<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1997
REGISTRATION NO. 333-23927
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SAXTON INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEVADA 6552 88-0223654
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER IDENTIFICATION NUMBER)
CLASSIFICATION CODE NUMBER)
</TABLE>
5440 WEST SAHARA AVENUE, THIRD FLOOR, LAS VEGAS, NEVADA 89102
(702) 221-1111
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES C. SAXTON
5440 WEST SAHARA AVENUE, THIRD FLOOR
LAS VEGAS, NEVADA 89102
TELEPHONE: (702) 221-1111
FACSIMILE: (702) 221-1127
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
PLEASE SEND COPIES OF ALL CORRESPONDENCE TO:
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THEODORE H. LATTY, ESQ. WILLIAM N. DYE, ESQ.
ANDREA H. BRICKER, ESQ. WILLKIE FARR & GALLAGHER
HUGHES HUBBARD & REED LLP ONE CITICORP CENTER
350 SOUTH GRAND AVENUE, SUITE 3600 153 EAST 53RD STREET
LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10022
TELEPHONE: (213) 613-2800 TELEPHONE: (212) 821-8000
FACSIMILE: (213) 613-2950 FACSIMILE: (212) 821-8111
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 9, 1997
PROSPECTUS
2,275,000 SHARES
LOGO
COMMON STOCK
------------------------
All of the shares of Common Stock offered hereby (the "Offering") are being
issued and sold by Saxton Incorporated (the "Company"). Prior to the Offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between $9.00
and $10.00 per share. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.
The Common Stock has been approved for listing on the Nasdaq National
Market under the trading symbol "SXTN."
SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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=====================================================================================================
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------
Per Share.................... $ $ $
- -----------------------------------------------------------------------------------------------------
Total(3)..................... $ $ $
=====================================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters by the Company
and certain compensation payable to the Representatives of the Underwriters,
see "Underwriting."
(2) Before deducting expenses of the Offering estimated to be approximately
$ .
(3) The Underwriters have been granted a 30-day option to purchase up to an
additional 341,250 shares of Common Stock from the Company solely to cover
over-allotments, if any, on the same terms and conditions as the shares
offered hereby. If the Underwriters exercise such option in full, the total
"Price to Public," "Underwriting Discounts and Commissions" and "Proceeds to
Company" will be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, when,
as and if delivered to and accepted by the Underwriters, subject to their right
to reject any order in whole or in part and to certain other conditions. It is
expected that delivery of the certificates representing the Common Stock will be
made on or about , 1997 at the offices of Ladenburg Thalmann & Co.
Inc., New York, New York.
LADENBURG THALMANN & CO. INC. STIFEL, NICOLAUS & COMPANY
INCORPORATED
The date of this Prospectus is , 1997
<PAGE> 3
[COLLAGE OF PHOTOGRAPHS OF COMPANY PROPERTIES AND
LOCATION MAP DEPICTING PROPERTY LOCATIONS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING MAINTAINING A MARKET IN THE COMMON STOCK ON BEHALF OF THE
UNDERWRITERS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following material is qualified in its entirety by the more detailed
information and the financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. In this Prospectus, the term "Company" includes
Saxton Incorporated, its wholly owned subsidiaries and its predecessors,
including Jim Saxton, Inc. ("JSI"). Unless otherwise indicated or the context
otherwise requires, all information in this Prospectus (i) assumes consummation
of the Reorganization concurrently with the closing of the Offering, (ii) gives
effect to a 1-for-0.51312465 reverse split of the Common Stock to be effected
prior to the closing of the Offering, (iii) assumes no exercise of the
Underwriters' over-allotment option and (iv) assumes no exercise of outstanding
options or warrants. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from the results discussed in such forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those set forth in the section entitled "Risk Factors" and elsewhere
in this Prospectus.
THE COMPANY
Saxton Incorporated is an integrated real estate company engaged in the
design, development, construction, operation, ownership and sale of residential,
commercial and industrial properties in the greater Las Vegas metropolitan 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 ("portfolio properties"); (ii) the performance of design,
development and construction services for third-party clients ("design-build
services") and (iii) property operations and management. The Company's principal
focus historically has been the design and development of properties for
third-party clients and for its own portfolio. Since its inception in 1986, the
Company has completed over 125 projects, including professional office
buildings, retail and industrial facilities and apartment complexes.
The Company's development experience and expertise enable it to identify
and take advantage of market opportunities and to minimize the risk of real
estate cycles. In 1995, management recognized the need for affordable housing in
the Las Vegas market and began to develop value-priced single-family detached
homes. For 1996, the Company's initial home development was ranked fourth in
number of units sold out of over 400 home developments in Clark County (which
includes Las Vegas). Based on this strong response, management has made a
commitment to expand the Company's homebuilding activities and to make them a
significant component of its business operations. The Company strives to deliver
superior value to low and moderate income families and senior citizens by
pricing its homes competitively while providing innovative designs, quality
construction and features and amenities not usually found in affordable housing.
Its two-, three- and four-bedroom homes, which range from 950 square feet to
1,250 square feet, are currently base priced from $69,990 to $89,990 to appeal
to the growing population of low and moderate income families and senior
citizens in Las Vegas. Management believes that the Company is currently one of
only two developers offering single-family detached homes for sale under $70,000
in the greater Las Vegas metropolitan area.
In 1996, the year during which the Company began selling single-family
homes, the Company closed sales of 173 homes. The Company currently owns or has
under option or contract approximately 282 acres of land on which management
expects to develop approximately 1,445 single-family detached homes,
condominiums, cluster homes and townhouses, which management believes represents
at least a three-year inventory, based on the Company's current absorption rate.
The Company also provides design-build development services to clients
which have included large nationally recognized public companies as well as
smaller regional businesses. The Company benefits from a reputation for
delivering high quality projects on time and on budget. During the past year,
the Company has begun to perform many of the functions previously performed by
subcon-
3
<PAGE> 5
tractors, including concrete, masonry, wood framing, painting, drywall and
landscaping. Management believes that the Company's ability to perform these
construction services provides the Company with a competitive advantage by
enabling it to better control the costs, timing and, therefore, profitability of
its projects. In 1996, the Company completed nine design-build projects and had
total construction revenue of approximately $41.9 million. At March 31, 1997,
the Company had eight uncompleted design-build projects under contract,
representing approximately $28.8 million of backlog (the uncompleted portion of
work on signed fixed-price contracts), and an additional three design-build
projects in the initial stages of development, but not yet under contract.
At March 31, 1997, the Company owned and operated a portfolio of rental
properties which includes 14 properties comprised of approximately 334,150
square feet of office, retail and industrial space. In addition, since March 31,
1997, the Company has completed construction of three portfolio properties, one
of which has been sold, one of which is under contract to be sold and one of
which is in initial lease-up. The Company currently has seven proposed portfolio
properties in the initial stages of development. Management monitors the market
for the Company's properties on an ongoing basis to take advantage of
opportunities for strategic sales of its holdings when conditions are favorable.
The rapid economic growth of Las Vegas and the surrounding areas and the
positive demographic trends associated with such growth make Clark County a
favorable location for real estate investment and development. Clark County has
experienced increasing levels of business and employment over the past decade
which have helped drive large increases in population and demand for new
construction of both commercial and residential developments. The expansion of
gaming has led to population and employment increases that are among the highest
in the country. These increases have in turn driven increases in new home sales,
apartment rents and occupancy rates. Additionally, a favorable business
environment has led to growth of non-gaming businesses and the local population
growth has attracted additional retail and service businesses to Clark County
leading to increases in commercial rents and occupancy rates.
The Company's business and growth strategy includes the following key
elements:
Reducing the risk of economic and real estate cycles through operating
diversification. The Company seeks to enhance its financial stability and
reduce the potential impact of economic and real estate cycles by operating
in three components of the real estate business: (i) the design,
development, construction and sale of single-family homes and portfolio
properties; (ii) design-build services for third-party clients and (iii)
property operations and management.
Enhancing profitability through an opportunistic approach to
development. The Company seeks to take advantage of market opportunities by
employing its experience and expertise to identify and enter new markets.
Most recently, in response to the identified shortage of affordable
housing, the Company expanded its development operations to include
value-priced homes and increased its development of apartments for low and
middle income families and senior citizens.
Increasing profit margins through vertical integration. The Company's real
estate and construction expertise allows the integration of most aspects of
development and construction, thereby enabling the Company to provide
one-stop shopping to its customers, maintain greater control over its
projects and generate higher operating margins. The Company intends to
integrate certain additional construction trades to further increase its
profitability and strengthen its competitive position.
Reducing development risks through conservative land policies. The Company
seeks to maximize its return on capital by limiting its investment in land
while maintaining an inventory of owned and controlled sites sufficient to
accommodate demand for its homes and other development requirements. The
Company seeks to further maximize its return by acquiring undeveloped land
and using its expertise to obtain all entitlements and develop the land. To
implement this strategy and to reduce the risks associated with investments
in land, the
4
<PAGE> 6
Company uses options or conditional land sales contracts to control land
whenever possible and seeks to purchase land only for specific
developments.
Expanding business opportunities by taking advantage of
government-sponsored programs. The Company has expanded its business
opportunities by building projects which are eligible for various
government-sponsored programs that provide down payment assistance or lower
cost financing. These government-sponsored programs include private
activity revenue bonds, small business loans and mortgage loan programs of
federal agencies. By building properties which are eligible for such
programs, the Company is able to expand the pool of qualified purchasers
for its homes and other properties.
Pursuing geographic expansion. While the Company believes that the outlook
for the Las Vegas market is favorable, geographic expansion is a key
element in achieving long-term stability and growth. The Company intends to
capitalize on its experience and demonstrated capabilities in real estate
by targeting other viable geographic markets, including other areas of
Nevada and selected markets in the southwestern United States, such as
Arizona and New Mexico.
Pursuing growth through strategic acquisitions. The Company believes that
there are significant opportunities to acquire existing homebuilding
companies, particularly in and around the Las Vegas area and selected
markets in the southwestern United States. The Company intends to pursue
strategic acquisitions to provide the Company with additional market share,
desirable land and local market experience. The Company has no agreements,
understandings or arrangements with respect to any such acquisition and
there can be no assurance that the Company will be able to consummate such
an acquisition.
The Company was incorporated under the laws of the State of Nevada on
December 21, 1995, as the successor to JSI, a diversified real estate company
founded by James C. Saxton in 1986. The Company's principal executive offices
are located at 5440 West Sahara Avenue, Third Floor, Las Vegas, Nevada 89102,
and its telephone number is (702) 221-1111.
THE OFFERING
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Common Stock offered hereby............... 2,275,000 shares
Common Stock to be outstanding after the
Offering(1)............................. 7,619,142 shares
Use of proceeds........................... To repay certain indebtedness, including
indebtedness to existing stockholders and other
related parties, to acquire land for planned
home development, to acquire the interests of
various parties in certain properties in
connection with the Reorganization, to fund the
Company's development activities and for general
corporate purposes, which may include the
repayment of additional indebtedness and
strategic acquisitions.
Nasdaq National Market symbol............. SXTN
</TABLE>
- ---------------
(1) Excludes (i) 104,410 shares issuable upon the exercise of options granted by
the Company to certain employees and others in December 1994, (ii) 500,000
shares reserved for issuance upon the exercise of options issuable under the
Company's Management Stock Option Incentive Plan, (iii) 50,000 shares
reserved for issuance upon the exercise of options issuable under the
Company's Non-Employee Director Stock Option Plan, (iv) 400,000 shares
reserved for issuance upon the exercise of warrants to be purchased as part
of the Reorganization, exercisable at 120% of the initial public offering
price if the Company achieves specified levels of after tax net income in
1997 and 1998 (the "Saxton Warrants"), and (v) 227,500 shares reserved for
issuance upon the exercise of warrants to be granted to the Representatives
of the Underwriters, exercisable at 120% of the initial public offering
price (the "Representatives' Warrants"). See "The Reorganization,"
"Management -- Individual Stock Option Agreements," "Management -- Stock
Option Plans," "Description of Capital Stock" and "Underwriting."
5
<PAGE> 7
SUMMARY COMBINED AND PRO FORMA FINANCIAL AND OPERATING INFORMATION
The following table sets forth selected financial and other information for
the Company on a combined historical basis, on a pro forma basis to reflect the
Reorganization and on a pro forma basis as adjusted to reflect the
Reorganization and the Offering. The combined historical financial statements of
the Company are comprised of the operations, assets and liabilities of the
Company and of certain properties which were owned and operated by entities
affiliated with and controlled by the Company during the periods presented.
These operations and properties will be acquired by the Company in connection
with the Reorganization. The following information is qualified in its entirety
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements, including the notes thereto, and other financial information
appearing elsewhere in this Prospectus.
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<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1996
---------------------------------
PRO
PRO FORMA AS
1992 1993 1994 1995 ACTUAL FORMA(1) ADJUSTED(2)
-------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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INCOME STATEMENT
DATA(3):
Total revenue.............................. $ 21,921 $ 23,372 $ 22,360 $ 35,570 $ 64,068 $64,068 $64,068
Gross profit............................... 5,235 4,584 4,985 7,372 15,795 15,795 15,795
General and administrative expenses........ 1,258 1,152 1,736 1,957 3,425 3,425 3,425
Depreciation and amortization.............. 746 653 745 722 1,079 1,130 1,055
Operating income........................... 3,231 2,779 2,504 4,693 11,291 11,240 11,315
Interest expense (net)..................... 2,202 1,628 1,475 2,127 2,748 2,748 1,898
Income before provision for income taxes... 1,003 1,215 1,035 3,697 8,500 8,449 9,374
Pro forma income taxes(4).................. 341 413 352 1,257 2,890 2,873 3,187
Pro forma net income....................... 662 802 683 2,440 5,610 5,576 6,187
Pro forma net income per share............. $ 1.04 $ 0.87
Number of shares outstanding............... 5,344 7,106
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1997
---------------------------------
PRO
PRO FORMA AS
1996 ACTUAL FORMA(1) ADJUSTED(2)
-------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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INCOME STATEMENT
DATA(3):
Total revenue.............................. $ 11,180 $ 16,540 $16,540 $16,540
Gross profit............................... 2,915 4,160 4,160 4,160
General and administrative expenses........ 434 794 794 794
Depreciation and amortization.............. 246 286 298 301
Operating income........................... 2,235 3,080 3,068 3,065
Interest expense (net)..................... 607 739 739 557
Income before provision for income taxes... 1,628 2,341 2,329 2,508
Pro forma income taxes(4).................. 554 796 792 853
Pro forma net income....................... 1,074 1,545 1,537 1,655
Pro forma net income per share............. $ 0.20 $ 0.29 $ 0.23
Number of shares outstanding............... 5,344 5,344 7,092
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THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
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OPERATING DATA:
EBITDA (in thousands)(5)............................ $ 4,174 $ 3,753 $ 3,752 $ 6,812 $ 12,474 $ 2,499 $ 3,423
Cash Flows:
Provided by (Used in) Operating Activities........ (180) (405) (1,552) (1,465) (3,708) (1,675) 386
Provided by (Used in) Investing Activities........ 2,597 1,084 (1,420) (3,317) 818 (1,305) 653
Provided by (Used in) Financing Activities........ (2,429) (607) 2,680 5,221 3,988 2,573 (1,541)
Single-family homes:
New contracts, net of cancellations............... -- -- -- -- 210 60 59
Closings.......................................... -- -- -- -- 173 30 37
Backlog (at period end)(6)........................ -- -- -- -- 37 30 31
Homes remaining for sale (at period end).......... -- -- -- -- 9 159 68
Aggregate sales value of backlog (in thousands)... -- -- -- -- $ 2,970 $ 2,156 $ 2,408
Average sales price per home closed............... -- -- -- -- $ 74,930 $ 70,400 $ 79,950
Design-build projects:
Number of contracts awarded....................... 17 13 10 4 6 0 1
Backlog (at period end) (in thousands)(7)......... $ 30,157 $ 30,826 $ 31,464 $ 52,075 $ 21,130 $ 42,405 $ 28,845
Portfolio properties:
Number of properties developed.................... 3 3 5 3 5 2 1
Number of properties sold......................... 2 2 7 3 3 0 2
Number of properties owned (at period end)........ 15 16 14 14 16 16 15
</TABLE>
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MARCH 31, 1997
-----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(8) ADJUSTED(9)
------- ------------ ------------
(IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 1,088 $ 1,088 $ 4,303
Real estate properties, net.......................................................... 36,967 38,945 44,788
Total assets......................................................................... 66,654 67,905 75,375
Total debt........................................................................... 49,728 44,351 36,265
Stockholders' equity................................................................. 6,664 10,482 28,981
</TABLE>
- ---------------
(1) Pro Forma Income Statement Data for the year ended December 31, 1996 and for
the three months ended March 31, 1997 give effect to the Reorganization as
if it had occurred on January 1, 1996. See "The Reorganization."
(2) Pro Forma As Adjusted Income Statement Data for the year ended December 31,
1996 and for the three months ended March 31, 1997 give effect to (i) the
Reorganization as if it had occurred on January 1, 1996, (ii) the reduction
in interest expense resulting from the assumed repayment of debt with a
portion of the net proceeds of the Offering as if such repayment had
occurred on January 1, 1996, and (iii) the additional number of shares
outstanding from the beginning of the period equal to the aggregate number
of shares the Company would have to sell at the assumed initial public
offering price of $9.50 per share to acquire the interests of unaffiliated
parties in various properties in connection with the Reorganization, to
acquire land for planned home development and to repay debt utilizing a
portion of the net proceeds of the Offering.
(3) In accordance with generally accepted accounting principles ("GAAP"), the
income statement does not include construction revenue and costs incurred in
connection with the construction of property for the Company's own portfolio
or for any combined or consolidated entity ("Portfolio Construction"), but
does include construction revenue and costs incurred in connection with the
construction for entities which the Company does not control. Costs of
Portfolio Construction are capitalized as improvements on the Company's
balance sheet and profit, if any, in connection with such activities is
recognized only upon sale of the property.
(4) The combined historical financial statements of the Company are comprised of
the operations, assets and liabilities of the Company, JSI and certain other
affiliated entities (the "Combined Entities"). Prior to October 1, 1995, JSI
operated as an S corporation for income tax purposes and was, therefore,
subject to no income taxes until October 1, 1995. In addition, certain of
the Combined Entities are partnerships for federal income tax purposes and
were, therefore, subject to no income taxes. Pro forma income tax, computed
at a marginal effective rate of 34%, has been calculated for all periods as
if the Company had been subject to income taxes as a C corporation during
such periods.
(5) EBITDA, or earnings before interest, income taxes, depreciation and
amortization, is a supplemental financial measurement used by the Company in
the evaluation of its business. EBITDA is calculated by adding interest,
income taxes, depreciation and amortization expense to net income. EBITDA
should not be construed as an alternative to income from operations or cash
flows from operating activities (as determined in accordance with GAAP).
(6) Represents the number of homes subject to pending sales contracts which have
not closed.
(7) Represents the uncompleted portion of design-build construction under
fixed-price contracts.
(8) Pro Forma Balance Sheet Data give effect to the Reorganization as if it had
occurred on March 31, 1997.
(9) Pro Forma As Adjusted Balance Sheet Data give effect to (i) the
Reorganization and (ii) the Offering and the application of the net proceeds
therefrom, as if each had occurred on March 31, 1997.
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered before investing in the
Common Stock. Except for historical information contained herein, the
information in this Prospectus contains forward-looking statements that involve
risks and uncertainties, such as statements concerning the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
Prospectus should be read as being applicable to all related forward-looking
statements wherever they appear in this Prospectus. The Company's actual results
could differ materially from those discussed in the Prospectus. Factors that
could cause or contribute to such differences include those discussed below, as
well as those discussed elsewhere herein.
DEPENDENCE ON GREATER LAS VEGAS AREA
The Company has conducted all of its business to date in the greater Las
Vegas metropolitan area. Although management is considering certain additional
markets into which the Company may expand, management currently anticipates
that, for the foreseeable future, the Company will continue to conduct
substantially all of its business in the greater Las Vegas metropolitan area.
The Company's performance will, therefore, be dependent on the economic
conditions and population growth in this area. A decline in the economy or in
the rate of population growth in this area could have a material adverse effect
on the Company. See "Business -- Las Vegas Market."
RISKS OF HOMEBUILDING AND OTHER REAL ESTATE DEVELOPMENT
General. All components of the Company's real estate development business
(homebuilding, design-build services for third parties and portfolio property
development) are subject to various risks including, without limitation, risks
relating to the ability to locate and consummate the acquisition of suitable
parcels of land, the availability and timely receipt of zoning, land-use,
building, occupancy and other required regulatory permits or approvals, the cost
and timely completion of construction (including risks from causes beyond the
Company's control, such as weather, labor conditions or material costs and
shortages) and the availability of financing on favorable terms. These risks
could result in substantial unanticipated delays or expense and, under certain
circumstances, could prevent completion of development activities, any of which
could have a material adverse effect on the Company.
Fixed-Price Contracts. The Company undertakes its third-party design-build
projects under fixed-price contracts, subject to adjustment for agreed upon
change orders. As a result, the Company bears fully the risk of cost overruns.
Liability. The Company acts as general contractor on its construction
projects. Construction services are performed by the Company and by unaffiliated
subcontractors. As general contractor, the Company is responsible for the
performance of the entire contract, including work assigned to unaffiliated
subcontractors, and may be liable for personal injury or property damage caused
by the subcontractors. Should an uninsured loss or a loss in excess of insured
limits under its general liability, excess liability insurance or workers
compensation insurance occur, such loss could have a material adverse effect on
the Company.
Interest Rates; Mortgage Financing. The Company's ability to sell homes and
portfolio properties may be adversely affected by increases in interest rates or
the unavailability of mortgage financing, including home mortgages insured by
the Federal Housing Administration (the "FHA") or guaranteed by the Department
of Veterans Affairs (the "VA"). Mortgage interest rate increases and other
factors which adversely affect the ability of prospective buyers to finance home
or other property purchases could have a material adverse effect on the Company.
