LAHA
February 22, 2000
LAHAINA ACQUISITIONS INC (LAHA)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the unaudited
consolidated financial statements and related notes thereto included elsewhere in this report. This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. Those
statements relate to dividends; business plans, programs and trends; results of future operations; uses of future earnings; satisfaction of future cash requirements;
funding of future growth; acquisition plans; and other matters. Words or phrases such as "will," "hope," "expect," "intend," "plan" or similar expressions are generally
intended to identify forward-looking statements. Those statements involve risks and uncertainties that could cause actual results to differ materially from the results
discussed herein. The principal risks and uncertainties that may affect the Company's actual performance and results of operations include the following: general
economic conditions and interest rates; adverse weather; changes in property taxes and energy costs; changes in federal income tax laws and federal mortgage
financing programs; governmental regulation; changes in governmental and public policy; changes in economic conditions specific to one or more of the Company's
markets and businesses; competition; availability of raw materials; and unexpected operations difficulties. Other risks and uncertainties may also affect the outcome
of the Company's actual performance and results of operations. Readers are cautioned not to place undue reliance on the forward-looking statements made in, or
incorporated by reference into, this Quarterly Report on Form 10-Q or in any document or statement referring to this Quarterly Report on Form 10-Q.
Recent Developments
Sale of Beachside Commons I, Inc.
On December 31, 1999, Lahaina and Accent Mortgage Services, Inc. ("AMSI"), a wholly owned subsidiary of Lahaina, sold all of the outstanding capital stock of
Beachside Commons I, Inc. ("Beachside") to NP Holding, Inc. (the "Buyer"). On December 14, 1998, the Company originally acquired all of the issued and
outstanding capital stock of Beachside, which was reported by the Company on a current report on Form 8-K dated December 28, 1998. Beachside is the owner
of a commercial real estate development located in Fernandina Beach, Florida in the resort area of Amelia Island located in northeast Florida. The property owned
by Beachside includes two (2) fully developed ocean view structures and two ocean front sites for future development. The net realizable value of the property
owned by Beachside has been determined by the Company at this time to be $3,650,000.
The purchase price for all of the issued and outstanding capital stock of Beachside is $4,550,000 payable (i) by the delivery of a Non-Recourse Promissory Note
made payable to AMSI in the outstanding principal amount of $3,000,000 from Buyer which bears interest at a rate equal to six percent (6%) per annum (the
"Note") and (ii) by taking the property and assets owned by Beachside subject to a first mortgage granted by Beachside in favor of Pacific Coast Investment
Company in the original principal amount of $1,550,000. The purchase price shall be allocated between the Company and AMSI for the adjustment, payment and
settlement of certain expenses that the Company previously incurred in connection with the original acquisition of Beachside or its operating subsequent to the original
acquisition. The Company and AMSI have also agreed to pay certain liabilities associated with the operation of Beachside. In the event that such liabilities are not
paid by Lahaina and/or AMSI, Beachside Holding, LLC may exercise the right to sell shares pledged under the Pledge Agreement (as defined below) to satisfy such
unpaid liabilities.
The outstanding principal and interest under the Note is due and payable in a balloon payment on December 31, 2000. The repayment of the Note is secured solely
by the pledge of 660,000 shares of common stock of Lahaina under the terms of the Stock Pledge Agreement (the "Pledge Agreement") dated December 31, 1999
by and between Beachside Holding, LLC, an affiliate of the Buyer (the "Pledgor") and AMSI. If the outstanding principal and interest under the Note is not paid in
full on or before December 31, 2000, Lahaina may only exercise its rights to the common stock of the Company under the Pledge Agreement and may not seek any
recourse against the Buyer.
Additionally, in connection with the sale of all of the issued and outstanding capital stock of Beachside to the Buyer, the consulting agreement entered into between
the Company and Gator Glory, LLC, an affiliate of Richard
P. Smyth, has been terminated, except that the provision requiring payment of a two percent (2%) fee to obtain certain financing on behalf of the Company remains
in effect. The Company has also terminated its Consulting Agreement with Gerald F. Sullivan, except that the provision requiring a one percent (1%) fee for the first
$13,000,000 of transactions consummated by Lahaina as a finder's fee for identifying proposed acquisition candidates with such fee based on the value of the gross
assets of the target company remains in effect.
