U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2002
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File No. 0-32331
SURETY HOLDINGS CORP.
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(Name of Small Business Issuer in its Charter)
Delaware 52-2229054
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State of other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
850 Fort Plains Road
Howell, New Jersey 07731
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(Address of Principal Executive Offices)
Registrant's telephone number including area code 732-886-0706
------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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.
(1) YES X NO (2) YES X NO
--- --- --- ---
State the number of shares outstanding of each of the Registrant's classes of
common equity, as of the latest applicable date:
6,738,000 -- August 14, 2002
SURETY HOLDINGS CORP. AND SUBSIDIARY
INDEX
Page
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Part I - Financial Information
Item 1 - Condensed Consolidated Financial Statements (unaudited)
Balance Sheet as of June 30, 2002 1
Statements of Income for the Six and Three Months
Ended June 30, 2002 and 2001 2
Statements of Cash Flows for Six Months Ended June 30, 2002 and 2001 3
Notes to the Financial Statements 4-8
Item 2 - Management's Discussion and Analysis or Plan of Operation 9-16
Part II - Other Information
Item 1 - Legal Proceedings 17
Item 2 - Change in Securities 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURE 18
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2002
(unaudited)
ASSETS
Current assets
Cash $ 9,870,000
Real estate held for sale, current 2,452,000
Other current assets 143,000
-------------
Total current assets 12,465,000
Notes receivable, less current maturities 1,531,000
Note receivable, officer 573,000
Real estate held for sale 36,611,000
Notes receivable and accrued interest,
Marine Forest Resort, Inc., net of a $7.2
million allowance for loan losses 3,814,000
Real estate development costs 36,734,000
Property and equipment, net of accumulated depreciation
and amortization of $1,923,000 2,636,000
Deferred tax asset 3,512,000
-------------
$ 97,876,000
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, current maturity $ 30,000
Notes payable, president, including accrued
interest of $6,000 121,000
Accounts payable 167,000
Accrued expenses and other current liabilities 145,000
Income taxes payable 154,000
-------------
Total current liabilities 617,000
-------------
Long-term liabilities,
Notes payable, less current maturity 421,000
-------------
Commitments and contingencies
Stockholders' equity
Common stock, $.001 par value,
200,000,000 shares authorized,
6,738,000 shares issued and
outstanding 7,000
Capital in excess of par value 101,678,000
Accumulated deficit (4,847,000)
-------------
Total stockholders' equity 96,838,000
-------------
$ 97,876,000
=============
See accompanying notes to condensed consolidated financial statements.
1
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six and Three Months Ended June 30, 2002 and 2001
(unaudited)
Six Months Ended June 30, Three Months Ended June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues $ 1,793,000 $ 1,339,000 $ 848,000 $ 1,064,000
Cost of Revenues 649,000 548,000 309,000 389,000
----------- ----------- ----------- -----------
Gross profit 1,144,000 791,000 539,000 675,000
General and administrative
expenses 775,000 741,000 382,000 350,000
----------- ----------- ----------- -----------
Income from operations 369,000 50,000 157,000 325,000
----------- ----------- ----------- -----------
Other income (expense)
Interest income 137,000 654,000 63,000 326,000
Interest expense (98,000) (28,000) (10,000) (15,000)
----------- ----------- ----------- -----------
39,000 626,000 53,000 311,000
----------- ----------- ----------- -----------
Income before income taxes 408,000 676,000 210,000 636,000
Income taxes (165,000) (274,000) (116,000) (258,000)
----------- ----------- ----------- -----------
Net income $ 243,000 $ 402,000 $ 94,000 $ 378,000
=========== =========== =========== ===========
Net income per common
share, basic and diluted $ 0.04 $ 0.06 $ 0.01 $ 0.06
=========== =========== =========== ===========
Weighted average common shares
outstanding, basic and diluted 6,738,000 6,738,000 6,738,000 6,738,000
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
2
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2002 and 2001
(unaudited)
2002 2001
------------ ------------
Cash flows from operating activities
Net income $ 243,000 $ 402,000
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 73,000 73,000
Deferred income taxes 8,000 266,000
Accrued interest receivable, Marine Forest Resorts, Inc. (475,000)
Gain on sales of property (1,125,000) (638,000)
Loss on sale of property and improvements 15,000 12,000
Loss on sale of notes receivable 75,000
Increase (decrease) in cash
attributable to changes in operating
assets and liabilities:
