<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
the transition period from to
Commission File Number: 1-14488
SAXTON INCORPORATED
(Exact name of Registrant as specified in its charter)
NEVADA 88-0223654
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
5440 WEST SAHARA AVE., THIRD FLOOR
LAS VEGAS, NEVADA 89102
(702) 221-1111
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
YES NO X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of common stock, par value $.001 per share, outstanding as
of August 13, 1997 was 7,619,142.
<PAGE> 2
SAXTON INCORPORATED
FORM 10-Q
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income - 3
Three and Six Months ended June 30, 1997 and 1996
Condensed Consolidated Balance Sheets - 4
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Cash Flows - 5-6
Six Months ended June 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of 12-17
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
INDEX TO EXHIBITS and EXHIBITS 20-21
</TABLE>
2
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SAXTON INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(PREDECESSOR) (PREDECESSOR)
<S> <C> <C> <C> <C>
Revenue, including Tax Credit Partnership
construction revenue of $ 6,605 and $5,528
for the three months ended June 30, 1997 and 1996
respectively, and $13,105 and $12,888 for the
six months ended June 30, 1997 and 1996,
respectively $ 16,189 $ 10,026 $ 32,729 $ 21,206
Costof revenue, including Tax Credit Partnership
cost of revenue of $4,799 and $4,843 for
the three months ended June 30, 1997 and 1996,
respectively, and $9,984 and $10,441 for the
six months ended June 30, 1997 and 1996,
respectively 11,832 7,538 24,212 15,803
----------- ----------- ----------- -----------
Gross profit 4,357 2,488 8,517 5,403
----------- ----------- ----------- -----------
General and administrative expenses 853 969 1,647 1,403
Depreciation and amortization 337 228 623 474
----------- ----------- ----------- -----------
Operating income 3,167 1,291 6,247 3,526
----------- ----------- ----------- -----------
Other income (expense):
Interest expense, net of interest income of $37
and $18 for the three months ended June 30, 1997
and 1996, respectively, and $94 and $36 for the
six months ended June 30, 1997 and 1996, respectively (524) (759) (1,263) (1,366)
Joint venture earnings 10 16 10 16
----------- ----------- ----------- -----------
Total other income (expense) (514) (743) (1,253) (1,350)
----------- ----------- ----------- -----------
Income before provision for income taxes 2,653 548 4,994 2,176
Provision for income taxes 944 146 1,441 597
----------- ----------- ----------- -----------
Net income $ 1,709 $ 402 $ 3,553 $ 1,579
=========== =========== =========== ===========
Net income per common share (note 6) $ 0.33 $ 0.08 $ 0.70 $ 0.32
----------- ----------- ----------- -----------
Weighted average common shares outstanding (note 6) 5,137,170 4,933,257 5,043,911 4,933,257
----------- ----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SAXTON INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (PREDECESSOR)
<S> <C> <C>
ASSETS
Real estate properties:
Operating properties, net of accumulated depreciation (note 3) $ 25,881 $ 26,051
Properties in development 12,559 10,504
Land held for future development or sale 8,326 2,253
--------- ---------
Total real estate properties 46,766 38,808
Cash and cash equivalents 992 1,590
Due from Tax Credit Partnerships 18,000 16,215
Construction contracts receivable, net of allowance for
doubtful accounts of $421 at June 30, 1997
and $369 at December 31, 1996 3,175 973
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 4) 3,903 2,518
Notes receivable 412 139
Investments in joint ventures 1,532 1,332
Due from related parties (note 1) 377 610
Prepaid expenses and other assets 6,256 5,772
--------- ---------
Total assets $ 81,413 $ 67,957
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses (note 5) $ 15,384 $ 10,545
Tenant deposits and other liabilities 2,727 993
Billings in excess of costs and estimated earnings
on uncompleted contracts (note 4) 231 418
Notes payable and capital lease obligations (note 1) 35,725 39,187
Notes payable to related parties (note1) -- 2,446
Subordinated dividend notes (note 1) -- 8,077
--------- ---------
Total liabilities 54,067 61,666
Stockholders' equity (notes 1, 6 and 7)
Common stock, $.001 par value. Authorized 50,000,000 shares;
issued and outstanding 7,619,142 shares at June 30, 1997
and 4,950,548 shares at December 31, 1996 8 5
Preferred stock, $.001 par value. Authorized 5,000,000 shares;
no shares issued and outstanding -- --
Additional paid-in capital 19,570 1,014
