- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ending December 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____ to _____
Commission file number 1-4719
THE DELTONA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 59-0997584
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8014 SW 135th Street Road
Ocala, FL 34473
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (352) 307-8100
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant: $1,142,910 (based upon the sales price at which shares were
sold on February 14, 2003 ($0.35 per share) multiplied by the 3,265,458 shares
of stock owned by non-affiliates, excluding voting stock held by directors,
executive officers and beneficial owners of more than 10% of the Registrant's
voting stock ; however, this does not constitute an admission that any such
holder is an "affiliate" for any purpose.)
Indicate the number of shares outstanding of the Registrant's classes of
common stock, as of the latest practicable date: 13,544,277 shares of common
stock, $1 par value, as of February 14, 2003, excluding 12,228 shares held in
treasury.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
------------------------------------------------------------------------------
THE DELTONA CORPORATION
INDEX
Form 10-K Page
Item No. Section Heading in Attached Material Number
- --------- ------------------------------------ ------
PART I
Items 1 and 2 ...... Business.................................. 1
General................................. 1
Forward Looking Statements.............. 1
Recent Developments..................... 2
Real Estate............................. 2
Other Businesses........................ 7
Employees............................... 8
Competition............................. 8
Regulation.............................. 8
Item 3 ............. Legal Proceedings......................... 11
PART II
Item 4 ............. Submission of Matters to a Vote of
Security Holders......................... 12
Item 5 ............. Price Range of Common Stock and Dividends. 13
Item 6 ............. Selected Consolidated Financial
Information ............................. 14
Item 7 ............. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 15
Item 7A............. Disclosures and Market Risk............... 21
Item 8 ............. Index to Consolidated Financial Statements
and Supplemental Data ................... 23
Item 9 ............. Independent Public Accountants............ 42
PART III
Item 10............. Directors and Executive Officers of the
Registrant............................... 43
Item 11............. Executive Compensation.................... 46
Item 12............. Security Ownership of Certain Beneficial
Owners and Management.................... 48
Item 13............. Certain Relationships and Related
Transactions............................. 50
PART IV
Item 14 ............ Exhibits, Financial Statement Schedules
and Reports on Form 8-K ................. 52
ITEMS 1 AND 2
BUSINESS
General
The Company was founded in 1962 and is principally engaged in the
development and sale of Florida real estate, through the development of planned
communities on land acquired for that purpose. The Company offers single-family
lots and multi-family and commercial tracts for sale, in communities designed by
the Company. The Company is the developer of eleven planned communities in
Florida, including TimberWalk, which is located in the western portion of Marion
Oaks. Of those eleven planned communities, two are in various stages of
development. The Company plans, designs and develops roads, waterways,
recreational amenities, grading and drainage systems within these communities.
Since 1962, the Company has sold over 157,000 single-family lots and
multi-family and commercial tracts in its communities, in addition to over
13,000 single-family homes and over 4,300 multi-family housing units.
The Company's land holdings in Florida include an inventory of
approximately 16,000 unsold platted single-family and multi-family lots and
commercial tracts. (Platting is the process of recording, in the public records
of the county where the land is located, a map or survey delineating the legal
boundaries of the lots and tracts.) See "Real Estate: Land".
The Company also operates other businesses related to its real estate
activities, such as a title insurance company and a real estate brokerage
company. In addition, the Company has designed and constructed country clubs,
golf courses and other recreational amenities at its communities, and operated
such amenities until their conveyance or sale.
Historically, the Company had designed, constructed and operated utility
systems for the distribution of water and LP gas and for the collection and
treatment of sewage, primarily at the Company's communities. However, on June 6,
1989, Topeka Group Incorporated ("Topeka"), a subsidiary of Minnesota Power &
Light Company ("MPL"), exchanged the Company's Preferred Stock which it acquired
in November, 1985 for the Company's utility subsidiaries. The Company entered
into a Developer Agreement for each of its communities, which provides the
policies for water and sewer utility services to the Company and the Company's
customers.
Unless the context otherwise requires, the term Affiliate and Related Party
as used in the document shall have the meanings given by the Securities and
Exchange Commission Regulation S-X and other appropriate rules, regulations and
authoritative sources. As described herein, such relationships are significant
to the Company and have been disclosed herein, to the extent appropriate.
The Company is incorporated in Delaware and has its principal office at
8014 SW 135th Street Road, Ocala, Florida 34473. Its telephone number is
(352)307-8100. The Company or Deltona, as used herein, refers to The Deltona
Corporation and, unless the context otherwise indicates, its wholly-owned
subsidiaries.
Forward Looking Statements
This annual report on Form 10-K of The Deltona Corporation for the year
ended December 31, 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 Items 1 and 2, Business, Item 5,
Price Range of Common Stock and Dividends, and Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operation, contain
forward-looking statements. Where, in any forward- looking statement, Deltona
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.
1
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.
Recent Developments
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. 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.
Based upon the number of shares of common stock held by each stockholder as of
February 14, 2003, 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 the review and
subsequent amendments to the disclosures in preliminary proxy statement and
Form13E(3) filings.
On March 7, 2003, the Company closed on an agreement that resulted in the
termination of its repurchase obligation on contracts receivable sold in 1990
and 1992. The termination of this recourse obligation covering approximately $1
million of contracts receivable, substantially all of which were non-performing,
will result in a one-time gain on termination of a recourse obligation of
approximately $870,000 and a reduction in the liability for "Obligation under
recourse provisions". This one-time gain will be reported in the first quarter
of 2003. In terminating the obligation, the Company acquired over 200 contracts
receivable, substantially all of which are non-performing, each of which is
collateralized by an improved vacant residential lot, and over 150 lots, which
were added to the Company's land inventory. As a part of this transaction, the
Company received lots that are being conveyed to Citony Development Corporation
pursuant to a 1992 purchase agreement, which conveyed all of the Company's
property in the Citrus Springs subdivision, including any lots reacquired under
this transaction. The aggregate costs incurred of approximately $195,000 will be
assigned to the acquired assets based on a basket-purchase method of allocation.
If the termination of the repurchase obligation had occurred prior to the
earliest reported year, the impact of the transaction on the reported Results of
Operations in 2002, 2001 and 2000 would have been to increase the "Estimated
uncollectible sales expense" and to decrease net income or increase net loss in
each of the years by $80,000, $260,000 and $260,000, respectively. Set forth
below is the Summary Pro forma results, as if the transaction occurred prior to
the earliest reported year:
Pro Forma Results Years ended December 31,
2002 2001 2000
-------- -------- --------
Revenues, as reported $ 10,682 $ 14,569 $ 10,082
Costs and expenses, as reported 12,275 14,217 11,124
Pro forma - increase in expenses 81 260 260
-------- -------- --------
Pro forma Net income (loss) $ (1,674) $ 92 $ (1,302)
======== ======== ========
Pro forma income (loss) per share $ (.12) $ .01 $ (.10)
Weighted average common shares outstanding 13,544,277 13,544,277 13,544,277
The pro forma results are provided for illustration only of the transaction
described above. The pro forma results should not be considered indicative of
future results of operations.
Real Estate
Since its inception in 1962, the Company is primarily involved with the
development and marketing of planned communities in Florida. The following table
sets forth certain information about these communities and other land assets of
the Company as of December 31, 2002. For a detailed description of these
communities, see "Existing Communities" and "Other Properties".
2
Existing Communities
Platted Unsold Platted
Acreage Initial Estimated Lots & Tracts Lots & Tracts
In Acquisition Year Current in Masterplan Unimproved Improved
Masterplan Year Opened Population (a) (a) (b) (a) (b)
---------- ---- ------ ---------- ------------- ---------- ---------
* Deltona Lakes .......... 17,203 1962 1962 77,730 34,964 -- 1
* Marco Island(c) ........ 7,844 1964 1965 45,140 8,657 -- --
* Spring Hill(d) ......... 17,240 1966 1967 81,930 32,909 -- 7
* Citrus Springs(e) ..... 15,954 1969 1970 7,360 33,783 -- 11(h)
* St. Augustine Shores.... 1,985 1969 1970 7,890 3,130 -- -(h)
Sunny Hills (g)......... 17,743 1968 1971 1,440 26,251 12,537 700
* Pine Ridge ............. 9,994 1969 1972 4,580 4,833 -- 2
Marion Oaks(e)(f) ..... 14,644 1969 1973 9,560 27,537 1,967(f) 1,246(f)(h)
* Seminole Woods ......... 1,554 1969 1979 560 262 -- --
There is no unplatted acreage in any community
Joint Venture Community:
* Tierra Verde ........... 666 1976 1977 5,610 1,036 -- --
--- ---- ---- ----- ----- ------ -----
Total ............ 104,827 242,210 173,362 14,504 1,967
======= ======= ======= ====== =====
Other Properties
Initial
Acquisition
Year Acres
Other Land Assets:
Other land adjacent to
existing communities(h).. Various 92
--
Total..... 92
==
- ---------------
* Development completed.