Risks Relating to Tax Credit Projects. In each of its last three fiscal
years, the Company derived a significant portion of its construction revenue
from the development of apartment complexes
8
<PAGE> 10
("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 ("Housing Tax Credit"). The continued
demand for Tax Credit Projects is dependent on the continued availability of the
Housing Tax Credit. There can be no assurance that the Housing Tax Credit will
not be reduced or eliminated in the future and any such reduction or elimination
could have a material adverse effect on the Company.
Tax Credit Projects are also structured to be eligible for financing
through one or more of the tax-exempt private activity revenue bond programs
sponsored by the Nevada Housing Division. The programs of the Nevada Housing
Division are intended to provide incentives for the construction, ownership and
financing of housing for low and middle income families. These incentives may
include lower interest rates on construction and permanent financing with
respect to the eligible project. The Company, as a sponsor of the Tax Credit
Projects, must obtain a private activity bond allocation from both the state and
the local government within whose jurisdiction the project will be located.
Private activity bond financing by the states is limited by the Internal Revenue
Code. Nevada currently has a total annual allocation of $150 million, of which
one-half is managed by the local governments. The Company generally makes
concurrent applications to the state and local governments for allocations in
matching amounts. The allocations are made by the state and local governments
based on established criteria. There can be no assurance that the Company will
continue to be able to obtain allocations of the private activity revenue bonds
for its Tax Credit Projects.
At March 31, 1997, the Tax Credit Partnerships were indebted to the Company
in the aggregate amount of approximately $17.5 million, representing developer
fees and land and construction costs. Of such amount, approximately $9.8 million
is payable out of loan proceeds or partner contributions and is expected to be
paid in the ordinary course from such sources. The approximate $7.7 million
balance is payable 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 receivables will be paid in
full or at all.
REAL ESTATE INVESTMENT RISKS
General. The Company's portfolio property investments are subject to
varying degrees of risk. Revenue from the Company's portfolio properties and
their values may be adversely affected by general economic conditions (including
business levels and unemployment rates), local real estate conditions (such as
oversupply of or a reduction in demand for similar properties), the
affordability of competitive alternative properties, increased operating costs
(including real estate taxes), governmental regulations and applicable laws
(including zoning, tax laws and rent control, although rent control does not
currently exist in Las Vegas), interest rate levels and the availability of
financing.
Illiquidity of Real Estate. Real estate investments are relatively illiquid
and, therefore, the ability of the Company to vary its portfolio promptly in
response to changes in economic or other conditions will be limited.
Dependence on Rental Income from Real Property. All of the Company's
operating rental properties are subject to the risks associated with the
inability to rent unleased space, both in connection with the initial lease-up
of newly completed properties and upon the expiration of tenant leases. There
can be no assurance that the Company's portfolio properties will achieve or
maintain occupancy levels sufficient to generate income in excess of their
respective operating expenses. In addition, certain significant expenditures
associated with an investment in real estate (such as mortgage payments, real
estate taxes and maintenance costs) generally are not reduced when circumstances
cause a reduction in income from the investment. If the Company's portfolio
9
<PAGE> 11
properties do not generate income sufficient to meet operating expenses,
including debt service and capital expenditures, the Company's results of
operations will be adversely affected.
The Company may be adversely affected by any financial difficulties
experienced by its significant tenants, including a bankruptcy, insolvency or
general downturn in the business of such a tenant. At any time, a tenant may
seek the protection of applicable bankruptcy laws, which could result in the
rejection and termination of such tenant's lease and thereby cause a reduction
in the Company's cash flow. No assurance can be given that any tenants will not
seek bankruptcy protection in the future or, if any tenants seek bankruptcy
protection, that they will affirm their leases and continue to make rental
payments in a timely manner.
Uninsured Loss. The Company carries comprehensive liability, rental loss
and all-risk (at full replacement cost) insurance with respect to all of the
property it owns, with policy specifications, insured limits and deductibles
customarily carried for similar properties by carriers deemed capable of
providing such coverage. An uninsured loss or a loss in excess of insured limits
could have a material adverse effect on the Company.
FINANCING; FUTURE CAPITAL REQUIREMENTS
The real estate development business is capital intensive and requires
significant up-front expenditures to acquire and entitle land and commence
development. The Company has incurred substantial indebtedness to finance its
development activities and to invest in its portfolio properties. As a result,
the Company is subject to the risks generally associated with debt financing,
including the risk that its cash available for debt service will be insufficient
to meet required payments of principal and interest, the risk of increased
payments or negative amortization as a result of increases in interest rates in
the case of indebtedness which bears interest at a variable rate and the risk
that indebtedness requiring balloon principal payments may not be able to be
repaid or refinanced when due. Furthermore, in the case of indebtedness secured
by the Company's real property, upon a default by the Company in its payment
obligations, the property could be foreclosed with a consequent loss of income
and asset value to the Company. The Company's indebtedness is generally fully
recourse to the Company. Accordingly, in the event of a default by the Company
under its indebtedness, the lender may proceed against all Company assets to
satisfy its debt and is not limited to the specific real property pledged as
security therefor.
At March 31, 1997, on a pro forma basis after giving effect to the
anticipated use of net proceeds of the Offering, total indebtedness of the
Company would have been approximately $36.3 million. In addition, the Tax Credit
Partnerships had approximately $49.0 million principal amount of indebtedness,
of which approximately $37.2 million represents construction financing which is
made on a recourse basis to the partnerships (and, therefore, to the Company as
general partner). There can be no assurance that the Company will be able to
repay or refinance its indebtedness (on acceptable terms or at all) as it
becomes due.
Future growth of the Company will depend on the Company's borrowing
capacity and its ability to raise capital. There can be no assurance that the
Company will continue to have access to funds sufficient to finance future
growth or, if available, that funds will be available on terms acceptable to the
Company. In addition, substantially all of the Company's existing indebtedness
is personally guaranteed by James C. Saxton, the Company's Chairman, Chief
Executive Officer and President, and his wife. Consistent with the Company's
status as a publicly traded corporation, Mr. Saxton has indicated to the Company
that he and his wife do not intend to provide personal guarantees for any future
indebtedness of the Company and the Company is seeking to obtain releases of the
Saxtons' guarantees of all existing indebtedness of the Company. The absence of
such personal guarantees may adversely affect the ability of the Company to
obtain additional financing on terms acceptable to the Company. In addition, the
Company has agreed to indemnify the guarantors for all amounts they are required
to pay under any personal guarantee of the Company's (or any Tax Credit
Partnership's) indebtedness.
10
<PAGE> 12
VARIABILITY OF RESULTS
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
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 metropolitan 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 homebuilding activities may cause it to experience seasonal variations
in its home sales as a result of the preference of home buyers to close new home
purchases either prior to the start of a new school year or prior to the end of
year holiday season.
DEPENDENCE ON KEY PERSONNEL
The Company is substantially dependent upon the efforts and skills of its
executive officers, particularly James C. Saxton, the Company's Chairman, Chief
Executive Officer and President. The loss of the services of Mr. Saxton or other
executive officers could have a material adverse effect on the Company. The
Company has entered into an employment agreement with Mr. Saxton and maintains
key man life insurance on Mr. Saxton in the amount of $5.0 million. See
"Management."
CONTROL BY CURRENT STOCKHOLDERS
After the consummation of the Offering, Mr. Saxton and members of his
immediate family will own an aggregate of approximately 70% of the outstanding
shares of Common Stock of the Company. As a result, Mr. Saxton and members of
his immediate family will be able to control the outcome of all matters
requiring stockholder approval and will be able to elect all of the directors of
the Company. Such control, which may have the effect of delaying, deferring or
preventing a change of control of the Company, is likely to continue for the
foreseeable future and significantly diminishes control and influence which
future stockholders may have in the Company. See "Principal Stockholders."
REGULATORY AND ENVIRONMENTAL RISKS
Building Regulation and Controls. The Company is subject to a variety of
statutes, ordinances, rules and regulations governing certain developmental
matters, building and site design. In particular, the Company may be required to
obtain the approval of numerous governmental authorities regulating such matters
as permitted land uses, levels of density and the installation of utility
services such as gas, electric, water and waste disposal. In addition, certain
fees, some of which may be substantial, may be imposed to defray the cost of
providing certain governmental services and improvements. The Company may be
subject to additional costs or delays or may be precluded from building a
project entirely because of "no growth" or "slow growth" initiatives, building
permit allocation ordinances, building moratoriums or similar governmental
regulations that could be imposed in the future. Such ordinances or moratoriums,
if imposed in the greater Las Vegas metropolitan area in the future, could have
a material adverse effect on the Company.
Potential Environmental Liability. The Company and its competitors are
subject to a variety of local, state and federal statutes, ordinances, rules and
regulations concerning the protection of
11
<PAGE> 13
health and the environment. The particular environmental laws which apply to any
given property vary greatly according to the property, its environmental
condition and its present and former use. Environmental laws may result in
delays, cause the Company to incur substantial compliance or other costs or
prohibit or severely restrict development in certain environmentally sensitive
regions or areas. In addition, environmental regulations can have an adverse
impact on the availability and price of certain raw materials such as lumber.
See "Business -- Regulatory and Environmental Matters."
Laws to Protect Disabled Persons. Certain federal and state laws require
that certain types of properties be accessible to disabled persons. Although the
Company believes that its properties are in substantial compliance with such
laws, noncompliance with such laws could result in imposition of fines, costs
associated with remedial construction and the award of damages to private
litigants. The Company intends to construct all future properties in compliance
with any then-existing requirements of laws to protect disabled persons.
Resident Income and Other Limitations. The Company is a general partner of
Tax Credit Partnerships which own and operate Tax Credit Projects and intends in
the future to act as a general partner of additional Tax Credit Partnerships
which will own Tax Credit Projects. Tax Credit Projects are subject to
restrictions that require that a specified percentage of the apartments be
rented to persons with incomes below a certain percentage of the local median
income and limit the amount of rent which may be charged for such apartments.
The Company, as general partner and property manager, is responsible for
ensuring compliance with any applicable tenant and rent restrictions. The
Company may be liable to the investor limited partners of the Tax Credit
Partnerships or others for certain losses resulting from any failure to comply
with the applicable restrictions and any such liability may be substantial. See
"Business -- Regulatory and Environmental Matters -- Resident Income and Other
Limitations."
EXPANSION INTO NEW MARKETS
The Company has conducted all of its business to date in the greater Las
Vegas metropolitan area. However, the Company's business and growth strategy
contemplates geographic expansion. The Company has had no experience
effectuating geographic expansion or managing operations which are
geographically diverse. The risks of such expansion include those associated
with a lack of knowledge of the local market and government regulations and
procedures, the absence of an established local customer base and reputation,
and the inability to identify and retain qualified employees and subcontractors.
The Company may seek to expand its operations geographically by acquiring
local developers that provide similar or compatible services to those offered by
the Company or by entering into joint venture arrangements with such developers
on a project-by-project or other basis. The Company is seeking to identify and
evaluate opportunities for acquisitions and joint ventures, but has no
agreements, understandings or arrangements with respect to any acquisition or
joint venture. In addition, the Company has not established any specific
criteria for any such acquisition or joint venture arrangement and management
will have complete discretion in determining the terms thereof.
Identifying potential acquisitions and joint venture partners can be
expensive and time consuming and there can be no assurance that the Company will
be able to effect any acquisition or joint venture. Furthermore, acquisitions
involve numerous risks, including difficulties in the assimilation of the
acquired entity's employees, operations and products, uncertainties associated
with operating in new markets and working with new customers, the potential loss
of the acquired entity's key employees and the costs associated with completing
the acquisition and integrating the acquired entity. Moreover, any future
acquisitions may result in potentially dilutive issuances of equity securities,
increased debt, cash payments and contingent liabilities or amortization expense
related to intangible assets acquired, any of which could have a material
adverse effect on the Company.
12
<PAGE> 14
COMPETITION
The real estate industry is highly competitive. The Company competes for
desirable properties, financing, raw materials and skilled labor. In each of its
business components, the Company competes against numerous developers and others
in the real estate business, many of which are larger and have greater financial
resources and better access to capital markets than the Company. The Company
competes on the basis of a complete package of real estate services it offers
its clients, as well as its reputation for fair pricing and quality
construction. The Company also competes with other owners and operators of real
properties for tenants and buyers of the portfolio properties it owns and
operates.
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE;
VOLATILITY
Prior to the Offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing on the Nasdaq
National Market, there can be no assurance that an active trading market for the
Common Stock will develop or be sustained. The initial public offering price of
the Common Stock offered hereby has been determined by negotiations between the
Company and the Representatives of the Underwriters. There can be no assurance
that the price at which the Common Stock will trade in the public market after
the Offering will not be lower than the initial public offering price. The
market price of the Common Stock could be subject to significant fluctuations in
response to such factors as, among others, variations in the Company's
anticipated or actual results of operations, limited trading volume in the
Common Stock, general market conditions or the real estate industry in general.
See "Underwriting."
DILUTION
Purchasers of Common Stock in the Offering will experience immediate
dilution of $5.70 in net tangible book value per share of Common Stock. See
"Dilution."
AUTHORIZATION OF PREFERRED STOCK
The Board of Directors has authority to issue up to 5,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of the Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the rights of
holders of Common Stock and under certain circumstances make it more difficult
for a third party to gain control of the Company. No shares of preferred stock
are outstanding and the Company has no current plans to issue any shares of
preferred stock. See "Description of Capital Stock -- Preferred Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
Offering, or the perception that such sales could occur, could adversely affect
the market price for the Common Stock. In addition to the 2,275,000 shares
offered hereby which will be freely tradable in the public market, 4,933,256
shares of Common Stock held by the existing stockholders will be immediately
eligible for sale in the public market in the quantities and manner permitted by
Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"). Each officer, director and holder of 5% or more of the
Company's Common Stock has agreed with the Underwriters not to offer, sell or
otherwise dispose of any shares of Common Stock for 180 days after the date of
this Prospectus without the prior written consent of Ladenburg Thalmann & Co.
Inc., on behalf of the Representatives. In addition, 410,886 additional shares
of Common Stock held by the existing stockholders, including 26,630 of the
shares of Common Stock held by the Company's Employee
13
<PAGE> 15
Stock Ownership Plan, and an aggregate of 104,410 shares of Common Stock
reserved for issuance pursuant to outstanding options will be available for sale
in the public market from time to time pursuant to exemptions from registration
requirements or upon registration. Following completion of the Offering, the
Company intends to file a Registration Statement on Form S-8 under the
Securities Act to register an aggregate of 654,410 shares of Common Stock
reserved for issuance under outstanding options, the Company's Management Stock
Option Incentive Plan and the Company's Non-Employee Director Stock Option Plan.
See "Management -- Stock Option Plans" and "Shares Eligible for Future Sale."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,275,000 shares of
Common Stock offered hereby (at the assumed initial public offering price of
$9.50 per share) are estimated to be approximately $18.5 million ($21.5 million
if the over-allotment option is exercised in full), after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
The Company intends to use the net proceeds approximately as follows: (i)
to repay $8.1 million of indebtedness, of which $3.4 million represents
indebtedness to the Company's five principal stockholders (see "Principal
Stockholders") and $1.6 million represents indebtedness to Dorothy Kidd, Mr.
Saxton's sister, and Paul Eisenberg, a proposed director of the Company (see
"Certain Relationships and Related Transactions"); (ii) $5.8 million to acquire
144 acres of land for planned home development; (iii) $2.8 million to acquire
the interests of various parties in certain properties in connection with the
Reorganization and (iv) the balance, to fund the Company's development
activities and for general corporate purposes, which may include the repayment
of additional indebtedness and strategic acquisitions. The Company has no
agreements, understandings or arrangements with respect to any such acquisition.
Substantially all of the indebtedness to be repaid with a portion of the net
proceeds of the Offering, other than the Subordinated Dividend Notes held by
existing stockholders (see Note 12 of Notes to Combined Financial Statements
included elsewhere herein), matures in 1997 and represents loans for general
corporate purposes, including land acquisition. At March 31, 1997, the weighted
average annual interest rate was approximately 14.5% on such indebtedness other
than indebtedness to the existing stockholders which bears no interest.
Pending application, the Company intends to invest the net proceeds of the
Offering in investment-grade, short-term, interest-bearing securities or
instruments.
DIVIDEND POLICY
The Company currently intends to retain all future earnings for use in the
Company's business and therefore does not anticipate declaring or paying
dividends on the Common Stock in the foreseeable future. Any future
determination as to the payment of dividends will be at the discretion of the
Board of Directors of the Company, and will depend on the Company's financial
condition, results of operations, capital requirements and such other factors as
the Board of Directors deems relevant.
Because the Company was comprised of JSI, an S corporation until October 1,
1995, and various limited and general partnerships, a portion of the net income
of such entities was distributed to the owners of such entities in each of the
past two years. See "Certain Relationships and Related Transactions."
THE REORGANIZATION
Concurrently with the closing of the Offering, the transactions described
below (collectively, the "Reorganization") will be consummated by the Company
and others for the principal purpose of
14
<PAGE> 16
transferring to the Company the ownership of all investment properties and all
interests in partnerships which own properties which are currently owned by
James C. Saxton, his wife (Dorothy J. Saxton), and their adult children (Michele
Saxton-Pori, Lee-Ann Saxton and James C. Saxton II) (the "Contributing
Stockholders"), alone or with one or more third parties. In addition, as part of
the Reorganization, certain outstanding indebtedness between the Company and the
Contributing Stockholders will be satisfied.
The Reorganization will be comprised of the transactions summarized below:
Acquisition of Partnership Interests of Third Parties. The Company will
acquire the noncontrolling partnership interests of five third-party investors,
including Paul Eisenberg, a proposed director of the Company, in four limited
and general partnerships which own an aggregate of six operating properties and
approximately 3.3 acres of undeveloped land, for an aggregate of approximately
$2.8 million in cash from the net proceeds of the Offering. The operating
properties owned by such partnerships are identified on the table of operating
properties in the section of this Prospectus entitled "Business -- Property
Operations and Management" as follows: Levitz, Furniture Expo, Woody's
Furniture, Americana, Arcata Industrial Park and JCH Wire and Cable. No
third-party determination of the value was sought or obtained in connection with
the acquisition by the Company of the partnership interests. The consideration
to be paid was based on the value of the partnerships' real property and other
assets as determined by negotiation between the Company and the third-party
partners.
Contribution of Partnership Interests of the Contributing Stockholders. The
Contributing Stockholders will contribute to the Company (a) their interests in
the partnerships described in the preceding paragraph and (b) their interests in
three additional limited and general partnerships which own an aggregate of six
operating properties, two properties under construction and approximately 5.6
acres of undeveloped land. The operating properties owned by the three
additional partnerships are identified on the table of operating properties in
the section of this Prospectus entitled "Business -- Property Operations and
Management" as follows: Nellis Express Village, Sahara/Decatur, Nellis/Stewart,
General Services Administration, Flamingo Point and Sahara Vista. All interests
in partnerships to be acquired from the Contributing Stockholders will be
acquired by the Company as additional capital contributions of such stockholders
for which the Company will neither pay any consideration nor issue any shares of
Common Stock.
Upon completion of the acquisitions and contributions of partnership
interests described above, the Company will own 100% of the economic interest in
the partnerships, the partnerships will be dissolved by operation of law and all
assets, subject to all liabilities, of such partnerships will be transferred to
the Company.
Additional Contributions by James C. Saxton. Mr. Saxton will also
contribute to the Company, for no additional consideration, (a) his direct or
indirect general partner interest in four Tax Credit Partnerships, subject to
receiving the consent described below, and (b) an assignment of his 50% economic
interest in an unconsolidated general partnership with Paul Eisenberg, a
proposed director of the Company, which owns two small retail properties (the
"Retail Partnership"). The contribution of Mr. Saxton's general partner interest
in the Tax Credit Partnership which owns Saratoga Palms East I is subject to the
receipt of the consent of the mortgage lender (the "SPE Consent"). Although the
Company expects to receive the SPE Consent by the closing of the Reorganization,
there can be no assurances that such consent will be obtained by such date or at
all. If the SPE Consent is not obtained by the closing of the Reorganization,
Mr. Saxton will remain the managing general partner of Saratoga Palms East I
until the SPE Consent is received. Mr. Saxton has agreed that until the SPE
Consent is received he will contribute to the Company an amount equal to all
distributions he receives in respect of his general partner interest. As a
result of such transactions, and assuming the SPE Consent is obtained, the
Company will own a general partner interest in all of the Tax Credit
Partnerships described in the section of this Prospectus entitled
"Business -- Design-Build Services -- Tax Credit Projects" and will own a 50%
interest in the Retail Partnership.
15
<PAGE> 17
Satisfaction of Outstanding Indebtedness. The Company is indebted to the
Contributing Stockholders in the aggregate amount of $8.1 million, which amount
is represented by non-interest bearing notes of the Company, with original terms
of 10 years and subordinated to all existing Company debt (the "Subordinated
Dividend Notes"). Of such Subordinated Dividend Notes, $6.5 million in aggregate
principal amount was distributed to the Contributing Stockholders in December
1994 and represented the Company's estimated undistributed S corporation
earnings as of December 31, 1994. The $1.6 million balance of the Subordinated
Dividend Notes was issued to the Contributing Stockholders in September 1996 in
connection with loans of equal amount to the Company by the Contributing
Stockholders. The Company is also indebted to Mr. Saxton in the amount of
$695,440 on account of a non-interest bearing demand loan made by Mr. Saxton to
the Company in July 1996. The Contributing Stockholders are indebted to the
Company in the aggregate amount of approximately $727,000. See "Certain
Relationships and Related Transactions."