Acquisition of Paradigm Mortgage Associates, Inc.
On January 11, 2000, the Company announced that it had executed a letter of intent to acquire Paradigm Mortgage Associates, Inc. ("Paradigm") of Jacksonville,
Florida. Paradigm is one of the largest cooperative branch mortgage companies in the country with more than 250 branch offices. In its announcement, the Company
stated that a plan of acquisition should be defined by January 31, 2000 and that the transaction is expected to close within 60 days. Closing of the transaction is
subject to, among other things, negotiation of a definitive agreement and plan of merger, satisfactory completion of a due diligence review, approval by both
companies' boards of directors, and appropriate regulatory approvals. On February 8, 2000, the Company announced that the due diligence process was continuing
and that closing of the transaction is anticipated by the end of the Company's second fiscal quarter.
Results of Operations
FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 1999
Revenues
Revenues for the three-month period ended December 31, 1999 totaled $2,777,142. Broker fee income generated by AMSI represented $1,686,361 (or
approximately 60.7 percent) of total revenues for the period. This broker fee income represents fees associated with the brokerage of mortgage loans by AMSI
branch offices. Mortgage loan volume originated and brokered by AMSI's branch operation for the period totaled approximately $45.3 million, representing an
increase over the immediately preceding three-month period of 99.7%. Revenues for ARG totaled $1,090,781 for the period (or approximately 39.3 percent of
total revenues). Revenues for ARG represented a gain on the sale of an option and related development rights associated with a parcel of land in Tennessee.
Operating Expenses
Operating expenses for the three month period ended December 31, 1999 totaled $2,248,905. The principal components of operating expenses for the period were
broker commissions ($1,493,457 or 66.4 percent of total operating expenses), salaries and employee benefits ($299,456 or 13.3 percent of total operating
expenses) general and administrative expenses ($247,006 or 11.0 percent of total operating expenses), and professional fees ($140,462 or 6.3 percent of total
operating expenses).
The principal components of broker commissions ($1,493,457 for the period) were commissions paid by AMSI to branch offices for loans brokered by each
branch. Such expenses are attributable to the Mortgage Services segment, and represent commissions due to branch offices net of applicable fees due to AMSI.
General and administrative expense ($247,006 for the period) consisted of $126,333 (or 51.2 percent of the total) attributable to the mortgage brokerage segment,
$107,726 (or 43.6 percent of the total) attributable to corporate activities, and $12,947 (or 5.2 percent of the total) attributable to the real estate development
segment.
The principal components of the $126,333 of general and administrative expense attributable to the mortgage brokerage segment were travel and entertainment
($22,446), advertising and marketing ($12,827), printing costs ($14,241) and expenses associated with the operation of Beachside ($15,666). The mortgage
brokerage segment experienced significant expansion of its branch operation during the period, and as a result experienced significant costs associated with this
expansion.
The principal components of the $107,726 of general and administrative expense attributable to corporate activities were filing fees ($20,461), legal fees ($21,500),
costs associated with the Company's obtaining financing ($18,218), telephone expenses ($11,558), office supplies ($5,589), and travel and entertainment ($4,329).
Other Expense (Income)
Other expense (income) for the period totaled $107,583, primarily consisting of interest expense ($178,572 for the period), other expense ($104,049 for the
period) and other income ($175,039 for the period).
Interest expense ($178,562) represents interest expense associated with the Company's borrowings. Approximately $98,250 of the total interest expense relates to
borrowings associated with the Company's real estate holdings, while approximately $66,616 relates to general corporate indebtedness. A total of $60,270 relates
to indebtedness on the Company's Beachside property.
Other income of $175,039 for the period consists primarily of $147,438 attributable to the restructuring of the Company's $1,275,000 of outstanding convertible
notes. Approximately $7,776 of rental income relating to a sublease of certain corporate office space, and $19,800 of miscellaneous income relating to the mortgage
brokerage segment also contributed to total other income.
Other expense ($104,049 for the period) consists primarily of a valuation adjustment of $83,180 pertaining to the note receivable recorded as a result of the sale of
the Company's Beachside Commons I, Inc. subsidiary. Approximately $20,869 of other expense relates to fees for taxes and licenses within the Company's
mortgage brokerage segment.
