<PAGE> 1
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 SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER 1-9885
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.)
13662 OFFICE PLACE, SUITE 201, WOODBRIDGE, VIRGINIA 22192
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (703) 680-2226
---------------
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 [x]. NO [ ].
Shares of common stock outstanding as of November 10, 1998: 6,290,874.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Condensed Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1998 (unaudited)
and December 31, 1997........................................................3
Condensed Consolidated Statements of Operations for the Nine Months
Ended September 30, 1998 and 1997 (unaudited)................................4
Condensed Consolidated Statements of Operations for the Three Months Ended
September 30, 1998 and 1997 (unaudited)......................................5
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 (unaudited)................................6
Notes to Condensed Consolidated Financial Statements (unaudited).............7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................10
Item 3 Quantitative and Qualitative Disclosures about Market Risks.................17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...........................................................18
Item 3. Defaults Upon Senior Securities.............................................18
Item 6. Exhibits and Reports of Form 8-K............................................19
Signatures...........................................................................20
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
LEGEND PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------
Assets
------
<S> <C> <C>
Real estate inventory $ 113,615,730 103,857,159
Cash and cash equivalents 2,015,626 12,732,681
Restricted cash and investments 17,599,002 15,230,538
Accounts and notes receivable 2,656,912 1,012,877
Property and equipment, net 24,792,949 25,759,305
Intangible assets, net 1,694,010 1,828,470
Other assets, net 2,485,010 2,449,522
---------------------------
$ 164,859,239 162,870,552
---------------------------
Liabilities and Stockholders' Equity
------------------------------------
Notes payable to banks and others $ 59,313,045 60,411,332
Payables to related parties 81,032,805 72,893,927
Accounts payable 4,734,635 3,406,650
Other notes and liabilities 12,938,925 9,407,537
---------------------------
158,019,410 146,119,446
---------------------------
Stockholders' equity :
Common stock, $.01 par value. Authorized 10,000,000
shares; 6,311,678 shares issued and 6,290,874 shares
outstanding 63,117 63,117
Additional paid-in capital 44,171,103 44,171,103
Accumulated deficit (37,273,075) (27,361,798)
Treasury stock, 20,804 shares (121,316) (121,316)
---------------------------
Total stockholders' equity 6,839,829 16,751,106
- ---------------------------------------------------------------------------------------------------
$ 164,859,239 162,870,552
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
3
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LEGEND PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Real estate sales $ 26,755,717 23,675,536
Club operations 4,221,563 4,046,717
Patient service 1,943,464 2,042,804
Rent - 1,876,587
Other 1,510,304 1,255,850
-----------------------------
Total revenues 34,431,048 32,897,494
-----------------------------
Operating costs and expenses:
Real estate sales 18,410,807 18,207,358
Club operations 5,018,475 4,038,039
Patient service direct costs 1,368,670 1,084,305
Rental operations - 300,248
Other 911,140 517,451
Selling, general and administrative 10,473,874 11,376,049
Depreciation and amortization 1,561,327 1,281,913
-----------------------------
Total operating costs and expenses 37,744,293 36,805,363
-----------------------------
Operating loss (3,313,245) (3,907,869)
-----------------------------
Other income (expense):
Interest income 636,732 1,160,694
Interest income, related party - 73,339
Interest expense, including loan cost
amortization (3,919,692) (5,952,982)
Interest expense, related party (3,709,509) (4,112,385)
Other, net 394,437 314,807
-----------------------------
Net other expense (6,598,032) (8,516,527)
-----------------------------
Loss before minority interests (9,911,277) (12,424,396)
Minority interests in loss of consolidated
subsidiaries - 252,716
-----------------------------
Net loss $ (9,911,277) (12,171,680)
-----------------------------
Net loss per share - basic and diluted $ (1.58) (1.94)
--------------- -------------
Weighted average number of common shares
outstanding 6,290,874 6,284,788
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
4
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LEGEND PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Real estate sales $ 7,941,346 6,371,174
Club operations 985,599 1,037,572
Patient service 623,589 689,345
Rent - 625,835
Other 298,240 395,712
-------------------------
Total revenues 9,848,774 9,119,638
-------------------------
Operating costs and expenses:
Real estate sales 6,043,361 4,909,540
Club operations 1,536,510 1,222,085
Patient service direct costs 494,689 368,264
Rental operations - 102,617
Other 426,201 186,036
Selling, general and administrative 2,935,290 4,030,369
Depreciation and amortization 502,493 516,056
-------------------------
Total operating costs and
expenses 11,938,544 11,334,967
-------------------------
Operating loss (2,089,770) (2,215,329)
-------------------------
Other income (expense):
Interest income 172,298 362,120
Interest income, related party - 802
Interest expense, including loan cost
amortization (1,378,869) (2,115,122)
Interest expense, related party (1,241,790) (1,611,463)
Other, net 17,500 80,250
