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, 2003
-------------------
OR
------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _________ to_________
Commission file number 1-4719
THE DELTONA CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-0997584
--------------------------------------------------------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8014 SW 135 STREET ROAD, OCALA, FLORIDA 34473
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(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 October 15, 2003.
PART I- FINANCIAL INFORMATION
=============================
ITEM 1. FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
----------------------------------------
($000 Omitted)
--------------
September 30, December 31,
2003 2002
------------- ------------
(Unaudited)
ASSETS
------
Cash and cash equivalents, including escrow
deposits and restricted cash of $1,017 in 2003
and $820 in 2002 ............................. $ 1,491 $ 1,039
-------- --------
Contracts receivable for land sales - net ...... 353 930
-------- --------
Mortgages and other receivables - net .......... 185 139
-------- --------
Inventories:
Land and land improvements .................... 6,480 7,237
Housing ....................................... 2,196 1,754
-------- --------
Total inventories ...................... 8,676 8,991
-------- --------
Property, plant, and equipment - net ........... 617 608
Investment in venture .......................... 9 70
Prepaid expenses and other ..................... 1,002 967
-------- --------
Total .................................. $ 12,333 $ 12,744
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Mortgages and similar debt:
Mortgage notes payable - related parties ...... $ 2,100 $ 3,000
Other loans - related parties ................. 8,637 8,282
Other loans ................................... 53 95
-------- --------
Total mortgages and similar debt ............ 10,790 11,377
Accounts payable - trade ....................... 621 332
Accrued interest payable - related parties ..... 1,722 2,466
Obligation under recourse provisions ........... 2,542 3,088
Accrued expenses and other ..................... 1,081 334
Customers' deposits ............................ 1,769 1,161
Deferred revenue ............................... 3,543 3,818
-------- --------
Total liabilities ........................... 22,068 22,576
-------- --------
Commitments and contingencies:
Stockholders' equity (deficit):
Preferred stock, $1 par value - authorized
5,000,000 shares; no shares are issued and
outstanding, preferences will be determined
prior to issuance ............................ -0- -0-
Common stock, $1 par value - authorized
15,000,000 shares; outstanding: 13,544,277
shares (excluding 12,228 shares held in
treasury)..................................... 13,544 13,544
Additional paid-in capital ..................... 52,603 52,518
-------- --------
Accumulated deficit ............................ (75,882) (75,894)
-------- --------
Total stockholders' equity (deficit) ... ( 9,735) (9,832)
-------- --------
Total .......................... $ 12,333 $ 12,744
======== ========
See accompanying notes.
2
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
---------------------------------------------------------
FOR THE PERIODS INDICATED
-------------------------
($000 Omitted, Except Per Share Amounts)
Nine Months Ended Three Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenues:
Net land sales .................. $ 4,860 $ 4,068 $ 1,975 $ 956
Sales - Housing ................. 6,166 4,092 2,728 1,757
Recognized improvement revenue-
prior period sales ............. 115 232 16 103
Gain on termination of recourse
obligation ..................... 872 0 0 0
Interest income ................. 183 298 52 73
Other ........................... 568 593 238 175
------------ ----------- ----------- ------------
Total 12,764 9,283 5,009 3,064
------------ ----------- ----------- ------------
Costs and expenses :
Cost of sales and improvements .. 6,597 4,711 2,856 1,867
Selling, general, administrative
and other expenses ............. 5,419 4,311 1,934 1,316
Loss in Joint Venture ........... 62 16 27 12
Loss on transfer of contracts
receivable...................... 299 103 83 29
Interest expense ................ 374 350 117 133
------------ ----------- ----------- ------------
Total ....................... 12,751 9,491 5,017 3,357
------------ ----------- ----------- ------------
Income (loss) from operations
before income taxes
Provision for income taxes ....... -0- -0- -0- -0-
------------ ----------- ----------- ------------
Net income (loss) ................ $ 13 $ (208) $ (8) $ (293)
============ =========== =========== ============
Net income (loss)per common share $ .00 $ (.01) $ (.00) $ (.02)
============ =========== =========== ============
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, 2003 AND SEPTEMBER 30, 2002
-----------------------------------------
($000 Omitted)
Nine Months Ended
-------------------------------
September 30, September 30,
2003 2002
------------- -------------
Cash flows from operating activities ........ $(1,416) $(1,779)
------- -------
Cash flows from investing activities:
Payment for acquisition of equipment ...... $ (90) $ (44)
------- -------
Cash flows from financing activities:
New borrowings ............................ 2,000 1,640
Repayment of borrowings ................... (42) (41)
------- -------
Net cash provided by (used in)
financing activities ................ 1,958 1,599
------- -------
Net increase (decrease) in cash and
cash equivalents ........................... 452 (224)
Cash and cash equivalents, beginning of
period ..................................... 1,039 923
------- -------
Cash and cash equivalents, end of period .... $ 1,491 $ 699
======= =======
See accompanying notes.