The Company and the Contributing Stockholders will satisfy their respective
obligations to the other as follows: (a) the approximately $727,000 outstanding
balance of loans by the Company to the Contributing Stockholders will be offset
against an equal amount of Subordinated Dividend Notes; (b) the Company will
issue 384,256 shares of Common Stock to the Contributing Stockholders in
satisfaction of approximately $3.7 million of Subordinated Dividend Notes, based
on a per share price of $9.50; (c) the Company will issue the Saxton Warrants
for 400,000 shares of Common Stock, exercisable at 120% of the initial public
offering price if the Company achieves specified levels of after tax net income
in 1997 and 1998, in satisfaction of $1.0 million of Subordinated Dividend
Notes; and (d) the Company will utilize a portion of the net proceeds of the
Offering to repay the $2.7 million balance of Subordinated Dividend Notes and
$695,440 of other indebtedness. See "Use of Proceeds," "Certain Relationships
and Related Transactions" and "Description of Capital Stock -- Saxton Warrants
and Registration Rights."
Upon consummation of the Reorganization, ownership of all of the real
property interests held by the Contributing Stockholders, other than their
personal residences, will have been transferred to the Company. After the
consummation of the Reorganization, the Contributing Stockholders intend to
engage in the real estate business exclusively through the Company.
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<PAGE> 18
DILUTION
The pro forma net tangible book value of the Company at March 31, 1997,
after giving effect to the Reorganization, was $10.5 million, or $1.96 per
share. Pro forma net tangible book value per share represents the Company's pro
forma net tangible assets less total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the sale by the
Company of the shares of Common Stock offered hereby (at an assumed initial
public offering price of $9.50 per share) and the application of the net
proceeds therefrom, the pro forma net tangible book value of the Common Stock at
March 31, 1997 would have been approximately $29.0 million, or $3.80 per share.
This represents an immediate increase in pro forma net tangible book value of
Common Stock of $1.84 per share to existing stockholders and an immediate
dilution of $5.70 per share to purchasers of Common Stock in the Offering. The
following table illustrates the dilution per share to the purchasers of shares
of Common Stock in the Offering.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................ $9.50
Pro forma net tangible book value per share as of March 31, 1997......... $1.96
Increase per share attributable to the Offering.......................... 1.84
-----
Pro forma as adjusted net tangible book value per share after the
Offering................................................................. 3.80
-----
Dilution per share to new investors........................................ $5.70
=====
</TABLE>
The following table sets forth, on a pro forma basis after giving effect to
the Reorganization as of March 31, 1997, the number of shares of Common Stock
acquired from the Company, the total consideration paid and the average price
per share paid by the existing stockholders and the new investors purchasing
shares of Common Stock in the Offering (at an assumed initial public offering
price of $9.50 per share).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 5,344,142 70% $10,482,000 33% $1.96
New investors.................... 2,275,000 30% 21,612,500 67% $9.50
--------- --- ----------- ---
Total.................. 7,619,142 100% $32,094,500 100%
========= === =========== ===
</TABLE>
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<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1997 (i) on an actual basis, (ii) on a pro forma basis to reflect the
Reorganization and (iii) on a pro forma basis as adjusted to reflect the
Reorganization and the issuance of 2,275,000 shares of Common Stock offered
hereby at the assumed initial offering price of $9.50 per share and the
application of the estimated net proceeds therefrom. See "The Reorganization"
and "Use of Proceeds." This table should be read in conjunction with the
Combined Financial Statements of the Company and related notes thereto and the
discussion under "Management's Discussion and Analysis of Financial Condition
and Results of Operations," in each case included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
DEBT:
Notes payable..................................... $38,170 $38,170 $35,117
Notes payable to related parties.................. 2,333 2,333 --
Capital lease obligations......................... 1,148 1,148 1,148
Subordinated dividend notes....................... 8,077 2,700 --
------- ------- -------
Total debt................................ 49,728 44,351 36,265
------- ------- -------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par value; 5,000,000 shares
authorized; none outstanding................... -- -- --
Common Stock, $.001 par value; 50,000,000 shares
authorized; 4,959,886 shares issued and
outstanding actual; 5,344,142 shares issued and
outstanding pro forma; 7,619,142 shares issued
and outstanding pro forma as adjusted(1)....... 5 5 8
Additional paid-in capital........................ 1,021 5,671 22,944
Partners' deficit................................. (421) (1,253) --
Retained earnings................................. 6,059 6,059 6,029
------- ------- -------
Total stockholders' equity................ 6,664 10,482 28,981
------- ------- -------
TOTAL CAPITALIZATION................................ $56,392 $54,833 $65,246
======= ======= =======
</TABLE>
- ---------------
(1) Excludes (i) 104,410 shares issuable upon the exercise of options granted by
the Company to certain employees and others in December 1994, (ii) 500,000
shares reserved for issuance upon the exercise of options issuable under the
Company's Management Stock Option Incentive Plan, (iii) 50,000 shares
reserved for issuance upon the exercise of options issuable under the
Company's Non-Employee Director Stock Option Plan, (iv) 400,000 shares
reserved for issuance upon the exercise of the Saxton Warrants to be
purchased as part of the Reorganization, exercisable at 120% of the initial
public offering price if the Company achieves specified levels of after tax
net income in 1997 and 1998 and (v) 227,500 shares reserved for issuance
upon the exercise of the Representatives' Warrants, exercisable at 120% of
the initial public offering price. See "Reorganization,"
"Management -- Individual Stock Option Agreements," "Management -- Stock
Option Plans," "Description of Capital Stock" and "Underwriting."
18
<PAGE> 20
SELECTED COMBINED AND PRO FORMA FINANCIAL AND OPERATING INFORMATION
The following tables set forth selected financial and operating information
for the Company on a combined historical basis, on a pro forma basis to reflect
the Reorganization and on a pro forma as adjusted basis to reflect the
Reorganization and the Offering. The combined historical financial and operating
information is comprised of the operations, assets and liabilities of the
Company and certain properties which were owned and operated by entities
affiliated with and controlled by the Company during the periods presented.
These operations and properties will be acquired by the Company in connection
with the consummation of the Reorganization and the Offering.
The following information should be read in conjunction with all of the
financial statements and notes thereto included elsewhere in this Prospectus.
The combined historical operating data of the Company for the years ended
December 31, 1994, 1995 and 1996 have been derived from the historical Combined
Financial Statements audited by KPMG Peat Marwick LLP, independent certified
public accountants, whose report as of December 31, 1995 and 1996 and for each
of the years in the three-year period ended December 31, 1996 is included
elsewhere in this Prospectus. The operating data for the years ended December
31, 1992 and 1993 and for the three months ended March 31, 1996 and 1997 have
been derived from unaudited combined financial statements and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein. The
Company believes that the book value of its real estate, which reflects
historical costs less accumulated depreciation, is not indicative of the current
market value of such assets. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements, the notes thereto and other financial
information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1996
--------------------------------
PRO
PRO FORMA AS
1992 1993 1994 1995 ACTUAL FORMA(1) ADJUSTED(2)
------- ------- ------- ------- ------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(3):
Revenue:
Construction revenue......... $10,569 $11,951 $10,863 $22,090 $41,875 $41,875 $41,875
Sales of homes............... -- -- -- -- 12,963 12,963 12,963
Sales of commercial
properties................. 7,693 7,950 8,072 9,850 4,772 4,772 4,772
Rental revenue............... 3,559 3,328 3,288 3,531 3,922 3,922 3,922
Other revenue................ 100 143 137 99 536 536 536
------- ------- ------- ------- ------- ------- -------
Total revenue............ 21,921 23,372 22,360 35,570 64,068 64,068 64,068
------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Cost of construction......... 9,918 11,267 10,713 18,194 33,078 33,078 33,078
Cost of homes sold........... -- -- -- -- 10,967 10,967 10,967
Cost of commercial
properties sold............. 6,031 6,876 6,027 9,373 3,444 3,444 3,444
Rental operating cost........ 737 645 635 631 784 784 784
------- ------- ------- ------- ------- ------- -------
Total cost of revenue.... 16,686 18,788 17,375 28,198 48,273 48,273 48,273
------- ------- ------- ------- ------- ------- -------
Gross profit............. 5,235 4,584 4,985 7,372 15,795 15,795 15,795
------- ------- ------- ------- ------- ------- -------
General and administrative
expenses................... 1,258 1,152 1,736 1,957 3,425 3,425 3,425
Depreciation and amortization 746 653 745 722 1,079 1,130 1,055
------- ------- ------- ------- ------- ------- -------
Operating income............. 3,231 2,779 2,504 4,693 11,291 11,240 11,315
Other income (expense):
Joint venture earnings (loss) (26) 64 6 1,131 (43) (43) (43)
Interest expense, net........ (2,202) (1,628) (1,475) (2,127) (2,748) (2,748) (1,898)
------- ------- ------- ------- ------- ------- -------
Total other income
(expense).............. (2,228) (1,564) (1,469) (996) (2,791) (2,791) (1,941)
------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes... 1,003 1,215 1,035 3,697 8,500 8,449 9,374
Pro forma income taxes(4)..... 341 413 352 1,257 2,890 2,873 3,187
------- ------- ------- ------- ------- ------- -------
Pro forma net income.......... $ 662 $ 802 $ 683 $ 2,440 $ 5,610 $ 5,576 $ 6,187
======= ======= ======= ======= ======= ======= =======
Pro forma net income per
share....................... $ 1.04 $ 0.87
Number of shares outstanding.. 5,344 7,106
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1997
--------------------------------
PRO
PRO FORMA AS
1996 ACTUAL FORMA(1) ADJUSTED(2)
--------- ------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA(3):
Revenue:
Construction revenue......... $ 8,021 $ 7,563 $ 7,563 $ 7,563
Sales of homes............... 2,112 2,958 2,958 2,958
Sales of commercial
properties................. -- 4,895 4,895 4,895
Rental revenue............... 963 923 923 923
Other revenue................ 84 201 201 201
--------- ------- ------- -------
Total revenue............ 11,180 16,540 16,540 16,540
--------- ------- ------- -------
Cost of revenue:
Cost of construction......... 6,326 6,326 6,326 6,326
Cost of homes sold........... 1,762 2,435 2,435 2,435
Cost of commercial
properties sold............. -- 3,392 3,392 3,392
Rental operating cost........ 177 227 227 227
--------- ------- ------- -------
Total cost of revenue.... 8,265 12,380 12,380 12,380
--------- ------- ------- -------
Gross profit............. 2,915 4,160 4,160 4,160
--------- ------- ------- -------
General and administrative
expenses................... 434 794 794 794
Depreciation and amortization 246 286 298 301
--------- ------- ------- -------
Operating income............. 2,235 3,080 3,068 3,065
Other income (expense):
Joint venture earnings (loss) -- -- -- --
Interest expense, net........ (607) (739) (739) (557)
--------- ------- ------- -------
Total other income
(expense).............. (607) (739) (739) (557)
--------- ------- ------- -------
Income before provision
for income taxes... 1,628 2,341 2,329 2,508
Pro forma income taxes(4)..... 554 796 792 853
--------- ------- ------- -------
Pro forma net income.......... $ 1,074 1,545 1,537 1,655
========= ======= ======= =======
Pro forma net income per
share....................... $ 0.20 $ 0.29 $ 0.23
Number of shares outstanding.. 5,344 5,344 7,092
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
EBITDA (in thousands)(5).................................. $ 4,174 $ 3,753 $ 3,752 $ 6,812 $12,474 $ 2,499 $ 3,423
Cash Flows:
Provided by (Used in) Operating Activities.............. (180) (405) (1,552) (1,465) (3,708) (1,675) 386
Provided by (Used in) Investing Activities.............. 2,597 1,084 (1,420) (3,317) 818 (1,305) 653
Provided by (Used in) Financing Activities.............. (2,429) (607) 2,680 5,221 3,988 2,573 (1,541)
Single-family homes:
New contracts, net of cancellations..................... -- -- -- -- 210 60 59
Closings................................................ -- -- -- -- 173 30 37
Backlog (at period end)(6).............................. -- -- -- -- 37 30 31
Homes remaining for sale (at period end)................ -- -- -- -- 9 159 68
Aggregate sales value of backlog (in thousands)......... -- -- -- -- $ 2,970 $ 2,156 $ 2,408
Average sales price per home closed..................... -- -- -- -- $74,930 $70,400 $79,950
Design-build projects:
Number of contracts awarded............................. 17 13 10 4 6 0 1
Backlog (at period end) (in thousands)(7)............... $30,157 $30,826 $31,464 $52,075 $21,130 $42,405 $28,845
Portfolio properties:
Number of properties developed.......................... 3 3 5 3 5 2 1
Number of properties sold............................... 2 2 7 3 3 0 2
Number of properties owned (at period end).............. 15 16 14 14 16 16 15
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------------
DECEMBER 31, PRO FORMA
----------------------------------------------- PRO AS
1992 1993 1994 1995 1996 ACTUAL FORMA(8) ADJUSTED(9)
------- ------- ------- ------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 213 $ 345 $ 53 $ 492 $ 1,590 $ 1,088 $ 1,088 $ 4,303
Real estate properties, net.............. 26,635 24,393 25,154 31,966 38,808 36,967 38,945 44,788
Total assets............................. 31,614 32,107 35,682 49,580 67,957 66,654 67,905 75,375
Total debt............................... 23,020 21,243 31,952 39,969 49,710 49,728 44,351 36,265
Stockholders' equity..................... 7,057 7,732 908 3,693 6,291 6,664 10,482 28,981
</TABLE>
- ---------------
(1) Pro Forma Income Statement Data for the year ended December 31, 1996 and for
the three months ended March 31, 1997 give effect to the Reorganization as
if it had occurred on January 1, 1996. See "The Reorganization."
(2) Pro Forma As Adjusted Income Statement Data for the year ended December 31,
1996 and for the three months ended March 31, 1997 give effect to (i) the
Reorganization as if it had occurred on January 1, 1996, (ii) the reduction
in interest expense resulting from the assumed repayment of debt with a
portion of the net proceeds of the Offering as if such repayment had
occurred on January 1, 1996, and (iii) the additional number of shares
outstanding from the beginning of the period equal to the aggregate number
of shares the Company would have to sell at the assumed initial public
offering price of $9.50 per share to acquire the interests of unaffiliated
parties in various properties in connection with the Reorganization, to
acquire land for planned home development and to repay debt utilizing a
portion of the net proceeds of the Offering.
(3) In accordance with GAAP, the income statement does not include construction
revenue and costs incurred in connection with Portfolio Construction, but
does include construction revenue and costs incurred in connection with the
construction for entities which the Company does not control. Costs of
Portfolio Construction are capitalized as improvements on the Company's
balance sheet and profit, if any, in connection with such activities is
recognized only upon sale of the property.
(4) The combined historical financial statements of the Company are comprised of
the operations, assets and liabilities of the Combined Entities. Prior to
October 1, 1995, JSI operated as an S corporation for income tax purposes
and was, therefore, subject to no income taxes until October 1, 1995. In
addition, certain of the Combined Entities are partnerships for federal
income tax purposes and were, therefore, subject to no income taxes. Pro
forma income tax, computed at a marginal effective rate of 34%, has been
calculated for all periods as if the Company had been subject to income
taxes as a C corporation during such periods.
(5) EBITDA is a supplemental financial measurement used by the Company in the
evaluation of its business. EBITDA is calculated by adding interest, income
taxes, depreciation and amortization expense to net income. EBITDA should
not be construed as an alternative to income from operations or cash flows
from operating activities (as determined in accordance with GAAP).
(6) Represents the number of homes subject to pending sales contracts which have
not closed.
(7) Represents the uncompleted portion of design-build construction under
fixed-price contracts.
(8) Pro Forma Balance Sheet Data give effect to the Reorganization as if it had
occurred on March 31, 1997.
(9) Pro Forma As Adjusted Balance Sheet Data give effect to (i) the
Reorganization and (ii) the Offering and the application of the net proceeds
therefrom, as if each had occurred on March 31, 1997.
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion is based primarily on the Combined Financial
Statements of the Company and should be read in conjunction with "Selected
Combined and Pro Forma Financial and Operating Information" and the Combined
Financial Statements, including the notes thereto, and other financial
information appearing elsewhere in this Prospectus. The Combined Financial
Statements of the Company are comprised of the operations, assets and
liabilities of the Company and of certain properties which were owned and
operated by entities affiliated with and controlled by the Company during the
periods presented. These operations and properties will be acquired by the
Company in connection with the consummation of the Reorganization. See "The
Reorganization." The pro forma effects of the Reorganization and the Offering
are set forth in the Unaudited Pro Forma Condensed Consolidated Financial
Statements of the Company, which are included elsewhere in this Prospectus.
The Company is an integrated real estate company which engages in (i) the
design, development, construction and sale of single-family homes and portfolio
properties, (ii) the performance of design-build services for third-party
clients under fixed-price construction contracts and (iii) property operations
and management which generate rental income and management fees. During the past
three years, the Company has added residential property development to its
business focus with its entry into the single-family home development business
in 1995, which first generated sales in 1996, and its increased development of
Tax Credit Projects.
Revenue from home sales and portfolio property sales is recognized based
upon the sales price at the time of closing. Revenue from construction contracts
is recognized on the percentage-of-completion method, based upon the ratio of
costs incurred to total estimated costs. All other revenue is based on accrual
accounting. Revenue resulting from the sales of homes and portfolio properties
as well as from the award and timing of design-build construction contracts may
vary significantly from period to period.
On September 30, 1995, the Company terminated its election to be treated as
an S corporation for income tax purposes. As a result, effective October 1,
1995, the Company became subject to federal income tax.
21
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth, for periods indicated, information derived
from the Company's Combined Statements of Income expressed as a percentage of
total revenue unless otherwise noted:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Construction revenue................ 48.6% 62.1% 65.4% 71.7% 45.7%
Sales of homes...................... -- -- 20.2 18.9 17.9
Sales of commercial properties...... 36.1 27.7 7.4 -- 29.6
Rental revenue...................... 14.7 9.9 6.1 8.6 5.6
Other revenue....................... 0.6 0.3 0.9 0.8 1.2
----- ----- ----- ----- -----
Total revenue.................... 100.0 100.0 100.0 100.0 100.0
Cost of Revenue:
Cost of construction(1)............. 98.6 82.4 79.0 78.9 83.6
Cost of homes sold(1)............... -- -- 84.6 83.4 82.3
Cost of commercial properties 74.7 95.2 72.2 -- 69.3
sold(1)..........................
Rental operating cost(1)............ 19.3 17.9 20.0 18.4 24.6
Total cost of revenue............ 77.7 79.3 75.3 73.9 74.8
----- ----- ----- ----- -----
Gross profit..................... 22.3 20.7 24.7 26.1 25.2
General and administrative expenses... 7.8 5.5 5.3 3.9 4.8
Depreciation and amortization......... 3.3 2.0 1.7 2.2 1.7
----- ----- ----- ----- -----
Operating income................. 11.2 13.2 17.7 20.0 18.7
Other income (expense):
Joint venture earnings (loss)....... -- 3.2 (0.1) -- --
Interest expense, net............... (6.6) (6.0) (4.3) (5.4) (4.5)
----- ----- ----- ----- -----
Total other income (expense)..... (6.6) (2.8) (4.4) (5.4) (4.5)
----- ----- ----- ----- -----
Income before provision for income 4.6% 10.4% 13.3% 14.6% 14.2%
taxes...............................
</TABLE>
- ---------------
(1) Shown as percentage of corresponding revenue items.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenue. Total revenue increased by $5.3 million, or 47.3%, from $11.2
million for the three months ended March 31, 1996 to $16.5 million for the three
months ended March 31, 1997. Construction revenue decreased by $458,000, or
5.7%, from $8.0 million for the three months ended March 31, 1996 to $7.6
million for the three months ended March 31, 1997, primarily due to a higher
amount of revenue being earned on Tax Credit Projects during the three months
ended March 31, 1996 than during the comparable period in 1997. Sales of
single-family homes increased by $846,000, or 40.1%, from $2.1 million for the
three months ended March 31, 1996 to $3.0 million for the three months ended
March 31, 1997. The increase was primarily due to the Company's increased
activity in the single-family homebuilding market in 1997. Sales of commercial
properties was $4.9 million for the three months ended March 31, 1997,
reflecting two property sales. There were no property sales during the three
months ended March 31, 1996. Rental revenue decreased by $40,000, or 4.2%, from
$963,000 for the three months ended March 31, 1996 to $923,000 for the three
months ended March 31, 1997, primarily due to the sales of revenue generating
properties.
22
<PAGE> 24
This decrease was partially offset by rent increases and portfolio properties
commencing operations.
Cost of Revenue. Total cost of revenue increased by $4.1 million, or 49.8%,
from $8.3 million for the three months ended March 31, 1996 to $12.4 million for
the three months ended March 31, 1997. Cost of construction was unchanged at
$6.3 million for the periods ending March 31, 1996 and 1997. Cost of
construction as a percentage of construction revenue increased from 78.9% for
the three months ended March 31, 1996 to 83.6% for the three months ended March
31, 1997. This increase was primarily due to higher indirect costs. Cost of
homes sold increased by $673,000, or 38.2%, from $1.8 million for the three
months ended March 31, 1996 to $2.4 million for the three months ended March 31,
1997. Cost of homes sold as a percentage of sales of homes decreased from 83.4%
for the three months ended March 31, 1996 to 82.3% for the three months ended
March 31, 1997. This decrease was primarily due to sales price increases
exceeding cost increases which were generally associated with the increase in
sewer and water connection fees. Cost of commercial properties sold was $3.4
million for the three months ended March 31, 1997. Cost of commercial properties
sold as a percentage of sales of commercial properties was 69.3% for the three
months ended March 31, 1997. Rental operating costs increased by $50,000, or
28.2%, from $177,000 for the three months ended March 31, 1996 to $227,000 in
for the three months ended March 31, 1997, primarily due to the sale of a rental
property with respect to which the Company has maintained a master lease. Rental
operating costs as a percentage of rental revenue increased from 18.4% for the
three months ended March 31, 1996 to 24.6% for the three months ended March 31,
1997 primarily due to the master lease discussed above and increased operating
costs from portfolio properties which were in initial lease-up in 1997.
