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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 THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ending December 31, 1998
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)
8014 SW 135th Street Road
Ocala, FL 34473
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (352) 307-8100
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: $1,085,000 (based upon the average price of such stock as
traded over-the-counter ($.31) at December 31, 1998 multiplied by the 3,498,836
shares of stock owned by non-affiliates, excluding 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: 13,544,277 shares of common
stock, $1 par value, as of March 19, 1999, excluding 12,228 shares held in
treasury.
DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated Part(s)
* Registrant's 1999 Annual Meeting Proxy Statement Part III
to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A
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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.............................. 9
Employees..................................... 9
Competition................................... 9
Regulation.................................... 9
Item 3 ............ Legal Proceedings............................. 12
Item 4 ............ Not Applicable
PART II
Item 5 ............ Price Range of Common Stock and Dividends..... 13
Item 6 ............ Selected Consolidated Financial Information... 14
Item 7 ............ Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 8 ............ Index to Consolidated Financial Statements and
Supplemental Data ........................... 23
Item 9 ............ Not Applicable
PART IV
Item 14 ........... Exhibits, Financial Statement Schedules and
Reports on Form 8-K ......................... 45
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 is the developer of eleven planned communities in
Florida, including TimberWalk, which is located in the western portion of Marion
Oaks. Seven communities are completed and four are in various stages of
development. The Company plans, designs and develops roads, waterways,
recreational amenities, grading and drainage systems within these communities.
Since 1962, the Company has sold over 156,000 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's land holdings in Florida include an inventory of
approximately 17,500 unsold platted single-family and multi-family lots 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 operated
such amenities until their conveyance or sale.
Historically, the Company had 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 entered
into a Developer Agreement for each of its communities, which provides the
policies for water and sewer utility services to the Company and it's
purchasers.
The Company is incorporated in Delaware and has its principal office at
8014 SW 135th Street Road, Ocala, Florida 34473. Its telephone number is
(352)307-8100. The Company, as used herein, refers to The Deltona Corporation
and, unless the context otherwise indicates, its wholly-owned subsidiaries.
Recent Developments
In September 1998, the Company moved its principal office from Miami,
Florida to TimberWalk at Marion Oaks in Central Florida. This move signifies the
Company's commitment to Central Florida and its dedication to the success of its
communities.
On September 29, 1998, Earle D. Cortright, Jr. and the Company agreed to
terms for his resignation as President of the Company effective October 1, 1998.
Mr. Cortright received the sum of $400,000 as compensation for termination of
his Employment Agreement: $200,000 of which was paid in October 1998 and the
remaining $200,000 paid in January 1999.
On September 29, 1998, David M. Harden and the Company agreed to terms for
his resignation as Senior Vice President - Marketing Administration of the
Company effective October 1, 1998. Mr. Harden will receive the sum of $114,963
as compensation for termination of his Employment Agreement: $20,663.00, which
was paid on October 1, 1998 and the balance payable in semi-monthly installments
of $4,100 on the 1st and 15th of each month until paid for in full. In addition,
in February 1999, Mr. Harden received reimbursement for the actual costs paid by
him for closing on the sale of his Miami residence, $16,000, and is entitled to
receive reimbursement for the actual costs paid by him for closing on the sale
of an alternative home (not to exceed the sum of $14,000).
1
On October 2, 1998, the Board of Directors appointed Mr. Antony Gram to the
position of President of the Company , in addition to his position as Chairman
of the Board and Chief Executive Officer. On October 2, 1998, the Board of
Directors promoted Sharon J. Hummerhielm from her position as Vice President and
Corporate Secretary to the position of Executive Vice President and Corporate
Secretary.
During 1998, the Company transferred 14 lots and 4 tracts of land to Swan
Development Corporation ("Swan"), an affiliate of Yasawa Holdings N.V.
("Yasawa") and Scafholding B.V. ("Scafholding"). In return, Swan built an office
complex on part of the land for use by the Company for a period of 54 months,
renewable thereafter. The Company valued the land transferred at approximately
$440,000 and recorded the net present value of the use of the office complex of
approximately $375,000 as prepaid rent. The difference between the net present
value of the rent and the cost of the land of approximately $290,000 is recorded
as deferred profit at December 31, 1998.
Additionally during 1998, Scafholding advanced the Company $200,000 against
future administrative fees due the Company for selling lots owned by
Scafholding. The Company recorded this advance as a deposit. During 1998, the
Company earned $27,780 in fees for sold lots.
On December 9, 1998, the Company announced that they had appointed longtime
community development consultant and executive Jim Fleming as President of
Deltona Marketing Corporation, the Company's sales and marketing subsidiary.
Fleming, who began with the Company on January 4, 1999, has held similar chief
marketing executive positions for other large Florida land development firms.
As of December 31, 1998, the Company's outstanding debt to Scafholding was
$1,130,000 , secured by a first lien on the Company's receivables; the Company's
outstanding debt to Yasawa was $6,670,000 secured by a second lien on the
Company's receivables and a mortgage on all of the Company's property. As of
December 31, 1998, loans outstanding from Yasawa and Scafholding to the Company
totaled $7,800,000. The terms of repayment of this debt have been restructured
to provide for monthly payments of principal in the amount of $100,000 payable
monthly in cash or with contracts receivable at 100% of face value, plus
interest payable monthly on the declining balance at the rate of 9.6% per annum
in cash or with contracts receivable at 65% of face value. Yasawa and
Scafholding did not require the Company to pay interest for the period September
1, 1998 to December 31, 1998. As of December 31, 1998, the total amount of
interest accrued is approximately $258,000. Effective January 1, 1999, Yasawa
and Scafholding agreed to reduce the annual percentage rate for their existing
loans to the Company from 9.6% to 6% per annum.
From October 9, 1998 through the present, Swan has advanced the Company
funds to meet its working capital requirements. The Company's outstanding debt
to Swan, which is secured by a third lien on the Company's receivables, was
$765,000 and $5,690,000 as of December 31, 1998 and March 26, 1999,
respectively. The Company signed a promissory note to Swan in March 1999 which
provides that funds advanced by Swan will be paid back by the Company monthly in
contracts receivables at 90% of face value, with recourse. There will be no
interest for the first six months after an advance of money is received from
Swan by the Company; thereafter the interest shall be 6% per annum on the
outstanding balance of the advance. The amount of each monthly payment will vary
and will be dependent upon the amount of contracts receivable in the Company's
portfolio, excluding contracts receivable held as collateral for prior
receivable sales. Pursuant to the terms of the promissory note, the Company is
required to transfer to Swan monthly as debt repayment all current contracts
receivable in the Company's portfolio in excess of the aggregate sum of
$500,000. Funds advanced by Swan were used by the Company to pay approximately
$2,567,000 in outstanding real estate taxes for unsold properties with the
balance to meet the Company's working capital requirements.
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 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(in thousands)
Revenues
Real estate:
Net land sales....... $ 3,078 $ 4,045 $ 4,296 $ 2,394 $ 2,058
Housing revenues......... 1,622 1,214 1,202 1,382 2,543
Improvement revenues. 956 2,366 1,008 1,052 1,214
Interest income...... 548 1,367 1,464 1,019 1,046
-------- -------- -------- -------- --------
Total real estate...... 6,204 8,992 7,970 5,848 6,861
Other.................. 529 617 963 1,030 1,832
Intersegment sales..... (245) (184) (283) (190) (152)
-------- -------- -------- -------- --------
Total.................. $ 6,488 $ 9,425 $ 8,650 $ 6,688 $ 8,541
======== ======== ======== ======== ========
Operating profits (losses)
Real estate................ $ 1,361 $ 3,052 $ 3,077 $ 1,377 $ 1,055
Other ................. 33 185 443 341 1,033
General corporate expense.. (3,173) (3,018) (2,966) (2,981) (4,147)
Interest expense........... (812) (1,545) (1,781) (1,642) (1,847)
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes
and extraordinary items... $ (2,591) $ (1,326) $ (1,227) $ (2,905) $ (3,906)
======== ======== ======== ======== ========
Net land sales consist of gross land sales less estimated uncollectible
installment sales and contract valuation discount (see Notes 1, 2 and 7
to Consolidated Financial Statements).
Improvement revenues consist of revenue recognized due to completion of
improvements on prior period sales and exchanges from undeveloped to
developed lots.
Interest income primarily consists of interest earned on contracts and
mortgages receivable and on temporary cash investments and the
amortization of valuation discounts.
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.
Intersegment sales consist primarily of sales between the Company and
its title company 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, 1998. 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
Masterplan Year Opened Population
---------- ----------- ------ ---------- ----------- -------------- --------------
Deltona Lakes... 17,203 1962 1962 71,500 34,964 - 6
Marco Island 7,844 1964 1965 41,070 8,657 - -
Spring Hill. 17,240 1966 1967 74,400 32,909 - 6
Citrus Springs 15,954 1969 1970 6,710 33,783 - 8
St. Augustine
Shores ....... 1,985 1969 1970 7,610 3,130 - -
Sunny Hills...... 17,743 1968 1971 1,410 26,251 12,457 696
Pine Ridge....... 9,994 1969 1972 3,300 4,833 - 3
Marion Oaks14,644 1969 1973 8,370 27,537 3,592 492
Seminole Woods.. 1,554 1969 1979 510 262 - -
There is no unplatted acreage in any community.
Joint Venture Community:
Tierra Verde.... 666 1976 1977 5,100 1,036 - -
------- ------- ------- -------- -----
Total............ 104,827 219,980 173,362 16,049 1,139
======= ======= ======= ======== =====
Other Properties
Initial
Acquisition
Year Acres
----------- -----
Other Land Assets:
Other land adjacent to existing communities... Various 92
--
Total......................................... 92
==
- ----------------------
Development completed.
Excluded from these lots and tracts are approximately 110 improved and 89
unimproved lots and tracts that are required for drainage and cannot be
sold, and approximately 141 improved and 334 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 1 unimproved golf course site, as well as
approximately 427 tracts reserved for community usage such as for
greenbelts, buffer areas, church and school sites.
"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.
Excludes permit denial areas; reflects seasonal population.
Includes the South Hernando U.S. # 19 Commerce Center.
Excludes 83 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.
4
Includes TimberWalk.
Excludes 3,637 acres of unplatted natural preserve in Washington County
restricted for recreational, open space/ park use which can only be sold
subject to the underlying land use restrictions
Not included are 585 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 483 lots in Citrus Springs, 101
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
156,000 lots and tracts sold since the Company's inception, contracts receivable
presently exist with respect to approximately 425 lots and tracts with an
outstanding balance of approximately $4,296,000 at December 31, 1998, 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.
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
5
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
Two, three and four bedroom moderately-priced homes are being constructed
by independent builders at the Company's Marion Oaks Community, including
TimberWalk located in the western portion of Marion Oaks. Houses are sold with
the lot included in the sales price; however, the Company also offers build on
your own lot program for those purchasers who have previously acquired a lot.