(a) Excluded from these lots and tracts are approximately 101 improved and 90
unimproved lots and tracts that are required for drainage and cannot be
sold, and approximately 172 improved and 339 unimproved lots and tracts
that have been removed from sale for encumbrances or additional site
development, which can only be sold when these issues are resolved. Also
excluded are amenities consisting of 2 administration facility sites, 2
recreational facility sites and 1 unimproved golf course sites, as well as
approximately 259 tracts reserved for community usage such as for
greenbelts, buffer areas, church and school sites.
(b) "Unimproved Unsold Platted Lots & Tracts" and "Improved Unsold Platted Lots
& Tracts", when added to lots and tracts sold, as described in "Existing
Communities", may not equal "Platted Lots & Tracts in Masterplan" for
various reasons, such as the subdivision of tracts into two or more parcels
for sale to different purchasers.
(c) Excludes permit denial areas; reflects seasonal population.
(d) Includes the South Hernando U.S. # 19 Commerce Center.
(e) Excludes 83 Citrus Springs and 63 Marion Oaks improved lots deeded to a
purchaser of the Company's contracts receivable as exchange inventory to be
available for customers who pre-pay their contracts prior to the
installation of water service lines within one mile of their homesite and
who wish to commence immediate construction. Unused exchanged inventory
will be reconveyed to the Company when all purchased receivables have
matured and are paid in full.
(f) Includes TimberWalk
(g) Excludes 3,637 acres of unplatted natural preserve in Washington County
restricted for recreational, open space/park use which can only be sold
subject to the underlying land use restrictions.
(h) Not included are 570 improved lots deeded to a collateral trustee on behalf
of a purchaser of the Company's contract receivables so they may be sold by
the Company to create additional receivables for the Company's replacement
obligation. These lots are comprised of 482 lots in Citrus Springs, 87 lots
in Marion Oaks and 1 lot in St. Augustine Shores.
3
Land
In selecting sites for its communities, the Company examined various
demographic and economic factors, the regulatory climate, the availability of
governmental services and medical, educational and commercial facilities, and
estimated development costs. Its communities are accessible to major highways
and Florida's major metropolitan areas and are near at least one large body of
water that can be used for recreational purposes. Other criteria used by the
Company in site selection are the suitability of the land for natural or
engineered drainage and the availability of a sufficient supply of potable water
to support the community's anticipated population.
The master plans of the Company's communities have been designed to provide
for amenities such as golf courses, greenbelt areas, parks and recreational
areas, as well as for the basic infrastructure, such as roads and water, and in
selected development areas, sewer lines. Sites are set aside for shopping
centers, schools, houses of worship, medical centers and public facilities such
as libraries and fire stations.
In its major planned communities, the Company offers for sale lot and house
"packages" situated on paved streets. In other areas of these communities, the
Company historically has sold single-family lots and multi-family and commercial
tracts on an installment basis. Prior to 1991, the Company sold such land,
subject to a future development obligation, accepting down payments as low as 5%
of the sales price, with the balance payable over periods ranging from 2 to 15
years, depending on the payment plan selected. When the applicable rescission
period had expired and the Company had received at least 10% of the contracted
sales price, a substantial portion of the revenue and related profit on the sale
was recognized, with the remaining revenue and profit deferred and recognized as
land improvements, such as street paving, occurred.
Due to various factors, since 1986, the Company had utilized a deed and
mortgage format for effecting certain sales in its communities. Beginning
September 29, 1990, the Company changed its method of recognizing land sales by
recording the sale of lots, subject to a future development obligation, under
the deposit method; since January 1, 1991, no sale has been recognized until the
Company receives at least 20% of the contracted sales price; and beginning in
the fourth quarter of 1991, the Company limited the sale of lots to those which
front on a paved street and are ready for immediate building. See Note 1 to
Consolidated Financial Statements.
A portion of the contract purchase price is discounted and treated as
interest income to be amortized over the life of the contract. Interest income
is also earned in accordance with the interest rate stated in the installment
land sales contract or promissory note. The Company further provides an
allowance for contract cancellations based on the historical experience of the
Company for such cancellations.
Substantially all of the Company's single-family lot and multi-family and
commercial tract sales have been made on an installment basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 2 to Consolidated Financial Statements.
Housing
Historically, the Company has been involved in the design, construction and
marketing of single-family homes and multi-family housing, including both
condominium apartment complexes and a vacation ownership (timesharing) project.
Since commencing operations, the Company has constructed and sold over 13,000
single-family homes and over 4,300 multi-family housing units in its
communities, with much of the actual construction performed by subcontractors.
Revenues, as well as related costs and expenses, from single-family home and
vacation ownership sales are recorded at the time of closing.
Single-Family Housing
The Company's homes are designed to fit the needs and wants of a variety of
housing customers: models range from 1,692 square feet to 2,895 square feet.
From the smallest home to the largest, these homes feature 2 car garages,
cathedral ceilings over the main living areas, ceramic tile foyers, plant
shelves, large fully equipped kitchens (most with breakfast nooks or good
morning rooms), fully enclosed laundry centers, impressive master suites with
walk-in closets and
4
large bedrooms. Model centers are open at Marion Oaks and in Sunny Hills. Houses
are sold with the lot included in the sales price; however, the Company also
offers a "build on your own lot" program for those purchasers who have
previously acquired a lot. The FeatherNest Housing Village in Marion Oaks, where
the lot is included in the price of the home, is owned by Conquistador
Development Corporation and marketed by the Company. Housing sales are made
within the local market and through the Company's independent dealer network.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations".
The Company is directing a greater portion of its marketing efforts to the sale
of lots with homes or lots with compulsory building obligations to offset the
negative cash effects of installment land sales, where the purchase price of the
lot is paid over several years and there is no commitment to build.
Multi-Family Housing
The Company has designed, constructed and sold more than 4,300 condominium
apartment units at its communities in buildings ranging from garden-style
apartment complexes to luxury high-rise towers. Every condominium complex
constructed by the Company includes at least one pool and patio area; many
feature tennis courts and other recreational amenities.
The Company's limited inventory of multi-family housing is at its vacation
ownership complex, The Surf Club, located on the Gulf of Mexico at Marco Island.
The bulk of its inventory at The Surf Club was sold prior to 1990.
Marketing
The Company has historically sold land and housing on a national and
international basis through independent dealers in the United States, Canada and
overseas, as well as through Company-affiliated salespeople. For the year ended
December 31, 2002, sales by independent dealers in the United States accounted
for substantially all new land sales contracts.
Existing Communities
Deltona Lakes
Deltona Lakes is located 26 miles northeast of Orlando, with its popular
tourist attractions of Disney World and Sea World, and is bordered on the
northwest by Interstate 4. Opened in 1962, Deltona Lakes is now an incorporated
city with a population of approximately 77,700. Over 30,000 lots and tracts and
over 4,500 single and multi-family housing units have been sold at this
community.
Recreational amenities constructed by the Company include tennis courts, a
golf course and country club (which were sold in 1983), and a recreational
complex on the shores of Lake Monroe. A 133-room motel, an industrial park, a
medical complex, several shopping centers, numerous houses of worship, a fire
station, a public library and schools are located in the community. The Company
has completed development of this community.
Marco Island
The Company's resort community of Marco Island is located 104 miles west of
Miami and approximately 17 miles south of Naples, Florida. Over 8,500 lots and
tracts and over 4,200 single and multi-family housing units have been sold in
this community. More than 45,500 persons reside at Marco Island, including a
population which more than triples during the winter season. It is the largest
of Florida's Ten Thousand Islands and is known for its recreational amenities
which, in addition to its 3 1/2 mile white sand beach, sport fishing, sailing
and shelling, include golf, tennis, swimming and other recreational activities.
The island community has several major shopping centers, banks and savings &
loan associations, and medical and professional centers.
