SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934.
For the quarterly period ending September 30, 2002
-------------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ______ to ______
Commission file number 1-4719
------
THE DELTONA CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-0997584
--------------------------------------------------------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8014 SW 135 STREET ROAD, OCALA, FLORIDA 34473
--------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (352)307-8100
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of the issuer's classes of common
stock, as of the latest practicable date: 13,544,277 shares of common stock, $1
par value, excluding treasury stock, as of September 30, 2002.
PART I- FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
-----------------------------------------------
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
----------------------------------------
($000 Omitted)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
------
Cash and cash equivalents, including escrow
deposits and restricted cash of $424 in 2002
and $561 in 2001 .............................. $ 699 $ 923
-------- --------
Contracts receivable for land sales - net ...... 1,007 1,213
-------- --------
Mortgages and other receivables - net .......... 173 248
-------- --------
Inventories (b):
Land and land improvements .................... 7,399 7,941
Other ......................................... 1,084 1,261
-------- --------
Total inventories ...................... 8,483 9,202
-------- --------
Property, plant, and equipment at cost - net ... 601 623
Investment in Venture .......................... 52 53
Prepaid expenses and other ..................... 866 1,168
-------- --------
Total .................. $ 11,881 $ 13,430
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Mortgages and similar debt(c):
Mortgage notes payable ........................ $ 3,300 $ 4,200
Other loans ................................... 6,641 6,077
-------- --------
Total mortgages and similar debt ....... 9,941 10,277
Accounts payable, accrued expenses,
customers' deposits ........................... 6,770 7,045
Deferred revenue ............................... 3,625 4,425
-------- --------
Total liabilities .............. 20,336 21,747
-------- --------
Commitments and contingencies (d):
Stockholders' equity (deficiency):
Common stock, $1 par value - authorized
15,000,000 shares; outstanding: 13,544,277
shares (excluding 12,228 shares held in
treasury) .................................... 13,544 13,544
Capital surplus ............................... 52,510 52,440
Accumulated deficit ........................... (74,509) (74,301)
-------- --------
Total stockholders' equity
(deficiency) ................... (8,455) (8,317)
-------- --------
Total .................. $ 11,881 $ 13,430
======== ========
See accompanying notes.
2
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
---------------------------------------------------------
FOR THE PERIODS INDICATED
-------------------------
($000 Omitted Except Per Share Amounts)
Nine Months Ended Three Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues (a):
Net land sales .................. $ 3,965 $ 5,909 $ 927 $ 1,816
House sales ..................... 4,092 2,821 1,757 881
Recognized improvement revenue /
prior period sales ............. 232 91 103 50
Gain on recovery of bad debt .... 0 178 0 0
Interest income ................. 298 300 73 70
Other revenues .................. 593 632 175 212
------------ ------------ ------------ ------------
Total ....................... 9,180 9,931 3,035 3,029
------------ ------------ ------------ ------------
Costs and expenses (a):
Cost of sales and improvements .. 4,711 3,975 1,867 1,231
Selling, general, administrative
and other expenses ............. 4,311 5,129 1,316 1,617
Loss in Joint Venture ........... 16 0 12 0
Interest expense (c)(e) .......... 350 707 133 166
------------ ----------- ------------ -----------
Total ....................... 9,388 9,811 3,328 3,014
------------ ----------- ------------ -----------
Net Income (Loss) ................ $ (208) $ 120 $ (293) $ 15
============ =========== ============ ===========
Net Income (Loss) per common share $ (.01) $ .01 $ (.02) $ .01
============ =========== ============ ===========
Number of common and common
equivalent shares ............... 13,544,277 13,544,277 13,544,277 13,544,277
============ =========== ============ ===========
See accompanying notes.
