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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ending March 31, 2003
---------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
----- -----
Commission file number 1-4719
THE DELTONA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 59-0997584
- --------------------------------------------------------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8014 SW 135 STREET ROAD, OCALA, FLORIDA 34473
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (352)307-8100
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of the issuer's classes of
common stock, as of the latest practicable date: 13,544,277 shares of common
stock, $1 par value, excluding treasury stock, as of May 9, 2003.
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
MARCH 31, 2003 AND DECEMBER 31, 2002
------------------------------------
($000 Omitted)
March 31, December 31,
2003 2002
----------- ------------
(Unaudited)
ASSETS
------
Cash and cash equivalents, including escrow
deposits and restricted cash of $801 in 2003
and $820 in 2002 ................................. $ 1,216 $ 1,039
-------- --------
Contracts receivable for land sales - net ......... 276 930
-------- --------
Mortgages and other receivables - net ............. 46 139
-------- --------
Inventories:
Land and land improvements ....................... 7,199 7,237
Housing .......................................... 2,279 1,754
-------- --------
Total inventories ........................ 9,478 8,991
-------- --------
Property, plant, and equipment - net .............. 630 608
Investment in venture ............................. 54 70
Prepaid expenses and other ........................ 853 967
-------- --------
Total ...................................... $ 12,553 $ 12,744
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Mortgages and similar debt(c):
Mortgage notes payable - related parties ......... $ 2,700 $ 3,000
Other loans - related parties .................... 8,729 8,282
Other loans ...................................... 81 95
-------- --------
Total mortgages and similar debt ............... 11,510 11,377
Accounts payable - trade .......................... 817 332
Accrued interest payable - related parties ........ 1,663 2,466
Obligation under recourse provisions .............. 2,070 3,088
Accrued expenses and other ........................ 566 334
Customers' deposits ............................... 1,362 1,161
Deferred revenue .................................. 4,054 3,818
-------- --------
Total liabilities .............................. 22,042 22,576
-------- --------
Commitments and contingencies:
Stockholders' equity (deficit):
Preferred stock, $1 par value - authorized
5,000,000 shares; no shares are issued and
outstanding, preferences will be determined
prior to issuance............................... -0- -0-
Common stock, $1 par value - authorized
15,000,000 shares; outstanding: 13,544,277 shares
(excluding 12,228 shares held in treasury........ 13,544 13,544
Additional paid-in capital......................... 52,555 52,518
Accumulated deficit................................ (75,588) (75,894)
-------- --------
Total stockholders' equity (deficit)...... (9,489) (9,832)
-------- --------
Total............................ $ 12,553 $ 12,744
======== ========
See accompanying notes.
2
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
---------------------------------------------------------
FOR THE PERIODS INDICATED
-------------------------
($000 Omitted Except Per Share Amounts)
Three Months Ended
--------------------------
March 31, March 31,
2003 2002
----------- ------------
Revenues:
Net land sales .................................... $ 1,304 $ 1,677
Sales - housing ................................... 1,077 973
Recognized improvement revenue- prior period sales 49 42
Gain on termination of recourse obligation ........ 872 -0-
Interest income ................................... 66 69
Other ............................................. 207 202
----------- -----------
Total ......................................... 3,575 2,963
----------- -----------
Costs and expenses :
Cost of sales and improvements .................... 1,312 1,251
Selling, general, administrative and other expenses 1,668 1,450
Loss in Joint Venture ............................. 17 4
Loss on transfer of contracts receivable .......... 139 33
Interest expense .................................. 132 92
----------- -----------
Total ......................................... 3,268 2,830
----------- -----------
Income from operations before income taxes ......... 307 133
Provision for income taxes ......................... -0- -0-
----------- -----------
Net income ......................................... $ 307 $ 133
=========== ===========
Net income per common share ........................ $ 0.02 $ 0.01
=========== ===========
Number of common and common equivalent shares ...... 13,544,277 13,544,277
=========== ===========
See accompanying notes.