4
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
UNAUDITED CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
---------------------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
-----------------------------------------
($000 Omitted)
Nine Months Ended
-------------------------------
September 30, September 30,
2003 2002
------------- -------------
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Net income(loss)........................... $ 13 $ (208)
-------- --------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization ............. 81 68
Provision for estimated uncollectible
sales-net ................................ 546 (54)
Contract valuation discount, net of
amortization ............................. 103 (31)
Imputed Interest on debt with related
party .................................... 84 70
Equity in loss in joint venture ........... 62 16
Loss on transfer of contracts receivable... 299 104
Net change in assets and liabilities ...... (2,604) (1,744)
-------- --------
Total adjustments ................... $ (1,429) $ (1,571)
-------- --------
Net cash provided by (used in) operating
activities ................................. $ (1,416) $ (1,779)
======== ========
Supplemental disclosure of non cash
investing and financing activities:
Interest expense treated as contribution
to capital ............................... $ 84 $ 70
======== ========
Transfer of contracts receivable for debt
and interest repayment ................... $ 3,892 $ 1,935
======== ========
See accompanying notes.
5
THE DELTONA CORPORATION AND SUBSIDIARIES
----------------------------------------
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------
SEPTEMBER 30, 2003
------------------
THE INFORMATION PRESENTED HEREIN AS OF SEPTEMBER 30, 2003 FOR THE THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 IS UNAUDITED.
(a) BASIS OF PRESENTATION
The condensed unaudited financial statements of The Deltona Corporation and
subsidiaries ("the Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to
Commission rules and regulations. The information furnished reflects, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results for the interim
periods presented. Operating results for the three and nine months ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's latest Annual Report on Form
10-K/A.
Certain amounts have been reclassified for comparative purposes.
The accompanying financial statements of the Company have been prepared on
a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The consolidated
financial statements do not include any adjustments relating to the
recoverability of asset amounts or the amounts of liabilities should the Company
be unable to continue as a going concern.
The Company has been dependent on its ability to sell or otherwise finance
contracts receivable and/or secure other financing sources to meet its cash
requirements. Additional financing in the amount of $2,000,000 was required
during the nine months ending September 30, 2003 and was funded through
additional loans from Swan. Additional financing will be required in the future.
Although Swan has loaned the Company additional funds to be paid back with
contracts receivable at the rate of 90% of face value, with recourse since 1999,
there can be no guarantee that the Company will be able to generate sufficient
receivables to obtain sufficient financing in the future or that the Company
will be able to obtain financing from Yasawa, Scafholding, Swan and other
related parties, or from unrelated parties.
(b) INVENTORIES
Information with respect to the classification of inventory of land and
improvements including land held for sale or transfer is as follows (in
thousands):
Land and Improvements
September 30, December 31,
2003 2002
-------------- -------------
Unimproved land................... $ 420 $ 420
Land in various stages of
development...................... 2,734 2,622
Fully improved land............... 3,326 4,195
-------- --------
Total..................... $ 6,480 $ 7,237
======== ========
(c) MORTGAGES AND SIMILAR DEBT
As of September 30, 2003, the Company's outstanding debt to Yasawa was
$2,100,000 secured by a first lien on the Company's receivables and a mortgage
on all of the Company's properties. The terms of repayment of the Yasawa loan
provide for $100,000 of monthly payments of principal in cash or contracts
receivable at 100% of face value, with recourse. Interest accrues at the prime
rate adjusted semi-annually to the then current rate of 4.75% for 2002, 4.25%
for January 1 through June 30, 2003 and 4.0% effective July 1, 2003. For
advances after September 1, 2003, the minimum annual percentage rate charged is
6% per annum notwithstanding a lower prime rate. The Company satisfied its
principal obligation to Scafholding as of December 31, 1999. Yasawa and
Scafholding have not required the Company to make interest payments since
September 1, 1998. As of September 30, 2003, the total amount of interest
accrued on the Yasawa and Scafholding obligations is approximately
$1,722,000, which is included in accrued interest.