General and Administrative Expenses. General and administrative expenses
increased by $360,000, or 82.9%, from $434,000 for the three months ended March
31, 1996 to $794,000 for the three months ended March 31, 1997. This increase
was primarily 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 increased from 3.9% for
the three months ended March 31, 1996 to 4.8% for the three months ended March
31, 1997 as a result of the factors discussed above.
Depreciation and Amortization. Depreciation and amortization increased by
$40,000, or 16.3%, from $246,000 for the three months ended March 31, 1996 to
$286,000 for the three months ended March 31, 1997, primarily due to the
purchase of equipment for subcontracting trades and an increase in financing
fees associated with borrowings incurred for land acquisition and development.
Joint Venture Earnings. Joint venture activity was insignificant for the
three months ended March 31, 1996 and March 31, 1997.
Interest Expense. Net interest expense increased by $132,000, or 21.7%,
from $607,000 for the three months ended March 31, 1996 to $739,000 for the
three months ended March 31, 1997, primarily due to an increase in the amount
of, and interest rates on, borrowings incurred for land acquisition and
development. Interest expense as a percentage of total revenue decreased from
5.4% for the three months ended March 31, 1996 to 4.5% for the three months
ended March 31, 1997.
Income Before Provision For Income Taxes. As a result of the foregoing
factors, income before provision for income taxes increased by $713,000, or
43.8%, from $1.6 million for the three months ended March 31, 1996 to $2.3
million for the three months ended March 31, 1997. Income before provision for
income taxes as a percentage of total revenue decreased from 14.6% for the three
months ended March 31, 1996 to 14.2% for the three months ended March 31, 1997.
23
<PAGE> 25
1996 COMPARED TO 1995
Revenue. Total revenue increased by $28.5 million, or 80.1%, from $35.6
million in 1995 to $64.1 million in 1996. Construction revenue increased by
$19.8 million, or 89.6%, from $22.1 million in 1995 to $41.9 million in 1996,
primarily due to construction on four Tax Credit Projects and contract additions
on a Tax Credit Project completed in 1995. The Company receives revenue as both
general contractor and developer from the development of Tax Credit Projects.
The commencement of sales of single-family homes in January 1996 resulted in
sales of homes of $13.0 million in 1996. Sales of commercial properties
decreased by $5.1 million, or 51.5%, from $9.9 million in 1995 to $4.8 million
in 1996. Sales of commercial properties for 1995 reflect three property sales
and five land sales compared to three property sales and two land sales for
1996. Rental revenue increased by $391,000, or 11.1%, from $3.5 million in 1995
to $3.9 million in 1996, primarily due to rent increases and changes in the
portfolio of operating properties held during 1995 and 1996.
Cost of Revenue. Total cost of revenue increased by $20.1 million, or
71.2%, from $28.2 million in 1995 to $48.3 million in 1996. Cost of construction
increased by $14.9 million, or 81.8%, from $18.2 million in 1995 to $33.1
million in 1996, primarily due to a corresponding increase in construction
revenue. Cost of construction as a percentage of construction revenue decreased
from 82.4% in 1995 to 79.0% in 1996. This decrease was primarily due to the
Company beginning, in 1996, to perform certain subcontracting trades on its
construction projects and revenues from change orders approved in 1996 relating
to work performed on a Tax Credit Project in 1995. Cost of homes sold was $11.0
million in 1996, which represents 84.6% of sales of homes. Cost of commercial
properties sold decreased $5.9 million, or 63.3%, from $9.4 million in 1995 to
$3.4 million in 1996. Cost of commercial properties sold as a percentage of
sales of commercial properties decreased from 95.2% in 1995 to 72.2% in 1996 due
primarily to the greater number of land sales in 1995 which tend to have a lower
profit margin than sales of operating properties. Rental operating costs
increased by $153,000, or 24.2%, from $631,000 in 1995 to $784,000 in 1996,
primarily due to the net addition of two rental properties placed in service in
1996. Rental operating costs as a percentage of rental revenue increased from
17.9% in 1995 to 20.0% in 1996 primarily due to increased operating costs from
additional portfolio properties which were in initial lease-up in 1996.
General and Administrative Expenses. General and administrative expenses
increased by $1.4 million, or 75.0%, from $2.0 million in 1995 to $3.4 million
in 1996. This increase was primarily due to an increase in salary expense
associated with an increase in the number of employees related to the Company's
expansion into homebuilding, certain subcontracting trades and retail
operations. General and administrative expenses as a percentage of total revenue
decreased from 5.5% in 1995 to 5.3% in 1996 as a result of spreading the costs
over a larger revenue base.
Depreciation and Amortization. Depreciation and amortization increased by
$357,000, or 49.4%, from $722,000 in 1995 to $1.1 million in 1996, primarily due
to rental properties placed in service and the purchase of equipment for
subcontracting trades.
Joint Venture Earnings (Loss). Joint venture earnings (loss) decreased
approximately $1.2 million, or 103.8%, from $1.1 million in 1995 to a loss of
$43,000 in 1996. The decrease was due to the sale of an apartment complex by a
partnership in which the Company had a general partner interest. Subsequent to
1995, the Company's only joint venture activity was its interest in Tax Credit
Partnerships, which hold properties for long-term investment.
Interest Expense. Net interest expense increased by $621,000, or 29.2%,
from $2.1 million in 1995 to $2.7 million in 1996, primarily due to an increase
in the average amount of debt outstanding due to additional borrowings incurred
for land acquisition and development and an increase in the average interest
rate, offset, in part, by a decrease in interest income due to a reduction in
notes receivable outstanding.
24
<PAGE> 26
Income Before Provision For Income Taxes. As a result of the foregoing
factors, income before provision for income taxes increased by $4.8 million, or
130.0%, from $3.7 million in 1995 to $8.5 million in 1996. Income before
provision for income taxes as a percentage of total revenue increased from 10.4%
in 1995 to 13.3% in 1996.
1995 COMPARED TO 1994
Revenue. Total revenue increased by $13.2 million, or 59.1%, from $22.4
million in 1994 to $35.6 million in 1995. Construction revenue increased by
$11.2 million, or 103.4%, from $10.9 million in 1994 to $22.1 million in 1995,
primarily due to the construction on three Tax Credit Projects in 1995 compared
to one in 1994. Sales of commercial properties increased $1.8 million, or 22.0%,
from $8.1 million in 1994 to $9.9 million in 1995. Sales of commercial
properties for 1994 reflect seven property sales and two land sales and 1995
reflect three property sales and five land sales. The increase in revenue was
primarily due to one property sale in 1995 being substantially larger than any
sale in 1994. Rental revenue increased by $243,000, or 7.4%, from $3.3 million
in 1994 to $3.5 million in 1995, primarily due to rent increases and changes in
the portfolio of operating properties held during 1994 and 1995.
Cost of Revenue. Total cost of revenue increased by $10.8 million, or
62.3%, from $17.4 million in 1994 to $28.2 million in 1995. Cost of construction
increased by $7.5 million, or 69.8%, from $10.7 million in 1994 to $18.2 million
in 1995, primarily due to a corresponding increase in construction revenue. Cost
of construction as a percentage of construction revenue decreased from 98.6% in
1994 to 82.4% in 1995, primarily due to a larger percentage of construction
revenue being derived from Tax Credit Projects which tend to have a higher
profit margin than the Company's other construction projects. Cost of commercial
properties sold increased $3.3 million, or 55.5%, from $6.0 million in 1994 to
$9.4 million in 1995. Cost of commercial properties sold as a percentage of
sales of commercial properties increased from 74.7% in 1994 to 95.2% in 1995 due
primarily to the greater number of land sales in 1995 which tend to have a lower
profit margin than sales of operating properties. Rental operating cost
decreased slightly, from $635,000 in 1994 to $631,000 in 1995. Rental operating
cost as a percentage of rental revenue decreased from 19.3% in 1994 to 17.9% in
1995 as a result of spreading the fixed operating costs over a larger rental
revenue base.
General and Administrative Expenses. General and administrative expenses
increased $221,000, or 12.7%, from $1.7 million in 1994 to $2.0 million in 1995,
primarily as a result of an increase in salary expense associated with an
increase in the number of employees in connection with the Company's expansion.
General and administrative expenses as a percentage of total revenue decreased
from 7.8% in 1994 to 5.5% in 1995 as a result of spreading the costs over a
larger revenue base.
Depreciation and Amortization. Depreciation and amortization decreased by
$23,000, or 3.1%, from $745,000 in 1994 to $722,000 in 1995, primarily due to
the net effect of new rental properties placed in service, rental properties
sold and amortization of loan fees on loans refinanced.
Joint Venture Earnings. Joint venture earnings increased approximately $1.1
million, from $6,000 in 1994 to $1.1 million in 1995, due to the sale of an
apartment complex by a partnership in which the Company had a general partner
interest.
Interest Expense. Net interest expense increased $652,000, or 44.2%, from
$1.5 million in 1994 to $2.1 million in 1995 primarily due to an increase in the
average amount of debt outstanding from additional borrowings incurred for the
refinancing of a portfolio property and land acquisition, offset, in part, by a
decrease in interest income due to a reduction in notes receivable outstanding.
Income Before Provision For Income Taxes. As a result of the foregoing
factors, income before provision for income taxes increased $2.7 million, or
257.2%, from $1.0 million in 1994 to $3.7 million in 1995. Income before
provision for income taxes as a percentage of total revenue increased from 4.6%
in 1994 to 10.4% in 1995.
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<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied upon land and project financing, as
applicable, partner 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.
Funds needed for property operations are generally available from such
operations. The Company intends to continue to provide for its capital
requirements from these sources. Management believes that these sources,
together with a portion of the net proceeds of the Offering, will be sufficient
to provide for its capital requirements for at least the next 12 months.
Substantially all of the Company's existing indebtedness is fully recourse
to the borrower and is personally guaranteed by Mr. Saxton and his wife.
Consistent with the Company's status as a publicly traded corporation, Mr.
Saxton has indicated to the Company that he and his wife do not intend to extend
personal guarantees of any future indebtedness of the Company and the Company
and Mr. Saxton are seeking to obtain releases of the Saxtons' guarantees of all
existing indebtedness of the Company. Management anticipates that after the
Offering financing will be available to the Company without the necessity of
personal guarantees.
Upon consummation of the Offering and the application of a portion of the
proceeds therefrom to repay approximately $8.1 million of existing indebtedness
of the Company (including $2.7 million of Subordinated Dividend Notes), the
Company expects to have outstanding indebtedness of approximately $36.3 million.
Of such amount, approximately $12.0 million of the Company's indebtedness will
become due and payable prior to December 31, 1997. Of the indebtedness that will
become due and payable in 1997, approximately $8.4 million represents
construction financing which will convert to permanent loans or for which
take-out commitments have been obtained, subject to completion of construction
and satisfaction of other customary conditions. An additional $2.8 million
represents land loans which are expected to be repaid from construction loans.
The Company expects to refinance the $818,000 balance of its indebtedness
maturing in 1997 upon maturity at then current market rates. The weighted
average maturity of the Company's indebtedness expected to be outstanding
following the Offering is 3.5 years and the weighted average interest rate on
such indebtedness is 11.9% per annum, which includes the current weighted
average interest rate on the Company's floating rate debt. See -- "Inflation;
Interest Rates."
Net cash used in operating activities increased from $1.5 million in 1995
to $3.7 million in 1996. This increase was primarily due to increases in amounts
due from Tax Credit Partnerships, residential properties in development and
prepaid expenses and other assets. Net cash used in operating activities was
$1.7 million for the three months ended March 31, 1996. Net cash provided by
operating activities was $386,000 for the three months ended March 31, 1997.
This was primarily due to increases in due from Tax Credit Partnerships and
residential properties under development.
Net cash used in investing activities was $3.3 million in 1995. Net cash
provided by investing activities was $818,000 in 1996. The $4.1 million change
is primarily due to a decrease in expenditures for property acquisitions and
improvements in 1996. Net cash used in investing activities was $1.3 million for
the three months ended March 31, 1996. Net cash provided by investing activities
was $653,000 for the three months ended March 31, 1997. The increase was
primarily due to proceeds from sales of commercial properties.
Net cash provided by financing activities was $5.2 million in 1995 and $4.0
million in 1996. Financing activity in 1995 and 1996 consisted primarily of new
borrowings and refinancings which exceeded loan payments, loan retirements and
distributions. Net cash provided by financing activities was $2.6 million for
the three months ended March 31, 1996. Net cash used in financing activities was
$1.5 million for the three months ended March 31, 1997. This change was
primarily due to principal payments on notes payable and distributions paid.
The Company has utilized, and will continue to utilize, options as a method
of controlling and subsequently acquiring land. By controlling land, through
options on the future discretionary purchase of land, the Company attempts to
minimize its cash outlays and reduce its risk from changing market conditions.
While the Company attempts to prudently manage its acquisition and
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<PAGE> 28
development of property, the development of such property can have a negative
impact on liquidity due to the timing of acquisition and development activities.
If strategic acquisitions or joint venture opportunities arise, the capital
resources of the Company may be utilized to undertake such opportunities. The
timing and nature of these opportunities cannot be predicted and the financing
of any future strategic acquisition or joint venture may take a variety of
forms.
The Company anticipates that development of portfolio projects during 1997
will cost approximately $9.6 million in the aggregate, of which the Company
plans to finance $7.7 million 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 will continue 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 $250,000 of construction and computer equipment during
1997.
At March 31, 1997, the Tax Credit Partnerships were indebted to the Company
in the aggregate amount of approximately $17.5 million, representing developer
fees and land and construction costs. Of such amount, approximately $9.8 million
is payable to the Company by the Tax Credit Partnerships from loan proceeds and
additional capital contributions of the investor limited partners. The Company
anticipates that approximately $7.7 million of loan proceeds and capital
contributions will be paid to the Company during 1997 and that the remaining
$2.1 million will be paid to the Company during the first three quarters of
1998. The approximate $7.7 million balance 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 initial stages of development of an additional Tax Credit
Project to be known 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 Madre 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 Madre Mesa Tax
Credit Partnership. It is anticipated that the estimated total $16.5 million
cost of developing Madre Mesa will be financed in generally the same manner as
the Company's other Tax Credit Projects as follows: loan proceeds, 65%; partner
equity, 22% and deferred developer fees, 13%. The Company's capital
contribution, anticipated to be approximately $340,000, will be funded in cash
or as a contribution of a portion of its equity in the Madre Mesa land upon
closing of the construction loan. The investor limited partner's equity is
expected to be contributed in installments over a period of approximately 24
months. Approximately 40% of such contribution will be funded upon admission of
the investor limited partner to the Madre Mesa Tax Credit Partnership and the
balance will be contributed from time to time when specified conditions are
satisfied (i.e., completion of construction, certification of project costs and
award of tax credits by the Nevada Housing Division and achievement of specified
levels of operating cash flow).
The Company has made its capital contributions to the five 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.
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<PAGE> 29
BACKLOG
The Company's homes are generally offered for sale in advance of their
construction. The majority of the Company's homes sold in 1996 and during the
first quarter of 1997 were sold pursuant to standard sales contracts entered
into prior to commencement of construction. Such sales contracts are typically
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 March 31, 1996 and March 31, 1997, the Company had
30 homes and 31 homes, respectively, in backlog, representing aggregate sales
values of approximately $2.2 million and approximately $2.4 million,
respectively.
As part of its sales and marketing efforts, the Company builds and
maintains model homes in each of its active communities. The Company also builds
speculative homes (defined as homes which are under construction or completed
for which the Company does not yet have sales contracts) on a project-by-project
basis. See "Business -- Development Activities -- Homebuilding -- Marketing and
Sales." It is possible that, in the event of adverse economic or other business
conditions affecting home buying activity in the Company's markets, the Company
may be required to reduce prices or provide sales incentives to liquidate its
inventory of model or speculative homes. It is also possible that the Company
could be required to reduce prices or provide sales incentives to sell its model
homes at the conclusion of a particular community. Either of these actions, if
taken, could have the effect of depressing the Company's gross margin for the
relevant periods.
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 March 31, 1996 and March 31, 1997, the Company had backlog under
its design-build contracts of approximately $42.4 million and approximately
$28.8 million, respectively.
INFLATION; INTEREST RATES
Management believes that inflation has not had a material impact on the
Company's operations. Substantial increases in labor costs, workers'
compensation rates and employee benefits, equipment costs, material or
subcontractor costs could adversely affect the operations of the Company for
future periods to the extent that the Company is unable to pass such increases
on to its construction clients or the purchasers of its properties. Following
the closing of the Offering and the application of the net proceeds therefrom,
the Company expects to have outstanding approximately $22.7 million of floating
rate debt (exclusive of the indebtedness of unconsolidated partnerships of which
the Company is a general partner), currently bearing a weighted average interest
rate of 9.8% per annum. If the interest rates on the floating rate debt increase
in accordance with changes to the indices upon which the rates are based, debt
service obligations of the Company may increase. The increases may be partially
offset by increases in investment income from increased interest earnings.
The potential adverse impact of inflation on the Company's rental
operations is mitigated by the inclusion of rent adjustment clauses in its
longer-term nonresidential leases and by generally requiring tenants to pay
their share of operating expenses, including common area maintenance, real
property taxes, insurance and utilities. The Company's shorter-term
nonresidential leases and its residential leases, which are typically for terms
of six or 12 months, permit the Company to seek increased rents upon renewal or
reletting of the leased space.
Management believes that the Company's future homebuilding activities may
be affected by fluctuations in interest rates. Higher interest rates may
decrease the demand for new homes by making it more difficult for home buyers to
qualify for mortgages or to obtain mortgages at interest rates that are
acceptable to the potential buyers. In addition, the Company, as well as the
homebuilding industry in general, may be adversely affected during periods of
high inflation,
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<PAGE> 30
primarily as a result of higher land acquisition and land development costs, as
well as higher costs of labor and materials. The Company attempts to pass on to
its customers any increase in costs through higher sales prices. There can be no
assurance that inflation will not have a material impact on the Company's future
results of operation.
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
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 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 homebuilding activities may cause it to experience seasonal variations
in its home sales as a result of the preference of home buyers to close new home
purchases either prior to the start of a new school year or prior to the end of
year holiday season.
IMPACT OF ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT ADOPTED BY COMPANY
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement simplifies the standards for computing earnings per
share previously found in Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share," and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS.
The Company anticipates that the adoption of SFAS No. 128 will not result
in disclosures that will be materially different from those presently required
under APB Opinion No. 15.
29
<PAGE> 31
BUSINESS
GENERAL
Saxton Incorporated is an integrated real estate company engaged in the
design, development, construction, operation, ownership and sale of residential,
commercial and industrial properties in the greater Las Vegas metropolitan area.
The Company's business is comprised of three components: (i) the design,
development, construction and sale of single-family homes and portfolio
properties; (ii) the performance of design-build services for third-party
clients and (iii) property operations and management. The Company's principal
focus historically has been the design and development of properties for
third-party clients and for its own portfolio. Since its inception in 1986, the
Company has completed over 125 projects, including professional office
buildings, retail and industrial facilities and apartment complexes.
The Company's development experience and expertise enable it to identify
and take advantage of market opportunities and to minimize the risk of real
estate cycles. In 1995, management recognized the need for affordable housing in
the Las Vegas market and began to develop value-priced single-family detached
homes. For 1996, the Company's initial home development was ranked fourth in
number of units sold out of over 400 home developments in Clark County (which
includes Las Vegas). Based on this strong response, management has made a
commitment to expand the Company's homebuilding activities and to make them a
significant component of its business operations.
The Company also provides design-build development services to clients
which have included large nationally recognized public companies as well as
smaller regional businesses. The Company benefits from a reputation for
delivering high quality projects on time and on budget.
The Company's current portfolio of 14 operating properties includes office
buildings, retail and industrial facilities. Management monitors the market for
the Company's properties on an ongoing basis to take advantage of opportunities
for strategic sales of its holdings when conditions are favorable.
The rapid economic growth of Las Vegas and the surrounding areas and the
positive demographic trends associated with such growth make Clark County a
favorable location for real estate investment and development. Clark County has
experienced increasing levels of business and employment over the past decade
which have helped drive large increases in population and demand for new
construction of both commercial and residential developments. The expansion of
gaming has led to population and employment increases that are among the highest
in the country. These increases have in turn driven increases in new home sales,
apartment rents and occupancy rates. Additionally, a favorable business
environment has led to growth of non-gaming businesses and the local population
growth has attracted additional retail and service businesses to Clark County
leading to increases in commercial rents and occupancy rates.
DEVELOPMENT ACTIVITIES
GENERAL
Land Acquisition. The Company selects land for its home and other
development projects based upon a variety of factors, including (i) internally
and externally generated demographic and marketing studies, (ii) soil and other
physical conditions of the site, (iii) financial and legal reviews as to the
feasibility of the proposed project, including projected profitability, (iv) the
ability to secure necessary financing and additional governmental approvals and
entitlements, (v) environmental due diligence, (vi) competition, (vii) proximity
to local traffic corridors and community facilities, (viii) infrastructure
requirements for grading, drainage, utilities and streets and (ix) management's
judgment and experience as to the real estate market and economic trends in a
particular market.
Management generally seeks opportunities to purchase undeveloped land and
the Company invests the time and resources to obtain all necessary entitlements
and develop the land. By
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<PAGE> 32
acquiring unentitled land, the Company (i) minimizes its capital investment
because the land can generally be purchased at a discount to land with
entitlements and because the purchase is generally not consummated until all
necessary entitlements are obtained, (ii) realizes greater returns on its
investment in land due to the significant value that is added once entitlements
are obtained and subdivision or parcel maps are filed and (iii) is provided a
greater degree of involvement and control over the design and development
process. Once entitlements are obtained, the Company undertakes final
engineering, site grading and construction of roads and utilities.
The Company utilizes contingent purchase agreements and options to control
land while it performs its preliminary review. The Company typically obtains all
necessary development approvals, completes a satisfactory environmental
assessment of the site, secures any necessary financing and completes other due
diligence deemed appropriate by the Company prior to becoming obligated to
complete the purchase or exercising its option. The use of contingent purchase
agreements and options reduces the risks normally associated with the purchase
of undeveloped land and reduces the Company's land carrying costs. The Company
does not generally inventory undeveloped land; rather, the Company typically
acquires land in contemplation of a specific development project which is
scheduled to be commenced within six to nine months following the acquisition.