Other current assets 5,000 (200,000)
Accounts payable (271,000) 89,000
Accrued expenses and other current liabilities 20,000 2,000
Income taxes payable 154,000 14,000
------------ ------------
Net cash used in operating activities (803,000) (455,000)
------------ ------------
Cash flows from investing activities
Purchases of property and equipment (93,000) (162,000)
Proceeds from sales of property 1,318,000 788,000
Real estate development expenditures (957,000) (1,397,000)
Proceeds from repayments of notes receivable 769,000 956,000
Advances to Marine Forest Resort, Inc. (1,950,000)
Proceeds from repayments of note receivable, officer 2,000
------------ ------------
Net cash provided by (used in) investing activities 1,039,000 (1,765,000)
------------ ------------
Cash flows from financing activities
Principal payments on notes payable (14,000) (5,000)
Proceeds from notes payable, president 155,000
Repayments of notes payable, president (260,000)
------------ ------------
Net cash provided by (used in) financing activities (274,000) 150,000
------------ ------------
Net decrease in cash (38,000) (2,070,000)
Cash
Beginning of period 9,908,000 10,147,000
------------ ------------
End of period $ 9,870,000 $ 8,077,000
============ ============
Supplemental disclosures of noncash investing and
financing activity, issuance of notes receivable to officer
upon sale of property and improvements $ 575,000 $ --
============ ============
See accompanying notes to condensed consolidated financial statements
3
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of operations
Surety Holdings Corp. ("Surety") and its wholly-owned subsidiary, Surety Kohala
Corporation ("Kohala") (collectively, the "Company") is primarily engaged in the
development of a property on 642 acres of land in the North Kohala district of
Hawaii Island in the state of Hawaii. This development, referred to as the
Mahukona development project (see Note 3), was initially slated to be a hotel,
18-hole golf course and resort homes. However, the Company is exploring other
avenues of development for the 642 acres most notably, an all-inclusive
fractional interest club community.
The current operations of the Company include the sale of its non-Mahukona
development project real estate and other ancillary activities, all of which are
not deemed to be the future of the Company's business.
2. Unaudited statements and summary of significant accounting policies
Unaudited Statements
The accompanying condensed consolidated financial statements of Surety Holdings
Corp. and Subsidiary as of June 30, 2002 and for the six and three-month periods
ended June 30, 2002 and 2001 are unaudited and reflect all adjustments of a
normal and recurring nature to present fairly the consolidated financial
position, results of operations and cash flows for the interim periods. These
unaudited condensed consolidated financial statements have been prepared by the
Company pursuant to instructions to Form 10-QSB. Pursuant to such instructions,
certain financial information and footnote disclosures normally included in such
financial statements have been omitted.
These unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated audited financial statements and notes
thereto, together with management's discussion and analysis or plan of
operations, contained in the Company's Annual Report on the Form 10-KSB for the
year ended December 31, 2001. The results of operations for the six and
three-month periods ended June 30, 2002 are not necessarily indicative of the
results that may occur for the year ending December 31, 2002.
Income per Common Share
The Company complies with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" which requires dual presentation of basic and
diluted earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average common shares outstanding for the year. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Since the Company has no securities or other contracts to issue common
stock, basic and diluted net income per common share for the six and three-month
periods ended June 30, 2002 and 2001 were the same.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Surety
and Kohala. All significant intercompany transactions and balances have been
eliminated in consolidation.
4
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Real estate development costs
At June 30, 2002, real estate development costs, attributed primarily to the
Company's Mahukona development project, consist of the following:
Land and land acquisition costs $ 23,896,000
Planning and studies 2,226,000
Engineering and architectural 548,000
Infrastructure 6,192,000
Professional and consulting fees 2,395,000
Other 1,477,000
-------------
$ 36,734,000
=============
4. Stockholders' equity
In February 2002, the Company's board of directors authorized a three-for-one
stock split effected in the form of a 200 percent stock dividend which was
distributed on February 15, 2002 to stockholders of record on February 4, 2002.