6
During the nine months ended September 30, 2003, Swan loaned the Company an
additional $2,000,000 to meet the Company's working capital requirements. The
Company's debt to Swan as of September 30, 2003, of $8,637,000 is secured by a
second lien on the Company's receivables. Swan has agreed to accept contracts
receivable at 90% of face value, with recourse, in payment of the Company's
obligation to Swan. The Company recognizes a loss on the transfer of contracts
at less than face value. The amount of each monthly payment will be dependent
upon the amount of contracts receivable in the Company's portfolio. Each month,
the Company is required to transfer to Swan , as debt repayment, all current
contracts receivable in the Company's portfolio in excess of $500,000, including
contracts that have not yet met the Company's revenue recognition criteria.
Interest accrues at the prime rate adjusted semi-annually to the then current
rate of 4.75% for 2002, 4.25% for January 1 through June 30, 2003 and 4.0%
effective July 1, 2003. Effective September 1, 2003, a minimum interest rate of
6% will apply to all new advances notwithstanding a lower prime rate. As of
September 30, 2003, the Company paid the accrued and unpaid interest on the Swan
notes through the transfer of contracts receivable at 90% of their face value.
The Company records interest expense for all borrowing at the Company's
incremental borrowing rate, which is currently the prime rate. Prior to
September 1, 2003, the interest did not accrue for the first six months of each
loan advance from Swan, and the interest calculated was expensed and recorded as
additional paid-in capital. This amount was approximately $85,000 for the nine
months ended September 30, 2003.
In the future, if the Company elects to do so, Yasawa and Scafholding have
agreed to purchase contracts receivable at 65% of face value, with recourse. The
Company has an agreement with Swan whereby Swan may loan the Company funds to be
repaid with contracts receivable at 90% of face value, with recourse.
Indebtedness under various purchase money mortgages and loan agreements is
collateralized by substantially all of the Company's assets, including stock of
wholly-owned subsidiaries.
The Company has an agreement with Scafholding and Citony Development
Corporation for the servicing of their receivable portfolios. The Company
received approximately $54,000 and $55,000, in the nine months ended September
30, 2003 and 2002, respectively, in revenue pursuant to these agreements. The
Company also services the Swan receivable portfolio, which consisted of 1,137
contracts (approximately $13,264,000) as of September 30, 2003; however, the
Swan portfolio is serviced at no charge to Swan under the Trust and Servicing
Agreement.
(d) COMMITMENTS AND CONTINGENCIES
Homesite sales contracts provide for the return of all monies paid in
(including paid-in interest) should the Company be unable to meet its
contractual obligations after the use of reasonable diligence. If a refund is
made, the Company will recover the related homesite and any improvement thereto.
(e) CAPITALIZED INTEREST
The Company capitalizes interest cost incurred during a project's
construction period. Interest incurred was $391,000 and $385,000 for the nine
months ended September 30, 2003 and 2002, respectively, of which $16,000 and
$36,000 was capitalized for the nine months ended September 30, 2003 and 2002,
respectively.
(f) EARNINGS OR LOSS PER SHARE
Basic earnings (loss) per common and common equivalent share were computed
by dividing net income (loss) by the weighted average number of shares of Common
Stock and common stock equivalents outstanding during each period.
(g) CAPITAL TRANSACTION
In 2002, the Company filed a Form 13E(3) and a preliminary proxy statement
related to a proposed going private transaction. These documents are currently
being reviewed by the SEC staff. These filings were done pursuant to actions by
the Board of Directors. On December 13, 2001, the Board of Directors approved,
subject to stockholder approval, a 1 for 500,000 reverse split of the Company's
common stock and a related amendment to the Company's Articles of Incorporation
reducing the number of authorized shares to 30. Based on the current common
stockholdings, if voted and approved by the stockholders, the reverse split will
reduce the number of the Company's stockholders to two stockholders: Selex
International, B.V., a Netherlands corporation ("Selex") and Yasawa Holdings,
N.V., a Netherlands Antilles corporation ("Yasawa"). The date of the meeting of
stockholders to consider both matters will be determined upon the conclusion of
the review and subsequent amendments to the disclosures in preliminary proxy
statement and Form 13E(3) filings.
