203,625)
Other expenses, net (3,611,291)
-------------
Net loss (4,814,916)
=============
</TABLE>
3. BORROWINGS FROM AFFILIATES
Defaults
As of December 31, 1996, mortgage notes payable to Holdings with outstanding
principal balances totaling $30,649,872 (the Loans) were in default due to the
Company's failure to make certain interest payments when due. On June 30, 1997,
a $4,000,000 unsecured note payable to Holdings, plus accrued interest of
$415,320, matured. The Company did not repay the amounts, thereby causing the
note to be in default. On or about August 13, 1997, the maturity date of the
$4,000,000 note payable to Holdings was extended to December 31, 1997. The note
payable will continue to accrue interest at LIBOR plus 1% (6.81% at June 30,
1997). On August 1, 1997, the Company received a notice of default from a third
party lender, for a loan with an outstanding principal balance of approximately
$9.4 million. The default was caused by a material adverse change in the
financial condition of the principal guarantor of the loan; an affiliate of the
Company's majority shareholder, RGI Holdings, Inc.; due to a restructuring.
The lender has requested that the Company cure the default by relacing the
guarantor by September 1, 1997. On or about August 13, 1997, the Company's
majority shareholder and/or an affiliate agreed to replace the principal
guarantor of the loan, which will cure the event of the default.
Short-term borrowings
From January 1 to June 30, 1997, Legend had short-term borrowings from Holdings
of approximately $13.4 million. In conjunction with the announcement of the
settlement of the Delaware litigation (See Note 4, "Contingencies and
Litigation"), Holdings agreed to, among other things, provide Legend with a line
of credit in the aggregate principal amount of $8.5 million, bearing interest at
the prime rate plus 2% (10.5% at June 30, 1997). The principal amount available
under this line of credit agreement was increased to $17.0 million in May, and
then to $21.0 million in August. Draws on the $21.0 million line of credit
mature on December 31, 1997, and are partially secured by a second mortgage on
certain real estate inventory. Through August 10, 1997, Legend had borrowed
approximately $16.96 million under the credit line. The proceeds were used to,
among other things, pay certain amounts borrowed from Holdings during 1996 and
the first quarter of 1997. The remaining
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proceeds were used to fund development, construction and operating costs
associated with the properties, as well as outstanding merger costs and costs
associated with the lawsuit.
4. CONTINGENCIES AND LITIGATION
Legend has significant indebtedness maturing in 1997 and will not be able to
satisfy these obligations without restructuring or refinancing. However, due to
the uncertainty related to the litigation described in this note, Legend is
unable to satisfactorily negotiate such transactions. Management believes that
if the litigation is satisfactorily resolved in the near term, Legend's debt can
be refinanced or restructured to enable its obligations to be met.
On October 31, 1996, a lawsuit was filed in Delaware State court by two of
Banyan's stockholders on behalf of themselves and all of the non-defendant
stockholders of Banyan, against certain of the directors and officers of Banyan.
The plaintiffs have alleged, among other things, that Banyan's board of
directors breached its fiduciary duties by failing to seek alternative change of
control transactions, other than the merger with RGI/US, or appropriately
evaluate the alternative of liquidating Banyan. Plaintiffs further alleged that
the merger unfairly diluted the voting and equity interests of Banyan's
stockholders. In addition, the plaintiffs alleged that the proxy statement
utilized by Banyan in connection with the annual meeting held to consider and
vote upon the merger was misleading and failed to disclose certain material
information. Among other remedies, the plaintiffs sought to enjoin the merger
and require the defendants to undertake additional activities to maximize
stockholder value and disclose certain additional information.
On November 13, 1996, another Banyan stockholder filed an action asserting
allegations substantially similar to those in the action filed on October 31.
These two suits were ultimately consolidated by the Delaware Court of Chancery
on December 11, 1996 under the case number C.A. No. 15287. The parties
subsequently engaged in discovery, including producing and reviewing documents
and taking depositions. Plaintiff filed a motion for preliminary injunction and
an opening brief in support of that motion on November 15, 1996. On December 24,
1996, the plaintiffs served and filed a consolidated amended and supplemental
complaint repeating the allegations made in the initial complaint and adding
additional factual allegations that Banyan had failed to properly consider
acquisition proposals submitted by third parties to acquire Banyan. The amended
complaint also claimed that purchases made by Holdings during December of shares
of Banyan's common stock from third parties constituted unlawful vote buying.
Certain of the plaintiffs in the Delaware action then filed an individual action
in federal district court in New York against RGI/US, Holdings and Legend's
president, Kenneth L. Uptain, alleging, among other things, that these purchases
constituted an illegal tender offer (New York Action).
On January 8, 1997, the plaintiffs filed an application pursuant to Section
225(b) of the General Corporation Laws of the State of Delaware seeking judicial
review of the certified vote on the merger. Plaintiffs contended that: (i) the
merger was approved by fewer than 210,000 votes; (ii) many shareholders had
sought to revoke proxies previously cast in favor of the merger; and (iii)
Banyan had announced varying results of the vote. The plaintiffs sought an
expedited hearing on the Section 225 application. The Delaware Court
subsequently scheduled a hearing on the plaintiffs' application for relief under
Section 225 for March 4, 1997. The parties engaged in discovery incident to that
application, including a review of documents obtained from the independent
inspector of election for the annual meeting, as well as other third parties and
taking depositions of certain of the plaintiffs' class representatives. The
hearing scheduled for March 4, 1997 was subsequently postponed without date at
the direction of the Delaware court. In the interim, the parties entered into
discussions with a view towards finding a mutually agreeable basis for resolving
the litigation.
On April 15, 1997, the parties announced that they had reached a stipulation and
settlement agreement to settle the Delaware litigation. As part of the
settlement, Holdings agreed to, among other things: (i) defer interest due on
the Morgens and SoGen loans (the Loans) until December 31, 1997; (ii) forebear
on any defaults
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existing on the Loans as of the effective date of the settlement until December
31, 1997; (iii) effective January 1, 1997, reduce the interest rate on the Loans
to the lower of the prime rate plus 2% (10.25% at January 1, 1997) or LIBOR plus
2.5% (8.1% at January 1, 1997); (iv) provide Legend with a line of credit in the
aggregate principal amount of $8.5 million, a portion of which would be utilized
to repay Holdings for advances previously made to Legend; and (v) repurchase up
to $300,000 of Legend's shares of common stock from time to time on the open
market over the next twelve months subject to compliance with the SEC's rules
and regulations relating to open market repurchase programs.
On July 23, 1997, the Delaware Chancery Court rejected the settlement as
proposed by the parties. In a memorandum opinion issued by the court, the
Chancellor stated that he was unable to approve the proposed settlement because
he was unable to conclude that the named plaintiffs were adequate class
representatives. The Company is evaluating its options in light of the court's
decision.