The FeatherNest Housing Village in Marion Oaks, where the lot is included in the
price of the home, is owned by Conquistador Development Corporation and marketed
by the Company. All housing sales are made within the local market and through
the Company's independent dealer network. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
The Company is directing a greater portion of its marketing efforts to the
sale of lots with homes or lots with compulsory building obligations to offset
the negative cash effects of installment land sales, where the price of the lot
is paid for over several years and there is no commitment to build.
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.
The Company's limited inventory of multi-family housing is at its vacation
ownership complex, The Surf Club, located on the Gulf of Mexico at Marco Island.
The bulk of its inventory at The Surf Club was sold prior to 1990.
Marketing
The Company has historically sold land and housing 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, 1998, sales by independent dealers in the United States accounted
for approximately 99% (in dollar volume) of new land sales contracts; while
overseas dealers accounted for approximately 1% of such contracts.
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 71,500. 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 schools are located in the community. The Company
has completed development of this community.
6
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 41,000 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 and sold over 3,300 condominium units on the island and The Surf
Club, a 44 unit vacation ownership complex. In 1990, the Company completed the
sale of substantially all of its remaining vacation ownership weeks at The Surf
Club.
Spring Hill
Spring Hill, with an estimated population of over 74,000, 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, which
have been sold. Several shopping centers and medical centers, schools, numerous
houses of worship and fire stations are located in the community. The Company
has completed the development of this community.
Citrus Springs
Citrus Springs, with an estimated population of over 6,700, 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, schools and a convenience shopping
area are located in the community. 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 provides miscellaneous
administrative assistance and loan servicing to Citony for a fee.
In February 1997, the Company finalized the sale of the undeveloped second
Citrus Springs Golf Course to a third party, which completed the golf course
("El Diablo") in 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 over 7,600, is
located seven miles south of St. Augustine, between the Intracoastal Waterway
and U.S. Highway 1. Over 2,000 single and multi-family housing units and lots
and tracts have been sold. In December 1997, the Company sold all of its
remaining inventory at St. Augustine Shores to Swan Development Corporation
("Swan"). As part of the purchase, Swan assumed the liability for completing
improvements within St. Augustine Shores.
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, shopping facilities, a recreational building and a golf and country
club are also located in the community.
7
Sunny Hills
Sunny Hills, with a population of over 1,400 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. The community includes a golf course and country club,
which was sold by the Company, several houses of worship and convenience
shopping.
Pine Ridge
Pine Ridge, with a population of approximately 3,300, is located 34 miles
southwest of Ocala. The community's facilities include an equestrian club and
tennis courts. The Company sold over 3,500 lots and tracts and more than 53
single-family homes in Pine Ridge prior to the sale of its remaining inventory
in 1987.
Marion Oaks
Marion Oaks, with a population of over 8,300 residents, is located 18 miles
south of Ocala. Over 23,000 lots and tracts have been sold in the community. The
community includes playgrounds, two golf courses (both of which are owned by
third parties), several recreation buildings, community shopping centers and
several houses of worship. In addition, this community is home to the Company's
corporate headquarters.
Two, three and four bedroom moderately-priced homes are being constructed
by independent builders at the Company's Marion Oaks Community, including
TimberWalk located in the western portion of Marion Oaks. Houses are sold with
the lot included in the sales price; however, the Company also offers build on
your own lot program for those purchasers who have previously acquired a lot.
The FeatherNest Housing Village in Marion Oaks, where the lot is included in the
price of the home, is owned by Conquistador Development Corporation and marketed
by the Company. All housing sales are made within the local market and through
the Company's independent dealer network.
Revenues in 1999 will be generated from the sale of land inventory, from
housing sales, from the recognition of deferred revenue as land development
proceeds, from collections on existing contracts receivable and from the
Company's real estate brokerage and title company subsidiary operations.
Seminole Woods
Seminole Woods, with a population of over 500, is comprised of 1,554 acres
of property located 20 miles north of Orlando. The community's 262 single-family
lots, each with a minimum of five acres, have been sold and development
completed.
Tierra Verde
Tierra Verde, with a population of over 5,000, is a 666-acre waterfront
subdivision located eight miles south of St. Petersburg. It was developed and
marketed pursuant to a 50% joint venture, which no longer exists, between a
wholly-owned subsidiary of the Company and an unaffiliated corporation. The
community has been sold out and development completed.
Other Land Assets
The Company also owns 92 acres of land in Florida adjacent to its existing
communities.
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 to its purchasers. The
8
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, 1998, the Company had 35 employees, of whom 33 were
involved in executive, administrative, sales and community development/
maintenance capacities and 2 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 and
marketing personnel employed by the Company and its subsidiaries.
Competition
The Company faces competition in the sale of its lots primarily from
property owners in the Company's communities seeking to resell their land. The
Company is also facing competition, on a regional level, from 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")
precludes the issuance of development orders or permits if public facilities
such as transportation, water and sewer services will not be available
concurrent with development. Development orders have been issued for, and
development has commenced in, the Company's existing communities (with
development being completed in certain of these communities). Thus, the
Company's communities are less likely to be affected by the new growth
management policies than future communities. Any future communities developed by
the Company will be strongly impacted by new growth management policies. Since
the Act and its implications are consistently being re-examined by the State,
together with local governments and various state and local governmental
agencies, the Company cannot further predict the timing or the effect of new
growth management policies, but anticipates that such policies may increase the
Company's permitting and development costs.
Environmental
To varying degrees, certain permits and approvals will be necessary to
complete the development of all of the Company's communities. 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
9
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.
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 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; regulates 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, in 1980 the Company entered into a Consent Order
with the Division which provided a program for notifying affected customers.
Since 1980, the Consent Order was restated and amended several times,
culminating in the 1992 Deltona Consent Order.
On December 30, 1997, the Division approved the formation of a Lot Exchange
Trust into which the Company conveyed sufficient exchange inventory to provide
exchanges to customers with undeveloped lots. Concurrently, the Division
released its lien on the Company's contracts receivable, satisfied its mortgage
on the Company's property and approved a settlement of all remaining issues
under the 1992 Deltona Consent Order. The 1992 Deltona Consent Order was
formally terminated on April 13, 1998.
As of December 31, 1998, the Company had estimated development obligations
of approximately $25,000 on sold property, an estimated liability to provide
title insurance and deeding costs of $423,000 and an estimated cost of street
10
maintenance, prior to assumption of such obligations by local governments of
$612,000, all of which are included in deferred revenue. As of December 31, 1998
and December 31, 1997 the Company had in escrow approximately $7,000 and
$50,000, respectively, specifically for land improvements at certain of its
Central and North Florida communities. The Company's development obligation was
substantially reduced in 1997 by the consummation of the Agreement approved by
the stockholders on November 4, 1997. Approximately $7,400,000 of the
development obligation at St. Augustine Shores was assumed by Swan. In addition,
the creation of a Lot Exchange Trust reduced the development obligation at
Marion Oaks and Sunny Hills by approximately $5,800,000.
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.
The Company's land sales activities are further subject to the jurisdiction
of the laws of various states in which the Company's properties are offered for
sale. In addition, Florida and other jurisdictions in which the Company's
properties are offered for sale have strengthened, or are considering
strengthening, their regulation of subdividers and subdivided lands in order to
provide further assurances to the public. The Company has attempted to take
appropriate steps to modify its marketing programs and registration applications
in the face of such increased regulation, but has incurred additional costs and
delays in the marketing of certain of its properties in certain states and
countries. For example, the Company has complied with the regulations of certain
states which require that the Company sell its properties to residents of those
states pursuant to a deed and mortgage transaction, regardless of the amount of
the down payment. The Company intends to continue to monitor any changes in
statutes or regulations affecting, or anticipated to affect, the sale of its
properties and intends to take all necessary and reasonable action to assure
that its properties and its proposed marketing programs are in compliance with
such regulations, but there can be no assurance that the Company will be able to
timely comply with all regulatory changes in all jurisdictions in which the
Company's properties are presently offered for sale to the public.
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
Various 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.
11
ITEM 3
LEGAL PROCEEDINGS
The Company is subject to a lawsuit entitled Marco Island Civic
Association, Inc. et al v. The Deltona Corporation, et al, Case No. 98-3758-CA,
which was filed in the Circuit Court of Collier County Florida on October 29,
1998. The complaint alleges that the Company amended certain Declaration of
Restrictions for property in Marco Island without having the authority to do so.
The plaintiff is seeking to overturn the Amendment to the Declaration as null
and void and for unspecified relief. The complaint was amended by the plaintiff
to add claims for breach of warranty and indemnity and now includes a claim for
attorney's fees incurred in connection with prior litigation. In the amended
Complaint, the plaintiff is also seeking certification of the case as a class
action based upon an allegation that Deltona received compensation for granting
amendments. The case is in the initial discovery phase. The Company intends to
vigorously defend itself against the claims and to defeat the effort to convert
the case to a class action. In the event the plaintiff is successful and if the
class certification is authorized, and if the Company is not successful in its
defenses, a substantial claim would be obtained against the Company.
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.
12
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, 1998, the Company's Common Stock
was traded on a limited basis in the over-the-counter markets (on the bulletin
board) under the symbol DLTA. The weighted average price at which the stock was
traded at the end of the first, second, third and fourth quarters of 1998 is as
follows:
March 31, 1998 $ .466
June 30, 1998 $ .447
September 30, 1998 $ .266
December 31, 1998 $ .248
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.
13
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 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(in thousands)
Revenues ................. $ 6,487 $ 9,425 $ 8,650 $ 6,688 $ 8,541
Costs and expenses........ 9,078 10,751 9,877 9,593 12,447
----------- ---------- ----------- ---------- ----------
Loss from continuing
operations before taxes
and extraordinary items.. (2,591) (1,326) (1,227) (2,905) (3,906)
Provision for income taxes -0- -0- -0- -0- -0-
----------- ---------- ----------- ---------- ----------
Loss from operations
before extraordinary
items.................... (2,591) (1,326) (1,227) (2,905) (3,906)
Extraordinary items:
Gain on settlement related
to the Marco refund
obligation............... -0- -0- 331 702 -0-
----------- ---------- ----------- ---------- ----------
Net income (loss)
applicable to common
stock.................... $ (2,591) $ (1,326) $ (896) $ (2,203) $ (3,906)
=========== ========== =========== ========== ==========
Basic earnings per share
amounts:
Continuing operations. $ (.19) $ (.20) $ (.18) $ (.43) $ (.59)
Extraordinary items... .00 .00 .05 .10 .00
----------- ---------- ----------- ---------- ----------
Net income (loss)......... $ (.19) $ (.20) $ (.13) $ (.33) $ (.59)
=========== ========== =========== ========== ==========
Weighted average common
shares outstanding....... 13,544,277 6,753,587 6,729,648 6,699,923 6,514,988
=========== ========== =========== ========== ==========
Consolidated Balance Sheet Date
(in thousands)
Years ended
December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(in thousands)
Total assets.............. $ 11,915 $ 13,560 $ 19,422 $ 19,180 $ 22,109
========== ========== =========== ========== ==========
Liabilities............... $ 20,175 $ 19,174 $ 37,301 $ 36,193 $ 38,930
Stockholders' equity
(deficiency)............. (8,260) (5,614) (17,879) (17,013) (16,821)
---------- ---------- ----------- ---------- ----------
Total liabilities and
stockholders' equity
(deficiency)............. $ 11,915 $ 13,560 $ 19,422 $ 19,180 $ 22,109
========== ========== =========== ========== ==========
14
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
From June 19, 1992 through November 4, 1997, the Company had entered into loan
agreements with Selex International B.V., a Netherlands corporation ("Selex"),
Yasawa Holdings, N.V., a Netherlands Antilles Corporation ("Yasawa"), and
related parties. Since December, 1992, the Company has been dependent on loans
and advances from Selex, Yasawa and their affiliates in order to implement its
marketing program and assist in meeting its working capital requirements.