Retained earnings 7,768 5,100
Partners' capital -- 172
--------- ---------
Total stockholders' equity 27,346 6,291
Commitments and contingencies (note 8) -- --
--------- ---------
Total liabilities and stockholders' equity $ 81,413 $ 67,957
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SAXTON INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1997 1996
-------- -------------
(PREDECESSOR)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,553 $ 1,579
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 623 474
Gain on sales of commercial properties (1,977) (210)
Joint venture earnings (10) (16)
Changes in operating assets and liabilities:
Increase in due from Tax Credit Partnerships (1,785) (6,423)
Increase in construction contracts receivable (2,202) (51)
Decrease (increase) in costs and estimated earnings
in excess of billings on uncompleted contracts (1,385) 1,164
Decrease (increase) in residential properties under
development 920 (2,834)
Increase in prepaid expenses and other assets (2,507) (890)
Increase in accounts payable and accrued expenses 4,839 2,966
Increase (decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts (187) 2,301
Increase (decrease) in tenant deposits and other liabilities 1,734 (225)
-------- --------
Net cash provided by (used in) operating activities 1,616 (2,165)
-------- --------
Cash flows from investing activities:
Expenditures for property acquisitions and improvements (11,035) (5,677)
Payment to purchase partnerships interests (note 1) (2,804) --
Proceeds from sales of commercial properties 5,505 1,189
Increase in due from related parties (note 1) (496) (466)
Decrease (increase) in notes receivable (273) 91
Capital contributions to joint ventures (190) --
-------- --------
Net cash used in investing activities (9,293) (4,863)
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SAXTON INCORPORATED
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1997 1996
-------- -------------
(Predecessor)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of notes payable and capital leases $ 9,896 $ 10,808
Principal payments on notes payable and capital leases (13,494) (2,316)
Increase (decrease) in notes payable to related parties (note 1) (2,446) 250
Payments on subordinated dividend notes (note 1) (2,698) --
Net proceeds from issuance of common stock (note 1) 17,323 --
Partners' capital contributions 819 --
Distributions paid to partners (2,321) (248)
-------- --------
Net cash provided by financing activities 7,079 8,494
-------- --------
Net increase (decrease) in cash and cash equivalents (598) 1,466
Cash and cash equivalents:
Beginning of period 1,590 492
-------- --------
End of period $ 992 $ 1,958
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of amounts $ 1,346 $ 1,408
capitalized
======== ========
Cash paid during the period for income taxes $ -- $ 55
======== ========
Non-cash financing and investing activities:
Deferred offering costs charged against gross proceeds
of initial public offering (note 1) $ 2,321 $ --
======== ========
Common stock issued to reduce subordinated dividend notes (note 1) $ 3,650 $ --
======== ========
Warrants for common stock issued to reduce subordinated
dividend note obligations (note 1) $ 1,000 $ --
======== ========
Amounts due from related parties offset against
subordinated dividend notes in satisfaction of the
respective obligations (note 1) $ 729 $ --
======== ========
Capital lease obligation recorded in connection with
equipment acquisitions $ 136 $ --
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SAXTON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. DESCRIPTION OF SAXTON INCORPORATED
Saxton Incorporated (the "Company") is engaged in the acquisition, design,
development, construction, ownership and operation of real property located in
the greater Las Vegas, Nevada area. The Company's business is comprised of three
components: (i) the design, development, construction and sale of single-family
homes and properties for its own portfolio; (ii) the performance of design,
development and construction services for third parties ("Design-Build
Services"); and (iii) property operations and management. The properties consist
of industrial buildings, retail centers, apartments, single family homes and
land in various phases of development. The Company also has noncontrolling
interests in joint ventures that are engaged in the acquisition, development,
ownership and operation of real property. The accompanying condensed
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Summit Hills, Inc., Hillcrest, Inc. and Big Tyme Food
Marts, Inc.