3
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 2003 AND MARCH 31, 2002
---------------------------------
($000 Omitted)
Three Months Ended
--------------------------
March 31, March 31,
2003 2002
----------- ------------
Cash flows from operating activities ............... $ (561) $ (1,283)
------- --------
Cash flows from investing activities:
Payment for acquisition of equipment ............. $ (48) $ (18)
------- --------
Cash flows from financing activities:
New borrowings ................................... 800 1,000
Repayment of borrowings .......................... (14) (15)
------- --------
Net cash provided by (used in)financing
activities ................................. 786 985
------- --------
Net increase (decrease) in cash and cash equivalents 177 (316)
Cash and cash equivalents, beginning of period ..... 1,039 923
------- --------
Cash and cash equivalents, end of period ........... $ 1,216 $ 607
======= ========
See accompanying notes.
4
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 2003 AND MARCH 31, 2002
---------------------------------
($000 Omitted)
Three Months Ended
--------------------------
March 31, March 31,
2003 2002
----------- ------------
Reconciliation of net income to net cash
provided by (used in) operating activities:
Net income ....................................... $ 307 $ 133
-------- --------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization .................... 26 20
Provision for estimated uncollectible sales
and Recourse obligation ......................... 215 357
Contract valuation discount, net of
amortization .................................... 60 (45)
Equity in loss in joint venture .................. 17 4
Imputed interest on debt with related party ...... 36 25
Loss on transfer of contracts receivable ......... 139 33
Net change in assets and liabilities ............... (1,361) (1,810)
------- -------
Total adjustments ......................... $ (868) $(1,416)
------- -------
Net cash provided by (used in) operating
activities ........................................ $ (561) $(1,283)
======= =======
Supplemental disclosure of non cash investing
and financing activities:
Interest expense treated as contribution to
capital........................................... $ 36 $ 25
======= =======
Transfer of contracts receivable for debt
repayment......................................... $ 1,693 $ 628
======= =======
See accompanying notes.
5
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------
MARCH 31, 2003
--------------
THE INFORMATION PRESENTED HEREIN AS OF MARCH 31, 2003 FOR THE THREE MONTHS ENDED
MARCH 31, 2003 AND 2002 IS UNAUDITED.
(a) BASIS OF PRESENTATION
The condensed unaudited financial statements of The Deltona Corporation and
subsidiaries ("The Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to
Commission rules and regulations. The information furnished reflects, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results for the interim
periods presented. Operating results for the three months ended March 31, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. These condensed consolidated financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Company's latest Annual Report on Form 10-K.
Certain amounts have been reclassified for comparative purposes.
The accompanying financial statements of the Company have been prepared on
a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The consolidated
financial statements do not include any adjustments relating to the
recoverability of asset amounts or the amounts of liabilities should the Company
be unable to continue as a going concern.
The Company has been dependent on its ability to sell or otherwise finance
contracts receivable and/or secure other financing sources to meet its cash
requirements. Additional financing in the amount of $800,000 was required during
the three months ending March 31, 2003 and was funded through additional loans
from Swan. Additional financing will be required in the future. Although Swan
has loaned the Company additional funds to be paid back with contracts
receivable at the rate of 90% of face value, with recourse since 1999, there can
be no guarantee that the Company will be able to generate sufficient receivables
to obtain sufficient financing in the future or that the Company will be able to
obtain financing from Yasawa, Scafholding, Swan and other related parties, or
from unrelated parties.
(b) INVENTORIES
Information with respect to the classification of inventory of land and
improvements including land held for sale or transfer is as follows (in
thousands):
Land and Improvements
---------------------
March 31, December 31,
2003 2002
----------- ------------
Unimproved land............................. $ 420 $ 420
Land in various stages of development....... 2,714 2,622
Fully improved land......................... 4,065 4,195
-------- --------
Total................................ $ 7,199 $ 7,237
======== ========
(c) MORTGAGES AND SIMILAR DEBT
As of March 31, 2003, the Company's outstanding debt to Yasawa was
$2,700,000 secured by a first lien on the Company's receivables and a mortgage
on all of the Company's properties. The terms of repayment of the Yasawa loan
provide for $100,000 of monthly payments of principal in cash or contracts
receivable at 100% of face value, with recourse. Interest accrues at the prime
rate adjusted semi-annually to the then current rate of 4.75% for 2002 and 4.25%
effective January 1, 2003. The Company satisfied its principal obligation to
Scafholding as of December 31, 1999. Yasawa and Scafholding have not required
the Company to make interest payments since September 1, 1998. As of March 31,
2003,
6
the total amount of interest accrued on the Yasawa and Scafholding obligations
is approximately $1,663,000, which is included in accrued interest.
