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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THESECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ending December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
999 BRICKELL AVENUE, SUITE 700
MIAMI, FLORIDA 33131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (305) 579-0999
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1 PAR VALUE
(Title of Class)
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $1,087,600 based on the average price of such
stock as last traded over-the-counter. (Excludes shares of voting stock held by
directors, executive officers and beneficial owners of more than 10% of the
Registrant's voting stock; however, this does not constitute an admission that
any such holder is an "affiliate" for any purpose.)
Indicate the number of shares outstanding of the Registrant's classes
of common stock, as of the latest practicable date: 6,734,939 shares of common
stock, $1 par value, as of March 21, 1997, excluding 12,228 shares held in
treasury.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated Part(s)
* Registrant's 1997 Annual Meeting
Proxy Statement to be filed with
the Securities and Exchange
Commission pursuant to Regulation 14A Part III
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THE DELTONA CORPORATION
INDEX
Form 10-K Page
Item No. Section Heading in Attached Material Number
- --------- ------------------------------------ ------
PART I
Items 1 and 2 ... Business............................. 1
General............................. 1
Recent Developments................. 1
Business Segments................... 3
Real Estate......................... 4
Other Businesses.................... 10
Employees........................... 10
Competition......................... 10
Regulation.......................... 10
Item 3 ......... Legal Proceedings.................... 14
Item 4 ......... Not Applicable
PART II
Item 5 .......... Price Range of Common Stock and
Dividends............................ 15
Item 6 .......... Selected Consolidated Financial
Information.......................... 16
Item 7 .......... Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................ 17
Item 8 .......... Index to Consolidated Financial
Statements and Supplemental Data .... 31
Item 9 .......... Not Applicable
PART IV
Item 14 ......... Exhibits, Financial Statement Schedules
and Reports on Form 8-K ............. 56
ITEMS 1 AND 2
BUSINESS
GENERAL
The Company was founded in 1962 and is principally engaged in the
development and sale of Florida real estate, through the development of planned
communities on land acquired for that purpose. The Company offers single-family
lots and multi-family and commercial tracts for sale, in communities designed by
the Company. The Company has developed nine planned communities in Florida, six
of which are completed and three are in various stages of development, and range
in size from 1,500 to over 17,000 acres with a combined estimated population in
excess of 209,000. The Company plans, designs and develops roads, waterways,
recreational amenities, grading and drainage systems within these communities.
Since 1962, the Company has sold over 150,000 single-family lots and
multi-family and commercial tracts in its communities, in addition to over
13,000 single-family homes and over 4,300 multi-family housing units.
The Company has substantial land holdings in Florida. Its holdings include
an inventory of approximately 18,700 unsold platted single-family lots and
multi-family and commercial tracts. (Platting is the process of recording, in
the public records of the county where the land is located, a map or survey
delineating the legal boundaries of the lots and tracts.) See "Real Estate:
Land".
The Company also operates other businesses related to its real estate
activities, such as a title insurance company and a real estate brokerage
company. In addition, the Company has designed and constructed country clubs,
golf courses and other recreational amenities at its communities, and operates
such amenities until their conveyance or sale.
Historically, the Company has designed, constructed and operated
utility systems for the distribution of water and LP gas and for the collection
and treatment of sewage, primarily at the Company's communities. However, on
June 6, 1989, Topeka Group Incorporated ("Topeka"), a subsidiary of Minnesota
Power & Light Company ("MPL"), exchanged the Company's Preferred Stock which it
acquired in November, 1985 for the Company's utility subsidiaries.
The Company is incorporated in Delaware and has its principal executive
offices at 999 Brickell Avenue, Suite 700, Miami, Florida 33131. Its telephone
number is (305) 579-0999. The Company, as used herein, refers to The Deltona
Corporation and, unless the context otherwise indicates, its wholly-owned
subsidiaries.
RECENT DEVELOPMENTS
During the first quarter of 1995, the Company initiated a new land
sales program, which utilizes a limited group of independent dealers. During
1996, the Company reached a lot sales volume of $6,612,000 as compared to
$6,260,000 during 1995.
Since Antony Gram's appointment as Chairman of the Board and Chief
Executive Officer of the Company on July 13, 1994, he has been responsible for
resolving the financial and legal difficulties facing the Company and developing
an alternative business plan to enable the Company to continue as a going
concern. Mr. Gram, who had served as a director of the Company and Vice Chairman
of the Board from June, 1992 through April 6, 1994, holds a controlling interest
in Yasawa Holdings, N.V., a Netherland Antilles Corporation ("Yasawa") and
Wilbury International N.V., a Netherlands Antilles Corporation ("Wilbury"),
which holds all of the issued and outstanding capital stock of Selex
International, B.V., a Netherlands corporation ("Selex"), a 41.9% shareholder of
the Company. As a consequence, Mr. Gram is deemed to be the beneficial owner of
3,109,703 shares of Common Stock of the Company (46.17% of the outstanding
shares of Common Stock of the Company, based upon the number of shares of the
Company's Common Stock outstanding as of March 21, 1997).
During 1996, the Company was successful in settling the lawsuit
entitled Estate of Bobinger et al v. The Deltona Corporation, Case No. 87-45051,
which was filed in the Circuit Court of the Eleventh Judicial Circuit in and for
Dade
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County, Florida. Coupled with the payment of the remaining refunds to
purchasers, the settlement of this lawsuit brings to a close the issues
surrounding the denial of dredge and fill permits at the Company's Marco
communities.
The Company continues to be dependent upon Yasawa to fund continuing
working capital requirements until the Company is able to satisfy its prior
development and other obligations As of December 31, 1996, Yasawa has advanced
an aggregate amount of $6,012,000 to the Company ("the Second Yasawa loan") at
an interest rate of 8% per annum. In 1996, Yasawa loaned the Company $2,000,000
which was used to pay a portion of delinquent real estate taxes, meet minimum
working capital requirements and satisfy the remaining obligation of the Marco
class action settlement agreement. This final settlement resulted in an
extraordinary gain of $331,000.
The Company continued to experience liquidity problems during 1996, with
the Company's minimum working capital requirements being funded by Yasawa.
Efforts are continuing to seek third parties to provide funds to the Company for
the Company to continue as a going concern. There can be no assurance, however,
that any of these efforts will be successful or that additional financing will
be obtained. In the event that new financing is not successfully obtained or
that Yasawa or Mr. Gram do not continue to fund the Company's minimum working
capital requirements, the Company's Board of Directors will consider other
appropriate action given the severity of the Company's liquidity position,
including, but not limited to, filing for protection under the federal
bankruptcy laws. See "Legal Proceedings", "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Notes 1, 5 and 8 to
Consolidated Financial Statements.
2
BUSINESS SEGMENTS
The following table sets forth the total amounts of revenues and
operating profits (losses) from continuing operations attributable to each of
the Company's business segments for the years ended as indicated. See Note 11 to
Consolidated Financial Statements:
Years ended
--------------------------------------------
December December December December December
31, 1996 31, 1995 31, 1994 31, 1993 25, 1992
-------- -------- -------- -------- --------
(in thousands)
Revenues
Real estate:
Net land sales(a)........$ 4,296 $ 2,394 $ 2,058 $ 2,432 $ 2,092
Housing revenues......... 1,202 1,382 2,543 344 -0-
Improvement revenues(b).. 1,008 1,052 1,214 4,725 2,404
Interest income(c)....... 1,464 1,019 1,046 1,197 3,584
Other.................... -0- -0- -0- 67 -0-
-------- -------- -------- -------- --------
Total real estate...... 7,970 5,848 6,861 8,765 8,080
Other(d)................... 963 1,030 1,832 3,447 4,373
Intersegment sales(e)...... (283) (190) (152) (113) (235)
-------- -------- -------- -------- --------
Total..................$ 8,650 $ 6,688 $ 8,541 $ 12,099 $ 12,217
======== ======== ======== ======== ========
Operating profits (losses)
Real estate................$ 3,077 $ 1,377 $ 1,055 $ (3,072)$ 1,486
Other (d).................. 443 341 1,033 279 2,209
General corporate expense.. (2,966) (2,981) (4,147) (4,721) (7,057)
Interest expense........... (1,781) (1,642) (1,847) (1,257) (3,356)
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes
and extraordinary items...$ (1,227)$ (2,905)$ (3,906)$ (8,772)$ (6,718)
======== ======== ======== ======== ========
- ----------------
(a) Net land sales consist of gross land sales less estimated uncollectible
installment sales and contract valuation discount and, prior to 1992,
deferred revenue (see Notes 1, 2 and 7 to Consolidated Financial
Statements).
(b) Improvement revenues consist of revenue recognized due to completion of
improvements on prior period sales and exchanges from undeveloped to
developed lots.
(c) Interest income primarily consists of interest earned on contracts and
mortgages receivable and on temporary cash investments and the
amortization of valuation discounts.
(d) Other consists of revenues from sales other than real estate, the major
portion of which came from the country club operations in prior years.
In 1994, the major portion consists of a gain of $1,051,000 from the
termination of its office lease on its Miami corporate headquarters.
(e) Intersegment sales consist primarily of sales between the Company and
its title insurance subsidiary.
3
REAL ESTATE
The Company's principal business segment has primarily involved the
development and marketing of planned communities in Florida since 1962. The
following table sets forth certain information about these communities and other
land assets of the Company as of December 31, 1996. For a detailed description
of these communities, see "Existing Communities" and "Other Properties".
EXISTING COMMUNITIES
Platted Unimproved Improved
Acreage Initial Estimated Lots & Tracts Unsold Platted Unsold Platted
in Acquisition Year Current in Masterplan Lots & Tracts Lots & Tracts Unplatted
Masterplan Year Opened Population (a) (a) (b) (a) (b) Acreage
---------- ----------- ------ ---------- ------------- -------------- -------------- ---------
* Deltona Lakes... 17,203 1962 1962 68,090 34,964 - 6 -
* Marco Island(c). 7,844 1964 1965 39,000 8,657 - 1 -
* Spring Hill(d).. 17,240 1966 1967 71,890 32,909 - 6 -
* Citrus Springs
(e),(f),(g)..... 15,954 1969 1970 6,330 33,783 42 122(f)(i)
St. Augustine
Shores ....... 1,985 1969 1970 7,450 3,130 897 5(i) 16
Sunny Hills..... 17,743 1968 1971 1,360 26,251 12,471 726(i) -
* Pine Ridge...... 9,994 1969 1972 2,660 4,833 - 3(i) -
Marion Oaks(e).. 14,644 1969 1973 7,900 27,537 3,990 399(i) -
* Seminole Woods.. 1,554 1969 1979 430 262 - - -
JOINT VENTURE
COMMUNITY:
* Tierra Verde.... 666 1976 1977 4,740 1,036 - - -
------- ------- ------- -------- ------- -----
Total............. 104,827 209,850 173,362 17,400(f) 1,268(f) 16
======= ======= ======= ======== ======= =====
OTHER PROPERTIES
Initial
Acquisition
Year Acres
------------ ------
Other Land Assets:
Other land adjacent to existing communities(h)................................ Various 92
--
Total................................................................. 92
==
- ----------------------
* Development completed.
(a) Excluded from these lots and tracts are approximately 114 improved and 92
unimproved lots and tracts that are required for drainage and cannot be
sold, and approximately 142 improved and 344 unimproved lots and tracts
that have been removed from sale for encumbrances or additional site
development, which can only be sold when these issues are resolved. Also
excluded are amenities consisting of 2 administration facility sites, 2
recreational facility sites and 2 unimproved golf course sites, as well as
approximately 468 tracts reserved for community usage such as for
greenbelts, buffer areas, church and school sites.
(b) "Unimproved Unsold Platted Lots & Tracts" and "Improved Unsold Platted Lots
& Tracts", when added to lots and tracts sold, as described in "Existing
Communities", may not equal "Platted Lots & Tracts in Masterplan" for
various reasons, such as the subdivision of tracts into two or more parcels
for sale to different purchasers.
(c) Excludes permit denial areas; reflects seasonal population.
(d) Includes the South Hernando U.S. # 19 Commerce Center.
4
(e) Excluded 84 Citrus Springs and 63 Marion Oaks improved lots deeded to a
purchaser of the Company's contracts receivable as exchange inventory to be
available for customers who pre-pay their contracts prior to the
installation of water service lines within one mile of their homesite and
who wish to commence immediate construction. Unused exchanged inventory
will be reconveyed to the Company when all purchased receivables have
matured and are paid in full.
(f) Excludes 850 improved and 844 unimproved platted lots and tracts held for
retail sale by Citony Development Corporation ("Citony"), an affiliate of
Yasawa. Also excludes 272 improved and 76 unimproved platted lots and tracts
owned by Citony that may be subject to certain adverse soil conditions and/or
drainage conditions that render the subject properties unusable for retail sales
purposes. The property acquired by Citony in December 1992 was marketed by the
Company during 1993 and early 1994 pursuant to a joint venture agreement between
the Company and Citony. The Company and Citony agreed to terminate the joint
venture agreement in April 1994; however, the Company is providing certain
assistance to Citony during the transition period. In March 1997, the Company
transferred to Citony, per the terms of the 1992 agreement, 173 lots and tracts
reacquired by the Company principally through cancellation and legal settlement.
(g) Excludes 17 improved lots held by SunBank/Miami, N.A., as Trustee for the
Marco Shores Trust, which properties were transferred back to the Company
in March 1997.
(h) Excludes 18 unplatted acres in existing communities and 3,829 acres of
unplatted natural preserves restricted for recreational park use which
cannot be sold.
(i) Not included are 669 improved lots deeded to a collateral trustee on behalf
of a purchaser of the Company's contract receivables so they may be sold by
the Company to create additional receivables for the Company's replacement
obligation. These lots are comprised of 469 lots in Citrus Springs, 199
lots in Marion Oaks and 1 lot in St. Augustine Shores.
LAND
In selecting sites for its communities, the Company examined various
demographic and economic factors, the regulatory climate, the availability of
governmental services and medical, educational and commercial facilities, and
estimated development costs. Its communities are accessible to major highways
and Florida's major metropolitan areas and are near at least one large body of
water that can be used for recreational purposes. Other criteria used by the
Company in site selection are the suitability of the land for natural or
engineered drainage and the availability of a sufficient supply of potable water
to support the community's anticipated population.
The master plans of the Company's communities have been designed to provide
for amenities such as golf courses, greenbelt areas, parks and recreational
areas, as well as for the basic infrastructure, such as roads and water, and in
selected development areas, sewer lines. Sites are set aside for shopping
centers, schools, houses of worship, medical centers and public facilities such
as libraries and fire stations.
In its major planned communities, the Company offers for sale lot and house
"packages" situated on paved streets. In other areas of these communities, the
Company historically has sold single-family lots and multi-family and commercial
tracts on an installment basis. Prior to 1991, the Company sold such land,
subject to a future development obligation, accepting down payments as low as 5%
of the sales price, with the balance payable over periods ranging from 2 to 15
years, depending on the payment plan selected. When the applicable rescission
period expired and the Company received at least 10% of the contracted sales
price, a substantial portion of the revenue and related profit on the sale was
recognized, with the remaining revenue and profit deferred and recognized as
land improvements such as street paving occurred.
Due to various factors, since 1986, the Company had utilized a deed and
mortgage format for effecting certain sales in its communities. Beginning
September 29, 1990, the Company changed its method of recognizing land sales by
recording the sale of lots, subject to a future development obligation, under
the deposit method; since January 1, 1991, no sale has been recognized until the
Company receives at least 20% of the contracted sales price; and beginning in
the fourth quarter of 1991, the Company limited the sale of lots to those which
front on a paved street and are ready for immediate building. See Note 1 to
Consolidated Financial Statements.
A portion of the contract purchase price is discounted and treated as
interest income to be amortized over the life of the contract. Interest income
is also earned in accordance with the interest rate stated in the installment
land sales contract or promissory note. The Company further provides an
allowance for contract cancellations based on the historical experience of the
Company for such cancellations.
Substantially all of the Company's single-family lot and multi-family and
commercial tract sales have been made on an installment basis. Of the over
150,000 lots and tracts sold since the Company's inception, contracts receivable
presently exist with respect to approximately 1,405 lots and tracts with an
outstanding balance of approximately $12,554,900 at December 31, 1996, excluding
contracts receivable of which the Company is a guarantor. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 2 to Consolidated Financial Statements.
5
HOUSING
Historically, the Company has been involved in the design, construction and
marketing of single-family homes and multi-family housing, including both
condominium apartment complexes and a vacation ownership (timesharing) project.
Since commencing operations, the Company has constructed and sold over 13,000
single-family homes and over 4,300 multi-family housing units in its
communities, with much of the actual construction performed by subcontractors.
Revenues, as well as related costs and expenses, from single-family home and
vacation ownership sales are recorded at the time of closing.
SINGLE-FAMILY HOUSING
Although the Company had discontinued its single-family housing activities
at the end of 1984, in December, 1992, the Company re-entered the single-family
housing business at its Marion Oaks community. Two and three bedroom
moderately-priced homes are being constructed by an exclusive independent
builder at the Feather Nest housing village in this community and sold in the
local markets and through the Company's independent dealer network. These homes
include, as standard features, cathedral ceilings, attached garages, lanais,
breakfast nooks and spacious walk-in closets. The housing village features its
own recreational complex, including a swimming pool, tennis courts and other
amenities. The Company also offers the same model line in Marion Oaks outside of
the FeatherNest village in a suburban program as well as build on your own lot
program for those purchasers who have previously acquired a lot. Prices on the
Company's current model line range from $53,300 to $86,500, exclusive of lot.
The Company sold to Conquistador the remaining lot inventory in FeatherNest as
partial consideration for the satisfaction of $2,599,300 in debt; however, it is
still offering the product through its dealer network. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
In an effort to offset the negative cash effects of installment land sales,
the Company is attempting to direct its marketing efforts to its housing product
in which a house and lot are sold as a package. The success of this direction
will be dependent upon the Company's dealer recruiting program and availability
of funds for a national advertising and promotion program.
MULTI-FAMILY HOUSING
The Company has designed, constructed and sold more than 4,300 condominium
apartment units at its communities in buildings ranging from garden-style
apartment complexes to luxury high-rise towers. Every condominium complex
constructed by the Company includes at least one pool and patio area; many
feature tennis courts and other recreational amenities.
Substantially all of the Company's remaining inventory in its vacation
ownership complex, The Surf Club, located on the Gulf of Mexico at Marco Island,
was sold in 1990.
MARKETING
The Company has historically sold land and housing products on a national
and international basis through independent dealers in the United States, Canada
and overseas, as well as through Company-affiliated salespeople. For the year
ended December 31, 1996, sales by independent dealers in the United States
accounted for approximately 97% (in dollar volume) of new land sales contracts;
while overseas dealers accounted for approximately 3% of such contracts.
During the first quarter of 1995, the Company initiated a new land sales
program, which utilizes a limited group of independent dealers. During 1996, the
Company reached a lot sales volume of over $6,612,000 of contracts written.
6
EXISTING COMMUNITIES
DELTONA LAKES
Deltona Lakes is located 26 miles northeast of Orlando, with its popular
tourist attractions of Disney World and Sea World, and is bordered on the
northwest by Interstate 4. Opened in 1962, Deltona Lakes now has a population of
approximately 68,100. Over 30,000 lots and tracts and over 4,500 single and
multi-family housing units have been sold at this community.
Recreational amenities constructed by the Company include tennis courts, a
golf course and country club (which were sold in 1983), and a recreational
complex on the shores of Lake Monroe. A 133-room motel, an industrial park, a
medical complex, several shopping centers, numerous houses of worship, a fire
station, a public library and a junior high school are located in the community.
The Company has virtually completed development of this community.
MARCO ISLAND
The Company's resort community of Marco Island is located 104 miles west of
Miami and approximately 17 miles south of Naples, Florida. Over 8,500 lots and
tracts and over 4,200 single and multi-family housing units have been sold in
this community.
