-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F2Vt5Chyvuj6Y5WGCW3Cg2QUc0tOC1YZvoq/T4Sy3fWMyN6+nsXjUTZi9l1h/IGE 6aK7DopO02EnWX80ziJ65g== 0001019056-97-000317.txt : 19971113 0001019056-97-000317.hdr.sgml : 19971113 ACCESSION NUMBER: 0001019056-97-000317 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLANTIC GULF COMMUNITIES CORP CENTRAL INDEX KEY: 0000771934 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE DEALERS (FOR THEIR OWN ACCOUNT) [6532] IRS NUMBER: 590720444 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08967 FILM NUMBER: 97716957 BUSINESS ADDRESS: STREET 1: 2601 S BAYSHORE DR CITY: MIAMI STATE: FL ZIP: 33133-5461 BUSINESS PHONE: 3058594000 MAIL ADDRESS: STREET 1: 2601 S BAYSHORE DR CITY: MIAMI STATE: FL ZIP: 33133 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 Commission File Number: 1-8967 ATLANTIC GULF COMMUNITIES CORPORATION (Exact name of Registrant as specified in its charter) Delaware 59-0720444 - -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2601 South Bayshore Drive Miami, Florida 33133-5461 - -------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number: (305) 859-4000 -------------- 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. [X] Yes [ ] No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. There are 11,521,249 shares of the Registrant's Common Stock outstanding as of November 12, 1997. TABLE OF CONTENTS ----------------- Page No. ---- PART I. - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996 1 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1997 and 1996 2 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. - OTHER INFORMATION Item 1. Legal Proceedings 28 Item 2. Change in Securities 30 Item 6. Exhibits and Reports on Form 8-K 30 SIGNATURES 31 PART I. - FINANCIAL INFORMATION Item 1. Financial Statements -------------------- ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets September 30, 1997 and December 31, 1996 (in thousands of dollars)
September 30, December 31, 1997 1996 ---- ---- Assets (unaudited) ------ Cash and cash equivalents $ 2,081 $ 7,050 Restricted cash and cash equivalents 1,985 6,034 Contracts receivable, net 6,772 9,649 Mortgages, notes and other receivables, net 34,577 63,800 Land and residential inventory 161,945 153,417 Property, plant and equipment, net 2,074 2,911 Other assets, net 19,338 20,532 --------- --------- Total assets $ 228,772 $ 263,393 ========= ========= Liabilities and Stockholders' Equity ------------------------------------ Accounts payable and accrued liabilities $ 12,449 $ 16,914 Customers' and other deposits 2,008 5,483 Other liabilities 10,541 15,393 Notes, mortgages and capital leases 137,037 169,215 --------- --------- 162,035 207,005 --------- --------- Cumulative Redeemable Convertible Preferred Stock Series A, 20%, $.01 par value; 2.5 million shares authorized; 1.996 million shares issued, liquidation preference of $20.805 million 18,500 -- Series B, 20%, $.01 par value; 2.0 million shares authorized; 1.0 million shares issued, liquidation preference of $10.541 million 9,659 -- --------- --------- 28,159 -- --------- --------- Stockholders' equity Common stock, $.10 par value; 70,000,000 and 15,665,000 shares authorized; 11,600,546 and 9,795,642 shares issued 1,160 980 Contributed capital 130,880 122,123 Accumulated deficit (87,453) (60,706) Minimum pension liability adjustment (6,000) (6,000) Treasury stock, 86,277 shares, at cost (9) (9) --------- --------- Total stockholders' equity 38,578 56,388 --------- --------- Total liabilities and stockholders' equity $ 228,772 $ 263,393 ========= =========
See accompanying notes to consolidated financial statements. 1
ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Three and Nine Months Ended September 30, 1997 and 1996 (in thousands, except per share data) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ---------------------- Revenues: 1997 1996 1997 1996 ---- ---- ---- ---- Real estate sales: Homesite $ 4,977 $ 4,155 $ 17,059 $ 28,380 Tract 4,809 7,605 17,515 43,554 Residential 826 4,704 10,097 14,025 --------- --------- --------- --------- Total real estate sales 10,612 16,464 44,671 85,959 Other operating revenue 632 1,281 2,077 3,563 Interest income 1,182 1,027 4,299 4,157 --------- --------- --------- --------- Total revenues 12,426 18,772 51,047 93,679 --------- --------- --------- --------- Costs and expenses: Cost of real estate sales: Homesite 4,308 3,053 15,564 21,466 Tract 4,371 6,171 16,064 35,780 Residential 3,890 3,465 12,288 10,536 --------- --------- --------- --------- Total cost of real estate sales 12,569 12,689 43,916 67,782 Inventory valuation reserve 145 -- 145 -- Selling expense 1,930 3,029 5,948 8,853 Other operating expense 337 354 965 1,611 Other real estate costs 3,742 5,878 9,544 14,570 General and administrative expense 2,078 2,906 6,734 8,292 Depreciation 171 186 524 658 Cost of borrowing, net of amounts capitalized 2,389 2,725 11,123 9,111 Other expense 123 100 585 402 --------- --------- --------- --------- Total costs and expenses 23,484 27,867 79,484 111,279 --------- --------- --------- --------- Operating loss (11,058) (9,095) (28,437) (17,600) --------- --------- --------- --------- Other income (expense): Reorganization items 442 129 2,236 1,396 Utility condemnation -- (2) -- 4,122 Miscellaneous (185) (240) (546) 2,965 --------- --------- --------- --------- Total other income (expense) 257 (113) 1,690 8,483 --------- --------- --------- --------- Loss before extraordinary items (10,801) (9,208) (26,747) (9,117) Extraordinary gains on extinguishment of debt -- 7,255 -- 11,025 --------- --------- --------- --------- Net income (loss) (10,801) (1,953) (26,747) 1,908 --------- --------- --------- --------- Less: Accrued preferred stock dividends 1,319 -- 1,381 -- Accretion of preferred stock to redemption amount 182 -- 190 -- --------- --------- --------- --------- 1,501 -- 1,571 -- --------- --------- --------- --------- Net income (loss) applicable to common stock $ (12,302) $ (1,953) $ (28,318) $ 1,908 ========= ========= ========= ========= Loss before extraordinary items per common share $ (.94) $ (.95) $ (2.58) $ (.94) ========= ========= ========= ========= Net income (loss) per common share $ (1.07) $ (.20) $ (2.73) $ .20 ========= ========= ========= ========= Weighted average common shares outstanding 11,512 9,692 10,372 9,708 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 2 ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, 1997 and 1996 (in thousands of dollars) (unaudited)
Nine Months Ended September 30, --------------------- 1997 1996 ---- ---- Cash flows from operating activities: Net income (loss) $ (26,747) $ 1,908 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,047 4,174 Gains from utility condemnations or sales -- (5,504) Extraordinary gains on extinguishment of debt -- (11,025) Other income (1,568) (1,841) Inventory valuation reserve 145 -- Reorganization items 562 (1,281) Land acquisitions (19,745) (8,101) Other net changes in assets and liabilities: Restricted cash 4,049 3,192 Receivables 19,446 6,636 Land and residential inventory 20,559 37,619 Other assets (3,944) (9,130) Accounts payable and accrued liabilities (4,124) (6,259) Customer deposits (3,475) (1,646) Other liabilities (1,108) (1,897) Other, net (103) (260) --------- --------- Net cash provided by (used in) operating activities (12,006) 6,585 --------- --------- Cash flows from investing activities: Additions to property, plant and equipment, net (278) (198) Proceeds from sale of property, plant and equipment, net 1 773 Proceeds from utility condemnations or sales -- 28,699 Funds withdrawn from utility trust accounts 12,109 -- --------- --------- Net cash provided by investing activities 11,832 29,274 --------- --------- Cash flows from financing activities: Borrowings under credit agreements 78,670 113,637 Repayments under credit agreements (120,932) (146,670) Principal payments on other liabilities (2,498) (4,266) Proceeds from issuance of common stock 10,000 -- Proceeds from issuance of preferred stock 29,965 -- --------- --------- Net cash used in financing activities (4,795) (37,299) --------- --------- Decrease in cash and cash equivalents (4,969) (1,440) Cash and cash equivalents at beginning of period 7,050 3,560 --------- --------- Cash and cash equivalents at end of period $ 2,081 $ 2,120 ========= ========= Supplemental cash flow information: Interest payments, net of amounts capitalized $ 6,634 $ 8,513 ========= ========= Reorganization item payments $ 1,743 $ 4,919 ========= =========
See accompanying notes to consolidated financial statements. 3 ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997 (unaudited) (1) The September 30, 1997 financial statements are unaudited and subject to year-end adjustments. In management's opinion, the interim financial statements reflect all adjustments, principally consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations. Results for interim periods are not necessarily indicative of results for the full year. For a complete description of the Company's accounting policies, see "Notes to Consolidated Financial Statements" included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 ("1996 Annual Report"). Certain prior year amounts have been reclassified to conform with the 1997 presentation. (2) The net income (loss) per common share is computed by deducting accrued preferred stock dividends and the accretion of preferred stock to the redemption amount to determine net income (loss) applicable to common stock. This amount is then divided by the weighted average number of shares of common stock outstanding during the periods. The effect of any outstanding warrants and options to purchase common stock on the per share computation was anti-dilutive or not material during the periods. (3) The Company capitalizes interest primarily on land inventory being developed for sale which is subsequently charged to income when the related asset is sold. Capitalized interest was $2,067,000 and $4,789,000 for the three and nine-month periods ended September 30, 1997, respectively, and $1,527,000 and $4,788,000 for the three and nine-month periods ended September 30, 1996, respectively. (4) Revenue from the sale of residential units other than Regency Island Dunes ("Regency") condominium units is recognized when the earnings process is complete. Revenue from the sale of Regency condominium units is recognized using the percentage-of-completion method. Earned revenue is based on the percentage of costs incurred to date to total estimated costs to be incurred. This percentage is then applied to the expected revenue associated with units that have been sold to date. Revenue from the sale of land is recognized when the cash received, as a percentage of the sales price, is at least 20% for land sales other than retail land sales and 10% for retail land sales, the earnings process is complete and the collection of any remaining receivable is reasonably assured. (5) The Company has made an estimate of Available Cash, as defined in the Company's debt agreements, at December 31, 1997, and has determined, based on this estimate, that due to the necessity to establish reserves against future mandatory debt, and capital and operating expenditures, the Company will not have Available Cash, at December 31, 1997, to require it to make any interest payments on the Cash Flow Notes for the six-month period ending December 31, 1997. In addition, the Company did not have any Available Cash requiring it to make any interest payments for the six-month periods ended June 30, 1997 and December 31, 1996. Interest on the Cash Flow Notes is noncumulative. Therefore, the Company has not recorded interest expense associated with the Cash Flow Notes during the nine months ended September 30, 1997 and 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." 