Legend's independent auditors in their report dated April 15, 1997, stated that
they were unable to express, and did not express, an opinion on Legend's 1996
consolidated financial statements (the Disclaimer of Opinion). This inability
was due to uncertainties regarding the resolution of certain matters raised in a
class action lawsuit. The Independent Auditors' Report states that "because of
the significance of the uncertainties regarding the lawsuit..., we are unable to
express, and we do not express, an opinion on the 1996 consolidated financial
statements". (See Part II -- Other Information "Item 1. Legal Proceedings").
Additionally, the Independent Auditors' Report states that "Legend Properties,
Inc. has substantial indebtedness maturing in 1997 and does not have sufficient
resources to satisfy these obligations without restructuring or refinancing
certain of this indebtedness. These matters raise substantial doubt about the
ability of Legend Properties, Inc. to continue as a going concern".
The National Association of Securities Dealers (NASD) Marketplace Rules specify
that "(a)nnual reports filed with the Association shall contain audited
financial statements. Due to the aforementioned Disclaimer of Opinion, the
Company was not in compliance with this filing requirement. The Company was
granted a temporary exception from this standard through July 31, 1997, subject
to the Company meeting certain conditions.
The Company was unable to meet those conditions, which included the delivery of
an opinion on Legend's 1996 consolidated financial statements, by July 31, 1997.
On July 31, 1997, the Company's common shares were removed from listing on
Nasdaq's Small Cap Market. The Company's ability to re-commence trading is
dependent upon, among other things, the satisfactory resolution of certain
uncertainties surrounding the lawsuit. There can be no assurances that the
Company will be able to either satisfactorily resolve the uncertainties, or
re-commence trading of its common shares.
5. STOCKHOLDERS' EQUITY
Changes in Securities
On April 30, 1997, the Company sold 34,130 shares of its common stock to
Holdings at a per share price of $11.72, or $400,003. The shares were issued in
a transaction that was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. The Company did not retain the services of
an underwriter in connection with this transaction. On or about May 1, 1997, the
Company purchased 20,000 shares of its common stock from an unrelated third
party for $5.50 per share, or $110,000.
Changes in Authorized Shares
In July of 1997, the Company amended Article Fourth of the Company's Amended and
Restated Certificate of Incorporation to reduce the number of authorized shares
of capital stock to 15,000,000 shares, of which 5,000,000 shares shall be
preferred stock, $0.01 par value, and 10,000,000 shares shall be common stock,
$0.01 par value.
6. NEW ACCOUNTING PRONOUNCEMENTS
Earnings Per Share
In February of 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128). This statement specifies the computation, presentation, and disclosure
requirements for earnings per share. SFAS No. 128 is designed to improve the
earnings per share information provided in financial statements by simplifying
the existing computational guidelines, revising the disclosure requirements and
increasing the comparability of earnings per share data. SFAS No. 128 is
effective for financial statements for periods ending after December 15, 1997,
including interim periods, and earlier adoption is not permitted. When adopted,
the Company will be required to restate its earnings per share data for all
prior periods presented. In the opinion of management, the adoption of SFAS No.
128 will not have a material effect on the Company's calculation of earnings per
share.
Reporting Comprehensive Income
In June of 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
(SFAS No. 130). This statement establishes standards for reporting and display
of comprehensive income and its components. SFAS No. 130 is effective for
financial statements for periods beginning after December 15, 1997, including
interim periods, and earlier adoption is permitted. When adopted, the Company
will be required to reclassify its comparative income statements to report and
display comprehensive income and its components for all prior periods presented.
The Company does not anticipate adopting this statement earlier than required.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Certain statements in this quarterly report that are not historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Without limiting the foregoing, words
such as "anticipates," "expects," "intends," "plans" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements involve risks and uncertainties including, but not limited to, risks
associated with new and future communities, competition, financing availability,
fluctuations in interest rates or labor and material costs, government
regulation, geographic concentration, natural risks and other matters. For a
discussion of the factors affecting the Company's business plan, see the
Company's 1996 Annual Report on Form 10-K/A--management's discussion and
analysis--"factors affecting Legend's business plan." Actual results could
differ materially from those projected in the forward-looking statements. The
Company undertakes no obligation to update these forward-looking statements to
reflect future events or circumstances.
Legend Properties, Inc., formerly known as Banyan Mortgage Investment Fund
(Banyan), is the surviving corporation from the December 31, 1996 merger (the
Merger) with RGI U.S. Holdings (RGI/US).
For financial reporting purposes, the Merger was treated as a recapitalization
of RGI/US, with RGI/US as the acquirer of Banyan. As of December 31, 1996, the
historical consolidated financial statements of RGI/US became those of Legend
Properties, Inc.
Legend's independent auditors in their report dated April 15, 1997, stated that
they were unable to express, and did not express, an opinion on Legend's 1996
consolidated financial statements (the Disclaimer of Opinion). This inability
was due to uncertainties regarding the resolution of certain matters raised in a
class action lawsuit. The Independent Auditors' Report states that "because of
the significance of the uncertainties regarding the lawsuit..., we are unable to
express, and we do not express, an opinion on the 1996 consolidated financial
statements". (See Part II -- Other Information "Item 1. Legal Proceedings").
Additionally, the Independent Auditors' Report states that "Legend Properties,
Inc. has substantial indebtedness maturing in 1997 and does not have sufficient
resources to satisfy these obligations without restructuring or refinancing
certain of this indebtedness. These matters raise substantial doubt about the
ability of Legend Properties, Inc. to continue as a going concern".
The National Association of Securities Dealers (NASD) Marketplace Rules specify
that "(a)nnual reports filed with the Association shall contain audited
financial statements. Due to the aforementioned Disclaimer of Opinion, the
Company was not in compliance with this filing requirement. The Company was
granted a temporary exception from this standard through July 31, 1997, subject
to the Company meeting certain conditions.
The Company was unable to meet those conditions, which included the delivery of
an opinion on Legend's 1996 consolidated financial statements, by July 31, 1997.
On July 31, 1997, the Company's common shares were removed from listing on
Nasdaq's Small Cap Market. The Company's ability to re-commence trading is
dependent upon, among other things, the satisfactory resolution of certain
uncertainties surrounding the lawsuit. There can be no assurances that the
Company will be able to either satisfactorily resolve the uncertainties, or
re-commence trading of its common shares.
RGI/US owned, operated and developed real estate through its wholly-owned
subsidiaries, American Property Investments, Inc. (API) and Grand Harbor
Associates, Inc. (GHA). API owns a 164,724 square foot shopping center located
in Lynnwood, Washington (the Lynnwood Center). RGI/US listed the Lynnwood Center
for sale during 1996. GHA owns a 90% interest in Grand Harbor Property Holdings,
Inc. (GHPH) , Oak Harbor Property Holdings Inc. and Quality Life Services, Ltd.