7
(h) REPURCHASE OF CONTRACTS AND REDUCTION OF RECOURSE OBLIGATION LIABILITY
On March 7, 2003, the Company closed on an agreement to repurchase 200
"non-performing" contracts receivable from an unrelated third party. The Company
had sold the contracts in 1990 and 1992 subject to a repurchase obligation. The
contract portfolio had been subsequently conveyed to other unrelated investors.
The Company did not service this contract portfolio.
The repurchased contracts had uncollected balances aggregating
approximately $1 million and were beyond their original term. The Company
entered into the agreement principally to reacquire underlying collateral, the
developed residential lots , under terms favorable for the Company because the
organization selling the contracts back to the Company was in bankruptcy
proceedings and desired to quickly liquidate these contracts receivable for a
one-time cash payment.
Based upon its analysis of recent payment history, management has
determined approximately 25 contracts aggregating approximately $50,000 might be
collectable. Management exercised its right to cancel the remaining
nonperforming contracts and recover the underlying collateral of developed
residential lots. The reacquired lots will be added to its land inventory and
sold in the normal course of business.
The acquired assets were recorded at their fair value, the aggregate
repurchase cost incurred of approximately $215,000, including costs of title
searches, legal fees, transfer fees, taxes and other direct costs. The cost was
first assigned to the net realizable value of contracts expected to be collected
in the normal course of business of $50,000, and the remaining cost of $165,000
was assigned to land inventory to be recovered. The management believes, based
on the sale of similar developed lots, that the Company's expected net
realizable value of the recoverable developed lots exceeds its cost basis.
Prior to the repurchase of these contracts, the Company had a net recourse
obligation of $872,000 for this portfolio of sold contracts. Management
periodically analyzes and adjusts its recourse obligation liability based on
reports of the non-performing status of the contracts receivable and its
obligation to replace the contracts (perpetuating the recourse obligation).
Management also considered other factors including the negative impact of the
bankruptcy of the owner of the portfolio. Management believes the liability was
equal to the expected obligation to replace the non-performing contracts with
performing contracts in the normal course of business. The Company recognized a
one-time gain of approximately $872,000 as a direct result of the reduction of
the recourse obligation liability when the recourse obligation was eliminated.
The Company was able to receive very favorable terms in this transaction due to
the one-time cash repurchase of the remaining contracts from an organization
going through bankruptcy proceedings. Incidental to the transaction, lots that
were designated as additional collateral for the recourse obligation and owned
by an affiliated company, Citony Development Corporation, were released to
Citony.
(i) INCOME TAXES
For the nine month period ending September 30, 2003, the Company reported
income for financial reporting purposes, and a net loss for tax purposes through
the utilization of the benefit of net operating loss carry-forwards. For the
nine month period ending September 30, 2002, the Company reported a net loss for
both financial reporting and tax purposes. Although the Company expects to
utilize the tax benefit carry-forwards to offset any taxable income, there can
be no assurance that the Company will generate taxable income for the year or
utilize any of the carry-forward benefits.
(j) OTHER EVENTS
On September 12, 2003, Marion County acquired the utility assets of Florida
Water Services within Marion Oaks subdivision through a condemnation action.
Marion County replaced Florida Water as the provider of water and sewer services
within the Marion Oaks subdivision. The Company does not expect this change to
have a material impact upon the operations of the Company.
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, 2003 contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. To the extent that such statements
are not recitations of historical fact, such statements constitute
forward-looking statements which, by definition, involve risks and
uncertainties. In particular, statements under Items 1 and 2, contain
forward-looking statements. Where, in any forward-looking statement, the Company
expresses an expectation or belief as to future results or events, such
expectation or belief is expressed in good faith and believed to have reasonable
basis, but there can be no assurance that the statement of expectation or belief
will result or be achieved or accomplished.
All of the above estimates are based on the current expectations of our
management team, which may change in the future due to a large number of
potential events, including unanticipated future developments.
