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 September 30, 2001
( ) 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.
(Name of Small Business Issuer in its Charter)
Delaware 56-2229054
State of other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
850 Fort Plains Road
Howell, New Jersey 07731
(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:
2,246,000 - - December 17, 2001
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2001
(dollars in thousands, except for per share data)
(unaudited)
CURRENT ASSETS
Cash $ 7,739
Real estate held for sale, current 2,337
Other current assets 1,087
---------
Total current assets 11,163
NOTES RECEIVABLE, less current maturities 1,441
REAL ESTATE HELD FOR SALE 37,725
NOTES RECEIVABLE, MARINE FOREST RESORT, INC.,
including accrued interest of $940 (see Note 5) 10,690
REAL ESTATE DEVELOPMENT COSTS 34,959
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $1,834 4,039
DEFERRED TAX ASSET 1,589
---------
$ 101,606
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Mortgage note payable, current maturity $ 12
Notes payable, current maturity 17
Bank line of credit 500
Notes payable, president, including accrued
interest of $16 411
Accounts payable 475
Accrued expenses and other current liabilities 208
Income taxes payable 155
---------
Total current liabilities 1,778
---------
LONG-TERM LIABILITIES
Mortgage note payable, less current maturity 406
Notes payable, less current maturity 37
---------
443
---------
CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value,
200,000,000 shares authorized,
2,246,000 shares issued and
outstanding 2
Capital in excess of par value 101,683
Accumulated deficit (2,300)
---------
Total stockholders' equity 99,385
---------
$ 101,606
=========
See accompanying notes to condensed consolidated financial statements.
1
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
Nine Months Ended September 30, Three Months Ended September 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
REVENUES $ 2,470 6,448 $ 1,131 $ 4,172
COST OF REVENUES 986 2,380 438 1,599
----------- ----------- ----------- -----------
GROSS PROFIT 1,484 4,068 693 2,573
GENERAL AND ADMINISTRATIVE
EXPENSES 997 834 256 256
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 487 3,234 437 2,317
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 979 282 325 144
Interest expense (47) (30) (19) (12)
----------- ----------- ----------- -----------
932 252 306 132
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,419 3,486 743 2,449
INCOME TAXES 562 717 168 527
----------- ----------- ----------- -----------
NET INCOME $ 857 $ 2,769 $ 575 $ 1,922
=========== =========== =========== ===========
NET INCOME PER COMMON
SHARE, basic and diluted $ 0.38 $ 1.26 $ 0.26 $ 0.86
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 2,246,000 2,197,000 2,246,000 2,246,000
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
2
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(DOLLARS IN THOUSANDS)
(unaudited)
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 857 $ 2,769
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 121 90
Deferred income taxes 540 645
Gain on sales of property (1,403) (4,386)
Gain on disposition of property (7)
Increase (decrease) in cash attributable
to changes in operating assets and liabilities:
Other current assets (918) 15
Accounts payable 101 162
Accrued expenses and other
current liabilities (161) 72
Income taxes payable 28 72
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (842) (561)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (219) (403)
Proceeds from sales of property 1,144 3,497
Real estate development expenditures (2,160) (1,143)
Proceeds from notes receivable 963 106
Advances to Marine Forest Resort, Inc. (1,950) (2,900)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,222) (843)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgage
note payable and bank line of credit (509) (207)
Proceeds from bank line of credit 1,000 200
Capital contributions 72
Proceeds from notes payable, president 165 150
Proceeds from sales of common
stock, net of offering costs 7,240
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 656 7,455
-------- --------
NET INCREASE (DECREASE) IN CASH (2,408) 6,051
CASH
Beginning of period 10,147 1,935
-------- --------
End of period $ 7,739 $ 7,986
======== ========
See accompanying notes to condensed consolidated financial statements.
3
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. NATURE OF OPERATIONS
Surety Holdings Corp. ("Surety") and its wholly - owned subsidiary, Surety
Kohala Corporation's ("Kohala") (formerly known as Chalon International of
Hawaii) (collectively, the "Company") primary focus is the development of a
hotel, 18-hole golf course and resort homes on 642 acres of land in the North
Kahola district of Hawaii Island in the state of Hawaii (the "Mahukona
development project") (see Note 3).
The current operations of the Company include the sale of its non-Mahukona
development project real estate and other ancillary activities (See Note 6), all
of which are not deemed to be the future of the Company's business.