5
Since the community's opening in January, 1965, the Company has built and
operated a yacht club and marina, the Marco Beach Hotel & Villas, and a golf
course and country club, all of which have been sold. The Company has also
constructed and sold over 3,300 condominium units on the island and The Surf
Club, a 44 unit vacation ownership complex. In 1990, the Company completed the
sale of substantially all of its remaining vacation ownership weeks at The Surf
Club.
Spring Hill
Spring Hill, with an estimated population of over 81,900 is located 45
miles north of Tampa-St. Petersburg. Over 32,000 lots and tracts and over 4,000
single-family homes have been sold in this community. The Company has
constructed a recreation complex, a country club, and two golf courses, which
have been sold. Several shopping centers and medical centers, schools, numerous
houses of worship and fire stations are located in the community. The Company
has completed the development of this community.
Citrus Springs
Citrus Springs, with an estimated population of over 7,300 is located 28
miles southwest of Ocala and 25 miles from the Gulf of Mexico. Over 30,000 lots
and tracts and over 700 single-family homes have been sold at this community. A
golf course and a clubhouse (sold in 1990) and a community center have been
completed by the Company. Several churches, schools and a convenience shopping
area are located in the community. In 1992, most of the Company's remaining
inventory at this community was sold to Citony Development Corporation
("Citony") for approximately $6,500,000. The Company provides miscellaneous
administrative assistance and loan servicing to Citony for a fee.
St. Augustine Shores
St. Augustine Shores, with a population estimated to be over 7,800 is
located seven miles south of St. Augustine, between the Intracoastal Waterway
and U.S. Highway 1. In December 1997, the Company sold all of its remaining
inventory at St. Augustine Shores to Swan Development Corporation ("Swan"). As
part of the purchase, Swan assumed the liability for completing improvements
within St. Augustine Shores.
Certain common areas of the community, such as parks and swale areas, are
maintained by the St. Augustine Shores Service Corporation, a non-profit
corporation, of which all property owners are members. Several houses of
worship, shopping facilities, a recreational building and a golf and country
club are also located in the community.
Sunny Hills
Sunny Hills, with a population of over 1,400 residents, is located in the
Florida Panhandle, 45 miles north of the Gulf of Mexico and 35 miles north of
Panama City. Over 12,000 lots and tracts and 300 single-family homes have been
sold at this community. The community includes a golf course and country club,
which was sold by the Company, several houses of worship and convenience
shopping.
During 2002, the Company opened a four home model center in Sunny Hills.
The Company's homes are designed to fit the needs and wants of a variety of
housing customers: models range from 1,904 to 2,498 total square feet. The
construction of these models is to test the market and future sales potential in
the geographical area. Houses will be sold with the lot included in the sales
price, however the Company also offers a "build on your own lot" program for
those purchasers who have previously acquired a lot. Housing sales are expected
to be made within the local market for the foreseable future.
Revenues in 2003 will be generated from the sale of land inventory and
housing sales.
6
Pine Ridge
Pine Ridge, with a population of approximately 4,600 is located 34 miles
southwest of Ocala. The community's facilities include an equestrian club and
tennis courts. The Company sold over 3,500 lots and tracts and more than 53
single-family homes in Pine Ridge prior to the sale of its remaining inventory
in 1987.
Marion Oaks
Marion Oaks, with a population of over 9,500 residents, is located 12 miles
southwest of Ocala. Over 24,000 lots and tracts have been sold in the community.
The community includes playgrounds, two golf courses (both of which are owned by
third parties), several recreation buildings, community shopping centers and
several houses of worship. This community is home to the Company's corporate
headquarters.
The Company's homes, constructed by an independent builder, are designed to
fit the needs and wants of a variety of housing customers: models range from
1,692 square feet to 2,895 square feet. From the smallest home to the largest,
these homes feature 2 car garages, cathedral ceilings over the main living
areas, ceramic tile foyers, plant shelves, large fully equipped kitchens (most
with breakfast nooks or good morning rooms), fully enclosed laundry centers,
impressive master suites with walk-in closets and large bedrooms. A model center
is open at Marion Oaks. Houses are sold with the lot included in the sales
price; however, the Company also offers a "build on your own lot" program for
those purchasers who have previously acquired a lot. The FeatherNest Housing
Village in Marion Oaks, where the lot is included in the price of the home, is
owned by Conquistador Development Corporation and marketed by the Company. All
housing sales are made within the local market and through the Company's
independent dealer network. During 2002, the Company continued to construct spec
homes and these homes generally sold prior to completion of construction.
Revenues in 2003 will be generated from the sale of land inventory, from
housing sales, from the recognition of deferred revenue as land development
proceeds, from collections on existing contracts receivable and from the
Company's real estate brokerage and title company subsidiary operations.
Seminole Woods
Seminole Woods, with a population of over 550, is comprised of 1,554 acres
of property located 20 miles north of Orlando. The community's 262 single-family
lots, each with a minimum of five acres, have been sold and development
completed.
Tierra Verde
Tierra Verde, with a population of over 5,600, is a 666-acre waterfront
subdivision located eight miles south of St. Petersburg. It was developed and
marketed pursuant to a 50% joint venture, which no longer exists, between a
wholly-owned subsidiary of the Company and an unaffiliated corporation. The
community has been sold out and development completed.
Other Land Assets
The Company also owns 92 acres of land in Florida adjacent to its existing
communities.
Other Businesses
The Company's title insurance subsidiary was established in 1978 in order
to reduce title insurance, legal and certain related closing costs incurred by
the Company in transferring title of its land and housing to its purchasers. The
subsidiary serves as an agent for TICOR Title Insurance Company, Chicago Title
Insurance Company and other title insurers. The Company's realty subsidiary
performs real estate brokerage and rental services at the Company's Marion Oaks
and Sunny Hills communities.
7
Employees
At December 31, 2002, the Company had 42 employees, of whom 39 were
involved in executive, administrative, sales and community development/
maintenance capacities and 3 were involved with the title insurance subsidiary.
Certain of the Company's development activities are carried out by
subcontractors who separately employ additional personnel. For the most part,
the Company's marketing activities are carried out by independent dealers and
marketing personnel employed by the Company and its subsidiaries.
Competition
The Company faces competition in the sale of its lots primarily from
property owners in the Company's communities seeking to resell their land. The
Company is also facing competition, on a regional level, from other builders and
developers in the sale of single-family housing. Such competition is generally
based upon location, price, reputation, quality of product and the existence of
commercial and recreational facilities and amenities.
Regulation
The Company's real estate business is subject to regulation by various
local, state and federal agencies. The communities are increasingly subject to
substantial regulation as they are planned, designed and constructed, the nature
of such regulation extending to improvements, zoning, building, environmental,
health and related matters. Although the Company has been able to operate within
the regulatory environment in the past, there can be no assurance that such
regulations could not be made more restrictive and thereby adversely affect the
Company's operations.
Community Development
In Florida, as in many growth areas, local governments have sought to limit
or control population growth in their communities through restrictive zoning,
density reduction, the imposition of impact fees and more stringent development
requirements. Although the Company has taken such factors into consideration in
its master plans by agreeing, for example, to make improvements, construct
public facilities and dedicate certain property for public use, the increased
regulation has lengthened the development process and added to development
costs.
The implementation of the Florida Growth Management Act of 1985 (the "Act")
precludes the issuance of development orders or permits if public facilities
such as transportation, water and sewer services will not be available
concurrent with development. Development orders have been issued for, and
development has commenced in, the Company's existing communities (with
development being completed in certain of these communities). Thus, the
Company's communities are less likely to be affected by the new growth
management policies than future communities. Any future communities developed by
the Company will be strongly impacted by new growth management policies. Since
the Act and its implications are consistently being re-examined by the State,
together with local governments and various state and local governmental
agencies, the Company cannot further predict the timing or the effect of new
growth management policies, but anticipates that such policies may increase the
Company's permitting and development costs.
Environmental
To varying degrees, certain permits and approvals will be necessary to
complete the development of Marion Oaks and Sunny Hills. Despite the fact that
the Company has obtained substantially all of the permits and authorizations
necessary to proceed with its development work on communities presently being
marketed, additional approvals may be required to develop certain platted
properties to be marketed in the future. Although the Company cannot predict the
impact of such requirements, they could result in delays and increased
expenditures. In addition, the continued effectiveness of permits and
authorizations already granted is subject to many factors, some of which,
including changes in policies, rules and regulations and their interpretation
and application, are beyond the Company's control.