On November 4, 1997 at the 1997 Annual Meeting, the Company's stockholders
approved an Agreement between the Company and its lenders that would
substantially reduce the Company's outstanding debt obligation of $25.3 million
(the "Agreement"). The Agreement, consummated effective December 30, 1997,
resulted in a reduction in the Company's outstanding debt obligation through the
conveyance of all remaining land inventory and obligations in the Company's St.
Augustine Shores Subdivision and the issuance of approximately 6.8 million
shares of Common Stock at $1.00 per share (par value). Additionally, the lenders
purchased $7.5 million in contracts receivable from the Company to generate
working capital and further reduce the debt obligation. Specifically:
1. Selex sold its remaining debt ($2,664,736), including the Empire note,
to Yasawa and the Company owes no further duty or obligation to Selex, which
provided the Company a release. The debt purchased by Yasawa was satisfied
through Yasawa's purchase of 2,664,736 shares of Common Stock issued by the
Company at a per share conversion price of One Dollar ($1.00), which is equal to
par value.
2. Swan Development Corporation ("Swan"), an affiliate of Selex and Yasawa,
had previously acquired $5,529,501 of the Company's debt from Selex. This
$5,529,501 was satisfied through the Company's conveyance of all of the
Company's remaining land inventory and obligations in its St. Augustine Shores
Subdivision to Swan . The price, based upon appraised value, was adjusted to
take into account the development obligations on sold lots assumed by Swan.
3. Scafholding B.V. ("Scafholding"), an affiliate of Selex and Yasawa,
purchased approximately $7.5 million in contracts receivable from the Company at
seventy-five percent (75%) of face value with recourse for non-performing
contracts. This sale generated approximately $5.6 million, $1,982,457 of which
was used to reduce outstanding debt to Yasawa. The balance has been used by the
Company to pay a portion of the delinquent real estate taxes, to implement its
marketing programs, to initiate development of TimberWalk and to meet the
Company's working capital requirements.
4. A $4,144,602 portion of the Company's debt to Yasawa was satisfied
through Yasawa's purchase of 4,144,602 shares of Common Stock issued by the
Company at a per share conversion price of One Dollar ($1.00), which is equal to
par value.
Through Yasawa's acquisition of the 6,809,338 shares of Common Stock of the
Company referenced above, Mr. Antony Gram's beneficial ownership increased from
3,109,703 shares to 9,919,041 shares (73.23% of the outstanding shares of Common
Stock of the Company as of December 31, 1998).
Prior to November 4, 1997 and independent of the Agreement outlined above, Selex
and Yasawa agreed to forgive $2,050,818 in accrued interest on the Company's
debt to them.
As part of the Agreement, if the Company elects to do so, Scafholding agreed to
purchase contracts receivable at 65% of face value, with recourse, to meet the
Company's ongoing capital requirements. Scafholding purchased the following
contracts receivables from the Company to generate working capital for the
Company:
15
Approximate Contracts
Date of Purchase Receivable Amount Purchased
---------------- ---------------------------
June 30, 1998 $200,100
July 15, 1998 $115,200
July 31, 1998 $179,900
August 31, 1998 $250,400
September 10, 1998 $153,400
September 29, 1998 $497,100
As of December 31, 1998, the Company's outstanding debt to Scafholding was
$1,130,000 , secured by a first lien on the Company's receivables; the Company's
outstanding debt to Yasawa was $6,670,000 secured by a second lien on the
Company's receivables and a mortgage on all of the Company's property. As of
December 31, 1998, loans outstanding from Yasawa and Scafholding to the Company
totaled $7,800,000. The terms of repayment of this debt have been restructured
to provide for monthly payments of principal in the amount of $100,000 payable
monthly in cash or with contracts receivable at 100% of face value, plus
interest payable monthly on the declining balance at the rate of 9.6% per annum
in cash or with contracts receivable at 65% of face value. Yasawa and
Scafholding did not require the Company to make interest payments for the period
September 1, 1998 to December 31, 1998. As of December 31, 1998, the total
amount of interest accrued is approximately $258,000. Effective January 1, 1999,
Yasawa and Scafholding agreed to reduce the annual percentage rate for their
existing loans to the Company from 9.6% to 6% per annum.
From October 9, 1998 through the present, Swan has advanced the Company
funds to meet its working capital requirements. The Company's outstanding debt
to Swan, which is secured by a third lien on the Company's receivables, was
$765,000 and $5,690,000 as of December 31, 1998 and March 26, 1999,
respectively. The Company signed a promissory note to Swan in March 1999 which
provides that funds advanced by Swan will be paid back by the Company monthly in
contracts receivables at 90% of face value, with recourse. There will be no
interest for the first six month after an advance of money is received from Swan
by the Company; thereafter the interest shall be 6% per annum on the outstanding
balance of the advance. The amount of each monthly payment will vary and will be
dependent upon the amount of contracts receivable in the Company's portfolio,
excluding contracts receivable held as collateral for prior receivable sales.
Pursuant to the terms of the promissory note, the Company is required to
transfer to Swan monthly as debt repayment all current contracts receivable in
the Company's portfolio in excess of the aggregate sum of $500,000. Funds
advanced by Swan were used by the Company to pay approximately $2,567,000 in
outstanding real estate taxes for unsold properties with the balance to meet the
Company's working capital requirements.
During 1998, the Company transferred 14 lots and 4 tracts of land to Swan
Development Corporation ("Swan"), an affiliate of Yasawa Holdings N.V.
("Yasawa") and Scafholding B.V. ("Scafholding"). In return, Swan built an office
complex on part of the land for use by the Company for a period of 54 months,
renewable thereafter. The Company valued the land transferred at approximately
$440,000 and recorded the net present value of the use of the office complex of
approximately $375,000 as prepaid rent. The difference between the net present
value of the rent and the cost of the land of approximately $290,000 is recorded
as deferred profit at December 31, 1998.
Results of Operations
Years ended December 31, 1998 and December 31, 1997
Revenues
Total revenues were $6,488,000 for 1998 compared to $9,425,000 for 1997.
Gross land sales were $4,155,000 for 1998 versus $6,093,000 for 1997. Net
land sales (gross land sales less estimated uncollectible installment sales and
contract valuation discount) decreased to $3,078,000 for 1998 from $4,045,000
for 1997. The decrease reflects lower sales by the Company's independent
dealers.
16
Housing revenues are not recognized from housing sales until the completion
of construction and the passage of title. Housing revenues were $1,622,000 for
1998 compared to $1,214,000 in 1997. The increase in housing revenues is
directly related to the increase in the Company's housing advertising and
promotional programs for housing.
The following table reflects the Company's real estate product mix for 1998
and 1997 (in thousands):
Years Ended
------------------------------------
December 31, December 31,
1998 1997
------------ ------------
Gross Land Sales:
Retail sales*......... $ 4,155 $ 6,093
------- -------
Total............... 4,155 6,093
------- -------
Housing Sales:
Single Family......... 1,622 1,214
------- -------
Total............... 1,622 1,214
------- -------
Total Real Estate... $ 5,777 $ 7,307
======= =======
* 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, 1998 and December 31, 1997 were
$4,679,000 and $5,359,000, respectively. The Company had a backlog of $630,000
and $1,094,000 in unrecognized sales as of December 31, 1998 and December 31,
1997, 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 $956,000 in 1998 as compared to $2,366,000 for
1997. The decrease is a result of the Lot Exchange Trust, which provided
sufficient developed inventory for exchanges to customers with undeveloped lots,
being executed in 1997.
Interest income was $548,000 for 1998 compared to $1,367,000 for 1997. This
decrease is the result of lower contracts receivable balances.
Other revenues were $284,000 for 1998 compared to $433,000 in 1997. Other
revenues are generated principally by the Company's title insurance and real
estate brokerage subsidiaries.
Costs and Expenses
Costs and expenses were $9,079,000 for 1998 compared to $10,751,000 in
1997. Cost of sales totaled $2,562,000 for 1998 versus $2,831,000 for 1997. The
decrease reflects lower sales by the Company's independent dealers.
Commissions, advertising and other selling expenses totaled $2,533,000 for
1998 versus $2,517,000 for 1997. Advertising decreased to $46,000 in 1998 from
$104,000 in 1997. Other selling expenses increased to $1,124,000 in 1998 from
$623,000 in 1997 as a result of increased promotion of the Company's housing
line.
General and administrative expenses were $2,144,000 in 1998 versus
$1,680,000 for 1997. General and administrative expenses have increased
primarily due to termination agreements to officers who resigned effective
October 1998.
The Company recorded a $840,000 provision for recourse obligations in 1997.
Real estate tax expense was $1,028,000 in 1998 compared to $1,338,000 in
1997. Included in real estate tax expense is delinquent interest and
administrative fees on delinquent taxes, which accrue interest at 18% per annum.
Interest expense was $812,000 for 1998 as compared to $1,545,000 for 1997.
The decrease in interest expense is the result of the decrease in debt. No
interest was capitalized in 1998 or 1997.
17
Net Income
The Company reported a net loss of $2,591,000 for 1998, compared to a net
loss of $1,326,000 for 1997.
Years ended December 31, 1997 and December 31, 1996
Revenues
Total revenues were $9,425,000 for 1997 compared to $8,650,000 for 1996.
Gross land sales were $6,093,000 for 1997 versus $6,816,000 for 1996. Net
land sales (gross land sales less estimated uncollectible installment sales and
contract valuation discount) decreased to $4,045,000 for 1997 from $4,296,000
for 1996. The decrease in sales reflects lower sales from the Company's
independent dealer network.
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
$1,214,000 for 1997 compared to $1,202,000 in 1996. Housing revenues remained
constant in 1997.