-------------------------
Net other expense (2,430,861) (3,283,413)
-------------------------
Net loss $ (4,520,631) (5,498,742)
-------------------------
Net loss per share - basic and diluted $ (0.72) (0.87))
-------------------------
Weighted average number of common shares
outstanding 6,290,874 6,290,874
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
5
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LEGEND PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,911,277) (12,171,680)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,033,305 2,341,248
Related party interest expense not paid 4,342,044 4,009,647
Related party interest income not collected - (72,537)
Minority interests in loss - (252,716)
Change in certain assets and liabilities:
Decrease (increase) in real estate inventory (9,758,571) 1,212,472
Increase in accounts and notes receivable
and other assets (1,984,070) (1,622,112)
(Decrease) increase in accounts payable and
other notes and liabilities 4,859,372 (3,901,082)
----------------------------
Net cash used in operating activities (10,419,197) (10,456,760)
----------------------------
Cash flows from investing activities:
Decrease (increase) in restricted cash and
investments (2,368,464) 6,971,623
Purchase of property and equipment (455,390) (4,701,274)
Loans to related parties - (20,000)
Collection of loans to related parties - 298,434
----------------------------
Net cash provided by (used in) investing
activities (2,823,854) 2,548,783
----------------------------
Cash flows from financing activities:
Proceeds from notes payable to bank and others 17,622,929 16,958,491
Repayment of notes payable to bank and others (18,721,216) (25,774,650)
Proceeds from loans from related parties 3,796,834 20,702,720
Payment of loan fees and other costs (172,551) -
Sale of common shares - 400,003
Purchase of fractional shares - (131,377)
----------------------------
Net cash provided by financing activities 2,525,996 12,155,187
----------------------------
Net (decrease) increase in cash and cash
equivalents (10,717,055) 4,247,210
Cash and cash equivalents at beginning of period 12,732,681 1,529,898
----------------------------
Cash and cash equivalents at end of period $ 2,015,626 5,777,108
----------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest,
net of amount capitalized of $946,895 in 1998
and $498,868 in 1997 $ 3,617,866 4,516,597
----------------------------
</TABLE>
See accompanying notes to the Condensed Consolidated Financial Statements
6
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LEGEND PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
Legend Properties, Inc. (Legend or the Company) 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, Inc. (RGI/US).
Prior to the Merger, RGI/US was a wholly-owned subsidiary of RGI Holdings, Inc.
(Holdings). As of September 30, 1998, Holdings owns approximately 80% of the
outstanding common shares of Legend Properties, Inc.
The condensed consolidated financial statements include the accounts of Legend
and its subsidiaries. In the opinion of management, the accompanying unaudited
condensed 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 condensed 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 for the year ended December 31,
1997, filed with the Securities and Exchange Commission.
The results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full fiscal year.
2. ACQUISITION OF REAL ESTATE
In March 1998, the Company entered into an option agreement, which assigned two
contracts, known as the Ashburn Corporate Center ("Ashburn") for approximately
116 acres to Ashburn Corporate Center, LC, a majority owned subsidiary of the
Company ("ACCLC"). On March 6, 1998, ACCLC acquired the initial parcel of
Ashburn comprised of approximately 88 acres for approximately $7,098,021,
including closing costs and allocated fees. The acquisition was funded with two
loans in the amounts of $5,500,000 and $440,000, which mature on September 6,
1999. The interest rate on both loans is 18% per annum, payable monthly.
Acquisition of the remaining 28-acre parcel for approximately $3,919,641
including closing costs and allocated fees, has not yet occurred.
Ashburn is a commercial business park development project located in Loudoun
County, Virginia planned for office and flex/tech uses. The project is
substantially improved with sewer, water and roadways in place.
ACCLC is owned 82% by the Company, which serves as the Manager. The remaining
18% is owned by unaffiliated third parties. The Company is entitled to: first,
an 18% preferred return; second, return of its capital contribution; and
thereafter, a declining percentage of cash flows (80% to 60%) until it achieves
certain internal rates of return on its capital contribution.
Subsequent to the second quarter, the Company began marketing its interest in
the project. In Management's view, strong development and leasing activity in
Northern Virginia has created an opportunity to achieve an acceptable return
from the outright sale of the project rather then proceeding with development as
originally planned. Management is currently negotiating a sales contract with a
third party buyer.
7
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3. RELATED PARTY TRANSACTIONS
On July 9, 1998 the Company executed a letter agreement providing for advances
of $6,500,000 from Holdings. These advances are secured by a first mortgage on
certain real estate inventory and bear interest at the prime rate plus 1 percent
to 1.5 percent. Principal and accrued interest are due the earlier of April 1,
1999 or within 5 days of the disposition of certain property or the financing of
certain activities with external lenders. As of September 30, 1998 the Company
has borrowed $3,800,000 under the agreement. The interest rate on these
borrowings was 9.75% at September 30, 1998.