The following factors are factors that could cause actual results or events
to differ materially from those anticipated, and include, but are not limited
to: the availability of operating capital; general economic, financial and
business conditions; competition for customers in the single-family and
multi-family home market; the costs of construction; and changes in and
compliance with governmental regulations.
RESULTS OF OPERATIONS
For the nine months ended September 30, 2003 and September 30, 2002.
Revenues
--------
Total revenues were $12,764,000 for the nine months ended September 30,
2003 ($5,009,000 for the quarter ended September 30, 2003) compared to
$9,283,000 for the comparable 2002 period ($3,064,000 for the quarter ending
September 30, 2002).
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, 2003 and 2002 were
$5,966,000 ($2,054,000 for the three months ended September 30, 2003) and
$4,820,000 ($1,433,000 for the quarter ending September 30, 2002), respectively.
The Company had a backlog of approximately $2,347,000 in unrecognized sales as
of September 30, 2003. Such contracts are not included in retail land revenue
until the applicable rescission period has expired and the Company has received
payments totaling 20% of the contract sales price.
Housing revenues were $6,166,000 for the first nine months of 2003 versus
$4,092,000 for the comparable 2002 period. Revenues are not recognized from
housing sales until the completion of construction and passage of title. Housing
revenues increased as a result of more homes being closed in the period. The
backlog of houses under contract was $14,139,000 and $8,034,000 as of September
30, 2003 and 2002, 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,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Gross Land Sales:.. $ 5,508 $ 5,093 $ 2,090 $ 1,300
-------- --------- -------- --------
Housing Sales:..... 6,166 4,092 2,728 1,757
-------- --------- -------- --------
Total Real
Estate:......... $ 11,674 $ 9,185 $ 4,818 $ 3,057
======== ========= ======== ========
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 $115,000 for the first nine months of 2003 ($16,000
for the three months ending September 30, 2003) versus $232,000 for the
comparable 2002 period ($103,000 for the three months ending September 30,
2002).
9
Interest income was $183,000 for the first nine months of 2003 ($52,000 for
the three months ending September 30, 2003) versus $298,000 for the comparable
period in 2002 ($73,000 for the three months ending September 30, 2002).
Other revenues were $568,000 for the first nine months of 2003 ($238,000
for the three months ending September 30, 2003) versus $593,000 for the
comparable period in 2002 ($175,000 for the three months ending September 30,
2002). Other revenues are principally generated by the Company's title insurance
and real estate brokerage subsidiaries.
Costs and Expenses
------------------
Costs and expenses were $12,751,000 for the first nine months of 2003
($5,017,000 for the three months ending September 30, 2003) versus $9,491,000
for the comparable period in 2002 ($3,357,000 for the three months ending
September 30, 2002).
Cost of sales increased to $6,597,000 for the first nine months of 2003
($2,856,000 for the three months ending September 30, 2003) versus $4,711,000
for the comparable period in 2002 ($1,867,000 for the three months ending
September 30, 2002) due to increased housing sales.
Commissions, advertising and other selling expenses totaled $3,642,000 for
the nine months of 2003 ($1,296,000 for the three months ending September 30,
2003) versus $2,620,000 for the comparable period in 2002 ($790,000 for the
three months ending September 30, 2002). General and administrative expenses
were $1,027,000 for the first nine months of 2003 ($355,000 for the three months
ending September 30, 2003) versus $1,163,000 for the comparable period in 2002
($348,000 for the three months ending September 30, 2002) as a result of
decreased overhead expenses. Real estate tax expenses were $750,000 for the
first nine months of 2003 ($283,000 for the three months ending September 30,
2003) versus $431,000 for the comparable period in 2002 ($144,000 for the three
months ending September 30, 2002).
Interest expense was $374,000 for the first nine months of 2003 ($117,000
for the three months ending September 30, 2003) compared to $350,000 for the
first nine months of 2002 ($133,000 for the three months ending September 30,
2002). The interest expense increased due to less interest being capitalized for
development costs and increased due to increased outstanding debt for the nine
month period ended September 30, 2003 when compared to the same period in 2002.
For an expanded discussion of the Company's debt agreements, see the following
section, "Liquidity and Capital Resources".
Net Income
----------
The Company reported net income of $13,000 for the first nine months of
2003 (a net loss of ($8,000) for the three months ending September 30, 2003)
versus a net loss of ($208,000) for the comparable period in 2002 ( a net loss
of ($293,000) for the three months ending September 30, 2002). The 2003 net
income is due to a non-cash gain of $872,000 on the termination of the remaining
repurchase obligation on contracts that had been sold in 1990 and 1992.