4 ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997 (unaudited) (6) Pursuant to the Company's 1996 Non-Employee Directors' Stock Plan, the Company issued 12,355 shares of Atlantic Gulf's common stock to the Non-Employee Directors at a price of $4.3125 per share for the first quarter of 1997, 11,158 shares at a price of $5.50 per share plus 288 shares at $6.625 per share for the second quarter of 1997, and 4,904 shares at a price of $6.375 per share for the third quarter of 1997. (7) The Company and AP-AGC, LLC a Delaware limited liability company ("Apollo"), entered into an Amended and Restated Investment Agreement dated as of February 7, 1997, amended as of March 20, 1997, and amended and restated as of May 15, 1997 (the "Investment Agreement"). In addition, the Company, certain of its subsidiaries and Apollo entered into a Secured Agreement dated as of February 7, 1997, and amended and restated as of May 15, 1997 (the "Secured Agreement" and, together with the Investment Agreement, the "Agreements"). Apollo is an affiliate of Apollo Real Estate Investment Fund II, L.P. ("Apollo Fund II"), a private real estate investment fund, the general partner of which is Apollo Real Estate Advisors II, L.P., a New York-based investment fund. Pursuant to the Agreements, Apollo agreed to purchase from the Company up to 2,500,000 shares of 20% Series A Cumulative Redeemable Convertible Preferred Stock (the "Series A Preferred Stock") at a per share price of $9.88, and 5,000,000 warrants to purchase up to 5,000,000 shares of Common Stock (the "Investor Warrants"), at a per warrant price of $.06, for an aggregate purchase price of up to $25 million (the "Apollo Transaction"). See Part II. Item 2. CHANGES IN SECURITIES. On June 24, 1997, pursuant to the Agreements, Apollo purchased 553,475 shares of Series A Preferred Stock and Investor Warrants to purchase an additional 1,106,950 shares of Common Stock, for an aggregate purchase price of $5,534,752. Also on June 24, 1997, the Company and certain purchasers (the "Private Purchasers") consummated a private placement pursuant to which the Private Purchasers purchased for an aggregate price of $20 million; (a) 1,776,199 shares of Common Stock for $10 million, and (b) 1,000,000 shares of 20% Series B Cumulative Redeemable Convertible Preferred Stock (the "Series B Preferred Stock"), at a per share price of $9.88, and 2,000,000 Series B Warrants to purchase 2,000,000 shares of Common Stock at a per warrant price of $.06 for an aggregate purchase price of $10 million. The Series B Preferred Stock balance at September 30, 1997 is the total aggregate purchase price of $10 million plus Series B accrued dividends - $.541 million and the accretion of the preferred stock to the redemption amount - $.063 million, net of corresponding Series B Warrants purchased - $0.120 million and net of Series B issuance costs - $0.825 million for a net Series B Preferred Stock balance of $9.659 million. The $20 million of proceeds from the private placement were applied primarily to the reduction of aggregate debt. 5 ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997 (unaudited) The Series A Preferred Stock and the Series B Preferred Stock are each convertible at $5.75 per share, at the option of the holder thereof, in whole or in part, into Common Stock, subject to certain adjustments as provided in the applicable Certificate of Designations. The Investor Warrants and Series B Warrants may be exercised at the option of the holder thereof, in whole or in part, to purchase Common Stock at $5.75 per share, subject to certain adjustments, at any time within seven years of their respective dates of issuance, subject to certain terms and conditions set forth in the warrants, and in the case of the Series B Warrants, in the related Warrant Agreement. On June 30, 1997, pursuant to the Agreements, Apollo purchased, for an aggregate purchase price of $3,340,000, an additional 334,000 shares of Series A Preferred Stock and Investor Warrants to purchase an additional 668,000 shares of Common Stock. The Company used approximately $3.0 million of these proceeds plus an acquisition loan of $2.6 million to acquire a 2.9-acre parcel in the downtown business district of Fort Lauderdale, Florida upon which the Company plans to construct a high-rise luxury apartment complex to be called Las Olas Tower. On July 31, 1997, pursuant to the Agreements, Apollo purchased, for an aggregate purchase price of $8.5 million, an additional 850,000 shares of Series A Preferred Stock and Investor Warrants to purchase an additional 1,700,000 shares of Common Stock. On July 31, 1997, approximately $7.5 million of these proceeds were used to acquire approximately 740 acres in Frisco, Texas which is near Dallas, Texas. This property is anticipated to yield approximately 1,725 single family units. On August 7, 1997, pursuant to the Agreements, Apollo purchased, for an aggregate purchase price of $2,590,000, an additional 259,000 shares of Series A Preferred Stock and Investor Warrants to purchase an additional 518,000 shares of Common Stock. On August 7, 1997, the Company utilized approximately $2.5 million of these proceeds plus a purchase money mortgage of $8.0 million to acquire approximately 515 acres of residential property in the Fort Myers, Florida area in a project known as West Bay Club. In September 1997, the Company acquired an additional 35 acres in West Bay Club for approximately $1.2 million, of which $0.6 million was financed by a purchase money mortgage. The total financed amount of $8.6 million is a non-cash financing activity and therefore is not reflected in the accompanying statements of cash flows. Subsequent to these acquisitions, the Company owns a total of approximately 876 acres in West Bay Club and is planning to assemble a total of 879 acres in this project which is anticipated to yield approximately 523 single family homes and 578 high-rise condominium units. The Series A Preferred Stock balance at September 30, 1997 is the total aggregate purchase price of Series A Preferred Stock issued to Apollo as of that date - $19.965 million plus Series A accrued dividends - $.840 million and the accretion of the preferred stock to the redemption amount - $.127 million, net of corresponding Investor Warrants purchased - $.240 million and net of Series A issuance costs - $2.192 million for a net Series A Preferred Stock balance of $18.5 million. 6 ATLANTIC GULF COMMUNITIES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1997 (unaudited) The holders of the Series A Preferred Stock and the Series B Preferred Stock are entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefore, cash dividends on each share of preferred stock at an annual rate equal to 20% of the Liquidation Preference ($10 per share plus accumulated and unpaid dividends) in effect from time to time. All dividends are cumulative, whether or not declared, on a daily basis from the date on which the preferred stock is originally issued by the Company, and will be payable, subject to declaration by the board of directors, quarterly in arrears on March 31, June 30, September 30, and December 31 of each year commencing on September 30, 1997. As of September 30, 1997, the Series A Preferred Stock Liquidation Preference was $20.805 million, including undeclared but accumulated and unpaid dividends of $0.840 million. As of September 30, 1997, the Series B Preferred Stock Liquidation Preference was $10.541 million, including undeclared but accumulated and unpaid dividends of $0.541 million. (8) In August 1997, the Company acquired approximately 127 acres in Orlando, Florida for approximately $2.9 million, of which $1.3 million was financed by an acquisition loan secured by a mortgage on the property. This project, known as Saxon Park, is anticipated to yield 408 single family homes. 7 PART I. - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------------------------------------------- Current Business - ---------------- Atlantic Gulf Communities Corporation is a Florida-based real estate development and asset management company. The Company's primary lines of business are acquisition, development and sale of new subdivision and scattered developed homesites, sale of land tracts and residential construction and sales. Additional lines of business which contribute to the Company's overall operations include portfolio management of mortgages and contracts receivable and environmental services. The Company acquires and develops real estate to: (i) enhance the value of certain properties, (ii) maintain a continuing inventory of marketable tracts and (iii) supply finished homesites to independent builders in Florida's fastest growing markets and in other related markets. The Company's acquisition and development activities are comprised of four primary functions: business development, planning, community development and residential construction. See Item 1. BUSINESS in the 1996 Annual Report for a more detailed description of the Company's current business. Business Plan - ------------- The Company's goal is to produce superior returns for stockholders by liquidating predecessor assets, paying off debt, matching overhead to development and construction activities, and becoming the leading supplier of finished homesites to independent homebuilders in Florida's fastest growing markets and in selected primary markets in the southeastern United States, including North Carolina and Texas. Predecessor assets are those real estate assets inherited by the Company from its predecessor company and consist of tracts and scattered homesites located in secondary markets throughout Florida and in one community in Tennessee. The Company's business plan is centered on its three principal lines of business: (i) sales of finished homesites to independent homebuilders, (ii) sales of tract land to end users as well as to investors and (iii) residential construction and sales. The intent of the plan is to monetize the Company's predecessor assets as rapidly as market conditions permit while entering into new markets with a higher risk-adjusted return potential. The business plan also contemplates modifying the Company's capital structure by reducing debt, improving financial flexibility, and reducing overhead by focusing on the Company's core assets and businesses. The Company is also actively marketing predecessor assets on a bulk sale basis as well as on an individual tract/lot basis through the Company's Atlantic Gulf Land Company. The Company currently has approximately $17.2 million in pending contracts and letters of intent on predecessor assets. There are no assurances that the above-mentioned negotiations, pending contracts and letters of intent will result in material sales or in material sales at prices which, in the aggregate, equal the Company's book value in the properties sold. See Item 1. BUSINESS in the 1996 Annual Report for additional information on the Company's business plan. 8 This Quarterly Report includes "forward looking" statements that are subject to risks and uncertainties. Such forward-looking statements include (a) expectations and estimates as to the Company's future financial performance, including growth and opportunities for growth in revenues, net income and cash flow; (b) estimated and targeted annual unit sales, sales prices, and margins and (c) those other statements preceded by, followed by or that include the words "believes," "expects," "intends," "anticipate," "potential" or similar expressions. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The following important factors, in addition to those discussed elsewhere in this Quarterly Report, could affect the Company's future results and could cause those results to differ materially from those expressed in the forward-looking statements: (a) the inability to generate growth in revenues and net income; (b) the inability to generate sufficient cash flows from operations to fund capital expenditures and debt service; (c) unanticipated capital expenditures, including costs associated with real estate development projects; (d) unanticipated costs, difficulties or delays in completing or realizing the intended benefits of development projects; (e) adverse changes in current financial markets and general economic conditions, including interest rate increases; (f) adverse changes in current real estate markets and the real estate industry; and (g) actions by competitors. 9