(collectively OHPH), entities that own: (i) Grand Harbor, a 772-acre residential
golf community development project located in Vero Beach, Florida; (ii) Oak
Harbor, a 116-acre, adult retirement community also located in Vero Beach,
Florida; and (iii) the Royal Palm Convalescent Center, a skilled nursing center
licensed for 72 beds and located in Vero Beach, Florida in close proximity to
Oak Harbor.
12
<PAGE> 13
During 1996, operating results primarily consisted of the operations of Grand
Harbor, Oak Harbor and the Lynnwood Center. Operating results for the six month
period ended June 30, 1997 also include the operations of the Southbridge,
Chapman's Landing and Laguna Seca Ranch projects owned by Banyan (now Legend).
Currently, Legend intends to focus on continuing the development of
infrastructure, amenities and residential units at Grand Harbor and Oak Harbor
consistent with approved zoning and development plans. Additionally, Legend
intends to develop and sell land parcels at Southbridge and Chapman's Landing.
The Company's ability to fully implement its business plan is dependent on,
among other things, the Company resolving the lawsuit in a satisfactory manner
and securing construction financing related to certain developments on
acceptable terms. There can be no assurances that the Company will be able to
satisfactorily resolve the lawsuit or obtain construction financing on
acceptable terms. In connection with Legend's current plan to focus on these
land and residential developments, Legend is marketing the Lynnwood Center and
Laguna Seca Ranch properties for sale, and anticipates selling them by December
31, 1997.
The cash flow from operations for each of Legend's projects can differ
substantially from reported earnings, depending on the status of the development
cycle. At the Southbridge and Chapman's Landing properties, which are in the
initial years of development, significant cash outlays are required for, among
other things, land acquisition, obtaining zoning and other approvals,
construction of amenities (including golf courses and club houses and recreation
centers), model homes, sales and administrative facilities, major roads,
utilities, general landscaping and interest. Since these initial costs are
generally capitalized, this can result in income reported for financial
statement purposes during the initial years significantly exceeding operating
cash flow. However, at the Grand Harbor and Oak Harbor properties, which have
completed the initial years of development, operating cash flow can exceed
earnings reported for financial statement purposes, as costs and expenses
include charges for substantial amounts of previously expended and capitalized
costs.
LIQUIDITY AND CAPITAL RESOURCES
Legend's cash and cash equivalents balance at June 30, 1997, and December 31,
1996, was $1,961,290 and $1,529,898, respectively. The increase in the first six
months of 1997 is attributable to cash provided by financing activities of
$7,949,986, partially offset by cash utilized in operating and investing
activities of $7,117,535 and $401,059, respectively.
Cash Flows from Operating Activities: For the six months ended June 30, 1997,
Legend utilized cash in operating activities of $7,117,535.
Cash utilized in operations in the six months ended June 30, 1997 was primarily
due to the following:
- Net losses of $6,672,938 for the six months ended June 30, 1997,
due primarily to losses incurred at the Grand Harbor, Oak
Harbor, Southbridge and Chapman's Landing developments. Sales at
the Vero Beach, Florida developments (Grand Harbor and Oak
13
<PAGE> 14
Harbor) were less than anticipated, due primarily to a lower
level of demand for new homes at these developments and similar-
type developments in the Vero Beach area in the first six months
of 1997, when compared to 1996. Additionally, net operating
losses were incurred during the three months ended June 30,
1997, due primarily to seasonality, with the majority of sales
occurring between the months of October and April. Due to delays
caused during the Merger proceedings and by the litigation
discussed below, Legend was unable to start development and
construction activities at the Southbridge and Chapman's Landing
properties as early as originally anticipated, and the Company
was only able to close on six lot sales at these developments
during the six months ended June 30, 1997;
- An increase in other assets and accounts and notes receivable of
$325,071 and a decrease in accounts payable and other
liabilities of $6,186,567 for the six months ended June 30,
1997. These increases and decreases were generally due to the
timing of the payment of certain liabilities, including trade
payables, advances from customers, and prepaid expenses, and the
collection of accounts and notes receivable. These amounts can
vary significantly from month to month depending on the timing
of the closing of sales and development and construction
activity at each of Legend's properties. Due to the nature of
Legend's business, significant fluctuations in operating assets
and liabilities are not considered unusual;
- Construction and development costs incurred at Legend's
development properties of $10,739,984 for the six months ended
June 30, 1997. In Vero Beach, Florida the construction of
residential units continued, including the completion of a 24
unit condominium building at Oak Harbor and the introduction of
several new product types at Grand Harbor. Construction
activities also continued at Southbridge, and six lots were
delivered to builders in April. As of August 10, 1997, an
additional four lots had been delivered to builders.
Partially offset by the following:
- Sales of 24 units and 22 units at Grand Harbor and Oak Harbor,
respectively, and the sale of six lots to builders at
Southbridge. Costs of real estate sales at Grand Harbor, Oak
Harbor and Southbridge were $13,297,818 for the six months ended
June 30, 1997;
- Related party interest expense of $2,398,185 was not paid during
the six months ended June 30, 1997. Legend has borrowed
significant amounts from related parties, primarily RGI
Holdings, Inc. (Holdings) over the last twelve months. As of
December 31, 1996, and during the six months ended June 30,
1997, certain of Legend's loans from Holdings were in default
and interest payments on these and other payables to Holdings
were not made.
- Depreciation and amortization expense was $1,436,275, related
primarily to Grand Harbor and Oak Harbor. As of June 30, 1996,
management decided to dispose of the Lynnwood Center and
discontinued recording depreciation on the Lynnwood Center
assets.
Cash Flows From Investing Activities: During the six months ended June 30, 1997
Legend utilized cash flow in investing activities of $401,059. The amount of
cash flow utilized in investing activities for the six months ended June 30,
1997 was primarily due to Legend purchasing $3,606,729 of property and equipment
partially offset by the release of restricted cash and investments of $2,927,236
during 1997. The additions to property and equipment occurred primarily at Oak
Harbor, and substantially represented the construction of the Assisted Care
Facility (ACF). The ACF is anticipated to be completed during the third quarter
of 1997. At December 31, 1996, Legend had, among other things, restricted cash
deposited with a lender for the construction of the ACF. As construction
occurred on the ACF during the six months ended June 30, 1997, the lender
released
14
<PAGE> 15
certain of these restricted amounts to Oak Harbor to fund the construction.
Also, net customer deposits previously received for the rental and sale of real
estate were released to Grand Harbor and Oak Harbor. In addition, Legend
collected $298,434 of loans to related parties.