4. NOTES PAYABLE TO BANKS AND OTHERS
Due to the Company's failure to make certain minimum principal payments, a
mortgage note payable to a bank in the principal amount of $8,344,317 is in
default. The Company was required to reduce the principal balance to $7,000,000
as of May 20, 1998 and $5,000,000 as of August 20, 1998 as required in the loan
agreement. The Company is negotiating with the bank for the pay off of a
substantial portion of the loan balance, which will eliminate the event of
default.
5. CONTINGENCIES
The Company is subject to various lawsuits arising in the ordinary course of
business. The Company is of the opinion that the outcome of any such lawsuits
will not have a material adverse effect on its operations.
6. SUBSEQUENT EVENTS
a) Real Estate
On October 28, 1998 the Company sold the entire Chapman's Landing
project (a 2,227 acre parcel located in Charles County, Maryland) to
the State of Maryland and a national environmental group for a total
sales price of $28.5 million. Net proceeds, after the payment of
closing and legal costs, were approximately $28.4 million. The Company
recognized a gain, net of closing and legal costs, on the sale for
accounting purposes of approximately $5 million. Proceeds from the sale
will be used to reduce outstanding debt obligations and fund
development, construction and operating activities.
As a result of the sale, the Company anticipates that certain
litigation challenging the wetlands and groundwater appropriation
permits will be withdrawn or dismissed.
b) Related Party Transactions
Pursuant to the terms of the debt agreement with Holdings on a
$24,258,798 mortgage note payable, the Company is required to pay to
Holdings 50% of the net cash flow (as defined) from the Chapman's
Landing sale. In conjunction with the sale, the Company has negotiated
an agreement in principle with Holdings to forego a substantial amount
of this repayment in exchange for the Company's commitment to utilize a
portion of the sales proceeds to retire or reduce certain external
obligations, repayment of which is currently guaranteed by Aker RGI
ASA, the indirect parent of Holdings.
In conjunction with their negotiations, the Company and Holdings have
tentatively agreed to certain modifications to all of the Company's
related party debt including an extension of the maturity date on all
the related party debt to April 1, 2003, adjustment in the interest
rates to between LIBOR + 2.5% to Prime + 2% and modifications to the
repayment of principal and interest. The Company and Holdings have also
8
<PAGE> 9
tentatively agreed to combine the $3,800,000 advanced under the July 9,
1999 letter agreement into the $21 million line of credit and cancel
the July 9, 1998 letter agreement. In addition, Holdings has
tentatively committed to provide a $5 million general line of credit to
be used to fund ongoing development, construction and operating
activities.
c) Notes Payable to Banks and Other
Pursuant to the negotiations with Holdings, the Company has had ongoing
negotiations with certain external lenders regarding the Company's loan
obligations. The Company has made payments totaling approximately
$2,000,000 to an external lender to reduce certain obligations, or
provide additional collateral security, to allow the release of the
related Aker RGI ASA guarantees.
The Company has also negotiated a modification on a $2,950,000 note
payable with an external lender to reduce the interest rate on the
obligation to 3% from 12%. The loan has a maturity date of January
20, 1999.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Legend Properties, Inc., formerly known as Banyan Mortgage Investment Fund
(Legend or the Company), is the surviving corporation from the December 31, 1996
merger (the Merger) of Banyan Mortgage Investment Fund (Banyan) with RGI U.S.
Holdings, Inc. (RGI/US). For financial reporting purposes, the Merger was
treated as a recapitalization of RGI/US, with RGI/US as the acquirer of Banyan.
Prior to the Merger, RGI/US was a wholly-owned subsidiary of RGI Holdings, Inc.
(Holdings). As of September 30, 1998, Holdings owns approximately 80% of the
outstanding common shares of Legend.
The Company's strategy is to realize and enhance the market potential of its
core assets. The Company currently controls more than 2,500 acres of land in a
master planned community (Southbridge), a commercial business park development
(the Ashburn Corporate Center), a residential golf community (Grand Harbor) and
a retirement community (Oak Harbor).
Grand Harbor is a 772-acre residential golf community located in Vero Beach,
Florida. Oak Harbor is a 116-acre retirement community also located in Vero
Beach, Florida. The Royal Palm Convalescent Center is a skilled nursing care
facility licensed for 72 beds located in Vero Beach, Florida (Oak Harbor and
Royal Palm are collectively referred to as Oak Harbor). Southbridge is a
2,685-acre development located in Prince William County, Virginia.
The Ashburn Corporate Center (Ashburn) is a 116-acre commercial business park
development project located in Loudoun County, Virginia planned for office and
flex/tech uses. The project is improved with sewer, water and roadways in place.
On March 6, 1998 the Company closed on the initial acquisition of 88 acres.
Acquisition of the remaining 28 acres has not yet occurred. Subsequent to the
second quarter, the Company began marketing its interest in the project. In
Management's view, strong development and leasing activity in Northern Virginia
has created an opportunity to achieve an acceptable return from the outright
sale of the project rather then proceeding with development as originally
planned. Management is currently negotiating a sales contract with a third party
buyer.