During the three months ended March 31, 2003, Swan loaned the Company an
additional $800,000 so that it was able to meet its working capital
requirements. The Company's debt to Swan as of March 31, 2003, of $8,729,000 is
secured by a second lien on the Company's receivables. Swan has agreed to accept
contracts receivable at 90% of face value, with recourse, in payment of the
Company's obligation to Swan. The Company recognizes a loss on the transfer of
contracts at less than face value. The amount of each monthly payment will be
dependent upon the amount of contracts receivable in the Company's portfolio.
Each month, the Company is required to transfer to Swan , as debt repayment, all
current contracts receivable in the Company's portfolio in excess of $500,000,
including contracts that have not yet met the Company's revenue recognition
criteria. Swan does not charge interest for the first six months after an
advance; thereafter, the interest accrues at the prime rate adjusted
semi-annually to the then current rate of 4.75% for 2002 and 4.25% effective
January 1, 2003. As of March 31, 2003, the Company paid the accrued and unpaid
interest on the Swan notes through the transfer of contracts receivable at 90%
of their face value.
The Company records interest expense for all borrowing at the Company's
incremental borrowing rate, which is currently the prime rate. Since the
interest does not accrue for the first six months of each loan advance from
Swan, the interest calculated is expensed and recorded as additional paid-in
capital. This amount was approximately $37,000 for the three months ended March
31, 2003.
In the future, if the Company elects to do so, Yasawa and Scafholding have
agreed to purchase contracts receivable at 65% of face value, with recourse. The
Company has an agreement with Swan whereby Swan may loan the Company funds to be
repaid with contracts receivable at 90% of face value, with recourse.
Indebtedness under various purchase money mortgages and loan agreements is
collateralized by substantially all of the Company's assets, including stock of
wholly-owned subsidiaries.
The Company has an agreement with Scafholding and Citony Development
Corporation for the servicing of their receivable portfolios. The Company
received approximately $18,000 and $17,000, in the three months ended March 31,
2003 and 2002, respectively, in revenue pursuant to these agreements. The
Company also services the Swan receivable portfolio, which consisted of 954
contracts (approximately $11,506,000) as of March 31, 2003; however, the Swan
portfolio is serviced at no charge to Swan under the Trust and Servicing
Agreement.
(d) COMMITMENTS AND CONTINGENCIES
Homesite sales contracts provide for the return of all monies paid in
(including paid-in interest) should the Company be unable to meet its
contractual obligations after the use of reasonable diligence. If a refund is
made, the Company will recover the related homesite and any improvement thereto.
(e) CAPITALIZED INTEREST
The Company capitalizes interest cost incurred during a project's
construction period. Interest incurred was $136,000 and $129,000 for the three
months ended March 31, 2003 and 2002, respectively of which $5,000 and $37,000
was capitalized for the three months ended March 31, 2003 and 2002,
respectively.
(f) EARNINGS OR LOSS PER SHARE
Basic earnings (loss) per common and common equivalent share were computed
by dividing net income (loss) by the weighted average number of shares of Common
Stock and common stock equivalents outstanding during each period.
(g) CAPITAL TRANSACTION
In 2002, the Company filed a Form 13E(3) and a preliminary proxy statement
related to a proposed going private transaction. These documents are currently
being reviewed by the SEC staff. These filings were done pursuant to actions
7
by the Board of Directors. On December 13, 2001, the Board of Directors
approved, subject to stockholder approval, a 1 for 500,000 reverse split of the
Company's common stock and a related amendment to the Company's Articles of
Incorporation reducing the number of authorized shares to 30. Based on the
current common stockholdings, if voted and approved by the stockholders, the
reverse split will reduce the number of the Company's stockholders to two
stockholders: Selex International, B.V., a Netherlands corporation ("Selex") and
Yasawa Holdings, N.V., a Netherlands Antilles corporation ("Yasawa"). The date
of the meeting of stockholders to consider both matters will be determined upon
the conclusion of the review and subsequent amendments to the disclosures in
preliminary proxy statement and Form13E(3) filings.