On June 30, 1997, the Company completed its initial public offering (the
"Offering") of 2,275,000 shares of common stock at $8.25 per share. The net
proceeds of approximately $17.3 million were used as follows: (i) $8.1 million
to repay indebtedness, of which $3.4 million represented indebtedness to the
Company's principal stockholders and $1.7 million represented indebtedness to
other related parties, (ii) $5.6 million to acquire land for future development,
(iii) $2.8 million to acquire the interests of various third party partners in
certain properties, and (iv) approximately $.8 million for development
activities and general corporate purposes.
Concurrent with the closing of the Offering, certain stockholders of the
Company (the "Contributing Stockholders") contributed their partnership
interests in certain properties to the Company. In addition, certain obligations
to the Contributing Stockholders represented by subordinated dividend notes
("the Notes") were satisfied as follows: (i) approximately $.7 million of
outstanding amounts due to the Company by the principal stockholders were offset
against the Notes, (ii) $3.65 million was repaid through the issuance by the
Company of 384,256 shares of common stock, and (iii) $1.0 million was repaid
through the issuance by the Company of warrants for 400,000 shares of common
stock. The warrants are exercisable at $9.90 per share if the Company achieves
specified levels of after tax net income in 1997 and 1998.
The accompanying condensed consolidated financial statements present the
financial position and results of operations and cash flows of the Company,
including the operations of seven general partnerships and three limited
partnerships ("Predecessor") that were under the common management and control
(or significant ownership) of the Company or its executive officers prior to the
Offering. Upon completion of certain transactions consummated by Predecessor and
others in connection with the Offering, the Company owns 100% of the economic
interests in the partnerships. Therefore, the partnerships were dissolved by
operation of law and all assets, subject to all liabilities, of such
partnerships were transferred to the Company.
7
<PAGE> 8
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
NOTE 2. BASIS OF PRESENTATION
The accompanying condensed consolidated unaudited interim financial
statements of the Company have been prepared in conformity with generally
accepted accounting principles and reflect all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of the results of operations for the three and six months ended
June 30, 1997 and 1996. These condensed consolidated unaudited interim financial
statements should be read in conjunction with the Company's audited combined
financial statements and the notes thereto as of and for the year ended December
31, 1996, which are included in its prospectus dated June 24, 1997.
The Company historically has experienced, and expects to continue to
experience, variability in quarterly sales and revenues. The combined results of
operations for the three and six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ materially from those estimates.
NOTE 3. REAL ESTATE OPERATING PROPERTIES
Real estate operating properties are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(unaudited) (Predecessor)
<S> <C> <C>
Cost:
Buildings $21,260 $21,188
Tenant Improvements 641 900
Land 6,410 6,460
------- -------
Real estate
operating properties at cost 28,311 28,548
Less accumulated depreciation
and amortization (2,430) (2,497)
------- -------
Real estate operating
properties, net $25,881 $26,051
======= =======
</TABLE>
8
<PAGE> 9
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
NOTE 4. CONSTRUCTION CONTRACTS
Construction contracts receivable include amounts retained pending
contract completion aggregating $263,000 at June 30, 1997 and $265,000 at
December 31, 1996. Based on anticipated completion dates these retentions are
expected to be collected in 1997.
Accounts payable and accrued expenses includes amounts retained pending
subcontract completion aggregating approximately $1,766,000 at June 30, 1997 and
$1,220,000 at December 31, 1996.
Costs and estimated earnings on uncompleted contracts are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- -------------
(unaudited) (Predecessor)
<S> <C> <C>
Costs incurred to date $ 50,971 $ 53,002
Estimated earnings to date 14,718 14,279
-------- --------
65,689 67,281
Less billings to date (62,017) (65,181)
-------- --------
Costs and estimated earnings in excess of
billings, net $ 3,672 $ 2,100
======== ========
</TABLE>
Costs and estimated earnings in excess of billings, net, are shown on the
accompanying condensed consolidated balance sheets as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- -------------
(unaudited) (Predecessor)
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 3,903 $ 2,518
Billings in excess of costs and estimated
earnings on uncompleted contracts (231) (418)
------- -------
$ 3,672 $ 2,100
======= =======
</TABLE>
9
<PAGE> 10
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
NOTE 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
(unaudited) (Predecessor)
<S> <C> <C>
Trade accounts payable $10,400 $ 7,585
Income taxes payable 3,787 2,346
Accrued expenses 1,197 614
------- -------
$15,384 $10,545
======= =======
</TABLE>
NOTE 6. EARNINGS PER SHARE DATA
The Company will adopt the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share", in the fourth quarter of 1997.