More than 39,000 persons reside at Marco Island, including a population
which more than triples during the winter season. It is the largest of Florida's
Ten Thousand Islands and is known for its recreational amenities which, in
addition to its 3 1/2 mile white sand beach, sport fishing, sailing and
shelling, include golf, tennis, swimming and other recreational activities. The
island community has several major shopping centers, banks and savings & loan
associations, and medical and professional centers.
Since the community's opening in January, 1965, the Company has built and
operated a yacht club and marina, the Marco Beach Hotel & Villas, and a golf
course and country club, all of which have been sold. The Company has also
constructed over 3,300 condominium units and The Surf Club, a 44 unit vacation
ownership complex, on the island. In 1990, the Company completed the sale of
substantially all of its remaining vacation ownership weeks.
Since its inventory at Marco Island is virtually sold out, 1997 revenues
are expected to be generated from collections on existing contracts receivable.
The community's planned growth was interrupted in 1976 by denial of certain
federal permits needed to complete the development of approximately 14,500
units. The Settlement Agreement between the Company, the State of Florida and
various environmental interest groups (the "Settlement Agreement") which became
effective on March 14, 1985, allowed for the potential development of additional
dwelling units at Marco Island, Horr's Island and Marco Shores, located two
miles from Marco Island. The bulk of these properties have subsequently been
sold or transferred to the Company's lenders or to the trustee pursuant to the
1992 settlement of the class action litigation. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and Note 9 to Consolidated Financial Statements.
SPRING HILL
Spring Hill, with an estimated population of approximately 71,900, is
located 45 miles north of Tampa-St. Petersburg. Over 32,000 lots and tracts and
over 4,000 single-family homes have been sold in this community. The Company has
constructed a recreation complex, a country club, and two golf courses. The
Company has sold its country club and golf courses. Several shopping centers and
medical centers, two elementary schools, a junior high school, a senior high
school, numerous houses of worship and two fire stations are located in the
community. The Company has completed the development of this community.
7
CITRUS SPRINGS
Citrus Springs, with an estimated population of 6,300, is located 28 miles
southwest of Ocala and 25 miles from the Gulf of Mexico. Over 30,000 lots and
tracts and over 700 single-family homes have been sold at this community. A golf
course and a clubhouse (sold in 1990) and a community center have been completed
by the Company. Several churches and a convenience shopping area are located in
the community. The Company has completed 400 miles of road. In 1992, most of the
Company's remaining inventory at this community was sold to Citony Development
Corporation ("Citony") for approximately $6,500,000. The Company and Citony then
entered into a joint venture agreement with respect to the property, providing
for the Company to market the property and receive an administration fee from
the venture. The Company and Citony terminated the joint venture agreement in
April 1994; however, the Company provided certain assistance to Citony during
the transition period. In February 1997, the Company finalized the sale of the
undeveloped second Citrus Springs Golf Course to a third party. The Purchase and
Sale agreement contemplates the completion of the course by the buyer by June
30, 1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" .
ST. AUGUSTINE SHORES
St. Augustine Shores, with a population estimated to be approximately
7,450, is located seven miles south of St. Augustine, between the Intracoastal
Waterway and U.S. Highway 1. Only commercial and multi-family tracts, house and
lot packages and condominium apartment units had been sold in this community
before 1987, but that year St. Augustine Shores was opened for the retail sale
of single-family lots. Approximately 1,000 additional single-family lots became
available during 1988 through the platting of 641 acres adjacent to the existing
platted properties. Over 2,000 single and multi-family housing units and lots
and tracts have been sold.
The Company has completed 28 miles of road. Certain common areas of the
community, such as parks and swale areas, are maintained by the St. Augustine
Shores Service Corporation, a non-profit corporation, of which all property
owners are members. Several houses of worship and shopping facilities are also
located in the community. A golf course and country club and a recreation
building have been completed by the Company. In October 1991, the country club
and golf course was transferred to the Company's lenders. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources" and Note 5 to Consolidated Financial
Statements.
Pursuant to the June, 1992 transaction with Selex, the Company purchased
certain multi-family and commercial property at this community from Mr. Muyres
and entities affiliated with Messrs. Muyres and Zwaans. Also in conjunction with
the June, 1992 transaction, an affiliate of Selex was granted an option to
repurchase certain of the property for $312,000, which option was exercised by
the affiliate in March, 1994. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Retail land sales will not
resume at the community until certain improvements are completed, as the Company
is selling only fully improved lots. See also "Regulation - Community
Development and Environmental".
On May 22, 1995 the Company sold to Conquistador (the "Second Conquistador
Acquisition") an administration building and a multi-family site in the
Company's St. Augustine Shores community, as well as other property, in
consideration for the satisfaction of $2,599,300 of principal and accrued
interest on the Second and Third Selex Loans. On that same date but in a
separate transaction, the Company also sold to Conquistador (the "Third
Conquistador Acquisition") four single family residential lots in the St.
Augustine Shores community for $100,000 in cash. These transactions were
accounted for in accordance with generally accepted accounting principals for
these types of related party transactions. Accordingly, the resulting gain of
$1,900,000 was treated as a contribution of capital and recorded directly to
capital surplus.
SUNNY HILLS
Sunny Hills, with a population of approximately 1,360 residents, is located
in the Florida Panhandle, 45 miles north of the Gulf of Mexico and 35 miles
north of Panama City. Over 12,000 lots and tracts and 300 single-family homes
have been sold at this community. It includes several houses of worship and a
convenience shopping center. The Company has
8
completed or under construction 165 miles of road. The community also has a golf
course and country club, which was sold by the Company for $1,000,000 in the the
first quarter of 1993.
The Company reopened Sunny Hills for retail lot sales in mid-1989. Revenues
in 1997 will be generated from collections on existing contracts receivable,
from retail land sales and from the recognition of deferred revenue as land
development and lot exchanges proceed.
PINE RIDGE
Pine Ridge, with a population of approximately 2,660, is located 34 miles
southwest of Ocala. The community's facilities include an equestrian club and
tennis courts. In May, 1987, the Company completed the $8,500,000 sale of its
remaining inventory and golf course at Pine Ridge. Prior to the sale, the
Company had sold over 3,500 lots and tracts and over 53 single-family homes in
Pine Ridge.
MARION OAKS
Marion Oaks, with a population of approximately 7,900 residents, is located
18 miles south of Ocala. Over 23,000 lots and tracts and over 2,700
single-family homes have been sold in the community. The community includes
playgrounds, two golf courses (one of which was sold in 1988 and the second
which was transferred to the Company's lenders on October 11, 1991) and several
recreation buildings. A shopping center and several houses of worship are
located in the community. The Company has completed 311 miles of road. The
Company re-entered the single-family housing business at this community in
December, 1992 with the opening of its FeatherNest housing village. On May 22,
1995, the Company sold to Conquistador (the "Second Conquistador Acquisition")
the remaining lot inventory in the Company's FeatherNest community at Marion
Oaks , as well as other property, in consideration for the satisfaction of
$2,599,300 of principal and accrued interest on the Second and Third Selex
Loans. See "Housing" and "Marketing". Revenues in 1997 will be generated from
the sale of land inventory, from housing sales, from the recognition of deferred
revenue as land development and lot exchanges proceed, from collections on
existing contracts receivable and from the Company's real estate brokerage
operation.
SEMINOLE WOODS
Seminole Woods, with a population of approximately 430, is comprised of
1,554 acres of property located 20 miles north of Orlando. The community,
comprised of 262 single-family lots, each a minimum of five acres, has been sold
out and development completed.
TIERRA VERDE
Tierra Verde, with a population of approximately 4,740, is a 666-acre
waterfront subdivision located eight miles south of St. Petersburg. It was
developed and marketed pursuant to a 50% joint venture between a wholly-owned
subsidiary of the Company and an unaffiliated corporation which filed a petition
for bankruptcy under the Bankruptcy Code in 1985. The community has been sold
out and development completed. The venture, which extended until December 31,
1990, provided for the Company's subsidiary to receive a management fee and to
share in the venture's results of operations equally with its venture partner.
The venture was extended for the purposes of winding down operations which were
completed in 1993.
OTHER LAND ASSETS
The Company also owns 92 acres of land in Florida adjacent to its existing
communities. Certain of these properties are being marketed by the Company's
commercial sales division.
9
OTHER BUSINESSES
The Company's title insurance subsidiary was established in 1978 in order
to reduce title insurance, legal and certain related closing costs incurred by
the Company in transferring title of its land and housing products to its
purchasers. The subsidiary serves as an agent for TICOR Title Insurance Company,
Chicago Title Insurance Company and other title insurers. The Company's realty
subsidiary performs real estate brokerage and rental services at the Company's
Marion Oaks and Sunny Hills communities.
EMPLOYEES
At December 31, 1996, the Company had 37 employees, of whom 34 were
involved in executive, administrative, sales and community development and
maintenance capacities and 3 were involved with the title insurance subsidiary.
Certain of the Company's development activities are carried out by
subcontractors who separately employ additional personnel. For the most part,
the Company's marketing activities are carried out by independent dealers.
COMPETITION
The Company faces competition primarily from property owners in the
Company's communities seeking to resell their land. The Company is also facing
competition, on a regional level, with other builders and developers in the sale
of single-family housing. Such competition is generally based upon location,
price, reputation, quality of product and the existence of commercial and
recreational facilities and amenities.
REGULATION
The Company's real estate business is subject to regulation by various
local, state and federal agencies. The communities are increasingly subject to
substantial regulation as they are planned, designed and constructed, the nature
of such regulation extending to improvements, zoning, building, environmental,
health and related matters. Although the Company has been able to operate within
the regulatory environment in the past, there can be no assurance that such
regulations could not be made more restrictive and thereby adversely affect the
Company's operations.
COMMUNITY DEVELOPMENT
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")
has now commenced. The Act precludes the issuance of development orders or
permits if public facilities such as transportation, water and sewer services
will not be available concurrent with development. Development orders have been
issued for, and development has commenced in, the Company's existing communities
(with development being virtually completed in certain of these communities).
Thus, such communities are less likely to be affected by the new growth
management policies than future communities. Any future communities developed by
the Company will be strongly impacted by new growth management policies. Since
the Act and its implications are consistently being re-examined by the State,
together with local governments and various state and local governmental
agencies, the Company cannot further predict the timing or the effect of new
growth management policies, but anticipates that such policies may increase the
Company's permitting and development costs.
On September 30, 1988, the Company entered into an agreement with Citrus
County, Florida to establish the procedure for transferring final maintenance
responsibilities for roads in the Company's Citrus Springs subdivision to Citrus
County. The agreement obligated the Company to perform certain remedial work on
previously completed improvements within the Citrus Springs subdivision by June
1, 1991. The Company was unable to complete this work due to the lack of
available
10
funds and negotiated a final settlement with Citrus County for the transfer of
final maintenance responsibility for the roads to the County. This final
agreement was entered into in May 1995.
The Company's present development schedule for completing improvements to
approximately 600 acres at its St. Augustine Shores community does not coincide
with the current development requirements of the Planned Unit Development
("PUD") approved by St. Johns County. The Company will seek a modification of
the PUD development requirements consistent with the Company's future
development plans at St. Augustine Shores.
The Company's corporate performance bonds to assure the completion of
development at its St. Augustine Shores community expired in 1993. Such bonds
cannot be renewed due to a change in the policy of the Board of County
Commissioners of St. Johns County which precludes allowing any developer to
secure the performance of development obligations by the issuance of corporate
bonds. In the event that St. Johns County elects to undertake the completion of
such development work, the Company would be obligated with respect to 1,000
unimproved lots at St. Augustine Shores in the amount of approximately
$6,200,000. The Company has proposed the formation of a community development
district as a funding source and submitted an alternative assurance program for
the completion of such development and improvements.
ENVIRONMENTAL
To varying degrees, certain permits and approvals will be necessary to
complete the development of all of the Company's comunities. Despite the fact
that the Company has obtained substantially all of the permits and
authorizations necessary to proceed with its development work on communities
presently being marketed, additional approvals may be required to develop
certain platted properties in certain communities to be marketed in the future.
Although the Company cannot predict the impact of such requirements, they could
result in delays and increased expenditures. In addition, the continued
effectiveness of permits and authorizations already granted is subject to many
factors, some of which, including changes in policies, rules and regulations and
their interpretation and application, are beyond the Company's control.
Certain of the Company's development permits for a portion of its St.
Augustine Shores community issued by the St. Johns Water Management District and
the U.S. Army Corps of Engineers expired. The Company will submit new permit
applications that will coincide with the Company's future development plans.
Since there can be no assurance that the Company will be successful in obtaining
such new permits in a timely manner, the Company may be required to alter its
development plans for this community.
The Company is aware of studies indicating that prolonged exposure to radon
gas may be hazardous to one's health. Such studies further indicate that radon
gas is apparently associated with mining and earth moving activities,
particularly in phosphate-bearing geological formations. Since phosphate mining
has, over the years, constituted a significant industry in Florida, various
state and local governmental agencies are in the process of attempting to
determine the nature and extent of indoor radon gas intrusion throughout the
state. Similar studies undertaken by the Company at its Citrus Springs community
indicate that less than 1% of its property in that community may be affected by
radon gas; studies conducted at the Company's Marion Oaks community revealed no
indications of potential indoor radon gas problems. None of the other properties
owned by the Company are situated over geological formations which are suspected
of causing radon gas problems. Consequently, the existence of radon gas in
Florida is not expected to materially affect the business or financial condition
of the Company.
The Company owns and operates above ground fuel storage tanks at its
communities. The Florida Department of Environmental Regulation ("DER") is
responsible not only for regulating these tanks, but for developing and
implementing plans and programs to prevent the discharge of pollutants by such
facilities. The Company has registered its storage tanks with the DER,
constructed containment devices around above ground storage tanks, replaced or
properly abandoned faulty tanks or equipment and conducts periodic inspections
and monitoring of all facilities.
In December, 1988, the Company surveyed all of its fuel facilities and
reported any facility which exhibited evidence of potential soil contamination
to the DER prior to the deadline for acceptance into the Early Detection
Incentive ("EDI") Program. The EDI Program provides for the State to assume the
financial responsibility for any necessary clean-up
11
operations when suspected contamination has been voluntarily reported by the
facility owner and accepted into the program by the DER. The Company's sites
have been inspected and reviewed under the EDI program and are in compliance
with current DER regulations.
MARKETING
The Company is also subject to a number of statutes imposing registration,
filing and disclosure requirements with respect to homesites and homes sold or
proposed to be sold to the public. On the state level, the Company's land sales
activities are subject to the jurisdiction of the Division of Florida Land
Sales, Condominiums and Mobile Homes (the "Division") which requires
registration of subdividers and subdivided land; reviews the contents of
advertising and other promotional material; inspects the Company's land and
development work; exercises jurisdiction over sales practices; and requires full
disclosure to prospective purchasers of pertinent information relating to the
property offered for sale.
OTHER OBLIGATIONS
As a result of the delays in completing the land improvements to certain
property sold in certain of its Central and North Florida communities, the
Company fell behind in meeting its contractual obligations to its customers. In
connection with these delays, the Company, in February, 1980, entered into a
Consent Order with the Division which provided a program for notifying affected
customers. The Consent Order, which was restated and amended, provided a program
for notifying affected customers of the anticipated delays in the completion of
improvements (or, in the case of purchasers of unbuildable lots in certain areas
of the Company's Sunny Hills community, the transfer of development obligations
to core growth areas of the community); various options which may be selected by
affected purchasers; a schedule for completing certain improvements; and a
deferral of the obligation to install water mains until requested by the
purchaser. Under an agreement with Topeka, Topeka's utility companies agreed to
furnish utility service to the future residents of the Company's communities on
substantially the same basis as such services were provided by the Company. The
Consent Order also required the establishment of an improvement escrow account
as assurance for completing such improvement obligations.
In June, 1992, the Company entered into the 1992 Consent Order with the
Division, which replaced and superseded the original Consent Order, as amended
and restated. Among other things, the 1992 Consent Order consolidated the
Company's development obligations and provided for a reduction in its required
monthly escrow obligation to $175,000 from September, 1992 through December,
1993. Beginning January, 1994 and until development is completed or the 1992
Consent Order is amended, the Company is required to deposit $430,000 per month
into the escrow account. As part of the assurance program under the 1992 Consent
Order, the Company and its lenders granted the Division a lien on certain
receivables and future receivables. The Company defaulted on its obligation to
escrow $430,000 per month for the period of January, 1994 through the present
and, in accordance with the 1992 Consent Order, collections on Division
receivables were escrowed for the benefit of purchasers from March 1, 1994
through April 30, 1994. In May, 1994 the Company implemented a program to
exchange purchasers who contracted to purchase property which is undeveloped to
property which is developed. As of March 21, 1997, approximately 84% of the
customers whose lots are currently undeveloped have opted to exchange or have
otherwise been resolved. Consequently, the Division has allowed the Company to
utilize collections on receivables since May 1, 1994. Because of the Company's
default, the Division could also exercise other available remedies under the
1992 Consent Order, which remedies entitle the Division, among other things, to
halt all sales of registered property. The Company's goal is to eliminate its
development obligation (with the exception of its maintenance obligation in
Marion Oaks) under the 1992 Consent Order through this exchange program and
settlement of all remaining maintenance and improvements obligations in Citrus
Springs through a final agreement with Citrus County (entered into in May 1995).
Pursuant to the 1992 Consent Order, the Company has limited the sale of
single-family lots to lots which front on a paved street and are ready for
immediate building.
As of December 31, 1996, the Company had estimated development obligations
of approximately $1,134,000 on sold property, an estimated liability to provide
title insurance and deeding costing $1,139,000 and an estimated cost of street
maintenance, prior to assumption of such obligations by local governments, of
$880,000, all of which are included in
12
deferred revenue. The total cost to complete improvements at December 31, 1996
to lots subject to the 1992 Consent Order, including the previously mentioned
obligations, and to all lots, sold and unsold, including the St. Augustine
Shores community, was estimated to be approximately $15,152,000. As of December
31, 1996 and December 31, 1995 the Company had in escrow approximately $360,000
and $489,000, respectively, specifically for land improvements at certain of its
Central and North Florida communities.
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.
On the federal level, the Company's homesite installment sales are subject
to the Federal Consumer Credit Protection ("Truth-in-Lending") Act. In addition,
the Company's activities are subject to regulation by the Interstate Land Sales
Registration Division ("ILSRD"), which administers the Interstate Land Sales
Full Disclosure Act. That Act requires that the Company file with ILSRD copies
of applicable materials on file with the Division as to all properties
registered; certain properties must be registered directly with ILSRD, in
addition to being registered with the Division.
The Company has either complied with applicable statutory requirements
relative to the properties it is offering or has relied on various statutory
exemptions which have relieved the Company from such registration, filing and
disclosure requirements. If these exemptions do not continue to remain available
to the Company, compliance with such statutes may result in delays in the
offering of the Company's properties and products to the public.
In addition, Florida and other jurisdictions in which the Company's
properties are offered for sale have strengthened, or are considering
strengthening, their regulation of subdividers and subdivided lands in order to
provide further assurances to the public, particularly given the adverse
publicity surrounding the industry which existed in 1990. The Company has
attempted to take appropriate steps to modify its marketing programs and
registration applications in the face of such increased regulation, but has
incurred additional costs and delays in the marketing of certain of its
properties in certain states and countries. For example, the Company has
complied with the regulations of certain states which require that the Company
sell its properties to residents of those states pursuant to a deed and mortgage
transaction, regardless of the amount of the down payment. The Company intends
to continue to monitor any changes in statutes or regulations affecting, or
anticipated to affect, the sale of its properties and intends to take all
necessary and reasonable action to assure that its properties and its proposed
marketing programs are in compliance with such regulations, but there can be no
assurance that the Company will be able to timely comply with all regulatory
changes in all jurisdictions in which the Company's properties are presently
offered for sale to the public.