(h) REPURCHASE OF CONTRACTS AND TERMINATION OF RECOURSE OBLIGATION
On March 7, 2003, the Company closed on an agreement that resulted in the
termination of its repurchase obligation on contracts receivable sold in 1990
and 1992. The termination of this recourse obligation covering approximately $1
million of contracts receivable, substantially all of which were non-performing,
resulted in a one-time gain on termination of a recourse obligation of
approximately $872,000 and a reduction in the liability for "Obligation under
recourse provisions". In terminating the obligation, the Company acquired over
200 contracts receivable, substantially all of which are non-performing, each of
which is collateralized by an improved vacant residential lot, and over 150
lots, which were added to the Company's land inventory. As a part of this
transaction, the Company received lots that are being conveyed to Citony
Development Corporation pursuant to a 1992 purchase agreement, which conveyed
all of the Company's property in the Citrus Springs subdivision, including any
lots reacquired under this transaction. The aggregate costs incurred of
approximately $215,000 were assigned to (a) $50,000 to contracts receivable for
the net value of contracts expected to be collected; and (b) $165,000 to land
for the remaining value, attributed to the land acquired and the land to be
acquired through the normal collateral process.
(i) INCOME TAXES
For the quarters ending March 31 2003 and 2002, the Company reported income
for financial reporting purposes, and a net loss for tax purposes through the
utilization of the benefit of net operating loss carry-forwards. Although the
Company utilized the tax benefit carry-forwards in these quarters, there can be
no assurance that the Company will generate taxable income for the year or
utilize any of the carry-forward benefits.
(j) SUBSEQUENT EVENTS
On April 30, 2003, Florida Water Services sent the Company notice that they
believe that Marion County intends to acquire their assets in Marion Oaks
subdivision through a condemnation action. Florida Water stated that they are
not aware of "if or when" such action may occur. If this action were to occur,
it is expected that Marion County would replace Florida Water as the provider of
water and sewer services within Marion Oaks subdivision. Without further
information concerning the timing and consequences of the potential action, the
financial and operational impact upon the Company is not known.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report on Form 10-Q of the Company for the quarter ended March 31,
2003 contains certain forward- looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. To the extent that such statements are not recitations
of historical fact, such statements constitute forward-looking statements which,
by definition, involve risks and uncertainties. In particular, statements under
Items 1 and 2, contain forward-looking statements. Where, in any forward-looking
statement, the Company expresses an expectation or belief as to future results
or events, such expectation or belief is expressed in good faith and believed to
have reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished.
All of the above estimates are based on the current expectations of our
management team, which may change in the future due to a large number of
potential events, including unanticipated future developments.
The following factors are factors that could cause actual results or events
to differ materially from those anticipated, and include, but are not limited
to: the availability of operating capital, general economic, financial and
business conditions; competition for customers in the single-family and
multi-family home market; the costs of construction; and changes in and
compliance with governmental regulations.
RESULTS OF OPERATIONS
- ---------------------
For the three months ended March 31, 2003 and March 31, 2002.
Revenues
- --------
Total revenues were $3,575,000 for the first three months of 2003 compared
to $2,963,000 for the comparable 2002 period.
New retail land sales contracts entered into, including deposit sales on
which the Company has received less than 20% of the sales price, net of
cancellations, for the three months ended March 31, 2003 and 2002 were
$1,578,000 and $2,064,000, respectively. The Company had a backlog of
approximately $2,549,000 in unrecognized sales as of March 31, 2003. Such
contracts are not included in retail land sales until the applicable rescission
period has expired and the Company has received payments totaling 20% of the
contract sales price. The decrease in sales reflects lower sales by the
Company's independent dealers for the period.
Housing revenues were $1,077,000 for the first three months of 2003 versus
$973,000 for the comparable 2002 period. Revenues are not recognized from
housing sales until the completion of construction and passage of title. Housing
revenues increased as a result of more homes being closed in the period. The
backlog of houses under contract was $9,977,000 and $6,282,000 as of March 31,
2003 and 2002, respectively.
The following table reflects the Company's real estate product mix for the
periods indicated (in thousands):
Three Months Ended
March 31, March 31,
2003 2002
--------- ---------
Gross land sales.................. $ 1,578 $ 2,064
Housing Sales..................... 1,077 973
--------- ---------
Total Real Estate $ 2,655 $ 3,037
========= =========
Improvement revenues result from recognition of revenues deferred from
prior period sales. Recognition occurs as development work proceeds on the
previously sold property or customers are exchanged to a developed lot.