Regulatory Developments which may affect Future Operations
----------------------------------------------------------
In Florida, as in many growth areas, local governments have sought to limit
or control population growth in their communities through restrictive zoning,
density reduction, the imposition of impact fees and more stringent development
requirements. Although the Company has taken such factors into consideration in
its master plans by agreeing, for example, to make improvements, construct
public facilities and dedicate certain property for public use, the increased
regulation has lengthened the development process and added to development
costs.
The implementation of the Florida Growth Management Act of 1985 (the "Act")
precludes the issuance of development orders or permits if public facilities
such as transportation, water and sewer services will not be available
concurrent with development. Development orders have been issued for, and
development has commenced in, the Company's existing communities (with
development being completed in certain of these communities). Thus, the
Company's communities are less likely to be affected by the new growth
management policies than future communities. Any future communities developed by
the Company will be strongly impacted by new growth management policies. Since
the Act and its implications are consistently being re- examined by the State,
together with local governments and various state and local governmental
agencies, the Company cannot further predict the timing or the effect of new
growth management policies, but anticipates that such policies may increase the
Company's permitting and development costs.
10
The Company's land sales activities are further subject to the jurisdiction
of the laws of various states in which the Company's properties are offered for
sale. In addition, Florida and other jurisdictions in which the Company's
properties are offered for sale have strengthened, or may strengthen, their
regulation of subdividers and subdivided lands in order to provide further
assurances to the public. The Company has attempted to take appropriate steps to
modify its marketing programs and registration applications in the face of such
increased regulation, but has incurred additional costs and delays in the
marketing of certain of its properties in certain states and countries. For
example, the Company has complied with the regulations of certain states which
require that the Company sell its properties to residents of those states
pursuant to a deed and mortgage transaction, regardless of the amount of the
down payment. The Company intends to continue to monitor any changes in statutes
or regulations affecting, or anticipated to affect, the sale of its properties
and intends to take all necessary and reasonable action to assure that its
properties and its proposed marketing programs are in compliance with such
regulations, but there can be no assurance that the Company will be able to
timely comply with all regulatory changes in all jurisdictions in which the
Company's properties are presently offered for sale to the public.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Mortgages and Similar Debt
As of September 30, 2003, the Company's outstanding debt to Yasawa was
$2,100,000 secured by a first lien on the Company's receivables and a mortgage
on all of the Company's properties. The terms of repayment of the Yasawa loan
provide for $100,000 of monthly payments of principal in cash or contracts
receivable at 100% of face value, with recourse. Interest accrues at the prime
rate adjusted semi-annually to the then current rate of 4.75% for 2002, 4.25%
for January 1 through June 30, 2003 and 4.0% effective July 1, 2003. For
advances after September 1, 2003, the minimum annual percentage rate charged is
6% per annum notwithstanding a lower prime rate. The Company satisfied its
principle obligation to Scafholding as of December 31, 1999. Yasawa and
Scafholding have not required the Company to make interest payments since
September 1, 1998. As of September 30, 2003, the total amount of interest
accrued on the Yasawa and Scafholding obligations is approximately
$1,722,000, which is included in accrued interest.
During the nine months ended September 30, 2003, Swan loaned the Company an
additional $2,000,000 to meet the Company's working capital requirements. The
Company's debt to Swan as of September 30, 2003, of $8,637,000 is secured by a
second lien on the Company's receivables. Swan has agreed to accept contracts
receivable at 90% of face value, with recourse, in payment of the Company's
obligation to Swan. The Company recognizes a loss on the transfer of contracts
at less than face value. The amount of each monthly payment will be dependent
upon the amount of contracts receivable in the Company's portfolio. Each month,
the Company is required to transfer to Swan , as debt repayment, all current
contracts receivable in the Company's portfolio in excess of $500,000, including
contracts that have not yet met the Company's revenue recognition criteria.
Interest accrues at the prime rate adjusted semi-annually to the then current
rate of 4.75% for 2002, 4.25% for January 1 through June 30, 2003 and 4.0%
effective July 1, 2003. Effective September 1, 2003, a minimum interest rate of
6% will apply to all new advances notwithstanding a lower prime rate. As of
September 30, 2003, the Company paid the accrued and unpaid interest on the Swan
notes through the transfer of contracts receivable at 90% of their face value.