The Company is aware of studies indicating that prolonged exposure to radon
gas may be hazardous to one's health. Such studies further indicate that radon
gas is apparently associated with mining and earth moving activities,
particularly
8
in phosphate-bearing geological formations. Since phosphate mining has, over the
years, constituted a significant industry in Florida, various state and local
governmental agencies are in the process of attempting to determine the nature
and extent of indoor radon gas intrusion throughout the state. Similar studies
undertaken by the Company at its Citrus Springs community indicate that less
than 1% of its property in that community may be affected by radon gas; studies
conducted at the Company's Marion Oaks community revealed no indications of
potential indoor radon gas problems. None of the other properties owned by the
Company are situated over geological formations which are suspected of causing
radon gas problems. Consequently, the existence of radon gas in Florida is not
expected to materially affect the business or financial condition of the
Company.
The Company owns and operates one above ground fuel storage tank at Marion
Oaks. The Florida Department of Environmental Regulation ("DER") is responsible
not only for regulating this tank, but for developing and implementing plans and
programs to prevent the discharge of pollutants by the facility. The Company has
registered this storage tank with the DER, constructed a containment device
around the above ground storage tank and conducts periodic inspections and
monitoring of the facility. The Company surveyed this site, which exhibited
evidence of potential soil contamination to the DER prior to the deadline for
acceptance into the Early Detection Incentive ("EDI") Program. The EDI Program
provides for the State to assume the financial responsibility for any necessary
clean-up operations when suspected contamination has been voluntarily reported
by the facility owner and accepted into the program by the DER. The site has
been inspected and reviewed under the EDI program and is in compliance with
current DER regulations.
Marketing
The Company is also subject to a number of statutes imposing registration,
filing and disclosure requirements with respect to homesites and homes sold or
proposed to be sold to the public. On the state level, the Company's land sales
activities are subject to the jurisdiction of the Division of Florida Land
Sales, Condominiums and Mobile Homes (the "Division") which requires
registration of subdividers and subdivided land; regulates the contents of
advertising and other promotional material; inspects the Company's land and
development work; exercises jurisdiction over sales practices; and requires full
disclosure to prospective purchasers of pertinent information relating to the
property offered for sale.
Other Obligations
As a result of the delays in completing the land improvements to certain
property sold in certain of its Central and North Florida communities, the
Company fell behind in meeting its contractual obligations to its customers. In
connection with these delays, in 1980 the Company entered into a Consent Order
with the Division which provided a program for notifying affected customers.
Since 1980, the Consent Order was restated and amended several times,
culminating in the 1992 Deltona Consent Order.
On December 30, 1997, the Division approved the formation of a Lot Exchange
Trust into which the Company conveyed sufficient exchange inventory to provide
exchanges to customers with undeveloped lots. Concurrently, the Division
released its lien on the Company's contracts receivable, satisfied its mortgage
on the Company's property and approved a settlement of all remaining issues
under the 1992 Deltona Consent Order. The 1992 Deltona Consent Order was
formally terminated on April 13, 1998.
Currently, the Company has an obligation to complete land improvements
prior to sale. Prior to 1987, 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 at December 31, 2002 and 2001 was approximately $648,000 and
$783,000, respectively. The foregoing estimates reflect the Company's current
development plans at its communities. These estimates as of December 31, 2002
and 2001 include a liability to provide title insurance and deeding costs of
$110,000 and $145,000, respectively; and an estimated cost of street
maintenance, prior to assumption of such obligations by local governments, of
$539,000 and $638,000, respectively; all of which are included in deferred
revenue.
9
The Company's homesite installment sales are subject to the Federal
Consumer Credit Protection ("Truth-in-Lending") Act. The Company's activities
are subject to regulation by the Interstate Land Sales Registration Division
("ILSRD"), which administers the Interstate Land Sales Full Disclosure Act. That
Act requires that the Company file with ILSRD copies of applicable materials on
file with the Division as to all properties registered; certain properties must
be registered directly with ILSRD, in addition to being registered with the
Division.
The Company has either complied with applicable statutory requirements
relative to the properties it is offering or has relied on various statutory
exemptions which have relieved the Company from such registration, filing and
disclosure requirements. If these exemptions do not continue to remain available
to the Company, compliance with such statutes may result in delays in the
offering of the Company's properties to the public.
The Company's land sales activities are further subject to the jurisdiction
of the laws of various states in which the Company's properties are offered for
sale. 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 taken appropriate steps to modify its marketing programs
and registration applications in the face of such increased regulation, and has
incurred costs and delays in the marketing of certain of its properties in
certain states and countries. For example, the Company has complied with the
regulations of certain states which require that the Company sell its properties
to residents of those states pursuant to a deed and mortgage transaction,
regardless of the amount of the down payment. The Company intends to continue to
monitor any changes in statutes or regulations affecting, or anticipated to
affect, the sale of its properties and intends to take all necessary and
reasonable action to assure that its properties and its proposed marketing
programs are in compliance with such regulations, but there can be no assurance
that the Company will be able to timely comply with all regulatory changes in
all jurisdictions in which the Company's properties are presently offered for
sale to the public.
Real estate salespersons must, absent exemptions which may be available to
employees of the property owner, be licensed in the jurisdiction in which they
perform their activities. Real estate brokerage companies in Florida, as well as
their brokers and salespersons, must be licensed by the Florida Real Estate
Commission.
Miscellaneous
Various subsidiaries and divisions of the Company are subject to regulation
by local, state and federal agencies. Such regulation extends to the licensing
of operations, operating areas and personnel; the establishment of safety and
service standards; and various other matters.
10
ITEM 3
LEGAL PROCEEDINGS
From time to time the Company may become a party to legal and
administrative proceedings arising in the ordinary course of business. At
present, the Company is not a party to any legal or administrative proceeding
which might have a material adverse effect on the business or financial
condition of the Company.
11
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the stockholders of the Company was held December 10, 2002
at the Woodlands Pavilion, 312 Marion Oaks Boulevard, Marion Oaks, Florida
34473.
Holders of 13,544,277 shares of Common Stock (holders as of the close of
business on the record date, November 1, 2002) were entitled to vote at the
meeting. Holders of 10,983,990 shares of Common Stock were present in person or
were represented by proxy constituting eighty-one (81%) of the total outstanding
shares. They cast their votes as set forth below:
Votes cast
----------
Abstentions and
Item For Against Withheld Broker non-votes
- ---------------------------- ----------- ------------ -------------- ----------------
(I) re-elect directors,
Antony Gram (Chairman) 10,746,196 237,794 0 0
Christel DeWilde 10,746,584 237,406 0 0
George W. Fischer 10,746,064 237,926 0 0
Rudy Gram 10,747,276 263,714 0 0
Thomas B. McNeill 10,746,984 237,006 0 0
(ii)select James Moore & Co.,
PL, as the Company's 2002
auditors, subject to the discretion
of the Board of Directors. 10,738,761 92,252 152,977 0
That being all of the scheduled business of the meeting, the meeting was
adjourned by voice vote.
See ITEM 11, contained herein, for additional information concerning the present
directors of the Company.
12
ITEM 5
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock is quoted on the Over-The-Counter Bulletin Board
("OTCBB") under the symbol DLTA. According to the over-the-counter bulletin
board, the low and high bid prices for the Company's stock, during the first,
second, third and fourth quarters of 2002 and 2001 were as follows:
Low Bid High Bid
------- --------
1st quarter 2002 $ 0.25 $ 0.39
2nd quarter 2002 $ 0.29 $ 0.35
3rd quarter 2002 $ 0.30 $ 0.35
4th quarter 2002 $ 0.31 $ 0.38
1st quarter 2001 $ 0.16 $ 0.56
2nd quarter 2001 $ 0.25 $ 0.45
3rd quarter 2001 $ 0.25 $ 0.46
4th quarter 2001 $ 0.25 $ 0.37
As of February 14, 2003, there were approximately 1,748 record holders of
the Company's Common Stock, excluding shareholders whose shares are held by
banks and brokerages. The Company has not privately purchased or sold any stock
since September 30, 2001.
The Company has never paid cash dividends on its Common Stock. The
Company's loan agreements contain certain restrictions which currently prohibit
the Company from paying dividends on its Common Stock.