3
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
-----------------------------------------
($000 Omitted)
Nine Months Ended
-----------------------------
September 30, September 30,
2002 2001
------------- -------------
Cash flows from operating activities ........... $(1,779) $(3,224)
------- -------
Cash flows from investing activities:
Payment for acquisition of equipment .......... (44) (62)
------- -------
Cash flows from (used in)financing activities:
New borrowings ............................... 1,640 3,600
Repayments of notes .......................... (41) 0
------- -------
Net cash provided by funding activities. 1,599 3,600
------- -------
Net increase (decrease) in cash and cash
equivalents (including escrow deposits and
restricted cash) .............................. (224) 314
Cash and cash equivalents beginning of period .. 923 680
------- -------
Cash and cash equivalents end of period ........ $ 699 $ 994
======= =======
See accompanying notes.
4
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
-----------------------------------------
($000 Omitted)
Nine Months Ended
-----------------------------
September 30, September 30,
2002 2001
------------- -------------
Reconciliation of net income (loss) to net
cash provided by (used in) operating
activities:
Net income (loss) ............................ $ (208) $ 120
------- -------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ................ 68 45
Provision for estimated uncollectible
sales-net ................................... (54) 1,751
Contract valuation discount, net of
amortization ................................ (31) (82)
Imputed Interest on debt with related party .. 70 24
Loss on Joint Venture ........................ 16 0
Net change in assets and liabilities ......... (1,640) (5,082)
------- -------
Total adjustments ...................... $(1,572) $(3,344)
------- -------
Net cash provided by (used in) operating
activities................................... $(1,779) $(3,224)
======= =======
Supplemental disclosure of non cash investing
and financing activities:
Purchase of equipment with note payable ...... $ 0 $ 127
======= =======
Reduction of debt as a result of the
conveyance of contracts receivable .......... $ 1,935 $ 4,486
======= =======
See accompanying notes.
5
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------
SEPTEMBER 30, 2002
------------------
THE INFORMATION PRESENTED HEREIN AS OF SEPTEMBER 30, 2002 FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED.
(a) BASIS OF PRESENTATION
The condensed unaudited financial statements of The Deltona Corporation and
subsidiaries ("The Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to Commission rules and regulations. The information furnished
reflects, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair statement of the results
for the interim periods presented. Operating results for the three and nine
months ended September 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. These
condensed consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K.
Certain amounts have been reclassified for comparative purposes.
The accompanying financial statements of the Company have been prepared on
a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The
consolidated financial statements do not include any adjustments relating
to the recoverability of asset amounts or the amounts of liabilities should
the Company be unable to continue as a going concern.
The Company has been dependent on its ability to sell or otherwise finance
contracts receivable and/or secure other financing sources to meet its cash
requirements. Additional financing was required in the three and nine month
periods ended September 30, 2002 and was funded through additional loans
from Swan, an affiliated company. Additional financing will be required in
the future. Although Swan has loaned the Company additional funds to be
paid back with contracts receivable at the rate of 90% of face value, with
recourse since 1999, there can be no guarantee that the Company will be
able to generate sufficient receivables to obtain sufficient financing in
the future or that Yasawa, Scafholding, Swan and other related parties will
continue to make loans to the Company.
(b) INVENTORIES
Information with respect to the classification of inventory of land and
improvements including land held for sale or transfer is as follows (in
thousands):
Land and Improvements
---------------------
September 30, December 31,
2002 2001
------------- ------------
Unimproved land............................. $ 420 $ 420
Land in various stages of development....... 2,622 2,147
Fully improved land......................... 4,357 5,374
-------- --------
Total................................ $ 7,399 $ 7,941
======== ========
(c) MORTGAGES AND SIMILAR DEBT
The following table presents information with respect to mortgages and
similar debt (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Mortgage Notes Payable ..................... $ 3,300 $ 4,200
Other Loans................................. 6,641 6,077
--------- ---------
Total mortgages and similar debt..... $ 9,941 $ 10,277
========= =========
6
From June 19, 1992 through March 1999, 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"), Swan Development Corporation ("Swan") and related parties,
including Scafholding B.V. ("Scafholding"). Since December 1992, the
Company has been dependent on loans and advances from Selex, Yasawa, Swan
and their affiliates in order to meet its working capital requirements.
Included in Mortgage Notes Payable is the Yasawa loan ($3,300,000 at
September 30, 2002); included in Other Loans is the Swan loan ($6,533,000
as of September 30, 2002).