The following table reflects the Company's real estate product mix for 1997
and 1996 (in thousands):
Years Ended
------------------------------------
December 31, December 31,
1997 1996
------------ ------------
Gross Land Sales:
Retail sales*......... $ 6,093 $ 6,816
------- -------
Total............... 6,093 6,816
------- -------
Housing Sales:
Single Family......... 1,214 1,188
Vacation Ownership.... -0- 14
------- -------
Total............... 1,214 1,202
------- -------
Total Real Estate... $ 7,307 $ 8,018
======= =======
- -------------
* 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, 1997 and December 31, 1996 were $5,359,000 and
$6,612,000, respectively. The Company had a backlog of $1,094,000 and $2,089,000
in unrecognized sales as of December 31, 1997 and December 31, 1997,
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 $2,366,000 in 1997 as compared to
$1,008,000 for 1996. The increase is a result of the Lot Exchange Trust, which
provided sufficient developed inventory for exchanges to customer with
undeveloped lots.
Interest income was $1,367,000 for 1997 compared to $1,464,000 for 1996.
This decrease is the result of lower recognition of the Company's valuation
discount.
Other revenues were $433,000 for 1997 compared to $680,000 in
1996. 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.
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.
18
Costs and Expenses
Costs and expenses were $10,751,000 for 1997 compared to $9,877,000 in
1996. Cost of sales totaled $2,831,000 for 1997 versus $2,673,000 for 1996. This
increase is primarily due to an increase in the cost of improvements on prior
period sales.
Commissions, advertising and other selling expenses totaled $2,517,000 for
1997 versus $2,457,000 for 1996. Advertising and promotional expenditures
decreased to $104,000 in 1997 from $118,000 in 1996. Other selling expenses
increased to $623,000 in 1997 from $514,000 in 1996 as a result of preparations
for the introduction of a new housing line in early 1998.
General and administrative expenses were $1,680,000 in 1997 versus
$1,715,000 for 1996. General and administrative expenses remained constant.
The Company recorded a $840,000 provision for recourse obligations in 1997.
Real estate tax expense was $1,338,000 in 1997 compared to $1,251,000 in
1996. Included in real estate tax expense is delinquent interest and
administrative fees on delinquent taxes, which accrue interest at 18% per annum.
Interest expense was $1,545,000 for 1997, as compared to $1,781,000 for
1996. The decrease in interest expense is the result of cessation of interest
accrual as of November, 1997 simultaneous with the stockholder's approval of the
debt restructuring at the 1997 annual meeting. Total interest cost (none of
which represents capitalized interest) was $1,545,000 fr 1997 as compared to
$1,781,000 for 1996. No interest was capitalized in 1997 and 1996.
Net Income
The Company reported a net loss of $1,326,000 for 1997, compared to a net
loss of $896,000 for 1996. Included in the 1996 results is an extraordinary gain
of $331,000 resulting from the final settlement of the Marco class action
litigation.
Regulatory Developments which may affect Future Operations
In Florida, as in many growth areas, local governments have sought to limit
or control population growth in their communities through restrictive zoning,
density reduction, the imposition of impact fees and more stringent development
requirements. Although the Company has taken such factors into consideration in
its master plans by agreeing, for example, to make improvements, construct
public facilities and dedicate certain property for public use, the increased
regulation has lengthened the development process and added to development
costs.
The implementation of the Florida Growth Management Act of 1985 (the "Act")
precludes the issuance of development orders or permits if public facilities
such as transportation, water and sewer services will not be available
concurrent with development. Development orders have been issued for, and
development has commenced in, the Company's existing communities (with
development being completed in certain of these communities). Thus, the
Company's communities are less likely to be affected by the new growth
management policies than future communities. Any future communities developed by
the Company will be strongly impacted by new growth management policies. Since
the Act and its implications are consistently being re-examined by the State,
together with local governments and various state and local governmental
agencies, the Company cannot further predict the timing or the effect of new
growth management policies, but anticipates that such policies may increase the
Company's permitting and development costs.
The Company's land sales activities are further subject to the jurisdiction
of the laws of various states in which the Company's properties are offered for
sale. In addition, Florida and other jurisdictions in which the Company's
properties are offered for sale have strengthened, or are considering
strengthening, their regulation of subdividers and subdivided lands in order to
provide further assurances to the public. The Company has attempted to take
appropriate steps to modify its
19
marketing programs and registration applications in the face of such increased
regulation, but has incurred additional costs and delays in the marketing of
certain of its properties in certain states and countries. For example, the
Company has complied with the regulations of certain states which require that
the Company sell its properties to residents of those states pursuant to a deed
and mortgage transaction, regardless of the amount of the down payment. The
Company intends to continue to monitor any changes in statutes or regulations
affecting, or anticipated to affect, the sale of its properties and intends to
take all necessary and reasonable action to assure that its properties and its
proposed marketing programs are in compliance with such regulations, but there
can be no assurance that the Company will be able to timely comply with all
regulatory changes in all jurisdictions in which the Company's properties are
presently offered for sale to the public.
Liquidity and Capital Resources
Mortgages and Similar Debt
Effective December 30, 1997, the Company and its lenders consummated
several transactions that resulted in a reduction in the Company's outstanding
debt obligation through the conveyance of all remaining land inventory and
obligations in the Company's St. Augustine Shores Subdivision and the issuance
of approximately 6.8 million shares of Common Stock at $1.00 per share (par
value). Additionally, the lenders purchased $7,500,000 in contracts receivable
from the Company to generate working capital and further reduce the debt
obligation. Selex sold its remaining debt ($2,664,736), including the Empire
note, to Yasawa and the Company owes no further duty or obligation to Selex,
which provided the Company with a release. The debt purchased by Yasawa was
satisfied through Yasawa's purchase of 2,664,736 shares of Common Stock issued
by the Company at a per share conversion price of One Dollar ($1.00), which is
equal to par value. Swan had previously acquired $5,529,501 of the Company's
debt from Selex. This $5,529,501 was satisfied through the Company's conveyance
of all of the Company's remaining land inventory and obligations in its St.
Augustine Shores Subdivision to Swan . The price, based upon appraised value,
was adjusted to take into account the development obligations on sold lots
assumed by Swan. Scafholding purchased approximately $7,500,000 in contracts
receivable from the Company at seventy-five percent (75%) of face value with
recourse for non-performing contracts. This sale generated approximately $5.6
million, $1,982,457 of which was used to reduce outstanding debt to Yasawa. The
balance was used by the Company to pay a portion of the delinquent real estate
taxes, to implement its marketing programs, to initiate development of
TimberWalk and to meet the Company's working capital requirements. A $4,144,602
portion of the Company's debt to Yasawa was satisfied through Yasawa's purchase
of 4,144,602 shares of Common Stock issued by the Company at a per share
conversion price of One Dollar ($1.00), which is equal to par value.
The terms of repayment of the Yasawa and Scafholding debt have been
restructured to provide for monthly payments of principal in the amount of
$100,000 payable monthly in cash or with contracts receivable at 100% of face
value, plus interest payable monthly on the declining balance at the rate of
9.6% per annum in cash or with contracts receivable at 65% of face value. Yasawa
and Scafholding have not required the Company to make monthly interest payments
for the period September 1, 1998 to December 31, 1998. As of December 31, 1998,
the total amount of interest accrued is approximately $258,000. Effective
January 1, 1999, Yasawa and Scafholding agreed to reduce the annual percentage
rate on their existing loans to the Company from 9.6% to 6% per annum.
From October 9, 1998 through the present, Swan has advanced the Company
funds to meet its working capital requirements. The Company's outstanding debt
to Swan, which is secured by a third lien on the Company's receivables, was
$765,000 and $5,690,000 as of December 31, 1998 and March 26, 1999,
respectively. The Company signed a promissory note to Swan in March 1999 which
provides that funds advanced by Swan will be paid back by the Company monthly in
contracts receivables at 90% of face value, with recourse. There will be no
interest for the first six months after an advance of money is received from
Swan by the Company; thereafter the interest shall be 6% per annum on the
outstanding balance of the advance. The amount of each monthly payment will vary
and will be dependent upon the amount of contracts receivable in the Company's
portfolio, excluding contracts receivable held as collateral for prior
receivable sales. Pursuant to the terms of the promissory note, the Company is
required to transfer to Swan monthly as debt repayment all current contracts
receivable in the Company's portfolio in excess of the aggregate sum of
$500,000. Funds advanced
20
by Swan were used by the Company to pay approximately $2,567,000 in outstanding
real estate taxes for unsold properties with the balance to meet the Company's
working capital requirements.
The following table presents information with respect to mortgages and
similar debt (in thousands):
Years Ended
December 31, December 31,
1998 1997
------------ -----------
Mortgage Notes Payable..... $ 6,670 $ 6,693
Other Loans................ 1,895 2,294
------- -------
Total Mortgages and
similar debt............ $ 8,565 $ 8,987
------- -------
- -----------
* Included in Mortgage Notes Payable is the Yasawa loan ($6,670,000 at
December 31, 1998); included in Other Loans is the Scafholding loan
($1,130,000 as of December 31, 1998) and the Swan loan ($765,000 as
of December 31, 1998).
Indebtedness under various purchase money mortgages and loan agreements is
collateralized by substantially all of the Company's assets, including stock of
certain wholly-owned subsidiaries. The Company's outstanding debt to Scafholding
is secured by a first lien on the Company's receivables; the Company's
outstanding debt to Yasawa is secured by a second lien on the Company's
receivables and a mortgage on all of the Company's property; and the Company's
outstanding debt to Swan is secured by a third lien on the Company's
receivables.
Contracts and Mortgages Receivable Sales
In June, 1992 and February, 1990, the Company completed sales of contracts
and mortgages receivable totaling $13,500,000 and $17,000,000, respectively,
which generated approximately $8,000,000 and $13,900,000 respectively, in net
proceeds to the Company. The anticipated costs of the June, 1992 transaction
were included in the extraordinary loss from debt restructuring for 1991 since
the restructuring was dependent on the sale. The Company recorded a loss of
$600,000 on the February, 1990 sale. In conjunction with these sales the Company
granted the purchaser a security interest in certain additional contracts
receivable of approximately $2,700,000 and conveyed all of its rights, title and
interest in the property underlying such contracts to a collateral trustee. In
addition, these transactions, among other things require that the Company
replace or repurchase any receivable that becomes 90 days delinquent upon the
request of the purchaser. Such requirement can be satisfied from contracts in
which the purchaser holds a security interest (approximately $2,328,000 as of
December 31, 1998). The purchaser of these receivables experienced financial
difficulty and filed in 1994 for protection under Chapter 11 of the Federal
Bankruptcy Code. In November 1995, the purchaser of these receivables sold the
portfolio to Finova Capital Corporation. The Company has fully reserved for the
estimated future cancellations based on the Company's historical experience for
receivables the Company services and believes these reserves to be adequate. In
1998, the Company did not replace any delinquent receivables. As of December 31,
1998 and 1997, $1,019,000 and $1,279,000 in receivables were delinquent,
respectively.