Real estate salespersons must, absent exemptions which may be available to
employees of the property owner, be licensed in the jurisdiction in which they
perform their activities. Real estate brokerage companies in Florida, as well as
their brokers and salespersons, must be licensed by the Florida Real Estate
Commission.
MISCELLANEOUS
In addition, various other subsidiaries and divisions of the Company are
subject to regulation by local, state and federal agencies. Such regulation
extends to the licensing of operations, operating areas and personnel; the
establishment of safety and service standards; and various other matters.
13
ITEM 3
LEGAL PROCEEDINGS
In the action styled Garcia v. Deltona et. al, Case No. 86-03542, filed in
the Circuit Court for Dade County, Florida, on January 30, 1986, the plaintiff
sought to recover $2,000,000 allegedly paid to the Company on four installment
land sales contracts, claiming fraud and misrepresentation on the part of the
Company. On October 27, 1995, the parties resolved and settled their dispute by
the Company transferring alternative property for settlement purposes. The
Company exchanged releases with the plaintiff, which released the Company from
any further obligations, except certain obligations and warranties contained in
the modification of the Settlement Agreement. The Company believes that it is in
compliance with the warranties and obligations under the Settlement Agreement.
In the action entitled Estate of Bobinger, et al. v. The Deltona
Corporation, Case No. 87-45051, filed in the Circuit Court of the Eleventh
Judicial Circuit in and for Dade County, Florida, the plaintiff sued the Company
for alleged breach of contract and for recovery of monies paid on contracts for
Marco property that will not be developed by the Company. The matter was
settled. This matter has been dismissed in accordance with the order of the
Circuit Court dismissing the case with prejudice entered September 25, 1996. The
Company does not expect further liability from this claim.
In the action styled Lee Su Wen Ni et. al. v. The Deltona Corporation and
Scafholding B.V., Case No. 95-4422-CA-E, filed in the Circuit Court of Marion
County, Florida on October 11, 1995, the plaintiff alleges that the liquidated
damages provision in the Company's installment contracts for the sale of its
properties is unenforceable under Florida Law and contests the method utilized
by the Company to calculate actual damages in the event of contract
cancellations. As part of the complaint, the plaintiff is seeking certification
as a class action, as well as unspecified compensatory damages, together with
interest, costs and fees. The Company filed a Motion to Dismiss in response to
the plaintiff's complaint. The trial court dismissed the claim of the class
representative against the Company and against Scafholding B.V. An appeal from
that dismissed is pending. There has been no ruling by the appellate court. In
the event that this appeal is successful and if, class certification is
authorized, and if the Company is not successful in its defenses, a substantial
claim could be asserted against the Company.
In the action styled Joseph Mancilla, Jr. v. The Deltona Corporation, filed
in the Circuit Court of Dade County, Florida, Case No. 94-09116, the plaintiff,
Joseph Mancilla, Jr., prior Senior Vice President of the Company, sued the
Company on May 17, 1994 for alleged breach of employment contract seeking
damages in excess of $391,000 plus an unspecified amount in employee benefits,
costs and attorneys' fees. The Company settled the matter and a general release
was entered into in 1995. The Company satisfied its settlement obligations in
January 1997 and a Notice of Voluntary Dismissal, with prejudice, was filed.
The Company is also a party to certain other legal and administrative
proceedings arising in the ordinary course of business. The outcome will not, in
the opinion of the Company, have a material adverse effect on the business or
financial condition of the Company.
14
ITEM 5
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock was traded on the New York and Pacific Stock
Exchanges under the ticker symbol DLT. On April 6, 1994, both the New York and
Pacific Stock Exchanges suspended the Company's Common Stock from trading and
instituted procedures to delist the Company's Common Stock. On June 16, 1994,
the Company's Common Stock was formally removed from listing and registration on
the New York Stock Exchange. As of December 31, 1996, the Company's Common Stock
was traded on a limited basis in the over-the-counter markets. The average price
at which the stock was traded at the end of the first, second, third and fourth
quarters of 1996 is as follows:
March 31, 1996 $ .300
June 30, 1996 $ .125
September 30, 1996 $ .097
December 31, 1996 $ .196
The Company has never paid cash dividends on its Common Stock. The
Company's loan agreements contain certain restrictions which currently prohibit
the Company from paying dividends on its Common Stock.
15
ITEM 6
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table summarizes selected consolidated financial information
and should be read in conjunction with the Consolidated Financial Statements.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Consolidated Income Statement Data
(in thousands except per share amounts)
Years Ended
-----------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 25,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
Revenues ......................... $ 8,650 $ 6,688 $ 8,541 $ 12,099 $ 12,217
Costs and expenses................ 9,877 9,593 12,447 20,871 18,935
--------- ---------- ---------- ---------- ----------
Loss from continuing operations
before taxes and extraordinary
items............................ (1,227) (2,905) (3,906) (8,772) (6,718)
Provision for income taxes........ -0- -0- -0- -0- 90
--------- ---------- ---------- ---------- ----------
Loss from operations
before extraordinary items....... (1,227) (2,905) (3,906) (8,772) (6,808)
Extraordinary items:
Gain (loss) from debt
restructuring................... -0- -0- -0- -0- 10,161
Gain on settlement related to
the Marco refund obligation..... 331 702 -0- -0- 3,983
--------- ----------- ---------- ---------- ----------
Net income (loss) applicable
to common stock................. $ (896) $ (2,203) $ (3,906) $ (8,772) $ 7,336
========= =========== ========== ========== ==========
Per common share amounts:
Continuing operations......... $ (.18) $ (.43) $ (.59) $ (1.45) $ (1.19)
Extraordinary items........... .05 .10 .00 .00 2.48
--------- ----------- ---------- ---------- ----------
Net income (loss)................. $ (.13) $ (.33) $ (.59) $ (1.45) $ 1.29
========= =========== ========== =========== ==========
Weighted average common shares
outstanding...................... 6,729,648 6,699,923 6,514,988 6,056,743 5,694,236
========= =========== ========== =========== ==========
Consolidated Balance Sheet Data
(in thousands)
December 31, December 31, December 31, December 31, December 25,
1996 1995 1994 1993 1992
----------- ------------ ------------ ------------ ------------
Total assets.................... $ 19,442 $ 19,180 $ 22,109 $ 26,565 $ 37,050
=========== ========== ========= ========= =========
Liabilities.................... $ 37,301 $ 36,192 $ 38,930 $ 40,856 $ 42,569
Stockholders' equity (deficiency). (17,879) (17,013) (16,821) (14,291) (5,519)
----------- ---------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficiency).............. $ 19,422 $ 19,180 $ 22,109 $ 26,565 $ 37,050
=========== ========== ========= ========= =========
16
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On June 19, 1992, the Company completed a transaction with Selex, which
resulted in a change in control of the Company. Under the transaction, Selex
loaned the Company $3,000,000 collateralized by a first mortgage on certain of
the Company's property in its St. Augustine Shores, Florida community (the
"First Selex Loan"). The First Selex Loan initially bears interest at the rate
of 10% per annum with a term of four years and payment of interest deferred for
the first 18 months.
In conjunction with the First Selex Loan: (i) Empire of Carolina, Inc.
("Empire") sold Selex its 2,220,066 shares of the Company's Common Stock and
assigned Selex its $1,000,000 Note from the Company, with $225,000 of interest
accrued thereon; (ii) Maurice A. Halperin, Chairman of the Board of Empire and
former Chairman of the Board of the Company, forgave payment of the $200,000
salary due him for the period of April, 1990 through April, 1991, which was in
arrears; and (iii) certain changes occurred in the composition of the Company's
Board of Directors. Namely, the six directors serving on the Company's Board who
were previously designated by Empire resigned and four Selex designees (Messrs.
Marcellus H.B. Muyres, Antony Gram, Cornelis van de Peppel and Cornelis L.J.J.
Zwaans) were elected to serve as directors in their stead. Marcellus H.B. Muyres
was appointed Chairman of the Board and Chief Executive Officer of the Company.
These directors, as well as Leonardus G.M. Nipshagen, a Selex designee, were
then elected as directors at the Company's 1992 Annual Meeting and re-elected at
the Company's 1993 Annual Meeting.
As part of the Selex transaction, Selex was granted an option, approved by
the holders of a majority of the outstanding shares of the Company's Common
Stock at the Company's 1992 Annual Meeting, to convert the Selex Loan, or any
portion thereof, into a maximum of 850,000 shares of the Company's Common Stock
at a per share conversion price equal to the greater of (i) $1.25 or (ii) 95% of
the market price of the Company's Common Stock at the time of conversion, but in
no event greater than $4.50 per share (the "Option"). However, on September 14,
1992, Selex formally waived and relinquished its right to exercise the Option as
to 250,000 shares of the Company's Common Stock to enable the Company to settle
certain litigation involving the Company through the issuance of approximately
250,000 shares of the Company's Common Stock to the claimants, without
jeopardizing the utilization of the Company's net operating loss carryforward.
On February 17, 1994, Selex exercised the remaining full 600,000 share Option at
a conversion price of $1.90 per share, such that $1,140,000 in principal was
repaid under the First Selex Loan through such conversion. As a consequence of
such conversion, Selex holds 2,820,066 shares of the Company's Common Stock
(41.9% of the outstanding shares of Common Stock of the Company based upon the
number of shares of the Company's Common Stock outstanding as of March 21,
1997).
Pursuant to the Selex transaction, $1,000,000 of the proceeds from the
First Selex Loan was used by the Company to acquire certain commercial and
multi-family properties at the Company's St. Augustine Shores community at their
net appraised value, from Mr. Muyres and certain entities affiliated with
Messrs. Zwaans and Muyres. Namely, (i) $416,000 was used to acquire 48
undeveloped condominium units (twelve 4 unit building sites) and 4 completed
(and rented) condominium units from Conquistador, in which Messrs. Zwaans and
Muyres serve as directors, as well as President and Secretary/Treasurer,
respectively; (ii) $485,000 was used to acquire 4 commercial lots from Swan
Development Corporation ("Swan"), in which Messrs. Zwaans and Muyres also serve
as directors, as well as President and Secretary, respectively; and (iii)
approximately $99,000 was used to reacquire, from Mr. Muyres, all of his rights,
title and interest in a certain contract with the Company for the purchase of a
commercial tract in St. Augustine Shores, Florida. None of the commercial land
and multi-family property acquired by the Company from Mr. Muyres and certain
entities affiliated with Messrs. Zwaans and Muyres collateralizes the First
Selex Loan. In March, 1994, Conquistador exercised its right to repurchase
certain of the multi-family property from the Company (which right had been
granted in connection with the June, 1992 transaction) at a price of $312,000,
of which $260,000 was paid in cash to the Company and $52,000 was applied to
reduce interest due to Selex under the Second Selex Loan (the "First
Conquistador Acquisition").
17
In December, 1992, Mr. Gram, a director of the Company and beneficial owner
of the Common Stock of the Company held by Selex, acquired all of the Company's
outstanding bank debt and then assigned same to Yasawa, of which Mr. Gram is
also the beneficial owner. Yasawa simultaneously completed a series of
transactions with the Company which involved the transfer of certain assets to
Yasawa or its affiliated companies, the acquisition by Yasawa of 289,637 shares
of the Company's Common Stock through the exercise of warrants previously held
by the banks, the provision of a $1,500,000 line of credit to the Company and
the restructuring of the remaining debt as a $5,106,000 Yasawa Loan. Principal
repayments aggregating $136,000 have reduced the Yasawa Loan to $4,764,600 as of
December 31, 1996. On April 30, 1993, Selex loaned the Company an additional
amount of $1,000,000 pursuant to the Second Selex Loan and since July 1, 1993
made further loans to the Company aggregating $4,400,000 under the Third Selex
Loan. The Second Selex Loan has been satisfied and principal of $1,381,000 has
been repaid under the Third Selex Loan through December 31, 1996. As of December
31, 1996, Yasawa has loaned the Company an additional sum of $6,012,000 pursuant
to the Second Yasawa Loan. As a consequence of these transactions, the Company
had loans outstanding from Selex, Yasawa and their affiliates on December 31,
1996 in the aggregate amount of approximately $22,368,000. On May 22, 1995, the
Company closed a transaction with Conquistador (the "Second Conquistador
Acquisition") for the sale of an administration building and a multi-family site
in the Company's St. Augustine Shores community as well as the remaining lot
inventory in the Company's FeatherNest community at Marion Oaks in consideration
for the satisfaction of $2,599,300 of principal and accrued interest on the
Second and Third Selex Loans. On that same date, but in a separate transaction,
the Company also sold to Conquistador Development Corporation (the "Third
Conquistador Acquisition") four single family residential lots in the St.
Augustine Shores community for $100,000 in cash. These transactions were
accounted for in accordance with generally accepted accounting principals for
these types of related party transactions. Accordingly, the resulting gain of
$1,900,000 was treated as a contribution of capital and recorded directly to
capital surplus. The loans from Selex, Yasawa and their affiliates are secured
by substantially all of the assets of the Company. See Note 5 to Consolidated
Financial Statements.
On March 10, 1994, the Company was advised that Selex filed an Amendment to
its Schedule 13D with the Commission. In the Amendment, Selex reported that it,
together with Yasawa and their affiliates, were uncertain as to whether they
would provide any further funds to the Company. The Amendment further stated
that Selex, Yasawa and their affiliates were seeking third parties to provide
financing for the Company and that as part of any such transaction, they would
be willing to sell or restructure all or a portion of their loans and Common
Stock in the Company.
The Company, Selex and Yasawa entered into loan modification agreements in
which all accrued interest was converted into non-interest bearing principal at
the earlier of the maturity date or the default date. Accordingly, at December
31, 1995, $4,200,000 of accrued interest was reclassified as principal. The
loans were also modified to formalize the elimination of the default interest
rate provisions in each of the applicable loan agreements.
The Company has stated in previous filings with the Commission and
elsewhere herein that the obtainment of additional funds to implement its
marketing program and achieve the objectives of its business plan is essential
to enable the Company to maintain operations and continue as a going concern.
Since December, 1992, the Company has been dependent on loans and advances from
Selex, Yasawa and their affiliates in order to implement its marketing program
and assist in meeting its working capital requirements. As previously stated,
during the last nine months of 1993, Selex, Yasawa and their affiliates loaned
the Company an aggregate of $4,400,000 pursuant to Third Selex Loan. Funds
advanced under the Third Selex Loan enabled the Company to commence
implementation of the majority of its marketing program in the third quarter of
1993. The full benefits of the program were not realized in 1993 and the Company
was unable to secure financing in 1994 to meet its working capital requirements
and continue its marketing program. Commencing in 1994, Yasawa advanced
additional funds (the "Second Yasawa Loan") totaling $6,012,000 as of December
31, 1996, to meet the Company's minimum working capital requirements, to pay a
portion of delinquent real estate taxes, to pay settlements with certain trade
creditors and to settle certain litigation.
As a consequence of its liquidity position, the Company has defaulted on
certain obligations, including its previously described escrow obligations to
the Division pursuant to the Company's 1992 Consent Order and its obligation to
make required payments under loans from Selex, Yasawa and their affiliates.
Furthermore, the Company has not paid delinquent real estate taxes which
aggregate approximately $2,371,000 as of December 31, 1996; non-payment of these
delinquent taxes may adversely affect the financial condition of the Company.
18
The Company is continuing to seek third parties to provide financing. There
can be no assurance, however, that any financing will be obtained. Accordingly,
the Company's Board of Directors will consider other appropriate action given
the severity of the Company's liquidity position including, but not limited, to
filing for protection under the federal bankruptcy laws. See "Business: Recent
Developments", and Notes 1, 5 and 8 to Consolidated Financial Statements.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
REVENUES
Total revenues were $8,650,000 for 1996 compared to $6,688,000 for 1995.
Gross land sales were $6,816,000 for 1996 versus $3,623,000 for 1995. Net
land sales (gross land sales less estimated uncollectible installment sales and
contract valuation discount) increased to $4,296,000 for 1996 from $2,394,000
for 1995. The increase in sales reflects the Company's marketing program which
was initiated in 1995.
There were no bulk land sales in 1996 and 1995. In light of the Company's
diminished bulk land sales inventory it is anticipated that in the future the
Company will produce a negligible volume of bulk land sales. See "Liquidity and
Capital Resources: Mortgages and Similar Debt".
The Company re-entered the single-family housing business in December,
1992. Revenues are not recognized from housing sales until the completion of
construction and passage of title. Housing revenues were $1,202,000 for 1996
compared to $1,383,000 in 1995. The decrease in housing revenues is directly
related to the reduction in the Company's housing advertising and promotional
programs for housing due to limited working capital. Housing revenues decreased
in both 1995 and 1996 due to the lack of an advertising and promotion program
The following table reflects the Company's real estate product mix for 1996
and 1995 (in thousands):
Years Ended
--------------------------------
December 31, December 31,
1996 1995
------------ ------------
Gross Land Sales:
Retail sales*............................................ $ 6,816 $ 3,623
------- -------
Total................................................ 6,816 3,623
------- -------
Housing Sales:
Single Family............................................ 1,188 1,328
Vacation Ownership....................................... 14 55
------- -------
Total................................................ 1,202 1,383
------- -------
Total Real Estate.................................... $ 8,018 $ 5,006
======= =======
- ------------
* 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 years ended December 31, 1996 and December 31, 1995 were
$6,612,000 and $6,260,000, respectively. The Company had a backlog of $2,089,000
and $3,100,000 in unrecognized sales as of December 31, 1996 and December 31,
1995, respectively. 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. See Note 1 to the
Consolidated Financial Statements.
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 $1,008,000 in 1996 as compared to $1,052,000 for
1995. Due to the Company's financial condition, the Company has done minimal
development work in the last two years.
Interest income was $1,464,000 for 1996 compared to $1,019,000 for 1995.
This increase is the result of higher contract receivable balances.
19
Other revenues were $680,000 for 1996 compared to $840,000 in 1995. Other
revenues are generated principally by the Company's title insurance and real
estate brokerage subsidiaries.
Included in the 1996 results is an extraordinary gain of $331,000 resulting
from the final settlement of the Marco class action litigation. Included in the
1995 results is an extraordinary gain of $702,000 resulting from a reduction in
the allowance for the guarantee pursuant to the final settlement of the Marco
class action litigation.
In 1996 the Company evaluated its property, plant and equipment. As a
result, the Company wrote off approximately $1,044,000 of obsolete assets, most
of which were fully depreciated. The Company recognized a loss of $40,000 as a
result of this write off.
COSTS AND EXPENSES
Costs and expenses were $9,877,000 for 1996 compared to $9,593,000 in 1995.
Cost of sales totaled $2,673,000 for 1996 versus $2,432,000 for 1995. This
increase is primarily due to higher land sales in 1996.
In 1995, the Company recorded a provision of $650,000 representing the
Company's estimate of its liability to replace or repurchase canceled contracts
receivable under the recourse provisions of its prior sales of contracts and
mortgages receivable.
Commissions, advertising and other selling expenses totaled $2,457,000 for
1996 versus $1,889,000 for 1995. The increase is the result of higher retail
sales levels. Advertising and promotional expenditures decreased to $118,000 in
1996 from $151,000 in 1995 as a result of the reduction in the Company's
marketing programs. Other selling expenses decreased to $514,000 in 1996 from
$550,000 in 1995.
General and administrative expenses were $1,715,000 in 1996 versus
$1,869,000 for 1995. General and administrative expenses have decreased
primarily due to overhead reductions.
Real estate tax expense was $1,251,000 in 1996 compared to $1,111,000 in
1995. Included in real estate tax expense is delinquent interest and
administrative fees on delinquent taxes, which accrue interest at 18% per annum.
Total interest cost (none of which represents capitalized) was $1,781,000
for 1996 as compared to $1,642,000 for 1995. The increase in interest expense is
the result of the increase in debt. No interest was capitalized in 1996 and 1995
since the Company did minimal land development work at its communities.