The Company is currently focused on continuing the development of infrastructure
and residential units at Grand Harbor and Oak Harbor consistent with approved
zoning and development plans. Additionally, the Company intends to develop and
sell land parcels at Southbridge. The Company's ability to fully implement its
business plan is dependent on, among other things, securing short-term and
long-term financing on acceptable terms.
On October 28, 1998, the Company sold the Chapman's Landing project (a
2,227-acre parcel located in Charles County, Maryland) to the State of Maryland
and an environmental group for a total sales price of $28.5 million. The Company
realized proceeds, after closing costs, of approximately $28.4 million and a
gain on the sale of approximately $5 million. As a result of the sale, the
Company anticipates that certain litigation challenging the wetlands and
groundwater appropriation permits will be withdrawn or dismissed.
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 statements are subject to
a number of risks and uncertainties. For a discussion of the factors affecting
the Company's business plan, see the Company's 1997 Annual Report on Form 10-K
"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.
10
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LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has utilized internally generated funds, third party
borrowing and loans from Holdings and affiliated entities to fund its
construction and development activities, and ongoing operating expenses.
The Company's business plan for 1998 contemplates continued expenditures for
development and construction activities at Southbridge, Grand Harbor and Oak
Harbor. For Grand Harbor and Oak Harbor, the Company anticipates utilizing
existing construction lines for the majority of the construction financing
required, but must arrange financing for future development and the remainder of
the construction. For Southbridge, the Company must arrange development
financing.
During the nine months ended September 30, 1998, the Company utilized existing
cash and cash equivalents, third party borrowings and borrowed $3,800,000 from
Holdings to fund its development, construction and operating activities.
On July 9, 1998 the Company executed a letter agreement with Holdings for the
advancement of $6,500,000 to fund certain development and construction
activities and to repay a loan with an external lender. As of September 30, 1998
the Company has drawn $3,800,000 under the agreement to fund certain
construction activities.
As of September 30, 1998, the Company's debt obligations totaled $140,345,850 of
which $110,090,755 matures by September 30, 1999 and an additional $22,511,543
by September 30, 2000. A substantial portion of the debt relates to loans
totaling $81,032,806 from Holdings, of which $69,202,450 and $11,830,356 matures
during April and July 1999, respectively.
The Company has substantial existing debt obligations maturing in late 1998 and
early 1999 and requires additional financing to advance its business plan. As of
September 30, 1998 the Company had $2,015,626 of cash and cash equivalents,
which will not be sufficient to fund these obligations. The Company anticipates
meeting its debt obligations during the remainder of 1998 from existing and
internally generated cash resources, including the proceeds from the sale of
Chapman's Landing, the release of restricted cash pledged as collateral on
certain debt, and from refinancings.
Pursuant to the terms of the debt agreement with Holdings on a $24,258,798
mortgage note payable, the Company is required to pay to Holdings 50% of the net
cash flow (as defined) from the Chapman's Landing sale. In conjunction with the
sale, the Company has negotiated an agreement in principle with Holdings to
forego a substantial amount of this repayment in exchange for the Company's
commitment to utilize a portion of the sales proceeds to retire or reduce
certain external obligations, repayment of which is currently guaranteed by Aker
RGI ASA, the indirect parent of Holdings. The remainder of the proceeds will be
used to Fund development, construction and operating activities.
In conjunction with their negotiations, the Company and Holdings have
tentatively agreed to certain modifications to all of the Company's related
party debt including an extension of the maturity date on all the related party
debt to April 1, 2003, adjustment in the interest rates to between LIBOR + 2.5%
to Prime + 2% and modifications to the repayment of principal and interest. The
Company and Holdings have also tentatively agreed to combine the $3,800,000
advanced under the July 9, 1999 letter agreement into the $21 million line of
credit and cancel the July 9, 1998 letter agreement. In addition, Holdings has
tentatively committed to provide a $5 million general line of credit to be used
to fund ongoing development, construction and operating activities.
11
<PAGE> 12
Pursuant to the negotiations with Holdings, the Company has had ongoing
negotiations with certain external lenders regarding the Company's loan
obligations. The Company has made payments totaling approximately $2,000,000 to
an external lender to reduce certain obligations, or provide additional
collateral security, to allow the release of the related Aker RGI ASA
guarantees.
There can be no assurance that the Company will be able to refinance the
existing indebtedness or obtain the necessary construction and development
financing to implement its business plan or that, if available, the terms and
conditions will be acceptable to the Company. If the Company is unable to secure
the necessary additional financing or capital when needed, the business plans
for its projects will likely be materially revised, which would have a material
adverse effect on the Company's financial condition and results of operations.