Results of Operations Comparison of the Nine Months Ended September 30, 1997 and 1996 --------------------------------------------------------------- The Company's results of operations for the nine months ended September 30, 1997 and 1996 are summarized by line of business, as follows: Combining Results of Operations by Line of Business --------------------------------------------------- Nine Months Ended September 30, 1997 (in thousands of dollars) (unaudited) Homesite Tract Residential Other Business Administrative Sales Sales Sales Operations Development & Other Total ----- ----- ----- ---------- ----------- ------- ----- Revenues: Real estate sales $ 17,059 $ 17,515 $ 10,097 $ $ $ $ 44,671 Other operating revenues 511 1,566 2,077 Interest income 3,367 932 4,299 -------------------------------------------------------------------------------------------------------- Total revenues 17,570 17,515 10,097 4,933 - 932 51,047 -------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of real estate sales 15,564 16,064 12,288 43,916 Inventory valuation reserve 145 145 Selling expense 3,092 2,316 532 8 5,948 Other operating expense 965 965 Other real estate costs: Property tax, net 2,803 2,803 Other real estate overhead 1,234 1,118 440 533 2,000 1,416 6,741 General and administrative expense 6,734 6,734 Depreciation 15 46 2 90 371 524 Cost of borrowing, net 1,789 9,334 11,123 Other expense 120 465 585 -------------------------------------------------------------------------------------------------------- Total costs and expenses 20,170 19,544 13,262 3,377 2,473 20,658 79,484 -------------------------------------------------------------------------------------------------------- Operating income (loss) (2,600) (2,029) (3,165) 1,556 (2,473) (19,726) (28,437) -------------------------------------------------------------------------------------------------------- Other income (expense): Reorganization items 798 1,438 2,236 Utility condemnation - Miscellaneous (96) (450) (546) -------------------------------------------------------------------------------------------------------- Total other income (expense) - - - 702 - 988 1,690 -------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary items (2,600) (2,029) (3,165) 2,258 (2,473) (18,738) (26,747) Extraordinary gains on extinguishment of debt - -------------------------------------------------------------------------------------------------------- Net income (loss) (2,600) (2,029) (3,165) 2,258 (2,473) (18,738) (26,747) -------------------------------------------------------------------------------------------------------- Less: Accrued preferred stock dividends - - - - - 1,381 1,381 Accretion of preferred stock to redemption amount - - - - - 190 190 -------------------------------------------------------------------------------------------------------- - - - - - 1,571 1,571 -------------------------------------------------------------------------------------------------------- Net income (loss) $ (2,600) $ (2,029) $ (3,165) $ 2,258 $ (2,473) $(20,309) $(28,318) applicable to common ======================================================================================================== stock 10
Combining Results of Operations by Line of Business --------------------------------------------------- Nine Months Ended September 30, 1996 (in thousands of dollars) (unaudited) Homesite Tract Residential Other Business Administrative Sales Sales Sales Operations Development & Other Total ----- ----- ----- ---------- ----------- -------------- ----- Revenues: Real estate sales $28,380 $43,554 $14,025 $ $ $ $ 85,959 Other operating revenue 3,563 3,563 Interest income 2,765 1,392 4,157 --------------------------------------------------------------------------------------------------- Total revenues 28,380 43,554 14,025 6,328 1,392 93,679 --------------------------------------------------------------------------------------------------- Costs and expenses: Cost of real estate sales 21,466 35,780 10,536 67,782 Selling expense 4,379 3,382 1,092 8,853 Other operating expense 1,611 1,611 Other real estate costs: Property tax, net 4,405 4,405 Other real estate overhead 1,280 2,703 629 865 2,958 1,730 10,165 General and administrative expense 8,292 8,292 Depreciation 13 69 18 228 330 658 Cost of borrowing, net 9,111 9,111 Other expense (6) 408 402 --------------------------------------------------------------------------------------------------- Total costs and expenses 27,132 41,934 12,275 2,704 3,366 23,868 111,279 --------------------------------------------------------------------------------------------------- Operating income (loss) 1,248 1,620 1,750 3,624 (3,366) (22,476) (17,600) --------------------------------------------------------------------------------------------------- Other income (expense): Reorganization items 1,396 1,396 Utility condemnation 4,122 4,122 Miscellaneous 1,382 1,583 2,965 --------------------------------------------------------------------------------------------------- Total other income (expense) - - - 5,504 - 2,979 8,483 --------------------------------------------------------------------------------------------------- Income (loss) before extraordinary items 1,248 1,620 1,750 9,128 (3,366) (19,497) (9,117) Extraordinary gains on extinguishment of debt 11,025 11,025 --------------------------------------------------------------------------------------------------- Net income (loss) $ 1,248 $ 1,620 $ 1,750 $ 9,128 $ (3,366) $(8,472) $ 1,908 ===================================================================================================
During the first nine months of 1997, the Company recorded a net loss applicable to common stock of $28.3 million compared to net income of $1.9 million during the first nine months of 1996, primarily due to a 48% reduction in real estate revenues and a relative increase in the cost of real estate sales in the first nine months of 1997, a $6.8 million decrease in other income, and $11.0 million of extraordinary gains in 1996. All these factors were partially offset by a $9.5 million reduction in selling expenses, other real estate costs and general and administrative expenses. The lower real estate sales revenues in the first nine months of 1997 were primarily attributable to the Company's bulk sale in 1996 of its Julington Creek Plantation and Summerchase projects, and decreasing revenues 11 from predecessor asset sales as the Company successfully executes its business plan to sell off the remaining predecessor tract assets and apply the proceeds to debt reduction. Although predecessor asset sales have decreased, they will continue to be a significant source of revenue for the remainder of 1997 and during 1998. Current subdivision projects under development, along with recently acquired projects and projects to be acquired, are anticipated to increase subdivision revenues beginning in 1998. Increased relative cost of sales in the first nine months of 1997 were attributable principally to the expected effect of the Company's business plan to liquidate predecessor tract and scattered homesite product and use the proceeds for debt reduction, a single loss-generating sale of the final 102 lots in the Windsor Palms project in June 1997 motivated by liquidity needs prior to the June 30, 1997 Foothill debt payment, and an unanticipated $2.8 million accrual in August 1997 for an arbitration award to the general contractor on the Company's Regency Island Dunes condominium project. The decrease in other income was principally attributable to a $4.1 million gain in the first quarter of 1996 from the settlement of certain utility condemnation litigation. The extraordinary gains during the first nine months of 1996 resulted from the extinguishment of debt. Homesite Sales -------------- The net operating results from homesite sales decreased $3.8 million during the first nine months of 1997 compared to the first nine months of 1998, principally due to the loss of the revenue and profitability formerly generated by Julington Creek Plantation, which the Company sold in bulk in 1996, and to the necessary sale at a loss of the remaining 102 lots in Windsor Palms in June 1997 in order to raise cash for the Foothill debt payment due June 30, 1997. These factors were partially offset by reduced selling expenses in the first nine months of 1997. Revenues from homesite sales decreased $11.3 million in the first nine months of 1997 from the first nine months of 1996. The decrease resulted from a 43.5% decrease in the average sales price per homesite, partially offset by a 6% increase in the number of homesites sold. The average sales price decreased primarily due to a change in the sales mix, most notably due to a lower percentage of subdivision homesite sales than scattered homesite sales in 1997 compared to 1996. The following table summarizes homesite sales activity for the nine months ended September 30 (in thousands of dollars):
1997 1996 --------------------------------- ---------------------------------- Number of Average Number of Average lots Revenue sales price lots Revenue sales price --------- ------- ----------- --------- ------- ----------- Subdivision homesite sales 437 $11,438 $26.2 600 $19,643 $32.7 Scattered homesite sales 1,352 5,621 4.2 1,088 8,737 8.0 ----- ----- ----- ----- ------- ----- 1,789 $17,059 $ 9.5 1,688 $28,380 $16.8 ===== ======= ===== ===== ======= =====
The decrease in subdivision homesite sales revenue is primarily due to approximately $7.6 million of sales in 1996 in Julington Creek Plantation, a project in Jacksonville, Florida, including a bulk sale of the remaining 126 homesites in this project for $5.6 million in June 1996. In addition, there was a $3.6 million decrease in sales in Windsor Palms, a project located in southwest Broward County, Florida. Partially offsetting these decreases were sales of 76 homesites for $2.3 million in the first nine months of 1997 in West Meadows, a project in Tampa, Florida. Subdivision revenues for the full year of 1997 are anticipated to be lower than 1996 due to the bulk sale of Julington Creek Plantation in 1996 and the sale of 75% of the inventory in Windsor Palms in 1996, which represented the Company's two largest subdivision projects at that time. Current subdivision projects under development along with recently acquired projects and projects to be acquired utilizing proceeds from the issuance of Series A Preferred Stock to Apollo are anticipated to generate increased subdivision revenues beginning in 1998. The decrease in the average sales price of subdivision homesite sales is primarily due to the homesite sales in Julington Creek Plantation in 1996 which yielded an average sales price of approximately $43,000. Revenues from scattered homesite sales decreased in the first nine months of 1997 compared to the first nine months of 1996 due to a 47.5% decrease in the average sales price per homesite, partially offset by a 24% increase in the number of homesites sold. The decrease in the average sales price is principally due to a 42% decrease in the average sales price in the Company's Cumberland Cove community in Tennessee and to an increase in bulk sales of scattered homesites in secondary markets in Florida which yield a lower sales price. 12 The decrease in the average sales price in Cumberland Cove was primarily due to the mix of homesites sold. The volume of scattered homesites sales increased primarily due to the increase in the number of bulk homesites sold. The Company anticipates it will continue to supplement scattered homesite sales volume in secondary markets through bulk homesite sales as part of its plan to accelerate the disposition of predecessor assets in secondary real estate markets in Florida. Homesite sales other operating revenues in the first nine months of 1997 included management fees of $332,000 received from Country Lakes, Ltd., a Virginia limited partnership, of which the Company is a limited partner. This partnership was formed to acquire, plan, develop and market approximately 1,750 acres of mixed-use property located in Dade and Broward counties Florida. The Company provides the day-to-day management, development, marketing and sales coordination for the partnership. The $332,000 of management fees represented 3.5% of $9.5 million of revenues from sales in this project during the first nine months of 1997. Other operating revenues also included management fees of $179,000 earned in connection with Sunset Lakes Associates, a partnership in which the Company is the managing partner. This partnership was formed to plan, finance, develop and sell approximately 1,950 acres of residential property located in southwest Broward County. The $179,000 of management fees were earned based on 4% of the development costs incurred on the Sunset Lakes project during 1997. Other expense of $120,000 in the first nine months of 1997 represented the Company's 65% share of the net loss of the Sunset Lakes joint venture which resulted primarily from the management fees earned by the Company. Initial closings of sales in Sunset Lakes are anticipated during the first quarter of 1998. As of September 30, 1997, the Company had under contract approximately 1,518 scattered homesite lots for $2.8 million and approximately 93 subdivision homesites for $2.6 million which are anticipated to close in 1997. Substantially, all of the Company's subdivision homesites currently under development are under contract for sale. As of September 30, 1996, the Company had approximately 2,279 total homesites under contract totaling approximately $14.4 million. The homesite sales gross margin percentages were 8.8% in 1997 compared to 24.4% in 1996. The gross margin percentage in the first nine months of 1996 reflects targeted gross margins of 20% to 30% for this line of business. The lower gross margin percentage in the first nine months of 1997 is attributable principally to the sale of the final 102 Windsor Palms lots in June 1997 for $4.5 million, generating a negative 11% gross margin. This sale was necessitated by the Company's need for liquidity to meet its June 30, 1997 Foothill debt payment. The gross margin for the first nine months of 1997 for all other subdivision homesite sales was 20.1%, which reflects the targeted gross margin of 20% to 30% for this line of business. Homesite sales margins were also adversely affected in the first nine months of 1997 by an increase in the bulk sale of scattered homesites. Although bulk sales of scattered homesites yield lower margins than individual sales, they are consistent with the Company's business plan to accelerate the sale of predecessor assets and reduce debt. Homesite selling expense decreased $1.3 million or 29% in 1997 primarily due to an $832,000 decrease in direct selling expenses resulting from the decrease in revenues and to a $493,000 reduction in costs in Cumberland Cove. Homesite selling expense as a percentage of revenues increased from 15.4% in 1996 to 18.1% in 1997, primarily due to the decreased revenues over which to spread fixed selling costs. 