Stockholders' equity has been restated to give retroactive recognition to the
stock split for all periods presented by reclassifying from capital in excess of
par value to common stock the par value of the additional shares arising from
the split. In addition, all references in the condensed consolidated financial
statements to number of shares and per share amounts have been restated.
5. Commitments and contingencies
The prior approvals obtained for the Mahukona development project are
conditional; that is, each approval is subject to various conditions of
approval. Certain of these conditions of approval contain time limits or
financial compliance requirements, which if not met, may ultimately result in
legislative and/or administrative actions to void or revoke the prior approvals.
The effect of such adverse actions would be to return the land entitlements to
the former zoning, or more appropriate zoning as determined by the County of
Hawaii. The Company believes that it has continued to maintain the prior
approvals through compliance with all applicable conditions. In the future,
however, the Company may not be able to maintain compliance with all applicable
conditions.
The Company has entered into various consulting agreements for investment
banking, project development and other services.
The Company is involved in certain legal actions that arose in the normal course
of business. In the opinion of the Company's management, the resolution of these
matters will not have a material adverse effect on the condensed consolidated
financial position, results of operations or cash flows of the Company.
6. Related party transactions
President
From time to time, the Company's President advances the Company monies pursuant
to one-year 5% promissory notes. At June 30, 2002, the amount owed to the
Company's President pursuant to such notes was approximately $121,000. Related
interest expense for the six months ended June 30, 2002 and 2001 is
approximately $6,000 and $8,000, respectively and $2,000 and $5,000, for the
three months ended June 30, 2002 and 2001, respectively.
5
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Related party transactions (continued)
Marine Forest Resort, Inc. ("Marine Forest")
Pursuant to uncollateralized promissory notes, the Company advanced Marine
Forest, a related Japanese corporation that owns approximately 400 acres of land
in Okinawa, Japan, $9.75 million. The notes bear interest at the U.S. prime
rate, at date of issuance, plus one percent. Under their original terms, the
notes were due six months after date of issuance. However, the notes were
extended an additional six months and subsequently extended to December 31,
2002, as a concession to Marine Forest to advance Marine Forest's development
projects. In connection therewith, the Company continues to discuss the
possibility of a strategic arrangement with Marine Forest, including the Company
acquiring Marine Forest. Current discussions, which are ongoing, are based upon
a recently completed study (Concept Development and Economic Projections Report)
prepared by a consultant for the Mahukona development plan. Related interest
income for the six months ended June 30, 2002 and 2001 is approximately nil and
$475,000, respectively. Related interest income for the three months ended June
30, 2002 and 2001 is approximately nil and $226,000, respectively. In 2002, the
Company discontinued accruing interest income on the promissory notes in light
of its 2001 impairment charge (see next paragraph). Through June 30, 2002, no
interest has been paid, however management anticipates that all accrued interest
receivable will be reclassified to principal and settled in connection with the
parties' contemplated strategic arrangement.
At December 31, 2001, in light of the speculative nature of Marine Forest's
contemplated development projects among other reasons and in accordance with its
compliance with the requirements of SFAS No. 114, the Company recorded an
impairment charge of approximately $7.2 million.
Note receivable, officer
In April 2002, an officer of the Company purchased property and improvements
thereon for $575,000. The officer entered into 30-year note agreement which
requires monthly payments of principal and interest through 2032. The note
receivable bears interest at the rate of 2.66%. The sale of the property and
improvements to the officer resulted in a loss of approximately $15,000.
Other
During the six months ended June 30, 2002 and 2001, the Company rented
properties to related individuals for aggregate rentals of $10,000 and $30,000,
respectively. The aggregate rentals to related individuals for the three months
ended June 30, 2002 and 2001 was nil and $12,000, respectively.
7. Segment reporting
As discussed in Note 1, the Company's primary business focus is the Mahukona
development project. Nonetheless, the Company complies with SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information", which
provides information about the Company's current business activities. Management
has divided the Company into the following segments: real estate sales, rental,
cattle sales and other. Transactions between segments are not common and are not
material to the segment information. Some business activities that cannot be
classified in the aforementioned segments are shown under "corporate".