13
ITEM 6
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table summarizes selected consolidated financial information
and should be read in conjunction with the Consolidated Financial Statements and
the notes thereto. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Consolidated Income Statement Data
(in thousands except per share amounts)
Year Ending
----------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31,
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Revenues .................................... $ 10,682 $ 14,569 $ 10,082 $ 9,132 $ 6,487
Costs and expenses .......................... 12,275 14,217 11,124 9,499 9,078
------------ ------------ ------------ ------------ ------------
Income (Loss) from continuing
operations before income taxes ............. (1,593) 352 (1,042) (367) (2,591)
Provision for income taxes .................. -0- -0- -0- -0- -0-
------------ ------------ ------------ ------------ ------------
Net income (loss) applicable
to common stock ........................... $ (1,593) $ 352 $ (1,042) $ (367) $ (2,591)
============ ============ ============ ============ ============
Basic earnings per share amounts:
Net income (loss) ........................... $ (.12) $ .03 $ (.08) $ (.03) $ (.19)
============ ============ ============ ============ ============
Weighted average common shares
outstanding ................................ 13,544,277 13,544,277 13,544,277 13,544,277 13,544,277
============ ============ ============ ============ ============
Consolidated Balance Sheet Data
(in thousands)
----------------------------------------------------------------------------
December 31, December 31, December 31, December 31, December 31,
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Total assets ................................ $ 12,744 $ 13,430 $ 13,968 $ 11,913 $ 11,915
============ ============ ============ ============ ============
Liabilities ................................. $ 22,576 $ 21,747 22,807 20,117 $ 20,175
Stockholders' equity(deficiency) ............ (9,832) (8,317) (8,839) (8,204) (8,260)
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity (deficiency) ........................ $ 12,744 $ 13,430 13,968 $ 11,913 $ 11,915
============ ============ ============ ============ ============
14
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since 1992, in order to meet its working capital requirements, the Company
has been dependent on loans and advances from Selex International B.V., a
Netherlands corporation ("Selex"), Yasawa Holdings, N.V., a Netherlands Antilles
Corporation ("Yasawa"), Swan Development Corporation ("Swan"), Scafholding B.V.,
a Netherlands corporation ("Scafholding"), and other related parties.
Scafholding agreed to purchase contracts receivable at 65% of face value,
with recourse, to meet the Company's ongoing capital requirements. During 1998,
Scafholding purchased approximately $1,396,000 in contracts receivable from the
Company, and as of December 31, 1999, the Company had satisfied its principal
debt obligation to Scafholding.
As of December 31, 2002, the Company's outstanding debt to Yasawa was
$3,000,000 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 6% for all
2000, at the prime rate adjusted semi-annually to the then current rate ranging
from 9.5% to 4.75% for 2001 and 2002, and 4.25% effective January 1, 2003. The
Company satisfied its principal obligation to Scafholding as of December 31,
1999. Yasawa and Scafholding have not required the Company to make interest
payments since September 1, 1998. As of December 31, 2002, the total amount of
accrued interest on the Yasawa and Scafholding obligations is approximately
$1,629,000, which is included in accrued expenses.
During 2002, Swan loaned the Company an additional $3,849,000 so that it
was able to meet its working capital requirements. The Company's debt to Swan as
of December 31, 2002, of $8,282,000 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, excluding contracts receivable
held as collateral for prior receivable sales. 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. Swan does not
charge interest for the first six months after an advance; thereafter, the
interest was 6% for 2000, at the prime rate adjusted semi-annually to the then
current rate ranging from 9.5% to 4.75% for 2001 and 2002 and 4.25% effective
January 1, 2003. As of December 31, 2002, the accrued and unpaid interest on the
Swan notes of approximately $837,000 is included in accrued interest.
The Company receives preferential cost of borrowings from related companies
as described above. For 2002 and 2001, the Company recognized interest expense
and a contribution to additional paid in capital for the first six months of
each loan advance from Swan, computed at the prime rate, the Company's
incremental borrowing rate. Interest is not paid to Swan for the first six
months of each advance, the interest expense that is recognized is recorded as a
capital contribution increase to capital surplus in the amounts of $78,000 and
$170,000, for 2002 and 2001, respectively. For 2000, the Company recognized
interest expense on all outstanding debt balances to Yasawa, Scafholding and
Swan at 8%, the Company's incremental borrowing rate. The difference between
interest calculated at 8% and the amount accrued under the terms of the
respective notes was recorded as a capital contribution increase to additional
paid in capital of $407,000.
Results of Operations
Years ended December 31, 2002 and December 31, 2001
Revenues
Total revenues were $10,682,000 for 2002 compared to $14,569,000 for 2001.
15
Gross land sales were $6,591,000 for 2002 versus $9,960,000 for 2001. Net
land sales (gross land sales less estimated uncollectible installment sales and
contract valuation discount) decreased to $4,530,000 for 2002 compared to
$8,113,000 for 2001. The decrease is attributed to a reduction in land sales in
2002, when compared to the prior year, and an increase in the allowance for
uncollectible sales of approximately $500,000, when compared to the allowance
percentage for 2001.
For the years 2002 and 2001, the Company entered into $6,325,300 and
$10,258,000, respectively, of new retail land sales contracts, net of
cancellations, and including deposit sales on which the Company has received
less than 20% of the sales price. The Company reported a backlog of $2,241,000
and $3,785,000 of unrecognized sales as of December 31, 2002 and 2001,
respectively. The backlog of unrecognized contracts are excluded from retail
land sales until the applicable rescission period has expired and the Company
has received payments totaling 20% of the contract sales price. See Note 1 to
the Consolidated Financial Statements.
Advertising and marketing costs are charges to operations when incurred.
Sales commissions are recognized as a liability when the related contract is
accepted or as a prepaid asset when paid and charged to expense when the sale is
recognized as revenue.
Housing revenues are recognized upon completion of construction and the
passage of title. Housing revenues were $4,768,000 for 2002 compared to
$4,975,000 for 2001. Although housing revenues were flat when comparing 2002 to
2001, the Company's expanded promotional programs for housing has contributed to
an expanded housing backlog.
Improvement revenues result from recognition of revenues deferred from
prior period sales. Improvement revenues totaled $261,000 in 2002 as compared to
$124,000 in 2001. Recognition occurs as development work proceeds on the
previously sold property or customers are exchanged to a developed lot.
Interest income was $355,000 for 2002 as compared to $377,000 for 2001.
This decrease is the result of lower contracts receivable balances resulting
from the Company's repayment of debt.
Other revenues were $768,000 for 2002 compared to $802,000 for 2001. Other
revenues were generated principally by the Company's title insurance and real
estate brokerage subsidiaries.
Costs and Expenses
Costs and expenses were $12,275,000 for 2002 compared to $14,217,000 for
2001. Cost of sales totaled $5,821,000 for 2002 compared to $6,216,000 for 2001.
The decrease is a result of lower sales by the Company's independent dealers.
Commissions, advertising and other selling expenses totaled $3,368,000 for
2002 compared to $4,690,000 for 2001. Advertising was $144,000 for 2002 compared
to $194,000 in 2001. Other selling expenses were $1,062,000 in 2002 as compared
to $1,207,000 in 2001.
General and administrative expenses were $1,615,000 in 2002 as compared to
$1,431,000 in 2001. General and administrative expenses increased primarily due
to increased costs of public liability insurance costs for builder / developer
companies.
Real estate tax expense was $794,000 in 2002 as compared to $702,000 in
2001.
Interest expense was $460,000 in 2002 and $724,000 in 2001. The decrease in
interest expense is the result of lower cost of funds from Swan, an affiliated
company. Interest in the amount of $54,000 and $164,000 was capitalized in 2002
and 2001, respectively.
Net Income (Loss)
The Company reported a net loss of $(1,593,000) for 2002 compared to a net
income of $352,000 for 2001.
16
Years ended December 31, 2001 and December 31, 2000
Revenues
Total revenues were $14,569,000 for 2001 compared to $10,082,000 for 2000.
Gross land sales were $9,960,000 for 2001 versus $6,804,000 for 2000. Net
land sales (gross land sales less estimated uncollectible installment sales and
contract valuation discount) increased to $8,113,000 for 2001 compared to
$5,361,000 for 2000. The increase reflects higher sales by the Company's
independent dealers and a lower estimate of uncollectible installment sales .