In certain cases, however, the Company may acquire a site larger than required
for the specified project with the intent of using the balance of the site for
future development.
The Company owns one site containing approximately 10 acres on which the
Company is currently developing single-family detached homes and one site
containing approximately 92.5 acres zoned for mixed residential development. The
Company has entered into options to acquire five additional sites, containing an
aggregate of approximately 180 acres, proposed to be developed with residential
properties, subject to obtaining all necessary entitlements. Two of these sites,
containing an aggregate of approximately 144 acres, will be acquired utilizing
$5.8 million of the net proceeds of the Offering. The Company also owns
approximately 13.6 acres zoned for commercial or industrial development and has
an additional 4.4 acres of commercial or industrial property under option. All
of the foregoing property is located in the greater Las Vegas area.
A small portion of the 92.5 acre mixed residential site has been identified
by the U.S. Army Corps of Engineers (the "Corps") as jurisdictional wetlands.
Before the Company may engage in any activities at the overall site that may
constitute dredging or filling of the wetlands, it must obtain a permit from the
Corps. The Company has commenced the process of applying for the permit and
believes, based on initial meetings with the Corps, that the permit will be
issued in due course and without significant conditions. However, there can be
no assurance that the Corps will grant the permit or that the permit will not
impose onerous conditions. The Company has commenced pre-construction
development activities with respect to approximately 36 acres of the site. The
Company is willing to entertain a land exchange whereby all or a portion of the
site would be exchanged for land which is of comparable or greater value. The
Company would also consider a sale of all or a portion of the site. There can be
no assurance, however, that the Company will be able to consummate such a land
exchange or sale, in which event the Company will endeavor to develop the entire
site as residential development.
The continuation of the Company's development activities over the long term
will be dependent upon its continued ability to locate, enter into contracts to
acquire, obtain governmental approval for, consummate the acquisition of, and
improve suitable parcels of land.
Construction. The Company currently employs a licensed architect who
directs and oversees the preparation of design plans for all of the Company's
projects by its design staff. Engineering plans are prepared by consultants
retained by the Company. The Company acts as the general contractor for all of
its development projects and each is assigned a project manager with
responsibility for all planning, scheduling and budgeting operations and an
on-site superintendent who oversees the subcontractors. The Company supervises
the construction of each project, coordinates the activities of subcontractors
and suppliers, subjects their work to quality and cost controls and assures
compliance with zoning and building codes. In addition, the Company
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<PAGE> 33
performs certain construction services, including concrete, masonry, wood
framing, painting, drywall and landscaping. The Company also intends to develop
capabilities in flooring, roofing and insulation. Management believes that the
Company's ability to perform construction services provides the Company with a
competitive advantage by enabling it to better control the costs, timing and,
therefore, profitability of its projects.
As to trades not performed by the Company, the Company subcontracts to
specialty contractors. Subcontractors typically are retained on a
project-by-project basis to complete construction at a fixed price. Agreements
with the Company's subcontractors are generally entered into after competitive
bidding on an individual basis. The Company generally obtains information from
prospective subcontractors and suppliers with respect to their financial
condition and ability to perform under their agreements prior to commencement of
a formal bidding process. The services performed for the Company by
subcontractors are generally readily available from a number of qualified
subcontractors.
The Company uses, to the extent feasible, standardized designs and
materials in its commercial construction and homebuilding operations in order to
permit efficiencies in construction and materials purchasing that can result in
higher margins. In addition, by integrating its development and construction
operations, the Company is able to offer affordable homes with a wide range of
amenities not offered by other homebuilders in the Company's price range.
The Company generally negotiates the purchase of major raw material
components, such as concrete, lumber and structural steel. Where possible, the
Company negotiates price and volume discounts with suppliers on behalf of itself
and its subcontractors in order to take advantage of its volume of production.
Raw materials used in the Company's operations are generally readily available
from a number of sources but prices of such raw materials may fluctuate due to
various factors, including supply and demand.
HOMEBUILDING
In 1995, the Company began applying its construction expertise to the
development of value-priced single-family detached homes to meet the demand for
affordable housing in the Las Vegas market. The Company's objective in its
homebuilding activities is to deliver superior value to low and moderate income
families by pricing its homes competitively while providing innovative designs,
quality construction and features and amenities not usually found in affordable
housing. Management plans to offer a range of value-priced homes at each
residential development, including at least one design that is the lowest priced
comparable product in the market. The Company has been able to minimize the cost
of its homes by integrating and performing many of the development functions as
well as utilizing high density site plans configured with the lots having
minimal frontage. This type of site design enables the Company to reduce certain
infrastructure construction costs, such as streets and sewer lines, in order to
increase potential profitability. The Company intends to expand its
single-family development activities to include condominiums, townhouses,
cluster homes and duplexes.
Product Description. Summit Hills is the Company's first single-family home
development. Site grading commenced in July 1995 and Phase I, comprised of 47
homes, was completed in April 1996. Phase I is comprised of two-bedroom,
two-bath homes of approximately 950 square feet and three-bedroom, two-bath
homes of approximately 1,100 square feet. The base sales prices of homes in
Phase I ranged from approximately $66,000 to $70,000, depending on the model,
lot location and optional features. Phases II, III and IV of Summit Hills
include two and three-bedroom models, as well as a four-bedroom, two-bath model
of approximately 1,250 square feet. The two-and three-bedroom homes in Phases
III and IV were sold at base prices ranging from $69,950 to $75,990,
approximately 5% higher than the comparable models in Phase I. The four-bedroom
model was sold at an average price of approximately $77,910. Management believes
that its price structure
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made Summit Hills one of the most affordable newly constructed single-family
detached home communities in the Las Vegas area and one of only two developments
offering single-family detached homes for sale under $70,000. The homes' designs
include open floor plans which permit an efficient use of the limited space.
Common area amenities at the Company's home developments include pools,
community centers and landscaped common areas. Management believes that the
affordable price of its homes, combined with their quality and features,
contributed to making Summit Hills one of the best selling home developments in
Clark County in 1996.
Hillcrest, the Company's second single-family home development, is
comprised of 90 detached single-family homes. The Company completed all lot
development at Hillcrest in 1996 and constructed three Hillcrest model homes in
early 1997. Hillcrest I, which consists of 34 homes, is expected to be completed
in mid-1997. The Company has designed the homes at Hillcrest utilizing the same
floorplans that were successful at Summit Hills. Various design improvements,
including concrete tile roofs, vaulted ceilings, a sliding glass door in the
master bedroom, wiring for a security alarm, backyard landscaping and exterior
trim, have been incorporated into the Hillcrest homes based on the Company's
survey of Summit Hills homeowners. Common area amenities at Hillcrest will
include a recreation building with a pool and spa.
The Company is currently developing residential communities at Taylor
Ranch, Madre Mesa, Silver Springs and Sunrise Ridge which will include
townhouses, condominiums, cluster homes and duplexes. The townhouses will have
two or three bedrooms, with two and one-half baths, and either a one- or two-car
attached garage. The condominiums will consist of one-bedroom, one-bath units
and two-bedroom, two-bath units. The cluster home development will consist of
seven to eight single-family detached homes sharing a common cul-de-sac, thus
enabling the Company to maximize the number of homes buildable on the site. Each
duplex unit will be a single-story unit, modeled after the two bedroom plan at
Summit Hills, sharing a common wall with one other duplex unit.
The following table presents certain information relating to the Company's
current home developments, both of which are in the Las Vegas area. All sales
information is provided as of March 31, 1997.
<TABLE>
<CAPTION>
TOTAL ESTIMATED
HOMES AT HOMES HOMES HOMES IN HOMES AVERAGE
COMMUNITY HOME TYPE COMPLETION SOLD(1) CLOSED BACKLOG REMAINING(2) PRICE(3)
- ----------------------- ----------------------- ---------- ------- ------ -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Summit Hills I......... Single-family detached 47 47 46 1 -- $70,270
Summit Hills II........ Single-family detached 60 60 59 1 -- $74,600
Summit Hills III....... Single-family detached 60 60 57 3 -- $76,100
Summit Hills IV........ Single-family detached 52 52 48 4 -- $77,910
-- --
--- --- ---
Subtotal........... 219 219 210 9 --
-- --
--- --- ---
Hillcrest I............ Single-family detached 34 22 -- 22 12 $77,220
Hillcrest II........... Single-family detached 24 -- -- -- 24 $84,160
Hillcrest III.......... Single-family detached 20 -- -- -- 20 $84,160
Hillcrest IV........... Single-family detached 12 -- -- -- 12 $84,160
-- --
--- --- ---
Subtotal........... 90 22 -- 22 68
-- --
--- --- ---
Total.......... 309 241 210 31 68
=== === === == ==
</TABLE>
- ---------------
(1) "Homes Sold" includes both home sales which have closed and homes subject to
pending sales contracts.
(2) "Homes Remaining" is the number of constructed homes not yet sold and the
number of homes which could be built on both the remaining lots available
for sale and land to be developed into lots as estimated by the Company.
(3) "Estimated Average Price" represents the average sales price of homes sold
and the proposed offering price of homes to be built in future phases.
The following table presents certain information relating to the Company's
planned home developments, all of which are in the Las Vegas area. The Company
controls the land for each planned home development. In most cases, the planned
home developments require additional
33
<PAGE> 35
entitlements prior to the commencement of construction. See "-- Development
Activities -- General -- Land Acquisition" and "Risk Factors -- Regulatory and
Environmental Risks."
<TABLE>
<CAPTION>
ESTIMATED
TOTAL HOMES AVERAGE
COMMUNITY HOME TYPE AT COMPLETION PRICE(1)
- ----------------------------------------------------- ---------------------- ------------- ---------
<S> <C> <C> <C>
Taylor Ranch......................................... Single-family detached 129 $ 80,660
Taylor Ranch......................................... Condominiums 128 $ 54,990
Taylor Ranch......................................... Townhouses 222 $ 75,660
Taylor Ranch......................................... Cluster homes 149 $ 85,590
Taylor Ranch......................................... Duplexes 66 $ 75,990
Madre Mesa........................................... Single-family detached 42 $ 93,000
Madre Mesa........................................... Cluster homes 48 $ 89,000
Madre Mesa........................................... Townhouses 134 $ 79,500
Silver Springs....................................... Cluster homes 283 $ 85,990
Sunrise Ridge........................................ Townhouses 154 $ 85,000
-----
Total........................................ 1,355
=====
</TABLE>
- ---------------
(1) "Estimated Average Price" represents the proposed offering price of homes.
Production Strategy. The Company attempts to limit the number of unsold
units under construction by limiting the size of each construction phase and
closely monitoring sales activity. However, the Company commences construction
prior to obtaining sales contracts for all homes within a given phase. The
Company strives to match construction starts to its sales rates. The Company
controls its construction starts by releasing homes for construction and for
sale in phases. Building homes of the same product type in phases also allows
the Company to utilize production techniques that reduce its construction costs.
The size of these phases depends on such factors as current sales and
cancellation rates, the type of buyer targeted for a particular residential
project, the time of the year and the Company's assessment of prevailing and
anticipated economic conditions. Depending on the design, time of year, local
labor situation, governmental approvals, availability of materials and supplies,
and other factors, the Company generally completes a home in three to four
months.
Marketing and Sales. The Company sells its homes through its own licensed
sales representatives who typically work from sales offices located in the model
homes at the development. Sales representatives assist potential buyers by
providing them with basic floorplans, price information, development and
construction timetables, tours of model homes and the selection of options. The
Company's sales representatives are provided training by the Company and
generally have had prior experience selling new homes in the local market. The
Company also markets its homes for sale through direct mailing to identified
populations of prospective buyers and, to a lesser extent, through other media,
including newspaper, television and radio advertising, billboard and other
signage.
The Company has built and decorated model homes at each of its residential
communities to display the homes' design features. Model homes play a key role
in helping buyers understand the efficiencies and value provided by each plan
type of the Company's homes. The Company intends to utilize model homes at each
of its planned residential communities.
Homes are typically sold prior to or during construction using sales
contracts which are accompanied by small cash deposits. Purchasers are permitted
to cancel sales contracts if they are unable to qualify for financing and under
certain other circumstances. The Company believes that its cancellation rate is
consistent with that generally experienced at other affordable home
developments. Although cancellations can delay the sale of the Company's homes,
they have not had a material impact on sales, operations or liquidity because
the Company closely monitors the progress of prospective buyers in obtaining
financing and monitors and adjusts its construction plans to better match the
level of demand for its homes.
34
<PAGE> 36
To assist in the marketing of its homes and to limit the Company's
liability for certain construction defects, the Company sells the homes subject
to a limited warranty which includes, among other things, coverage from an
insurance company for the cost to repair major structural defects for ten years.
The Company is liable for such repair costs during only the first two years and,
subject to the following limitations, such liability is covered by the Company's
builders' policy. The foregoing repair costs are limited by the Company's
builders' policy to the repair, replacement or payment of the reasonable cost of
repair or replacement of such warranted items not to exceed an aggregate equal
to the final sales price of the home covered by the warranty. The choice to
repair, replace or make payments is the Company's during the first two years and
the insurance company's thereafter. In addition, all other warranties, express
or implied, including but not limited to, all implied warranties of fitness,
merchantability or habitability, are disclaimed and excluded to the extent
allowed by law.
Customer Financing. The Company does not provide financing to prospective
home buyers, but works closely with unaffiliated mortgage lenders who assist the
Company's home buyers in locating financing. At the on-site office, sales
representatives provide prospective home buyers with information regarding the
qualifying criteria for mortgage financing. In addition, the Company prices its
homes to meet the applicable requirements for a home buyer's mortgage loan to be
insured by the FHA or guaranteed by the VA and purchased by the Nevada Housing
Division. FHA and VA financing generally enables home buyers who satisfy certain
income and other requirements to purchase homes with lower down payments than
the down payments required by conventional mortgage lenders, and the Nevada
Housing Division's mortgage purchase programs generally enable such buyers to
obtain mortgage financing at less than prevailing rates. The Company also
intends to work with other federal, state and nonprofit sponsors which provide
down payment assistance to qualifying home buyers. Management believes that the
availability of the foregoing financing programs broadens the pool of potential
purchasers for the Company's homes.
Customer Service and Quality. Management believes that strong customer
relations and an adherence to high quality control standards are fundamental to
the Company's continued success. The Company employs a quality assurance process
which is intended to provide a positive atmosphere for each customer throughout
the pre-sale, sale, building, closing and post-closing periods. The Company
employs full-time customer service employees, who, working as a team with the
Company's sales representatives and on-site construction supervisor, oversee
compliance with the Company's quality control standards. These employees as a
group have responsibility for (i) overseeing the entire project from land
development through construction, (ii) overseeing performance by the Company's
subcontractors and suppliers, (iii) reviewing the progress of each home and
conducting formal inspections as specific stages of construction are completed,
(iv) regularly updating each buyer on the progress of such buyer's home, (v)
preparing homeowner orientation materials and (vi) scheduling and performing all
service calls to handle "punchlist" and other items immediately before and after
the home sale.
PORTFOLIO PROPERTIES
The Company takes advantage of its construction experience and expertise by
developing residential, retail and commercial income producing properties for
its own portfolio. At March 31, 1997, the Company owned and operated a portfolio
of 14 properties comprised of approximately 334,150 square feet of office,
retail and industrial space. In addition, since March 31, 1997, the Company has
completed construction of three portfolio properties, one of which has been
sold, one of which is under contract to be sold and one of which is in initial
lease-up. The Company currently has seven proposed portfolio properties in the
initial stages of development. The construction of portfolio properties is
financed with construction loans. Management monitors the market for the
Company's properties on an ongoing basis to take advantage of opportunities for
strategic sales of its holdings when conditions are favorable. See "-- Property
Operations and Management -- Operations."
35
<PAGE> 37
The Company builds retail and office properties which typically are located
within commercial corridors near traffic generators such as regional malls,
business developments and major thoroughfares. Management believes the benefits
of such locations include high visibility to passing traffic, ease of access and
tenant control over the site's operating hours and maintenance standards. The
Company typically builds industrial properties in areas where other industrial
properties are located. The Company's commercial and industrial properties have
the potential to be easily adapted to a variety of tenants and have relatively
low re-leasing costs which provide the Company with flexibility in use and
tenant selection when the properties are vacated upon lease termination.
DESIGN-BUILD SERVICES
The Company provides its design-build services to third-party clients,
including Tax Credit Partnerships. During the three years ended December 31,
1996, the Company completed 20 design-build projects, comprised of five
industrial facilities, 12 other commercial properties and three apartment
complexes. At March 31, 1997, the Company had eight uncompleted design-build
projects under contract and an additional three design-build projects in the
initial stages of development, but not yet under contract.
Under design-build services, the Company conducts all phases of the project
including architectural design, the selection and review of engineering
professionals and the performance of all general contractor responsibilities.
Design-build projects can permit accelerated construction because the Company
can perform work on certain aspects of a project while other aspects are still
being designed. Design-build contracting enables the Company to provide
customers with comprehensive project management, providing a coordinated team
approach from the pre-construction development stage through construction and
completion of a project.
Design-build projects are undertaken on a fixed-price basis and may be
built on land owned by the Company which is then sold to the client, on land
owned by the client or on land identified by the client which is then either
purchased by the client or by the Company for resale to the client. The typical
design-build contract requires the Company to obtain all necessary government
permits and approvals, perform or oversee all architectural and engineering
services, construct the project and, in many cases, arrange, on the client's
behalf, any needed land, construction and permanent financing. The Company's
design-build projects are generally the result of referrals by former clients,
brokers or others in the real estate business.
Fixed-price contracts require the Company to accurately estimate the cost
and quantities of materials, labor and equipment necessary, and the amount of
time required to complete a project. The Company generally bears the risks of
construction cost overruns. In order to arrive at the contract price, the
Company uses a computer-based estimating program to develop a comprehensive
estimate for the project for which separate labor, equipment, material,
subcontractor, overhead and profit estimates are compiled. Once a project
begins, the estimate is used to measure and monitor ongoing project costs. The
Company's ability to estimate project costs accurately has been a key component
of its success and profitability. Fixed-price contracts provide the opportunity
for greater profits to the extent the contractor is able to hold down costs
below those originally anticipated.
The Company bills its client, or the project construction lender, for work
performed and pays the subcontractors from funds received. The Company is
responsible for the performance of the entire contract, including work assigned
to subcontractors. Accordingly, the Company is subject to liability resulting
from the failure of subcontractors to perform as required under the contract.
Typically, pursuant to construction industry practice, a portion of billings,
generally not exceeding 10%, is retained by the client until the project is
completed. The Company recognizes revenue and profit on its construction
contracts under the percentage-of-completion method.
36
<PAGE> 38
The Company does not furnish bonds guaranteeing its performance and,
because the Company thoroughly investigates its subcontractors prior to entering
into subcontracts, the Company generally does not require completion bonds from
its subcontractors. To date, the Company has not been denied a construction job
because of its unwillingness to furnish a completion bond.
Stages of a Project. The Company's design and construction process is
intended to be accomplished through a coordinated, cooperative team approach.
The Company's primary goal is to achieve the owner's cost and schedule
objectives while producing a facility of the highest standards of quality.
Following is a summary of the Company's approach at the pre-construction,
construction and post-construction stages of a project:
Pre-Construction Stage. Management believes that the Company's
pre-construction stage involvement results in many benefits to its clients.
The Company's approach for providing pre-construction services involves
establishing a project team that advises and assists the client on all
aspects of design and development for the project. The Company also assists
in or manages the development of the architectural, civil, mechanical,
electrical and structural plans and specifications, and advises in the
areas of land selection, construction feasibility, possible economies,
availability and utilization of materials, and labor and time requirements
for procurement, construction and project costs.
The Company assists its clients in the financial planning for the
project through preparation of cash flow projections, accounting
procedures, detailed cost budgets and comparative cost analysis studies.
More specifically, the Company assumes responsibility for the preparation
and updating of detailed project schedules which incorporate all required
project activities. The Company (i) works with the client to establish
completion dates for all stages of the project, (ii) analyzes market
conditions with a view toward material availabilities, cost strategies,
construction techniques, manpower levels and similar matters, (iii)
develops a bid-packaging program to encourage maximum bidder interest and
fully defines the work to minimize contingencies for unknown circumstances,
(iv) thoroughly reviews and defines the project schedule, critical
materials required, delivery dates and performance criteria with the
selected subcontractors and (v) advises and incorporates considerations
regarding construction safety and public agency requirements.
Construction Stage. As general contractor, the Company assumes
responsibility for managing the construction of a project and directs the
field execution of the concepts and objectives established during the
pre-construction stage. The Company maintains a full-time, supervisory
staff at the job site to coordinate and provide general direction of the
work and progress of the subcontractors, establishes an on-site
organization to carry out the overall plans of the project team and directs
the work being performed until final completion and delivery to the owner.
The Company regularly conducts job meetings to discuss the orderly progress
of the work.
During the past year, the Company began to perform many of the
functions previously performed by subcontractors, including concrete,
masonry, wood framing, painting, drywall and landscaping. The Company
intends to integrate certain additional construction trades to further
increase its profitability and strengthen its competitive position.
Management believes that the Company's ability to perform these
construction services provides the Company with a competitive advantage by
enabling it to better control the costs, timing and, therefore,
profitability of its projects.
Post-Construction Stage. As a project nears completion, the Company
works with the project team to assist in an orderly project close-out and
transition from construction to actual use in the areas of quality control,
documentation and building turnover.