Improvement revenues totaled $49,000 for the first three months of 2003 versus
$42,000 for the comparable 2002 period.
9
Interest income was $66,000 for the first three months of 2003 versus
$69,000 for the comparable period in 2002.
Other revenues were $207,000 for the three months of 2003 versus $202,000
for the comparable period in 2002. Other revenues are principally generated by
the Company's title insurance and real estate brokerage subsidiaries.
Costs and Expenses
- ------------------
Costs and expenses were $3,268,000 for the first three months of 2003
versus $2,830,000 for the comparable period in 2002.
Cost of sales increased to $1,312,000 for the first three months of 2003,
versus $1,251,000 for the comparable period in 2002 due to increased housing
sales.
Commissions, advertising and other selling expenses totaled $1,019,000 for
the three months of 2003 versus $959,000 for the comparable period in 2002.
General and administrative expenses were $416,000 for the first three months of
2003 versus $347,000 for the comparable period in 2002 as a result of increased
overhead expenses. Real estate tax expenses were $233,000 for the first three
months of 2003 versus $144,000 for the comparable period in 2002.
Interest expense was $132,000 for the first three months of 2003 compared
to $96,000 for the first three months of 2002. The interest expense increased
due to less interest being capitalized for development costs and increased due
to increased outstanding debt. For an expanded discussion of the Company's debt
agreements, see the following section, "Liquidity and Capital Resources".
Net Income
- ----------
The Company reported net income of $307,000 for the first three months of
2003 versus a net income of $133,000 for the comparable period in 2002. The net
income is due to a non-cash gain of $872,000 on the termination of a repurchase
obligation on contracts that had been sold in 1990 and 1992.
Regulatory Developments which may affect Future Operations
- ----------------------------------------------------------
In Florida, as in many growth areas, local governments have sought to limit
or control population growth in their communities through restrictive zoning,
density reduction, the imposition of impact fees and more stringent development
requirements. Although the Company has taken such factors into consideration in
its master plans by agreeing, for example, to make improvements, construct
public facilities and dedicate certain property for public use, the increased
regulation has lengthened the development process and added to development
costs.
The implementation of the Florida Growth Management Act of 1985 (the "Act")
precludes the issuance of development orders or permits if public facilities
such as transportation, water and sewer services will not be available
concurrent with development. Development orders have been issued for, and
development has commenced in, the Company's existing communities (with
development being completed in certain of these communities). Thus, the
Company's communities are less likely to be affected by the new growth
management policies than future communities. Any future communities developed by
the Company will be strongly impacted by new growth management policies. Since
the Act and its implications are consistently being re-examined by the State,
together with local governments and various state and local governmental
agencies, the Company cannot further predict the timing or the effect of new
growth management policies, but anticipates that such policies may increase the
Company's permitting and development costs.
The Company's land sales activities are further subject to the jurisdiction
of the laws of various states in which the Company's properties are offered for
sale. In addition, Florida and other jurisdictions in which the Company's
properties are offered for sale have strengthened, or may strengthen, their
regulation of subdividers and subdivided lands in order to provide further
assurances to the public. The Company has attempted to take appropriate steps to
modify its marketing programs and registration applications in the face of such
increased regulation, but has incurred additional costs and delays in the
marketing of certain of its properties in certain states and countries. For
example, the Company has complied with the regulations of certain states which
require that the Company sell its properties to residents of those states
pursuant to a deed and mortgage transaction, regardless of the amount of the
down payment. The Company intends to continue to monitor any changes in statutes
or regulations affecting, or anticipated to affect, the sale of its properties
and intends to take
10
all necessary and reasonable action to assure that its properties and its
proposed marketing programs are in compliance with such regulations, but there
can be no assurance that the Company will be able to timely comply with all
regulatory changes in all jurisdictions in which the Company's properties are
presently offered for sale to the public.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Mortgages and Similar Debt
As of March 31, 2003, the Company's outstanding debt to Yasawa was
$2,700,000 secured by a first lien on the Company's receivables and a mortgage
on all of the Company's properties. The terms of repayment of the Yasawa loan
provide for $100,000 of monthly payments of principal in cash or contracts
receivable at 100% of face value, with recourse. Interest accrues at the prime
rate adjusted semi-annually to the then current rate of 4.75% for 2002 and 4.25%
effective January 1, 2003. The Company satisfied its principal obligation to
Scafholding as of December 31, 1999. Yasawa and Scafholding have not required
the Company to make interest payments since September 1, 1998. As of March 31,
2003, the total amount of interest accrued on the Yasawa and Scafholding
obligations is approximately $1,663,000, which is included in accrued interest.