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 Yasawa is secured by a first lien on the Company's receivables and a
mortgage on all of the Company's property; and the Company's outstanding
debt to Swan is secured by a second lien on the Company's receivables.
The Company's outstanding debt to Yasawa as of September 30, 2002 was
$3,300,000. The terms of repayment of the restructured Yasawa loan 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, with recourse.
Interest accrues on the declining balance at the prime rate, adjusted
semi-annually to equal the prime rate then in effect. From January 2002 to
September 30, 2002, the interest rate on the outstanding debt was 4.75%,
which was prime. Yasawa and Scafholding have not required the Company to
make interest payments since September 1, 1998. As of September 30, 2002,
the total amount of interest accrued is approximately $2,226,000, which is
included in accrued expenses.
From October 9, 1998 through the present, Swan continued to loan the
Company funds to meet its working capital requirements. The Company's
outstanding debt to Swan was $6,533,000 as of September 30, 2002. 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. The Company has
recognized the loss on the transfer at less than face value as a component
of the estimated uncollectible sales expense. There is no interest for the
first six months after the Company receives an advance of money from Swan.
Currently, the interest rate is the prime rate, adjusted semi-annually to
equal the prime rate then in effect (4.75% as of September 30, 2002). Each
time an advance is made, a supplemental note is signed. 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. Under these repayment
terms, the Company transferred contracts receivable of $4.2 million and
recognized the losses on the transfers of $424,000 for the year ended 2001.
For each of the nine month periods ending September 30, 2002 and 2001, the
transfers were $1.0 million and $3.6 million, on which the Company
recognized losses on transfers of $100,000 and $360,000, respectively.
Funds advanced by Swan were used by the Company to meet the Company's
working capital requirements. From January 2002 to September 30, 2002, the
interest rate on the outstanding debt was 4.75%, which was prime. As of
September 30, 2002, the total amount of interest accrued is approximately
$765,000, which is included in accrued expenses.
For 2002 and 2001 , the Company recorded interest expense for the first
nine months of each loan advance from Swan that is non- interest bearing at
the prime rate. Since the interest is not paid to Swan, the amount
calculated is recorded as a capital contribution increase to capital
surplus. For the first nine months of 2002, the Company recorded interest
expense and a capital contribution in the amount of approximately $70,000.
In the future, if the Company elects to do so, Yasawa and Scafholding have
agreed to purchase contracts receivable at 65% of face value, with
recourse. The Company has an agreement with Swan whereby Swan may loan the
Company funds to be repaid with contracts receivable at 90% of face value,
with recourse.
(d) COMMITMENTS AND CONTINGENCIES
Homesite sales contracts provide for the return of all monies paid in
(including paid-in interest) should the Company be unable to meet its
contractual obligations after the use of reasonable diligence. If a refund
is made, the Company will recover the related homesite and any improvement
thereto.
7
(e) CAPITALIZED INTEREST
The Company capitalizes interest cost incurred during a project's
construction period. Interest expense incurred prior to capitalization was
$385,000 and $744,000 for the nine months ended September 30, 2002 and
September 30, 2001, respectively. Interest in the amount of $36,000 and
$37,000 was capitalized for the nine months ended September 30, 2002 and
2001, respectively.
(f) EARNINGS OR LOSS PER SHARE
Basic earnings (loss) per common and common equivalent share were computed
by dividing net income (loss) by the weighted average number of shares of
Common Stock and common stock equivalents outstanding during each period.
(g) CAPITAL TRANSACTION
On December 13, 2001, the Board of Directors approved a 1 for 500,000
reverse split of the Company's common stock and a related amendment to the
Company's Articles of Incorporation reducing the number of authorized
shares to 30. Both actions are subject to stockholder approval. The Company
has filed a Form 13E(3) and a preliminary proxy statement related to the
proposals. The effect of the reverse split will be to reduce the number of
the Company's stockholders to two stockholders: Selex International, B.V.,
a Netherlands corporation ("Selex") and Yasawa Holdings, N.V., a
Netherlands Antilles corporation ("Yasawa"). The date of the meeting of
stockholders to consider both matters will be determined upon the
conclusion of SEC review.