Tax Credit Projects. Substantially all of the Company's design-build
contracts for apartment complexes have been Tax Credit Projects developed for
Tax Credit Partnerships formed to take advantage of the low income housing tax
credit provided by Section 42 of the Internal Revenue
37
<PAGE> 39
Code (the "Housing Tax Credit"). The Housing Tax Credit has the effect of making
the purchase of eligible apartment complexes a more attractive investment by
increasing the return on investment. Developing Tax Credit Projects, which are
typically in excess of 200 units, provides the potential for substantial
benefits to the Company. In a typical Tax Credit Project, the Company is
retained by the Tax Credit Partnership to develop the project pursuant to a
fixed-price construction contract. Included in the fixed price are the Company's
customary contractor and developer fees and, where market conditions permit, a
markup on the sale of the underlying land. The cost of developing the Company's
Tax Credit Projects is generally financed approximately as follows: loan
proceeds, 60% to 65%; partner equity, 15% to 30%; and deferred developer fees,
5% to 15%. In addition, the Company may be entitled to earn, upon completion or
over a period of time following completion, certain additional fees, including
property management fees based on property rental income. See "-- Property
Operations and Management -- Management and Leasing" and "-- Regulatory and
Environmental Matters -- Resident Income and Other Limitations."
The Company structures the Tax Credit Partnership and generally retains or
purchases up to a 1% general partner interest which generally entitles it to
between 66% and 85% of any distributions of net cash from operation of the Tax
Credit Project and from its sale. The Company's capital contribution for its
general partner interest is funded in cash or as a contribution of all or a
portion of its equity in the land on which the Tax Credit Project is to be
constructed. In addition to its capital contribution, the Company is typically
obligated to make operating expense loans, up to a stated maximum, to meet
operating deficits of the Tax Credit Partnership. Under the terms of the
partnership agreements of two Tax Credit Partnerships, the Company is required
to withdraw as a general partner upon receipt of all amounts due the Company for
developer fees. An unaffiliated third-party investor group is the limited
partner of the Tax Credit Partnership and contributes all or substantially all
of the equity capital to the Tax Credit Partnership in exchange for
substantially all of the benefit of the Housing Tax Credit. The investor limited
partner's equity is generally contributed in installments over a period of
approximately 24 months. Approximately 40% of such contribution is funded upon
admission of the investor limited partner to the Tax Credit Partnership and the
balance is contributed from time to time when specified conditions are satisfied
(i.e., completion of construction, certification of project costs and award of
tax credits by the Nevada Housing Division and achievement of specified levels
of operating cash flow).
The Tax Credit Projects are also structured to be eligible for financing
through one or more of the tax-exempt private activity revenue bond programs
sponsored by the Nevada Housing Division. The programs of the Nevada Housing
Division are intended to provide incentives for the construction, ownership and
financing of housing for persons and families of low and moderate income. These
incentives may include lower interest rates on construction and permanent
financing with respect to the eligible project. Nevada Housing Division bond
financing typically involves substantially greater origination fees and expenses
than those associated with conventional financing. The Company believes that the
return on its investment provided by the lower interest rates over the term of
the loan more than compensates for the additional fees and expenses.
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<PAGE> 40
The Company has completed three Tax Credit Projects and is currently
completing construction of two additional Tax Credit Projects. One planned Tax
Credit Project is in the initial stages of development. The following table sets
forth information regarding the Tax Credit Projects. Except as otherwise
indicated, the Company holds a general partner interest in the Tax Credit
Partnership which holds fee simple title to the project.
<TABLE>
<CAPTION>
DATE OF
TOTAL PROJECT COMPLETION
COST(1) OR ESTIMATED NUMBER OCCUPANCY
TAX CREDIT PROJECT TYPE (IN THOUSANDS) COMPLETION OF UNITS AT 3/31/97
- ------------------------------------------ ---------------- --------------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Completed:
Saratoga Palms East I(2)................ Senior Citizens $16,900 2/96 360 98%
Lake Tonopah............................ Senior Citizens 15,400 8/96 356 93%
Paseo del Prado......................... Family 6,900 10/96 120 98%
Under Construction:
Saratoga Palms East II.................. Family 16,400 6/97 256 42%(3)
Saratoga Palms North II................. Family 16,100 7/97 252 --
Planned:
Madre Mesa(4)........................... Family 16,500 12/98 224 --
</TABLE>
- ---------------
(1) Represents all costs of the project including land, construction,
development, lease-up and financing costs.
(2) James C. Saxton, the managing general partner, intends to assign his general
partner interest to the Company in the Reorganization, however such
assignment is subject to receipt of the SPE Consent. Although the Company
expects to receive the SPE Consent by the closing of the Reorganization,
there can be no assurances that the SPE Consent will be obtained by such
date or at all. If the SPE Consent is not obtained by the closing of the
Reorganization, Mr. Saxton will remain the managing general partner of
Saratoga Palms East I until the SPE Consent is received. Mr. Saxton has
agreed that until the SPE Consent is received he will contribute to the
Company an amount equal to all distributions he receives in respect of his
general partner interest.
(3) This property is in initial lease-up.
(4) This property is in the early stages of development pursuant to an agreement
between the Tax Credit Partnership and the Company. Development of this
property is dependent upon the Tax Credit Partnership receiving funding by
an investor limited partner group, additional bond allocation and
commitments for construction and permanent financing.
The ability of the Company to continue to develop Tax Credit Projects in
the future is subject to the continued availability of the Housing Tax Credit
and the ability of the Company to utilize revenue bond financing for its
projects in the future is subject to its ability to obtain such financing from
various state and local agencies.
PROPERTY OPERATIONS AND MANAGEMENT
Operations. The Company's property operations provide it with flexibility
with respect to the disposition of its portfolio properties and enables it to
diversify its sources of revenues. The following table sets forth certain
information regarding each of the Company's operating portfolio properties as of
March 31, 1997. The Company holds fee simple title to each property.
<TABLE>
<CAPTION>
APPROXIMATE CURRENT
YEAR SQUARE PRINCIPAL NUMBER OF OCCUPANCY ANNUALIZED
PROPERTY(1) COMPLETED FOOTAGE TENANT(S) (2) TENANTS(3) AT 3/31/97(3) BASE RENT(4)
- ----------------------------------- ------------- ------------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Retail:
Nellis Express --
Village............... 1986 16,260 11 85% $ 140,342
Levitz.................. 1991 102,400 Levitz Furniture 2 100% 940,880
Furniture Expo.......... 1992 37,260 Furniture Expo; 4 100% 410,620
Leather Factory(5)
Woody's Furniture....... 1993 4,680 Woody's Furniture 1 100% 75,000
Turtle Stop(6).......... 1994 4,430 Operations 1 100% 163,070
Management Group
Sahara/Decatur.......... 1996 3,630 Bruegger's Bagels; 2 100% 94,770
Mirage Mattress
Nellis/Stewart.......... 1996 4,570 Bargain City 1 78%(7) 51,422
</TABLE>
39
<PAGE> 41
<TABLE>
<CAPTION>
APPROXIMATE CURRENT
YEAR SQUARE PRINCIPAL NUMBER OF OCCUPANCY ANNUALIZED
PROPERTY(1) COMPLETED FOOTAGE TENANT(S) (2) TENANTS(3) AT 3/31/97(3) BASE RENT(4)
- ----------------------------------- ------------- ------------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Office:
Las Vegas Sun........... 1987 15,450 Las Vegas Sun 1 100% 215,280
Americana............... 1991 17,150 Americana Realtors 2 75% 136,330
General Services Social Security
Administration........ 1994 17,000 1 100% 258,310
Administration
Flamingo Pt............. 1995 8,080 Air Touch Paging; 2 76% 81,700
A-Z Women's Clinic
Sahara Vista............ 1996 40,000 -- 6 80%(7) 228,056
Industrial:
Arcata Industrial Status Vending(8)
Park.................. 1989 24,200 4 100% 113,817
JCH Wire and Cable...... 1991 39,040 JCH Wire and 1 100% 206,950
Cable(9)
</TABLE>
- ---------------
(1) Excludes two retail properties owned by the Retail Partnership.
(2) For purposes of the table, a principal tenant is a tenant which leases 25%
or more of a property.
(3) In the case of the Americana and Sahara Vista office buildings and the
Arcata Industrial Park, the occupancy has been calculated including space
occupied by the Company. See "-- Facilities."
(4) Represents monthly base rent of occupied space at March 31, 1997,
annualized.
(5) Upon termination of its lease on May 31, 1997, Leather Factory vacated
10,000 square feet at this property, representing 27% of the property's
leasable space and 26% of the property's annualized base rent at March 31,
1997.
(6) This property is under contract to be sold for approximately $1.3 million,
subject to satisfaction of certain financing contingencies. Certain monthly
rent payments in excess of monthly debt service with respect to the
Company's indebtedness secured by this property will be credited to the
purchase price. See "Certain Relationships and Related Transactions."
(7) This property is in initial lease-up.
(8) Under its lease agreement, until December 31, 1998, the tenant has the right
to purchase the property for approximately $1.3 million, subject to annual
increases based on increases in the consumer price index.
(9) The Company is building a new property for this tenant on a design-build
basis. Upon completion of the property, estimated to occur in mid-1997, the
tenant will vacate its current space.
Since March 31, 1997, the Company has completed construction of three
portfolio properties, one of which has been sold, one of which is under contract
to be sold and one of which is in initial lease-up.
All of the Company's leases for its retail and industrial properties are on
a triple net basis and the leases of its office properties are on either a
triple net or full service gross basis. Under a triple net lease, tenants pay
their utilities and a pro rata share of all building insurance, property taxes
and common area services. Under a full service gross lease, the landlord
provides and pays for all utilities to the tenants' premises, as well as all
building insurance, property taxes and common area services, except that in most
cases the Company's office tenants are required to reimburse the Company for
their pro rata shares of increases in building operating costs each year over
those incurred in the base year, which is generally the year in which a
particular tenant's lease commences.
Leases for the Company's commercial and industrial properties typically
have terms ranging from one to five years, with renewal options of various
periods, and provide for periodic rent increases in either stated amounts or
based upon increases in the consumer price index. Leases representing
approximately 12.0% of the Company's commercial and industrial rental space, and
approximately 11.9% of the current annualized rental revenues therefrom, will
expire on or before December 31, 1997, assuming no renewal options are
exercised. Management believes that either the tenants will renew their leases
or the Company will be able to re-lease the vacated space at market rents.
The Company regularly repairs and maintains its operating properties,
including making the capital improvements, on an as needed basis utilizing
available working capital. There are no current
40
<PAGE> 42
plans for any renovation or improvement of any operating property and no funds
have been reserved for such purpose.
Management and Leasing. The Company provides property management and
leasing services with respect to all operating properties held in its portfolio.
From time to time the Company also provides such services for properties
developed by the Company and owned by third parties. Property management
agreements with third parties generally provide for the Company to be paid a
management fee of 3% to 5% of a property's gross rental income and generally
have a minimum term of five years, although some agreements provide for earlier
termination without cause. To date, the Company's revenue from third party
property management has not been significant. While management anticipates that
the Company's revenues from its property management operations will increase as
a result of its increased development of Tax Credit Projects, such operations
are not anticipated to be material to the Company overall.
Other than design-build properties which are to be occupied by the
Company's client, the Company strives to pre-lease its commercial properties
before and during construction through the use of on-site billboards, print
advertising and direct mail flyers. Although the Company has not previously
charged a separate leasing brokerage commission, the Company will, where
possible, negotiate a separate leasing commission for its services in leasing
properties owned by third parties. Tenants for the apartment complexes are
generally obtained through a combination of print advertising, on-site
billboards and walk-in traffic. As manager of residential properties, the
Company is responsible for the rent-up of the property and its daily
maintenance. All maintenance services, other than non-routine plumbing and
electrical, are provided by employees of the Company. See "-- Regulatory and
Environmental Matters -- Resident Income and Other Limitations."
STRATEGIES
The Company's business and growth strategy includes the following key
elements:
Reducing the risk of economic and real estate cycles through operating
diversification. The Company seeks to enhance its financial stability and reduce
the potential impact of economic and real estate cycles by operating in three
components of the real estate business: (i) the design, development,
construction and sale of single-family homes and portfolio properties; (ii)
design-build services for third-party clients and (iii) property operations and
management.
Enhancing profitability through an opportunistic approach to
development. The Company seeks to take advantage of market opportunities by
employing its experience and expertise to identify and enter new markets. Most
recently, in response to the identified shortage of affordable housing, the
Company expanded its development operations to include value-priced homes and
increased its development of apartments for low and middle income families and
senior citizens.
Increasing profit margins through vertical integration. The Company's real
estate and construction expertise allows the integration of most aspects of
development and construction, thereby enabling the Company to provide one-stop
shopping to its customers, maintain greater control over its projects and
generate higher operating margins. The Company intends to integrate certain
additional construction trades to further increase its profitability and
strengthen its competitive position.
Reducing development risks through conservative land policies. The Company
seeks to maximize its return on capital by limiting its investment in land while
maintaining an inventory of owned and controlled sites sufficient to accommodate
demand for its homes and other development requirements. The Company seeks to
further maximize its return by acquiring undeveloped land and using its
expertise to obtain all entitlements and develop the land. To implement this
strategy and to reduce the risks associated with investments in land, the
Company uses options or conditional land
41
<PAGE> 43
sales contracts to control land whenever possible and seeks to purchase land
only for specific developments.
Expanding business opportunities by taking advantage of
government-sponsored programs. The Company has expanded its business
opportunities by building projects which are eligible for various
government-sponsored programs that provide down payment assistance or lower cost
financing. These government-sponsored programs include private activity revenue
bonds, small business loans and mortgage loan programs of federal agencies. By
building properties which are eligible for such programs, the Company is able to
expand the pool of qualified purchasers for its homes and other properties.
Pursuing geographic expansion. While the Company believes that the outlook
for the Las Vegas market is favorable, geographic expansion is a key element in
achieving long-term stability and growth. The Company intends to capitalize on
its experience and demonstrated capabilities in real estate by targeting other
viable geographic markets, including other areas of Nevada and selected markets
in the southwestern United States, such as Arizona and New Mexico.
Pursuing growth through strategic acquisitions. The Company believes that
there are significant opportunities to acquire existing homebuilding companies,
particularly in and around the Las Vegas area and selected markets in the
southwestern United States. The Company intends to pursue strategic acquisitions
to provide the Company with additional market share, desirable land and local
market experience. The Company has no agreements, understandings or arrangements
with respect to any such acquisition and there can be no assurance that the
Company will be able to consummate such an acquisition.
LAS VEGAS MARKET
The Company currently focuses its real estate activities in Clark County,
Nevada. The Company believes that Clark County provides a favorable environment
for its real estate activities due to the rapid, continuing economic growth of
Las Vegas and the surrounding areas and positive demographic trends associated
with such growth. The area has experienced increasing levels of business and
employment over the past decade, which have helped to drive large increases in
population and demand for new construction of both commercial and residential
developments.
The following discussion includes information obtained from various
published sources independent of the Company, including the Historical
Perspective of Southern Nevada, Spring 1996, the Las Vegas Chamber of Commerce,
The Center for Business and Economic Research at the University of Nevada, Las
Vegas, the 1996 Las Vegas Perspective, the Nevada Apartment Association, U.S.
Housing Markets, the U.S. Census Bureau and the Clark County Business Licenses
Office. While the Company believes that such information evidences positive
economic trends, there can be no assurance that these trends will continue.
Clark County's population growth in recent years is among the highest in
the nation. Now containing over one million residents, the population of Clark
County grew at a 6.1% compounded annual rate between 1987 and 1996,
substantially higher than the .91% compounded annual growth rate experienced
nationally over the same period. The Las Vegas Chamber of Commerce has projected
that Clark County's population will reach approximately 1.3 million people by
the year 2000, an approximate 16.5% increase over the 1996 population. The
strong population growth in Clark County has resulted, in large part, from the
increasing availability of employment in the greater Las Vegas area. From 1987
to 1996, total employment in Clark County grew at a compound annual growth rate
of 6.3%. Clark County's population growth is also the result of a growing
retiree community, attracted by favorable living conditions, including the
absence of state income, inheritance and estate taxes and a warm climate. From
1987 to 1996, the number of retirees residing in the greater Las Vegas area
increased at a compounded annual growth rate of approximately 10.0%
42
<PAGE> 44
to over 167,600 people. The following tables show Clark County's population and
employment growth from 1987 to 1996.
CLARK COUNTY POPULATION
1987-1996
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
616,650 661,690 708,750 770,280 820,840 856,350 898,020 971,680 1,036,290 1,115,940
</TABLE>
Source: Historical Perspective of Southern Nevada, Spring 1996, by
the Center for Business and Economic Research, UNLV, citing
Nevada State Demographer.
CLARK COUNTY EMPLOYMENT
1987-1996
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 (est.) 1996 (est.)
---- ---- ---- ---- ---- ---- ---- ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
348,640 379,485 416,647 456,400 471,094 483,295 510,275 567,654 603,984 642,034
</TABLE>
Source: Historical Perspective of Southern Nevada, Spring 1996,
by the Center for Business and Economic Research, UNLV,
citing 1995 Regional Economic Information Systems Data.
The Company believes that much of the economic growth of Clark County has
come from the expansion of the local gaming industry and transformation of Las
Vegas into a leading destination resort city. Over 29.0 million people visited
Las Vegas in 1996 spending over $22.5 billion, an increase of 82.8% and 162%,
respectively over 1987. Las Vegas offers over 100,000 hotel rooms, the most of
any city in the United States, and has the ten largest resort hotels in the
world. With the
43
<PAGE> 45
development of mega-resorts, such as The Mirage, Excalibur, Treasure Island, MGM
Grand, New York-New York and Monte Carlo, the gaming and hospitality industry
has been a major source of new employment. Several new resort casino-hotel
properties are now in development and scheduled to be completed in 1997 and
1998, including Bellagio, Paris and the property being developed on the site of
the former Sands, and many existing casino-hotels are undergoing refurbishment
and expansion, including Caesar's Palace, Circus Circus, Luxor and the Rio. At
December 31, 1996, there were over 9,200 hotel rooms under construction and the
Las Vegas Convention and Visitors Authority estimated that approximately 60,000
additional hotel rooms were proposed for construction. The Company anticipates
that the expansion of the local gaming industry will continue to drive
population and employment growth.
The number of households in the Las Vegas metropolitan area increased 77.4%
from 1987 to 1996, and new home sales in Clark County reached 19,799 in 1996,
increasing from 9,634 new home sales in 1993. The median sale price in 1996 was
$118,500, with 79% of new homes purchased costing less than $150,000. In 1996,
permits were issued for 30,188 new housing units, including 18,901 detached
single family homes, a 25.8% increase from 1993 levels, and 11,287 multifamily
units, a 199% increase from 1993 levels. The following tables set forth the
number of building permits and the median sales prices for single family homes
from 1987 to 1996 and single family unit sales from 1992 to 1996.
CLARK COUNTY
SINGLE FAMILY HOME PERMITS
1987-1996
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5,630 7,850 11,024 11,177 12,120 9,986 15,015 17,374 17,674 18,901
</TABLE>
Source: Historical Perspective of Southern Nevada, Spring 1996, by
the Center for Business and Economic Research, UNLV
44
<PAGE> 46
CLARK COUNTY
SINGLE FAMILY HOME MEDIAN SALES
1987-1996
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
77,000 78,800 85,700 93,000 101,400 104,300 108,200 110,500 113,500 118,500
</TABLE>
Source: U.S. Housing Markets
CLARK COUNTY
SINGLE FAMILY HOME UNIT SALES
1992-1996
<TABLE>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
8,636 9,634 11,735 17,921 19,799
</TABLE>
Source: Las Vegas Perspective, citing Greater Las
Vegas Association of Realtors and Homebuilders
Research Association, Board of Realtors.
Demand for apartments in Las Vegas has also steadily increased as a result
of the local population growth. The average occupancy rate for apartment
complexes in metropolitan Las Vegas increased from approximately 95% in 1993 to
approximately 97% in 1994 and has remained at approximately 97% through 1996. In
addition, as growing demand for apartments has outpaced the creation of new
units, market rents have risen, increasing 8.5% between 1994 and 1996. The
Company believes that, based on increasing occupancy and rental rates, there is
presently a limited
45
<PAGE> 47
supply of vacant apartments in the greater Las Vegas area. The following table
sets forth apartment occupancy rates in Clark County for 1992 through 1996.
CLARK COUNTY
APARTMENT OCCUPANCY RATES
1992-1996
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
93.9 95.0 96.9 96.8 96.9
</TABLE>
Source: U.S. Housing Markets
In addition to the expansion of the gaming and hospitality industry,
economic growth in Clark County is being experienced in several other areas,
most notably in the emerging local manufacturing and warehouse/distribution
industries. Much of the growth in these and other areas can be attributed to a
favorable business environment which attracts new companies as well as
out-of-state businesses relocating to the greater Las Vegas area. These
businesses are attracted by among other factors, the absence of state income
taxes (both for corporations and individuals) and favorable unemployment and
workers compensation tax rates. According to the Nevada Development Authority,
more than 60 companies relocated to metropolitan Las Vegas in 1995 and 1996,
creating an aggregate of more than 6,400 new jobs. In fiscal year 1995-1996,
Clark County approved approximately 8,900 new general business applications
(general business applications do not include liquor and gaming business
applications). The growth of the local population also attracts more service and
retail businesses to serve the expanding customer base. As a result, the Company
believes that Clark County will continue to experience economic growth over an
increasingly broader range of businesses in the next several years.
As businesses expand or move into the area to service the growing
population, they require new or larger facilities. As the following table
demonstrates, the number of new commercial building permits (exclusive of hotels
and motels) issued in Clark County increased to 1,435 permits (representing
total building valuation of $810 million) in 1996.
46
<PAGE> 48
CLARK COUNTY
COMMERCIAL BUILDING PERMITS
1992-1996
<TABLE>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
421 596 642 809 1,435
</TABLE>
Source: Las Vegas Perspective, citing building department
reports.
CLARK COUNTY
TOTAL COMMERCIAL BUILDING VALUATION (MILLIONS)
1992-1996
<TABLE>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$221.60 $273.70 $321.40 $608.00 $810.20
</TABLE>
Source: Las Vegas Perspective, citing building department
reports.