NET INCOME
The Company reported a net loss of $896,000 for 1996, compared to a net
loss of $2,203,000 for 1995. Included in the 1996 results is an extraordinary
gain of $331,000 resulting from the final settlement of the Marco class action
litigation. Included in the 1995 results is an extraordinary gain of $702,000
resulting from a reduction in the allowance for the guarantee pursuant to the
final settlement of the Marco class action litigation.
20
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
REVENUES
Total revenues were $6,688,000 for 1995 compared to $ 8,541,000 for 1994.
Gross land sales were $3,623,000 for 1995 versus $2,994,000 for 1994. Net
land sales (gross land sales less estimated uncollectible installment sales and
contract valuation discount) increased to $2,394,000 for 1995 from $2,058,000
for 1994. The increase in sales reflects the Company's marketing program which
was initiated in 1995.
There were no bulk land sales in 1995 as compared to bulk land sales of
$315,000 in 1994. In light of the Company's diminished bulk land sales inventory
it is anticipated that in the future the Company will produce a negligible
volume of bulk land sales. See "Liquidity and Capital Resources: Mortgages and
Similar Debt".
The Company re-entered the single-family housing business in December,
1992. Revenues are not recognized from housing sales until the completion of
construction and passage of title. Housing revenues were $1,383,000 for 1995
compared to $2,543,000 in 1994. Housing revenues decreased in 1995 due to the
lack of an advertising and promotion program.
The following table reflects the Company's real estate product mix for 1995
and 1994 (in thousands):
Years Ended
---------------------------
December 31, December 31,
1995 1994
------------ ------------
Gross Land Sales:
Bulk sales............................................... $ 0 $ 315
Retail sales*............................................ 3,623 2,679
------ -------
Total................................................ 3,623 2,994
------ -------
Housing Sales:
Single Family............................................ 1,328 2,506
Vacation Ownership....................................... 55 37
------ -------
Total................................................ 1,383 2,543
------ -------
Total Real Estate.................................... $5,006 $ 5,537
====== =======
------------
* 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 years ended December 31, 1995 and December 31, 1994 were
$6,260,000 and $1,910,000, respectively. The Company had a backlog of $3,100,000
and $906,000 in unrecognized sales as of December 31, 1995 and December 31,
1994, respectively. 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. See Note 1 to the
Consolidated Financial Statements.
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 $1,052,000 in 1995 as compared to $1,214,000 for
1994. The decrease was due to the Company's financial condition which caused the
Company to curtail development in the first quarter of 1994.
Interest income was $1,019,000 for 1995 compared to $1,046,000 for 1994.
This decrease is the result of lower escrow balances.
Other revenues were $840,000 for 1995 compared to $629,000 in 1994. Other
revenues are generated principally by the Company's title insurance and real
estate brokerage subsidiaries.
Included in the 1995 results is an extraordinary gain of $702,000 related
to the settlement of the Marco refund obligation.
Included in the 1994 results is a gain of $1,051,000 from the termination
of the lease on the Company's corporate headquarters in Miami.
21
COSTS AND EXPENSES
Costs and expenses were $9,593,000 for 1995 compared to $12,447,000 in
1994. Cost of sales totaled $2,432,000 for 1995 versus $3,845,000 for 1994.
These decreases are primarily due to lower housing sales in 1995. The Company
completed its Compromise and Settlement Agreement program with its trade
creditors during the third quarter of 1994. Accordingly, costs and expenses were
reduced by approximately $430,000 as a result of these settlements.
In 1995, the Company recorded a provision of $650,000 representing the
Company's estimate of its liability to replace or repurchase canceled contracts
receivable under the recourse provisions of its prior sales of contracts and
mortgages receivable.
Commissions, advertising and other selling expenses totaled $1,889,000 for
1995 versus $2,608,000 for 1994. Advertising and promotional expenditures
decreased to $151,000 in 1995 from $275,000 in 1994 as a result of the reduction
in the Company's marketing programs. Other selling expenses decreased to
$550,000 in 1995 from $1,595,000 in 1994 as a result of cost reductions.
General and administrative expenses were $1,869,000 in 1995 versus
$2,984,000 for 1994. General and administrative expenses have decreased
primarily due to overhead reductions and settlement of the Company's lease
obligation on its corporate headquarters in October 1994.
Real estate tax expense was $1,111,000 in 1995 compared to $1,163,000 in
1994. Included in real estate tax expense is delinquent interest and
administrative fees on 1993 and 1994 delinquent taxes, which accrue interest at
18% per annum.
Interest expense was $1,642,000 for 1995, as compared to $1,847,000 for
1994. The decrease in interest expense is the result of the decrease in debt. No
interest was capitalized in 1995 and 1994 since the Company had curtailed land
development work at its communities.
NET INCOME
The Company reported a net loss of $2,203,000 for 1995, compared to a net
loss of $3,906,000 for 1994. Included in the 1995 results is an extraordinary
gain of $702,000 related to the settlement of the Marco refund obligation.
Included in 1994 results is a gain of $1,051,000 from the termination of the
lease on the Company's corporate headquarters in Miami.
REGULATORY DEVELOPMENTS WHICH MAY AFFECT FUTURE OPERATIONS
In Florida, as in many growth areas, local governments have sought to limit
or control population growth in their communities through restrictive zoning,
density reduction, the imposition of impact fees and more stringent development
requirements. Although the Company has taken such factors into consideration in
its master plans, the increased regulation has lengthened the development
process and added to development costs.
On a statewide level, the Florida Legislature adopted and implemented the
Florida Growth Management Act of 1985 (the "Act") to aid local governments
efforts to discourage uncontrolled growth in Florida. The Act precludes the
issuance of development orders or permits if public facilities such as
transportation, water and sewer services will not be available concurrent with
development. Development orders have been issued for, and development has
commenced in, the Company's existing communities (with development being
virtually completed in certain of these communities). Thus, such communities are
less likely to be affected by the new growth management policies than future
communities. Any future communities developed by the Company will be strongly
impacted by new growth management policies. Since the Act and its implications
are consistently being re-examined by the State, together with local governments
and various state and local governmental agencies, the Company cannot further
predict the timing or the effect of new growth management policies, but
anticipates that such policies may increase the Company's permitting and
development costs.
22
In addition to Florida, other jurisdictions in which the Company's
properties are offered for sale have recently strengthened, or are considering
strengthening, their regulation of subdividers and subdivided lands in order to
provide further assurances to the public, particularly given the adverse
publicity surrounding the industry which existed in 1990. The Company has
attempted to take appropriate steps to modify its marketing programs and
registration applications in the face of such increased regulation, but has
incurred additional costs and delays in the marketing of certain of its
properties in certain states and countries. For example, the Company has
complied with regulations of certain states which require that the Company sell
its properties to residents of those states pursuant to a deed and mortgage
transaction, regardless of the amount of the down payment. The Company intends
to continue to monitor any changes in statutes or regulations affecting, or
anticipated to affect, the sale of its properties and intends to take all
necessary and reasonable action to assure that its properties and its proposed
marketing programs are in compliance with such regulations, but there can be no
assurance that the Company will be able to timely comply with all regulatory
changes in all jurisdictions in which the Company's properties are presently
offered for sale to the public.
LIQUIDITY AND CAPITAL RESOURCES
MORTGAGES AND SIMILAR DEBT
Indebtedness under various purchase money mortgages and loan agreements is
collateralized by substantially all of the Company's assets, including stock of
certain wholly-owned subsidiaries.
The Company, Selex and Yasawa entered into loan modification agreements in
which all accrued interest was converted into non-interest bearing principal at
the earlier of the maturity date or the default date. Accordingly, at December
31, 1995, $4,200,000 of accrued interest was reclassified as non-interest
bearing principal. The loans were also modified to formalize the elimination of
the default interest rate provisions in each of the applicable loan agreements.
The following table presents information with respect to mortgages and
similar debt (in thousands):
Years Ended
------------------------------
December 31, December 31,
1996 1995
------------ ------------
Mortgage Notes Payable .................. $ 18,707 $ 16,717
Other Loans.............................. 3,661 3,661
-------- --------
Total mortgages and similar debt....... $ 22,368 $ 20,378
======== ========
Included in Mortgage Notes Payable are the First Selex Loan ($2,722,000 as
of December 31, 1996), the Third Selex Loan ($3,816,000 as of December 31,
1996), the Yasawa Loan ($5,829,000 as of December 31, 1996) and the Second
Yasawa Loan ($6,340,000 as of December 31, 1996). Other loans include the
$1,656,000 Empire note and the $2,005,000 Scafholding Loan.
These mortgage notes payable and other loans are in default as of December
31, 1996 due to the non-payment of principal. The lenders have not taken any
other action as a result of these defaults.
On June 19, 1992, Selex loaned the Company the sum of $3,000,000 pursuant
to the First Selex Loan. The First Selex Loan is collateralized by a first
mortgage on certain of the Company's unsold, undeveloped property in its St.
Augustine Shores, Florida community. The Loan matures on June 15, 1996 and
provides for principal to be repaid at 50% of the net proceeds per lot for lots
requiring release from the mortgage, with the entire unpaid balance becoming due
and payable at the end of the four year term. It initially bears interest at the
rate of 10% per annum, with payment of interest deferred for the initial 18
months of the Loan and interest payments due quarterly thereafter. As part of
the Selex transaction, Selex was granted an option, approved by the holders of a
majority of the outstanding shares of the Company's Common Stock at the
Company's 1992 Annual Meeting, which, as modified, enabled Selex to convert the
First Selex Loan, or any portion thereof, into a maximum of 600,000 shares of
the Company's Common Stock at a per share conversion price equal to the greater
of (i) $1.25 or (ii) 95% of the market price of the Company's Common Stock at
the time of conversion, but in no event greater
23
than $4.50 per share (the "Option"). On February 17, 1994, Selex exercised the
Option, in full, at a conversion price of $1.90 per share, such that $1,140,000
in principal was repaid under the First Selex Loan through such conversion. As
of March 21, 1997, the Company was in default of the First Selex Loan.
One million dollars of the proceeds from the First Selex Loan was used by
the Company to acquire certain commercial and multi-family properties at the
Company's St. Augustine Shores community at their net appraised value, from Mr.
Muyres and certain entities affiliated with Messrs. Zwaans and Muyres. Namely,
(i) $416,000 was used to acquire 48 undeveloped condominium units (twelve 4 unit
building sites) and 4 completed (and rented) condominium units from
Conquistador, in which Messrs. Zwaans and Muyres serve as directors, as well as
President and Secretary/Treasurer, respectively; (ii) $485,000 was used to
acquire 4 commercial lots from Swan, in which Messrs. Zwaans and Muyres also
serve as directors, as well as President and Secretary, respectively; and (iii)
approximately $99,000 was used to reacquire, from Mr. Muyres, all of his rights,
title and interest in that certain contracts with the Company for the purchase
of a commercial tract in St. Augustine Shores, Florida. None of the commercial
and multi-family property acquired by the Company from Mr. Muyres and certain
entities affiliated with Messrs. Zwaans and Muyres collateralizes the First
Selex Loan. In March, 1994, Conquistador exercised its right to repurchase
certain multi-family property from the Company (which right had been granted in
connection with the June, 1992 Selex transaction) at a price of $312,000, of
which $260,000 was paid in cash to the Company and $52,000 was applied to reduce
interest due to Selex under the Second Selex Loan (the "First Conquistador
Acquisition").
On December 2, 1992, the Company entered into various agreements relating
to certain of its assets and the restructuring of its debt with Yasawa, which is
beneficially owned by Mr. Antony Gram. The consummation of these agreements,
which are further described below, was conditioned upon the acquisition by Mr.
Gram of the Company's outstanding bank loan.
On December 4, 1992, Mr. Gram entered into an agreement with the lenders,
pursuant to which he acquired the bank loan of approximately $25,150,000
(including interest and fees) for a price of $10,750,000. In conjunction with
such transaction, the lenders transferred to Mr. Gram the warrants which they
held that entitled the holder to purchase an aggregate of 277,387 shares of the
Company's Common Stock at an exercise price of $1.00 per share. Immediately
after the acquisition of the bank loan, Mr. Gram transferred all of his interest
in the bank loan, including the warrants, to Yasawa.
On December 11, 1992, the Company consummated the December 2, 1992
agreements with Yasawa. Under these agreements, Yasawa, its affiliates and the
Company agreed as follows: (i) the Company sold certain property at its Citrus
Springs community to an affiliate of Yasawa in exchange for approximately
$6,500,000 of debt reduction credit; (ii) an affiliate of Yasawa and the Company
entered into a joint venture agreement with respect to the Citrus Springs
property, providing for the Company to market such property and receive an
administration fee from the venture (in March, 1994, the Company and the
affiliate agreed to terminate the venture); (iii) the Company sold certain
contracts receivable at face value to an affiliate of Yasawa for debt reduction
credit of approximately $10,800,000; (iv) the Company sold the Marco Shores
Country Club and Golf Course to an affiliate of Yasawa for an aggregate sales
price of $5,500,000, with the affiliate assuming an existing first mortgage of
approximately $1,100,000 and the Company receiving debt reduction credit of
$2,400,000, such that the Company obtained cash proceeds from this transaction
of $2,000,000, which amount was used for working capital; (v) an affiliate of
Yasawa agreed to lease the Marco Shores Country Club and Golf Course to the
Company for a period of approximately one year; (vi) an affiliate of Yasawa and
the Company agreed to amend the terms of the warrants to increase the number of
shares issuable upon their exercise from 277,387 shares to 289,637 shares and to
adjust the exercise price to an aggregate of approximately $314,000; (vii)
Yasawa exercised the warrants in exchange for debt reduction credit of
approximately $314,000; (viii) Yasawa released certain collateral held for the
bank loan; (ix) an affiliate of Yasawa agreed to make an additional loan of up
to $1,500,000 to the Company, thus providing the Company with a future line of
credit (all of which was drawn and outstanding as of March 21, 1997); and (x)
Yasawa agreed to restructure the payment terms of the remaining $5,106,000 of
the bank loan as a loan from Yasawa (the "Yasawa Loan").
The Yasawa Loan bears interest at the rate of 11% per annum, with payment
of interest deferred until December 31, 1993, when only accrued interest became
payable. Commencing January 31, 1994, principal and interest became payable
monthly, with all unpaid principal and accrued interest being due and payable on
December 31, 1997. As of March 21, 1997, $6,478,100 in principal and accrued
interest was in default under the Yasawa Loan.
24
On April 30, 1993 Selex loaned the Company an additional $1,000,000
collateralized by a first mortgage on certain of the Company's property in its
Marion Oaks, Florida community (the "Second Selex Loan"). Interest under the
Second Selex Loan was 11% per annum, deferred until December 31, 1993, and
principal was to be repaid at $3,000 per lot for lots requiring release from the
mortgage, with the entire unpaid principal balance and interest accruing from
January 1, 1994 to April 30, 1994 due and payable on April 30, 1994. Although
Selex had certain conversion rights under the Second Selex Loan in the event the
Company sold any Common Stock or Preferred Stock prior to payment in full of all
amounts due to Selex under the Second Selex Loan, such rights were voided. The
Second Selex Loan was satisfied on May 22, 1995 through the closing of the
Second Conquistador Acquisition, discussed below.
From July 9, 1993 through December 31, 1993, Selex loaned the Company an
additional $4,400,000 collateralized by a second mortgage on certain of the
Company's property on which Selex and/or Yasawa hold a first mortgage pursuant
to a Loan Agreement dated July 14, 1993 and amendments thereto (the "Third Selex
Loan"). The Third Selex Loan bears interest at 11% per annum, with interest
deferred until December 31, 1993. Principal is to be repaid at $3,000 per lot
for lots requiring release from the mortgage, with the entire unpaid principal
balance and interest accruing from January 1, 1994 to April 30, 1994 due and
payable on April 30, 1994. The Second Conquistador Acquisition, discussed below,
closed on May 22, 1995, provided a reduction of the debt due and payable under
the Third Selex Loan. As of March 21, 1997, the remaining balance of $4,229,200
in principal and accrued interest remained unpaid and in default.
In February, 1994, Yasawa loaned the Company an additional amount of
approximately $514,900 at an interest rate of 8% per annum (the "Second Yasawa
Loan"). Since May, 1994, additional amounts were advanced to the Company under
the Second Yasawa Loan to enable the Company to pay certain essential expenses,
including payment of certain real estate taxes, and effectuate settlements with
the Company's principal creditors. As of March 21, 1997, an aggregate amount of
$6,012,000 had been advanced to the Company under the Second Yasawa Loan and the
balance of $6,859,300 in principal and accrued interest remains unpaid.
On May 22, 1995, the Company closed a transaction with Conquistador (the
"Second Conquistador Acquisition") for the sale of an administration building
and a multi-family site in the Company's St. Augustine Shores community as well
as the remaining lot inventory in the Company's FeatherNest community at Marion
Oaks in consideration for the satisfaction of $2,599,300 of principal and
accrued interest on the Second and Third Selex Loans. In a separate transaction
which also closed on the same date, the Company sold to Conquistador (the "Third
Conquistador Acquisition") four single family residential lots in the St.
Augustine Shores community for $100,000 in cash. These transactions were
accounted for in accordance with generally accepted accounting principals for
these types of related party transactions. Accordingly, the resulting gain of
$1,900,000 was treated as a contribution of capital and recorded directly to
capital surplus.
As previously stated, Messrs. Muyres and Zwaans also serve as directors and
executive officers of M&M First Coast Realty ("M&M"). The Company had leased
certain office space to M&M at its St. Augustine Shores community pursuant to a
Lease Agreement dated August 10, 1990. A payment of approximately $21,300 in
delinquent rental payments was made on May 22, 1995 upon the closing of the
Second Conquistador Acquisition, which included the sale of the St. Augustine
Administration Building.
In 1996, Yasawa loaned the Company $2,000,000 which was used to pay
approximately $979,000 of delinquent real estate taxes and $993,000 of which was
used to satisfy the remaining obligation on the Marco class action settlement
agreement. As part of the settlement agreement, Swan Development Corporation, an
affiliate of Yasawa, acquired four condominium units from the class action
trustee for $182,000, the same value that the trustee attributed to the units on
September 14, 1992.
At December 31, 1995, $4,200,000 of accrued interest due to Selex, Yasawa
and their affiliates was reclassified as non-interest bearing principal. Through
March 21, 1997, $1,140,000 in principal was repaid under the First Selex Loan
through the exercise of the above described Option, the Second Selex Loan was
repaid in full, $1,380,900 in principal was repaid under the Third Selex Loan,
and $136,000 in principal and $346,000 in accrued interest was repaid under the
Yasawa loan. As of March 21, 1997, the Company had loans outstanding from Selex,
Yasawa and their affiliates in the aggregate amount of approximately
$24,522,200, including interest, all of which are in default, including
approximately $8,986,900, which
25
is owed to Selex, including accrued and unpaid interest of approximately
$792,700 (10% per annum on the First Selex Loan, 11% per annum on the Third
Selex Loan and 12% per annum on the $1,000,000 Empire Note assigned to Selex);
approximately $13,337,400, which is owed to Yasawa, including accrued and unpaid
interest of approximately $1,168,100 (11% per annum on the Yasawa Loan and 8%
per annum on the Second Yasawa Loan); and approximately $2,228,000, which is
owed to an affiliate of Yasawa, including accrued and unpaid interest of
approximately $223,000 (12% per annum). The loans from Selex, Yasawa and their
affiliates are secured by substantially all of the assets of the Company.
On March 10, 1994, the Company was advised that Selex filed an Amendment to
its Schedule 13D filed with the Commission. In the Amendment, Selex reported
that it, together with Yasawa and their affiliates, were uncertain as to whether
they would provide any further funds to the Company. The Amendment further
stated that Selex, Yasawa and their affiliates were seeking third parties to
provide financing for the Company and that as part of any such transaction, they
would be willing to sell or restructure all or a portion of their loans and
Common Stock in the Company.