Basic and diluted earnings per share are equal to the amount presented on the
accompanying condensed consolidated statements of income. Earnings per share for
the three and six months ended June 30, 1997 and 1996, respectively, are based
upon the weighted average number of shares of common stock outstanding as there
were no material common stock equivalents outstanding during the period.
NOTE 7. MANAGEMENT STOCK OPTION PLAN
On June 30, 1997, the Company adopted a Management Stock Option Incentive
Plan (the "Option Plan") which provides for the granting of options to employees
to purchase common stock, up to a maximum of 500,000 shares. On June 30, 1997,
251,800 stock options were awarded to certain executive officers and employees
of the Company pursuant to the Option Plan. These options will vest in equal
annual installments over five years, commencing one year from the award date,
and will expire on June 30, 2007. All stock options were granted at the initial
public offering price of $8.25 per share.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company and two of its principal stockholders are guarantors on
construction loans relating to Tax Credit Partnerships. Total construction loans
payable for these Tax Credit Partnerships was approximately $34.1 million and
$26.6 million at June 30, 1997 and December 31, 1996, respectively.
10
<PAGE> 11
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
NOTE 9. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, SFAS No. 129, "Disclosure of Information about Capital
Structure", was issued. This statement establishes standards for disclosing
information about an entity's capital structure and is effective for periods
ending after December 15, 1997. The Company intends to comply with the
requirements of this statement.
In June, 1997, SFAS No. 130, "Reporting Comprehensive Income", was issued
and is effective for fiscal years beginning after December 15, 1997. This
statement requires companies to classify items of other comprehensive income by
their nature in an income statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The Company
is currently assessing the impact of this statement on its financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", was issued and is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for segment
reporting in the financial statements. The Company is currently assessing the
impact of this statement on its financial statements.
11
<PAGE> 12
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto appearing
elsewhere in this Form 10-Q.
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Revenue. Total revenue increased by $6.2 million, or 62.0%, from $10.0
million for the three months ended June 30, 1996 to $16.2 million for the three
months ended June 30, 1997. This was primarily due to an increase in
Design-Build Services and increased sales of single-family homes.
Cost of Revenue. Total cost of revenue increased by $4.3 million, or
57.3%, from $7.5 million for the three months ended June 30, 1996 to $11.8
million for the three months ended June 30, 1997. This was due to the same
factors identified above for the increase in total revenue. Gross profit as a
percent of revenue increased to 26.9% for the three months ended June 30, 1997
as compared to 24.8% for the comparable period in 1996 primarily due to sales
price increases on single-family homes exceeding cost increases.
General and Administrative Expenses. General and administrative expenses
decreased by $116,000, or 12.0%, from $969,000 for the three months ended June
30, 1996 to $853,000 for the three months ended June 30, 1997. This decrease was
primarily due to a decrease in legal costs. General and administrative expenses
as a percentage of total revenue decreased from 9.7% for the three months ended
June 30,1996 to 5.3% for the three months ended June 30, 1997 due to lower
expenses and a higher revenue base.
Depreciation and Amortization. Depreciation and amortization increased by
$109,000, or 47.8%, from $228,000 for the three months ended June 30, 1996 to
$337,000 for the three months ended June 30, 1997, primarily due to increases in
equipment purchases necessitated by the further expansion into certain
subcontracting trades.
Interest Expense, Net. Interest expense, net, decreased by $235,000, or
31.0%, from $759,000 for the three months ended June 30, 1996 to $524,000 for
the three months ended June 30, 1997. This decrease was primarily due to a
reduction in the effective rate of interest on borrowings.
Income Before Provision for Income Taxes. As a result of the foregoing
factors, income before provision for income taxes increased by $2.2 million, or
392.7%, from $.5 million for the three months ended June 30, 1996 to $2.7
million for the three months ended June 30, 1997. Income before provision for
income taxes as a percentage of total revenue increased from 5.5% for the three
months ended June 30, 1996 to 16.4% for the three months ended June 30, 1997.