(h) RELATED PARTY TRANSACTION
During 2001, the Company entered into a joint venture agreement (the
"Venture") with Scafholding for the purchase of property tax certificates,
application of tax deeds, administration and the acquisition and sale of
land. The Company provides administrative, managerial, sales and marketing
services to the Venture. The Company is reimbursed by the Venture for all
commissions and marketing costs plus an administrative fee of 10% of all
sales consummated. Scafholding provides financing to the Venture and has
loaned the Venture approximately $1,369,000 as of September 30, 2002. There
were no reimbursements for the nine months ended September 30, 2002.
Administrative fees in the amount of $1,960 were earned for the nine months
ended September 30, 2002; no administrative fees were earned in 2001.
Interest on the outstanding debt accrues at the fixed rate of 7.75% (the
prime rate as of July 1, 2001 plus one percent). Net income is to be
distributed equally between the Company and Scafholding. The Company
records its investment in the Venture using the equity method of accounting
as control of the Venture rests with Scafholding as specified in the joint
venture agreement.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report on Form 10-Q of the Company for the three and nine months ended
September 30, 2002 contains certain forward- looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. To the extent that such statements
are not recitations of historical fact, such statements constitute
forward-looking statements which, by definition, involve risks and
uncertainties. In particular, statements under Item 2, Management's Discussion
and Analysis of Financial Condition and Results of Operation, contain
forward-looking statements. Where, in any forward-looking statement, the Company
has an expectation or belief as to future results or events, such expectation or
belief is expressed in good faith and believed to have reasonable basis, but
there can be no assurance that the statement of expectation or belief will
result or be achieved or accomplished.
RESULTS OF OPERATIONS
For the nine months ended September 30, 2002 and September 30, 2001.
Revenues
--------
Total revenues were $9,180,000 for the first nine months of 2002 ($3,035,000 for
the quarter ending September 30, 2002) compared to $9,931,000 for the comparable
2001 period ($3,029,000 for the quarter ending September 30, 2001).
Gross land sales were $5,093,000 for the first nine months of 2002 ($1,300,000
for the quarter ending September 30, 2002) compared to $7,758,000 for the first
nine months of 2001 ($2,305,000 for the quarter ending September 30, 2001). Net
land sales (gross land sales less estimated uncollectible installment sales and
contract valuation discount) decreased to $3,965,000 for the first nine months
of 2002 ($927 ,000 for the quarter ending September 30, 2002) compared to
$5,909,000 for the first nine months of 2001 ($1,816,000 for the quarter ending
September 30, 2001). The decrease in sales reflects lower land sales by the
Company's independent dealers.
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 nine months ended September 30, 2002 and September 30, 2001 were
$4,820,000 and $8,602,000, respectively and $1,433,000 and $2,887,000 for the
three months ended September 30, 2002 and 2001, respectively. The Company had a
backlog of approximately $2,406 ,000 in unrecognized sales as of September 30,
2002. 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.
Housing revenues were $4,092,000 for the first nine months of 2002 versus
$2,821,000 for the comparable 2001 period. Revenues are not recognized from
housing sales until the completion of construction and passage of title. Housing
revenues increased as of result of more homes being closed in the period. The
backlog of houses under contract, including both houses under construction and
to be constructed, was $8,034,000 and $3,019,000 as of September 30, 2002 and
September 30, 2001, respectively.
The following table reflects the Company's real estate product mix for the
periods indicated (in thousands):
Nine Months Ended Three Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Gross Land Sales...... $ 5,093 $ 7,758 $ 1,300 $ 2,305
------- --------- ------- -------
Housing Sales......... 4,092 2,821 1,757 881
------- --------- ------- -------
Total Real Estate... $ 9,185 $ 10,579 $ 3,057 $ 3,186
======= ========= ======= =======
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 $232,000 for the first nine first nine months of 2002 ($103,000
for the third quarter of 2002) versus $91,000 for the comparable 2001 period
($50,000 for the third quarter of 2001).