The Company recognizes the preferential cost of borrowing from Swan and
other related parties by recording the difference between the Company's
incremental borrowing rate and the contractual obligation rate as (i) interest
expense and (ii) a capital contribution. The Company recorded a capital
contribution of $78,000, $170,000 and $407,000 in 2002, 2001 and 2000,
respectively, due to the preferential cost of funds from affiliated companies.
Substantially all of the Company's assets are pledged as collateral for its
various obligations. The Company's outstanding debt to Yasawa is secured by a
first lien on the Company's receivables and a mortgage on all of the Company's
property; and the Company's outstanding debt to Swan is secured by a second lien
on the Company's receivables.
Contracts and Mortgages Receivable Sales and Transfers
Approximately $20 million of outstanding contracts receivable had been sold
or transferred by the Company subject to recourse obligations as of September
30, 2003. There are no funds on deposit with purchasers of the receivables as
collateral for the recourse obligations. A provision has been established for
the Company's obligation under the recourse provisions of which approximately
$2,542,000 remains at September 30, 2003.
11
The Company has an agreement with Scafholding and Citony Development Corporation
for the servicing of their receivable portfolios. The Company received
approximately $54,000 and $55,000 , in the nine months ended September 30, 2003
and 2002, respectively, in revenue pursuant to these agreements. The Company
also has an agreement with Swan for the servicing of its receivable portfolio;
however, the Company does not receive servicing fees from Swan.
In the future, if the Company elects to do so, Yasawa and Scafholding have
agreed to purchase contracts receivable at 65% of face value, with recourse. The
Company has an agreement with Swan whereby Swan may loan the Company funds to be
repaid with contracts receivable at 90% of face value, with recourse.
Other Obligations
Currently, the Company has an obligation to complete land improvements
prior to sale. Prior to 1991, the Company had an obligation to complete land
improvements upon deeding which, depending on contractual provisions, typically
occurred within 90 to 120 days after the completion of payments by the customer.
The estimated cost to complete improvements to lots and tracts from which sales
have been made is included in deferred revenue.
Liquidity
Retail land sales have traditionally produced negative cash flow at the
point of sale. This is a result of (i) regulatory requirements to sell fully
developed lots, (ii) the payment of marketing and selling expenses prior to or
shortly after the point of sale, and (iii) the collection of payments on sold
lots over 2-10 years. In an effort to offset these cash flow effects of
installment land sales, the Company is directing a greater portion of its
marketing efforts to the sale of lots with homes. The Company is now offering
lots for sale in compulsory building areas where a lot purchaser must complete
payments for the lot and construct a home within a limited period of time.
The Company is dependent on its ability to sell or otherwise finance its
contracts receivable and/or secure other financing to meet its cash
requirements. Since 1992, the Company has been largely dependent on Yasawa,
Scafholding and Swan and related parties for the financing of its operations.
Although Scafholding has purchased contracts receivables at the rate of 65% of
face value, with recourse, and Swan has loaned the Company additional funds to
be paid back with contracts receivable at the rate of 90% of face value, with
recourse, there can be no guarantee that the Company will be able to generate
sufficient receivables to obtain sufficient financing in the future, nor can
there be any guarantee that Yasawa, Scafholding, Swan and other related parties,
or unrelated third party lenders will continue to make loans to the Company.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The estimated fair values of financial instruments have been determined by
the Company using available market information and appropriate valuation
methods. Considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize or incur
in a current market transaction. The use of different market assumptions and/or
estimation methods may have a material effect on the estimated fair value
amounts. The Company's financial instruments consist of cash and cash
equivalents, contracts and mortgages receivable and similar debt. The stated
amount of cash and cash equivalents is a reasonable estimate of fair value. The
fair value of contracts and mortgages receivable and similar debt has been
estimated using interest rates currently available for similar terms. The stated
value of the contracts and mortgages receivable and similar debt approximate
fair value.
Management does not use derivatives to manage its exposure to market
interest rate risk.
The Company's exposure to market interest rate risk on its contracts
receivable has been minimized by the terms of its credit facilities agreements.