12
<PAGE> 13
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenue. Total revenue increased by $11.5 million, or 54.2%, from $21.2
million for the six months ended June 30, 1996 to $32.7 million for the six
months ended June 30, 1997. This was principally attributed to increases in
Design-Build Services, and increased sales of single-family homes and commercial
properties.
Cost of Revenue. Total cost of revenue increased by $8.4 million, or
53.2%, from $15.8 million for the six months ended June 30, 1996 to $24.2
million for the six months ended June 30, 1997. This was primarily due to the
same factors identified above for the increase in total revenue. Gross Profit as
a percent of revenue increased slightly for the six months ended June 30, 1997
to 26.0%, compared to 25.5% for the comparable period in 1996.
General and Administrative Expenses. General and administrative expenses
increased by $200,000, or 14.3%, from $1.4 million for the six months ended June
30, 1996 to $1.6 million for the six months ended June 30, 1997. This increase
was principally due to an increase in salary expense associated with an increase
in the number of employees related to the Company's increased homebuilding
activity and further expansion into certain subcontracting trades. General and
administrative expenses as a percentage of total revenue favorably decreased
from 6.6% for the six months ended June 30, 1996 to 5.0% for the six months
ended June 30, 1997 principally due to a higher revenue base.
Depreciation and Amortization. Depreciation and amortization increased by
$149,000, or 31.4%, from $474,000 for the six months ended June 30, 1996 to
$623,000 for the six months ended June 30, 1997, principally due to increases in
equipment purchases necessitated by the further expansion into certain
subcontracting trades.
Interest Expense, Net. Interest expense, net, decreased by $100,000, or
7.1%, from $1.4 million for the six months ended June 30, 1996 to $1.3 million
for the six months ended June 30, 1997, principally due to a reduction in the
effective interest rate on borrowings during the quarter ended June 30, 1997.
Income Before Provision for Income Taxes. As a result of the foregoing
factors, income before provision for income taxes increased by $2.8 million, or
127.3%, from $2.2 million for the six months ended June 30, 1996 to $5.0 million
for the six months ended June 30, 1997. Income before provision for income
taxes as a percentage of total revenue increased from 10.3% for the six months
ended June 30, 1996 to 15.3% for the six months ended June 30, 1997.
13
<PAGE> 14
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
On June 30, 1997, the Company completed its initial public offering of
2,275,000 shares of common stock at $8.25 per share. The net proceeds of
approximately $17.3 million were used as follows: (i) $8.1 million to repay
indebtedness, of which $3.4 million represented indebtedness to the Company's
principal stockholders and $1.7 million represented indebtedness to other
related parties, (ii) $5.6 million to acquire land for future development; (iii)
$2.8 million to acquire the interests of various third-party partners in certain
properties, and (iv) approximately $.8 million for development activities and
general corporate purposes.
The Company has historically relied upon land and project financing, as
applicable, partner and joint venture contributions in the form of land or cash,
developer's equity (value in excess of cost), other forms of debt and cash flow
from operations to provide capital for land acquisitions and portfolio
construction. The Company intends to continue to provide for its capital
requirements from these sources, except for partner contributions. Management
believes that cash generated from operations and funds available from external
sources of debt and equity financing, together the cash on hand at June 30,
1997, will be sufficient to provide for its capital requirements for at least
the next 12 months.
Operating Activities. Net cash provided by operating activities was $1.6
million for the six months ended June 30, 1997. Net cash used in operating
activities was $2.2 million for the six months ended June 30, 1996. The increase
in operating cash flows was primarily due to a higher net income for the six
months ended June 30, 1997 and net increases in operating liabilities for the
six months ended June 30, 1997.
Investing Activities. Net cash used in investing activities increased by
$4.4 million, or 89.8%, from $4.9 million for the six months ended June 30, 1996
to $9.3 million for the six months ended June 30, 1997. This was primarily due
to increased expenditures for property acquisitions and improvements as well as
payments to purchase partnership interests from affiliates.
Financing Activities. Net cash provided by financing activities decreased
by $1.4 million, or 16.5%, from $8.5 million for the six months ended June 30,
1996 to $7.1 million for the six months ended June 30, 1997. This was primarily
due to reductions in notes payable, offset partly by the net proceeds from the
Offering.