For each of the Company's projects, cash flow generated from operations can
differ substantially from earnings, depending on the status of the development
cycle. At the Southbridge property, which is in the initial stages of
development, significant cash outlays are required for, among other things, land
acquisitions, obtaining zoning and other regulatory approvals, construction of
amenities, sales facilities, major roads, utilities, general landscaping and
debt service. Since a major part of these initial expenditures are capitalized,
income reported for financial statement purposes during the initial years may
significantly exceed operating cash flow. At the Grand Harbor and Oak Harbor
properties, which have completed the initial stages of development, operating
cash flow can exceed earnings reported for financial statement purposes, since
expenses include charges for substantial amounts previously capitalized.
Legend's cash and cash equivalents balance at September 30, 1998, and December
31, 1997, was $2,015,626 and $12,732,681 respectively. The decrease for the nine
months ended September 30, 1998 is attributable to cash utilized in operating
and investing activities of $10,419,197 and $2,823,854 respectively, offset by
$2,525,996 generated by financing activities.
Cash Flows from Operating Activities: For the nine months ended September 30,
1998, Legend utilized cash in operating activities of $10,419,197.
Cash utilized in operations for the nine months ended September30, 1998 was
primarily due to the following:
- - Net losses of $9,911,277, due primarily to operating losses at the Oak
Harbor, Ashburn, Southbridge and Chapman's Landing developments, substantial
interest expense as well as corporate overhead expenses. These losses are
partially offset by an operating profit at the Grand Harbor project. Sales
at Oak Harbor were less than anticipated and lower than the comparable
period of 1997, while Southbridge experienced delays in lot development due
to an extremely wet winter and spring in the Washington D.C. area, and
closed on only 37 lots for the nine months ended September 30, 1998,
compared to 10 lots in 1997. Due to delays in obtaining the final permits
and the ongoing negotiations that resulted in the sale to the State of
Maryland, the Company had only commenced limited development at Chapman's
Landing, but continued to incur substantial expense to obtain the final
permits required for significant development to begin. Grand Harbor
generated an operating profit, mainly because of the sale of a 20-acre
parcel of raw land and the sale of 53 residential units, compared to 37
units in 1997.
- - An increase in real estate inventory of $9,758,571. The chief reason for
this increase was the acquisition of the initial parcel in the Ashburn
Corporate Center and related development activity totaling approximately
$7.7 million. In addition, construction of residential units continued at
Grand Harbor and Oak Harbor. Development activities continued at Southbridge
so that finished lots will be available for expected deliveries in 1998 and
beyond under existing contracts, however development activities were slowed
during the early part of the year because of the extremely wet winter in the
area. In total, land acquisition, development and construction activities
totaled $28,169,378. This was offset by sales of 53
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and 12 units at Grand Harbor and Oak Harbor, respectively, 37 residential
lot sales at Southbridge and the sale of a 20-acre parcel of raw land at
Grand Harbor. These activities reduced inventory by $18,410,807.
- - An increase in accounts and notes receivable and other assets of $1,984,070
during the nine months ended September 30, 1998. Fluctuations in these
accounts are generally due to the collection of accounts and notes
receivable, and the timing of prepaid expenses. These fluctuations can vary
significantly from period to period depending on the timing of sale closing
and prepayments. Due to the nature of Legend's business, significant
fluctuations in operating assets and liabilities are not considered unusual.
Partially offset by the following:
- - Related party interest expense of $4,342,044 was accrued but not paid during
the nine months ended September 30, 1998 pursuant to the terms of the
loan agreements.
- - Depreciation and amortization of $2,033,305 related primarily to fixed
assets at Grand Harbor and Oak Harbor and amortization of deferred loan
costs.
- - An increase in accounts payable and other notes and liabilities of
$4,859,372 during the nine months ended September 30, 1998. Fluctuations
in these accounts stem from the timing of payments of certain
liabilities, including accounts payable, and advances from customers.
These can vary widely from period to period depending on the timing of
sales closing, and development and construction activities. Significant
changes in operating assets and liabilities are not considered unusual
given the nature of Legend's business operations.
Cash Flows from Investing Activities: For the nine months ended September 30,
1998, Legend utilized cash flow in investing activities of $2,823,854. This is
principally attributed to increases in customer deposits at Grand Harbor, which
increased restricted cash and investments. Moreover, the company purchased
$455,390 of property and equipment.
Cash Flows from Financing Activities: For the nine months ended September 30,
1998, Legend generated net cash from financing activities of $2,525,996. The
Company borrowed an additional $17,622,929 from external parties ($5,940,000 at
Ashburn, $8,474,952 at Grand Harbor, and $3,207,977 at Oak Harbor). The
borrowings at Ashburn were used to finance the first takedown of land
acquisition described previously, while the borrowings at Grand Harbor and Oak
Harbor were used primarily to fund certain construction and development costs.
Repayments on external debt totaled $18,721,216 (Corporate $996,220, Grand
Harbor $13,101,695 and Oak Harbor $4,623,301). The funds for these repayments
were primarily provided by funds generated through sales of residential units
and club memberships and from existing cash resources. Moreover, the Company
borrowed $3,800,000 from Holdings (offset by reductions of $3,166 for a net of
$3,796,834), and paid $172,551 in loan fees and other costs.