Operating results, by segment, for the six and three months ended June 30, 2002
and 2001 are as follows (in thousands):
6
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Segment reporting (continued)
Six months ended June 30, 2002
Real Estate Rental Cattle
Sales Activity Sales Other Corporate Total
------------------------------------------------------------------
Total revenues $ 1,318 $ 139 $ 211 $ 125 $ -- $ 1,793
Total cost of revenues 384 57 88 120 649
------------------------------------------------------------------
Segment profit 934 82 123 5 1,144
General and administrative expenses (775) (775)
Interest income and other, net 39 39
Income taxes (165) (165)
------------------------------------------------------------------
Net income (loss) $ 934 $ 82 $ 123 $ 5 $ (901) $ 243
==================================================================
Total assets $ 40,614 40 105 $ 599 $56,518 $ 97,876
===================================================================
Capital expenditures $ -- $ -- $ 4 $ 51 $ 995 $ 1,050
==================================================================
Depreciation and amortization $ -- $ 2 $ 8 $ 31 $ 32 $ 73
==================================================================
Six months ended June 30, 2001
Real Estate Rental Cattle
Sales Activity Sales Other Corporate Total
------------------------------------------------------------------
Total revenues $ 789 $ 202 $ 234 $ 114 $ -- $ 1,339
Total cost of revenues 258 77 106 107 548
------------------------------------------------------------------
Segment profit 531 125 128 7 791
General and administrative expenses (741) (741)
Interest income, net 626 626
Income taxes (274) (274)
------------------------------------------------------------------
Net income (loss) $ 531 $ 125 $ 128 $ 7 $ (389) 402
==================================================================
Total assets $ 42,478 $2,040 $ 842 $ 204 $55,150 $100,714
==================================================================
Capital expenditures $ -- $ 7 $ 76 $ 74 $ 1,402 $ 1,559
==================================================================
Depreciation and amortization $ -- $ 4 $ 6 $ 33 $ 30 $ 73
==================================================================
7
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Segment reporting (continued)
Three months ended June 30, 2002
Real Estate Rental Cattle
Sales Activity Sales Other Corporate Total
------------------------------------------------------------------
Total revenues $ 608 $ 40 $ 130 $ 70 $ -- $ 848
Total cost of revenues 189 29 40 51 309
------------------------------------------------------------------
Segment profit 419 11 90 19 539
General and administrative expenses (382) (382)
Interest income, net 53 53
Income taxes (116) (116)
------------------------------------------------------------------
Net income (loss) $ 419 $ 11 $ 90 $ 19 $ (445) $ 94
==================================================================
Capital expenditures $ -- $ -- $ 4 $ 24 $ 608 $ 636
==================================================================
Depreciation and amortization $ -- $ 1 $ 4 $ 13 $ 17 $ 35
==================================================================
Three months ended June 30, 2001
Real Estate Rental Cattle
Sales Activity Sales Other Corporate Total
------------------------------------------------------------------
Total revenues $ 789 $ 71 $ 146 $ 58 $ -- $ 1,064
Total cost of revenues 244 36 61 48 389
------------------------------------------------------------------
Segment profit 545 35 85 10 675
General and administrative expenses (350) (350)
Interest income, net 311 311
Income taxes (258) (258)
------------------------------------------------------------------
Net income (loss) $ 545 $ 35 $ 85 $ 10 $ (297) 378
==================================================================
Capital expenditures $ -- $ -- $ 76 $ 5 $ 782 $ 863
==================================================================
Depreciation and amortization $ -- $ 2 $ 4 $ 16 $ 15 $ 37
==================================================================
8
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Note on Forward-Looking Information
This Form 10-QSB contains certain forward-looking statements. For this purpose,
any statements contained in this Form 10-QSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipates,"
"estimates," or "continue" or comparable terminology or the negative thereof are
intended to identify certain forward-looking statements. These statements by
their nature involve substantial risks and uncertainties, both known and
unknown, and actual results may differ materially from any future results
expressed or implied by such forward-looking statements. The Company undertakes
no obligation to publicly update or revise any forward-looking statements
whether as a result of new information, future events or otherwise.