The Company has stated in previous filings with the Commission and
elsewhere herein that the obtainment of additional funds to implement its
marketing program and achieve the objectives of its business plan is essential
to enable the Company to maintain operations and continue as a going concern.
Since December, 1992, the Company has been dependent on loans and advances from
Selex, Yasawa and their affiliates in order to implement its marketing program
and assist in meeting its working capital requirements. As previously stated,
during the last nine months of 1993, Selex, Yasawa and their affiliates loaned
the Company an aggregate of $4,400,000 pursuant to Third Selex Loan. Funds
advanced under the Third Selex Loan enabled the Company to commence
implementation of the majority of its marketing program in the third quarter of
1993. The full benefits of the program were not realized in 1993 and the Company
was unable to secure financing in 1994 to meet its working capital requirements
and continue its marketing program. Commencing in 1994, Yasawa advanced
additional funds (the "Second Yasawa Loan") totaling $6,012,000 as of December
31, 1996, to meet the Company's minimum working capital requirements, to pay a
portion of delinquent real estate taxes, to pay settlements with certain trade
creditors and to settle certain litigation.
As a consequence of its liquidity position, the Company has defaulted on
certain obligations, including its previously described escrow obligations to
the Division pursuant to the Company's 1992 Consent Order and its obligation to
make required payments under loans from Selex, Yasawa and their affiliates.
Furthermore, the Company has not paid delinquent real estate taxes which
aggregate approximately $2,371,000 as of December 31, 1996; non-payment of these
delinquent taxes may adversely affect the financial condition of the Company.
The Company is continuing to seek third parties to provide financing. There
can be no assurance, however, that any financing will be obtained. Accordingly,
the Company's Board of Directors will consider other appropriate action given
the severity of the Company's liquidity position including, but not limited, to
filing for protection under the federal bankruptcy laws. See "Business: Recent
Developments" and Notes 1, 5 and 8 to Consolidated Financial Statements.
CONTRACTS AND MORTGAGES RECEIVABLE SALES
In December, 1992, as described above, the Company sold $10,800,000 of
contracts and mortgages receivable to an affiliate of Yasawa at face value,
applying the proceeds therefrom to reduce the Bank Loan acquired by Yasawa.
In March, 1993, the Company transferred $1,600,000 in contracts and
mortgages receivable generating approximately $1,059,000 in proceeds to the
Company, which was used for working capital and the creation of a holdback
account in the amount of $150,000. As of December 31, 1996, the balance of the
holdback account as approximately $118,000.
In June, 1992 and February, 1990, the Company completed sales of contracts
and mortgages receivable totaling $13,500,000 and $17,000,000, respectively,
which generated approximately $8,000,000 and $13,900,000 respectively, in net
proceeds to the Company. The anticipated costs of the June, 1992 transaction
were included in the extraordinary loss from debt restructuring for 1991 since
the restructuring was dependent on the sale. The Company recorded a loss of
$600,000 on the February, 1990 sale. In conjunction with these sales the Company
granted the purchaser a security interest in certain additional contracts
receivable of approximately $2,700,000 and conveyed all of its rights, title and
interest in the
26
property underlying such contracts to a collateral trustee. In addition, these
transactions, among other things require that the Company replace or repurchase
any receivable that becomes 90 days delinquent upon the request of the
purchaser. Such requirement can be satisfied from contracts in which the
purchaser holds a security interest (approximately $2,183,000 as of December 31,
1996). The purchaser of these receivables experienced financial difficulty and
filed in 1994 for protection under Chapter 11 of the Federal Bankruptcy Code. In
November 1995, the purchaser of these receivables sold the portfolio to Finova
Capital Corporation. The Company is unable to determine what effect this will
have, if any, on future cancellations, since it is unable to determine how the
bankruptcy or the subsequent sale of the portfolio will impact servicing and
collection procedures and the customers' determination to continue to pay under
those contracts. The Company has fully reserved for the amount of the holdback
account and the estimated future cancellations based on the Company's historical
experience for receivables the Company services. However, due to the uncertainty
noted above, the Company does not feel there is sufficient information to
estimate future cancellations and is unable to determine the adequacy of its
reserves to replace or repurchase receivables that become delinquent. In 1996,
the Company replaced $293,000 in delinquent receivables. As of December 31, 1996
and 1995, $1,087,000 and $611,000 in receivables were delinquent, respectively.
The Company was the guarantor of approximately $11,319,000 of contracts
receivable sold or transferred as of December 31, 1996, for the transactions
described above and had $118,000 on deposit with purchasers of the receivables
as security to assure collectibility as of such date. A provision of $650,000
has been established for the Company's obligation under the recourse provisions
of which $491,000 remains at December 31, 1996. The Company has been in
compliance with all receivable transactions since the consummation of sales.
The Company anticipates that it will be necessary to complete additional
sales and/or financings of a portion of its receivables in 1997. There can be no
assurance, however, that such sales and/or financings can be accomplished.
OTHER OBLIGATIONS
As a result of the delays in completing the land improvements to certain
property sold in certain of its Central and North Florida communities, the
Company fell behind in meeting its contractual obligations to its customers. In
connection with these delays, the Company, in February, 1980, entered into a
Consent Order with the Division which provided a program for notifying affected
customers. The Consent Order, which was restated and amended, provided a program
for notifying affected customers of the anticipated delays in the completion of
improvements (or, in the case of purchasers of unbuildable lots in certain areas
of the Company's Sunny Hills community, the transfer of development obligations
to core growth areas of the community); various options which may be selected by
affected purchasers; a schedule for completing certain improvements; and a
deferral of the obligation to install water mains until requested by the
purchaser. Under an agreement with Topeka, Topeka's utility companies have
agreed to furnish utility service to the future residents of the Company's
communities on substantially the same basis as such services were provided by
the Company. The Consent Order also required the establishment of an improvement
escrow account as assurance for completing such improvement obligations.
In June, 1992, the Company entered into the 1992 Consent Order with the
Division, which replaced and superseded the original Consent Order, as amended
and restated. Among other things, the 1992 Consent Order consolidated the
Company's development obligations and provided for a reduction in its required
monthly escrow obligation to $175,000 from September, 1992 through December,
1993. Beginning January, 1994 and until development is completed or the 1992
Consent Order is amended, the Company is required to deposit $430,000 per month
into the escrow account. As part of the assurance program under the 1992 Consent
Order, the Company and its lenders granted the Division a lien on certain
receivables and future receivables. The Company defaulted on its obligation to
escrow $430,000 per month for the period of January, 1994 through the present
and, in accordance with the 1992 Consent Order, collections on Division
receivables were escrowed for the benefit of purchasers from March 1, 1994
through April 30, 1994. In May, 1994 the Company implemented a program to
exchange purchasers who contracted to purchase property which is undeveloped to
property which is developed. As of March 21, 1997, approximately 84% of the
customers whose lots are currently undeveloped have opted to exchange or were
otherwise resolved. Consequently, the Division has allowed the Company to
utilize collections on receivables since May 1, 1994. Because of the Company's
default, the Division could also exercise other available remedies under the
1992 Consent Order, which remedies entitle the Division, among other things, to
halt all sales of registered property.
27
The Company's goal is to eliminate its development obligation (with the
exception of its maintenance obligation in Marion Oaks) under the 1992 Consent
Order through this exchange program and settlement of all remaining maintenance
and improvements obligations in Citrus Springs through a final agreement with
Citrus County (entered into in May 1995). Pursuant to the 1992 Consent Order,
the Company has limited the sale of single-family lots to lots which front on a
paved street and are ready for immediate building.
Based upon the Company's experience with affected customers, the Company
believes that the total refunds arising from delays in completing improvements
will not materially exceed the amount provided for in the consolidated financial
statements. Approximately $5,000 of the provision for the total refunds relating
to the delays of improvements remained in accrued expenses and other at December
31, 1996.
As of December 31, 1996, the Company had estimated development obligations
of approximately $1,134,000 on sold property, an estimated liability to provide
title insurance and deeding costing $1,139,000 and an estimated cost of street
maintenance, prior to assumption of such obligations by local governments, of
$880,000, all of which are included in deferred revenue. The total cost to
complete improvements at December 31, 1996 to lots subject to the 1992 Consent
Order, including the previously mentioned obligations, and to all lots, sold and
unsold, including the St. Augustine Shores community, was estimated to be
approximately $15,152,000. As of December 31, 1996 and December 31, 1995 the
Company had in escrow approximately $360,000 and $489,000, respectively,
specifically for land improvements at certain of its Central and North Florida
communities.
The Company's continuing liquidity problems have precluded the timely
payment of the full amount of its real estate taxes. On properties where
customers have contractually assumed the obligation to pay into a tax escrow
maintained by the Company, the Company has and will continue to pay delinquent
real estate taxes as monies are collected from customers. Delinquent real estate
taxes aggregated approximately $2,371,000 as of December 31, 1996.
The Company's corporate performance bonds to assure the completion of
development at its St. Augustine Shores community expired in March and June,
1993. Such bonds cannot be renewed due to a change in the policy of the Board of
County Commissioners of St. Johns County which precludes allowing any developer
to secure the performance of development obligations by the issuance of
corporate bonds. In the event that St. Johns County elects to undertake and
complete such development work, the Company would be obligated with respect to
1,000 improved lots at St. Augustine Shores in the amount of approximately
$6,200,000. The Company intends to submit an alternative assurance program for
the completion of such development and improvements to the County for its
approval.
On September 30, 1988, the Company entered into an agreement with Citrus
County, Florida to establish the procedure for transferring final maintenance
responsibilities for roads in the Company's Citrus Springs subdivision to Citrus
County. The agreement obligated the Company to complete certain remedial work on
previously completed improvements within the Citrus Springs subdivision by June
1, 1991. The Company was unable to complete this work by the specified date and
negotiated another agreement with Citrus County for the transfer of final
maintenance responsibility for the roads to the County. This final agreement was
entered into in May 1995.
The Company had placed certain properties in trust to meet its refund
obligations to Marco customers affected by the permit denials. On September 14,
1992, the Circuit Court of Dade County, Florida approved a settlement of certain
class action litigation instituted by customers affected by the Marco permit
denials, under the terms of which the Company was required, among other things,
to convey more than 120 acres of multi-family and commercial land that had been
placed in trust to the trustee of the 809 member class. As part of the
settlement, the Company guaranteed the amount to be realized from the sale of
the conveyed property, not to exceed $2,000,000. Such settlement enabled the
Company to resolve the claims of an additional 12.7% of its affected customers
and re-evaluate the allowance for Marco permit costs. As a result of such
analysis, the Company was able to reduce such allowance by $12,200,000,
resulting in a $3,983,000 extraordinary gain in 1992 and a $500,000 credit to
accrued expenses to be credited to paid-in capital following issuance of 250,000
shares of restricted Common Stock of the Company to the class members. Following
the closing on a majority of the property conveyed to the trust, the Company
recorded an extraordinary gain of $702,000 resulting from a reduction in the
amount of its guarantee pursuant to the settlement agreement. During 1996,
$993,000 of the amount loaned by Yasawa was used to
28
satisfy the remaining obligation on the Marco class action settlement agreement
resulting in an extraordinary gain of $331,000. As part of the settlement
agreement, Swan Development Corporation, an affiliate of Yasawa, acquired four
condominium units from the class action trustee for $182,000, the same value
that the trustee attributed to the units on September 14, 1992.
LIQUIDITY
Since 1986, the Company has directed its marketing efforts to rebuilding
retail land sales in an attempt to obtain a more stable income stream and
achieve a balanced growth of retail land sales and bulk land sales. Retail land
sales typically have a higher gross profit margin than bulk land sales and the
contracts receivable generated from retail land sales provide a continuing
source of income. However, retail land sales also have traditionally produced
negative cash flow through the point of sale. This is because the marketing and
selling expenses have generally been paid prior to or shortly after the point of
sale, while the land is generally paid for in installments. The Company's
ability to rebuild retail land sales has been substantially dependent on its
ability to sell or otherwise finance contracts receivable and/or secure other
financing sources to meet its cash requirements.
To alleviate the negative cash flow impact arising from retail land sales
while attempting to rebuild its sales volume, the Company implemented several
new marketing programs which, among other things, adjusted the method of
commission payments and required larger down payments. However, the nationwide
economic recession, which was especially pronounced in the real estate industry,
adverse publicity surrounding the industry which existed in 1990, the resulting,
more stringent regulatory climate, and worldwide economic uncertainties have
severely depressed retail land sales beginning in mid-1990 and continuing
thereafter, resulting in a continuing liquidity crisis.
In an attempt to offset the negative cash effects of installment land
sales, the Company is attempting to direct its marketing efforts to its housing
product in which a house and lot are sold as a package. The success of this
direction will be dependent upon the Company's dealer recruiting program and
availability of funds for a national advertising and promotion program.
Because of this severe liquidity crisis, the Company ceased development
work late in the third quarter of 1990 and did not resume development work until
the third quarter of 1992. From September 29, 1990 through the fourth quarter of
1991, when the Company ceased selling undeveloped lots, sales of undeveloped
lots were accounted for using the deposit method. Under this method, all
payments were recorded as a customer deposit liability. In addition, because of
the increasing trend in delinquencies during 1990, since the beginning of 1991,
the Company has not recognized any sale until 20% of the contract sales price
has been received. As a result, the reporting and recognition of revenues and
profits on a portion of the Company's retail land sales contracts is being
delayed. See Note 1 to Consolidated Financial Statements.
The continued economic recession and the increasing adverse effects of such
recession on the Florida real estate industry not only resulted in the Company's
sales remaining at depressed levels, but caused greater contract cancellations
in 1991, particularly in the second half of the year, than were anticipated.
Such cancellations required the Company to record an additional provision to its
allowance for uncollectible sales of approximately $12,200,000 in the 1991 third
quarter, impacting net income by approximately $8,900,000. While the Company is
making every effort to reduce its cancellations, the Company could be required
to record additional provisions in the future.
In December, 1992, the Company's bank debt was acquired by Mr. Gram and
assigned to Yasawa. Through the sale of certain assets to Yasawa and its
affiliates, including certain contracts receivable, and the exercise of the
warrants by Yasawa, the Company was able to reduce such remaining debt from
approximately $25,150,000 (including interest and fees) to approximately
$5,106,000. During 1994, the Yasawa Loan was reduced to 4,764,600. The agreement
with Yasawa also provided the Company with a future line of credit, all of which
is drawn and outstanding as of December 31, 1996. During 1993, Selex loaned the
Company an additional $5,400,000 pursuant to the Second and Third Selex Loans.
The loans from Selex, Yasawa and their affiliates are collateralized by
substantially all of the Company's assets.
29
On March 10, 1994, the Company was advised that Selex filed an Amendment to
its Schedule 13D with the Commission. In the Amendment, Selex reported that it,
together with Yasawa and their affiliates, were uncertain as to whether they
would provide any further funds to the Company. The Amendment further stated
that Selex, Yasawa and their affiliates were seeking third parties to provide
financing for the Company and that as part of any such transaction, they would
be willing to sell or restructure all or a portion of their loans and Common
Stock in the Company.
The Company has stated in previous filings with the Commission and
elsewhere herein that the obtainment of additional funds to implement its
marketing program and achieve the objectives of its business plan is essential
to enable the Company to maintain operations and continue as a going concern.
Since December, 1992, the Company has been dependent on loans and advances from
Selex, Yasawa and their affiliates in order to implement its marketing program
and assist in meeting its working capital requirements. As previously stated,
during the last nine months of 1993, Selex, Yasawa and their affiliates loaned
the Company an aggregate of $4,400,000 pursuant to Third Selex Loan. Funds
advanced under the Third Selex Loan enabled the Company to commence
implementation of the majority of its marketing program in the third quarter of
1993. The full benefits of the program were not realized in 1993 and the Company
was unable to secure financing in 1994 to meet its working capital requirements
and continue its marketing program. Commencing in 1994, Yasawa advanced
additional funds (the "Second Yasawa Loan") totaling $6,012,000 as of December
31, 1996, to meet the Company's minimum working capital requirements, to pay a
portion of delinquent real estate taxes, to pay settlements with certain trade
creditors and to settle certain litigation.
As a consequence of its liquidity position, the Company has defaulted on
certain obligations, including its previously described escrow obligations to
the Division pursuant to the Company's 1992 Consent Order and its obligation to
make required interest payments under loans from Selex, Yasawa and their
affiliates. Furthermore, the Company has not paid delinquent real estate taxes
which aggregate approximately $2,371,000 as of December 31, 1996; non-payment of
these delinquent taxes may adversely affect the financial condition of the
Company.
The Company is continuing to seek third parties to provide financing. There
can be no assurance, however, that any financing will be obtained. Accordingly,
the Company's Board of Directors will consider other appropriate action given
the severity of the Company's liquidity position including, but not limited, to
filing for protection under the federal bankruptcy laws. See "Business: Recent
Developments" and Notes 1, 5 and 8 to Consolidated Financial Statements.
30
ITEM 8
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTAL DATA
Page
-------
Independent Auditors' Report................. 32
Consolidated Balance Sheets as of
December 31, 1996 and December 31, 1995..... 33
Statements of Consolidated Operations for
the years ended December 31, 1996,
December 31, 1995 and December 31, 1994..... 35
Statements of Consolidated Stockholders'
Equity (Deficiency) for the years
ended December 31, 1996, December 31,
1995 and December 31, 1994................ 36
Statements of Consolidated Cash Flows for
the years ended December 31, 1996,
December 31, 1995 and December 31, 1994.... 37
Notes to Consolidated Financial Statements.... 39
Supplemental Unaudited Quarterly Financial Data. 55
31
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
THE DELTONA CORPORATION:
We have audited the consolidated balance sheets of The Deltona Corporation
and subsidiaries (the "Company") as of December 31, 1996 and 1995 and the
related statements of consolidated operations, stockholders' equity (deficiency)
and cash flows for each of the three years in the period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 1996 and 1995 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company incurred substantial
operating losses and has continued to experience liquidity crises, causing the
Company to be unable to meet certain contractual obligations and has a
stockholders' deficiency at December 31, 1996. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans concerning these matters are described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 25, 1997
32
CONSOLIDATED BALANCE SHEETS
THE DELTONA CORPORATION AND SUBSIDIARIES
ASSETS
(in thousands)
December 31, December 31,
1996 1995
---------- ------------
Cash, including escrow deposits
and restricted cash of $845 in 1996 and $855 in 1995
(Note 7)................................................... $ 907 $ 982
------- --------
Contracts receivable for land sales (Notes 2, 5 and 8)...... 10,488 8,059
Less: Allowance for uncollectible contracts................. (2,429) (1,628)
Unamortized valuation discount........................ (1,094) (829)
------- --------
Contracts receivable - net.................................. 6,965 5,602
------- --------
Mortgages and other receivables - net (Notes 2, 5 and 8).... 384 413
------- --------
Inventories, at lower of cost or net realizable
value (Notes 3 and 5):
Land and land improvements.................................. 10,287 11,131
Other....................................................... 99 104
------- --------
Total inventories............................. 10,386 11,235
------- --------
Property, plant and equipment - net (Notes 4 and 5)......... 413 510
------- --------
Prepaid expenses and other.................................. 367 438
------- --------
Total.......................................... $19,422 $ 19,180
======= ========
The accompanying notes are an integral part of the consolidated
financial statements.