13 Tract Sales ----------- The net operating results from tract sales decreased in the first nine months of 1997 compared to the first nine months of 1996 primarily due to lower gross margins generated from tract sales in 1997 resulting from lower tract sales revenues and lower gross margin percentages, partially offset by lower selling expenses and other real estate overhead. Revenues from tract sales decreased $26.0 million in the first nine months of 1997 compared to the first nine months of 1996 primarily due to several large sales in 1996 including the sale of the Company's Julington Creek Plantation project which included $11.6 million of tract acreage, and a $9.0 million bulk sale of Summerchase, a project consisting of 320 acres in southwest Broward County. Tract sales acreages and corresponding revenues from such sales often vary significantly from period to period depending on the timing and size of individual sales. Despite the decrease in tract sales in the first nine months of 1997, tract sales are expected to be a significant source of revenue for the Company in 1997 due to the Company's ongoing plan to monetize the Company's predecessor assets located in secondary markets. As of September 30, 1997, there were pending tract sales contracts or letters of intent totaling approximately $14.4 million which, subject to certain contingencies, are anticipated to close in 1997. As of September 30, 1996, there were comparable pending tract sales contracts or letters of intent totaling approximately $29.6 million. Tract sales gross margins are summarized as follows for the nine months ended September 30: 1997 1996 ------------------------- ------------------------ Targeted Actual Targeted Actual Margins Margins Margins Margins ------- ------- ------- ------- Port LaBelle agricultural acreage 0% (5.2)% 5% - Julington Creek bulk sale - - - 6.3% Other tract acreage 5-10% 10.5% 20% 22.0% The targeted gross margin is lower for Port LaBelle agricultural acreage as management has determined that approximately 18,000 acres of the Port LaBelle agricultural property is not an integral part of the Company's long-term business strategy. In order to accelerate the disposal of this property, the sales value for this property was adjusted from a "retail" to a "wholesale" basis, which reduced the targeted gross margin for this property. During the first nine months of 1997, the Company sold 2,156 acres of Port LaBelle agricultural property for approximately $2.5 million. The low gross margin in Julington Creek in 1996 resulted from the bulk sale of this project in June 1996 as part of the Company's business plan to monetize certain assets to generate cash and retire debt. The actual gross margins for other tract acreage in 1997 and 1996 generally reflect the targeted gross margins. The targeted gross margins have been reduced primarily due to the Company's plan to accelerate land sales in secondary real estate market locations. Tract sales selling expenses decreased $1.1 million in the first nine months of 1997 compared to the first nine months of 1996 primarily due to lower direct selling expenses resulting from a decrease in revenues. Tract sales selling expense as a percentage of revenues increased from 7.8% in the first nine months of 1996 to 13.2% in the first nine months of 1997 primarily due to lower direct selling expenses associated with several large sales in 1996 including the Summerchase and Julington Creek sales and to lower revenues in 1997 over which to spread fixed selling costs. 14 Tract sales other real estate overhead decreased $1.6 million, a 59% decrease, in the first nine months of 1997 compared to the first nine months of 1996 primarily due to management and advertising costs in 1996 associated with the efforts to accelerate the disposition of predecessor assets in secondary real estate markets. Residential Sales ----------------- The net operating results from residential sales, which includes single family homes and condominiums, decreased $4.9 million during the nine months ended September 30, 1997 compared to the corresponding prior year period principally due to a decrease in the gross margin generated from the Company's Regency Island Dunes condominium project resulting from lower revenues and a lower gross margin percentage, partially offset by a reduction in selling expenses. Residential sales are summarized as follows for the nine months ended September 30 (in thousands of dollars): 1997 1996 ---- ---- Condominium sales - Regency Island Dunes: First Building $ 1,620 $ 2,014 Second Building 8,401 8,941 ------- ------- Total condominium sales 10,021 10,955 Single family home sales 76 3,070 ------- ------- $10,097 $14,025 ======= ======= The revenues and profits associated with Regency Island Dunes condominium sales are recorded using the percentage of completion method. The Regency Island Dunes condominium project consists of two 72-unit buildings. As of December 31, 1995, the Company recorded 97% of the expected revenues and profits on 61 units that were under contract in the first building as of December 31, 1995, based on a construction completion percentage of 97%. The condominium revenues of $2.0 million in the first building during the first nine months of 1996 represent the incremental revenue earned upon the completion of 59 of the 61 units in the first nine months of 1996 and the sale and closing of an additional five units in 1996. The condominium revenues of $1.6 million in the first building in 1997 represent revenue earned upon the closing of an additional five units in 1997. As of September 30, 1997, all 72 units in the first building have been sold and closed. The revenues of approximately $8.9 million in the second building in the first nine months of 1996 were derived from 49 units under contract as of September 30, 1996, with construction on the second building 55% complete. As of December 31, 1996, the Company recorded 79% of the expected revenues and profits on 56 units that were under contract in the second building as of December 31, 1996, based on a construction completion percentage of 79%. The revenues of approximately $8.4 million in the second building in the first nine months of 1997 were derived from an increase in the completion percentage to 100% as of September 30, 1997, and to an additional 13 units sold during the first nine months of 1997 for a total of 69 units sold in the second building. As of September 30, 1997, 68 of the 72 units in the second building have closed and the Company anticipates that the remaining four units in the second building will be sold and closed in 1997. Single family home sales revenues decreased during the first nine months of 1997 compared to the first nine months of 1996 due a decrease in closings from 35 in 1996 to one in 1997. Closings decreased as a result of the Company's decision in mid-1995 to begin phasing out its single family home business in predecessor communities, which withdrawal was substantially completed in 1996. The Company may seek to re-enter the single family home business in primary markets where this business would complement current or future land development activities. As of September 30, 1997, the Company had two single family home residential units in inventory, neither of which were under contract. As of September 30, 1996, the Company had three single family home residential units in inventory, none of which were under contract. 15 Residential sales gross margins are summarized as follows for the nine months ended September 30: 1997 1996 ---- ---- Condominiums (21.7)% 28.9% Single family homes (15.8)% 10.6% The gross margin for condominiums in the first nine months of 1997 was negative primarily due to an unanticipated $2.8 million accrual in August 1997 for an arbitration award granted to the Company's general contractor related to the first building in Regency Island Dunes. See Part II. Item 2. LEGAL PROCEEDINGS. The impact of this cost was absorbed by the five units closed in the first building in 1997 resulting in a large negative gross margin in 1997. The overall gross margin for this project is anticipated to be approximately 12%. Excluding the $2.8 million arbitration award, the gross margin on this project would have been approximately 18% which is lower than the targeted gross margin of approximately 20% to 25% for this line of business due to higher than anticipated construction costs. The single family home gross margin in the first nine months of 1997 was generated from one unit which was priced to sell as the Company has withdrawn from this line of business. Residential selling expense decreased $560,000 or 51% and decreased as a percentage of revenues from 7.8% in the first nine months of 1996 to 5.3% in the first nine months of 1997. The decreases were due to an adjustment in 1997 to reduce incentive expenses as a result of the decrease in profits associated with Regency Island Dunes and to a decrease in fixed selling costs as a result of the phasing-out of the single family home operations. Other real estate overhead decreased $189,000 or 30% in the first nine months of 1997 compared to the first nine months of 1996 primarily due to a reduction in single family overhead costs due to the phasing-out of this operation. Other Operations ---------------- Net income from other operations decreased $6.9 million in the first nine months of 1997 compared to the first nine months of 1996 primarily due to a $4.8 million decrease in other income and a $1.8 million increase in borrowing costs associated with the financing of mortgage and contract receivables. Other operating revenues and expenses decreased in the first nine months of 1997 from the same prior year period primarily due to the absence of revenues and expenses from the Port LaBelle utility system sold in February 1996 and the Julington Creek utility system sold in June 1996. In addition, other operating revenues in the first nine months of 1996 included $734,000 of development impact fees. Other operations interest income increased in the first nine months of 1997 from the corresponding prior year period primarily due to a higher average balance of land mortgages receivable in 1997 and to adjustments in the first quarter of 1996 associated with the Company's land mortgage receivable portfolio, partially offset by a lower average balance of contracts receivable during the periods under review. Other operations other real estate overhead decreased 38% in the first nine months of 1997 compared to the first nine months of 1996 primarily due to lower community operations costs associated with the Company's predecessor assets located in secondary markets in Florida. 