At June 30, 1997, approximately $11.0 million of notes payable mature in
1997 under the provisions of the various agreements. Management expects to be
able to negotiate acceptable refinancing alternatives with the applicable
lenders, however, there can be no assurance that the Company will successfully
do so.
14
<PAGE> 15
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Company anticipates that development of portfolio projects during 1997
will cost approximately $9.2 million, which the Company plans to finance through
construction financing. The real estate development business is capital
intensive and requires significant up-front expenditures to acquire and entitle
land and commence development. The Company typically finances, and expects to
finance, its land acquisition and portfolio development activities utilizing the
proceeds of institutional loans secured by real property. In some cases, the
Company plans to utilize private financing, typically on a short-term or interim
basis. In cases where the Company holds a property after completion of
construction, the Company plans to obtain permanent financing, secured by the
property. The Company also expects to purchase approximately $.3 million of
construction and computer equipment during 1997.
In each of its last three fiscal years, the Company has derived a
significant portion of its construction revenue from the development of
apartment complexes ("Tax Credit Projects") for limited partnerships ("Tax
Credit Partnerships") organized to take advantage of the low income housing tax
credit provided by Section 42 of the Internal Revenue Code. At June 30, 1997,
the Tax Credit Partnerships were indebted to the Company in the aggregate amount
of approximately $18.0 million, representing developer fees and land and
construction costs. Of such amount, approximately $7.0 million is payable to the
Company by the Tax Credit Partnerships from loan proceeds and additional capital
contributions of the investor limited partners. The balance of approximately
$11.0 million is payable to the Company by the Tax Credit Partnerships from cash
flow received from the operations of their respective Tax Credit Projects. While
management believes that the Tax Credit Projects will generate sufficient cash
flow to pay the amounts due, there can be no assurance that the receivable will
be paid in full or at all.
The Company is in the final stages of construction of two Tax Credit
Projects and in the early stages of development of an additional Tax Credit
Project to be known as Rancho Mesa (formerly referred to as Madre Mesa). The
Company has received a letter of intent from an investor limited partner to
purchase the tax credit equity and a conditional commitment from the Nevada
Housing Division to issue bonds in support of the loan for the project.
Construction of Rancho Mesa, which is anticipated to commence in the third
quarter of 1997, is contingent upon receipt of additional bond allocation,
commitments for both construction and permanent financing and the admission of
an investor limited partner to the Meadow Mesa Apartments Tax Credit
Partnership, which is the partnership that will develop Rancho Mesa. It is
anticipated that the estimated total $22.2 million cost of developing Rancho
Mesa will be financed in generally the same manner as the Company's other Tax
Credit Projects as follows: loan proceeds (59%), partner equity (22%), and
deferred fees (19%). The Company's capital contribution, anticipated to be
approximately $2.6 million, is expected to be funded as a contribution of a
portion of its developer fees. The investor limited partner's equity is expected
to be contributed in installments over a period of approximately 24 months.
Approximately 65% of such contribution is expected to be funded upon admission
of the investor limited partner to the Meadow Mesa Apartments Tax Credit
Partnership and the balance is expected to be contributed from time to time when
specified conditions are satisfied (i.e., completion of construction,
certification of project costs and award of tax credit by the Nevada Housing
Division and achievement of specified levels of operating cash flow).
15
<PAGE> 16
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Company has made its capital contributions to the Tax Credit
Partnerships which own completed or substantially completed Tax Credit Projects.
The Company is obligated, however, to make operating expense loans, not to
exceed an aggregate of $2.7 million, to meet operating deficits, if any, of such
Tax Credit Partnerships.
Backlog
The Company's homes are generally offered for sale in advance of their
construction. The majority of the Company's homes were sold pursuant to standard
sales contracts entered into prior to commencement of construction. Such sales
contracts are usually subject to certain contingencies such as the buyer's
ability to qualify for financing. Homes covered by such sales contracts are
considered by the Company as backlog. The Company does not recognize revenue on
homes covered by such contracts until the sales are closed and the risk of
ownership has been legally transferred to the buyer. At June 30, 1997, the
Company had 15 homes in backlog, representing an aggregate sales value of
approximately $1.3 million. At June 30, 1996, there were 52 homes in backlog,
representing an aggregate sales value of approximately $3.7 million.