33
CONSOLIDATED BALANCE SHEETS
THE DELTONA CORPORATION AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
(in thousands except share data)
December 31, December 31,
1996 1995
------------ ------------
Mortgages and similar debt (Note 5):
Mortgage notes payable ................................. $ 18,707 $ 16,717
Other loans ............................................. 3,661 3,661
-------- --------
Total mortgages and similar debt..................... 22,368 20,378
Accounts payable-trade ....................................... 94 152
Accrued interest payable (Note 5) ............................ 1,778 -0-
Accrued taxes, principally real estate taxes ................. 3,084 2,983
Accrued expenses and other (Notes 2 and 8) ................... 1,421 1,812
Customers' deposits .......................................... 792 754
Allowance for Marco permit costs (Note 9) .................... -0- 1,349
Deferred revenue (Notes 7 and 8) ............................. 7,764 8,765
-------- --------
Total liabilities ............................................ 37,301 36,193
-------- --------
Commitments and contingencies (Notes 1, 2, 5, 7, 8 and 9)
Stockholders' equity (deficiency) (Notes 1, 5, and 10):
Common stock, $1 par value-authorized 15,000,000 shares; issued
and outstanding: 6,734,572 shares in 1996 and 6,719,244 shares
in 1995 (excluding 12,228 shares held in treasury).......... 6,734 6,719
Capital surplus ............................................. 44,714 44,699
Accumulated deficit ......................................... (69,327) (68,431)
------- --------
Total stockholders' equity (deficiency) .......................... (17,879) (17,013)
------- --------
Total....................................... $19,422 $ 19,180
======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
34
STATEMENTS OF CONSOLIDATED OPERATIONS
THE DELTONA CORPORATION AND SUBSIDIARIES
(in thousands except share data)
Years Ended
------------------------------------------
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
Revenues
Gross land sales (Notes 2 and 7).............. $ 6,816 $ 3,623 $ 2,994
Less: Estimated uncollectible sales........... (1,706) (850) (712)
Contract valuation discount............ (814) (379) (224)
-------- -------- --------
Net land sales................................ 4,296 2,394 2,058
Sales-housing................................. 1,202 1,383 2,543
Recognized improvement revenue-prior period
sales........................................ 1,008 1,052 1,214
Interest income............................... 1,464 1,019 1,046
Gain on settlement of lease obligation (Note 8) -0- -0- 1,051
Other ........................................ 680 840 629
-------- -------- --------
Total............................ 8,650 6,688 8,541
-------- -------- --------
Costs and expenses
Cost of sales-land............................ 1,212 635 574
Cost of sales-housing......................... 1,005 1,135 2,169
Cost of improvements-prior period sales....... 219 395 711
Cost of sales-other........................... 237 267 391
Provision for uncollectible contracts and
recourse obligations (Note 2)............... -0- 650 -0-
Commissions, advertising, and other selling
expenses..................................... 2,457 1,889 2,608
General and administrative expenses........... 1,715 1,869 2,984
Real estate tax............................... 1,251 1,111 1,163
Interest expense.............................. 1,781 1,642 1,847
-------- -------- --------
Total.............................. 9,877 9,593 12,447
-------- -------- --------
Loss from operations before income
taxes and extraordinary items................. (1,227) (2,905) (3,906)
Provision for income taxes (Note 6)............ -0- -0- -0-
-------- -------- --------
Loss from operations before
extraordinary items........................... (1,227) (2,905) (3,906)
Extraordinary item:
Gain on settlement related to the Marco
refund obligation (Note 9)................... 331 702 -0-
-------- -------- --------
Net income (loss).............................. $ (896) $ (2,203) $ (3,906)
======== ======== ========
Earnings (loss) per common and common
equivalent shares from (Note 10):
Operations.................................... $ (.18) $ ( .43) $ (.59)
Extraordinary gain............................ .05 .10 -0-
-------- -------- --------
Net income (loss)...................... $ (.13) $ ( .33) $ (.59)
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
35
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIENCY)
THE DELTONA CORPORATION AND SUBSIDIARIES
(in thousands)
For the years ended December 31, 1996, December 31, 1995 and December 31, 1994
Common Stock Capital Accumulated
($1 par value) Surplus Deficit Total
-------------- ------- ----------- -------
Balances, December 31, 1993................... $ 5,951 $42,080 $(62,322) $(14,291)
Net proceeds from exercise of Warrants... 600 540 -0- 1,140
Issuance of Common Stock for Marco Permit
Costs.................................. 118 118 -0- 236
Net (loss) for the year.................. -0- -0- (3,906) (3,906)
------- ------- -------- --------
Balances, December 31, 1994.................. $ 6,669 $42,738 $(66,228) $(16,821)
Issuance of Common Stock for Marco Permit
Costs.................................. 50 50 -0- 100
Gain from exchange of debt for land
with related party (Note 5)............ -0- 1,911 -0- 1,911
Net (loss) for the year.................. -0- -0- (2,203) (2,203)
------- ------- -------- --------
Balances, December 31, 1995.................. $ 6,719 $44,699 $(68,431) $(17,013)
Issuance of Common Stock for Marco Permit
Costs.................................. 15 15 -0- 30
Net (loss) for the year.................. -0- -0- (896) (896)
------- ------- -------- --------
Balances, December 31, 1996.................. $ 6,734 $44,714 $(69,327) $(17,879)
======= ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
36
STATEMENTS OF CONSOLIDATED CASH FLOWS
THE DELTONA CORPORATION AND SUBSIDIARIES
(in thousands)
Years Ended
------------------------------------------
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities: Cash received from operations:
Proceeds from sale of residential units........... $ 1,182 $ 1,416 $ 2,543
Collections on contracts and mortgages receivable. 2,927 2,285 3,420
Down payments on and proceeds from sales
of homesites and tracts.......................... 1,517 1,261 592
Proceeds from sale of Marco Trust property........ -0- -0- 22
Proceeds (uses) from other sources................ 425 86 (44)
-------- --------- ---------
Total cash received from operations...... 6,051 5,048 6,533
-------- --------- ---------
Cash expended by operations:
Cash paid for residential units...................... 1,005 1,135 2,169
Cash paid for land and land improvements............. 461 602 816
Customer refunds..................................... 931 874 136
Commissions, advertising and other
selling expenses.................................... 2,515 1,558 2,587
General and administrative expenses.................. 1,892 2,721 2,728
Interest paid........................................ -0- -0- 398
Real estate taxes paid............................... 1,314 984 192
-------- --------- --------
Total cash expended by operations........ 8,118 7,874 9,026
-------- --------- --------
Net cash provided by (used in) operating
activities............................. (2,067) (2,826) (2,493)
-------- --------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment........................................ 6 29 24
Payment for acquisition and construction of
property, plant and equipment........................ (4) (43) (26)
-------- --------- --------
Net cash provided by (used in) investing
activities............................. 2 (14) ( 2)
-------- --------- --------
Cash flows from financing activities:
New borrowings........................................ 2,000 1,390 2,122
Repayment of borrowings............................... (10) (8) (195)
-------- --------- --------
Net cash provided by (used in) financing
activities............................. 1,990 1,382 1,927
-------- --------- --------
Net increase (decrease) in cash and short term
investments........................................... (75) (1,458) (568)
Cash and short term investments, at beginning
of year............................................... 982 2,440 3,008
-------- --------- --------
Cash and short term investments, at end of year........ $ 907 $ 982 $ 2,440
======== ========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
37
STATEMENTS OF CONSOLIDATED CASH FLOWS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
(in thousands)
Reconciliation of net income (loss) to net cash provided by (used in) operating
activities:
Years Ended
-------------------------------------------
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ --------
Net income (loss).................................... $ (896) $ (2,203) $ (3,906)
--------- --------- --------
Adjustments to reconcile net income (loss) to net
cash provided by (used in)
operating activities:
Depreciation and amortization.................... 60 64 86
Provision for estimated uncollectible sales and
recourse obligations............................ 1,706 1,500 712
Contract valuation discount, net of amortization. 279 30 19
Net (gain) loss on sale of property, plant
and equipment.................................. 35 (19) (34)
Extraordinary gain on settlement related to the
Marco refund obligation........................ (331) (702) -0-
(Increase) decrease in assets and increase (decrease)
in liabilities:
Gross contracts receivable plus deductions from
reserves........................................ (3,349) (936) (13)
Mortgages and other receivables.................. 29 830 2,513
Land and land improvements....................... 844 (8) 646
Housing completed or under construction and other. 5 44 15
Prepaid expenses and other........................ 71 (154) 181
Accounts payable, accrued expenses and other...... 1,461 1,244 377
Customers' deposits............................... 38 32 (329)
Allowance for Marco permit costs.................. (1,018) (846) 11
Deferred revenue.................................. (1,001) (1,702) (2,771)
--------- --------- --------
Total adjustments and changes................. (1,171) (623) 1,413
--------- --------- --------
Net cash provided by (used in) operating activities.... $ (2,067) $ (2,826) $ (2,493)
========= ========= ========
Supplemental disclosure of non-cash investing and financing activities:
Assets assigned or conveyed as a reduction of accrued expenses,
mortgages and notes payable and settlement of Marco refund
obligation:
Contracts and mortgages receivable (net)............. $ -0- $ -0- $ 50
========= ========== ========
Reduction of accrued interest as a result of the
capitalization of interest to principal............. $ -0- $ 4,200 $ -0-
========= ========== ========
Reduction of accrued interest and mortgage notes
payable as a result of an exchange of
land and property................................... $ -0- $ 2,694 $ -0-
========= ========== ========
Reduction of property, plant and equipment as a result
of exchange of debt................................. $ -0- $ 112 $ -0-
========= ========== ========
Reduction of land as a result of an exchange of debt.. $ -0- $ 674 $ -0-
========= ========== ========
Reduction of accrued expenses as a result of the
settlement of an obligation with a prior landlord... $ -0- $ 500 $ -0-
========= ========== ========
Common Stock issued for reduction of long-term debt... $ -0- $ -0- $ 1,140
========= ========== ========
Common stock issued for Marco permit costs............ $ 30 $ 101 $ 236
========= ========== ========
The accompanying notes are an integral part of the consolidated financial
statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation - Going Concern
The accompanying financial statements of The Deltona Corporation and
subsidiaries (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 Company has incurred a loss from operations for 1994 of $3,906,000, for
1995 of $2,905,000 and for 1996 of $1,227,000, resulting in a stockholders'
deficiency of $17,879,000 as of December 31, 1996. The Company has continued to
experience liquidity problems, causing it to be unable to fully meet certain
contractual obligations, primarily relating to the repayment of debt, payment of
real estate taxes and the completion of improvements. The Company must obtain
additional financing to accomplish the objectives of satisfying or substantially
reducing its current debt obligations and provide the financial stability that
will allow the Company to accomplish the objectives of a successful business
plan.
Following the completion of the restructuring of its bank debt in 1992 (see
Note 5), the Company commenced the implementation of its business plan by
undertaking a new marketing program which included the Company's re-entry into
the single-family housing business. To accomplish the objectives of its business
plan required the Company to obtain financing during 1995 and 1996 and will
require the Company to obtain additional financing in 1997. The transactions
described in Note 5 with Selex International, B.V., a Netherlands corporation
("Selex"), Yasawa Holdings, N.V., a Netherlands Antilles corporation ("Yasawa"),
and their affiliates provided the Company with a portion of its financing
requirements enabling the Company to commence implementation of the marketing
program and attempt to accomplish the objectives of its business plan, but
additional financing will be required in 1997. Selex, Yasawa and their
affiliates are uncertain as to whether they will provide any further funds to
the Company. While the Company, together with Selex, Yasawa and their
affiliates, is seeking third parties to provide financing for the Company and,
as part of any such transaction, Selex, Yasawa and their affiliates have
indicated their willingness to sell or restructure all or a portion of their
loans and Common Stock in the Company, such financing has not yet become
available. As a consequence of its liquidity position, the Company has defaulted
on certain obligations, including its escrow account obligations to the State of
Florida, Department of Business Regulation, Division of Land Sales, Condominiums
and Mobile Homes (the "Division") pursuant to the Company's 1992 Consent Order
with the Division (the "1992 Consent Order"), its obligation to pay certain real
estate taxes, and its obligation to make required payments under loans from
Selex, Yasawa and their affiliates. (See Notes 5 and 8.)
There can be no assurance that the Company will be able to timely secure
the necessary financing to resolve its liquidity situation or that a new
business plan will be successfully implemented. Consequently, there can be no
assurance that the Company can continue as a going concern. In the event that
these matters are not successfully addressed, the Company's Board of Directors
will consider other appropriate action given the severity of the Company's
liquidity position, including, but not limited to, filing for protection under
the federal bankruptcy laws. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes 5 and 8 to Consolidated
Financial Statements.
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.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
1. Basis of Presentation and Significant Accounting Policies -
(Continued)
Significant Accounting Policies
The Company's consolidated financial statements are prepared in accordance
with generally accepted accounting principles. Material intercompany accounts
and transactions are eliminated.
Since 1986, the Company has used a 52-53 week fiscal year ending on the
last Friday of the year. The year ended December 31, 1993 contained 53 weeks,
and the years ended December 25, 1992 and December 27, 1991 contained 52 weeks.
Commencing in 1994, the Company returned to a fiscal year ended December 31.
The Company sells homesites under installment contracts which provide for
payments over periods ranging from 2 to 10 years. Sales of homesites are
recorded under the percentage-of-completion method in accordance with Statement
of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate"
("FASB No. 66"). Since 1991, the Company has not recognized a sale until it has
received 20% of the contract sales price. During 1996 and 1995, approximately
94% and 72% respectively, of sales were through a single independent dealer in
New York.
Because of the severe liquidity crisis faced by the Company as discussed
above, the Company ceased development work late in the third quarter of 1990.
From September 29, 1990 through the fourth quarter of 1991, all sales of
undeveloped lots were accounted for using the deposit method. Since the fourth
quarter of 1991 and in compliance with the 1992 Consent Order, the Company has
been offering only developed lots for sale (see Note 8).
At the time of recording a sale the Company records an allowance for the
estimated cost to cancel the related contracts receivable through a charge to
the provision for uncollectible sales. The amount of this provision and the
adequacy of the allowance is determined by the Company's continuing evaluation
of the portfolio and past cancellation experience. While the Company uses the
best information available to make such evaluations, future adjustments to the
allowance may be necessary as a result of future national and international
economic and other conditions that may be beyond the Company's control. Changes
in the Company's estimate of the allowance for previously recognized sales will
be reported in earnings in the period in which they become estimable and are
charged to the provision for uncollectible contracts.
Land improvement costs are allocated to individual homesites based upon the
relationship that the homesite's sales price bears to the total sales price of
all homesites in the community. The estimated costs of improving homesites are
based upon independent engineering estimates made in accordance with sound cost
estimation and provide for anticipated cost-inflation factors. The estimates are
systematically reviewed. When cost estimates are revised, the percentage
relationship they bear to deferred revenues is recalculated on a cumulative
basis to determine future income recognition as performance takes place.
Bulk land sales are recorded and profit is recognized in accordance with
FASB No. 66. Bulk land sales of approximately $315,000 are included in gross
land sales for the year ended December 31, 1994.
Sales of houses and vacation ownership units, as well as all related costs
and expenses, are recorded at the time of closing.
Interest costs directly related to, and incurred during, a project's
construction period are capitalized. No interest has been capitalized in 1994,
1995 and 1996.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
1. Basis of Presentation and Significant Accounting Policies -
(Continued)
Property, plant and equipment is stated at cost. Depreciation is provided
by the straight-line method over the estimated useful lives of the respective
assets. Additions and betterments are capitalized, and maintenance and repairs
are charged to income as incurred. Generally, upon the sale or retirement of
assets, the accounts are relieved of the costs and related accumulated
depreciation and any gain or loss is reflected in income.
When property exchanges and refund transactions are consummated under the
Company's Marco Island-Marco Shores customer programs (see Note 9), any
resulting loss is charged to the allowance for Marco permit costs. When property
exchanges and refund transactions are consummated under the Consent Order (see
Note 8), any resulting loss is charged against the allowance included in accrued
expenses and other. The Company accrues interest on its refund obligations in
accordance with the various customer refund programs.
For the purposes of the statements of cash flows, the Company considers its
investments, which are comprised of short term, highly liquid investments
purchased with a maturity of three months or less, to be cash equivalents.
In accordance with Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed
Of" ( SFAS No. 121), long-lived assets, such as inventories and property, plant
and equipment to be held and used are to be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amounts of an
asset may not be recoverable. During 1996, SFAS No. 121 was adopted with no
material impact to the Company.
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 exchange. 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 carrying
amount of cash and cash equivalents are reasonable estimates 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
carrying value of the contracts and mortgages receivable and similar debt
approximates fair value.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
2. Contracts and Mortgages Receivable
At December 31, 1996, interest rates on contracts receivable outstanding
ranged from 5% to 12% per annum (weighted average approximately 8.2%). The
approximate principal maturities of contracts receivable were:
December 31,
1996
--------------
(in thousands)
1997................................................. $ 1,566
1998................................................. 1,562
1999................................................. 1,470
2000................................................. 1,248
2001................................................. 1,098
2002 and thereafter.................................. 3,544
-------
Total........................................... $10,488
=======
If a regularly scheduled payment on a contract remains unpaid 30 days after
its due date, the contract is considered delinquent. Aggregate delinquent
contracts receivable at December 31, 1996 and 1995 approximate $910,000 and
$1,360,000, respectively.
Information with respect to interest rates and average contract lives used
in valuing new contracts receivable generated from sales follows:
Average Average Stated Discounted
Years ended Term Interest Rate to Yield
--------------- --------- --------------- -----------
December 31, 1996............. 89 months 7.8% 13.5%
December 31, 1995............. 92 months 8.2% 13.5%
December 31, 1994............. 92 months 8.4% 13.5%
In December, 1992, as described above, the Company sold $10,800,000 of
contracts and mortgages receivable to an affiliate of Yasawa at face value,
applying the proceeds therefrom to reduce the Company's bank loan, which had
been acquired by Yasawa.
In March, 1993 the Company transferred $1,600,000 in contracts and
mortgages receivable, generating approximately $1,059,000 in proceeds to the
Company, which was used for working capital, and the creation of a holdback
account in the amount of $150,000. As of December 31, 1996 the balance of the
holdback account was $118,000.
In June, 1992 and February, 1990, the Company completed sales of contracts
and mortgages receivable totaling $13,500,000 and $17,000,000, respectively,
which generated approximately $8,000,000 and $13,900,000, respectively, in net
proceeds to the Company. The anticipated costs of the June, 1992 transaction
were included in the extraordinary loss from debt restructuring for 1991 since
the restructuring was dependent on the sale. The Company recorded a loss of
$600,000 on the February, 1990 sale. In conjunction with these sales the Company
granted the purchaser a security interest in certain additional contracts and
mortgages receivable of approximately $2,700,000 and conveyed all of its rights,
title and interest in the property underlying such contracts to a collateral
trustee. In addition, these transactions, among other things, require that the
Company replace or repurchase any receivable that becomes 90 days delinquent
upon the request of the purchaser. Such requirement can be satisfied from
contracts in which the purchaser holds a security interest
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
2. Contracts and Mortgages Receivable - (Continued)
(approximately $2,183,000 as of December 31, 1996). The purchaser of these
receivables experienced financial difficulty and filed in 1994 for protection
under Chapter 11 of the Federal Bankruptcy Code. In November 1995, the purchaser
of these receivables assigned the portfolio to a third party, who now owns the
portfolio and will service and collect the receivables. The Company is unable to
determine what effect this will have, if any, on future cancellations, since it
is unable to determine how the bankruptcy or the servicing and collection
procedures of the third party will impact the customers' determination to
continue to pay under those contracts. The Company has fully reserved for the
amount of the holdback account and the estimated future cancellations based on
the Company's historical experience for receivables the Company services.
However, due to the uncertainty noted above, the Company does not feel there is
sufficient information to estimate future cancellations and is unable to
determine the adequacy of its reserves to replace or repurchase receivables that
become delinquent. In 1996, the Company replaced $293,000 in delinquent
receivables. As of December 31, 1996 and 1995, $1,087,000 and $611,000 in
receivables were delinquent, respectively.