Interest income was $298,000 for the first nine months of 2002 ($73,000 for the
third quarter of 2002) versus $300,000 for the comparable 2001 period ($70,000
for the third quarter of 2001).
9
Other revenues were $593,000 for the first nine months of 2002 ($174 ,000 for
the third quarter of 2002) versus $632,000 for the comparable 2001 period
($212,000 for the third quarter of 2001). Other revenues are principally
generated by the Company's title insurance and real estate brokerage
subsidiaries.
Costs and Expenses
------------------
Costs and expenses were $9,388,000 for the first nine months of 2002 ($3,328,000
for the third quarter of 2002) versus $9,811,000 for the comparable 2001 period
($3,014,000 for the third quarter of 2001).
Cost of sales increased to $4,711,000 from $3,975,000 for the first nine months
of 2002 compared to 2001, and to $1,867,000 from $1,231,000 for the third
quarter of 2002 for the third quarter of 2002 compared to 2001. The higher cost
of sales is due to a higher percentage of housing sales .
Commissions and other selling expenses decreased to $2,620,000 from $3,469,000
for the first nine months of 2002 compared to 2001, and to $790,000 from
$1,109,000 for the third quarter of 2002 compared to 2001. Retail land sales,
which have a higher percentage selling costs, decreased; housing sales, which
have a lower percentage selling costs, increased. Advertising and promotional
expenses decreased to $97,000 for the first nine months of 2002 ($34,000 for the
third quarter of 2002) versus $168,000 for the comparable 2001 period ($33,000
for the third quarter of 2001). General and administrative expenses were
$1,163,000 for the first nine months of 2002 ($348,000 for the third quarter of
2002) versus $1,061,000 for the comparable 2001 period ($331,000 for the third
quarter of 2001). General and administrative expenses increased primarily due to
increased overhead expenses. Real estate tax expenses were $431,000 for the
first nine months of 2002 ($144,000 for the third quarter of 2002) versus
$431,000 for the comparable 2001 period ($144,000 for the third quarter of
2001).
Interest expense was $350,000 for the first nine months of 2002 ($133,000 for
the third quarter of 2002) compared to $707,000 for the first nine months of
2001 ($166,000 for the third quarter of 2001). The decrease in interest expense
is a result of debt balances accruing interest at a lower interest rate. For an
expanded discussion of the Company's debt agreements, see the following section,
"Liquidity and Capital Resources".
Net Income
----------
The Company reported a net loss of $208,000 for the first nine months of 2002 (a
net loss of $293,000 for the third quarter of 2002) versus a net income of
$120,000 for the comparable 2001 period (a net income of $15,000 for the third
quarter of 2001). The decrease in earnings is primarily attributable to lower
land sales through the Company's independent dealers. The Company has taken
actions to increase its housing and land sales, including efforts to continue to
seek new independent broker representatives.
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.
10
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.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
MORTGAGES AND SIMILAR DEBT
From June 19, 1992 through March 1999, 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"), Swan
Development Corporation ("Swan") and related parties, including Scafholding B.V.
("Scafholding"). Since December, 1992, the Company has been dependent on loans
and advances from Selex, Yasawa, Swan and their affiliates in order to meet its
working capital requirements.
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 Yasawa is
secured by a first lien on the Company's receivables and a mortgage on all of
the Company's property; and the Company's outstanding debt to Swan is secured by
a second lien on the Company's receivables.
The Company's outstanding debt to Yasawa as of September 30, 2002 was
$3,300,000. The terms of repayment of the restructured Yasawa loan 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, with recourse. Interest
accrues on the declining balance at the prime rate, adjusted semi-annually to
equal the prime rate then in effect. From January 2002 to September 30, 2002,
the interest rate on the outstanding debt was 4.75%, which was prime. Yasawa and
Scafholding have not required the Company to make interest payments since
September 1, 1998. As of September 30, 2002, the total amount of interest
accrued is approximately $2,226,000, which is included in accrued expenses.