New retail land sales contracts entered into, including deposit sales on
which the Company has received less than 20% of the sales price, net of
cancellations, for the years ended December 31, 2001 and December 31, 2000 were
$10,258,000 and $9,535,000, respectively. The Company had a backlog of
$3,785,000 and $4,413,000 in unrecognized sales as of December 31, 2001 and
2000, respectively. Such contracts are not included in retail land sales until
the applicable rescission period has expired and the Company has received
payments totaling 20% of the contract sales price. See Note 1 to the
Consolidated Financial Statements.
Advertising and marketing costs are charges to operations when incurred.
Sales commissions are recognized as a liability when the related contract is
accepted or as a prepaid asset when paid and charged to expense when the sale is
recognized as revenue.
Housing revenues are not recognized from housing sales until the completion
of construction and the passage of title. Housing revenues were $4,975,000 for
2001 compared to $3,231,000 for 2000. The increase in housing revenues is
directly related to the Company's expanded promotional programs for housing.
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 $124,000 for 2001 as compared to $276,000 in 2000.
The decrease is a result of lower expenditures on development work.
Interest income was $377,000 for 2001 as compared to $440,000 for 2000.
This decrease is the result of lower contracts receivable balances resulting
from the Company's repayment of debt to Swan and Yasawa.
Gain on recovery of bad debt was $178,000 for 2001. The Company collected a
large, previously charged-off contract receivable in 2001.
Other revenues were $802,000 for 2001 compared to $774,000 for 2000. Other
revenues were generated principally by the Company's title insurance and real
estate brokerage subsidiaries.
Costs and Expenses
Costs and expenses were $14,217,000 for 2001 compared to $11,124,000 for
2000. Cost of sales totaled $6,216,000 for 2001 compared to $4,350,000 for 2000.
The increase reflects higher sales by the Company's independent dealers.
Commissions, advertising and other selling expenses totaled $4,690,000 for
2001 compared to $3,455,000 for 2000. Advertising was $194,000 for 2001 compared
to $351,000 for 2000. Other selling expenses were $1,207,000 in 2001 compared to
$1,170,000 in 2000.
General and administrative expenses were $1,431,000 in 2001 compared to
$1,362,000 in 2000. General and administrative expenses increased primarily due
to there being increased overhead.
17
Real estate tax expense was $702,000 in 2001 compared to $598,000 in 2000.
Interest expense was $724,000 in 2001 and $894,000 in 2000. The decrease in
interest expense is the result of a decrease in the interest rate on outstanding
debt offset somewhat by higher total outstanding debt. Interest in the amount of
$164,000 and $99,000 was capitalized in 2001 and 2000, respectively.
Net Income (Loss)
The Company reported a net income of $352,000 for 2001 as compared to a net
loss of $(1,042,000) for 2000.
Regulatory Developments which may affect Future Operations
In Florida, as in many growth areas, local governments have sought to limit
or control population growth in their communities through restrictive zoning,
density reduction, the imposition of impact fees and more stringent development
requirements. Although the Company has taken such factors into consideration in
its master plans by agreeing, for example, to make improvements, construct
public facilities and dedicate certain property for public use, the increased
regulation has lengthened the development process and added to development
costs.
The implementation of the Florida Growth Management Act of 1985 (the "Act")
precludes the issuance of development orders or permits if public facilities
such as transportation, water and sewer services will not be available
concurrent with development. Development orders have been issued for, and
development has commenced in, the Company's existing communities (with
development being completed in certain of these communities). Thus, the
Company's communities are less likely to be affected by the new growth
management policies than future communities. Any future communities developed by
the Company will be strongly impacted by new growth management policies. Since
the Act and its implications are consistently being re-examined by the State,
together with local governments and various state and local governmental
agencies, the Company cannot further predict the timing or the effect of new
growth management policies, but anticipates that such policies may increase the
Company's permitting and development costs.
The Company's land sales activities are further subject to the jurisdiction
of the laws of various states in which the Company's properties are offered for
sale. In addition, Florida and other jurisdictions in which the Company's
properties are offered for sale have strengthened, or may strengthen, their
regulation of subdividers and subdivided lands in order to provide further
assurances to the public. The Company has attempted to take appropriate steps to
modify its marketing programs and registration applications in the face of such
increased regulation, but has incurred additional costs and delays in the
marketing of certain of its properties in certain states and countries. For
example, the Company has complied with the regulations of certain states which
require that the Company sell its properties to residents of those states
pursuant to a deed and mortgage transaction, regardless of the amount of the
down payment. The Company intends to continue to monitor any changes in statutes
or regulations affecting, or anticipated to affect, the sale of its properties
and intends to take 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 December 31, 2002, the Company's outstanding debt to Yasawa was
$3,000,000 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 6% for all
2000, at the prime rate adjusted semi-annually to the then current rate ranging
from 9.5% to 4.75% for 2001 and 2002, and 4.25% effective January 1, 2003. The
Company satisfied its principal obligation to Scafholding as of December 31,
1999. Yasawa and Scafholding have not required the Company to make interest
payments since September 1, 1998. As of December 31, 2002, the total amount of
accrued interest on the Yasawa and Scafholding obligations is approximately
$1,629,000, which is included in accrued expenses.
18
During 2002, Swan loaned the Company an additional $3,849,000 so that it
was able to meet its working capital requirements. The Company's debt to Swan as
of December 31, 2002, of $8,282,000 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, excluding contracts receivable
held as collateral for prior receivable sales. 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. Swan does not
charge interest for the first six months after an advance; thereafter, the
interest was 6% for 2000, at the prime rate adjusted semi-annually to the then
current rate ranging from 9.5% to 4.75% for 2001 and 2002 and 4.25% effective
January 1, 2003. As of December 31, 2002, the accrued and unpaid interest on the
Swan notes of approximately $837,000 is included in accrued interest.
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.
The following table presents information with respect to mortgages and
similar debt (in thousands):
Years Ended
-----------
December 31, December 31,
2002 2001
------------ ------------
Mortgage notes payable- Yasawa........ $ 3,000 $ 4,200
Other loans - Swan.................... 8,282 5,929
Other Loans........................... 95 148
------- -------
Total Mortgages and similar debt.... $11,377 $10,277
------- -------
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 December 31,
2002. 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
$3,088,000 remains at December 31, 2002.
The Company has an agreement with Scafholding and Citony Development
Corporation for the servicing of their receivable portfolios. The Company
received approximately $72,000 and $73,000 in 2002 and 2001, 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
occured within 90 to 120 days after the completion of payments by the customer.
The estimated cost to complete improvements to lots and tracts from which sales
have been made at December 31, 2002 and 2001 was approximately $648,000 and
$783,000, respectively. The foregoing estimates reflect the Company's current
development plans at its
19
communities. These estimates as of December 31, 2002 and 2001 include a
liability to provide title insurance and deeding costs of $110,000 and $145,000,
respectively; and an estimated cost of street maintenance, prior to assumption
of such obligations by local governments, of $539,000 and $638,000,
respectively; all of which are 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.
20
ITEM 7A
DISCLOSURE AND 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 is exposed to market interest rate risk on its contracts
receivable. Contracts receivable consists of fixed interest rate paper with an
initial collection term 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 December 31, 2002, the average stated
rate for contracts receivable was 9.3%, 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 $1,074,000 at December 31, 2002. The unamortized
valuation adjustment at December 31, 2002 was $148,000. Management estimates
that a 1% increase in the market interest rate equals a valuation discount
increase of approximately $30,000, which would reduce net income.
At December 31, 2002, interest rates on contracts receivable outstanding
ranged from 5% to 12% per annum (weighted average approximately 9.3%). The
approximate principal maturities of contracts receivable were:
December 31, 2002
-----------------
(in thousands)
2003.............................. $ 219
2004.............................. 219
2005.............................. 218
2006.............................. 186
2007.............................. 126
2008 and thereafter............... 310
----------
Total....................... $ 1,278
==========
If a regularly scheduled payment on a contract remains unpaid 30 days after
its due date, the contract is considered delinquent. Aggregate delinquent
contracts receivable at year end 2002 and 2001 approximate $408,000 and
$713,000, respectively.