In March, 1993, the Company transferred $1,600,000 in contracts and
mortgages receivable generating approximately $1,059,000 in proceeds to the
Company, which was used for working capital and the creation of a holdback
account in the amount of $150,000. There were no monies in the holdback account
as of December 31, 1998.
In December 1997, Scafholding purchased approximately $7,500,000 in
contracts receivable from the Company at seventy-five percent (75%) of face
value with recourse for non-performing contracts. This sale generated
approximately $5.6 million, $1,982,457 of which was used to reduce outstanding
debt to Yasawa. The balance has been used by the Company to pay a portion of the
delinquent real estate taxes, to implement its marketing programs, to initiate
development of TimberWalk and to meet the Company's working capital
requirements.
During 1998, Scafholding purchased approximately $1,400,000 in contracts
receivable from the Company at sixty-five percent (65%) of face value with
recourse for non-performing contracts. These sales generated approximately
$900,000 used to meet the Company's working capital requirements.
21
The Company was the guarantor of approximately $12,208,000 of contracts
receivable sold or transferred as of December 31, 1998, for the transactions
described above. There are no funds on deposit with purchasers of the
receivables as security to assure collectibility as of such date. A provision
has been established for the Company's obligation under the recourse provisions
of which $3,251,000 remains at December 31, 1998. The Company has been in
compliance with all receivable transactions since the consummation of receivable
sales.
The Company has an agreement with Scafholding and Citony Development
Corporation for the servicing of their receivable portfolios. During 1998, the
Company received approximately $82,000 in revenue pursuant to these agreements.
In the future, if the Company elects to do so, Yasawa and Scafholding have
agreed to purchase contracts receivable at 65% of face value, with recourse. The
Company has an agreement with Swan whereby Swan will loan the Company funds to
be repaid with contracts receivable at 90% of face value, with recourse.
Other Obligations
As of December 31, 1998, the Company had estimated development obligations
of approximately $25,000 on sold property, an estimated liability to provide
title insurance and deeding costing $423,000 and an estimated cost of street
maintenance, prior to assumption of such obligations by local governments, of
$612,000, all of which are included in deferred revenue. As of December 31, 1998
and December 31, 1997, the Company had in escrow approximately $7,000 and
$50,000, respectively, specifically for land improvements at certain of its
Central and North Florida communities. The Company's development obligation was
substantially reduced in 1997 by the consummation of the Agreement approved by
the stockholders on November 4, 1997. Approximately $7,400,000 of the
development obligation at St. Augustine Shores was assumed by Swan. In addition,
the creation of the Lot Exchange Trust reduced the development obligation at
Marion Oaks and Sunny Hills by approximately $5,800,000.
Liquidity
Retail land sales have traditionally produced negative cash flow through
the point of sale as a result of a regulatory requirement to sell fully
developed lots and the additional requirement to pay marketing and selling
expenses prior to or shortly after the point of sale. In an effort to offset the
negative cash flow effects of installment land sales, the Company is directing a
greater portion of its marketing efforts to the sale of lots with homes and has
just begun offering lots for sale in compulsory building areas where a lot
purchaser must complete payments for the lot and construct a home within a
limited period of time.
The Company has been dependent on its ability to sell or otherwise finance
its contracts receivable and/or secure other financing to meet its cash
requirements. Since 1992, the Company has been largely dependent on Yasawa and
related parties for the financing of its operations. Although Scafholding has
purchased contracts receivables at the rate of 65% of face value, with recourse,
and Swan has loaned the Company additional funds to be paid back with contracts
receivable at the rate of 90% of face value, with recourse, there can be no
guarantee that the Company will be able to generate sufficient receivables to
obtain sufficient financing in the future or that Yasawa, Scafholding, Swan and
other related parties will continue to make loans to the Company.
Year 2000
The Company utilizes a number of software systems in conjunction with its
community development, contract processing and contract servicing operations.
The Company has received assurances from third party servicing agents that
systems being used in conjunction with the Company's business are or will be
Year 2000 compliant on a timely basis. The Company has and will continue to make
certain investments in its software systems and applications to ensure the
Company is Year 2000 compliant. The financial impact of becoming Year 2000
compliant has not been and is not expected to be material to the Company's
financial position or the results of operations in a given year.
22
ITEM 8
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTAL DATA
Page
Independent Auditors' Report.................................... 24
Consolidated Balance Sheets as of December 31, 1998 and
December 31, 1997............................................ 26
Statements of Consolidated Operations for the years ended
December 31, 1998, December 31, 1997 and December 31, 1996... 28
Statements of Consolidated Stockholders' Equity (Deficiency)
for the years ended December 31, 1998, December 31, 1997 and
December 31, 1996............................................ 29
Statements of Consolidated Cash Flows for the years ended
December 31, 1998, December 31, 1997 and December 31, 1996... 30
Notes to Consolidated Financial Statements...................... 32
Supplemental Unaudited Quarterly Financial Data................. 44
23
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
THE DELTONA CORPORATION:
We have audited the consolidated balance sheet of The Deltona Corporation
and subsidiaries (the "Company") as of December 31, 1998 and the related
statements of consolidated operations, consolidated stockholders' equity
(deficiency) and consolidated cash flows for the year then ended. 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 audit.
We conducted our audit 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 of 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 audit provides 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, 1998 and the results of its operations and its cash flows for
the year then ended 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 problems with liquidity,
causing the Company to be unable to meet certain contractual obligations and has
a stockholders' deficiency at December 31, 1998. 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.
JAMES MOORE & CO. P.L.
Certified Public Accountants
Gainesville, Florida
March 26, 1999
24
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
THE DELTONA CORPORATION:
We have audited the consolidated balance sheet of The Deltona Corporation
and subsidiaries (the "Company") as of December 31, 1997 and the related
statements of consolidated operations, consolidated stockholders' equity
(deficiency) and consolidated cash flows for the years ended December 31, 1997
and 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 audit.
We conducted our audit 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, 1997 and the results of its operations and its cash flows for
the years ended December 31, 1997 and 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, 1997. 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 & TOUCH LLP
Certified Public Accountants
Miami, Florida
March 25, 1998
25
CONSOLIDATED BALANCE SHEETS
THE DELTONA CORPORATION AND SUBSIDIARIES
ASSETS
(in thousands)
December 31, December 31,
1998 1997
------------ ------------
Cash and cash equivalents, including escrow deposits
and restricted cash of $667 in 1998 and $1,293 in
1997(Note 7)....................................... $ 721 $ 1,397
-------- --------
Contracts receivable for land sales
(Notes 2, 5 and 8)................................ 3,519 4,356
Less: Allowance for uncollectible contracts........ (945) (1,150)
Unamortized valuation discount............... (401) ( 508)
-------- --------
Contracts receivable - net......................... 2,173 2,698
-------- --------
Mortgages and other receivables - net
(Notes 2, 5 and 8)................................ 194 1,291
-------- --------
Inventories, at lower of cost or net realizable
value (Notes 3 and 5):
Land and land improvements......................... 7,579 7,449
Other.............................................. 76 99
-------- --------
Total inventories............................ 7,655 7,548
-------- --------
Property, plant and equipment- net (Notes 4 and 5). 467 374
-------- --------
Prepaid expenses and other......................... 705 252
-------- --------
Total........................................ $ 11,915 $ 13,560
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
26
CONSOLIDATED BALANCE SHEETS
THE DELTONA CORPORATION AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
(in thousands except share data)
December 31, December 31,
1998 1997
------------ ------------
Mortgages and similar debt (Note 5):
Mortgage notes payable ....................... $ 6,670 $ 6,693
Other loans .................................. 1,895 2,294
-------- --------
Total mortgages and similar debt........ 8,565 8,987
Accounts payable - trade ......................... 193 75
Accrued interest payable (Note 5) ................ 258 0
Accrued taxes, principally real estate taxes ..... 2,880 1,917
Accrued expenses and other (Notes 2 and 8) ....... 4,459 3,995
Customers' deposits .............................. 996 689
Deferred revenue (Notes 7 and 8) ................. 2,824 3,511
-------- --------
Total liabilities ................................ 20,175 19,174
-------- --------
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:
13,544,277 shares in 1998 and 1997
(excluding 12,228 shares held in treasury).... 13,544 13,544
Capital surplus .............................. 51,440 51,495
Accumulated deficit .......................... (73,244) (70,653)
-------- --------
Total stockholders' equity (deficiency) .......... (8,260) ( 5,614)
-------- --------
Total.................................. $ 11,915 $ 13,560
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
27
STATEMENTS OF CONSOLIDATED OPERATIONS
THE DELTONA CORPORATION AND SUBSIDIARIES
(in thousands except share data)
Years Ended
----------------------------------------
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
Revenues
Gross land sales (Notes 2 and 7)...... $ 4,155 $ 6,093 $ 6,816
Less: Estimated uncollectible sales... (840) (1,528) (1,706)
Contract valuation discount..... (237) (520) (814)
------- -------- --------
Net land sales........................ 3,078 4,045 4,296
Sales-housing......................... 1,622 1,214 1,202
Recognized improvement revenue-prior
period sales........................ 956 2,366 1,008
Interest income....................... 548 1,367 1,464
Other ................................ 284 433 680
------- -------- --------
Total..................... 6,488 9,425 8,650
------- -------- --------
Costs and expenses
Cost of sales-land.................... 741 1,121 1,212
Cost of sales-housing................. 1,269 917 1,005
Cost of improvements-prior period
sales............................... 302 545 219
Cost of sales-other................... 250 248 237
Provision for uncollectible contracts
and recourse obligations (Note 2)... -0- 840 -0-
Commissions, advertising, and other
selling expenses.................... 2,533 2,517 2,457
General and administrative expenses... 2,144 1,680 1,715
Real estate tax....................... 1,028 1,338 1,251
Interest expense...................... 812 1,545 1,781
------- -------- --------
Total..................... 9,079 10,751 9,877
------- -------- --------
Loss from operations before income
taxes and extraordinary items......... (2,591) (1,326) (1,227)
Provision for income taxes (Note 6).... -0- -0- -0-
------- -------- --------
Loss from operations before
extraordinary items................... (2,591) (1,326) (1,227)
Extraordinary item:
Gain on settlement related to the
Marco refund obligation (Note 9)..... -0- -0- 331
------- -------- --------
Net income (loss)..................... $(2,591) $ (1,326) $ (896)
======= ======== ========
Basic earnings (loss) per common
and common equivalent shares from
(Note 10):
Operations.......................... $ (.19) $ ( .20) $ (.18)
Extraordinary gain.................. -0- -0- .05
------- -------- --------
Net income (loss)....... $ (.19) $ ( .20) $ (.13)
======= ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
28
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIENCY)
THE DELTONA CORPORATION AND SUBSIDIARIES
(in thousands)
For the years ended December 31, 1998, December 31, 1997 and December 31, 1996
Common Stock Capital Accumulated
($1 par value) Surplus Deficit Total
-------------- ------- ------------ ---------
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)
Issuance of Common Stock with Related