The Company believes that much of the demand for residential space is for
moderately priced single family homes and apartments for working families and
senior citizens. The Company also believes that the population and economic
growth anticipated in Clark County will provide demand for its single family
homes, as well as design-build services, for the next several years. However,
there can be no assurance that the market will continue to grow.
47
<PAGE> 49
COMPETITION
The real estate industry is highly competitive. The Company competes for
desirable properties, financing, raw materials and skilled labor. In each of its
business components, the Company competes against numerous developers and others
in the real estate business, many of which are larger and have greater financial
resources and better access to capital markets than the Company. The Company
competes on the basis of a complete package of real estate services it offers
its clients, as well as its reputation for fair pricing and quality
construction. The Company also competes with other owners and operators of real
properties for tenants and buyers of the portfolio properties it owns and
operates.
MORTGAGE INDEBTEDNESS
The Company has generally financed its land acquisition and development
activities utilizing the proceeds of institutional loans secured by real
property. In some cases, the Company has utilized private financing, typically
on a short-term or interim basis.
On a pro forma basis as of March 31, 1997, after giving effect to the
Reorganization and the Offering and the application of the net proceeds thereof
(see "The Reorganization" and "Use of Proceeds"), the mortgage indebtedness of
the Company was approximately $33.7 million. In addition, the Tax Credit
Partnerships had approximately $49.0 million principal amount of indebtedness,
of which approximately $37.2 million represents construction financing which is
made on a recourse basis to the partnerships (and, therefore, to the Company as
general partner).
The following table sets forth certain summary information relating to the
mortgage indebtedness of the Company and the Tax Credit Partnerships in order to
present on a pro forma basis the obligations of the Company and the Tax Credit
Partnerships with respect to their respective indebtedness.
<TABLE>
<CAPTION>
WEIGHTED
ORIGINAL AGGREGATE CURRENT AGGREGATE WEIGHTED AVERAGE
AGGREGATE PRINCIPAL AGGREGATE ANNUAL AVERAGE AGGREGATE REMAINING
NUMBER OF PRINCIPAL BALANCE AT ANNUAL DEBT PRINCIPAL INTEREST RATE AMOUNT DUE TERM
TYPE OF DEBT PROPERTIES BALANCE 3/31/97 SERVICE(1) PAYMENT AT 3/31/97 AT MATURITY (MONTHS)
- -------------------------------- ----------- ----------- ----------- ---------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Company:
Land Loans............ 9 $ 8,737,000 $ 8,618,000 $1,556,660 -- 18.1% $ 8,618,000 11
Construction
Loans(2)............ 6 15,675,000 8,352,000 858,760 -- 10.3% $15,675,000 4
Permanent Loans....... 14 18,354,000 16,716,000 1,986,100 $433,100 9.3% $11,909,000 70
----------- -----------
Total........... $42,766,000 $33,686,000
=========== ===========
Tax Credit
Partnerships:
Construction
Loans(2)............ 4 $37,175,000 $37,150,000 $3,569,600 -- 9.6% $37,175,000 8
Permanent Loans....... 1 $11,900,000 $11,871,000 1,105,100 $ 94,600 8.6% 0 351
----------- -----------
Total........... $49,075,000 $49,021,000
=========== ===========
</TABLE>
- ---------------
(1) "Current Aggregate Annual Debt Service" includes both principal and interest
payments, with interest calculated on principal amounts outstanding and at
interest rates in effect on March 31, 1997.
(2) In the case of construction loans, "Aggregate Principal Balance at 3/31/97"
represents the funded portion of the construction loan. It is anticipated
that the full amount of each construction loan will be funded during the
course of construction. Construction loan interest is capitalized and is
paid utilizing a portion of the proceeds of the related construction loan.
INSURANCE
The Company maintains general liability and excess liability insurance and
workers' compensation insurance in amounts it believes are consistent with its
risk of loss. The Company carries liability insurance of $1.0 million per
occurrence and an umbrella liability policy of $10.0 million, which management
believes are adequate for its current and anticipated future activities.
48
<PAGE> 50
In addition, the Company carries comprehensive liability, rental loss and
all-risk (at full replacement cost) insurance with respect to all of the
properties it owns, with policy specifications, insured limits and deductibles
customarily carried for similar properties by carriers deemed capable of
providing such coverage. The Company carries similar insurance with respect to
its unimproved land, with such exceptions as are appropriate given the
undeveloped nature of such land. Management believes that the Company's improved
properties and its unimproved land are adequately insured.
The Company maintains key man life insurance on Mr. Saxton in the amount of
$5.0 million.
REGULATORY AND ENVIRONMENTAL MATTERS
In addition to the obtaining of all building permits and authorizations
normally associated with the development of real property and customary and
routine business permits and licenses, the Company's business and operations are
subject to additional regulation as described below.
Americans With Disabilities Act. The Company's properties must comply with
Title III of the Americans with Disabilities Act of 1990 ("ADA") to the extent
that such properties are "public accommodations" and/or "commercial facilities"
as defined by the ADA. In the case of existing properties, compliance with the
ADA requirements could require removal of structural barriers to handicapped
access in certain public areas of the projects where such removal is "readily
achievable." The ADA considers apartment complexes to be public accommodations
or commercial facilities, only to the extent portions of such facilities, such
as a leasing office, are open to the public. The Company believes that all of
its properties are in substantial compliance with present requirements under the
ADA and any applicable state laws. Noncompliance could result in imposition of
fines or an award of damages to private litigants. The Company intends to
construct all future properties in compliance with any then-existing
requirements of the ADA and any applicable state law.
Fair Housing Amendments Act of 1988. The Fair Housing Amendment Act of 1988
("FHAA") requires multifamily communities first occupied after March 13, 1990 to
be accessible by the disabled. Noncompliance with the FHAA could result in the
imposition of fines or an award of damages to private litigants. The Company
believes that its properties that are subject to the FHAA are in compliance with
such law.
Resident Income and Other Limitations. The Company's development of Tax
Credit Projects is financed with the proceeds of tax-exempt multifamily housing
revenue bonds issued by the Nevada Housing Division, a division of the
Department of Business and Industry of the State of Nevada. As a condition to
obtaining such financing, the Company is required to enter into certain
regulatory and other agreements with the Nevada Housing Division, the terms of
which require that the owner of such properties (i) set aside a specified
percentage of the units (generally 100%) for residents whose incomes do not
exceed a specified percentage of the area median income ("Lower Income Tenants")
and (ii) hold all vacant units in the project (for a reasonable period
consistent with maintaining the project's financial viability) for rent or
occupancy by Lower Income Tenants. These restrictions terminate approximately 15
years following the date of initial occupancy of the project. During the period
that the restrictions apply, any sale or transfer of the project, or the sale or
transfer of the Company's interest in the partnership which owns the project,
will be subject to regulatory approval.
The Tax Credit Partnerships intend to operate their respective projects so
as to qualify for the Housing Tax Credit. Generally, the Housing Tax Credit is
available only with respect to residential rental projects in which a specified
minimum percentage of the residential rental units are occupied by individuals
with incomes not in excess of a specified percentage of the area median income,
as adjusted for family size (the "minimum set-aside"). The Tax Credit
Partnerships have generally elected to set aside 100% of the units for
individuals with incomes not in excess of 60% of the area median income. (Units
occupied by individuals meeting the income test are referred to herein as the
49
<PAGE> 51
"Low-Income Units.") All units comprising the minimum set-aside must be suitable
for residential occupancy and used on a non-transient basis. Additionally, in
order to qualify for the Housing Tax Credit, the gross rent (including the cost
of any utilities, other than telephone service) charged to tenants of Low-Income
Units comprising the minimum set-aside generally cannot exceed 30% of the
applicable income limits for an apartment of its size (the "rent restriction
test"). A project must, in general, continuously meet the requirements with
respect to the minimum set-aside and the rent restriction test during the period
commencing not later than the date 12 months after the date such project is
placed in service and ending 15 years thereafter.
The Company, as manager of the Tax Credit Projects and a general partner of
Tax Credit Partnerships, will be responsible for ensuring compliance with any
tenant and rent restrictions under the regulatory agreement or necessary for the
continued eligibility for the Housing Tax Credit. The Company may be liable to
the investors in the Tax Credit Partnerships for any lost tax credits resulting
from any failure to so comply and any such liability could be substantial.
Environmental Matters. The Company and its competitors are subject to a
variety of local, state and federal statutes, ordinances, rules and regulations
concerning the protection of health and the environment. The particular
environmental laws which apply to any given property vary greatly according to
the property, its environmental condition and its present and former use.
Environmental laws may result in delays, cause the Company to incur substantial
compliance or other costs or prohibit or severely restrict development in
certain environmentally sensitive regions or areas. In addition, environmental
regulations can have an adverse impact on the availability and price of certain
raw materials such as lumber.
Certain environmental laws can impose liability on owners of property,
among other parties, to the extent that hazardous or toxic substances are or
were present during their ownership period. A transfer of the property does not
relieve an owner of such liability. Thus, the Company may have liability with
respect to properties it has sold. There is also a risk that the Company may be
liable for such costs as an "owner" of real estate with respect to the
properties it owns or as an "operator" of real estate with respect to properties
that the Company does not own, but manages for a fee.
Prior to purchasing a parcel of land, the Company evaluates such land for
the presence of hazardous or toxic materials, wastes or substances. In addition,
the Company typically engages independent environmental engineers to perform
"Phase I" environmental assessments (which involve physical inspections without
soil or groundwater analyses) on the land. Since assessments are generally
performed at the time of the Company's acquisition or financing of a property,
many of the assessments of properties currently owned by the Company were
obtained more than one year ago and in one case was obtained over eight years
ago. None of the assessments revealed any hazardous or toxic materials, wastes
or substances that the Company believes would have a material adverse effect on
the Company's financial position or results of operations. The Company has not
been notified by any governmental authority of any material noncompliance,
liability or other claim in connection with any property currently or formerly
owned by the Company nor is the Company otherwise aware of any environmental
liability relating to the properties that it believes would have a material
adverse effect on its business, assets or results of operations. Nevertheless,
it is possible that the environmental assessments did not reveal all
environmental liabilities with respect to the properties, that environmental
liabilities have developed with respect to the properties since the
environmental assessments were prepared or that there are material environmental
liabilities of which the Company is unaware with respect to the properties.
Moreover, no assurance can be given that (i) future laws, ordinances or
regulations will not impose material environmental liabilities or (ii) the
current environmental condition of the properties will not be affected by the
Company or other tenants or occupants of the properties, by the uses or
condition of properties in the vicinity of the properties, or by third parties
unrelated to the Company.
For a discussion of certain wetlands property owned by the Company, see
"-- Development Activities -- General -- Land Acquisition."
50
<PAGE> 52
EMPLOYEES
As of March 31, 1997, the Company had approximately 699 employees (of which
145 were full-time, 17 were part-time and 537 were occasional construction
workers). The Company employs construction workers on an as-needed basis,
depending upon the level and type of its construction activities. None of the
Company's employees is represented by a labor union and the Company considers
its employee relations to be good.
FACILITIES
The Company's executive offices are located in approximately 19,000 square
feet at its Sahara Vista office building in Las Vegas. The Company also occupies
2,800 square feet at its adjacent Americana office building and 6,050 square
feet at its Arcata Industrial Park. The Company anticipates that its existing
space will satisfy its space requirements for the foreseeable future.
LEGAL PROCEEDINGS
The Company is involved in litigation arising from the ordinary course of
its business, none of which, in the opinion of the Company, will have a material
effect on the Company's financial position or results of operations.
51
<PAGE> 53
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------- --- -----------------------------------------------------
<S> <C> <C>
James C. Saxton 61 Chairman of the Board of Directors, Chief Executive
Officer and President
Douglas W. Hensley 42 Executive Vice President, Chief Financial Officer and
Proposed Director
Marc S. Hechter 45 Senior Vice President of Finance and Proposed
Director
Michele Saxton-Pori 29 Senior Vice President of Development and Director
Timothy J. Adams 36 General Counsel and Proposed Director
Lee-Ann Saxton 29 Vice President of Human Resources
Jeffrey A. Pori 31 Vice President of Marketing and Commercial
Development
Michael Etter 51 Vice President of Construction
Paul Eisenberg 71 Proposed Director
Bernard J. Mikell, Jr. 58 Proposed Director
Robert L. Seale 55 Proposed Director
</TABLE>
Messrs. Hensley, Hechter, Adams, Eisenberg, Mikell and Seale have agreed to
join the Board of Directors concurrently with the closing of the Offering.
James C. Saxton founded the Company in 1986 and has served as its Chairman,
Chief Executive Officer and President since its formation. For the two years
prior to the formation of the Company, Mr. Saxton concentrated on the
development in Las Vegas of privately owned construction projects financed
through private investments. From 1970 to May 1984, Mr. Saxton was employed by
Intel Corporation in various sales and management positions.
Douglas W. Hensley has served as Chief Financial Officer of the Company
since March 1990 and as Executive Vice President of the Company since January
1994. Mr. Hensley joined the Company as Corporate Controller in February 1990.
Prior to joining the Company, Mr. Hensley was with Henson, Stewart & Hensley,
Certified Public Accountants, for six years, the last three years as a partner.
Marc S. Hechter has served as Senior Vice President of Finance of the
Company since May 1995. From July 1993 to May 1995, Mr. Hechter served as a
director of Jayne, Hechter and Company, Inc., a consulting firm providing
strategic planning and financial advice. In such position, Mr. Hechter served as
a financial consultant to the Company from March 1994 to May 1995. Mr. Hechter
served as Assistant General Manager of Finance for the Nevada State Industrial
Insurance System from December 1991 to July 1993, and as Vice President of
Wadhams and Associates, Inc. from August 1990 to December 1991.
Michele Saxton-Pori has served as Senior Vice President of Development of
the Company since June 1990 and as a director since the Company's formation.
Timothy J. Adams has served as General Counsel of the Company since October
1996. From July 1987 to September 1996, Mr. Adams was engaged in the private
practice of law, most recently as a partner of Adams & Tobler, Ltd. Mr. Adams
has acted as counsel to the Company since 1993.
Lee-Ann Saxton has served as Vice President of Human Resources of the
Company since July 1996. From June 1993 to July 1996, Ms. Saxton served as
Director of Retail Operations of the Company. Ms. Saxton served as a director of
the Company from its formation until December 1995. Prior to her employment with
the Company, Ms. Saxton served as Management Consultant with Resource
Evaluation, Ltd., an accounting consultant firm based in San Francisco from
October 1992
52
<PAGE> 54
to June 1993 and Sales Operation Supervisor with Next Computer, Inc. from April
1991 to October 1992.
Jeffrey A. Pori has served as Vice President of Marketing and Commercial
Development of the Company since April 1995. Mr. Pori also serves as President
of the Company's licensed real estate brokerage subsidiary. Mr. Pori joined the
Company as Leasing Manager in April 1991 and was promoted to Director of
Marketing in December 1992. Prior to joining the Company, Mr. Pori served as a
sales representative for Nevada Advertising from October 1990 to March 1991.
Michael Etter has served as Vice President of Construction of the Company
since February 1996. Mr. Etter joined the Company as Director of Purchasing and
Construction Services in October 1995. From April 1991 to September 1995, Mr.
Etter owned and operated Desert Sands Masonry, a masonry subcontractor located
in Orange County, California.
Paul Eisenberg is a retired certified public accountant. Prior to his
retirement in 1991, Mr. Eisenberg was a partner in Eisenberg & Kimmell,
Certified Public Accountants, for five years.
Bernard J. Mikell, Jr. has been engaged in the private practice of law,
legislative advocacy and financial consulting since August 1995. From July 1994
to August 1995, Mr. Mikell served as Senior Vice President, Public Finance for
Sutro & Co. Incorporated. From April 1991 to July 1994, Mr. Mikell was engaged
in the private practice of law and financial consulting. Other previous
positions include Vice President, Municipal Finance for Goldman, Sachs & Co.,
Vice President, Public Finance for Dean Witter Reynolds Inc. and General Counsel
of California Housing Finance Agency.
Robert L. Seale has served as the elected Treasurer of the State of Nevada
since January 1991. Prior thereto, Mr. Seale was Managing Partner of Pangborn &
Co., Ltd., Certified Public Accountants, from 1983 to 1989. Mr. Seale is a past
president of the National Association of State Treasurers.
Mr. Saxton is the father of Michele Saxton-Pori and Lee-Ann Saxton and the
father-in-law of Jeffrey A. Pori.
Each director holds office until the next annual meeting of stockholders or
until his or her successor has been elected and qualified. Officers serve at the
pleasure of the Board of Directors.
The Board of Directors currently does not have, but will, concurrently with
the closing of the Offering, establish, an Audit Committee and a Compensation
Committee. The Company presently expects that, upon joining the Board of
Directors, Messrs. Eisenberg, Mikell and Seale will be appointed to the Audit
Committee and Messrs. Eisenberg and Seale will be appointed to the Compensation
Committee. The Audit Committee will be responsible for reviewing the audited
financial statements of the Company and making recommendations to the full Board
on matters concerning the Company's audits and the selection of independent
public accountants. The Compensation Committee will be responsible for
establishing salaries, bonuses and other compensation for the Company's
executive officers and administering the Company's Management Stock Option
Incentive Plan. See "-- Stock Option Plans -- Management Stock Option Incentive
Plan."
DIRECTOR COMPENSATION
Directors do not presently receive any compensation for their services. The
Company anticipates that directors who are not employees of the Company will
receive a fee of $625 per Board meeting attended and will be reimbursed for
certain expenses incurred in attending Board and committee meetings. No fee will
be payable for participation in Board committee meetings. In addition, such
directors will be eligible to participate in the Company's Non-Employee Director
Stock Option Plan. See "-- Stock Option Plans -- Non-Employee Director Stock
Option Plan." Directors who are employees of the Company will not receive
additional compensation for service as a director.
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<PAGE> 55
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, compensation of executive officers of the Company was
determined by James C. Saxton, Chairman, Chief Executive Officer and President
of the Company. Concurrently with the completion of the Offering, the Company
will establish a Compensation Committee. No member of such Compensation
Committee will be an executive officer of the Company.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid during the year ended
December 31, 1996 to the Chief Executive Officer and each other executive
officer of the Company whose cash compensation exceeded $100,000 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- ----------------------------------------------------- -------- ------- ------------
<S> <C> <C> <C>
James C. Saxton, Chairman, President and Chief
Executive Officer.................................. $346,991 $ 8,000 --(1)
Douglas W. Hensley, Executive Vice President and
Chief Financial Officer............................ 75,000 30,000 $8,654(2)
</TABLE>
- ---------------
(1) Excludes the value of interest-free loans made by the Company to Mr. Saxton
during 1996 because the outstanding principal amount of interest-free loans
made by Mr. Saxton to the Company was at all times during the year in excess
of the loans made to Mr. Saxton by the Company. See "Certain Relationships
and Related Transactions."
(2) Represents a cash payment for accrued vacation.
No stock options were granted during fiscal 1996 to the Named Executive
Officers. The following table sets forth the number and value of stock options
held as of December 31, 1996 by the Named Executive Officers.
AGGREGATE OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS IN-THE-MONEY OPTIONS AT
ACQUIRED AT FISCAL YEAR-END FISCAL YEAR-END(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James C. Saxton............ -- -- -- -- -- --
Douglas W. Hensley......... -- -- 30,723 30,724 $ 104,458 $ 104,462
</TABLE>
- ---------------
(1) Amounts calculated by subtracting the exercise price of the options from the
value of the underlying Common Stock on December 31, 1996, which, for
purposes of this table only, is the assumed initial public offering price of
$9.50 per share.
EMPLOYMENT AGREEMENT
The Company has entered into a three-year employment agreement with James
C. Saxton, the Company's President and Chief Executive Officer, which terminates
on March 10, 2000, subject to automatic one-year renewals unless either the
Company or Mr. Saxton gives 60 days prior notice to the other of its desire not
to renew. Pursuant to the terms of such agreement, Mr. Saxton will be entitled
to receive a base salary of $360,000 per year, increasing each year by 3% or
such other amount as is determined by the Board of Directors in its discretion,
and will receive supplemental life insurance and long-term disability insurance
at the Company's expense. Mr. Saxton will also be eligible to receive an annual
bonus at the discretion of the Board of Directors. The agreement requires Mr.
Saxton to devote his full-time attention and energies to the Company's business
and contains restrictive covenants pursuant to which Mr. Saxton has agreed not
to compete with the Company, within 90 miles of any location in which the
Company or any affiliate is doing business, for a period of one year following
termination of his employment if such termination is the result of the
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<PAGE> 56
Company's termination of Mr. Saxton "for cause" (as such term is defined in the
employment agreement), Mr. Saxton's election not to renew the agreement at the
end of any term thereof or if Mr. Saxton terminates the agreement for other than
"good reason" (as such term is defined in the employment agreement). The
agreement further provides that if Mr. Saxton is terminated other than "for
cause," Mr. Saxton will be entitled to receive any unpaid compensation accrued
through the last day of his employment together with certain severance payments.
INDIVIDUAL STOCK OPTION AGREEMENTS
In December 1994, the Company granted options to purchase an aggregate of
127,907 shares of Common Stock to various officers, key employees and a
consultant under separate letter agreements, including options to purchase
61,447 shares to Douglas W. Hensley. Options to purchase 23,497 shares lapsed
upon termination of certain employees' employment without vesting.
The options granted to Mr. Hensley vested as to 20% of the shares on
December 29, 1995, and as to an additional 30% of the shares on December 29,
1996. The remaining shares underlying Mr. Hensley's options will vest on
December 29, 1997. The other options vested as to 20% of the shares on December
29, 1995, and as to an additional 20% on December 31, 1996. The remaining 60%
will vest 20% per year on December 29 of each of the next three years. All
options are exercisable from the date of vesting through December 28, 2004, at
an exercise price of $6.10 per share, the fair market value of the underlying
shares on the date of grant, as determined by the Board of Directors in good
faith. The Company intends to register and qualify the stock underlying the
options for resale under federal and state securities laws after the closing of
the Offering if no exemption is available for such resale.