Information with respect to interest rates and average contract lives used
in valuing new contracts receivable generated from sales follows:
Average Average Stated Discounted
Years ended Term Interest Rate to Yield
----------- ---- ------------- --------
December 31, 2002......... 113 months 8.7% 13.5%
December 31, 2001......... 111 months 8.5% 13.5%
December 31, 2000......... 98 months 7.8% 13.5%
21
The Company also has exposure to market interest rate risk on outstanding
debt. As of December 31, 2002, the Company has outstanding debt of approximately
$11,377,000. The stated interest rate, which is adjusted semi-annually, is the
prime rate, which was 4.25% at January 1, 2003. The outstanding debt has no
standard repayment term, it is dependant on the Company's sales and future
contracts receivable. Under the assumption that additional borrowing would be
approximate to any debt repayment, the Company estimates that a 1% increase in
the market interest rate equals an increase in interest expense of approximately
$114,000, which would reduce net income.
22
ITEM 8
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTAL DATA
Page
----
Independent Auditors' Report................................... 24
Consolidated Balance Sheets as of December 31, 2002 and
December 31, 2001............................................. 25
Statements of Consolidated Operations for each of the
years ended December 31, 2002, December 31, 2001 and
December 31, 2000............................................. 27
Statements of Consolidated Stockholders' Equity
(Deficit) for each of the years ended December 31, 2002,
December 31, 2001 and December 31, 2000....................... 28
Statements of Consolidated Cash Flows for each of the years
ended December 31, 2002, December 31, 2001 and
December 31, 2000............................................. 29
Notes to Consolidated Financial Statements..................... 31
23
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
THE DELTONA CORPORATION:
We have audited the consolidated balance sheets of The Deltona Corporation
and subsidiaries (the "Company") as of December 31, 2002 and 2001 and the
related statements of consolidated operations, consolidated stockholders' equity
(deficit) and consolidated cash flows for the years ended December 31, 2002,
2001 and 2000. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 2002 and 2001 and the results of its operations and its cash
flows for the years ended December 31, 2002, 2001 and 2000 in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company incurred substantial
operating losses, has continued to experience problems with liquidity and has a
stockholders' deficit at December 31, 2002. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans concerning these matters are described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
JAMES MOORE & CO. P.L.
Certified Public Accountants
Gainesville, Florida
February 6, 2003, except for Note 12,
as to which the date is March 7, 2003
24
CONSOLIDATED BALANCE SHEETS
THE DELTONA CORPORATION AND SUBSIDIARIES
ASSETS
(in thousands)
December 31, December 31,
2002 2001
------------ ------------
Cash and cash equivalents, including escrow
deposits and restricted cash of $820 in 2002
and $561 in 2001 ............................... $ 1,039 $ 923
-------- --------
Contracts receivable for land sales ............. 1,278 1,556
Less: Allowance for uncollectible contracts ..... (200) (205)
Unamortized valuation discount ............ (148) (138)
-------- --------
Contracts receivable - net ...................... 930 1,213
-------- --------
Mortgages and other receivables - net ........... 139 248
-------- --------
Inventories, at lower of cost or net realizable
value:
Land and land improvements .................... 7,237 7,941
Other ......................................... 1,754 1,261
-------- --------
Total inventories ....................... 8,991 9,202
-------- --------
Property, plant and equipment - net ............. 608 623
-------- --------
Investment in venture ........................... 70 53
-------- --------
Prepaid expenses and other ...................... 967 1,168
-------- --------
Total ........................... $ 12,744 $ 13,430
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
25
CONSOLIDATED BALANCE SHEETS
THE DELTONA CORPORATION AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
December 31, December 31,
2002 2001
------------ ------------
Mortgages and similar debt:
Mortgage notes payable - related parties....... $ 3,000 $ 4,200
Other loans - related parties ................. 8,282 5,929
Other loans.................................... 95 148
-------- --------
Total mortgages and similar debt............. 11,377 10,277
Accounts payable-trade .......................... 332 298
Accrued interest payable - related parties....... 2,466 2,047
Obligation under recourse provisions............. 3,088 2,994
Accrued expenses and other ...................... 334 447
Customers' deposits ............................. 1,161 1,259
Deferred revenue................................. 3,818 4,425
-------- --------
Total liabilities ........................... 22,576 21,747
-------- --------
Commitments and contingencies (Notes 1 and 8)
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; issued and outstanding:
13,544,277 shares in 2002 and 2001
(excluding 12,228 shares held in treasury)..... 13,544 13,544
Additional paid-in capital..................... 52,518 52,440
Accumulated deficit ........................... (75,894) (74,301)
-------- --------
Total stockholders' equity (deficit) ........ (9,832) (8,317)
-------- --------
Total........................ $ 12,744 $ 13,430
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
26
STATEMENTS OF CONSOLIDATED OPERATIONS
THE DELTONA CORPORATION AND SUBSIDIARIES
(in thousands except share data)
Years Ended
----------------------------------------
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Revenues
Gross land sales .......................... $ 6,591 $ 9,960 $ 6,804
Less: Estimated uncollectible sales ....... (1,834) (1,774) (1,176)
Contract valuation discount ......... (227) (73) (267)
-------- -------- --------
Net land sales ............................ 4,530 8,113 5,361
Sales-housing ............................. 4,768 4,975 3,231
Recognized improvement revenue-prior
period sales ............................. 261 124 276
Gain on recovery of bad debt .............. -0- 178 -0-
Interest income ........................... 355 377 440
Other ..................................... 768 802 774
-------- -------- --------
Total ......... 10,682 14,569 10,082
-------- -------- --------
Costs and expenses
Cost of sales-land ........................ 1,470 1,928 1,397
Cost of sales-housing ..................... 3,943 4,028 2,716
Cost of improvements-prior period sales ... 161 59 62
Cost of sales-other ....................... 247 201 175
Commissions, advertising, and other selling
expenses ................................. 3,368 4,690 3,455
General and administrative expenses ....... 1,615 1,431 1,362
Real estate tax ........................... 794 702 598
Equity in loss of joint venture ........... 67 30 -0-
Loss on transfer of contracts receivable .. 150 424 465
Interest expense .......................... 460 724 894
-------- -------- --------
Total ........................ 12,275 14,217 11,124
-------- -------- --------
Income (loss) from operations before
income taxes .............................. (1,593) 352 (1,042)
Provision for income taxes ................. -0- -0- -0-
-------- -------- --------
Net income (loss) .......................... $ (1,593) $ 352 $ (1,042)
======== ======== ========
Net income (loss) per common share ......... $ (.12) $ .03 $ (.08)
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
27
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
THE DELTONA CORPORATION AND SUBSIDIARIES
(in thousands)
For the years ended December 31, 2002, 2001 and 2000
Additional Accumulated
Common Stock Paid-in Earnings
($1 par value) Capital (Deficit) Total
-------------- ------- --------- -----
Balances, December 31, 1999 ................ $ 13,544 $ 51,863 $(73,611) $ (8,204)
Imputed interest expense on debt
with related party ........................ -0- 407 -0- 407
Net (loss)for the year ..................... -0- -0- (1,042) (1,042)
---------- -------- -------- --------
Balances, December 31, 2000 ................ 13,544 52,270 (74,653) (8,839)
Imputed interest expense on debt
with related party ........................ -0- 170 -0- 170
Net income for the year .................... -0- -0- 352 352
---------- -------- -------- --------
Balances, December 31, 2001 ................ 13,544 52,440 (74,301) (8,317)
---------- -------- --------
Imputed interest expense on debt
with related party ........................ -0- 78 -0- 78
Net (loss) for the year .................... -0- -0- (1,593) (1,593)
---------- -------- -------- --------
Balances, December 31, 2002 ................ $ 13,544 $ 52,518 $(75,894) $ (9,832)
========== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
28
STATEMENTS OF CONSOLIDATED CASH FLOWS
THE DELTONA CORPORATION AND SUBSIDIARIES
(in thousands)
Years Ended
----------------------------------------
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Cash received from operations:
Proceeds from sale of residential units .. $ 4,768 $ 4,852 $ 3,282
Collections on contracts and mortgages
receivable ............................. 688 778 1,040
Down payments on and proceeds from sales
of homesites and tracts ................ 1,185 1,748 1,748
Proceeds (uses) from other sources ...... 876 375 490
-------- -------- --------
Total cash received from operations ... 7,517 7,753 6,560
-------- -------- --------
Cash expended by operations:
Cash paid for residential units .......... 3,944 4,036 3,167
Cash paid for land and land improvements . 1,469 1,494 1,309
Cash paid for interest ................... 0 5 0
Commissions, advertising and other selling
expenses ................................ 3,507 4,254 4,737
General and administrative expenses ...... 1,243 1,247 1,082
Real estate taxes paid ................... 863 900 347
-------- -------- --------
Total cash expended by operations ...... 11,026 11,936 10,642
-------- -------- --------
Net cash provided by (used in)
operating activities ................ (3,509) (4,183) (4,082)
-------- -------- --------
Cash flows from investing activities:
Payment for acquisition and construction of
property, plant and equipment ............ (87) (76) (31)
Investment in venture ..................... (84) (83) 0
-------- -------- --------
Net cash provided by (used in) investing
activities ................. (171) (159) (31)
-------- -------- --------
Cash flows from financing activities:
New borrowings ............................ 3,849 4,600 4,245
Repayment of borrowings ................... (53) (16) 0
-------- -------- --------
Net cash provided by (used in) financing
activities ............................ 3,796 4,584 4,245
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents ................................ 116 243 132
Cash and cash equivalents, beginning of year. 923 680 548
-------- -------- --------
Cash and cash equivalents, end of year ...... $ 1,039 $ 923 $ 680
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
29
STATEMENTS OF CONSOLIDATED CASH FLOWS-(Continued)
THE DELTONA CORPORATION AND SUBSIDIARIES
(in thousands)
Years Ended
----------------------------------------
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Reconciliation of net income (loss) to
net cash provided by (used in) operating
activities:
Net income (loss) ........................... $(1,593) $ 352 $ (1,042)
------- ------- --------
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation ............................. 102 72 66
Provision for estimated uncollectible
sales and recourse obligations .......... 1,834 1,774 1,176
Contract valuation discount, net of
amortization ............................ 10 (126) 62
Equity in loss in joint venture .......... 67 30 -0-
Imputed Interest on debt with related
party (See Note 5) ...................... 78 170 408
Loss on transfer of contracts receivable.. 150 424 465
(Increase) decrease in assets and increase
(decrease) in liabilities:
Gross contracts receivable plus deductions
from reserves ........................... (4,392) (7,174) (7,558)
Mortgages and other receivables .......... 109 (108) (31)
Land and land improvements ............... 704 597 (138)
Housing completed or under construction
and other ............................... (493) 100 (430)
Prepaid expenses and other ............... 201 234 (492)
Accounts payable, accrued expenses and
other ................................... 419 530 1,103
Customers' deposits ...................... (98) (138) 667
Deferred revenue ......................... (607) (920) 1,662
------- ------- --------
Total adjustments and changes ........ (1,916) (4,535) (3,040)
------- ------- --------
Net cash provided by (used in) operating
activities ................................. $(3,509) $(4,183) $ (4,082)
======= ======= ========
Supplemental disclosure of non-cash investing
and financing activities:
Interest expense treated as contribution to
capital (See Note 5) ...................... $ 78 $ 170 $ 408
======= ======= ========
Increase in inventory as a result of spec
house transfer and corresponding increase
in debt .................................... $ -0- $ -0- $ 863
======= ======= ========
Transfer of contracts receivable for
debt repayment.............................. $ 2,696 $ 5,443 $ 5,850
======= ======= ========
Acquisition of equipment financed with
debt ....................................... $ -0- $ 164 $ -0-
======= ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation - Going Concern
The accompanying financial statements of The Deltona Corporation and
subsidiaries (the "Company") have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business.
The Company has net loss from operations for 2002 of ($1,593,000), net
income from operations for 2001 of $352,000 and a net loss from operations for
2000 of ($1,042,000), resulting in a stockholders' deficit of $(9,832,000) as of
December 31, 2002.
Following the restructuring of its debt in 1997 (see Note 5), the Company
commenced the implementation of its business plan by redirecting its focus to
single-family housing with the development of TimberWalk and other housing in
Marion Oaks. The transactions described in Note 5 with Selex International, B.V.
("Selex"), Yasawa Holdings, N.V. ("Yasawa"), Scafholding B.V. ("Scafholding")
and Swan Development Corporation ("Swan"), provided the Company with a portion
of its financing requirements enabling the Company to commence implementation of
the marketing program and attempt to accomplish the objectives of its business
plan. Selex, Yasawa, Scafholding and Swan are related parties to the Company
either because they are stockholders or as a result of common control.
The Company has been dependent on its ability to sell or otherwise finance
contracts receivable and/or secure other financing sources to meet its cash
requirements. Additional financing of $3,849,000 was required in 2002 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. (See Notes 5 and 11.)
The consolidated financial statements do not include any adjustments
relating to the recoverability of asset amounts or the amounts of liabilities
should the Company be unable to continue as a going concern.
Significant Accounting Policies
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America.
Material intercompany accounts and transactions are eliminated.
The Company is principally engaged in the development and sale of Florida
real estate through the development of planned communities on land acquired for
that purpose. The Company sells homesites under installment contracts, which
provide for payments over periods ranging from 2 to 10 years. Since 1991, the
Company has offered only developed lots for sale. Sales of homesites are
recorded under the percentage-of-completion method in accordance with Statement
of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate"
("SFAS No. 66"). Since 1991, the Company has not recognized a sale until it has
received 20% of the contract sales price. The Company recognizes the sale of
houses at closing under the full accrual method meeting the requirements of SFAS
No. 66. The Company does not finance the sale of homes. Substantially all of the
sales in 2002, 2001 and 2000 were through two independent brokers in New York.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE DELTONA CORPORATION AND SUBSIDIARIES
1. Basis of Presentation and Significant Accounting Policies (continued)
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.
At the time of recording a sale the Company records an allowance for the
estimated cost to cancel the related contracts receivable through a charge to
the provision for uncollectible sales. If the contract is transferred with
recourse (see Note 8) the associated allowance for contract cancellation is
reclassified to a liability under "Obligation under recourse provisions". The
allowance for uncollectible contracts and recourse liability are maintained at a
level which, in management's judgement, is adequate to absorb credit losses
inherent in the contracts receivable portfolio. The amount of the allowance and
recourse liability is based on management's evaluation of the collectibility of
the contracts receivable portfolio, including historical loss experience,
economic conditions, and other risks inherent in the portfolio. While the
Company uses the best information available to make such evaluations it is at
least reasonably possible, future material adjustments to these allowances may
be necessary in the near term as a result of future national and international
economic and other conditions that may be beyond the Company's control. However,
the amount of the change that is reasonably possible cannot be estimated.
Changes in the Company's estimate of the allowance for previously recognized
sales are reported in earnings in the period in which they become estimable and
are charged to the provision for uncollectible contracts. The allowance is
increased by a provision for uncollectible sales, which is charged to expense
and reduced by cancellations, net of recoveries. The determination of the
adequacy of the allowance for uncollectible contracts is based on estimates that
are particularly susceptible to significant changes in the economic environment
and market conditions.
The Company records deferred revenue for contracts transferred to Swan and
Yasawa that have not yet been recognized for financial reporting purposes under
SFAS No. 66, as 20% of the contract sales price has not been received. These
contracts have not been recognized as sales when transferred to Swan and Yasawa
because Swan and Yasawa are related parties and because the recourse provision
allows the contracts to be returned to the Company in the event they become
delinquent. The Company monitors the collection of contracts receivable
transferred to Swan and Yasawa and recognizes the contracts as a sale when the
provisions of SFAS No. 66 are met. In addition, the Company has determined that
the transfer of contracts to Swan and Yasawa with recourse meets the
requirements of Statement of Financial Accounting Standard No. 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS No. 140") to be accounted for as a sale. In accordance with
the provisions of SFAS No. 140, the Company has reduced its contracts receivable
by the amount transferred and reduced debt by the payment credit given. The loss
realized upon the transfer of contracts is recognized as a loss on transfer of
contracts receivable. The Company does not retain any financial interests in the
contracts receivable transferred. SFAS No. 140 is effective for transactions
after March 31, 2001. Prior to the issuance of SFAS No. 140, the Company
followed the provisions of Statement of Financial Accounting Standard No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS No. 125"). There was no effect on the Company's financial
reporting resulting from the transition from SFAS No. 125 to SFAS No. 140.
Land improvement costs are allocated to individual homesites based upon the
relationship that the homesite's sales price bears to the total sales price of
all homesites in the community. The estimated costs of improving homesites are
based upon independent engineering estimates made in accordance with sound cost
estimation and provide for anticipated cost-inflation factors. The estimates are
systematically reviewed. When cost estimates are revised, the percentage
relationship they bear to deferred revenues is recalculated on a cumulative
basis to determine future income recognition as performance takes place.