Under the credit agreements, all excess contracts are transferred to pay down
the debt obligation. Therefore, it is expected that the Company will have less
than $500,000 of current contracts receivable in the portfolio at any time.
Prior to March 2003, the Company was also required to maintain contracts
receivable adequate to cover the third party recourse obligation for contracts
sold in 1990 and 1992. This recourse obligation was settled in March 2003.
Contracts receivable consists of fixed interest rate paper with an initial
collection term generally of ten years. The stated interest rate is below market
interest rates for similar paper. The Company periodically adjusts the stated
rate on new contracts in response to changes in the market interest rate and
other competitive sales factors. The Company discounts the contracts notes
receivable to current market rates. At September 30, 2003, the average stated
rate for contracts receivable was 8.6%, and the discount rate used was 13.5%.
Under its credit agreement, the Company is required to transfer all excess
contracts receivable as defined to a creditor for debt reduction. The Company's
outstanding contracts receivable, net of allowance for cancellations before
valuation adjustment was $396,000 at September 30, 2003. The unamortized
valuation adjustment at September 30, 2003 was $43,000. Management estimates
that a 1% increase in the market interest rate equals a valuation discount
increase of approximately $8,000, which would reduce net income.
The Company also has exposure to market interest rate risk on outstanding
debt. As of September 30, 2003, the Company has outstanding debt of
approximately $ 10.8 million. The stated interest rate, which is adjusted
semi-annually, is the prime rate, which was 4.0% at September 30, 2003. Advances
after September 1, 2003 have a minimum annual percentage rate of 6% per annum.
The outstanding debt has no standard repayment term: it is dependant on the
Company's sales and future contracts receivable. The Company estimates that a 1%
increase in the market interest rate equals an increase in interest expense of
approximately $108,000 per annum, which would reduce net income.
13
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior
to the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer. The evaluation conducted by the
Company's Chief Executive Officer and Chief Financial Officer has provided them
with reasonable assurance that as of September 30, 2003, the Company's
disclosure controls and procedures are effective in alerting them in a timely
manner to material information required to be included in periodic SEC filings.
Disclosure controls and procedures and other procedures are designed to
insure that information required to be disclosed in Company reports filed or
submitted and reported, within the time periods specified in the Security and
Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that the information required to be disclosed
in Company reports filed under the Exchange Act is accumulated and communicated
to management, including the Company's Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures.
(b) Changes in internal controls.
There have been no changes in internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
14
PART II - OTHER INFORMATION
===========================
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See attached Exhibit 31.1 for Certification pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002 (CEO Certification by Antony Gram)
See attached Exhibit 31.2 for Certification pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002 (CFO Certification by Robert O. Moore)
See attached Exhibit 32 for Certification under Section 906 of the Sarbanes
- Oxley Act of 2002.
(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: October 15, 2003 By: /s/ Robert O. Moore
-------------------
Robert O. Moore,
Treasurer & Chief Financial Officer
15
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Antony Gram, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period ended
September 30, 2003 of The Deltona Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report (September 30, 2003)
based upon such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the third fiscal quarter)
that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: October 15, 2003 /s/ Antony Gram
-------------------------------
Antony Gram, Chairman, President,
and Chief Executive Officer
16
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Robert O Moore, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the period ended
September 30, 2003 of The Deltona Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report (September 30, 2003)
based upon such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the third fiscal quarter)
that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: October 15, 2003 /s/ Robert O. Moore
---------------------------------
Robert O. Moore, Treasurer and
Chief Financial Officer
17
Exhibit 32
CERTIFICATION UNDER SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned certifies that the periodic report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that information contained in this periodic report fairly presents, in all
material respects, the financial condition and result of operations of The
Deltona Corporation as of September 30, 2003.
/S/ Antony Gram
-----------------------------
Antony Gram
Chairman of the Board, President and Chief Executive Officer
October 15, 2003
/S/ Robert O. Moore
-----------------------------
Robert O. Moore
Chief Financial Officer
October 15, 2003
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging , or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to The Deltona
Corporation and will be retained by The Deltona Corporation and furnished to the
Securities and Exchange Commission or its staff upon request.
The foregoing certification accompanies the issuer's quarterly report on
Form 10-Q for the period ending September 30, 2003 and is not filed as provided
in SEC Release Nos. 33-8238, 33-8212, 34-4751 and IC-25967.
18