Cash Flows from Financing Activities: During the six months ended June 30, 1997,
financing activities provided cash flow of $7,949,986, primarily due to proceeds
of $28,249,537 on borrowings ($13,416,271 from a related party), offset by
repayments of $20,568,177. Additionally, during the first six months of 1997,
Legend paid $21,377 to purchase fractional shares which resulted from the
December 31, 1996 reverse stock split, sold 34,130 shares of Legend common stock
to Holdings at a per share price of $11.72, or $400,003, and purchased 20,000
shares of Legend common stock from an unrelated third party for $5.50 per share,
or $110,000.
During the six months ended June 30, 1997, Legend borrowed $13,416,271 from
Holdings and used the proceeds to fund operating and development costs and costs
associated with the Merger and the lawsuit. In April of 1997, Holdings agreed
to, among other things, provide Legend with a line of credit in the aggregate
principal amount of $8.5 million. Subsequently, the principal amount available
under this line of credit agreement was increased to $21.0 million. Through
August 10, 1997, Legend had borrowed approximately $16.96 million under the
credit line. The proceeds were used to, among other things, pay certain amounts
borrowed from Holdings during 1996 and the first quarter of 1997. The remaining
proceeds were used to fund development, construction and operating
costs associated with the properties, as well as outstanding merger costs and
costs associated with the lawsuit.
The Company borrowed an additional $14,833,266 ($10,047,704 at Grand Harbor and
$4,785,562 at Oak Harbor), which was used primarily to "refinance" existing
construction and development revolving loans, and to fund certain construction
and development costs, such as the construction of new product types at Grand
Harbor and the ACF at Oak Harbor. Repayments of $20,568,177 were primarily at
Grand Harbor ($13,166,948) and Oak Harbor ($7,319,129), and were made from funds
generated through the preceding refinancings and through sales of residential
units and club memberships.
Historically, Legend has used internally generated funds, third party borrowings
and funds from Holdings and affiliated entities for construction and development
purposes. The business plan of Legend contemplates the continued development of
Southbridge, Grand Harbor and Oak Harbor and the initiation of development
activities at the Chapman's Landing project. There can be no assurances that the
Company will be able to obtain sufficient funding from related parties or third
parties to fully implement the Company's current business plan.
Legend's business plan for Southbridge, Chapman's Landing, Grand Harbor and Oak
Harbor contemplates development expenses during the year ended December 31,
1997, of approximately $24 million. Legend has obtained the approximately $12
million of construction financing necessary for Grand Harbor and Oak Harbor, and
anticipates obtaining construction financing, assuming the lawsuit is
satisfactorily resolved, of approximately $11 million for Southbridge and
Chapman's Landing. Legend anticipates that the additional $1 million needed to
fund development expenses will be generated through additional borrowings under
the $21.0 million line of credit from Holdings, the sale of the Lynnwood
Center and Laguna Seca Ranch properties or by operations. The Company's ability
to fully implement its business plan is dependent upon, among other things, the
Company resolving the lawsuit in a satisfactory manner and securing construction
financing for the Southbridge and Chapman's Landing developments on acceptable
terms. There can be no assurances that the Company will be able to
satisfactorily resolve the lawsuit or obtain construction financing on
acceptable terms, if at all.
Management of Legend does not believe that its remaining cash and cash
equivalents at June 30, 1997, will be sufficient to implement and complete its
current business plan for each of its properties. To increase its cash
resources, in addition to the $21.0 million funding from Holdings, Legend is
marketing the Laguna Seca Ranch and the Lynnwood Center properties for sale in
order to provide the Company additional funding for its planned development
activities. The Company has signed purchase and sale agreements, subject to
standard due diligence
15
<PAGE> 16
procedures, for both of these properties. The Company anticipates that both
properties will be sold by December 31, 1997, for an aggregate of approximately
$30 million. Additionally, Holdings and/or Affiliates have agreed to guarantee
the repayment of a loan to a third party lender, which will result in the
release of restricted cash held by the lender of approximately $4.2 million
during 1997. The Company believes that if it is able to secure construction
financing for the Southbridge and Chapman's Landing developments on acceptable
terms, its cash resources will be sufficient to meet its liquidity needs for
1997. There can be no assurances that the Company will be able to complete the
sales of the Laguna Seca Ranch and the Lynnwood Center properties or be able to
obtain construction finacing on acceptable terms, if at all.
On April 15, 1997, the parties announced that they had reached a stipulation and
settlement agreement to settle a lawsuit filed against the Company. The
agreement was subject to, among other things, final court approval. On July 23,
1997, the Delaware Chancery Court rejected the settlement as proposed by the
parties. In a memorandum opinion issued by the court, the Chancellor stated that
he was unable to approve the proposed settlement because he was unable to
conclude that the named plaintiffs were adequate class representatives. The
Company is reviewing its options, in light of the court's decision.
Certain existing debt obligations are in default or mature on December 31, 1997
and in 1998. To fully implement its business plan and meet its estimated cash
needs, the Company must restructure or refinance these obligations and obtain
construction financing of approximately $11 million for the Southbridge and
Chapman's Landing properties.
Until certain uncertainties related to the lawsuit are satisfactorily resolved,
the Company anticipates that it will be unable to obtain construction financing
for its Southbridge and Chapman's Landing properties or restructure or
refinance its existing debt obligations. There can be no assurances that the
Company will be able to satisfactorily resolve the lawsuit.
RESULTS OF OPERATIONS
Results of operations for the three and six months ended June 30, 1997, include
the expenses of Southbridge, Chapman's Landing and Laguna Seca Ranch, whereas
the results of operations for 1996 do not contain these results. As a result,
Legend believes that its consolidated statement of operations for the three and
six months ended June 30, 1997, are not comparable with its consolidated
statement of operations for the three and six months ended June 30, 1996. To
allow for comparability of period-to-period variances, the results of operations
for the three and six months ended June 30, 1997, are compared to unaudited pro
forma results of operations for the three and six months ended June 30, 1996
("Pro Forma 1996"). The Pro Forma 1996 information has been prepared as if the
acquisition of Banyan had been made on January 1, 1996.