Income before Income Taxes, Tax Provision, Net Income
The Company recorded income before income taxes of $420,655 for the three-month period ended December 31, 1999. Income tax expense of $115,000 was
recorded resulting in net income of $305,655 for the three-month period ended December 31, 1999, or basic and diluted earnings per share of $0.02 and $0.02,
respectively.
Liquidity and Capital Resources
The Company used cash in operating activities totaling $1,200,864 for the three-month period ended December 31, 1999. The principal component of cash
generated in operating activities was the Company's net income of $305,655. Increases in restricted cash ($219,723) , costs associated with development of real
estate ($99,156) and other assets ($204,702) served to offset cash generated by net income, while increases in accounts payable and accrued expenses ($188,366)
and accrued interest payable ($70,603) provided cash flow from operations.
Cash provided from financing activities totaled $1,266,000 for the period, primarily consisting of an increase in notes payable ($875,000) and amounts due to
related parties and stockholders ($591,000), partially offset by repayments of notes payable of $200,000.
The Company had $80,436 of cash and cash equivalents at December 31, 1999.
The Company's warehouse line of credit has been restructured to accept certain real estate owned as a reduction in the warehouse line of credit. The remaining
outstanding amounts are interest only with principal payments subject to the resolution of the SGE Mortgage Funding Corporation matter described in Note 8 to the
Company's financial statements included in this quarterly report on Form 10-Q.
Management's plan is to continue to restructure or refinance its existing obligations, increase the volume of mortgage loans brokered through its mortgage operations,
develop and sell its various parcels of real estate and, ultimately, to achieve sustainable profitability and positive cash flow.
The Company intends to pursue selected acquisition opportunities. The timing or success of any acquisition efforts is unpredictable. Accordingly, the Company is
unable to accurately estimate its expected capital commitments. Funding for future acquisitions will likely come from a combination of additional borrowings and the
issuance of additional equity.
On January 11, 2000, the Company announced that it had executed a letter of intent to acquire Paradigm Mortgage Associates, Inc. ("Paradigm") of Jacksonville,
Florida. Paradigm is one of the largest cooperative branch mortgage companies in the country with more than 250 branch offices. In its announcement, the Company
stated that a plan of acquisition should be defined by January 31, 2000 and that the transaction is expected to close within 60 days. Closing of the transaction is
subject to, among other things, negotiation of a definitive agreement and plan of merger, satisfactory completion of a due diligence review, approval by both
companies' boards of directors, and appropriate regulatory approvals. On February 8, 2000, the Company announced that the due diligence process was continuing
and that closing of the transaction is anticipated by the end of the Company's second fiscal quarter.
Year 2000 Readiness
The Company has not incurred any material costs nor has it experienced any operational problems as a result of Year 2000 issues.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standard ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which will require that all derivative financial instruments be recognized as either assets or liabilities on the balance sheet. In June
1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133, which
deferred the implementation of SFAS No. 133 until June 15, 2000. SFAS No. 133 will be effective for the Company's first quarter of fiscal 2001. The Company is
evaluating the effects of the new statement and how to implement the new requirements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates on variable rate debt. At December 31, 1999, approximately 3.0 percent of the Company's
total indebtedness of $8,749,037 is subject to changes in the prime rate of interest. Additionally, the short-term nature of a portion of the Company's indebtedness
will require that portions of the Company's total indebtedness be renegotiated. The Company will be subject to any changes in general interest rates at the time any
of such debt is renegotiated.
The table below presents the principal cash flows and related weighted average interest rates on debt by expected maturity dates as of December 31, 1999:
Fair
2000 2001 2002 Total Value
--------------- --------------- --------------- -------------- --------------
Fixed rate debt $ 5,133,442 $ 1,275,000 $ 2,085,595 $ 8,494,037 $ 8,494,037
Average interest rate 9.26% 9.00% 9.50% 9.28%
Floating rate debt $ 255,000 $ - $ - $ 255,000 $ 255,000
Average interest rate 9.25% 0.00% 0.00% 9.25%
Recent Filings: May 1999 (Qtrly Rpt) | Aug 1999 (Qtrly Rpt) | Jan 2000 (Annual Rpt) | Feb 2000 (Qtrly Rpt)
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