Overview
Surety Holdings Corp. (the "Company"), through its wholly-owned subsidiary,
Surety Kohala Corporation ("Surety Kohala") (formerly Chalon International of
Hawaii, Inc.), is engaged in the development of a property on 642 acres of land
in the North Kohala district of Hawaii Island in the state of Hawaii. This
development, referred to as the Mahukona development project, was initially
slated to be a hotel, 18-hole golf course and resort homes. However, the Company
is exploring other avenues of development for the 642 acres most notably, an
all-inclusive fractional interest club community (see Mahukona Development in
Liquidity and Capital Resources).
The current operations of the Company (discussed below) include the sale of its
non-Mahukona development project real estate and other ancillary activities,
many of which are not deemed to be the future of the Company's business.
9
Results of Operations
The following table sets forth the statements of income of the Company for the
six months ended June 30, 2002 and 2001:
2002 2001
Real estate sales $ 1,318,000 $ 789,000
Rentals 139,000 202,000
Cattle sales 211,000 234,000
Other 125,000 114,000
----------- -----------
Total revenues 1,793,000 1,339,000
----------- -----------
Cost of real estate sales 384,000 258,000
Cost of rentals 57,000 77,000
Cost of cattle sales 88,000 106,000
Cost of other 120,000 107,000
----------- -----------
Total cost of revenues 649,000 548,000
----------- -----------
Gross profit 1,144,000 791,000
General and administrative expenses 775,000 741,000
----------- -----------
Income from operations 369,000 50,000
----------- -----------
Interest income 137,000 654,000
Interest expense (98,000) (28,000)
Income taxes (165,000) (274,000)
----------- -----------
(126,000) 352,000
----------- -----------
Net income $ 243,000 $ 402,000
=========== ===========
Real estate sales -
During the six months ended June 30, 2002, the Company sold six parcels for
proceeds of $1,318,000. During the same period of the prior year there were
sales of only 2 parcels due to survey delays. Real estate sales for both periods
have been impacted due to delays caused by the Company's survey company, the
largest survey company on the Big Island of Hawaii and probably the only survey
company large enough to handle the Company's PCRS (Parcel Consolidation
Re-Subdivision) parcels and subdivisions, being backlogged with work. This
surveying backlog is a result of increasing demand of the Company's North Kohala
property in a favorable economic time. Further, many of the properties the
Company is selling have never been surveyed and the topography and terrain are
very difficult for surveyors. To address the backlog, the Company recently
switched surveyors on several projects and survey work is beginning to be
completed in a timely manner. The Company is expecting 23 closings in the third
and fourth quarter of 2002 which will bring additional proceeds of approximately
$11 million. However, in light of the aforementioned among other unanticipated
circumstances, no assurances can be made that the Company will meet its
expectations in this regard.
10
Real estate sales margin increased approximately four percentage points because
of favorable market conditions. Included in 2002 real estate costs is a $15,000
loss brought about as the result of the sale of the Sandalwood house and
property to Surety Kohala's president.
Rental revenues -
The approximate 31% decrease in rental revenue is primarily attributable to the
sale of real estate formerly leased by the Company. The Company expects this
trend to continue throughout 2002. During the first six months of 2002, the
Company's rental revenue was also negatively impacted by its contingent rental
of livestock. The downturn was brought about by dry climatic conditions
hindering the growth of livestock.
Cattle sales -
The approximate 10% decrease in cattle sales is attributable to a
difficult-to-predict beef market. Cattle sales declined to 741 heads in the six
months ended June 30, 2002, down from 839 heads in the same period of the prior
year. During the six months ended June 30, 2002, cattle margins increased
approximately three percentage points, due to decreased spending on fence
repairs over the same period of last year. The Company anticipates that 2002
annual cattle revenues and costs will continue to decrease as the Company
continues its sale of pasture lands.
Other revenues -
Other revenues increased approximately 10% during the first six months of 2002
as Eco-tourism activity rebounded strongly from the September 11th induced
downturn. However, margins for other revenues fell during 2002 as a result of an
increase in repairs and maintenance of buildings and grounds. The Company
anticipates that other revenues will continue to increase over the next four to
six quarters.