During the three months ended March 31, 2003, Swan loaned the Company an
additional $800,000 so that it was able to meet its working capital
requirements. The Company's debt to Swan as of March 31, 2003, of $8,729,000 is
secured by a second lien on the Company's receivables. Swan has agreed to accept
contracts receivable at 90% of face value, with recourse, in payment of the
Company's obligation to Swan. The Company recognizes a loss on the transfer of
contracts at less than face value. The amount of each monthly payment will be
dependent upon the amount of contracts receivable in the Company's portfolio.
Each month, the Company is required to transfer to Swan , as debt repayment, all
current contracts receivable in the Company's portfolio in excess of $500,000,
including contracts that have not yet met the Company's revenue recognition
criteria. Swan does not charge interest for the first six months after an
advance; thereafter, the interest accrues at the prime rate adjusted
semi-annually to the then current rate of 4.75% for 2002 and 4.25% effective
January 1, 2003. As of March 31, 2003, the Company paid the accrued and unpaid
interest on the Swan notes through the transfer of contracts receivable at 90%
of their face value.
The Company recognizes the preferential cost of borrowing from Swan and
other related parties by recording the difference between the Company's
incremental borrowing rate and the contractual obligation rate as (i) interest
expense and (ii) a capital contribution. The Company recorded a capital
contribution of $78,000, $170,000 and $407,000 in 2002, 2001 and 2000,
respectively, due to the preferential cost of funds from affiliated companies.
Substantially all of the Company's assets are pledged as collateral for its
various obligations. The Company's outstanding debt to Yasawa is secured by a
first lien on the Company's receivables and a mortgage on all of the Company's
property; and the Company's outstanding debt to Swan is secured by a second lien
on the Company's receivables.
Contracts and Mortgages Receivable Sales and Transfers
Approximately $20 million of outstanding contracts receivable had been sold
or transferred by the Company subject to recourse obligations as of March 31,
2003. There are no funds on deposit with purchasers of the receivables as
collateral for the recourse obligations. A provision has been established for
the Company's obligation under the recourse provisions of which approximately
$2,070,000 remains at March 31, 2003.
The Company has an agreement with Scafholding and Citony Development
Corporation for the servicing of their receivable portfolios. The Company
received approximately $18,000 and $17,000, in the three months ended March 31,
2003 and 2002, respectively, in revenue pursuant to these agreements. The
Company also has an agreement with Swan for the servicing of its receivable
portfolio; however, the Company does not receive servicing fees from Swan.
In the future, if the Company elects to do so, Yasawa and Scafholding have
agreed to purchase contracts receivable at 65% of face value, with recourse. The
Company has an agreement with Swan whereby Swan may loan the Company funds to be
repaid with contracts receivable at 90% of face value, with recourse.
11
Other Obligations
Currently, the Company has an obligation to complete land improvements
prior to sale. Prior to 1991, the Company had an obligation to complete land
improvements upon deeding which, depending on contractual provisions, typically
occurred within 90 to 120 days after the completion of payments by the customer.
The estimated cost to complete improvements to lots and tracts from which sales
have been made is included in deferred revenue.
Liquidity
Retail land sales have traditionally produced negative cash flow at the
point of sale. This is a result of (I) regulatory requirements to sell fully
developed lots, (ii) the payment of marketing and selling expenses prior to or
shortly after the point of sale, and (iii) the collection of payments on sold
lots over 2-10 years. In an effort to offset these cash flow effects of
installment land sales, the Company is directing a greater portion of its
marketing efforts to the sale of lots with homes. The Company is now offering
lots for sale in compulsory building areas where a lot purchaser must complete
payments for the lot and construct a home within a limited period of time.
The Company is dependent on its ability to sell or otherwise finance its
contracts receivable and/or secure other financing to meet its cash
requirements. Since 1992, the Company has been largely dependent on Yasawa,
Scafholding and Swan and related parties for the financing of its operations.