Party.................................. 6,810 -0- -0- 6,810
Gain from Exchange of Land and Contracts
Receivables with Related Party......... -0- 6,781 -0- 6,781
Net (loss) for the year.................. -0- -0- (1,326) (1,326)
------- ------- -------- --------
Balances, December 31, 1997................... $13,544 $51,495 $(70,653) $ (5,614)
Gain (loss)from Exchange
of Land and Contracts
Receivable with Related
Party.................................. -0- (55) -0- (55)
Net (loss) for the year.................. -0- -0- (2,591) (2,591)
------- ------- -------- --------
Balances, December 31, 1998................... $13,544 $51,440 $(73,244) $ (8,260)
======= ======= ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
29
STATEMENTS OF CONSOLIDATED CASH FLOWS
THE DELTONA CORPORATION AND SUBSIDIARIES
(in thousands)
Years Ended
------------------------------------------
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Cash received from operations:
Proceeds from sale of residential units............ $ 1,768 $ 1,272 $ 1,182
Collections on contracts and mortgages receivable.. 1,993 3,245 2,927
Down payments on and proceeds from sales
of homesites and tracts....................... 1,072 1,476 1,517
Proceeds from the sale of Contracts Receivables 868 4,625 -0-
Proceeds (uses) from other sources............. 240 (8) 425
--------- --------- ---------
Total cash received from operations.... 5,941 10,610 6,051
--------- --------- ---------
Cash expended by operations:
Cash paid for residential units................ 1,269 917 1,005
Cash paid for land and land improvements....... 1,047 621 461
Customer refunds............................... 35 28 931
Commissions, advertising and other
selling expenses............................... 2,620 2,414 2,515
General and administrative expenses............. 1,715 1,803 1,892
Interest paid.................................. 299 -0- -0-
Real estate taxes paid......................... 260 2,504 1,314
--------- --------- ---------
Total cash expended by operations...... 7,245 8,287 8,118
--------- ---------
Net cash provided by (used in) operating
activities........................... (1,304) 2,323 (2,067)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment...................................... -0- 18 6
Payment for acquisition and construction of
property, plant and equipment..................... (137) (6) (4)
--------- --------- ---------
Net cash provided by (used in) investing
activities.. ......................... (137) 12 2
--------- --------- ---------
Cash flows from financing activities:
New borrowings...................................... 765 137 2,000
Repayment of borrowings............................. -0- (1,982) (10)
--------- --------- ---------
Net cash provided by (used in) financing
activities............................ 765 (1,845) 1,990
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.......................................... (676) 490 (75)
Cash and cash equivalents, beginning of year.......... 1,397 907 982
--------- --------- ---------
Cash and cash equivalents, end of year................ $ 721 $ 1,397 $ 907
========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
30
STATEMENTS OF CONSOLIDATED CASH FLOWS - (Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
(in thousands)
Years Ended
------------------------------------------
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income (loss)........................................ $ (2,591) $ (1,326) $ (896)
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 45 46 60
Provision for estimated uncollectible sales and
recourse obligations............................... 840 1,528 1,706
Contract valuation discount, net of amortization.... 140 238 279
Net (gain) loss on sale of property, plant
and equipment..................................... -0- (18) 35
Extraordinary gain on settlement related to the
Marco refund obligation........................... -0- -0- (331)
Provision for recourse obligations.................. -0- 840 -0-
(Increase) decrease in assets and increase (decrease) in
liabilities:
Gross contracts receivable plus deductions from
reserves........................................... (1,689) 2,501 (3,349)
Mortgages and other receivables..................... 890 (907) 29
Land and land improvements.......................... (211) 673 844
Housing completed or under construction and other... 23 -0- 5
Prepaid expenses and other.......................... (87) 115 71
Accounts payable, accrued expenses and other........ 2,049 1,086 1,461
Customers' deposits................................. 243 (103) 38
Allowance for Marco permit costs.................... -0- -0- (1,018)
Deferred revenue.................................... (956) (2,350) (1,001)
-------- -------- --------
Total adjustments and changes................... 1,287 3,649 (1,171)
-------- -------- --------
Net cash provided by (used in) operating activities...... $ (1,304) $ 2,323 $ (2,067)
======== ======== ========
Supplemental disclosure of non-cash investing
and financing activities:
Reduction of accrued interest as a result of the
capitalization of interest to principal................ $ -0- $ 1,130 $ -0-
======== ======== =======
Reduction of accrued interest as a result of forgiveness
of interest............................................. $ -0- $ 2,050 $ -0-
======== ======== =======
Reduction of accrued interest and mortgage notes
payable as a result of an exchange of
land, property and common stock........................ $ -0- $ 11,689 $ -0-
======== ======== =======
Reduction of land as a result of an exchange of debt..... $ -0- $ 1,953 $ -0-
======== ======== =======
Reduction of deferred revenue as a result of assumption
of the development obligation by a related party........ $ -0- $ 1,901 $ -0-
======== ======== =======
Reduction of accrued expenses as a result of the
settlement of an obligation with a prior landlord...... $ -0- $ -0- $ -0-
======== ======== =======
Common Stock issued for reduction of long-term debt...... $ -0- $ 6,810 $ -0-
======== ======== =======
Common stock issued for Marco permit costs............... $ -0- $ -0- $ 30
======== ======== =======
Reduction of notes receivable as a result of payment
of accrued interest.................................... $ 254 $ -0- $ -0-
======== ======== =======
Reduction of accrued interest and mortgage notes payable
through transfer of contracts receivable............... $ 1,233 $ -0- $ -0-
======== ======== =======
Sale of land to related party in return for future rent
credits (see Note 8):
Increase of Prepaid Expenses sale/lease of office...... $ 398 $ -0- $ -0-
======== ======== =======
Reduction of land as a result of sale/lease office..... $ 81 $ -0- $ -0-
======== ======== =======
Increase in deferred revenue sale/lease of office...... $ 291 $ -0- $ -0-
======== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
31
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 1996 of $1,227,000, for
1997 of $1,326,000 and for 1998 of $2,591,000, resulting in a stockholders'
deficiency of $8,260,000 as of December 31, 1998.
Following the restructuring of its debt in 1997 (see Note 5), the Company
commenced the implementation of its business plan by redirecting its focus to
single-family housing with the development of TimberWalk and other housing in
Marion Oaks. The transactions described in Note 5 with Selex International, B.V.
("Selex"), Yasawa Holdings N.V. ("Yasawa"), Scafholding B.V. ("Scafholding") and
Swan Development Corporation ("Swan"), 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. Selex, Yasawa, Scafholding and Swan are related parties to the Company
either because they are shareholders or as a result of common control.
The Company has been dependent on its ability to sell or otherwise finance
contracts receivable and/or secure other financing sources to meet its cash
requirements. Additional financing was required in 1998 and was funded through
the sale of additional receivables to Scafholding as well as additional loans
from Swan. Additional financing will be required in the future. Although
Scafholding has purchased contracts receivables at the rate of 65% of face
value, with recourse, and Swan has loaned the Company additional funds to be
paid back with contracts receivable at the rate of 90% of face value, with
recourse, there can be no guarantee that the Company will be able to generate
sufficient receivables to finance in the future or that Yasawa, Scafholding,
Swan and other related parties will continue to make loans to the Company. As a
consequence of its liquidity problems over the last five years, the Company has
been forced to delay payment of certain real estate taxes. (See Notes 5 and 11.)
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.
Significant Accounting Policies
The Company 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's consolidated financial statements are prepared in accordance
with generally accepted accounting principles. Material intercompany accounts
and transactions are eliminated.
The Company sells homesites under installment contracts which provide for
payments over periods ranging from 2 to 10 years. Since the fourth quarter of
1991, the Company has offered only developed lots for sale. 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
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
1. Basis of Presentation and Significant Accounting Policies (continued)
it has received 20% of the contract sales price. During 1998, 1997 and 1996,
approximately 82%, 87% and 94% of sales were through a single independent dealer
in New York.
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, it is at least reasonably
possible future adjustments to the allowance may be necessary in the near term
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 are 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.
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 1996,
1997 and 1998.
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, which range from 5 to 33 years. 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 (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 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. As of December 31, 1998, there were no assets considered
impaired under the provisions of the Statement.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
1. Basis of Presentation and Significant Accounting Policies (continued)
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.
2. Contracts and Mortgages Receivable
At December 31, 1998, interest rates on contracts receivable outstanding
ranged from 5% to 12% per annum (weighted average approximately 8.65%). The
approximate principal maturities of contracts receivable were:
December 31,
1998
----
(in thousands)
1999.................... $ 540
2000.................... 532
2001.................... 511
2002.................... 468
2003.................... 429
2004 and thereafter..... 1,039
--------
Total.............. $ 3,519
========
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, 1998 and 1997 approximate $1,058,000 and
$1,151,000, 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, 1998............. 94 months 8.3% 13.5%
December 31, 1997............. 91 months 8.8% 13.5%
December 31, 1996............. 89 months 7.8% 13.5%
In June, 1992 and February, 1990, the Company completed sales of contracts
and mortgages receivable totaling $13,500,000 and $17,000,000, respectively,
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
2. Contracts and Mortgages Receivable (continued)
in net proceeds to the Company. The anticipated costs of the June, 1992
transaction were included in the extraordinary loss from debt restructuring for
1991 since the restructuring was dependent on the sale. The Company recorded a
loss of $600,000 on the February, 1990 sale. In conjunction with these sales the
Company granted the purchaser a security interest in certain additional
contracts receivable of approximately $2,700,000 and conveyed all of its rights,
title and interest in the property underlying such contracts to a collateral
trustee. In addition, these transactions, among other things require that the
Company replace or repurchase any receivable that becomes 90 days delinquent
upon the request of the purchaser. Such requirement can be satisfied from
contracts in which the purchaser holds a security interest (approximately
$2,328,000 as of December 31, 1998). The purchaser of these receivables
experienced financial difficulty and filed in 1994 for protection under Chapter
11 of the Federal Bankruptcy Code. In November 1995, the purchaser of these
receivables sold the portfolio to Finova Capital Corporation. The Company has
fully reserved for the estimated future cancellations based on the Company's
historical experience for receivables the Company services and believes these
reserves to be adequate. In 1998, the Company did not replace any delinquent
receivables. As of December 31, 1998 and 1997, $1,019,000 and $1,279,000 in
receivables were delinquent, respectively.
In March, 1993, the Company transferred $1,600,000 in contracts and
mortgages receivable generating approximately $1,059,000 in proceeds to the
Company, which was used for working capital and the creation of a holdback
account in the amount of $150,000. In 1998, the balance of the monies in the
holdback account were withdrawn by the contracts receivable purchaser pursuant
to the purchase agreement and the holdback account was terminated.