General and administrative expenses -
General and administrative expenses for the six months ended June 30, 2002
increased approximately 5% as compared with the same period of 2001. The
components of general and administrative expenses for 2002 include salaries and
related costs of approximately $260,000; professional fees (legal, auditing and
consulting) of approximately $135,000; franchise and other taxes of
approximately $101,000; depreciation of approximately $31,000; insurance of
approximately $60,000; rent expense of approximately $48,000; travel, meals and
entertainment of approximately $72,000 and other expenses aggregating
approximately $68,000. The components of general and administrative expenses for
the same period of 2001 include salaries and related costs of approximately
$293,000; professional fees (legal, auditing and consulting) of approximately
$168,000; franchise and other taxes of approximately $90,000; depreciation of
approximately $32,000 insurance of approximately $28,000; rent expense of
approximately $21,000; travel, meals and entertainment of approximately $9,000
and other expenses aggregating approximately $100,000.
Other income and expense -
Decreased interest income during the six months ended June 30, 2002 is directly
attributable to the Company discontinuing its accrual of interest income on the
Marine Forest notes in light of its 2001 impairment charge and compliance with
the requirements of Statements of Financial Accounting Standards ("SFAS") No
114. Included in interest expense for the six months ended June 30, 2002 is an
approximate $75,000 loss (a finance cost) resulting upon the sale of 5 mortgage
notes to financial institutions at a discount which provided cash of
approximately $759,000.
11
Results of Operations
The following table sets forth the statements of income of the Company for the
three months ended June 30, 2002 and 2001:
2002 2001
Real estate sales $ 608,000 $ 789,000
Rentals 40,000 71,000
Cattle sales 130,000 146,000
Other 70,000 58,000
----------- -----------
Total revenues 848,000 1,064,000
----------- -----------
Cost of real estate sales 189,000 244,000
Cost of rentals 29,000 36,000
Cost of cattle sales 40,000 61,000
Cost of other 51,000 48,000
----------- -----------
Total cost of revenues 309,000 389,000
----------- -----------
Gross profit 539,000 675,000
General and administrative expenses 382,000 350,000
----------- -----------
Income from operations 157,000 325,000
----------- -----------
Interest income 63,000 326,000
Interest expense (10,000) (15,000)
Income taxes (116,000) (258,000)
----------- -----------
(63,000) 53,000
----------- -----------
Net income $ 94,000 $ 378,000
=========== ===========
Real estate sales -
During the three months ended June 30, 2002, the Company sold four parcels for
proceeds of $608,000. During the same period of the prior year there were two
sales of parcels. See management's discussion and analysis for the six months
ended June 30, 2002 and 2001 for discussion of delays and future expectations.
Rental revenues -
As previously discussed, the decrease in rental revenue and related margins is
attributable to the sale of real estate formerly leased by the Company. The
Company expects this trend to continue throughout 2002.
Cattle sales -
Cattle sales declined approximately 16% for the three months ended June 30, 2002
as 460 heads of cattle were sold compared to 560 heads of cattle during the same
period of the prior year. The Company believes that cattle sales will continue
to decrease for the foreseeable future due to the continuing sale of pasture
lands.
12
Other revenues -
Other revenues increased approximately 12% during the three months ended June
30, 2002 as compared to the same period of the prior year. As previously
discussed, eco-tourism activity continued to steadily increase from the
September 11th induced downturn.
General and administrative expenses -
General and administrative expenses for the three months ended June 30, 2002
increased 9% with the same period of 2001. The components of general and
administrative expenses for the three months ended June 30, 2002 include
salaries and related costs of approximately $124,000; professional fees (legal,
auditing and consulting) of approximately $76,000; franchise and other taxes of
approximately $54,000; depreciation of approximately $16,000; insurance of
approximately $24,000; rent expense of approximately $30,000; travel, meals and
entertainment of approximately $44,000 and other expenses aggregating
approximately $14,000. The components of general and administrative expenses for
the same period of the prior year include salaries and related costs of
approximately $149,000; professional fees (legal, auditing and consulting) of
approximately $70,000; franchise and other taxes of approximately $54,000;
depreciation of approximately $17,000; insurance of approximately $13,000; rent
expense of approximately $13,000; travel, meals and entertainment of
approximately $4,000 and other expenses aggregating approximately $30,000.
Other income and expense -
Decreased interest income during the three months ended June 30, 2002 is
directly attributable to the Company discontinuing its accrual of interest
income on the Marine Forest note in light of its 2001 impairment charge and
compliance with the requirements of Statements of Financial Accounting Standards
("SFAS") No 114.