RESULTS OF OPERATIONS
Nine months ended September 30, 1998 compared with 1997
Results of operations for the nine months ended September 30, 1998, consists of
the consolidated revenues and expenses of Southbridge, Chapman's Landing, Grand
Harbor, Oak Harbor and the Ashburn Corporate Center properties, whereas the
results of operations for the nine months ended September 30, 1997 consists of
the consolidated revenues and expenses of Southbridge, Chapman's Landing, Grand
Harbor, Oak Harbor, Laguna Seca Ranch and the Lynnwood Center. Both the Laguna
Seca Ranch, (a 565-acre parcel located in Monterey, California), and the
Lynnwood Center, (a 164,724 square foot shopping center
13
<PAGE> 14
located in Lynnwood, Washington), were sold during the fourth quarter of 1997.
Therefore, from period to period these results are not comparable.
Total revenues for the nine months ended September 30, 1998 and 1997 were
$34,431,048 and $32,897,494, respectively. The increase of $1,533,554 was
primarily due to increases in real estate sales at Grand Harbor and Southbridge,
which were partially offset by a decrease in real estate sales at Oak Harbor.
Moreover, the 1997 results include rent revenues for the Lynnwood Center, which
was sold during 1997.
Real estate sales increased $3,080,181 to $26,755,717 for the nine months ended
September 30, 1998 from $23,675,536 for the comparable period of 1997.
Residential unit sales totaled 53 at Grand Harbor during the nine months ended
September 30, 1998 at an average sale price of approximately $350,000 as
compared to 37 units sold during the comparable period of 1997 at an average
sale price of approximately $390,000. Also included in real estate revenues for
Grand Harbor for the nine months ended September 30, 1998 is the sale of a 20
acre land parcel for a sales price of approximately $1.9 million. There were no
land parcel sales for the comparable period of 1997. A total of 12 residential
units were sold at Oak Harbor during the nine months ended September 30, 1998,
at an average sale price of approximately $380,000, compared to 24 units for the
nine months ended September 30, 1997, at an average sale price of approximately
$370,000. Oak Harbor completed its first 24 unit condominium during March 1997,
and at that time had a majority of those units under contract. These units
closed soon after, thereby substantially increasing sales for the nine months
ended September 30, 1997 over the comparable period for 1998. Since sales prices
range from $165,000 to approximately $1,100,000 at Grand Harbor and Oak Harbor,
the average sales price of residential units may fluctuate significantly from
period to period depending upon the unit type and location of product sold.
At Southbridge, even though lot development activities were delayed due to an
extremely wet winter and spring in the Washington D.C. area, the Company was
able to close on 37 residential lots for the nine months ended September 30,
1998, at an average sales price of nearly $ 42,500, compared to 10 lots for the
comparable period of 1997, at an average sales price of approximately $43,000.
As a result of the sale of the Lynnwood Center during November 1997, there were
no rent revenues recognized during the nine months ended September 30, 1998
compared to $1,876,587 in 1997.
Total revenues from club operations at Grand Harbor and Oak Harbor increased
$174,846. Grand Harbor's club operating revenues declined $199,363 from
$3,701,634 to $3,502,271 for the nine months ended September 30, 1997 and 1998,
respectively. This resulted from changes in certain maintenance operations and
alterations in some fee structures to accommodate the Grand Harbor members. Oak
Harbor club operations revenue increased $374,209 to $719,292 for the nine
months ended September 30, 1998 as compared to $345,083 in 1997, due to
increases in membership.
Total operating costs and expenses increased $938,930 to $37,744,293 for the
nine months ended September 30, 1998, from $36,805,363 for the comparable period
of 1997. The increase was due primarily to increases in club operations expense
at Grand Harbor and Oak Harbor.
Total real estate sales expense increased due to the increase in the over-all
number of units sold and changes in unit types sold. Gross margin as a
percentage of real estate sales was 31% (27% excluding the sale of the 20 acre
land parcel at Grand Harbor) for the nine months ended September 30, 1998,
compared to 23% for the comparable period in 1997. Gross margins realized on the
sale of residential units at Grand Harbor and Oak Harbor may fluctuate
significantly from period to period depending upon the type of product sold. The
gross margin on residential lot sales at Southbridge remained at approximately
20%.
Expenses related to club operations increased $980,436 to $5,018,475 for the
nine months ended September 30, 1998, from $4,038,039 for the comparable period
of 1997. The increase resulted from an increase in the number of members and
activities at the Grand Harbor and Oak Harbor clubs and that the Oak Harbor club
did not commence operations until March 1, 1997.