2. UNAUDITED STATEMENTS AND NEW ACCOUNTING PRONOUNCEMENTS
Unaudited Statements
The accompanying condensed consolidated financial statements of Surety Holdings
Corp. and Subsidiary as of September 30, 2001 and for the nine and three-month
periods ended September 30, 2001 and 2000 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-SB for the
year ended December 31, 2000. The results of operations for the nine and the
three-month periods ended September 30, 2001 are not necessarily indicative of
the results that may occur for the year ending December 31, 2001.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No.'s 141 and 142, "Business
Combinations" and "Goodwill and Other Intangibles". SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at
least an annual assessment for impairment applying a fair-market value based
test. Additionally, an acquired intangible asset should be separately recognized
if the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. The Company
does not anticipate these pronouncements will have a significant impact on its
consolidated financial position and results of operations.
4
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
3. REAL ESTATE DEVELOPMENT COSTS
At September 30, 2001, real estate development costs, attributed primarily to
the Company's Mahukona development project, consist of the following:
Land and land acquisition costs $23,896
Planning and studies 1,834
Engineering and architectural 513
Infrastructure 5,350
Professional and consulting fees 1,955
Other 1,411
-------
$34,959
=======
4. 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 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.
Approval of an environmental assessment and a permit to utilize state lands for
a cart underpass servicing the golf course, which must go under a state highway,
must still be obtained. These requirements resulted, in part, from an appeal
filed by a citizens group challenging the Company's approvals, and it can be
anticipated that this group will appeal future approvals or permits. There can
be no assurance that such matter will be favorably resolved. An adverse outcome
of such matter will adversely impact the Company's development plans.
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 consolidated financial
position, results of operations or cash flows of the Company.
5. RELATED PARTY TRANSACTIONS
During 2000 and 2001, the Company's President advanced the Company $395 ($165
during the nine months ended September 30, 2001) pursuant to one-year, 5%
promissory notes. The Company's management has indicated that these notes will
be extended and repaid in mid-2002. Related interest expense for the nine months
ended September 30, 2001 and 2000 is approximately $16 and $1, respectively.
5
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
Pursuant to promissory notes, during 2000 and 2001, the Company advanced Marine
Forest Resort, Inc. ("Marine Forest"), a related Japanese corporation, $9,750
($1,950 during the nine months ended September 30, 2001). The notes bear
interest at the U.S. prime rate (6.00% at September 30, 2001) plus one percent.
Under their original terms, the notes are due six months after date of issuance
and some, which have become due, have been extended another six months.
Further, management has indicated its intention to further extend the notes to
2003 and/or apply such notes to management and/or other strategic arrangements
it is negotiating with Marine Forest, an owner of property in Okinawa, Japan,
in connection with Marine Forest's contemplated development projects. Related
interest income for the nine months ended September 30, 2001 and 2000 is
approximately $730 and $72, respectively. Presently, no interest has ever been
paid, however management anticipates (i) interest payments to begin in early
2002 in undetermined intervals and installments and/or (ii) interest to be
rolled into principal and applied to management and/or other strategic
arrangements, as previously discussed.