Liquidity and Capital Resources
Cash flows
For the six months ended June 30, 2002 and 2001, the Company's net cash used in
operating activities of approximately $803,000 and $455,000, respectively, is
comprised of the following:
2002 2001
Net income $ 243,000 $ 402,000
Depreciation and amortization 73,000 73,000
Deferred income taxes 8,000 266,000
Accrued interest receivable, Marine Forest (475,000)
Net gain on sales of property
and notes receivable (1,035,000) (626,000)
Changes in operating assets
and liabilities (92,000) (95,000)
----------- -----------
$ (803,000) $ (455,000)
=========== ===========
13
For the six months ended June 30, 2002 and 2001, the Company's net cash provided
by (used in) investing activities of approximately $1,039,000 and ($1,765,000),
respectively, is comprised of the following:
2002 2001
Capital expenditures including
real estate development $ (1,050,000) $ (1,559,000)
Proceeds from sales of property 1,318,000 788,000
Proceeds from notes receivable 769,000 956,000
Proceeds from note receivable, officer 2,000
Advances to Marine Forest (1,950,000)
------------ -------------
$ 1,039,000 $ (1,765,000)
============ =============
Approximately $756,000 of the $1,050,000 2002 capital expenditures was made to
progress the Company's Mahukona development endeavors. These expenditures
include approximately $236,000 for land-clearing, leveling and grading,
approximately $290,000 of professional fees including consulting, approximately
$230,000 for design, engineering and surveying. As previously discussed, in
2002, the Company sold six properties for total proceeds of $1,318,000, whereas
in 2001 there were only two sales of real estate for total proceeds of $788,000.
During the six months ended June 30, 2001, the Company continued to advance
Marine Forest monies pursuant to short-term promissory notes. No monies were
advanced to Marine Forest during the six months ended June 30, 2002 (see
separate liquidity discussion on page 16).
For the six months ended June 30, 2002 and 2001, the Company's net cash provided
by (used in) financing activities of approximately ($274,000) and $150,000,
respectively, is comprised of the following:
2002 2001
Debt proceeds (from President) $ -- $ 155,000
Repayment of debt (to President) (260,000)
Debt repayments (14,000) (5,000)
--------- ---------
$(274,000) $ 150,000
========= =========
14
As of June 30, 2002, the Company has total current assets of approximately $12.5
million and total current liabilities of approximately $0.6 million or a working
capital of approximately $12 million. As previously discussed, the Company
anticipates 2002 revenue levels to be higher than levels experienced during
2001. However, given the Company's anticipated cash requirements to complete the
revised Mahukona development project and plans to execute a strategic
arrangement with Marine Forest (both discussed below), future capital raising or
debt financing activities may be required.
In an effort to increase the marketability of the Company's common stock, among
other reasons, in February 2002, the Company's board of directors authorized a
three-for-one stock split effected in the form of a two hundred percent stock
dividend.
Mahukona Development
As previously discussed, the events of September 11th had an impact on tourism
and hence, temporarily curtailed the Company's development activities. However,
the Company believes that the tourist market and the high-end second home market
are gradually recovering. In this regard, the Company has resumed its
development strategies however it has focused on a revised plan for the 642
acres of land in the North Kohala district of Hawaii Island in the state of
Hawaii (known as the Mahukona development project). As previously reported, the
plan for this valuable parcel of land was the development of a hotel, 18-hole
golf course and resort homes. However, the Company recently hired several
consultants, with extensive experience in high-end resort development and
marketing, to reassess its development strategy with respect to Mahukona
property, the goal of which is to provide the Company guidance in determining an
effective development strategy that will optimize the property's economic
potential.