14
<PAGE> 15
Total selling, general and administrative (SG&A) expenses decreased $902,175 to
$10,473,874 for the nine months ended September 30, 1998, from $11,376,049 for
the nine months ended September 30, 1997. The 1997 SG&A expenses includes
significant legal expenses related to the lawsuit challenging the Merger, which
was settled in November 1997. Moreover, the Company incurred one-time charges
during 1997 in moving the corporate offices from Seattle, Washington to
Woodbridge, Virginia.
Depreciation and amortization expense increased $279,414 to $1,561,327 for the
nine months ended September 30, 1998 from $1,281,913 in 1997, due primarily to
the commencement of depreciation on the Oak Harbor clubhouse and assisted living
facility.
Interest income decreased $523,962 to $636,732 for the nine months ended
September 30, 1998, from $1,160,694 in 1997, primarily due to a reduction in the
restricted cash account and cash available for short-term investment.
Interest paid to external lenders decreased $2,033,290 to $3,919,692 for the
nine months ended September 30, 1998, from $5,952,982 in 1997, due to a net
reduction in outstanding external indebtedness, resulting primarily from the
sale of the Lynnwood Center and sales of residential units at Grand Harbor and
Oak Harbor, partially offset by the Ashburn Corporate Center acquisition.
Related party interest expense increased because of new indebtedness resulting
from additional borrowings for operations and development at the properties.
Even so, this was partially offset by a reduction in the average interest rate
on indebtedness to related parties and higher levels of interest capitalized for
development activities at Southbridge, thus resulting in a net decrease.
The combination of the above changes resulted in a net loss of $9,911,277 ($1.58
per share) for the nine months ended September 30, 1998, as compared to a net
loss of $12,171,680 ($1.94 per share) for the nine months ended September 30,
1997.
15
<PAGE> 16
Three months ended September 30, 1998 compared to 1997
Total revenues for the three months ended September 30, 1998 and 1997 were
$9,848,774 and $9,119,638, respectively. The increase of $729,136 was primarily
due to increases in real estate sales at Grand Harbor, Oak Harbor and
Southbridge, offset by the cessation of rent revenues with the sale of the
Lynnwood Center during 1997.
Real estate sales increased $1,570,172 to $7,941,346 for the three months ended
September 30, 1998 from $6,371,174 for the comparable period of 1997. A total of
15 residential units were sold at Grand Harbor during the three months ended
September 30, 1998 at an average sale price of approximately $415,000 as
compared to 13 units sold during the comparable period of 1997 at an average
sale price of approximately $420,000. A total of 3 residential units were sold
at Oak Harbor during the three months ended September 30, 1998, at an average
sale price of approximately $330,000, compared to 2 units for the three months
ended September 30, 1997, at an average sale price of approximately $365,000.
During the three months ended September 30, 1998, 17 residential lots were sold
at Southbridge at an average sales price of $ 42,500 compared to 4 lots during
the comparable period of 1997 at an average sales price of approximately
$43,000.
Total operating costs and expenses increased $603,577 to $11,938,544 for the
three months ended September 30, 1998, from $11,334,967 for the comparable
period of 1997. This change is due primarily to an increase in real estate sales
expense, caused by an increase in the number of units sold, and an increase in
club operations expense at Grand Harbor and Oak Harbor offset by lower selling,
general and administrative expense.
Gross margin as a percentage of real estate sales was 24% for the three months
ended September 30, 1998, which is comparable to the 23% margin for the same
period in 1997.
Expenses related to club operations increased $314,425 to $1,536,510 for the
three months ended September 30, 1998, from $1,222,085 for the comparable period
of 1997. The increase resulted from an increase in the number of members at the
Oak Harbor club.
Total selling, general and administrative (SG&A) expenses decreased $1,095,079
to $2,935,290 for the three months ended September 30, 1998, from $4,030,369 for
the three months ended September 30, 1997. The decrease in SG&A resulted
primarily from a decrease in legal expenses from 1998 to 1997 because of the
1997 lawsuit challenging the Merger. Moreover, the Company incurred one-time
charges during 1997 in moving the corporate offices from Seattle, Washington to
Woodbridge, Virginia.
Depreciation and amortization expense was virtually unchanged decreasing $13,563
to $502,493 for the three months ended September 30, 1998 from $516,056 in 1997.
Interest income decreased $189,822 to $172,298 for the three months ended
September 30, 1998, from $362,120 in 1997, primarily due to a reduction in the
restricted cash accounts and cash available for short-term investment.
Interest expense to external lenders decreased $736,253 to $1,378,869 for the
three months ended September 30, 1998, from $2,115,122 for 1997, due to a net
reduction in outstanding external indebtedness, resulting primarily from the
sale of the Lynnwood Center and sales of residential units at Grand Harbor and
Oak Harbor, partially offset by the Ashburn Corporate Center acquisition.
Related party interest expense decreased because of levels of interest
capitalization for development activities at Southbridge and a reduction in the
average interest rates on indebtedness to related parties, which was partially
offset by a net increase in related party indebtedness resulting from additional
borrowings for operations and development at the properties.