The Company is also involved in the design-build development of commercial
projects. Backlog for such commercial projects is defined as the uncompleted
work remaining under a signed fixed price contract. The Company uses the
percentage of completion method to account for revenue from its design-build
contracts. At June 30, 1996 and June 30, 1997, the Company had backlog under its
design-build contracts of approximately $36.4 million and $20.1 million,
respectively.
Risks and Related Factors
Statement of Purpose of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995. In December 1995, the Private
Securities Litigation Reform Act of 1995 (the "Act") was enacted. The Act
contains amendments to the Securities Act of 1933 and the Securities Exchange
Act of 1934 which provide protection from liability in private lawsuits for
"forward-looking" statements made by persons specified in the Act. The Company
desires to take advantage of the "safe-harbor" provisions of the Act.
The Company wishes to caution readers that, with the exception of
historical matters, the matters discussed in this Quarterly Report on Form 10-Q
are forward-looking statements that involve risks and uncertainties, including
but not limited to factors related to the highly competitive nature of the real
estate industry and its sensitivity to changes in general economic conditions,
the Company's dependence on the greater Las Vegas, Nevada area, the risks of
homebuilding and other real estate development, real estate investment risks,
the risks of indebtedness and the inability to obtain future financing,
regulatory and environmental risks, risks associated with growth and other
factors discussed in the Company's filings with the Securities and Exchange
Commission. Such factors could affect the Company's actual results during fiscal
1997 and beyond and cause such results to differ materially from those expressed
in any forward-looking statement made by the Company.
16
<PAGE> 17
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Variability of Results: Seasonality. The Company historically has
experienced, and in the future expects to continue to experience, variability in
revenue on a quarterly basis. Factors expected to contribute to this variability
include, among others (i) the timing of home and other property sale closings;
(ii) the Company's ability to continue to acquire land and options thereon on
acceptable terms; (iii) the timing of the receipt of regulatory approvals for
the construction of homes and other development projects; (iv) the condition of
the real estate market and the general economic conditions in the greater Las
Vegas, Nevada area; (v) the prevailing interest rates and the availability of
financing, both for the Company and for the purchasers of the Company's homes
and other properties; (vi) the timing of the completion of construction of the
Company's homes and other portfolio properties; and (vii) the cost and
availability of materials and labor. The Company's historical financial
performance is not necessarily a meaningful indicator of future results and, in
particular, the Company expects its financial results to vary from project to
project and from quarter to quarter. In addition, although the Company has not
previously experienced significant seasonality in its business, management
expects that the Company's increased focus on home-building activities may cause
it to experience seasonal variations in its home sales as a result of the
preference of home buyers to close their new home purchase either prior to the
start of a new school year or prior to the end of year holiday season.
17
<PAGE> 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submissions of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
Refer to Index on page 20 of this filing.
18
<PAGE> 19
Part II. OTHER INFORMATION
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.
SAXTON INCORPORATED
Dated: August 14, 1997 By: /s/ JAMES C. SAXTON
----------------------------------------
James C. Saxton
Chairman, President and Chief
Executive Officer (Principal Executive
Officer)
By: /s/ DOUGLAS W. HENSLEY
----------------------------------------
Douglas W. Hensley
Executive Vice-President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
19
<PAGE> 20
Part II. OTHER INFORMATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - ------ ----------- ------------
<S> <C> <C>
27 Financial Data Schedule. 21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 992
<SECURITIES> 0
<RECEIVABLES> 21,175<F1>
<ALLOWANCES> 421
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 46,766
<DEPRECIATION> 2,430
<TOTAL-ASSETS> 81,413
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 27,338
<TOTAL-LIABILITY-AND-EQUITY> 81,413
<SALES> 32,729
<TOTAL-REVENUES> 32,739
<CGS> 24,212
<TOTAL-COSTS> 24,212
<OTHER-EXPENSES> 2,270<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,263
<INCOME-PRETAX> 4,994
<INCOME-TAX> 1,441
<INCOME-CONTINUING> 3,553
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,553
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
<FN>
<F1>Receivables are comprised of Due from Tax Credit Partnerships and Construction
contracts receivable.
<F2>Other Expenses are comprised of general and administrative, and depreciation
and amortization expenses.
</FN>
</TABLE>