The preliminary assessment of the consultants for the Mahukona property is the
development of an all-inclusive fractional interest club community structured as
an undivided interest ("UDI"). A UDI would allow the prospective buyer to use
the Mahukona facility plus the eco-ranch lands and would provide an ownership
interest in both. A UDI would not allow the prospective buyer to own a specific
parcel of land, but only a fraction of each square foot of property. During the
quarter ended June 30, 2002, the consultants completed their review and analysis
of the Mahukona property and issued a Concept Development and Economic
Projections Report. The "theme book" (a large, multi-page book, which
incorporates representative images of the components of the project
incorporating the written positioning statement) has been completed by
InterCommunications, Inc., a marketing consulting firm, for purposes of
presentations to prospective development partners, government agencies and
research groups; the Company is in the process of choosing a project logo. The
final site plan and development program is underway by EDSA, a consulting firm
hired by the Company to perform a master plan audit, which will convey
recommendations with regards to the modification of the existing master plan.
The Company is continuing discussions with its consultants and hopeful
formalized plans will be completed later in 2002.
Based on the preliminary assessment of its consultants, the revised Mahukona
development project cost (excluding ongoing costs and maintenance) would be
approximately $93 million and completed substantially over a three-year period.
Based on information provided by its consultants, the Company anticipates the
timing and details of the $93 million to be as follows (in thousands):
15
Year 1 Year 2 Year 3
Initial Infrastructure and Development Costs
Infrastructure (roads, water, sewer, etc.) $10,000 $10,000 $10,000
Golf course, range, clubhouse, etc 10,000 10,000
Tennis complex 1,000
Central lodge facility (lobby, restaurants, etc.) 10,500
Beach club 10,000
Recreational trails/improvements 500 500
Ranch Improvements/amenities 500 2,000 1,000
Club boats / marina improvements 1,500 1,000
Other amenities/improvements 2,000
Entrance/gatehouse 500
Design, permits, engineering
contingency 3,075 7,200 2,012
------- ------- -------
$23,575 $55,200 $14,512
======= ======= =======
The Company recognizes that its current operations will not be sufficient to
fund the cost of Mahukona's development and it may not be successful in future
capital raising or debt financing activities. Accordingly, the Company is
exploring other financing strategies including, but not limited to, a 50% joint
venture with development partners, including, but not limited to, another
property development company, a fractional facility management company or
private investors. No assurances can be made that the Company will be able to
finance or complete the Mahukona development as outlined above.
Marine Forest
As disclosed in the Company's prior public filings, the Company has advanced
funds to Marine Forest, a related Japanese corporation that owns approximately
400 acres of land in Okinawa, Japan, in which it is developing pursuant to a
"golf resort" theme. Funding of $9.75 million was used by Marine Forest
primarily in the construction of a golf course and related amenities. The
Company anticipated interest payments to commence on or about December 31, 2001.
However, such interest payments were contingent upon Marine Forest's ability to
start the sales of its golf memberships. These sales were postponed and
development (construction) activity was temporarily suspended as a result of the
events of September 11th.
The Company continues to discuss the possibility of a strategic arrangement with
Marine Forest including, but not limited to, the Company acquiring Marine
Forest, which Marine Forest has orally agreed to. Current discussions, which are
ongoing, are based upon a completed study (Concept Development and Economic
Projections Report) prepared by a consultant for the Mahukona development plan.
Through June 30, 2002, no interest has been paid to the Company, however
management anticipates that all accrued interest receivable will be reclassified
to principal and settled in connection with the parties' contemplated strategic
arrangement previously discussed.
At December 31, 2001, in light of the speculative nature of Marine Forest's
contemplated development projects among other reasons and in accordance with its
compliance with the requirements of SFAS No. 114, the Company has recorded an
impairment charge of approximately $7.2 million. The Company will continue to
review impairment by applying the procedures set forth in SFAS No. 114. If
there's a significant change in the amount or timing of the impaired loan's
expected future cash flow, the Company will adjust (upward or downward) the
valuation allowance.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
There have been no material changes in legal proceedings as required to be
reported on Form 10-QSB from as previously reported in the Company's 10-KSB for
the fiscal year ended December 31, 2001.
Item 2. Change in Securities:
In February 2002, the Company's board of directors authorized a three-for-one
stock split effected in the form of a 200 percent stock dividend which was
distributed on February 15, 2002 to stockholders of record on February 4, 2002.
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other information:
None
Item 6. Exhibits and Reports on Form 8-K:
None
17
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.
SURETY HOLDINGS CORP.
(Registrant)
By: /s/ Howard R. Knapp
--------------------------------
Howard R. Knapp
Chief Financial Officer
Dated: August 14, 2002
18