16
<PAGE> 17
Three months ended June 30, 1997 compared with the three months ended June 30,
1996
<TABLE>
<CAPTION>
for the three months ended June 30, June 30,
1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Real estate sales $ 6,973,724 6,817,306
Club operations 1,356,045 1,302,119
Patient service 679,535 654,409
Rent 619,726 652,407
Other 61,026 279,245
---------------- ------------
Total revenues 9,690,056 9,705,486
---------------- ------------
Costs and expenses:
Real estate 5,574,156 4,518,355
Club operations 1,201,383 1,295,405
Patient service direct costs 359,806 338,961
Rental operations 98,218 253,603
Other 41,682 24,460
Selling, general and administrative 3,817,322 3,621,697
Depreciation and amortization 347,059 274,415
---------------- ------------
Total costs and expenses 11,439,626 10,326,896
---------------- ------------
Operating loss (1,749,570) (621,410)
---------------- ------------
Other income (expense):
Interest income 324,734 312,484
Interest income, related party 36,469 35,968
Interest expense (2,198,343) (2,452,467)
Interest expense, related party (1,382,654) (630,303)
Other, net 146,768 71,940
---------------- ------------
Net other expense (3,073,026) (2,662,378)
---------------- ------------
Loss before equity in
income of investee (4,822,596) (3,283,788)
and minority interests
Equity in income of investee - 1,499
Minority interests in losses of consolidated 265,095 5,547
subsidiaries
---------------- ------------
Net loss $ (4,557,501) (3,276,742)
---------------- ------------
</TABLE>
Total revenues for the three months ended June 30, 1997, and for Pro Forma 1996
were $9,690,056 and $9,705,486, respectively. Real estate sales increased by
$156,418 to $6,973,724 in 1997 from $6,817,306 in Pro Forma 1996. In the three
months ended June 30, 1997, real estate sales at Grand Harbor, Oak Harbor and
Southbridge were $4,314,611, $2,399,938 and $259,175, respectively, compared to
sales of $6,817,306 at Grand Harbor in the comparable period of Pro Forma 1996.
A total of 12 Grand Harbor residential units were sold during the three months
ended June 30, 1997 at an average sale price of approximately $360,000 as
compared to 19 units sold during the comparable period of Pro Forma 1996 at an
average sale price of approximately $358,000. The fourth quarter of 1996 was the
first quarter of sales
17
<PAGE> 18
of residential units at Oak Harbor. A total of 6 Oak Harbor units were sold
during the three months ended June 30, 1997, at an average sale price of
approximately $400,000. A total of 6 lots at Southbridge were sold during the
three months ended June 30, 1997, at an average sale price of approximately
$43,000. No lots were sold during the comparable period of the prior year at
Southbridge. Overall occupancy at the Lynnwood Center at June 30, 1997 and 1996
was approximately 91%.
The average sales price of residential units at the Grand Harbor and Oak Harbor
developments may fluctuate significantly from month to month depending upon
the type of product sold and whether or not a previously owned unit was "traded
in". Depending upon the product type, sales prices at Grand Harbor range from
$165,000 to more than $500,000, and sales prices at Oak Harbor range from
$205,000 to more than $600,000.
Due to delays incurred during the merger proceedings and by the lawsuit, Legend
was unable to start development and construction activities at the Southbridge
and Chapman's Landing properties as early as originally anticipated, and the
Company was only able to close on six lot sales at Southbridge during the three
months ended June 30, 1997. The Company currently has signed contracts or
letters of intent to deliver approximately 750 lots over the next five years
with a total sales value in excess of $30 million. Additionally, the Company has
signed a letter of intent to deliver 150 acres to an entity associated with the
owner of a minor league baseball team. The entity wants to build a minor league
baseball stadium and entertainment complex on the site. As proposed, it would
include, among other things, an 8,000 seat minor league ballpark, a baseball
themed hotel and convention center, a 400,000-square-foot office building and a
minor league hockey stadium. Although the Company anticipates that the letters
of intent will be converted into signed contracts and result in sales, the
letters of intent do not represent firm "sales contracts", and there can be no
assurances that any sales will result from these or any other letters of intent,
or that actions proposed by other third parties, will occur. In addition, the
Company continues to negotiate with other builders for additional residential
lot sales contracts.
Total costs and expenses increased $1,112,730 to $11,439,626 for the three
months ended June 30, 1997, from $10,326,896 for Pro Forma 1996. The increase
was primarily due to increased costs of real estate sales and general and
administrative costs, partially offset by a decrease in the cost of rental
operations.
Real estate sales gross margin as a percentage of real estate sales amounted to
20% for the three months ended June 30, 1997, compared to 34% for the comparable
period in Pro Forma 1996. During 1997, costs associated with the sale of
residential units at Oak Harbor and lot sales at Southbridge were also included
whereas 1996 only included costs associated with sales at Grand Harbor. Gross
margin percentages realized on the sale of residential units at the Grand Harbor
and Oak Harbor developments may fluctuate significantly from period to period
depending upon the type of product sold and whether or not a previously owned
unit was "traded in". The gross margin on the lot sales at Southbridge during
the period were 20%.
Selling, general and administrative (SG&A) expenses increased $195,625 to
$3,817,322 for the three months ended June 30, 1997, from $3,621,697 in the same
quarter of Pro Forma 1996. The increase was primarily due to an increase in SG&A
expenses at the corporate office and at Oak Harbor. The Oak Harbor increases
were due to the fact that the Oak Harbor sales organization was not fully
operational in the first quarter of 1996. The increase in corporate office costs
were due primarily to transition and legal costs associated with the merger and
the related lawsuit of approximately $950,000, the costs associated with
establishing a Legend corporate office in Seattle, offset by the savings
realized by eliminating the Company's corporate office in Chicago.
Rental operation expenses decreased $155,385 to $98,218 for the three months
ended June 30, 1997, from $253,603 in the same quarter of Pro Forma 1996. The
Pro Forma 1996 amount includes costs of approximately $145,000 incurred by
Banyan associated with operation of the 120 S. Spalding property, which was sold
in April 1996.
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<PAGE> 19
Interest expense decreased $254,124 to $2,198,343 for the three months ended
June 30, 1997, from $2,452,467 in Pro Forma 1996, and related party interest
expense increased $752,351 to $1,382,654 for the three months ended June 30,
1997, from $630,303 in the same period in Pro Forma 1996. The decrease in
interest expense is due to a shift in expense to related party in 1997, due
primarily to Holdings purchasing $30.6 million of loans payable by Banyan from
third parties in May of 1996, and the Merger of Banyan and RGI/US in December
1996, which resulted in the Loans being "related party" loans after the purchase
date. The increase in related party interest expense is primarily due to the
preceding plus borrowings of $11,181,102 from Holdings during the three months
ended June 30, 1997.
The combination of the above changes resulted in a net loss of $4,557,501 ($0.72
per share) for the three months ended June 30, 1997, as compared to a net loss
of $3,276,742 ($0.52 per share) for the same period in Pro Forma 1996.