6. 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
activity, 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 nine and three months ended September 30,
2001 and 2000 are as follows:
NINE MONTHS ENDED SEPTEMBER 30, 2001
Real Estate Cattle
Sales Rental Sales Other Corporate Total
----- ------ ----- ----- --------- -----
Total revenues $ 1,683 $ 273 $ 309 $ 205 $ -- $ 2,470
Total cost of revenues 531 103 181 171 986
-------- -------- -------- -------- -------- --------
Segment profit 1,152 170 128 34 1,484
General and administrative expenses (997) (997)
Interest income, net 932 932
Income taxes (562) (562)
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1,152 $ 170 $ 128 $ 34 $ (627) $ 857
======== ======== ======== ======== ======== ========
Total assets $ 42,225 $ 2,006 $ 37 $ 138 $ 57,200 $101,606
======== ======== ======== ======== ======== ========
6
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
6. SEGMENT REPORTING (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2000
Real Estate Rental Cattle
Sales Activity Sales Other Corporate Total
----- -------- ----- ----- --------- -----
Total revenues $ 5,628 $ 246 $ 359 $ 215 $ -- $ 6,448
Total cost of revenues 1,937 103 128 212 2,380
-------- -------- -------- -------- -------- --------
Segment profit 3,691 143 231 3 4,068
General and administrative expenses (834) (834)
Interest income, net 252 252
Income taxes (717) (717)
-------- -------- -------- -------- -------- --------
Net income (loss) $ 3,691 $ 143 $ 231 $ 3 $ (1,299) $ 2,769
======== ======== ======== ======== ======== ========
Total assets $ 45,595 $ 2,002 $ 39 $ 126 $ 46,933 $ 94,695
======== ======== ======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2001
Real Estate Rental Cattle
Sales Activity Sales Other Corporate Total
----- -------- ----- ----- --------- -----
Total revenues $ 894 $ 71 $ 75 $ 91 $ -- $ 1,131
Total cost of revenues 273 26 75 64 438
-------- -------- -------- -------- -------- --------
Segment profit 621 45 27 693
General and administrative expenses (256) (256)
Interest income, net 306 306
Income taxes (168) (168)
-------- -------- -------- -------- -------- --------
Net income (loss) $ 621 $ 45 $ -- $ 27 $ (118) $ 575
======== ======== ======== ======== ======== ========
7
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
6. SEGMENT REPORTING (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2000
Real Estate Rental Cattle
Sales Activity Sales Other Corporate Total
----- -------- ----- ----- --------- -----
Total revenues $ 3,912 $ 54 $ 105 $ 101 $ -- $ 4,172
Total cost of revenues 1,396 38 51 114 1,599
-------- -------- -------- -------- -------- --------
Segment profit 2,516 16 54 (13) 2,573
General and administrative expenses (256) (256)
Interest income, net 132 132
Income taxes (527) (527)
-------- -------- -------- -------- -------- --------
Net income (loss) $ 2,516 $ 16 $ 54 $ (13) $ (651) $ 1,922
======== ======== ======== ======== ======== ========
7. SUBSEQUENT EVENT
In December 2001, the Company has entered into contracts with a financial
institution to sell (factor) some of its notes receivables at a discount. These
notes had a balance of $698 at September 30, 2001 and are included in other
current assets.
8
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Surety Holdings Corp. ("Surety") and its wholly-owned subsidiary, Surety Kohala
Corporation ("Kohala") (formerly known as Chalon International of Hawaii)
(collectively, the "Company") primary focus is the development of a hotel,
18-hole golf course and resort homes on 642 acres of land in the North Kahola
district of Hawaii Island in the state of Hawaii (i.e. the Mahukona development
project).
The current operations of the Company (discussed below) 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.
RESULTS OF OPERATIONS
The following table sets forth the statements of operations of the Company for
the nine months ended September 30, 2001 and 2000:
2001 2000
Real estate sales $ 1,683,000 $ 5,628,000
Rentals 273,000 246,000
Cattle sales 309,000 359,000
Other 205,000 215,000
----------- -----------
Total revenues 2,470,000 6,448,000
----------- -----------
Cost of real estate sales 531,000 1,937,000
Cost of rentals 103,000 103,000
Cost of cattle sales 181,000 128,000
Cost of other 171,000 212,000
----------- -----------
Total cost of revenues 986,000 2,380,000
----------- -----------
Gross profit 1,484,000 4,068,000
General and administrative expenses 997,000 834,000
----------- -----------
Income from operations 487,000 3,234,000
----------- -----------
Interest income 979,000 282,000
Interest expense (47,000) (30,000)
Income taxes (562,000) (717,000)
----------- -----------
370,000 (465,000)
----------- -----------
Net income $ 857,000 $ 2,769,000
=========== ===========
9
Real estate sales and rental -
During the nine months ended September 30, 2001, real estate sales were only
comprised of four sales because they were delayed due to 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. Once the surveyors have
finished, the land court begins verifying title of the land. Through the
surveying and title work, the Company believes to have an additional 820 acres
of property available for sale in 2002, which would generate sales of
approximately $5.3 million. Real estate sales during the 4th quarter of 2001
have increased and should continue through January 2002, however, thereafter,
the Company may have to await the results of the Company's appeal of the
County's new Planning Director's initiative to condition certain PCRS with
additional requirements. The appeal is scheduled for February 2002.
Rental revenues -
The slight increase in rental revenue is attributable to the rental of the
Sandalwood property, a new home built on the island during 2001.