16 Cost of borrowing of $1.8 million in the first nine months of 1997 represented interest expense on debt associated with the financing of a portion of the Company's land mortgages and contract receivables, which were generated from the sale of predecessor tracts and scattered homesites, pursuant to the Company's business plan to monetize predecessor assets. The Company raised approximately $13.3 million of cash proceeds in the latter part of 1996 and an additional $14.6 million in the first nine months of 1997 from these financings and plans to continue to finance mortgages and other receivables generated from the future sales of predecessor real estate assets. The proceeds from these financings were used to the reduce corporate debt and to fund ongoing operations. Other income - reorganization items of $798,000 in the first nine months of 1997 represents the amortization of the Company's utility connections reserve. Other income - utility condemnation in the first nine months of 1996 consisted of a gain of approximately $4.1 million on an $18.75 million settlement in March 1996 with the City of Port St. Lucie regarding litigation pursuant to condemnation proceedings associated with the taking of the Company's Port St. Lucie system. Other income miscellaneous of $1.4 million in the first nine months of 1996 consisted of a gain of $686,000 on the sale of the Company's Port LaBelle utility system which was sold in February 1996 for $4.5 million and a gain of $696,000 on the sale of the Company's Julington Creek utility system sold in June 1996 for $6.0 million. Business Development -------------------- Total business development expenditures decreased in the first nine months of 1997 compared to the first nine months of 1996 primarily due to a decrease in expenditures related to the Company's Ya Dong joint venture in China. Business development expenditures currently consist primarily of costs associated with the pursuit of business opportunities in primary market locations within Florida and other southeastern United States locations. Business development other expenses consisted of $465,000 in the first nine months of 1997 and $408,000 in the first nine months of 1996 representing the Company's share of the net loss of the Ocean Grove joint venture which was 100% in 1997 and 50% in 1996. The loss resulted from pre-sales advertising and other selling and overhead costs. Administrative & Other ---------------------- The net loss from administrative & other activities increased $11.8 million in the first nine months of 1997 from the first nine months of 1996 principally due to extraordinary gains totalling $11.0 million in 1996 resulting from the extinguishment of debt. Interest income decreased in the first nine months of 1997 from the corresponding prior year period primarily due to a decrease in short term investment interest income. Property tax, net of capitalized property taxes decreased in the first nine months of 1997 compared to the first nine months of 1996 primarily due to a reduction of land inventory not under development which corresponds to sales activity during the intervening period. Other real estate overhead decreased 18% in the first nine months of 1997 compared to the same period in 1996 primarily due to a decrease in legal costs associated with supporting increased real estate sales activity. General and administrative expenses decreased $1.6 million or 19% in the first nine months of 17 1997 compared to the first nine months of 1996 principally due to financial advisory and due diligence costs incurred in the first nine months of 1996 associated with the Company's recapitalization efforts. Cost of borrowing, net of capitalized interest increased slightly in the first nine months of 1997 compared to the same period in 1996, despite a decrease in corporate debt, primarily due to a $1.0 million fee paid to Foothill in 1997 pursuant to an amendment of the Revolving Loan Agreement on March 31, 1997. During the nine months ended September 30, 1997 and 1996, the Company did not accrue interest on its Cash Flow Notes because of the absence of Available Cash during the periods. See "LIQUIDITY AND CAPITAL RESOURCES." Other income - reorganization items consisted of gains of $1.4 million in the first nine months of 1997 and $1.4 million in the first nine months of 1996 resulting from the resolution of certain reorganization items. This process is expected to continue during the remainder of the year with adjustments to be recorded as the final disposition of various claims and other liabilities is concluded. Other expense - miscellaneous of $450,000 in the first nine months of 1997 consisted of net gains and losses associated with various reserve adjustments and settlements, none of which were individually significant. Other income miscellaneous of $1.6 million in the first nine months of 1996 included gains of approximately $1.0 million due to reductions in the Company's environmental reserve and $600,000 due to reductions in the Company's land mortgages receivable valuation reserve. In February 1996, the Company recorded an extraordinary gain of approximately $3.8 million due to the extinguishment of approximately $1.9 million of Unsecured 12% Notes and $1.9 million of Unsecured Cash Flow Notes. These notes, held in the disputed claims reserve account, were in excess of the requirements necessary to satisfy the Company's obligations in accordance with the Company's plan of reorganization (the "POR"). In September 1996, the Company fully prepaid at a discount its Secured Cash Flow Notes for $40.0 million in cash plus warrants to purchase up to 1,500,000 of the Company's common stock at $6.50 per share. As a result of the extinguishment of the Secured Cash Flow Notes, the Company recorded an extraordinary gain of approximately $7.2 million representing the difference between the book value of these notes of $49.1 million, consisting of a par value of $54.9 million less an unamortized discount of $5.8 million, and the consideration given of $41.9 million, consisting of cash of $40.0 million and the estimated fair market value of the warrants of $1.9 million. During the first nine months of 1997, the Company recorded a $1.4 million accrual for preferred stock dividends, which were undeclared but accumulated and unpaid as of September 30, 1997, associated with its Series A and Series B Preferred Stock at an annual rate of 20% of the liquidation preference value which is $10 per share plus accumulated and unpaid dividends. In addition, the Company is accreting the value of its preferred stock to the redemption amount and accreted $190,000 during the first nine months of 1997. The total of approximately $1.6 million of accrued preferred stock dividends and preferred stock accretion was charged to contributed capital in the accompanying September 30, 1997 consolidated balance sheet. 18
Comparison of the Three Months Ended September 30, 1997 and 1996 ---------------------------------------------------------------- The comparison of the three months ended September 30, 1997 and 1996 should be read in conjunction with the comparison of the nine months ended September 30, 1997 and 1996 for a more comprehensive discussion of the result of operations. The Company's results of operations for the three months ended September 30, 1997 and 1996 are summarized by line of business, as follows: Combining Results of Operations by Line of Business --------------------------------------------------- Three Months Ended September 30, 1997 (in thousands of dollars) (unaudited) Homesite Tract Residential Other Business Administrative Sales Sales Sales Operations Development & Other Total ----- ----- ----- ---------- ----------- ------ ----- Revenues: Real estate sales $ 4,977 $ 4,809 $ 826 $ $ $ $ 10,612 Other operating revenues 110 522 632 Interest income 941 241 1,182 -------------------------------------------------------------------------------------------------- Total revenues 5,087 4,809 826 1,463 - 241 12,426 -------------------------------------------------------------------------------------------------- Costs and expenses: Cost of real estate sales 4,308 4,371 3,890 12,569 Inventory valuation reserve 145 145 Selling expense 976 685 293 (24) 1,930 Other operating expense 337 337 Other real estate costs: Property tax, net 1,072 1,072 Other real estate overhead 584 419 302 185 653 527 2,670 General and administrative expense 2,078 2,078 Depreciation 8 15 28 120 171 Cost of borrowing, net 684 1,705 2,389 Other expense 63 60 123 -------------------------------------------------------------------------------------------------- Total costs and expenses 6,084 5,490 4,485 1,234 689 5,502 23,484 -------------------------------------------------------------------------------------------------- Operating income (loss) (997) (681) (3,659) 229 (689) (5,261) (11,058) -------------------------------------------------------------------------------------------------- Other income (expense): Reorganization items 266 176 442 Utility condemnation - Miscellaneous (185) (185) -------------------------------------------------------------------------------------------------- Total other income (expense) - - - 266 - (9) 257 -------------------------------------------------------------------------------------------------- Income (loss) before extraordinary items (997) (681) (3,659) 495 (689) (5,270) (10,801) Extraordinary gains on extinguishment of debt - -------------------------------------------------------------------------------------------------- Net income (loss) (997) (681) (3,659) 495 (689) (5,270) (10,801) -------------------------------------------------------------------------------------------------- Less: Accrued preferred stock dividends - - - - - 1,319 1,319 Accretion of preferred stock to redemption amount - - - - - 182 182 -------------------------------------------------------------------------------------------------- - - - - - 1,501 1,501 -------------------------------------------------------------------------------------------------- Net income (loss) applicable to common stock $ (997) $ (681) $ (3,659) $ 495 $ (689) $ (6,771) $(12,302) ================================================================================================== 19
Combining Results of Operations by Line of Business --------------------------------------------------- Three Months Ended September 30, 1996 (in thousands of dollars) (unaudited) Homesite Tract Residential Other Business Administrative Sales Sales Sales Operations Development & Other Total ----- ----- ----- ---------- ----------- ------- ----- Revenues: Real estate sales $ 4,155 $ 7,605 $ 4,704 $ $ $ $16,464 Other operating revenues 1,281 1,281 Interest income 686 341 1,027 -------------------------------------------------------------------------------------------------- Total revenues 4,155 7,605 4,704 1,967 - 341 18,772 -------------------------------------------------------------------------------------------------- Costs and expenses: Cost of real estate sales 3,053 6,171 3,465 12,689 Selling expense 1,498 1,345 186 3,029 Other operating expense 354 354 Other real estate costs: Property tax, net (30) 1,503 1,473 Other real estate overhead 345 1,839 96 242 1,371 512 4,405 General and administrative expense 2,906 2,906 Depreciation (5) 24 4 40 123 186 Cost of borrowing, net 2,725 2,725 Other expense 5 95 100 -------------------------------------------------------------------------------------------------- Total costs and expenses 4,896 9,379 3,751 606 1,466 7,769 27,867 -------------------------------------------------------------------------------------------------- Operating income (loss) (741) (1,774) 953 1,361 (1,466) (7,428) (9,095) -------------------------------------------------------------------------------------------------- Other income (expense): Reorganization items 129 129 Utility condemnation (2) (2) Miscellaneous (169) (71) (240) -------------------------------------------------------------------------------------------------- Total other income (expense) - - - (171) - 58 (113) -------------------------------------------------------------------------------------------------- Income (loss) before extraordinary items (741) (1,774) 953 1,190 (1,466) (7,370) (9,208) Extraordinary gains on extinguishment of debt 7,255 7,255 -------------------------------------------------------------------------------------------------- Net income (loss) $ (741) $(1,774) $ 953 $ 1,190 $ (1,466) $ (115) $(1,953) ==================================================================================================