Six months ended June 30, 1997 compared with the six months ended June 30, 1996
<TABLE>
<CAPTION>
for the six months ended June 30, June 30,
1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Real estate sales $ 17,304,362 13,178,354
Club operations 3,429,894 3,174,461
Patient service 1,353,459 1,288,125
Rent 1,250,752 1,476,769
Other 337,010 404,151
---------------- -------------
Total revenues 23,675,477 19,521,860
---------------- -------------
Costs and expenses:
Real estate 13,297,818 9,249,477
Club operations 2,789,797 2,527,596
Patient service direct costs 716,041 664,742
Rental operations 197,631 574,729
Other 65,767 44,896
Selling, general and administrative 7,637,485 6,991,918
Depreciation and amortization 765,857 672,127
---------------- -------------
Total costs and expenses 25,470,396 20,725,485
---------------- -------------
Operating loss (1,794,919) (1,203,625)
---------------- -------------
Other income (expense):
Interest income 798,574 442,229
Interest income, related party 72,537 72,537
Interest expense (3,837,860) (4,999,471)
Interest expense, related party (2,500,922) (755,396)
Other, net 336,936 608,257
---------------- -------------
Net other expense (5,130,735) (4,631,844)
---------------- -------------
Loss before equity in
income of investee (6,925,654) (5,835,469)
and minority interests
Equity in income of investee - 981,330
Minority interests in losses of consolidated 252,716 39,223
subsidiaries
---------------- -------------
Net loss $ (6,672,938) (4,814,916)
---------------- -------------
</TABLE>
19
<PAGE> 20
Total revenues for the six months ended June 30, 1997, and for Pro Forma 1996
were $23,675,477 and $19,521,860, respectively. Real estate sales increased by
$4,126,008 to $17,304,362 in 1997 from $13,178,354 in the same period in Pro
Forma 1996. In the six months ended June 30, 1997, real estate sales at Grand
Harbor, Oak Harbor and Southbridge were $8,878,247, $8,166,940 and $259,175,
respectively, compared to sales of $13,178,354 at Grand Harbor in the comparable
period of Pro Forma 1996. A total of 24 Grand Harbor residential units were sold
during the six months ended June 30, 1997 at an average sale price of
approximately $370,000 as compared to 36 units sold during the comparable period
of Pro Forma 1996 at an average sale price of approximately $366,000. The fourth
quarter of 1996 was the first quarter of sales of residential units at Oak
Harbor. A total of 22 Oak Harbor units were sold during the six months ended
June 30, 1997, at an average sale price of approximately $371,000. A total of 6
lots at Southbridge were sold during the six months ended June 30, 1997, at an
average sale price of approximately $43,000. No lots were sold during the
comparable period of the prior year at Southbridge. Overall occupancy at the
Lynnwood Center at June 30, 1997 and 1996 was approximately 91%.
Total costs and expenses increased $4,744,911 to $25,470,396 for the six months
ended June 30, 1997, from $20,725,485 for Pro Forma 1996. The increase was
primarily due to increased costs of real estate sales and general and
administrative costs, partially offset by a decrease in the cost of rental
operations.
Real estate sales gross margin as a percentage of real estate sales amounted to
23% for the six months ended June 30, 1997, compared to 30% for the comparable
period in Pro Forma 1996. During 1997, costs associated with the sale of
residential units at Oak Harbor and lot sales at Southbridge were also included,
whereas 1996 only included costs associated with sales at Grand Harbor. Gross
margin percentages realized on the sale of residential units at the Grand Harbor
and Oak Harbor developments may fluctuate significantly from period to period
depending upon the type of product sold and whether or not a previously owned
unit was "traded in". The gross margin on the lot sales at Southbridge during
the period were 20%.
Selling, general and administrative (SG&A) expenses increased $645,567 to
$7,637,485 for the six months ended June 30, 1997, from $6,991,918 in the same
quarter of Pro Forma 1996. The increase was primarily due to an increase in SG&A
expenses at the corporate office and at Oak Harbor. The Oak Harbor increases
were due to the fact that the Oak Harbor sales organization was not fully
operational for all of the first six months of 1996. The increase in corporate
office costs were due primarily to transition and legal costs associated with
the merger and the related lawsuit of approximately $950,000, the costs
associated with establishing a Legend corporate office in Seattle, offset by the
savings realized by eliminating the Banyan corporate office in Chicago.
Rental operation expenses decreased $377,098 to $197,631 for the six months
ended June 30, 1997, from $574,729 in the same period of Pro Forma 1996. The Pro
Forma 1996 amount includes costs of approximately $374,000 incurred by Banyan
associated with operation of the 120 S. Spalding property, which was sold in
April 1996.
Interest expense decreased $1,161,611 to $3,837,860 for the six months ended
June 30, 1997, from $4,999,471 in Pro Forma 1996, and related party interest
expense increased $1,745,526 to $2,500,922 for the six months ended June 30,
1997, from $755,396 in Pro Forma 1996. The decrease in interest expense is due
to a shift in expense to related party in 1997, due primarily to Holdings
purchasing $30.6 million of loans payable by Banyan from third parties in May of
1996, and the Merger of Banyan and RGI/US in December 1996, which resulted in
the Loans being "related party" loans after the purchase date. The increase in
related party interest expense is primarily due to the preceding plus borrowings
of $13,416,271 from Holdings during the six months ended June 30, 1997.
20
<PAGE> 21
The combination of the above changes resulted in a net loss of $6,672,938 ($1.06
per share) for the six months ended June 30, 1997, as compared to a net loss of
$4,814,916 ($0.77 per share) for the same period in Pro Forma 1996.
21
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 31, 1996, a lawsuit was filed in Delaware State court by two of
Banyan's stockholders on behalf of themselves and all of the non-defendant
stockholders of Banyan, against certain of the directors and officers of Banyan.
The plaintiffs have alleged, among other things, that Banyan's board of
directors breached its fiduciary duties by failing to seek alternative change of
control transactions, other than the merger with RGI/US, or appropriately
evaluate the alternative of liquidating Banyan. Plaintiffs further alleged that
the merger unfairly diluted the voting and equity interests of Banyan's
stockholders. In addition, the plaintiffs alleged that the proxy statement
utilized by Banyan in connection with the annual meeting held to consider and
vote upon the merger was misleading and failed to disclose certain material
information. Among other remedies, the plaintiffs sought to enjoin the merger
and require the defendants to undertake additional activities to maximize
stockholder value and disclose certain additional information.
On November 13, 1996, another Banyan stockholder filed an action asserting
allegations substantially similar to those in the action filed on October 31.
These two suits were ultimately consolidated by the Delaware Court of Chancery
on December 11, 1996 under the case number C.A. No. 15287. The parties
subsequently engaged in discovery, including producing and reviewing documents
and taking depositions. Plaintiff filed a motion for preliminary injunction and
an opening brief in support of that motion on November 15, 1996. On December 24,
1996, the plaintiffs served and filed a consolidated amended and supplemental
complaint repeating the allegations made in the initial complaint and adding
additional factual allegations that Banyan had failed to properly consider
acquisition proposals submitted by third parties to acquire Banyan. The amended
complaint also claimed that purchases made by Holdings during December of shares
of Banyan's common stock from third parties constituted unlawful vote buying.
Certain of the plaintiffs in the Delaware action then filed an individual action
in federal district court in New York against RGI/US, Holdings and Legend's
president, Kenneth L. Uptain, alleging, among other things, that these purchases
constituted an illegal tender offer (New York Action).