From October 9, 1998 through the present, Swan continued to loan the Company
funds to meet its working capital requirements. The Company's outstanding debt
to Swan was $6,533,000 as of September 30, 2002. 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. The Company has recognized the loss on the transfer at less than
face value as a component of the estimated uncollectible sales expense. There is
no interest for the first six months after the Company receives an advance of
money from Swan. Currently, the interest rate is the prime rate, adjusted
semi-annually to equal the prime rate then in effect (4.75% as of September 30,
2002). Each time an advance is made, a supplemental note is signed. 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. Under these repayment terms, the Company
transferred contracts receivable of $4.2 million and recognized the losses on
the transfers of $424,000 for the year ended 2001. For each of the nine month
periods ending September 30, 2002 and 2001, the transfers were $1.0 million and
$3.6 million, on which the Company recognized losses on transfers of $100,000
and $360,000, respectively. Funds advanced by Swan were used by the Company to
meet the Company's working capital requirements. From January 2002 to September
30, 2002, the interest rate on the outstanding debt was 4.75%, which was prime.
As of September 30, 2002, the total amount of interest accrued is approximately
$765,000, which is included in accrued expenses.
The following table presents information with respect to mortgages and similar
debt (in thousands):
September 30, December 31,
2002 2001
------------- ------------
Mortgage Notes Payable ..................... $ 3,300 $ 4,200
Other Loans................................. 6,641 6,077
--------- ---------
Total mortgages and similar debt..... $ 9,941 $ 10,277
========= =========
---------
Included in Mortgage Notes Payable is the Yasawa loan ($3,300,000 at
September 30, 2002); included in Other Loans is the Swan loan ($6,533,000
as of September 30, 2002).
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CONTRACTS AND MORTGAGES RECEIVABLE SALES
In 1990 and 1992, the Company sold contracts and mortgages receivable to third
parties. 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 $1,019,000 as of September
30, 2002). The Company has 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. The Company did not replace any
delinquent receivables under these transactions in 2001 or 2002. As of September
30, 2002 and December 31, 2001, $996 ,000 and $1,060,000 in receivables were
delinquent, respectively.
Since 1997, the Company sold or transferred for debt repayment contracts and
mortgages receivable to related third parties, Scafholding and Swan. These
transactions, among other things, require that the Company replace any
receivable that becomes eligible to be canceled. Such requirement is satisfied
monthly from contracts in the Company's receivable portfolio not otherwise
secured to unrelated third parties.
The Company has reserved for the estimated future cancellations of these
contracts based on the Company's historical experience for receivables the
Company services and believes these reserves to be adequate. Approximately
$17,969,000 of outstanding contracts receivable, subject to recourse provisions,
were sold or transferred as of September 30, 2002, 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 approximately $2,728,000 remains at September 30, 2002. 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. The Company received
approximately $110,000 for the nine months ended September 30, 2002 and $73,000
for the year 2001 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 may loan the Company funds to be
repaid with contracts receivable at 90% of face value, with recourse.
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 is now
offering lots for sale in compulsory building areas where a lot purchaser must
complete payments for the lot and construct a home within a limited period of
time.
The Company 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,
Scafholding and Swan and related parties for the financing of its operations.
Although Scafholding has purchased contracts receivables at the rate of 65% of
face value, with recourse, and Swan has loaned the Company additional funds to
be paid back with contracts receivable at the rate of 90% of face value, with
recourse, there can be no guarantee that the Company will be able to generate
sufficient receivables to obtain sufficient financing in the future nor can
there be any guarantee that Yasawa, Scafholding, Swan and other related parties
will continue to make loans to the Company.
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PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See attached Exhibit 99.1 for Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
- Oxley Act of 2002 (CEO Certification by Antony Gram)
See attached Exhibit 99.2 for Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
- Oxley Act of 2002 (CFO Certification by Robert O. Moore)
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE DELTONA CORPORATION
Date: November 14, 2002 By: /s/Robert O. Moore
--------------------------------
Robert O. Moore,
Treasurer & Chief Financial Officer
13