During the third quarter of 1997, the Company recorded a net loss applicable to common stock of $12.3 million compared to a net loss of $2.0 million in the third quarter of 1996 primarily due to a 35% reduction in real estate revenues and a relative increase in cost of real estate sales, a $1.3 million accrual in 1997 for preferred stock dividends, and a $7.2 million extraordinary gain in the third quarter of 1996 resulting from the extinguishment of debt. These factors were partially offset by a $4.1 million reduction in selling expenses, other real estate costs and general and administrative expenses. The lower real estate sales revenues in the third quarter of 1997 were primarily attributable to the Company's decreasing revenues 20 from predecessor asset sales as the Company successfully executes its business plan to sell of the remaining predecessor tract assets and apply the proceeds to debt reduction. Increased relative cost of sales in the third quarter of 1997 were attributable principally to the expected effect of the Company's business plan to liquidate predecessor tract and scattered homesite product and use the proceeds for debt reduction, and an unanticipated $2.8 million accrual in August 1997 for an arbitration award to the general contractor on the Company's Regency Island Dunes condominium project. Homesite Sales -------------- The net operating results from homesite sales decreased in the third quarter of 1997 compared to the third quarter of 1996 despite an increase in revenues, primarily due to lower gross margins from the sale of predecessor assets in the third quarter of 1997, partially offset by a reduction in selling expenses. Revenues from homesite sales increased $822,000 in the third quarter of 1997 compared to the third quarter of 1996 due to a 56% increase in the number of homesites sold, partially offset by a 23% decrease in the average sales price per homesite. The following table summarizes homesite activity for the three months ended September 30 (in thousands of dollars):
1997 1996 ---------------------------- --------------------------- Number Average Number Average of lots Revenue sales price of lots Revenue sales price ------- ------- ----------- ------- ------- ----------- Subdivision homesite 167 $2,970 $ 17.8 58 $1,188 $ 20.5 sales 480 2,007 4.2 358 2,967 8.3 --- ------ ------- --- ------ ------- Scattered homesite sales 647 $4,977 $ 7.7 416 $4,155 $ 10.0 === ====== ======= === ====== =======
The increase in subdivision homesite sales revenue is primarily due to sales in the third quarter of 1997 of $1.0 million in West Meadows and to a $610,000 increase in sales for a total of $1.8 million of sales in Lakeside Estates. The decrease in the average sales price of subdivision homesite sales is primarily due to a decrease in the average sales price in Lakeside Estates from $20,000 in the third quarter of 1996 to $14,000 in the third quarter of 1997 primarily due to the mix of homesites sold. Revenues from scattered homesite sales decreased in the third quarter of 1997 compared to the third quarter of 1996 due to a 49% decrease in the average selling price, partially offset by a 34% increase in the number of homesites sold. The decrease in the average sales price is principally due to a 49% decrease in the average sales price in the Company's Cumberland Cove community in Tennessee and to an increase in bulk sales of scattered homesites in secondary markets in Florida which yield a lower sales price. The average sales price in Cumberland Cove decreased from $20,400 in the third quarter of 1996 to $10,300 in the third quarter of 1997 primarily due to the mix of homesites sold as most of the premium homesites in this project have been sold. The volume of scattered homesite sales increased due to the increase in the number of bulk homesites sold. Homesite sales other operating revenues in the third quarter of 1997 included $100,000 of management fees earned in connection with Sunset Lakes Associates, a partnership in which the Company is the managing partner. This partnership was formed to plan, finance, develop and sell approximately 1,950 acres of residential property located in southwest Broward County. The $100,000 of management fees were earned based on 4% of the development costs incurred on the Sunset Lakes project during the third quarter of 1997. Other expense of $63,000 in the third quarter of 1997 represented the Company's 65% share of the net loss of the Sunset Lakes joint venture which resulted primarily from the management fees earned by the Company. Initial closings in Sunset Lakes are anticipated during the first quarter of 1998. The homesite sales gross margin percentages were 13.4% in the third quarter of 1997 compared to 26.5% in the third quarter of 1996. The gross margin percentage in the third quarter of 1996 reflects 21 targeted gross margins of 20% to 30% for this line of business. The lower gross margin percentage in the third quarter of 1997 was primarily attributable to an increase in bulk homesite sales. Although bulk sales of scattered homesites yield lower margins than individual sales, they are consistent with the Company's business plan to accelerate the sale of predecessor assets and reduce debt. The lower gross margin percentage also corresponds to reduced gross margins recorded in West Meadows in the third quarter of 1997. During the third quarter of 1997, the gross margin percentage for West Meadows sales was 15.6%, however, based on revised cost estimates, future sales are anticipated to yield a gross margin percentage of approximately 19%. Homesite selling expense decreased $522,000 or 34.8% in the third quarter of 1997 and as a percentage of sales from 36.1% in the third quarter of 1996 to 19.6% in the third quarter of 1997 primarily due a decrease in fixed selling costs, most particularly in the Cumberland Cove community in Tennessee and to additional commissions paid in the third quarter of 1996 associated with sales during the first six months of 1996. Homesite sales other real estate overhead increased in the third quarter of 1997 compared to the corresponding prior year period primarily due to due diligence and other overhead costs associated with the Company's West Bay Club project which were included in business development in 1996 and are included in homesite sales in 1997 due to the acquisition of this project in 1997. Tract Sales ----------- The net operating results from tract sales improved $1.1 million in the third quarter of 1997 compared to the third quarter of 1996 primarily due to reductions in selling expenses and other real estate overhead, partially offset by lower gross margins generated from tract sales in the third quarter of 1997 resulting from lower tract sales revenues and lower gross margin percentages. Revenues from tract sales decreased $2.8 million in the third quarter of 1997 compared to the third quarter of 1996 primarily due to several large sales during the third quarter of 1996. Tract sales acreages and corresponding revenues from such sales often vary significantly from quarter to quarter depending on the timing and size of individual sales. Tract sales gross margins are summarized as follows for the three months ended September 30: 1997 1996 --------------------- --------------------- Targeted Actual Targeted Actual Margins Margins Margins Margins ------- ------- ------- ------- Other tract acreage 5-10% 9.1% 20% 18.9% The actual gross margins in the third quarter of 1997 and the third quarter of 1996 for other tract acreage generally reflect the targeted gross margins. The targeted gross margins have been reduced primarily due to the Company's plan to accelerate land sales in secondary real estate market locations. Tract sales selling expense decreased 49% in the third quarter of 1997 compared to the third quarter of 1996 primarily due to lower direct selling expenses due to a decrease in revenues. Tract sales other real estate overhead decreased $1.4 million or 77% in the third quarter of 1997 compared to the third quarter of 1996 primarily due to management and advertising costs in 1996 associated with the efforts to accelerate the disposition of predecessor assets in secondary real estate markets. 22 Residential Sales ----------------- The net operating results from residential sales, which includes single family homes and condominiums, decreased $4.6 million during the third quarter of 1997 compared to the corresponding prior year period. This decrease corresponds to a decrease in the gross margin generated from the Company's Regency Island Dunes condominium project resulting from lower revenues and a lower gross margin percentage. Residential sales are summarized as follows for the three months ended September 30 (in thousands of dollars): 1997 1996 ---- ---- Condominium sales - Regency Island Dunes: First Building $310 $ -- Second Building 516 4,414 ---- ----- Total condominium sales 826 4,414 Single family home sales -- 290 ---- ------ $826 $4,704 ==== ====== The revenues and profits associated with Regency Island Dunes condominium sales are recorded using the percentage of completion method. The Regency Island Dunes condominium project consists of two 72-unit buildings. The condominium revenues of $310,000 from the first building in the third quarter of 1997 were generated from the closing of the one remaining unit in the first building. As of September 30, 1997, all 72 units in the first building have been sold and closed. The condominium revenues of $516,000 from the second building in the third quarter of 1997 were derived from the sale of one additional unit plus an adjustment resulting from lower than anticipated buyer credits associated with closings in the second building. As of September 30, 1997, 68 of the 72 units in the second building have closed and the Company anticipates that the remaining four units in the second building will be sold and closed in 1997. The condominium revenues of $4.4 million in the second building in the third quarter of 1996 were derived from an increase in the second building completion percentage during the quarter from 30% as of June 30, 1996 to 55% as of September 30, 1996 and to four additional units under contract during the quarter from 45 units as of June 30, 1996 to 49 units as of September 30, 1996. Single family home sales revenues in the third quarter of 1996 were generated from three closings with an average selling of price of $96,700. There were no closings in the third quarter of 1997 due to the Company's decision in mid-1995 to withdraw from the single family home business. Residential sales gross margins are summarized as follows for the three months ended September 30: 1997 1996 ---- ---- Condominiums (370.9)% 27.7% Single family homes - 5.9% The gross margin for condominiums in the third quarter of 1997 was negative primarily due to an unanticipated $2.8 million accrual in August 1997 for an arbitration award granted to the Company's general contractor related to the first building in Regency Island Dunes. See Part II. Item 2. LEGAL PROCEEDINGS. The impact of this cost was absorbed by the one unit that closed in the first building in the third quarter of 1997 resulting in a large negative gross margin in 1997. 23 The overall gross margin for this project is anticipated to be approximately 12%. Excluding the $2.8 million arbitration award, the gross margin on this project would have been approximately 18% which is lower than the targeted gross margin of approximately 20% to 25% for this line of business due to higher than anticipated construction costs. The single family home gross margins in the third quarter of 1996 were low due to the mix of product sold and to the winding down of this operation. Residential sales other real estate overhead increased in the third quarter of 1997 compared to the corresponding prior year period primarily due to legal expenses associated with the legal proceedings between the Company and its general contractor regarding the construction of the first building in Regency Island Dunes. Other Operations ---------------- Net income from other operations decreased in the third quarter of 1997 compared to the third quarter of 1996 primarily due to a decrease in other operating revenues and to an increase in borrowing costs associated with the financing of mortgage and contract receivables. Other operating revenues decreased in the third quarter of 1997 from the third quarter of 1996 primarily due to $545,000 of development impact fees received in the third quarter of 1996. Interest income increased in the third quarter of 1997 from the corresponding prior year period primarily due to a higher average balance of land mortgages receivable in the third quarter of 1997, partially offset by a lower average balance of contracts receivable during the periods under review. Other operations other real estate overhead decreased 24% in the third quarter of 1997 compared to the third quarter of 1996 primarily due to lower community operations costs associated with the Company's predecessor assets located in secondary markets in Florida. Cost of borrowing of $684,000 in the third quarter of 1997 represents interest expense on debt associated with the financing of a portion of the Company's land mortgages and contract receivables generated from the sale of predecessor tracts and scattered homesites, pursuant to the Company's business plan to monetize predecessor assets. The Company raised approximately $13.3 million of cash proceeds in the latter part of 1996 and an additional $14.6 million in the first nine months of 1997 from these financings and plans to continue to finance mortgages and other receivables generated from the future sales of predecessor real estate assets. The proceeds were used to the reduce corporate debt and to fund ongoing operations. Other income - reorganization items of $266,000 in the third quarter of 1997 represents the amortization of the Company's utility connections reserve. Other expense - miscellaneous of $169,000 in the third quarter of 1996 represented additional expenses associated with the June 1996 sale of the Company's Julington Creek utilities system thereby reducing the gain on this sale to $696,000. 