On January 8, 1997, the plaintiffs filed an application pursuant to Section
225(b) of the General Corporation Laws of the State of Delaware seeking judicial
review of the certified vote on the merger. Plaintiffs contended that: (i) the
merger was approved by fewer than 210,000 votes; (ii) many shareholders had
sought to revoke proxies previously cast in favor of the merger; and (iii)
Banyan had announced varying results of the vote. The plaintiffs sought an
expedited hearing on the Section 225 application. The Delaware Court
subsequently scheduled a hearing on the plaintiffs' application for relief under
Section 225 for March 4, 1997. The parties engaged in discovery incident to that
application, including a review of documents obtained from the independent
inspector of election for the annual meeting, as well as other third parties and
taking depositions of certain of the plaintiffs' class representatives. The
hearing scheduled for March 4, 1997 was subsequently postponed without date at
the direction of the Delaware court. In the interim, the parties entered into
discussions with a view towards finding a mutually agreeable basis for resolving
the litigation.
On April 15, 1997, the parties announced that they had reached a stipulation and
settlement agreement to settle the Delaware Litigation. As part of the
settlement, Holdings agreed to, among other things: (i) defer interest due on
the Morgens and SoGen loans (the Loans) until December 31, 1997; (ii) forebear
on any defaults existing on the Loans as of the effective date of the settlement
until December 31, 1997; (iii) effective January 1, 1997, reduce the interest
rate on the Loans to the lower of the prime rate plus 2% (10.25% at January 1,
1997) or LIBOR plus 2.5% (8.1% at January 1, 1997); (iv) provide Legend with a
line of credit in the aggregate principal amount of $8.5 million, a portion of
which would be utilized to repay Holdings for advances previously made to
Legend; and (v) repurchase up to $300,000 of Legend's shares of common stock
from time to time on the open market over the next twelve months subject to
compliance with the SEC's rules and regulations relating to open market
repurchase programs.
On July 23, 1997, the Delaware Chancery Court rejected the settlement as
proposed by the parties. In a memorandum opinion issued by the court, the
Chancellor stated that he was unable to approve the proposed settlement because
he was unable to conclude that the named plaintiffs were adequate class
representatives. The Company is reviewing its options in light of the court's
decision.
22
<PAGE> 23
Other than as noted in this Item, the Company is not aware of any other material
pending legal proceedings as of August 10, 1997.
23
<PAGE> 24
ITEM 2. CHANGES IN SECURITIES
On April 30, 1997, the company sold 34,130 shares of its common stock to
Holdings at a per share price of $11.72, or $400,003. The shares were issued in
a transaction that was exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. The Company did not retain the services of
an underwriter in connection with this transaction. On or about May 1, 1997, the
Company purchased 20,000 shares of its common stock from an unrelated third
party for $5.50 per share, or $110,000.
Changes in Authorized Shares
In July of 1997, the Company amended Article Fourth of the Company's Amended and
Restated Certificate of Incorporation to reduce the number of authorized shares
of capital stock to 15,000,000 shares, of which 5,000,000 shares shall be
preferred stock, $0.01 par value, and 10,000,000 shares shall be common stock,
$0.01 par value.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of December 31, 1996, mortgage notes payable to Holdings with outstanding
principal balances totaling $30,649,872 (the Loans) were in default due to the
Company's failure to make certain interest payments when due. On June 30, 1997,
a $4,000,000 unsecured note payable to Holdings, plus accrued interest of
$415,320, matured. The Company did not repay the amounts, thereby causing the
note to be in default. On or about August 13, 1997, the maturity date of the
$4,000,000 note payable was extended to December 31, 1997. The note payable
will continue to accrue interest at LIBOR plus 1% (6.81% at June 30, 1997). On
August 1, 1997, the Company received a notice of default from a third party
lender, for a loan with an outstanding principal balance of approximately
$9.4 million. The default was caused by a material adverse change in the
financial condition of the principal guarantor of the loan; an affiliate of the
Company's majority shareholder, RGI Holdings, Inc.; due to a restructuring. The
lender has requested that the Company cure the default by replacing the
guarantor by September 1, 1997. On or about August 13, 1997, The Company's
majority shareholder and/or an affiliate agreed to replace the principal
guarantor of the loan, which will cure the event of the default.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Company was held on June 30, 1997.
The shareholders voted on the election of five directors to hold office until
the next Annual Meeting of Shareholders. The shareholders voted to elect the
following individuals:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
Walter E. Auch, Sr. 5,615,386 34,238
Robert M. Ungerleider 5,625,483 24,141
Fred E. Welker, III 5,626,499 23,125
Kenneth L. Uptain 5,626,279 23,345
Jan Petter Storetvedt 5,626,220 23,404
</TABLE>
The shareholders also voted their concurrence with the selection of KPMG Peat
Marwick LLP as the Company's principal independent accountants for the fiscal
year ending December 31, 1997, voting as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
--------- ------------- -----------
<S> <C> <C>
5,626,348 8,676 14,600
</TABLE>
The shareholders also voted to amend Article Fourth of the Company's Amended and
Restated Certificate of Incorporation to reduce the number of authorized shares
of capital stock to 15,000,000 shares, of which 5,000,000 shares shall be
preferred stock, $0.01 par value, and 10,000,000 shares shall be common stock,
$0.01 par value, voting as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
--------- ------------- -----------
<S> <C> <C>
5,150,464 19,204 22,186
</TABLE>
24
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT
NO.
2.1 Agreement and Plan of Merger, dated as of April 12, 1996 as amended and
restated as of May 20, 1996, by and among RGI/US, RGI Holdings, Inc. and
the Registrant, together with Amendment to Agreement and Plan of Merger
dated as of September 17, 1996.(5)
3.1 Amended and Restated Certificate of Incorporation of the Registrant.(8)
3.2 Bylaws of Registrant, as amended and restated as of July 1, 1996.(2)
10.1 Second Amendment of Leonard G. Levine's Employment Contract dated December
31, 1992.(3)
10.2 Form of Director Stock Option Agreements dated July 1, 1993, July 24, 1994
and July 7, 1995.(3)
10.3 Form of Executive Stock Option Agreements dated July 1, 1993, January 12,
1994 and February 8, 1995.(3)
10.4 Omitted
10.5 Loan Modification Agreement, dated as of May 20, 1996, by and between
Registrant and RGI Holdings, Inc. (SoGen Loan)(4)
10.6 Form of Second Loan Modification Agreement, by and between Legend
Properties, Inc. and RGI Holdings, Inc. (SoGen Loan)(6)
10.7 Loan Modification Agreement, dated as of May 21, 1996, by and between
Registrant and RGI Holdings, Inc. (Morgens Loan)(4)
10.8 Form of Second Loan Modification Agreement, by and between Legend
Properties, Inc. and RGI Holdings, Inc. (Morgens Loan)(6)
10.9 Registration Rights Agreement, dated as of May 21, 1996, by and between
Registrant and RGI Holdings, Inc.(5)
10.10 Master Construction Contract dated as of June 28, 1991 by and among GHA
Harbor Associates, GHA Grand Harbor, Ltd., GHA St. David's, Ltd., GHA Wood
Duck, Ltd., GHA Harbor Ltd., GHA Newport, Ltd., GHA River Club, Ltd., GHA
Coventry, Ltd. and Proctor Construction Company.(1)
10.11 Profit Sharing Agreement dated as of June 28, 1991 by and among Proctor
Construction Company, Andlinger Properties Capital L.P. and Grand Harbor
Associates, Inc.(1)
10.12 Stipulation and Agreement of Settlement dated April 15, 1997, by and among
John A. Hinson, John W. Temple, Gary M. Goldberg, Walter E. Auch, Sr.,
Robert M. Ungerleider, RGI Holdings, Inc. and Legend Properties, Inc.