Cattle sales -
The approximate 14% decrease in cattle sales is attributable to a
difficult-to-predict beef market. Cattle sales declined to 1,087 heads in the
nine months ended September 30, 2001, down from 1,357 heads in the nine months
ended September 30, 2000, or a decrease of 20%. The deteriorated cattle sales
margins are attributable to the fixed cost nature of the cattle sales
operations. Processes and tasks such as branding, culling, moving, fence
repairs, medicine and labor costs are required regardless of sales. Also, in
2001, the Company had to lease pasture previously owned and undertake major
fence repairs. The Company anticipates that 2001 annual cattle revenues will
approximate 2000 annual cattle revenues.
Other revenues -
During the nine months ended September 30, 2001, other revenues were slightly
down, as compared to the same period of the prior year, due to the September
11th disaster's effect on tourism in Hawaii.
General and administrative expenses -
General and administrative expenses increased approximately 20% primarily as a
result of increased professional fees due to the Company's regulatory filing
requirements and increased salaries related to Kohala's President and Chairman
of the Board (added to the payroll in September 2000).
10
Other income and expense -
Interest income has increased substantially as a result of (i) outstanding
promissory notes receivable ($9.75 million at September 30, 2001) from Marine
Forest Resort, Inc. ("Marine Forest") that accrues interest at the U.S. prime
rate (6% at September 30, 2001) plus one percent per annum and (ii) the
Company's high cash balance generated from the March 2000 private placement (see
Liquidity and Capital Resources). Interest expense has increased approximately
56% as a result of outstanding indebtedness ($395,000 at September 30, 2001) to
the Company's President that accrues interest at 5% per annum.
The following table sets forth the statements of operations of the Company for
the three months ended September 30, 2001 and 2000:
2001 2000
Real estate sales $ 894,000 $ 3,912,000
Rentals 71,000 54,000
Cattle sales 75,000 105,000
Other 91,000 101,000
----------- -----------
Total revenues 1,131,000 4,172,000
----------- -----------
Cost of real estate sales 273,000 1,396,000
Cost of rentals 26,000 38,000
Cost of cattle sales 75,000 51,000
Cost of other 64,000 114,000
----------- -----------
Total cost of revenues 438,000 1,599,000
----------- -----------
Gross profit 693,000 2,573,000
General and administrative expenses 256,000 256,000
----------- -----------
Income from operations 437,000 2,317,000
----------- -----------
Interest income 325,000 144,000
Interest expense (19,000) (12,000)
Income taxes (168,000) (527,000)
----------- -----------
138,000 (395,000)
----------- -----------
Net income $ 575,000 $ 1,922,000
=========== ===========
11
Real estate sales and rental -
During the three months ended September 30, 2001, real estate sales were only
comprised of two sales because they were delayed due to 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. Through the recent hiring of a new
surveyor on several projects the Company expects real estate sales activity to
pick-up during 2002 however, thereafter, the Company may have to await the
results of the Company's appeal of the County's new Planning Director's
initiative to condition certain PCRS with additional requirements. The appeal is
scheduled for February 2002.
Rental revenues increased slightly as a result of the recent leasing of the
Sandalwood property, a new home built on the island during 2001.
Cattle sales -
The approximate 29% decrease in cattle sales is attributable to a
difficult-to-predict beef market. Cattle sales decreased to 245 heads in the
three months ended September 30, 2001, down from 416 heads in the three months
ended September 30, 2000. The deteriorated cattle sales margins are attributable
to the fixed cost nature of the cattle sales operations. The Company anticipates
that 2001 annual cattle revenues will approximate 2000 annual cattle revenues.
Other revenues -
During the three months ended September 30, 2001, other revenues decreased
approximately 10% as a result of the effects on tourism activity that resulted
from the September 11th tragedy.
General and administrative expenses -
General and administrative expenses remained unchanged.
Other income and expense -
Interest income has increased substantially as a result of (i) outstanding
promissory notes receivable ($9.75 million at September 30, 2001) from Marine
Forest Resort, Inc. ("Marine Forest") that accrues interest at the U.S. prime
rate (6% at September 30, 2001) plus one percent per annum and (ii) the
Company's high cash balance generated from the March 2000 private placement (see
Liquidity and Capital Resources). Interest expense has increased approximately
50% as a result of outstanding indebtedness ($395,000 at September 30, 2001) to
the Company's President that accrues interest at 5% per annum.