24 Business Development -------------------- Total business development expenditures decreased in the third quarter of 1997 compared to the third quarter of 1996 primarily due to a decrease in expenditures related to the Company's Ya Dong joint venture in China and to due diligence and other overhead costs associated with the Company's West Bay Club project which were included in business development in 1996 and are included in homesite sales in 1997 due to the acquisition of this project in 1997. Business development expenditures currently consist primarily of costs associated with the pursuit of business opportunities in primary market locations within Florida and other southeastern United States locations. Business development other expenses in the third quarter of 1997 and in the third quarter of 1996 consisted of the Company's share of the net loss of the Ocean Grove joint venture which was 100% in 1997 and 50% in 1996. The loss resulted from pre-sales advertising and other selling and overhead costs. Administrative & Other ---------------------- The net loss from administrative & other activities increased $6.7 million in the third quarter of 1997 from the third quarter of 1996 principally due to an extraordinary gain of $7.2 million in 1996 resulting from the extinguishment of debt and a $1.3 million accrual in 1997 for preferred stock dividends, partially offset by a $1.0 million decrease in borrowing costs. Property tax, net decreased in the third quarter of 1997 compared to the third quarter of 1996 primarily due to a reduction of land inventory not under development which corresponds to sales activity in the intervening period. General and administrative expenses decreased $828,000 or 28% in the third quarter of 1997 compared to the third quarter of 1996 principally due to financial advisory and due diligence costs incurred in the third quarter of 1996 associated with the Company's recapitalization efforts. Cost of borrowing, net of capitalized interest decreased $1.0 million in the third quarter of 1997 compared to the same period in 1996 primarily due to a reduction in corporate debt and an increase in interest capitalized to other assets associated with the Company's investments in various joint ventures. During the three months ended September 30, 1997 and 1996, the Company did not accrue interest on its Cash Flow Notes because of the absence of Available Cash during the periods. See "LIQUIDITY AND CAPITAL RESOURCES." In September 1996, the Company fully prepaid at a discount its Secured Cash Flow Notes for $40.0 million in cash plus warrants to purchase up to 1,500,000 of the Company's common stock at $6.50 per share. As a result of the extinguishment of the Secured Cash Flow Notes, the Company recorded an extraordinary gain of approximately $7.2 million representing the difference between the book value of these notes of $49.1 million, consisting of a par value of $54.9 million less an unamortized discount of $5.8 million, and the consideration given of $41.9 million, consisting of cash of $40.0 million and the estimated fair market value of the warrants of $1.9 million. During the third quarter of 1997, the Company recorded a $1.3 million accrual for preferred stock dividends, which were undeclared but accumulated and unpaid as of September 30, 1997, associated with its Series A and Series B Preferred Stock at an annual rate of 20% of the liquidation preference value which is $10 per share plus accumulated and unpaid dividends. In addition, the Company is accreting the value of its preferred stock to the redemption amount and accreted $182,000 during the third quarter of 1997. The total of approximately $1.5 million of accrued preferred stock dividends and preferred stock accretion was charged to contributed capital in the accompanying September 30, 1997 consolidated balance sheet. LIQUIDITY & CAPITAL RESOURCES - ----------------------------- As of September 30, 1997, the Company's cash and cash equivalents totaled approximately $2.1 million. The Company also had restricted cash and cash equivalents of $2.0 million, which consisted primarily of escrows for the sale and development of real estate properties, funds held in trust to pay certain bankruptcy claims and various other escrow accounts. Of the $5.0 million decrease in cash and cash equivalents during the first nine months of 1997, $12.0 million was used in operating activities and 25 $4.8 million was used in financing activities, partially offset by $11.8 million provided by investing activities. Cash used in operating activities includes approximately (i) $11.4 million for interest payments, (ii) $5.5 million for property tax payments, (iii) $12.4 million for construction and development expenditures, (iv) $19.7 million related to property acquisitions and (v) $4.7 million of fees associated with the Company's refinancing and recapitalization efforts. These uses were offset in part by net cash generated through real estate sales and other operations. Cash provided by investing activities consisted primarily of $12.1 million of funds released on January 2, 1997 from various utility trust accounts which were funded by the Company during the reorganization proceedings. The terms of these trusts require the Company to periodically assess the adequacy of the property in these trusts. Pursuant to a review of these trusts in December 1996, it was determined that approximately $12.1 million in cash and $6.2 million of notes could be released from these trust accounts. Cash used in financing activities includes $37.5 million of principal payments on January 3, 1997 to repay in full the Company's Unsecured 12% Notes, a scheduled principal payment of $13.3 million on the Company's Term Loan, $7.2 million of net principal repayments on new project financings and $2.5 million in net principal payments related to the Company's deferred property tax and Section 365(j) lien obligations arising out of the reorganization proceedings. These payments were partially offset by proceeds of $10.0 million from the issuance of Common Stock and approximately $30.0 million from the issuance of Series A and B Preferred Stock as more fully described below. In addition, the Company had net borrowings of $10.9 million under the Reducing Revolving Loan and $4.8 million associated with the financing of the Company's mortgage and contract receivables. The Company has, pursuant to Loan Agreements dated as of September 30, 1996 with Foothill Capital Corporation ("Foothill"), (i) a $20 million working capital facility maturing December 1, 1998 ("Working Capital Facility"), (ii) a $25 million reducing revolving loan maturing June 30, 1998 ("Reducing Revolving Loan"), and (iii) a $40 million Term Loan at an interest rate of 15% per annum maturing on June 30, 1998. Amounts under the Reducing Revolving Loan are available only when (i) the Working Capital Facility is fully utilized, and (ii) the Company is in compliance with, among other conditions, a "borrowing base" formula based on the value of certain of the Company's assets. Amounts outstanding under the Working Capital Facility bear variable interest at a rate equal to the variable interest rate, per annum, announced by Northwest Bank of Minnesota, N.A., as its "base rate" plus two percentage points. The Reducing Revolving Loan bears variable interest at the "base rate" plus four percentage points. As of September 30, 1997, the Company had outstanding (i) the full $20 million under the Working Capital Facility, (ii) $12.7 million under the Reducing Revolving Loan, and (iii) $26.7 million under the Term Loan. The Term Loan requires principal repayments of $13.3 million on each of December 31, 1997 and June 30, 1998. The commitment under the Reducing Revolving Loan will be reduced to $8.3 million on December 31, 1997 and to zero on June 30, 1998, and the Company will be required to repay on those dates any amounts outstanding under the Reducing Revolving Loan in excess of the new commitment amount. The Company's remaining material obligations for 1997 include principal repayments on the Foothill debt up to $21.7 million. The Company's 1997 business plan also contemplates full year expenditures for development, construction and other capital improvements estimated at approximately $45 million, of which a substantial portion will require funding through individual project development loans 26 or joint venture arrangements, many of which are already in place. If the Company is unable to obtain the capital resources to fund these expenditures, the implementation of the Company's business plan will be adversely affected, thus slowing the Company's expected revenue growth and increasing the expected time necessary for the Company to achieve profitability. The Company does not currently have sufficient liquid capital resources to satisfy the up to $21.7 million of Foothill debt due on December 31, 1997. However, management believes that the Company, through a combination of sources as more fully described below, will be able to obtain sufficient liquidity and capital resources necessary to continue implementing its business plan and to satisfy its debt obligations as they become due. The Company's ongoing business plan is to continue to monetize its non-core tract and scattered homesite assets ("Predecessor assets") and to reduce corporate debt. The Company has made substantial progress in this regard as it sold $55.6 million of tract and scattered homesite assets in 1996 and $22.4 million in the first nine months of 1997. In addition, the Company currently has pending under contract or letter of intent a combination of Predecessor asset sale transactions which would generate, if consummated, approximately $17.2 million of revenue including $11.8 million of cash and $5.4 million of mortgage notes. The transactions under contract are subject to customary conditions, in some cases including a financing condition. Transactions subject to a letter of intent are also subject to further negotiation and documentation and there are no assurances that any particular transaction under contract or letter of intent will be consummated. As part of the effort to monetize the Predecessor assets, the Company is actively monetizing mortgage and note receivables generated from the sale of Predecessor tracts and scattered homesites. The Company raised approximately $14.6 million cash, and received certain residual interests in the first nine months of 1997 from the sale or financing of mortgages or other receivables generated from the sale of Predecessor real estate assets. These cash proceeds, along with the net cash proceeds from Predecessor real estate sales, were applied to the reduction of corporate debt and to fund ongoing operations. The Company plans to continue to sell or finance mortgages and other receivables generated from the future sale of Predecessor real estate assets going forward. As disclosed in Note 7 in the Notes to Consolidated Financial Statements, the Company closed on a series of preferred and common stock transactions with (i) Apollo to purchase up to $25 million of Series A Preferred Stock and warrants to purchase 5,000,000 shares of Common Stock, and (ii) through a private placement, the issuance of 1,776,199 shares of Common Stock for $10 million and $10 million of Series B Preferred Stock with Series B Warrants to purchase 2,000,000 shares of Common Stock. As of September 30, 1997, 1,996,475 Series A Preferred shares with Investor Warrants to purchase 3,992,950 shares of Common Stock had been purchased by Apollo for a total purchase price of approximately $20 million