In December 1997, Scafholding purchased approximately $7,500,000 in
contracts receivable from the Company at seventy-five percent (75%) of face
value with recourse for non-performing contracts. This sale generated
approximately $5.6 million, $1,982,457 of which was used to reduce outstanding
debt to Yasawa. The balance has been used by the Company to pay a portion of the
delinquent real estate taxes, to implement its marketing programs, to initiate
development of TimberWalk and to meet the Company's working capital
requirements.
During 1998, Scafholding purchased approximately $1,400,000 in contracts
and mortgages receivable from the Company at sixty-five percent (65%) of face
value with recourse for non-performing contracts. These sales generated
approximately $900,000 used to meet the Company's working capital requirments.
The Company was the guarantor of approximately $12,208,000 of contracts
receivable sold or transferred as of December 31, 1998, for the transactions
described above. There are no funds on deposit with purchasers of the
receivables as security to assure collectibility as of such date. A provision
has been established for the Company's obligation under the recourse provisions
of which $3,251,000 remains at December 31, 1998. The Company has been in
compliance with all receivable transactions since the consummation of receivable
sales. Because of inherent uncertainties in estimating the recourse provision,
it is at least reasonably possible that the Company's estimate will change in
the near term.
The Company has am agreement with Scafholding and Citony Development
Corporation for the servicing of their receivable portfolios. During 1998, the
Company received approximately $82,000 in revenue pursuant to these agreements.
In the future, if the Company elects to do so, Yasawa and Scafholding have
agreed to purchase contracts receivable at 65% of face value, with recourse. In
addition, Swan has agreed to loan the Company additional funds to be paid back
with contracts receivable at the rate of 90% of face value, with recourse.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
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,
1998 1997
------------ ------------
(in thousands)
Unimproved land.................. $ 420 $ 420
Land in various stages of
development.................... 2,287 1,888
Fully improved land.............. 4,872 5,141
-------- --------
Total.................... $ 7,579 $ 7,449
======== ========
4. Property, Plant and Equipment
Property, plant and equipment and accumulated depreciation consist of the
following:
December 31, 1998 December 31, 1997
---------------------- ----------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
------ ------------ ------ ------------
(in thousands)
Land and land improvements......... $ 74 $ -0- $ 74 $ -0-
Other buildings, improvements and
furnishings...................... 1,073 771 1,013 746
Construction and other equipment... 752 661 675 642
-------- -------- ------- --------
Total.......................... $ 1,899 $ 1,432 $ 1,762 $ 1,388
======== ======== ======= ========
Depreciation charged to operations for the years ended December 31, 1998,
1997 and 1996 was approximately $45,000, $46,000 and $60,000, respectively. In
1996 the Company evaluated its property, plant and equipment resulting in the
write off of approximately $1,044,000 in obsolete equipment and furniture,
resulting in a loss of $40,000.
5. Mortgages and Similar Debt
Effective December 30, 1997, the Company and its lenders consummated
several transactions that resulted in a reduction in the Company's outstanding
debt obligation through the conveyance of all remaining land inventory and
obligations in the Company's St. Augustine Shores Subdivision and the issuance
of approximately 6.8 million shares of Common Stock at $1.00 per share (par
value). Additionally, the lenders purchased $7,500,000 in contracts receivable
from the Company to generate working capital and further reduce the debt
obligation. Selex sold its remaining debt ($2,664,736), including the Empire
note, to Yasawa and the Company owes no further duty or obligation to Selex,
which provided the Company a release. The debt purchased by Yasawa was satisfied
through Yasawa's purchase of 2,664,736 shares of Common Stock issued by the
Company at a per share conversion price of One Dollar ($1.00), which is equal to
par value.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
5. Mortgages and Similar Debt (continued)
The terms of repayment of the Yasawa and Scafholding debt have been
restructured to provide for monthly payments of principal in the amount of
$100,000 payable monthly in cash or with contracts receivable at 100% of face
value, plus interest payable monthly on the declining balance at the rate of
9.6% per annum in cash or with contracts receivable at 65% of face value. Yasawa
and Scafholding have not required the Company to make monthly interest payments
for the period September 1, 1998 to December 31, 1998. As of December 31, 1998,
the total amount of interest accrued is approximately $258,000. Effective
January 1, 1999, Yasawa and Scafholding agreed to reduce the annual percentage
rate on their existing loans to the Company from 9.6% to 6% per annum.
Prior to November 4, 1997 and independent of the Agreement outlined above,
Selex and Yasawa agreed to forgive $2,050,818 in accrued interest on the
Company's debt to them.
As of December 31, 1998, Swan advanced the Company $765,000 to meet its
working capital requirements (see Note 11). The Company signed a promissory note
to Swan in March 1999 which provides that funds advanced by Swan will be paid
back by the Company monthly in contracts receivables at 90% of face value, with
recourse. There will be no interest for the first six months after an advance of
money is received from Swan by the Company; thereafter the interest shall be 6%
per annum on the outstanding balance of the advance. The amount of each monthly
payment will vary and will be dependent upon the amount of contracts receivable
in the Company's portfolio, excluding contracts receivable held as collateral
for prior receivable sales. Pursuant to the terms of the promissory note, the
Company is required to transfer to Swan monthly as debt repayment all current
contracts receivable in the Company's portfolio, in excess of the aggregate sum
of $500,000.
The following table presents information with respect to mortgages and
similar debt (in thousands):
Years Ended
December 31, December 31,
1998 1997
------------ ------------
Mortgage Notes Payable..... $ 6,670 $ 6,693
Other Loans................ 1,895 2,294
------- -------
Total Mortgages and
similar debt............ $ 8,565 $ 8,987
------- -------
- -----------
* Included in Mortgage Notes Payable is the Yasawa loan ($6,670,000 at
December 31, 1998); included in Other Loans is the Scafholding loan
($1,130,000 as of December 31, 1998) and the Swan loan ($765,000 as
of December 31, 1998).
The following table presents information with respect to the principle
maturities of mortgages and similar debt for the next five years (excluding
amounts owed to Swan):
For the year ended
December 31
------------
(in thousands)
1999............................... $ 120
2000............................... 120
2001............................... 120
2002............................... 120
2003............................... 120
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
5. Mortgages and Similar Debt (continued)
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 loan modifications consummated December
31, 1997, satisfied all Company obligations to Selex. The Company's outstanding
debt to Scafholding is secured by a first lien on the Company's receivables; the
Company's outstanding debt to Yasawa is secured by a second lien on the
Company's receivables and a mortgage on all of the Company's property; and the
Company's outstanding debt to Swan is secured by a third lien on the Company's
receivables.
6. Income Taxes
Effective December 26, 1992, the Company adopted Statement of Accounting
Standard No. 109 "Accounting for Income Taxes." Differences between accounting
rules and tax laws cause differences between the basis of certain assets and
liabilities for financial reporting purposes and tax purposes. The tax effect of
these differences, to the extent they are temporary, are recorded as deferred
tax assets and liabilities. 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, 1998, 1997 and 1996, the Company had a net
loss for tax purposes and there was no material amount of taxes payable or
refundable. Accordingly, there was no tax provision for such years.
As of December 31, 1998, the Company had a net deferred tax asset of
approximately $19,374,000 which primarily resulted from the tax effect of the
Company's net operating loss carryforward of $14,817,000 and losses on
subsidiaries sold in prior years of $3,960,000. A valuation allowance of
$19,374,000 has been established against the net deferred tax asset.
As of December 31, 1997, the Company had a net deferred tax asset of
approximately $22,868,000 which primarily resulted from the tax effect of the
Company's net operating loss carryforward of $14,893,000 and losses on
subsidiaries sold in prior years of $3,960,000. A valuation allowance of
$22,868,000 has been established against the net deferred tax asset.
The Company's regular net operating loss carryover for tax purposes is
estimated to be $37,417,000 at December 31, 1998, of which $7,319,000 was
available through 1999, $364,000 through 2002, $9,189,000 through 2005,
$9,780,000 through 2006, $5,029,000 through 2008, $5,401,000 through 2009, and
the remainder through 2011. In addition to the net operating loss carryover,
investment tax credit carryovers of approximately $66,000, which expire from
1999 through 2001 and alternative minimum tax credits of $386,000 , 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, 1998 and 1997 was
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
7. Liability for Improvements (continued)
approximately $1,060,000 and $1,159,000, 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 $25,000; a liability to provide title insurance and
deeding costs of $423,000 and $676,000, respectively; and an estimated cost of
street maintenance, prior to assumption of such obligations by local
governments, of $612,000 and $458,000, respectively; all of which are included
in deferred revenue. Included in cash at December 31, 1998 and December 31,
1997, are escrow deposits of $7,000 and $50,000, respectively, restricted for
completion of improvements in certain of the Company's communities. The
Company's development obligation was substantially reduced in 1997 by the
consummation of the Agreement approved by the stockholders on November 4, 1997.
Approximately $7,400,000 of the development obligation at St. Augustine Shores
was assumed by Swan. In addition, the creation of a Lot Exchange Trust reduced
the development obligation at Marion Oaks and Sunny Hills by approximately
$5,800,000.
The anticipated expenditures for land improvements, title insurance and
deeding to complete areas from which sales have been made through December 31,
1998 are as follows:
December 31, 1998
-----------------
(in thousands)
1999.......................................... $ 286
2000.......................................... 291
2001.......................................... 275
2002 and thereafter........................... 208
---------
Total.................................. $ 1,060
=========
8. Commitments and Contingent Liabilities
Total rental expense for the years ended December 31, 1998, December 31,
1997 and December 31, 1996 was approximately $134,000, $121,000 and $148,000,
respectively.
The Company has a lease on its headquarters building in TimberWalk and on
its Miami office that extend through 2003. Estimated rental expense under these
leases is expected to be approximately $76,000 annually. The Company has no
material equipment leases.
During 1998, the Company transferred 14 lots and 4 tracts of land to Swan.
In return, Swan built an office complex on part of the land for use by the
Company for a period of 54 months, renewable thereafter. The Company valued the
land transferred at approximately $440,000 and recorded the net present value of
the use of the office complex of approximately $375,000 as prepaid rent. The
difference between the net present value of the rent and the cost of the land of
approximately $290,000 is recorded as deferred profit at December 31, 1998.
Additionally during 1998, Scafholding advanced the Company $200,000 against
future administrative fees due the Company for selling lots owned by
Scafholding. The Company recorded this advance as a deposit. During 1998, the
Company earned $27,780 in fees for sold lots.
Homesite sales contracts provide for the return of all monies paid in
(including paid-in interest) should the Company be unable to meet its
contractual obligations after the use of reasonable diligence. If a refund is
made, the Company will recover the related homesite and any improvement thereto.