(f/k/a Banyan Mortgage Investment Fund)(6)
25
<PAGE> 26
10.13 Third Amendment to Administrative Services Agreement, dated March 31, 1997
by and between Banyan Management Corp. and Legend Properties, Inc. (f/k/a
Banyan Mortgage Investment Fund)(5)
- ----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Registration Number 333-12415) dated September 20, 1996.
(2) Incorporated by reference to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1996.
(3) Incorporated by reference to the Registrant's Report on Form 10-K for the
year ended December 31, 1995.
(5) Incorporated by reference to the Registrant's Report on Form 8-K dated May
20, 1996.
(6) Incorporated by reference to the Registrant's Report on Form 10-K/A for
the year ended December 31, 1996.
(7) Incorporated by reference to Registrant's Report on Form 8-K dated April
15, 1997.
(8) Filed with this report.
(b) THE FOLLOWING REPORTS ON FORM 8-K WERE FILED DURING THE QUARTER ENDED JUNE
30, 1997:
(1) A current report on Form 8-K was filed on April 16, 1997, disclosing
the following:
ITEM 5. OTHER EVENTS
On April 15, 1997, Legend Properties, Inc. ("Legend") announced that it
had reached an agreement in principle to settle various lawsuits. The
agreement is subject to, among other things, court approval. As part of
the settlement, the plaintiffs will likely file a second consolidated
amended and supplemental complaint repeating the allegations contained in
their previous complaints and adding the claims underlying their
application pursuant to Section 225 of the Delaware Code. In addition, RGI
Holdings, Inc. and RGI/US will likely be added as defendants solely for
purposes of the settlement. All of the defendants will subsequently answer
this complaint and have consented to a conditional certification of the
lawsuit as a plaintiff class action pursuant to Rules 23(a) and
23(b)(1)-(2) of the Court of Chancery of the State of Delaware. As part of
this settlement, RGI Holdings, Inc. has agreed to, among other things: (i)
defer interest due on the loans previously known as the Morgens Loan and
the SoGen Loan (collectively, the "Loans") and now owned by RGI Holdings,
Inc. until December 31, 1997; (ii) forebear on any defaults existing on
the Loans as of the effective date of the settlement until December 31,
1997; (iii) effective January 1, 1997, reduce the interest rate on the
Loans to the lower of the prime rate plus 2% (10.25% at January 1, 1997)
or LIBOR plus 2.5% (8.1% at January 1, 1997); (iv) provide Legend with a
line of credit in the aggregate principal amount of $8.5 million, a
portion of which will be utilized to repay RGI Holdings, Inc. for advances
previously made to Legend; and (v) repurchase up to $300,000 of Legend's
shares of common stock from time to time on the open market over the next
twelve months subject to compliance with the Securities Exchange
Commission's rules and regulations relating to open market repurchase
programs. Until the settlement is approved by the court and becomes
effective, management does not expect to be able to satisfactorily
restructure or refinance the Loans. If and when the settlement is
approved, management expects to enter into discussions with RGI Holdings,
Inc. and/or other third party lenders to restructure or refinance the
Loans. The parties will schedule a hearing during the week of April 21,
1997, to submit the settlement to the Delaware court for its preliminary
review.
26
<PAGE> 27
SIGNATURES
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.
Date: August 14, 1997 LEGEND PROPERTIES, INC.
By: /s/ KENNETH L. UPTAIN
------------------------------
Kenneth L. Uptain, President,
Chief Executive Officer
27
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
LEGEND PROPERTIES, INC. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
1. The Certificate of Incorporation of the Corporation was filed
with the Secretary of State of the State of Delaware on January 18, 1988 and
Amended and Restated on December 31, 1996.
2. The first sentence of Article IV, Section A of the Amended and
Restated Certificate of Incorporation be, and hereby is, deleted in its
entirety and the following be substituted in its entirety:
"The total number of shares of capital stock which the Corporation
shall have authority to issue is fifteen million (15,000,000) shares, of
which five million (5,000,000) shares shall be preferred stock, $0.01
par value, and ten million (10,000,000) shares shall be common stock,
$0.01 par value."
3. In accordance with Section 242 of the Delaware General
Corporation Law, the above statement of amendment has been duly approved by the
board of directors and stockholders of the Corporation.
IN WITNESS WHEREOF, Legend Properties, Inc. has caused this Certificate
to be signed by Raymond J. Whitty, its Secretary, who does make this
Certificate and declare and certify under penalty of perjury that this is the
act and deed of the Corporation and that the facts stated therein are true, and
accordingly have set his hand hereto this 1st day of July, 1997.
By: /s/ RAYMOND J. WHITTY
----------------------------------
Raymond J. Whitty, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 21,525,359
<SECURITIES> 0
<RECEIVABLES> 1,533,706
<ALLOWANCES> 0
<INVENTORY> 126,656,388
<CURRENT-ASSETS> 0
<PP&E> 26,875,254
<DEPRECIATION> 4,051,849
<TOTAL-ASSETS> 181,346,079
<CURRENT-LIABILITIES> 0
<BONDS> 80,965,706
0
0
<COMMON> 63,117
<OTHER-SE> 24,792,047
<TOTAL-LIABILITY-AND-EQUITY> 181,346,079
<SALES> 17,304,362
<TOTAL-REVENUES> 23,675,477
<CGS> 13,297,818
<TOTAL-COSTS> 25,470,396
<OTHER-EXPENSES> 5,130,735
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,837,860
<INCOME-PRETAX> (6,925,654)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,672,938)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,672,938)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
<FN>
<F1>CASH INCLUDES RESTRICTED CASH AND INVESTMENTS OF $19,564,069.
</FN>
</TABLE>