of the $25 million total. With respect to the above referenced private placement, $10 million of Common Stock and $10 million of Series B Preferred Stock with warrants to purchase 2,000,000 shares of common stock had been issued. The Company expects to issue up to an additional $10 million of Series B Preferred Stock along with warrants to purchase up to 2,000,000 shares of Common Stock through a pending rights offering to existing stockholders and to the holders of certain warrants issued by the Company in September 1996. While there can be no assurance, the Company expects to close the transaction in November, 1997. The Company intends to use the proceeds of the rights offering for working capital purposes, including the payment of a portion of the Foothill debt. The rights offering is being made only by means of a prospectus. As required by the Company's Agreements with Apollo, the proceeds from the sale of Series A Preferred Stock have been and will be used primarily to acquire and develop properties through a wholly 27 owned special purpose subsidiary of the Company ("SP Subsidiary") and through subsidiaries of the SP Subsidiary. The Company's repurchase and redemption obligations in respect of the Series A Preferred Stock (but not the Series B Preferred Stock) are secured by (i) a junior lien on substantially all of the assets of the Company and its subsidiaries, except for the outstanding capital stock of the SP Subsidiary and its assets, and (ii) a senior lien on the outstanding capital stock of the SP Subsidiary and on its assets. (See Note 7 to the Consolidated Financial Statements.) Pursuant to the certain debt agreements of the Company, it must apply any Available Cash (as defined below) (i) to the payment of interest due on the Company's unsecured cash flow notes due December 31, 1998 ("Cash Flow Notes"), (ii) to payments of outstanding amounts under the Working Capital Facility, and (iii) to repayments of principal on the Cash Flow Notes. Available Cash is defined in the Company's POR with respect to any payment period (generally, any six-month period ending June 30 or December 31), as the sum of all cash receipts (exclusive of borrowed money and certain delineated cash items) less the sum of payments for operating expenses, all debt payments (including repurchases of indebtedness), capital expenditures, tax payments, payments to creditors under the plan of reorganization and creation of reserves for working capital and other expenses for the next two payment periods. If there is no Available Cash on a payment date, the then current interest on the Cash Flow Notes is not due or payable on that payment date or at any time thereafter. Due to the necessity to establish reserves against future mandatory debt, capital and operating expenditures, the Company did not have any Available Cash to require it to make payments on the Cash Flow Notes through September 30, 1997. Accordingly, the Company did not accrue any interest on the Cash Flow Notes during the nine months ended September 30, 1997 and 1996. Also, based upon the Company's existing debt obligations, its anticipated net cash flows and its business plan, management does not anticipate the Company having Available Cash in the foreseeable future. Part II. - OTHER INFORMATION Item 1. Legal Proceedings ----------------- FLORIDA HOME FINDERS, INC. In March, 1995, the Company sold Florida Home Finders, Inc. ("Florida Home Finders") to the FHF Trust, owned by Ian R. Law and Benjamin Schiff, for $3.5 million. It has been alleged in litigation filed against Florida Home Finders that FHF Trust withdrew escrow deposits held by Florida Home Finders for the benefit of tenant and owner clients and utilized those funds to purchase a certificate of deposit. It is further alleged that the certificate of deposit was pledged as security to County National Bank for a personal loan to Messrs. Law and Schiff, and that a portion of the proceeds of that loan were utilized to pay the Company approximately $2.0 million of the amount due under the purchase money note given by FHF Trust in favor of the Company at the time of the sale of Florida Home Finders. The Company had no knowledge of the source of the payment. Subsequent to the foregoing alleged events, the Florida Real Estate Commission discovered that escrow deposits were missing from Florida Home Finder's accounts and brought an action in St. Lucie County circuit court seeking the appointment of a receiver for the property and business of Florida Home Finders. STATE OF FLORIDA, DEPARTMENT OF BUSINESS AND PROFESSIONAL REGULATION V. FLORIDA HOME FINDERS, INC. ET AL., Case No. 95-1092-CA 17 (St. Lucie Cty. Cir. Ct.) A receiver was appointed for Florida Home Finders in October 1995. In November 1995, the Company intervened in the receivership proceeding. The receivers have sold the Florida Home Finders' assets (other than litigation claims against third parties, which have been retained by the receiver) to All Florida Property Management, Inc., a Florida 28 corporation; however the sales proceeds are being held by the receiver pending the court's order directing disbursement. In November 1995, the receiver filed a lawsuit against several parties, including the Company, seeking a return and recovery of the missing escrow deposits. SPIRE V. IAN R. LAW ET AL., Case No. 95-1300-CA 17 (St. Lucie Cty. Cir. Ct.). The Company filed a motion to dismiss the complaint, contending that the complaint failed to identify any knowledge, notice or wrongdoing on the part of the Company. This case was voluntarily dismissed without prejudice on February 6, 1997. The Company agreed with the receiver on May 5, 1997 to a tentative settlement of all matters pending final documentation, the satisfaction of certain conditions and court approval. The documentation of the settlement was finalized and was submitted to the court for approval on or about August 6, 1997. The settlement was approved by the court on September 29, 1997 and will not have a material, adverse financial affect on the Company. REGENCY ISLAND DUNES. In connection with the construction of the Regency Island Dunes Condominium Project in Jensen Beach, Florida, various disputes have arisen between the Company's subsidiary, Regency Island Dunes, Inc. ("Regency"), and the general contractor, Foley and Associates Construction Company, Inc. ("Foley"), regarding completion of the first phase of the project containing 72 units. As a result, Foley filed suit in the Circuit Court of St. Lucie County under the caption of FOLEY AND ASSOCIATES CONSTRUCTION, INC. V. REGENCY ISLAND DUNES, INC. AND ATLANTIC GULF COMMUNITIES CORPORATION, Case No. 96-1569-CA-03 (St. Lucie Cty. Cir. Ct.) alleging breach of the construction contract, claims for lost profits and delay damages as well as various counts claiming fraudulent transfers of funds from Regency to the Company. This case was filed by Foley in addition to Foley's demand for arbitration before the American Arbitration Association as required pursuant to the terms of the construction contract between Regency and Foley. Regency has asserted counterclaims for Foley's failure to properly staff the job and refusal to perform corrective work which was performed at Regency's expense, and all such sums incurred by Regency would offset Foley's contract claim. The costs of corrective work already incurred together with Regency's claims for delay damages and penalties exceed Foley's claims for the unpaid contract balance. In addition, in the case styled REGENCY ISLAND DUNES INC. V. FOLEY AND ASSOCIATES CONSTRUCTION COMPANY, INC., Case No. 96-1532 CA-17 (St. Lucie Cty. Cir. Ct.), Regency filed its action to discharge the construction lien filed by Foley on the basis that the lien claim was inflated and was recorded against units which had previously been conveyed to third party purchasers as well as additional lands not included within the construction contract between the parties. The preceding two cases have been consolidated and partially stayed pending resolution of the contract disputes in arbitration. In REGENCY ISLAND DUNES, INC. V. NATIONAL FIRE INSURANCE COMPANY OF HARTFORD AND FOLEY AND ASSOCIATES CONSTRUCTION COMPANY, INC., now refiled under Case No. 97-14075, U.S.D.C., Southern District of Florida, Regency filed suit to recover damages against Foley's surety for corrective work performed by Regency as well as various other claims for damages asserted by Regency in the arbitration described above. This case was dismissed by the court on June 5, 1997. The arbitration proceeding commenced on July 1, 1997 and was completed on July 28, 1997. On August 26, 1997, the arbitration panel entered an award in the amount of $2,839,546.00 in favor of Foley, and an award in the amount of $442,000.00 in favor of Regency with respect to Regency's counterclaim. The arbitration awards are reflected in the Company third quarter financial results. Regency intends to file a motion to vacate and/or modify the arbitration award on or before November 24, 1997. In addition, based upon a separate construction contract between Regency and Foley for the construction of the second phase of the Regency Island Dunes Condominium Project, Foley filed a demand for arbitration in March 1997 asserting breach of contract relating to change orders, release of retainage and Foley's requests for extensions of time. The dispute with Foley in connection with the second phase has escalated and Foley has filed a claim of lien, which includes retainage, overhead and unauthorized change orders. Regency has filed counterclaims against Foley in the arbitration proceeding for breach of contract and failure to perform corrective work. 29 In addition, Regency has filed an independent action against Foley for recording a fraudulent lien and a declaratory action seeking dismissal of Foley's claim in the arbitration for lost profits. The Company and Regency will vigorously defend the claims asserted by Foley and aggressively pursue their claims against Foley. The Company does not believe Foley's claims will be resolved in a manner that will have a material adverse impact on the Company. Item 2. Changes in Securities --------------------- During the three-month period ended September 30, 1997, the Company sold and issued to Apollo an aggregate of 1,109,000 shares of Series A Preferred Stock, together with Investor Warrants to purchase 2,218,000 shares of Common Stock, divided evenly among Class A Warrants, Class B Warrants and Class C Warrants, for an aggregate purchase price of $11,090,000, in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Placement"). Apollo is an "accredited investor" as defined in Rule 501 promulgated under the Securities Act of 1933, as amended. The Placement occurred (i) on July 31, 1997 in respect of 850,000 shares of Series A Preferred Stock and Investor Warrants to purchase 1,700,000 shares of Common Stock, for an aggregate purchase price of $8,500,000 and (ii) on August 7, 1997 in respect of 259,000 shares of Series A Preferred Stock and Investor Warrants to purchase an additional 518,000 shares of Common Stock, for an aggregate purchase price of $2,590,000. The Placement occurred pursuant to the Company's Investment Agreement with Apollo, as discussed above in Note 7 to the Consolidated Financial Statements, and, as also discussed in Note 7, the Series A Preferred Stock and Investor Warrants are convertible or exercisable into Common Stock, at $5.75 per share, subject to certain adjustments. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits required by Item 601 of Regulation S-K (27) Financial Data Schedule. (b) Reports on Form 8-K None 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ATLANTIC GULF COMMUNITIES CORPORATION Date: November 13, 1997 /s/ Thomas W. Jeffrey --------------------- Thomas W. Jeffrey Executive Vice President and Chief Financial Officer Date: November 13, 1997 /s/ Callis N. Carleton ---------------------- Callis N. Carleton Vice President and Controller (Principal Accounting Officer) 31 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 (UNAUDITED) AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000771934 ATLANTIC GULF COMMUNITIES 1,000 9-MOS Dec-31-1997 Jan-01-1997 Sep-30-1997 4,066 0 41,349 0 161,945 0 2,074 0 228,772 0 137,037 28,159 0 1,160 37,418 228,772 44,671 51,047 43,916 50,829 17,532 0 11,123 (26,747) 0 (26,747) 0 0 0 (26,747) (2.73) (2.73) The values for receivables and PP& E represent net amounts. The Company does not prepare a classified balance sheet, therefore current assets and current liabilities are not applicable.
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