The Company was the guarantor of approximately $11,319,000 of contracts
receivable sold or transferred as of December 31, 1996, for the transactions
described above, and had $118,000 on deposit with purchasers of the receivables
as security to assure collectibility as of such date. During 1995, a provision
of $650,000 was established for the Company's obligation under the recourse
provisions of which $491,000 remains at December 31, 1996. The Company has been
in compliance with all receivable transactions since the consummation of sales.
The Company anticipates that it will be necessary to complete additional
sales and/or financings of a portion of its receivables in 1997. There can be no
assurance, however, that such sales and/or financings can be accomplished.
3. Inventories
Information with respect to the classification of inventory of land and
improvements including land held for sale or transfer is as follows:
December 31, December 31,
1996 1995
------------ ------------
(in thousands)
Unimproved Land.................................. $ 420 $ 444
Land in various stages of development............ 3,708 4,014
Fully improved land.............................. 6,159 6,673
-------- --------
Total............................... $ 10,287 $ 11,131
======== ========
Land and land improvements include approximately $202,000 of land placed in
the Marco Island and Marco Shores trusts for the Marco refund program as of
December 31, 1996 and 1995 (see Note 9). Other inventories consists primarily of
vacation ownership units completed.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
4. Property, Plant and Equipment
Property, plant and equipment and accumulated depreciation consist of the
following:
December 31, 1996 December 31, 1995
--------------------------- ---------------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
-------- ------------ ------- ------------
(in thousands)
Land and land improvements......... $ 74 $ -0- $ 74 $ -0-
Other buildings, improvements and
furnishings...................... 1,013 717 1,257 877
Construction and other equipment... 713 670 1,509 1,453
-------- -------- ------- -------
Total.......................... $ 1,800 $ 1,387 $ 2,840 $ 2,330
======== ======== ======= =======
Depreciation charged to operations for the years ended December 31, 1996,
1995 and 1994 was approximately $60,000, $64,000 and $86,000, respectively. In
1996 the Company evaluated its property, plant and equipment and wrote off
approximately $1,044,000 in obsolete equipment and furniture, resulting in a
loss of $40,000.
5. Mortgages and Similar Debt
Indebtedness under various purchase money mortgages and loan agreements is
collateralized by substantially all of the Company's assets, including stock of
certain wholly-owned subsidiaries.
The Company, Selex and Yasawa entered into loan modification agreements in
which all accrued interest was converted into non-interest bearing principal at
the earlier of the maturity date or the default date. Accordingly, at December
31, 1995, $4,200,000 of accrued interest due to Selex, Yasawa and their
affiliates was reclassified as non-interest bearing principal. The loans were
also modified to formalize the elimination of the default interest rate
provisions in each of the applicable loan agreements.
The following table presents information with respect to mortgages and
similar debt (in thousands):
December 31, December 31,
1996 1995
------------ ----------
Mortgage Notes Payable ......................... $ 18,707 $ 16,717
Other Loans................................. 3,661 3,661
-------- --------
Total mortgages and similar debt....... $ 22,368 $ 20,378
======== ========
Included in Mortgage Notes Payable are the First Selex Loan ($2,722,000 as
of December 31, 1996), the Third Selex Loan ($3,816,000 as of December 31,
1996), the Yasawa Loan ($5,829,000 as of December 31, 1996) and the Second
Yasawa Loan ($6,340,000 as of December 31, 1996). Other loans include the
$1,656,000 Empire note and the $2,005,000 Scafholding Loan.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
5. Mortgages and Similar Debt - (Continued)
These mortgage notes payable and other loans are in default as of December
31, 1996 due to the non-payment of principal and interest. The lenders have not
taken any other action as a result of these defaults.
On June 19, 1992, Selex loaned the Company the sum of $3,000,000 pursuant
to the First Selex Loan. The First Selex Loan is collateralized by a first
mortgage on certain of the Company's unsold, undeveloped property in its St.
Augustine Shores, Florida community. The Loan matures on June 15, 1996 and
provides for principal to be repaid at 50% of the net proceeds per lot for lots
requiring release from the mortgage, with the entire unpaid balance becoming due
and payable at the end of the four year term. It initially bears interest at the
rate of 10% per annum, with payment of interest deferred for the initial 18
months of the Loan and interest payments due quarterly thereafter. As part of
the Selex transaction, Selex was granted an option, approved by the holders of a
majority of the outstanding shares of the Company's Common Stock at the
Company's 1992 Annual Meeting, which, as modified, enabled Selex to convert the
First Selex Loan, or any portion thereof, into a maximum of 600,000 shares of
the Company's Common Stock at a per share conversion price equal to the greater
of (i) $1.25 or (ii) 95% of the market price of the Company's Common Stock at
the time of conversion, but in no event greater than $4.50 per share (the
"Option"). On February 17, 1994, Selex exercised the Option, in full, at a
conversion price of $1.90 per share, such that $1,140,000 in principal was
repaid under the First Selex Loan through such conversion. As of December 31,
1996, the Company was in default of the First Selex Loan.
One million dollars of the proceeds from the First Selex Loan was used by
the Company to acquire certain commercial and multi-family properties at the
Company's St. Augustine Shores community at their net appraised value, from Mr.
Muyres and certain entities affiliated with Messrs. Zwaans and Muyres. Namely,
(i) $416,000 was used to acquire 48 undeveloped condominium units (twelve 4 unit
building sites) and 4 completed (and rented) condominium units from Conquistador
Development Corporation ("Conquistador"), in which Messrs. Zwaans and Muyres
serve as directors, as well as President and Secretary/Treasurer, respectively;
(ii) $485,000 was used to acquire 4 commercial lots from Swan, in which Messrs.
Zwaans and Muyres also serve as directors, as well as President and Secretary,
respectively; and (iii) approximately $99,000 was used to reacquire, from Mr.
Muyres, all of his rights, title and interest in that certain contracts with the
Company for the purchase of a commercial tract in St. Augustine Shores, Florida.
None of the commercial and multi-family property acquired by the Company from
Mr. Muyres and certain entities affiliated with Messrs. Zwaans and Muyres
collateralizes the First Selex Loan. In March, 1994, Conquistador exercised its
right to repurchase certain multi-family property from the Company (which right
had been granted in connection with the June, 1992 Selex transaction) at a price
of $312,000, of which $260,000 was paid in cash to the Company and $52,000 was
applied to reduce interest due to Selex under the Second Selex Loan (the "First
Conquistador Acquisition").
On December 2, 1992, the Company entered into various agreements relating
to certain of its assets and the restructuring of its debt with Yasawa, which is
beneficially owned by Mr. Antony Gram. The consummation of these agreements,
which are further described below, was conditioned upon the acquisition by Mr.
Gram of the Company's outstanding bank loan.
On December 4, 1992, Mr. Gram entered into an agreement with the lenders,
pursuant to which he acquired the bank loan of approximately $25,150,000
(including interest and fees) for a price of $10,750,000. In conjunction with
such transaction, the lenders transferred to Mr. Gram the warrants which they
held that entitled the holder to purchase an aggregate of 277,387 shares of the
Company's Common Stock at an exercise price of $1.00 per share. Immediately
after the acquisition of the bank loan, Mr. Gram transferred all of his interest
in the bank loan, including the warrants, to Yasawa.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
5. Mortgages and Similar Debt - (Continued)
On December 11, 1992, the Company consummated the December 2, 1992
agreements with Yasawa. Under these agreements, Yasawa, its affiliates and the
Company agreed as follows: (i) the Company sold certain property at its Citrus
Springs community to an affiliate of Yasawa in exchange for approximately
$6,500,000 of debt reduction credit; (ii) an affiliate of Yasawa and the Company
entered into a joint venture agreement with respect to the Citrus Springs
property, providing for the Company to market such property and receive an
administration fee from the venture (in March, 1994, the Company and the
affiliate agreed to terminate the venture); (iii) the Company sold certain
contracts receivable at face value to an affiliate of Yasawa for debt reduction
credit of approximately $10,800,000; (iv) the Company sold the Marco Shores
Country Club and Golf Course to an affiliate of Yasawa for an aggregate sales
price of $5,500,000, with the affiliate assuming an existing first mortgage of
approximately $1,100,000 and the Company receiving debt reduction credit of
$2,400,000, such that the Company obtained cash proceeds from this transaction
of $2,000,000, which amount was used for working capital; (v) an affiliate of
Yasawa agreed to lease the Marco Shores Country Club and Golf Course to the
Company for a period of approximately one year; (vi) an affiliate of Yasawa and
the Company agreed to amend the terms of the warrants to increase the number of
shares issuable upon their exercise from 277,387 shares to 289,637 shares and to
adjust the exercise price to an aggregate of approximately $314,000; (vii)
Yasawa exercised the warrants in exchange for debt reduction credit of
approximately $314,000; (viii) Yasawa released certain collateral held for the
bank loan; (ix) an affiliate of Yasawa agreed to make an additional loan of up
to $1,500,000 to the Company, thus providing the Company with a future line of
credit (all of which was drawn and outstanding as of December 31, 1996); and (x)
Yasawa agreed to restructure the payment terms of the remaining $5,106,000 of
the bank loan as a loan from Yasawa (the "Yasawa Loan").
The Yasawa Loan bears interest at the rate of 11% per annum, with payment
of interest deferred until December 31, 1993, when only accrued interest became
payable. Commencing January 31, 1994, principal and interest became payable
monthly, with all unpaid principal and accrued interest being due and payable on
December 31, 1997. As of December 31, 1996, $6,362,000 in principal and accrued
interest was in default under the Yasawa Loan.
On April 30, 1993 Selex loaned the Company an additional $1,000,000
collateralized by a first mortgage on certain of the Company's property in its
Marion Oaks, Florida community (the "Second Selex Loan"). Interest under the
Second Selex Loan was 11% per annum, deferred until December 31, 1993, and
principal was to be repaid at $3,000 per lot for lots requiring release from the
mortgage, with the entire unpaid principal balance and interest accruing from
January 1, 1994 to April 30, 1994 due and payable on April 30, 1994. Although
Selex had certain conversion rights under the Second Selex Loan in the event the
Company sold any Common Stock or Preferred Stock prior to payment in full of all
amounts due to Selex under the Second Selex Loan, such rights were voided. The
Second Selex Loan was satisfied on May 22, 1995 through the closing of the
Second Conquistador Acquisition, discussed below.
From July 9, 1993 through December 31, 1993, Selex loaned the Company an
additional $4,400,000 collateralized by a second mortgage on certain of the
Company's property on which Selex and/or Yasawa hold a first mortgage pursuant
to a Loan Agreement dated July 14, 1993 and amendments thereto (the "Third Selex
Loan"). The Third Selex Loan bears interest at 11% per annum, with interest
deferred until December 31, 1993. Principal is to be repaid at $3,000 per lot
for lots requiring release from the mortgage, with the entire unpaid principal
balance and interest accruing from January 1, 1994 to April 30, 1994 due and
payable on April 30, 1994. The Second Conquistador Acquisition, discussed below,
closed on May 22, 1995, provided a reduction of the debt due and payable under
the Third Selex Loan. As of December 31, 1996, the remaining balance of
$4,155,000 in principal and accrued interest remained unpaid and in default.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
5. Mortgages and Similar Debt - (Continued)
In February, 1994, Yasawa loaned the Company an additional amount of
approximately $514,900 at an interest rate of 8% per annum (the "Second Yasawa
Loan"). Since May, 1994, additional amounts were advanced to the Company under
the Second Yasawa Loan to enable the Company to pay certain essential expenses,
including payment of certain real estate taxes, and effectuate settlements with
the Company's principal creditors. As of December 31, 1996, an aggregate amount
of $6,012,000 had been advanced to the Company under the Second Yasawa Loan and
the balance of $6,752,000 in principal and accrued interest remains unpaid.
On May 22, 1995, the Company closed a transaction with Conquistador (the
"Second Conquistador Acquisition") for the sale of an administration building
and a multi-family site in the Company's St. Augustine Shores community as well
as the remaining lot inventory in the Company's FeatherNest community at Marion
Oaks in consideration for the satisfaction of $2,599,300 of principal and
accrued interest on the Second and Third Selex Loans. In a separate transaction
which also closed on the same date, the Company sold to Conquistador (the "Third
Conquistador Acquisition") four single family residential lots in the St.
Augustine Shores community for $100,000 in cash. These transactions were
accounted for in accordance with generally accepted accounting principles for
these types of related party transactions. Accordingly, the resulting gain of
$1,900,000 was treated as a contribution of capital and recorded directly to
capital surplus.
As previously stated, Messrs. Muyres and Zwaans also serve as directors and
executive officers of M&M First Coast Realty ("M&M"). The Company had leased
certain office space to M&M at its St. Augustine Shores community pursuant to a
Lease Agreement dated August 10, 1990. A payment of approximately $21,300 in
delinquent rental payments was made on May 22, 1995 upon the closing of the
Second Conquistador Acquisition, which included the sale of the St. Augustine
Administration Building to which the lease pertained.
At December 31, 1995, $4,200,000 of accrued interest due to Selex, Yasawa
and their affiliates was reclassified as non-interest bearing principal pursuant
to an agreement with the lenders. Through December 31, 1996, $1,140,000 in
principal was repaid under the First Selex Loan through the exercise of the
above described Option, the Second Selex Loan was repaid in full, $1,380,900 in
principal was repaid under the Third Selex Loan, and $136,000 in principal and
$346,000 in accrued interest was repaid under the Yasawa loan. As of December
31, 1996, the Company had loans outstanding from Selex, Yasawa and their
affiliates in the aggregate amount of approximately $24,147,000, including
accrued interest of $1,778,000, all of which are in default, including
approximately $8,845,000, which is owed to Selex, including accrued interest of
approximately $650,500 (10% per annum on the First Selex Loan, 11% per annum on
the Third Selex Loan and 12% per annum on the Empire Note assigned to Selex);
approximately $13,114,000, which is owed to Yasawa, including accrued interest
of approximately $945,000 (11% per annum on the Yasawa Loan and 8% per annum on
the Second Yasawa Loan); and approximately $2,188,000, which is owed to an
affiliate of Yasawa, including accrued interest of approximately $183,000 (12%
per annum). The loans from Selex, Yasawa and their affiliates are secured by
substantially all of the assets of the Company.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
6. Income Taxes
Effective December 26, 1992, the Company adopted Statement of Accounting
Standard No. 109 "Accounting for Income Taxes." There was no effect from the
adoption of this standard. Under this standard deferred income assets and
liabilities are computed annually for the difference between financial
statements and the tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future bases on enacted tax and rates
applicable to periods in which the differences are expected to affect taxable
income. Income tax expense is the tax payable or refundable for the period plus
or minus the change during the period in deferred assets and liabilities.
For the years ended December 31, 1996 and 1995, the Company had a net loss
for tax purposes and, as a result, there was no tax payable or refundable and
there was no change in the net deferred tax asset. Accordingly, there was no tax
provision for such years.
As of December 31, 1996, the Company had a net deferred tax asset of
approximately $22,356,000 which primarily resulted from the tax effect of the
Company's net operating loss carryforward of $16,489,000 and losses on
subsidiaries sold in prior years of $3,960,000. A valuation allowance of
$22,356,000 has been established against the net deferred tax asset.
As of December 31, 1995, the Company had a net deferred tax asset of
approximately $23,615,000 which primarily resulted from the tax effect of the
Company's net operating loss carryforward of $17,561,000 and losses on
subsidiaries sold in prior years of $3,960,000. A valuation allowance of
$23,615,000 has been established against the net deferred tax asset.
The Company's regular net operating loss carryover for tax purposes is
estimated to be $42,740,000 at December 31, 1996, of which $11,022,000 was
available through 1999, $364,000 through 2002, $9,189,000 through 2005,
$4,780,000 through 2006, $5,029,000 through 2008, $5,402,000 through 2009, and
the remainder through 2011. In addition to the net operating loss carryover,
investment tax credit carryovers of approximately $116,000, which expire from
1997 through 2001, are available to reduce federal income tax liabilities only
after the net operating loss carryovers have been utilized.
The utilization of the Company's net operating loss and tax credit
carryforwards could be impaired or reduced under certain circumstances, pursuant
to changes in the federal income tax laws effected by the Tax Reform Act of
1986. Events which affect these carryforwards include, but are not limited to,
cumulative stock ownership changes of 50% or more over a three-year period, as
defined, and the timing of the utilization of the tax benefit carryforwards.
7. Liability for Improvements
The Company has an obligation to complete land improvements upon deeding
which, depending on contractual provisions, typically occurs 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 at
December 31, 1996 and 1995 was approximately $15,152,000 and $15,666,000 (as
adjusted for the 1992 Consent Order), respectively. The foregoing estimates
reflect the Company's current development plans at its communities (see Note 8).
These estimates include estimated development obligations applicable to sold
lots of approximately $1,134,000 and $1,295,000, respectively, a liability to
provide title insurance and deeding costing $1,139,000 and $1,217,000,
respectively, and an estimated cost of street maintenance, prior to assumption
of such obligations by local governments, of $880,000 and $1,150,000,
respectively, all of which are included in deferred revenue. Included in cash at
December 31, 1996 and December 31, 1995, are escrow
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
7. Liability for Improvements - (Continued)
deposits of $360,000 and $489,000, respectively, restricted for completion of
improvements in certain of the Company's communities.
In May, 1994 the Company implemented a program to exchange purchasers who
contracted to purchase property which is undeveloped to property which is
developed. As of December 31, 1996, approximately 84% of the customers whose
lots are currently undeveloped have opted to exchange. The Company's goal is to
eliminate its development obligation (with the exception of its road maintenance
obligations in Marion Oaks) under the 1992 Consent Order through this exchange
program and settlement of all remaining maintenance and improvements obligations
in Citrus Springs through a final agreement with Citrus County (entered into in
May 1995).
The anticipated expenditures for land improvements, title insurance and
deeding to complete areas from which sales have been made through December 31,
1996 are as follows:
December 31, 1996
------------------
(in thousands)
1997.................................... $ 689
1998.................................... 1,135
1999.................................... 1,192
2000+................................... 12,136
--------
Total.............................. $ 15,152
========
8. Commitments and Contingent Liabilities
Total rental expense for the years ended December 31, 1996, December 31,
1995 and December 31, 1994 was approximately $148,000, $172,000 and $773,000,
respectively.
The Company has no real estate leases that extend beyond 2000. Estimated
rental expense under these leases is expected to be approximately $148,000
annually. The Company has no material equipment leases.
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.
The aggregate amount of all monies paid in (including paid-in interest) on all
homesite contracts having outstanding contractual obligations (primarily to
complete improvements) at December 31, 1996 was approximately $5,121,000.
As a result of the delays in completing the land improvements to certain
property sold in certain of its Central and North Florida communities, the
Company fell behind in meeting its contractual obligations to its customers. In
connection with these delays, the Company, in February, 1980, entered into a
Consent Order with the Division which provided a program for notifying affected
customers. The Consent Order, which was restated and amended, provided a program
for notifying affected customers of the anticipated delays in the completion of
improvements (or, in the case of purchasers of unbuildable lots in certain areas
of the Company's Sunny Hills community, the transfer of development obligations
to core growth areas of the community); various options which may be selected by
affected purchasers; a schedule for completing certain
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
8. Commitments and Contingent Liabilities - (Continued)
improvements; and a deferral of the obligation to install water mains until
requested by the purchaser. Under an agreement with Topeka Group Incorporated
("Topeka"), which purchased the Company's utilities in 1989, Topeka's utility
companies have agreed to furnish utility service to the future residents of the
Company's communities on substantially the same basis as such services were
provided by the Company. The Consent Order also required the establishment of an
improvement escrow account as assurance for completing such improvement
obligations.