12
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2001 and 2000, the Company's net cash
used in operating activities of approximately $842,000 and $561,000,
respectively, is comprised of the following:
2001 2000
Net income $ 857,000 $ 2,769,000
Depreciation and amortization 121,000 90,000
Deferred income taxes 540,000 645,000
Gain on sales and disposition of property (1,410,000) (4,386,000)
Changes in operating assets
and liabilities (950,000) 321,000
----------- -----------
$ (842,000) $ (561,000)
=========== ===========
For the nine months ended September 30, 2001 and 2000, the Company's net cash
used in investing activities of approximately $2,222,000 and $843,000,
respectively, is comprised of the following:
2001 2000
Capital expenditures including
real estate development $(2,379,000) $(1,546,000)
Proceeds from sales of property 1,144,000 3,497,000
Proceeds from notes receivable 963,000 106,000
Advances to Marine Forest (1,950,000) (2,900,000)
----------- -----------
$(2,222,000) $ (843,000)
=========== ===========
13
Approximately $2,160,000 of the $2,379,000 of the 2001 capital expenditures was
made to progress the Company's Mahukona development endeavors. These
expenditures include approximately $1,134,000 for land-clearing, leveling and
grading, approximately $850,000 for design, engineering and surveying and
approximately $176,000 of other costs. Increased proceeds from notes receivable
are attributable to early mortgage redemptions. During the nine months ended
September 30, 2001, the Company continued to advance Marine Forest monies
pursuant to short-term promissory notes (see Note 5 in the accompanying
condensed consolidated financial statements). In connection with the notes, the
Company is negotiating management and other strategic arrangements with Marine
Forest, an owner of property in Okinawa, Japan, in connection with Marine
Forest's contemplated development projects.
For the nine months ended September 30, 2001 and 2000, the Company's net cash
provided by financing activities of approximately $656,000 and $7,455,000,
respectively, is comprised of the following:
2001 2000
Debt proceeds (from President) $ 165,000 $ 150,000
Proceeds from notes and bank line of credit 1,000,000 200,000
Capital contributions 72,000
Debt repayments (509,000) (207,000)
Proceeds from stock sales 7,240,000
----------- -----------
$ 656,000 $ 7,455,000
=========== ===========
In March 2000, the Company raised approximately $7.2 million, net of offering
costs, pursuant to a private placement of 146,000 shares of its common stock at
$50 per share. The proceeds will be used for development of the properties in
Hawaii including soft costs of approvals and development (i.e. engineering,
architecture, professional fee, etc.), construction, advertising and marketing,
offices expense and general working capital purposes.
14
As of September 30, 2001, the Company has total current assets of approximately
$11.2 million and total current liabilities of approximately $1.8 million or a
working capital of approximately $9.4 million. Looking forward to 2002, the
Company anticipates revenue levels to be higher with levels experienced during
2001. However, given the Company's anticipated cash requirements to complete the
Mahukona Resort project and plans to pursue the Okinawa Marine Forest Resort
project, future capital raising or debt financing activities will be required.
If the Company is unsuccessful in its capital raising or debt financing
activities, it will modify its Mahukona development plans, whereby it would
initially develop the golf course and 1 acre house units using the proceeds of
its non-Mahukona development project real estate. Subsequently, as phase two,
using proceeds from the sales of its 1 acre house lots as well as the
non-Mahukona development project real estate, complete the more costly hotel
endeavor.
The anticipated cash requirements to complete the Mahukona Resort project are as
follows (in millions):
Golf course $ 5.9
Hotel
Entry road $ 1.2
Infrastructure 22.0
Timeshare units 17.7
Park improvements 3.1 44.0
------
Sports facility 0.6
1 Acre house lots 10.8
Off-site infrastructure 9.4
------
70.7
Less: Costs incurred through
September 30, 2001 (11.1)
------
Anticipated cost to complete $ 59.6
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
There have been no material changes in legal proceedings as required to
be reported on Form 10QSB from as previously reported in the Company's 10-SB for
the fiscal year ended December 31, 2000.
Item 2. Change in Securities
None
Item 3. Default Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Securities Holders:
None
Item 5. Other information:
None
Item 6. Exhibits and Reports on Form 8-K:
None
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: December 27, 2001