16
<PAGE> 17
The combination of the above changes resulted in a net loss of $4,520,631 ($0.72
per share) for the three months ended September 30, 1998, as compared to a net
loss of $5,498,742 ($0.87 per share) for the three months ended September 30,
1997.
Computer Systems
The Company is assessing its systems to identify those that could be affected by
the "Year 2000" issue, and will and has initiated an implementation plan to
resolve the issue. The Company has identified certain systems that could be
potentially affected by the "Year 2000" issue. These include business computer,
medical technology, and mechanical systems. The Company's business computer
systems are either compliant or are in the process of conversion to "Year 2000"
compliant systems. The other systems are currently being assessed. The nature of
the Company's operations minimizes its exposure to the "Year 2000" issue. Even
so, the Company cannot fully estimate risk or costs until it has fully assessed
the "Year 2000" issue. To date, the Company has not identified any circumstance
that presents a material risk. Nevertheless, it is possible that a significant
risk will be identified as plans for dealing with the "Year 2000" issue are
developed and implemented. Contingency plans have not been developed to address
various business interruptions, which could include failures in accounting and
related information systems and certain disruptions in operations related to
medical technology and mechanical systems (contingency plans, if required, will
evolve as this issue continues to be addressed). The "Year 2000" problem is the
result of computer programs being written using two digits rather that four to
define the applicable year. Any of the company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
The Company does not engage in trading currencies or in any hedging activities.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to various lawsuits arising in the ordinary course of
business. The Company is of the opinion that the outcome of any such lawsuits
will not have a material adverse effect on its operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Due to the Company's failure to make a certain minimum principal payment, a
mortgage note payable to a bank in the principal amount of $8,344,317 is in
default. The Company was required to reduce the principal balance to $7,000,000
as of May 20, 1998, and $5,000,000 as of August 20, 1998 as required in the loan
agreement. The Company is negotiating with the bank for the pay off a
substantial portion of the loan balance, which will eliminate the event of
default.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT NO.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.(1)
3.2 Bylaws of Registrant, as amended and restated as of July 1,
1996.(2)
10.1 Employment contract dated March 31, 1998 by and between Legend
Properties, Inc. and Edward F. Podboy. (3)
10.2 Loan Modification Agreement, dated as of May 20, 1996, by and
between Registrant and RGI Holdings, Inc. (4)
10.3 Loan Modification Agreement, dated as May 21, 1996, by and between
Registrant and RGI Holdings, Inc. (4)
10.4 Form of Director Stock Option Agreements dated July 1, 1993, July
24, 1994 and July 7, 1995 (5)
10.5 Form of Executive Stock Option Agreements dated July 1, 1993,
January 12, 1994 and February 8, 1995 (5)
27.1 Financial Data Schedule
- ----------
(1) Incorporated by reference to the Registrant's Report on Form 10-K for
the year ended December 31, 1996.
(2) Incorporated by reference to the Registrant's Report on Form 10-Q for
the quarter ended September 30, 1996.
(3) Incorporated by reference to the Registrant's Report on Form 10-K for
the year ended December 31, 1997.
(4) Incorporated by reference to the Registrant's Report on Form 8-K dated
May 20, 1996.
(5) Incorporated by reference to the Registrant's Report on Form 10-K for
the year ended December 31, 1995.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended September 30,
1998.
19
<PAGE> 20
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: November 16, 1998 LEGEND PROPERTIES, INC.
By: /s/ Edward F. Podboy
----------------------------------------
Edward F. Podboy, President,
Chief Executive Officer
LEGEND PROPERTIES, INC.
By: /s/ Robert B. Cavoto
----------------------------------------
Robert B. Cavoto
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Legend
Properties, Inc. and Subsidiaries Condensed Consolidated Financial Statements
September 30, 1998 and 1997 and is qualified in its entirety by reference to
such September 30, 1998 Quarterly Report filed on Form 10-Q and 1997 Annual
Report filed on Form 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 19,614,628
<SECURITIES> 0
<RECEIVABLES> 2,656,912
<ALLOWANCES> 0
<INVENTORY> 113,615,730
<CURRENT-ASSETS> 0
<PP&E> 31,020,367
<DEPRECIATION> 6,227,418
<TOTAL-ASSETS> 164,859,239
<CURRENT-LIABILITIES> 0
<BONDS> 59,313,045
0
0
<COMMON> 63,117
<OTHER-SE> 6,326,712
<TOTAL-LIABILITY-AND-EQUITY> 164,859,239
<SALES> 26,755,717
<TOTAL-REVENUES> 34,431,048
<CGS> 18,410,807
<TOTAL-COSTS> 37,744,293
<OTHER-EXPENSES> 6,598,030
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,229,201
<INCOME-PRETAX> (9,911,277)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,911,277)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,911,277)
<EPS-PRIMARY> (1.58)
<EPS-DILUTED> (1.58)
</TABLE>