Although Scafholding has purchased contracts receivables at the rate of 65% of
face value, with recourse, and Swan has loaned the Company additional funds to
be paid back with contracts receivable at the rate of 90% of face value, with
recourse, there can be no guarantee that the Company will be able to generate
sufficient receivables to obtain sufficient financing in the future, nor can
there be any guarantee that Yasawa, Scafholding, Swan and other related parties,
or unrelated third party lenders will continue to make loans to the Company.
12
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The estimated fair values of financial instruments have been determined by
the Company using available market information and appropriate valuation
methods. Considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize or incur
in a current market transaction. The use of different market assumptions and/or
estimation methods may have a material effect on the estimated fair value
amounts. The Company's financial instruments consist of cash and cash
equivalents, contracts and mortgages receivable and similar debt. The stated
amount of cash and cash equivalents is a reasonable estimate of fair value. The
fair value of contracts and mortgages receivable and similar debt has been
estimated using interest rates currently available for similar terms. The stated
value of the contracts and mortgages receivable and similar debt approximate
fair value.
Management does not use derivatives to manage its exposure to market
interest rate risk.
The Company's exposure to market interest rate risk on its contracts
receivable has been minimized by the terms of its credit facilities agreements.
Under the credit agreements, all excess contracts are transferred to paydown the
debt obligation. Therefore, it is expected that the Company will have less than
$500,000 of current contracts receivable in the portfolio at any time. Prior to
March 2003, the Company was also required to maintain contracts receivable
adequate to cover the third party recourse obligation for contracts sold in 1990
and 1992. This recourse obligation was settled in March 2003.
Contracts receivable consists of fixed interest rate paper with an initial
collection term generally of ten years. The stated interest rate is below market
interest rates for similar paper. The Company periodically adjusts the stated
rate on new contracts in response to changes in the market interest rate and
other competitive sales factors. The Company discounts the contracts notes
receivable to current market rates. At March 31, 2003, the average stated rate
for contracts receivable was 9%, and the discount rate used was 13.5%. Under its
credit agreement, the Company is required to transfer all excess contracts
receivable as defined to a creditor for debt reduction. The Company's
outstanding contracts receivable, net of allowance for cancellations before
valuation adjustment was $310,000 at March 31, 2003. The unamortized valuation
adjustment at March 31, 2003 was $34,000. Management estimates that a 1%
increase in the market interest rate equals a valuation discount increase of
approximately $10,000, which would reduce net income.
The Company also has exposure to market interest rate risk on outstanding
debt. As of March 31, 2003, the Company has outstanding debt of approximately
$11,510,000. The stated interest rate, which is adjusted semi-annually, is the
prime rate, which was 4.25% at January 1, 2003. The outstanding debt has no
standard repayment term: it is dependant on the Company's sales and future
contracts receivable. Under the assumption that additional borrowing would be
approximate to any debt repayment, the Company estimates that a 1% increase in
the market interest rate equals an increase in interest expense of approximately
$115,000, which would reduce net income.
13
ITEM 4
CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to insure
the information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including the Chief Executive Officer and the
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Management necessarily applied its judgment in assessing
the costs and benefits of such controls and procedures which, by their nature,
can provide only reasonable assurance regarding management's control objectives.
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management ,
including the Chief Executive Officer and the Chief Financial Officer, an
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to the exchange Act Rule 13a-14. Based upon the foregoing,
our Chief Executive Officer along with our Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company required to be included in
our Exchange Act reports.
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date we carried out our evaluation.
14
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See attached Exhibit 99.1 for Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002 (CEO Certification by
Antony Gram)
See attached Exhibit 99.2 for Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002 (CFO Certification by
Robert O. Moore)
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE DELTONA CORPORATION
Date: May 13, 2003 By: /s/Robert O. Moore
---------------------------
Robert O. Moore,
Treasurer & Chief Financial Officer
15
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Antony Gram, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Deltona
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Antony Gram
- ----------------------------------
Antony Gram, Chairman, President,
and Chief Executive Officer
May 9, 2003
16
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Robert O Moore, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Deltona
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Robert O Moore
- --------------------------
Robert O Moore, Treasurer
and Chief Financial Officer
May 9, 2003
17