In June, 1992, the Company entered into the 1992 Consent Order with the
Division, which replaced and superseded the original Consent Order, as amended
and restated. Among other things, the 1992 Consent Order consolidated the
Company's development obligations and provided for a reduction in its required
monthly escrow obligation to $175,000 from September, 1992 through December,
1993. Beginning January, 1994 and until development is completed or the 1992
Consent Order is amended, the Company is required to deposit $430,000 per month
into the escrow account. As part of the assurance program under the 1992 Consent
Order, the Company and its lenders granted the Division a lien on certain
receivables and future receivables. The Company defaulted on its obligation to
escrow $430,000 per month for the period of January, 1994 through the present
and, in accordance with the 1992 Consent Order, collections on Division
receivables were escrowed for the benefit of purchasers from March 1, 1994
through April 30, 1994. In May, 1994 the Company implemented a program to
exchange purchasers who contracted to purchase property which is undeveloped to
property which is developed. As of December 31, 1996, approximately 84% of the
customers whose lots are currently undeveloped have opted to exchange or were
otherwise resolved. Consequently, the Division has allowed the Company to
utilize collections on receivables since May 1, 1994. Because of the Company's
default, the Division could also exercise other available remedies under the
1992 Consent Order, which remedies entitle the Division, among other things, to
halt all sales of registered property.
The Company's goal is to eliminate its development obligation (with the
exception of its maintenance obligation in Marion Oaks) under the 1992 Consent
Order through this exchange program and settlement of all remaining maintenance
and improvements obligations in Citrus Springs through a final agreement with
Citrus County (entered into in May 1995). Pursuant to the 1992 Consent Order,
the Company has limited the sale of single-family lots to lots which front on a
paved street and are ready for immediate building.
Based upon the Company's experience with affected customers, the Company
believes that the total refunds arising from delays in completing improvements
will not materially exceed the amount provided for in the consolidated financial
statements. Approximately $5,000 of the provision for the total refunds relating
to the delays of improvements remained in accrued expenses and other at December
31, 1996.
As of December 31, 1996, the Company had estimated development obligations
of approximately $1,134,000 on sold property, an estimated liability to provide
title insurance and deeding costing $1,139,000 and an estimated cost of street
maintenance, prior to assumption of such obligations by local governments, of
$880,000, all of which are included in deferred revenue. The total cost to
complete improvements at December 31, 1996 to lots subject to the 1992 Consent
Order, including the previously mentioned obligations, and to all lots, sold and
unsold, including the St. Augustine Shores community, was estimated to be
approximately $15,152,000. As of December 31, 1996 and December 31, 1995 the
Company had in escrow approximately $360,000 and $489,000, respectively,
specifically for land improvements at certain of its Central and North Florida
communities.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
8. Commitments and Contingent Liabilities - (Continued)
The Company's continuing liquidity problems have precluded the timely
payment of the full amount of its real estate taxes. On properties where
customers have contractually assumed the obligation to pay into a tax escrow
maintained by the Company, the Company has and will continue to pay delinquent
real estate taxes as monies are collected from customers. Delinquent real estate
taxes aggregated approximately $2,371,000 as of December 31, 1996.
The Company's corporate performance bonds to assure the completion of
development at its St. Augustine Shores community expired in March and June,
1993. Such bonds cannot be renewed due to a change in the policy of the Board of
County Commissioners of St. Johns County which precludes allowing any developer
to secure the performance of development obligations by the issuance of
corporate bonds. In the event that St. Johns County elects to undertake the
completion of such development work, the Company would be obligated with respect
to 1,000 unimproved lots at St. Augustine Shores in the amount of approximately
$6,200,000. The Company intends to submit an alternative assurance program for
the completion of such development and improvements to the County for its
approval.
In the action styled Lee Su Wen Ni et. al. v. The Deltona Corporation and
Scafholding B.V., Case No. 95-4422-CA-E, filed in the Circuit Court of Marion
County, Florida on October 11, 1995, the plaintiff alleges that the liquidated
damages provision in the Company's installment contracts for the sale of its
properties is unenforceable under Florida Law and contests the method utilized
by the Company to calculate actual damages in the event of contract
cancellations. As part of the complaint, the plaintiff is seeking certification
as a class action, as well as unspecified compensatory damages, together with
interest, costs and fees. The Company filed a Motion to Dismiss in response to
the plaintiff's complaint. The trial court dismissed the claim of the class
representative against the Company and against Scafholding B.V. An appeal from
that dismissed is pending. There has been no ruling by the appellate court. In
the event that this appeal is successful and if, class certification is
authorized, and if the Company is not successful in its defenses, a substantial
claim could be asserted against the Company.
In addition to the matters discussed above and in Note 9, the Company is a
party to other litigation relating to the conduct of its business which is
routine in nature and, in the opinion of management, should have no material
effect upon the Company's operation.
9. Marco Island-Marco Shores Permits
On April 16, 1976, the U.S. Army Corps of Engineers (the "Corps") denied
the Company's application for dredge and fill permits required to complete
development of the Marco Island community. These denials adversely affected the
Company's ability to obtain the required permits for the Marco Shores community
as originally platted. Following the denials, the Company instituted legal
proceedings, implemented various programs to assist its customers affected by
the Corps' action, and applied for permits from certain administrative agencies
for other areas of the Company's Marco ownership.
On July 20, 1982, the Company entered into an agreement with the State of
Florida and various state and local agencies (the "Settlement Agreement"),
endorsed by various environmental interest groups, to resolve pending litigation
and administrative proceedings relative to the Marco permitting issues. The
Settlement Agreement became effective when,
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
9. Marco Island-Marco Shores Permits - (Continued)
pursuant thereto, approximately 12,400 acres of the Company's Marco wetlands
were conveyed to the State in exchange for approximately 50 acres of State-owned
property in Dade County, Florida. In October, 1987, the Company sold the Dade
County property for $9,000,000. The Settlement Agreement also allowed the
Company to develop as many as 14,500 additional dwelling units in the Marco
vicinity. On October 11, 1991, 1,300 acres of Marco property (7,000 dwelling
units) were conveyed to the Company's lenders for debt reduction.
The Company placed certain properties in trust to meet its refund
obligation to affected customers. On September 14, 1992, the Circuit Court of
Dade County, Florida approved a settlement of certain class action litigation
instituted by customers affected by the Marco permit denials, under the terms of
which the Company was required, among other things, to convey more than 120
acres of multi-family and commercial land that had been placed in trust to the
trustee of the 809 member class. As part of the settlement, the Company
guaranteed the amount to be realized from the sale of the conveyed property.
This guaranteed amount shall not exceed $2,000,000.
Following the closing in 1995 on a majority of the property conveyed to the
Trust, the Company recorded an extraordinary gain of $702,000 resulting from a
reduction in the amount of its guarantee pursuant to the Settlement Agreement.
In September, 1996 the Company satisfied all remaining obligations under
the Settlement Agreement resulting in an additional gain of $331,000.
10. Common Stock and Earnings per Share Information
Under the Company's 1987 Stock Incentive Plan (the "Stock Plan"), an
aggregate of 500,000 shares of Common Stock have been reserved for the granting
of non-qualified stock options and the award of incentive shares to such
executive officers and other key employees of the Company as may be determined
by the Committee administering the Stock Plan. The extent to which incentive
shares are earned and charged to expense will be determined at the end of the
three-year award cycle, based on the achievement of the Company's net income
goal for the award cycle. Payment of incentive shares earned may be made in
shares of the Company's Common Stock and/or cash. If paid in cash, such payment
will be based on the average daily closing price of the Company's Common Stock
during the last month of the award cycle. The option features of the Stock Plan
are substantially the same as the Company's incentive stock option plan
described above. A total of 79,940 shares were issued and $233,412 was paid with
respect to awards earned under the Stock Plan as of December 29, 1989 and no
additional awards were granted until March 1993 when Bruce Weiner was granted
20,000 shares of the Company's Common Stock at a price of $4.00 per share, which
was in excess of the market value of the Company's Common Stock on the grant
date. Such option expired unexercised following Mr. Weiner's removal as an
officer of the Company in 1994.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
10. Common Stock and Earnings per Share Information - (Continued)
On June 18, 1992, the Company issued warrants to its lenders for the
purchase of 277,387 shares of Common Stock at $1.00 per share (the Warrants").
The Warrants became exercisable on June 18, 1992, were subject to mandatory
repurchase by the Company at the request of the holder at any time after
December 18, 1993 at 75% of the market price of the Company's Common Stock and
expired on the later of: (i) 30 days after payment in full of all debt under the
Sixth Restatement; (ii) July 31, 1997, or (iii) such later date as to which the
expiration date had been extended to implement the provisions applicable to the
mandatory repurchase option.
On December 2, 1992, the Company entered into a Warrant Exercise and Debt
Reduction Agreement with Yasawa, providing for the number of shares issuable
upon acquisition of the Warrants by Yasawa and the exercise of such Warrants by
Yasawa to be increased from 277,387 shares of Common Stock to 289,637 shares of
Common Stock, and adjusting the exercise price to an aggregate of approximately
$314,000. On December 11, 1992, following the acquisition of the Company's bank
loan and the Warrants by Gram and the immediate transfer of the bank loan and
the Warrants by Gram to Yasawa, Yasawa exercised the Warrants in exchange for
debt reduction credit to the Company of approximately $314,000.
As part of the Selex transaction, Selex was granted an option which was
approved by the holders of a majority of the outstanding shares of the Company's
Common Stock at the Company's 1992 Annual Meeting, to convert the Selex Loan, or
any portion thereof, into a maximum of 850,000 shares of the Company's Common
Stock at a per share conversion price equal to the greater of (i) $1.25 or (ii)
95% of the market price of the Company's Common Stock at the time of conversion,
but in no event greater than $4.50 per share (the "Option"). However, on
September 14, 1992, Selex formally waived and relinquished its right to exercise
the Option as to 250,000 shares of the Company's Common Stock to enable the
Company to settle certain litigation involving the Company through the issuance
of approximately 250,000 shares of the Company's Common Stock to the claimants,
without jeopardizing the utilization of the Company's net operating loss
carryforward.
On February 17, 1994, Selex exercised the remaining full 600,000 share
Option at a conversion price of $1.90 per share, such that $1,140,000 in
principal was repaid under the First Selex Loan through such conversion. As a
consequence of such conversion, Selex holds 2,820,066 shares of the Company's
Common Stock (41.9% of the outstanding shares of Common Stock of the Company
based upon the number of shares of the Company's Common Stock outstanding as of
December 31, 1996).
Earnings (loss) per common and common equivalent share were computed by
dividing net income (loss) by the weighted average number of shares of Common
Stock and common stock equivalents outstanding during each period. The net loss
and the average number of shares of Common Stock and common stock equivalents
used to calculate earnings (loss) per share for 1996, 1995 and 1994 were
$(896,000), $(2,203,000) and $(3,906,000) and 6,729,648, 6,699,923 and
6,668,765, respectively.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
11. Business Segments
Years ended
----------------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 25,
1996 1995 1994 1993 1992
------------ ------------- ------------- ------------ ------------
(in thousands)
Revenues
Real estate:
Net land sales(a)......... $ 4,296 $ 2,394 $ 2,058 $ 2,432 $ 2,092
Housing revenues.......... 1,202 1,383 2,543 344 -0-
Improvement revenues(b)... 1,008 1,052 1,214 4,725 2,404
Interest income(c)........ 1,464 1,019 1,046 1,197 3,584
Other..................... -0- -0- -0- 67 -0-
-------- -------- -------- -------- --------
Total real estate...... 7,970 5,848 6,861 8,765 8,080
Other(d)................... 963 1,030 1,832 3,447 4,372
Intersegment sales(e)...... (283) (190) (152) (113) (235)
-------- -------- -------- -------- --------
Total.................. $ 8,650 $ 6,688 $ 8,541 $ 12,099 $ 12,217
======== ======== ======== ======== ========
Operating profits (losses)
Real estate................ $ 3,077 $ 1,377 $ 1,055 $ (3,073) $ 1,486
Other...................... 443 341 1,032 279 2,209
General corporate expense.. (2,966) (2,981) (4,147) (4,721) (7,057)
Interest expense........... (1,781) (1,642) (1,847) (1,257) (3,356)
Income (loss) from
continuing operations
before income taxes
and extraordinary items... $ (1,227) $ (2,905) $ (3,906) $ (8,772) $ (6,718)
======== ======== ======== ======== ========
Real
Estate Other Corporate Total
-------- --------- --------- ---------
Identifiable assets........ 1996 $ 18,864 $ 502 $ 56 $ 19,422
1995 18,623 289 268 19,180
1994 21,515 248 346 22,109
Depreciation expense....... 1996 $ 38 $ 5 $ 17 $ 60
1995 34 5 25 64
1994 49 8 29 86
Capital expenditures....... 1996 $ 2 $ -0- $ 2 $ 4
1995 24 -0- 19 43
1994 -0- -0- 26 26
- -----------------------
(a) Net land sales consist of gross land sales less estimated uncollectible
installment sales and contract valuation discount and, prior to 1992,
deferred revenue (see Notes 1, 2 and 7 to Consolidated Financial
Statements).
(b) Improvement revenues consist of revenue recognized due to completion of
improvements on prior period sales and exchanges from undeveloped to
developed lots.
(c) Interest income primarily consists of interest earned on contracts and
mortgages receivable and on temporary cash investments and the
amortization of valuation discounts.
(d) Other consists of revenues from sales other than real estate, the major
portion of which came from the country club operations in prior years.
In 1994, the major portion consists of a gain of $1,051,000 from the
termination of its office lease on its Miami corporate headquarters.
(e) Intersegment sales consist primarily of sales between the Company and
its title insurance subsidiary.
54
SUPPLEMENTAL UNAUDITED QUARTERLY FINANCIAL DATA
(in thousands, except per share amounts)
Extraordinary
(Loss) Item: Gain on
From Settlement
Operations Relating to
Before (Loss) the Net
Income From Marco Refund Income
Revenues Taxes Operations Obligation (Loss)
--------- -------- ---------- ------------ -----------
1996
First.... $ 2,017 $ (404) $ (404) $ -0- $ (404)
Second... $ 2,251 $ (179) $ (179) $ -0- $ (179)
Third.... $ 2,607 $ (151) $ (151) $ 331 $ 180
Fourth... $ 1,775 $ (493) $ (493) $ -0- $ (493)
-------- -------- -------- -------- --------
Total...... $ 8,650 $ (1,227) $ (1,227) $ 331 $ (896)
======== ======== ======== ======== ========
1995
First.... $ 1,829 $ (667) $ (667) $ 702 $ 35
Second... 1,920 (363) (363) -0- (363)
Third.... 1,218 (743) (743) -0- (743)
Fourth... 1,721 (1,132) (1,132) -0- (1,132)
-------- -------- --------- -------- --------
Total...... $ 6,688 $ (2,905) $ (2,905) $ 702 $(2,203)
======== ======== ======== ======== ========
1994
First.... $ 1,831 $ (1,802) $ (1,802) $ -0- $(1,802)
Second... 1,740 (1,072) (1,072) -0- (1,072)
Third.... 2,105 (791) (791) -0- (791)
Fourth... 2,865 (241) (241) -0- (241)
-------- -------- -------- -------- =======
Total...... $ 8,541 $ (3,906) $ (3,906) $ -0- $(3,906)
======== ======== ======== ======== =======
Earnings (Loss) Per Share
Extraordinary Net Income
Operations Items (Loss)
----------- ------------- ----------
1996
First...................... $ (.06) $ -0- $ (.06)
Second..................... $ (.03) $ -0- $ (.03)
Third...................... $ (.02) $ .05 $ .03
Fourth..................... $ (.07) $ -0- $ (.07)
------- -------- -------
Total........................ $ (.18) $ .05 $ (.13)
======= ========= =======
1995
First...................... $ (.10) $ .10 $ -0-
Second..................... (.05) -0- (.05)
Third...................... (.11) -0- (.11)
Fourth..................... (.17) -0- (.17)
------- -------- -------
Total........................ $ (.43) $ .10 $ (.33)
======= ======== =======
1994
First...................... $ (.28) $ -0- $ (.28)
Second..................... (.16) -0- (.16)
Third...................... (.12) -0- (.12)
Fourth..................... (.04) -0- (.04)
------- -------- -------
Total........................ $ (.59)(a) $ -0- $ (.59)
======== ======== ========
- -------------------
(a) Total shown does not agree with earnings per share set forth in
the Company's Statement of Consolidated Operations for the year
ended December 31, 1994 due to differences in the calculation of
the weighted average number of shares outstanding at the end of
each quarter during the year.
55
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See Item 8, Index to Consolidated Financial Statements and
Supplemental Data.
(a) 2. Financial Statement Schedules
Page
-------
Independent Auditors' Report.................. 57
Schedule VIII - Valuation and qualifying
accounts for the three years ended
December 31, 1996............................. 58
All other schedules are omitted because they are not applicable or not required,
or because the required information is included in the Consolidated Financial
Statements or Notes thereto or the 1997 Annual Meeting Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A,
incorporated herein by reference.
(a) 3. Exhibits
See the Exhibit Index included herewith.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed for the year ended December 31, 1996.
56
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF THE DELTONA
CORPORATION:
We have audited the consolidated financial statements of The Deltona
Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and for each of the three years in the period ended December 31, 1996, and have
issued our report thereon dated March 25, 1997 (which expresses an unqualified
opinion and includes an explanatory paragraph relating to the Company's ability
to continue as a going concern), included elsewhere in this Annual Report on
Form 10-K. Our audits also included the financial statement schedules listed in
Item 14(a)2 of this Annual Report on Form 10-K. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 25, 1997
57
SCHEDULE VIII
THE DELTONA CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
Charged to
Those Valuation and Qualifying Accounts Balance at Revenues, Deductions Balance at
Which are Deducted in the Balance Sheet Beginning Costs, and from End of
from the Assets to Which They Apply of Period Expenses Reserves Period
- --------------------------------------- ---------- ---------- ---------- ----------
Year ended December 31, 1996
Allowance for uncollectible contracts(a)..$ 1,629 $ 1,706 $ 906 $ 2,429
======= ======== ======== =======
Unamortized contract valuation discount(b)$ 829 $ 535 $ 800 $ 1,094
======= ========= ======== =======
Year ended December 31, 1995
Allowance for uncollectible contracts(a)..$ 1,373 $ 850 $ 594 $ 1,629
======= ======== ======= =======
Unamortized contract valuation discount(b)$ 913 $ 379 $ 463 $ 829
======= ======= ======= =======
Year ended December 31, 1994
Allowance for uncollectible contracts(a)..$ 1,456 $ 712 $ 795 $ 1,373
======= ======= ======= =======
Unamortized contract valuation discount(b)$ 895 $ 223 $ 205 $ 913
======= ======= ======= =======
Unamortized mortgage valuation discount(d)$ 100 $ -0- $ 100 $ -0-
======= ======= ======= =======
- ------------
(a) Represents estimated uncollectible contracts receivable (see Notes 1
and 2 to Consolidated Financial Statements).
(b) Represents the unamortized discount generated from initial valuations
of contracts receivable (see Notes 1 and 2 to Consolidated Financial
Statements).
(c) Represents allowance for estimated uncollectible mortgages and other
receivables.
(d) Represents the unamortized discount generated from initial valuations
of mortgages receivable (see Notes 1 and 2 to Consolidated Financial
Statements).
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE DELTONA CORPORATION
(Company)
By /s/ Donald O. McNelley DATE: March 25, 1997
-----------------------------
Donald O. McNelley, Treasurer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the date indicated.
/s/ Antony Gram
------------------------------
Antony Gram, Chairman of the
Board of Directors & Chief
Executive Officer
/s/ Neil E. Bahr
------------------------------
Neil E. Bahr, Director
/s/Earle D. Cortright, Jr.
------------------------------
Earle D. Cortright, Jr.,
President, Chief Operating
Officer & Director
/s/George W. Fischer
------------------------------
George W. Fischer, Director
/s/Rudy Gram
------------------------------
Rudy Gram, Director
/s/Thomas B. McNeill
------------------------------
Thomas B. McNeill, Director DATE: March 25, 1997
59