As a result of the delays in completing the land improvements to certain
property sold in certain of its Central and North Florida communities, the
Company fell behind in meeting its contractual obligations to its customers. In
connection
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
8. Commitments and Contingent Liabilities (continued)
with these delays, in 1980 the Company entered into a Consent Order with the
Division of Florida Land Sales, Condominiums and Mobile Homes ("Division"),
which provided a program for notifying affected customers. Since 1980, the
Consent Order was restated and amended several times, culminating in the 1992
Deltona Consent Order.
On December 30, 1997, the Division approved the formation of a Lot Exchange
Trust into which the Company conveyed sufficient exchange inventory to provide
exchanges to customers with undeveloped lots. Concurrently, the Division
released its lien on the Company's contracts receivable, satisfied its mortgage
on the Company's property and approved a settlement of all remaining issues
under the 1992 Deltona Consent Order. The 1992 Deltona Consent Order was
formally terminated on April 13, 1998.
As of December 31, 1998 and December 31, 1997 the Company had in escrow
approximately $7,000 and $50,000, respectively, specifically for land
improvements at certain of its Central and North Florida communities. The
Company's development obligation was substantially reduced in 1997 by the
consummation of the Agreement approved by the stockholders on November 4, 1997.
Approximately $7,400,000 of the development obligation at St. Augustine Shores
was assumed by Swan. In addition, the creation of a Lot Exchange Trust reduced
the development obligation at Marion Oaks and Sunny Hills by approximately
$5,800,000.
The Company's continuing liquidity problems have precluded the timely
payment of the full amount of certain real estate taxes. Delinquent real estate
taxes aggregated approximately $2,880,000 as of December 31, 1998. 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. Of the
$2,880,000 in delinquent real estate taxes, approximately $90,000 relates to
sold lots on which the customer has assumed the obligation to pay but has not
yet done so. (See Note 11)
The Company is subject to a lawsuit entitled Marco Island Civic
Association, Inc. et al v. The Deltona Corporation, et al, Case No. 98-3758-CA,
which was filed in the Circuit Court of Collier County Florida on October 29,
1998. The complaint alleges that the Company amended certain Declaration of
Restrictions for property in Marco Island without having the authority to do so.
The plaintiff is seeking to overturn the Amendment to the Declaration as null
and void and for unspecified relief. The complaint was amended by the plaintiff
to add claims for breach of warranty and indemnity and now includes a claim for
attorney's fees incurred in connection with prior litigation. In the amended
Complaint, the plaintiff is also seeking certification of the case as a class
action based upon an allegation that Deltona received compensation for granting
amendments. The case is in the initial discovery phase. The Company intends to
vigorously defend itself against the claims and to defeat the effort to convert
the case to a class action. In the event the plaintiff is successful and if the
class certification is authorized, and if the Company is not successful in its
defenses, a substantial claim would be obtained against the Company. No
provision has been made for an unfavorable outcome in the accompanying financial
statements at December 31, 1998.
In addition to the matters discussed above, 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
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
9. Marco Island-Marco Shores Permits (continued)
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, 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
Effective December 30, 1997, the Company entered into agreements with its
lenders to substantially reduce the Company's outstanding debt obligations.
Yasawa purchased 6,809,338 shares of Common Stock issued by the Company at a per
share price of One Dollar ($1.00), which is equal to par value, in satisfaction
of $6,809,338 of the Company's debt to Yasawa. Through Yasawa's acquisition of
the 6,809,338 shares of Common Stock of the Company referenced above, Mr. Antony
Gram's beneficial ownership increased from 3,109,703 shares to 9,919,041 shares
(73.23% of the outstanding shares of Common Stock of the Company as of March 19,
1999).
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS No. 128) in the fourth quarter of 1997. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share on the face of the income
statement. Basic earnings per share excludes dilution and is computed by
dividing income or loss attributable to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts are excluded if there effects would be anti-dilutive. All prior period
loss per share data has been computed in accordance with SFAS No. 128.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
10. Common Stock and Earnings per Share Information (continued)
The net loss and the average number of shares of common stock and common
stock equivalents used to calculate basic earnings (loss) per share for 1998,
1997 and 1996 were $ (2,591,000), $(1,326,000) and $(896,000) and 13,544,277,
6,753,587 and 6,729,748, respectively.
11. Subsequent Event
Between January 1, 1999 and March 26, 1999, Swan loaned the Company
$4,925,000 under the agreement described in Note 5. These funds were used by the
Company to pay approximately $2,567,000 in outstanding real estate taxes with
the balance to meet the Company's working capital requirements.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
12. Business Segments
Years ended
-------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 25,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(in thousands)
Revenues
Real estate:
Net land sales....... $ 3,078 $ 4,045 $ 4,296 $ 2,394 $ 2,058
Housing revenues......... 1,622 1,214 1,202 1,383 2,543
Improvement revenues. 956 2,366 1,008 1,052 1,214
Interest income...... 548 1,367 1,464 1,019 1,046
-------- -------- -------- -------- --------
Total real estate...... 6,204 8,992 7,970 5,848 6,861
Other.................. 529 617 963 1,030 1,832
Intersegment sales..... (245) (184) (283) (190) (152)
-------- -------- -------- -------- --------
Total.................. $ 6,488 $ 9,425 $ 8,650 $ 6,688 $ 8,541
======== ======== ======== ======== ========
Operating profits (losses)
Real estate................ $ 1,361 $ 3,052 $ 3,077 $ 1,377 $ 1,055
Other...................... 33 185 443 341 1,032
General corporate expense.. (3,173) (3,018) (2,966) (2,981) (4,147)
Interest expense........... (812) (1,545) (1,781) (1,642) (1,847)
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes
and extraordinary items... $ (2,591) $ (1,326) $ (1,227) $ (2,905) $ (3,906)
======== ======== ======== ======== ========
Real
Estate Other Corporate Total
------ -------- --------- --------
Identifiable assets........ 1998 $ 10,976 $ 656 $ 283 $ 11,915
1997 13,107 404 49 13,560
1996 18,864 502 56 19,422
Depreciation expense....... 1998 $ 27 $ 1 $ 16 $ 44
1997 25 5 16 46
1996 38 5 17 60
Capital expenditures....... 1998 $ 67 $ -0- $ 70 $ 137
1997 6 -0- -0- 6
1996 2 -0- 2 4
- -----------------------
Net land sales consist of gross land sales less estimated uncollectible
installment sales and contract valuation discount (see Notes 1, 2 and 7
to Consolidated Financial Statements).
Improvement revenues consist of revenue recognized due to completion of
improvements on prior period sales and exchanges from undeveloped to
developed lots.
Interest income primarily consists of interest earned on contracts and
mortgages receivable and on temporary cash investments and the
amortization of valuation discounts.
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.
Intersegment sales consist primarily of sales between the Company and
its title insurance subsidiary.
43
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)
-------- ---------- ---------- ------------- -------
1998
First.... $ 1,379 $ (621) $ (621) $ -0- $ (621)
Second... 1,946 (304) (304) -0- (304)
Third.... 1,338 (1,269) (1,269) -0- (1,269)
Fourth... 1,825 (397) (397) -0- (397)
-------- --------- -------- -------- -------
Total...... $ 6,488 $ (2,591) $ (2,591) $ -0- $(2,591)
======== ========= ======== ======== =======
1997
First.... $ 2,072 $ (429) $ (429) $ -0- $ (429)
Second... 2,291 (174) (174) -0- (174)
Third.... 1,631 (627) (627) -0- (627)
Fourth... 3,431 (96) (96) -0- (96)
-------- --------- -------- -------- -------
Total...... $ 9,425 $ (1,326) $ (1,326) $ -0- $(1,326)
======== ========= ======== ======== =======
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)
======== ======== ======== ======== =======
Basic earnings (Loss) Per Share
- -------------------------------
Extraordinary Net Income
Operations Items (Loss)
---------- ------------- ----------
1998
First...................... $ (.05) $ .00 $ (.05)
Second..................... $ (.02) $ .00 $ (.02)
Third...................... $ (.09) $ .00 $ (.09)
Fourth..................... $ (.03) $ .00 $ (.03)
------- -------- --------
Total............................... $ (.19) $ .00 $ (.19)
======= ======== ========
1997
First...................... $ (.06) $ .00 $ (.06)
Second..................... $ (.03) $ .00 $ (.03)
Third...................... $ (.09) $ .00 $ (.09)
Fourth..................... $ (.01) $ .00 $ (.01)
------- -------- --------
Total............................... $ (.20) $ .00 $ (.20)
======= ======== ========
1996
First...................... $ (.06) $ .00 $ (.06)
Second..................... $ (.03) $ .00 $ (.03)
Third...................... $ (.02) $ .05 $ .03
Fourth..................... $ (.07) $ .00 $ (.07)
------- -------- -------
Total............................... $ (.18) $ .05 $ (.13)
======= ======== =======
- -------------------
Total shown does not agree with basic earnings per share set forth in
the Company's Statement of Consolidated Operations for the year ended
December 31, 1997 due to differences in the calculation of the
weighted average number of shares outstanding at the end of each
quarter during the year.
44
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.................................. 46
Schedule VIII - Valuation and qualifying accounts for
the three years ended December 31, 1998....................... 48
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 1999 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
A report on Form 8-K was filed on April 2, 1998 and incorporated herein by
reference to communicate a change in the Company's auditors.
45
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, 1998 and for the
year then ended, and have issued our report thereon dated March 26, 1999 (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 audit 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.
JAMES MOORE & CO. P.L.
Certified Public Accountants
Gainesville, Florida
March 26, 1999
46
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, 1997, and for
the years ended December 31, 1997 and 1996 and have issued our report thereon
dated March 25, 1998 (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, 1998
47
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, 1998
Allowance for uncollectible contracts.. $ 1,150 $ 840 $ 1,045 $ 945
========== ========= ========= =======
Unamortized contract valuation discount $ 508 $ 237 $ 344 $ 401
========== ========= ========= =======
Year ended December 31, 1997
Allowance for uncollectible contracts.. $ 2,429 $ 1,528 $ 2,807 $ 1,150
========== ========= ========= =======
Unamortized contract valuation discount. $ 1,094 $ 520 $ 1,106 $ 508
========== ========= ========= =======
Year ended December 31, 1996
Allowance for uncollectible contracts.. $ 1,629 $ 1,706 $ 906 $ 2,429
========== ========= ========= =======
Unamortized contract valuation discount $ 829 $ 814 $ 549 $ 1,094
========== ========= ========= =======
- ------------
Represents estimated uncollectible contracts receivable (see Notes 1
and 2 to Consolidated Financial Statements).
Represents the unamortized discount generated from initial valuations
of contracts receivable (see Notes 1 and 2 to Consolidated Financial
Statements).
48
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 31, 1999
-----------------------
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 and President
/s/ Christel DeWilde
-------------------------
Christel DeWilde, 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 31, 1999
49