STOCK OPTION PLANS
MANAGEMENT STOCK OPTION INCENTIVE PLAN
The Company plans to adopt a Management Stock Option Incentive Plan (the
"Option Plan") prior to the closing of the Offering. The Option Plan will
provide for the grant of options to purchase Common Stock either that are
intended to qualify as "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code or that are not intended to so qualify
("non-qualified options"). All officers, employees (including employees who are
directors), consultants, advisers, independent contractors and agents will be
eligible to receive options under the Option Plan, except that only employees
will be eligible to receive incentive stock options. The maximum number of
shares which will be available for issuance under the Option Plan is 500,000. No
person eligible to receive options under the Option Plan may receive options for
the purchase of more than an aggregate of 25,000 shares in any year.
The Option Plan will be administered by the Board of Directors or, in its
discretion, by a committee of the Board of Directors appointed for that purpose
(the "Committee"), which, subject to the terms of the Option Plan, will have the
authority in its sole discretion to determine (i) the individuals to whom
options shall be granted, (ii) the time or times at which options may be
exercised, (iii) the number of shares subject to each option, the option price
and the duration of each option granted and (iv) all of the other terms and
conditions of options granted under the Option Plan, including the period during
which options may be exercised following the optionee's termination of
employment or other relationship with the Company. The exercise price of
incentive stock options granted under the Option Plan must be at least equal to
the fair market value of the shares on the date of grant (110% of fair market
value in the case of optionees who own more than 10% of the combined voting
power of the Company and its subsidiaries) and may not have a term in excess of
10 years from the date of grant (five years in the case of optionees who own
more than 10% of the combined voting power of the Company and its subsidiaries).
These limits do not apply to non-qualified options. Options granted under the
Option Plan will not be transferable other than by will or the laws of descent
and distribution.
55
<PAGE> 57
Upon the occurrence of certain extraordinary events, appropriate
adjustments will be made by the Board of Directors to preserve, but not to
increase, the benefits to option holders, including adjustments to the aggregate
number and kind of shares subject to outstanding options and the per share
exercise price.
The Option Plan is of indefinite duration; however, no grant of incentive
stock options will be permitted to be made under the Option Plan more than 10
years after its date of adoption. The Board of Directors will have authority to
terminate or to amend the Option Plan without the approval of the Company's
stockholders unless stockholder approval is required by law or by stock exchange
or Nasdaq requirements applicable to the Company. The Board of Directors or the
Committee may amend the terms of any option granted under the Option Plan. No
amendment of any option or amendment or termination of the Option Plan that
impairs the rights of any holder of outstanding options may be made without the
consent of such holder.
The Company intends to grant non-qualified stock options to purchase an
aggregate of 250,700 shares of Common Stock under the Option Plan at the
consummation of the Offering. The options will include options to purchase
25,000 shares of Common Stock to be granted to Douglas W. Hensley. Options to
purchase an aggregate of 80,000 additional shares are anticipated to be granted
to other executive officers of the Company, including Messrs. Hechter, Adams,
Pori and Etter. All the foregoing options will have an exercise price equal to
the initial price of the Common Stock to the public in the Offering, be
exercisable for a period of 10 years from the date of grant and vest ratably
over a five-year period commencing on the date of grant. In the event that the
employment of any optionee terminates during the exercise period, the options
will terminate 30 days following such termination of employment.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company also plans to adopt a Non-Employee Director Stock Option Plan
(the "Director Plan") prior to the closing of the Offering. The Director Plan
will provide for the grant of non-qualified options to purchase Common Stock to
the members of the Company's Board of Directors who are not employees. The
maximum number of shares of Common Stock which will be available for issuance
under the Director Plan is 50,000. The Director Plan will be administered by the
Board of Directors.
Under the Director Plan, each person who becomes a non-employee director
will be automatically granted, as of the date of his election or appointment to
the Board of Directors, an initial option to purchase 500 shares of Common
Stock. On the first trading day of each April commencing with April 1998, each
non-employee director then serving on the Board of Directors and who has served
for at least three months will automatically be granted an option to purchase an
additional 500 shares of Common Stock. Options granted under the Director Plan
will have an exercise price equal to the fair market value of the shares on the
date of grant and will generally become exercisable one year from the date of
grant. Options granted under the Director Plan will have a term of 10 years from
the date of grant and will not be transferable other than by will or the laws of
descent and distribution.
Upon the occurrence of certain extraordinary events, appropriate
adjustments will be made by the Board of Directors to preserve, but not to
increase, the benefits to option holders, including adjustments to the aggregate
number and kind of shares subject to outstanding options and the per share
exercise price. In addition, options will become immediately exercisable upon a
change of control (as defined in the Director Plan).
The Director Plan is of indefinite duration. The Board of Directors will
have authority to terminate or to amend the Director Plan without the approval
of the Company's stockholders unless stockholder approval is required by law or
by stock exchange or Nasdaq requirements applicable to the Company. No such
amendment may impair the rights of any holder of outstanding options without the
consent of such holder.
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<PAGE> 58
PROFIT SHARING PLAN AND ESOP
On December 31, 1994, JSI established the Jim Saxton, Inc. Profit Sharing
Plan (the "Profit Sharing Plan") for its eligible employees. On December 29,
1995, the Company adopted the Saxton Incorporated Employee Stock Ownership Plan
(the "ESOP") and Trust (the "ESOP Trust"). In connection with the merger of the
Company and JSI on December 31, 1995, the Profit Sharing Plan was merged into
the ESOP and the assets of the trust established under the Profit Sharing Plan
were transferred to the ESOP Trust.
An "employee stock ownership plan" (as defined in Section 407(d)(6) of
ERISA and Section 4975(e)(7) of the Internal Revenue Code) is designed to invest
primarily in "qualifying employer securities" of the Company. The account
balances of participants in the Profit Sharing Plan transferred to the ESOP
Trust were invested by the ESOP Trust in the Company's Common Stock. Thereafter,
the Company may make periodic contributions to the ESOP Trust out of its net
profits in amounts determined by the Board of Directors, which contributions may
be made in cash or in shares of the Company's Common Stock. Amounts contributed
in cash will be used to purchase shares of the Company's Common Stock. The ESOP
Trust currently holds 44,142 shares of the Company's Common Stock.
Participants in the Profit Sharing Plan on December 31, 1995 were
immediately eligible to participate in the ESOP. All other employees will become
eligible to participate in the ESOP on the first day of the ESOP plan year
coinciding with or next following the date the employee completes one year of
service with the Company, although eligibility to participate in the salary
deferral feature described below may commence at an earlier date. Contributions
by the Company to the ESOP for the benefit of a participating employee will vest
over a seven-year period of participation in the ESOP and will be held in trust
until distributed pursuant to the terms of the ESOP.
The ESOP also includes a salary deferral feature (the "401(k) Feature")
which, if activated by the Company, will permit employees of the Company
participating in the ESOP to defer a portion of their compensation in accordance
with the provisions of Section 401(k) of the Code. Matching contributions by the
Company may be made in amounts and at times determined by the Company. Matching
contributions by the Company, if any, under the 401(k) Feature for the benefit
of a participating employee will vest over a seven-year period of participation
in the ESOP and will be held in trust, together with the participants'
deferrals, until distributed pursuant to the terms of the 401(k) Feature. The
401(k) Feature will be available to ESOP participants only for those plan years
which the Board of Directors of the Company determines that the 401(k) Feature
shall apply.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation provide that, pursuant to Nevada
law, each director shall not be liable for monetary damages for breach of the
directors' fiduciary duty as a director to the Company and its stockholders. In
addition, the Company's Bylaws provide that the Company will indemnify its
directors and officers and may indemnify its employees and other agents to the
fullest extent permitted by law. The Company also contemplates entering into
indemnification agreements with its officers and directors. See "Description of
Capital Stock -- Charter and Bylaw Provisions."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1994, the Company distributed to the Contributing Stockholders
$6.5 million of the Company's Subordinated Dividend Notes (see Note 12 of Notes
to Combined Financial Statements included elsewhere herein) representing the
Company's estimated undistributed S corporation earnings as of December 31,
1994. The Subordinated Dividend Notes are non-interest bearing, have 10-year
terms and are subordinated to all existing debt of the Company. In September
1996, the Company distributed to the Contributing Stockholders approximately
$1.6 million, which represented the stockholders' estimated aggregate liability
for federal income taxes attributed to the
57
<PAGE> 59
Company's undistributed S corporation earnings through September 30, 1995. Each
Contributing Stockholder immediately thereafter loaned the full amount of his or
her distribution to the Company in exchange for Subordinated Dividend Notes in
the principal amount of the loan. The distributions described above were made to
the Contributing Stockholders on a pro rata basis based on their ownership of
Common Stock as follows: 70% to James C. Saxton and his wife, Dorothy J. Saxton;
10% to Michele Saxton-Pori; 10% to Lee-Ann Saxton; and 10% to James C. Saxton
II. The Company is also indebted to Mr. Saxton in the amount of $695,440 on
account of a non-interest-bearing demand loan made by Mr. Saxton to the Company
in July 1996.
Since January 1, 1994, certain of the Contributing Stockholders have from
time to time been indebted to the Company in varying amounts. All such
indebtedness is non-interest-bearing. At May 15, 1997, the aggregate amount owed
by Contributing Stockholders to the Company was approximately $727,000. The
aggregate amount owed by Contributing Stockholders at the end of each of the
last three fiscal years was approximately as follows: 1994 -- $1.2 million;
1995 -- $1.8 million; and 1996 -- $610,000. The largest amount of indebtedness
outstanding at any time since January 1, 1994 was approximately $2.3 million in
December 1996. Substantially all of the loans were in the form of advances to
pay the personal income tax liabilities of the Contributing Stockholders and tax
preparation fees. The following table sets forth for each Contributing
Stockholder who is or has been indebted to the Company at any time since January
1, 1994, the largest amount of indebtedness outstanding since January 1, 1994
(in December 1996 as to each Contributing Stockholder) and the amount of the
indebtedness at May 15, 1997.
<TABLE>
<CAPTION>
LARGEST AMOUNT OF AMOUNT OF INDEBTEDNESS
CONTRIBUTING STOCKHOLDER INDEBTEDNESS AT MAY 15, 1997
----------------------------------- ----------------- ----------------------
<S> <C> <C>
James C. Saxton.................... $ 1,566,200 $268,000
Michele Saxton-Pori................ 238,110 162,000
Lee-Ann Saxton..................... 235,100 159,000
James C. Saxton II................. 214,400 138,000
</TABLE>
For a description of the transactions pursuant to which the Company and the
Contributing Stockholders will satisfy their respective indebtedness to the
other, see "The Reorganization."
Since January 1, 1994, the Contributing Stockholders received distributions
aggregating approximately $4.4 million from various partnerships which are being
combined with the Company in connection with the Reorganization. The amount of
the distributions received by each Contributing Stockholder through March 31,
1997 is as follows: $3,803,500 to James C. Saxton and his wife; $196,500 to
Michele Saxton-Pori; $196,500 to Lee-Ann Saxton; and $196,500 to James C. Saxton
II.
The Company received fees for construction, development and management of
properties owned by various partnerships which are being combined with the
Company in connection with the Reorganization. The Company also sold land to
such partnerships. Because the Combined Financial Statements of the Company
included elsewhere herein present the financial operations of the Company and
the various combining entities on a combined basis, all such transactions are
treated as intercompany transactions and have been eliminated.
In May 1997, James C. Saxton and Jeffrey A. Pori each sold to the Company
for $10 his respective 50% interest in RealNet Commercial Brokerage ("RealNet"),
a licensed real estate broker which provides real estate brokerage services to
the Company on a commission basis in connection with the sale and leasing of
Company properties. The aggregate amount earned by RealNet for such services was
approximately $55,000 in 1995 and approximately $252,000 in 1996. Since its
formation in 1995, Mr. Pori received an aggregate of $137,755 for services
rendered to RealNet, $8,500 of which was paid in 1996 and $129,255 of which was
paid in 1997. Messrs. Saxton and Pori each received $5,710 in distributions from
RealNet in 1996.
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<PAGE> 60
Mr. Saxton and his wife personally guarantee certain of the Company's
indebtedness for which they receive no compensation. The Company intends to seek
the elimination of such guarantees and to indemnify Mr. Saxton and his wife to
the extent such guarantees cannot be eliminated.
Pursuant to an agreement dated January 10, 1994, the Company agreed to
construct and sell an approximately 4,420 square-foot convenience store to
L.'M.E.D.D., Inc., a privately-held corporation of which Michele Saxton-Pori is
a 25% stockholder ("L'MEDD"), for approximately $1.3 million, subject to the
Company's arranging permanent financing on behalf of L'MEDD. The financing has
not been obtained and the sale has not occurred. L'MEDD has advised the Company
that it is attempting to arrange financing which would enable it to consummate
the sale. In July 1995, Ms. Saxton-Pori entered into a stock purchase agreement
to sell her shares in L'MEDD and its affiliate to a third party for $54,250. To
date, the sale of the shares has not been consummated. Pursuant to a lease dated
December 1, 1994, the Company leased the property to Operations Management
Group, a corporation owned by the stockholders of L'MEDD (including Ms. Saxton-
Pori) ("OMG"), on a triple net basis for a term of 20 years, with two five-year
renewal options. Under the terms of the lease, OMG is required to pay basic
monthly rent of $13,244 during the initial lease year, which amount is adjusted
annually to reflect increases in the cost of living. Of the rent paid during the
first 12 months of the lease, $24,000 will be applied to reduce the purchase
price payable by L'MEDD for the property. Management believes that the terms of
the lease with OMG are comparable to the terms which would have been negotiated
with an unaffiliated third party. At May 15, 1997, OMG was indebted to the
Company in the aggregate amount of approximately $175,280, of which $160,680
represented delinquent rent and $14,600 represented amounts advanced by the
Company to OMG for operating capital. The Company intends to pursue its legal
remedies to collect the delinquent rent. The Company assists in the operation of
the convenience store by maintaining the store books and records and providing a
Company employee to train on-site personnel and oversee store operations. The
Company receives no additional compensation for such services.
Marc S. Hechter, an executive officer and a proposed director of the
Company, was previously employed by, and a 50% stockholder of, Jayne, Hechter
and Company, Inc., a consulting firm to which the Company made payments totaling
approximately $55,207 in 1994 and $43,250 in 1995, exclusive of expense
reimbursements, for services rendered to the Company pursuant to a Consulting
Agreement in effect from January 1994 to May 1995. In December 1994, during the
term of such Consulting Agreement, the Company granted Mr. Hechter options to
purchase an aggregate of 25,562 shares of Common Stock, at an exercise price of
$6.10 per share. The options vest over a five-year period, subject to
acceleration or termination under certain circumstances. See
"Management -- Individual Stock Option Agreements."
Timothy J. Adams, an executive officer and a proposed director of the
Company, was previously a partner of Adams & Tobler, Ltd., to which the Company
made payments totaling approximately $5,870, $69,580 and $170,940 in 1994, 1995
and 1996, respectively. Prior to his affiliation with Adams & Tobler, Ltd., Mr.
Adams was sole proprietor of The Law Offices of Timothy J. Adams, to which the
Company made payments totaling approximately $41,840 in 1994.
Paul Eisenberg, a proposed director of the Company, loaned to the Company
$500,000 in November 1994 for general corporate purposes. The loan is evidenced
by a secured promissory note bearing interest at 12% per annum. On March 31,
1997, the principal amount owed to Mr. Eisenberg, including amounts borrowed
prior to 1994, was $868,000, which amount will be paid in full with a portion of
the net proceeds of the Offering.
In the Reorganization, the Company will acquire from Mr. Eisenberg for
approximately $800,000 his 14% interest in a limited partnership which owns
three contiguous operating properties and approximately 2.6 acres of vacant land
adjacent to such properties. Mr. Eisenberg's capital investment in the limited
partnership was $700,000, which investment was made in 1990. Mr. Eisenberg has
previously received distributions from the limited partnership in excess of his
capital
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<PAGE> 61
investment. In addition, Mr. Eisenberg is a general partner of and owns a 50%
economic interest in the Retail Partnership. See "The Reorganization."
From time to time, Mr. Saxton's sister, Dorothy Kidd, has advanced funds to
the Company for general corporate purposes. The aggregate amount borrowed from
Ms. Kidd during 1994, 1995 and 1996 was $610,000, none and $130,000,
respectively. In addition, the Company owes $30,000 to an affiliate of Ms. Kidd
for services in representing the Company before local governmental entities
during 1995. The amounts owed Ms. Kidd and her affiliate are evidenced by
unsecured promissory notes bearing interest at 12% per annum. At May 15, 1997,
the aggregate principal amount owed by the Company to Ms. Kidd and her affiliate
was $770,000, which amount will be paid in full using a portion of the net
proceeds of the Offering.
In the future, transactions with affiliates of the Company are anticipated
to be minimal and will require approval by a majority of the Board of Directors,
including a majority of the disinterested members of the Board of Directors, and
will be made on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
For a description of additional transactions between the Company and its
existing stockholders, see "The Reorganization" and "Description of Capital
Stock -- Saxton Warrants and Registration Rights."
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<PAGE> 62
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the date of this
Prospectus with respect to the beneficial ownership of the Company's outstanding
Common Stock by (i) each person or group who was on such date the beneficial
owner of more than five percent of the outstanding Common Stock, (ii) each
director and proposed director of the Company, (iii) each Named Executive
Officer and (iv) all directors, proposed directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES SHARES BENEFICIALLY OWNED
BENEFICIALLY ----------------------------------
NAME AND ADDRESS(1) OWNED(2)(3)(4) BEFORE OFFERING AFTER OFFERING
-------------------------------------- -------------- --------------- --------------
<S> <C> <C> <C>
James C. and Dorothy J. Saxton(5)..... 3,715,798 69.5% 48.8%
Michele Saxton-Pori................... 531,611 9.9% 7.0%
Lee-Ann Saxton(6)..................... 531,378 9.9% 7.0%
James C. Saxton II.................... 530,000 9.9% 7.0%
Douglas W. Hensley(6)(7)(8)........... 33,664 * *
Marc S. Hechter(7)(8)................. 10,225 * *
Timothy J. Adams(6)(8)................ -- -- --
Paul Eisenberg(8)..................... -- -- --
Bernard J. Mikell, Jr.(8)............. -- -- --
Robert L. Seale(8).................... -- -- --
Directors, proposed directors and
executive officers as a group (11
persons)(9)......................... 4,826,217 89.6% 63.0%
</TABLE>
- ---------------
* Less than 1%.
(1) The address of each beneficial owner of more than five percent of the
outstanding Common Stock is 5440 West Sahara Avenue, Third Floor, Las Vegas,
Nevada 89102.
(2) Unless otherwise noted, sole voting and dispositive power are possessed with
respect to all shares of Common Stock shown.
(3) Includes shares allocated to the account of the following individuals and
for all directors, proposed directors and executive officers as a group
under the Company's ESOP: James C. Saxton -- 5,798 shares; Michele
Saxton-Pori -- 1,611 shares; Lee-Ann Saxton -- 1,378 shares; Douglas W.
Hensley -- 2,941 shares; and all directors, proposed directors and executive
officers as a group -- 13,224 shares. ESOP participants have sole discretion
as to voting of such allocated shares.
(4) Includes shares to be issued to the following individuals in connection with
the Reorganization: James C. Saxton -- 268,978 shares (including 134,489
shares to be issued to Mr. Saxton's wife, Dorothy J. Saxton); Michele
Saxton-Pori -- 38,426 shares; Lee-Ann Saxton -- 38,426 shares; and James C.
Saxton II -- 38,426 shares. See "The Reorganization."
(5) Includes 1,860,798 shares beneficially owned by James C. Saxton and
1,855,000 shares beneficially owned by Mr. Saxton's wife, Dorothy J. Saxton.
Mr. and Mrs. Saxton each disclaim beneficial ownership of the shares owned
by the other.
(6) Does not include 23,957 shares owned by the Company's ESOP Trust which are
not currently allocated to the account of any ESOP participants. The voting
of such unallocated shares may be directed by Lee-Ann Saxton, Douglas W.
Hensley and Timothy J. Adams as members of the ESOP Administrative
Committee. Ms. Saxton and Messrs. Hensley and Adams each disclaim beneficial
ownership of all such shares.
(7) Represents shares which may be acquired upon exercise of options exercisable
within 60 days.
(8) Messrs. Hensley, Hechter, Adams, Eisenberg, Mikell and Seale have agreed to
be appointed to the Board of Directors concurrently with the closing of the
Offering.
(9) Includes 1,855,000 shares owned by Dorothy J. Saxton, as to which James C.
Saxton disclaims beneficial ownership, and an aggregate of 42,993 shares
which may be acquired by Messrs. Hensley, Hechter and Pori upon the exercise
of options exercisable within 60 days.
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
The following summarizes certain provisions of the Company's Articles of
Incorporation, the Company's Bylaws and certain provisions of the Nevada General
Corporation Law (the "Corporation Law"). Such summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Company's Articles of Incorporation and Bylaws
and the Corporation Law, including the definitions therein of certain terms.
Copies of the Company's Articles of Incorporation and Bylaws are filed as
exhibits to the Registration Statement of which this Prospectus is a part.
GENERAL
The authorized capital stock of the Company consists of 50,000,000 shares
of common stock, $0.001 par value per share ("Common Stock"), and 5,000,000
shares of preferred stock, $0.001 par value per share ("Preferred Stock"). As of
May 15, 1997, there were 4,959,886 shares of Common Stock and no shares of
Preferred Stock issued and outstanding. As of May 15, 1997, issued and
outstanding Common Stock was held by six stockholders of record, including the
Company's ESOP. All issued and outstanding shares of Common Stock are, and the
shares of Common Stock to be issued upon consummation of the Reorganization and
the Offering will be, fully paid and non-assessable.
COMMON STOCK
Holders of Common Stock have one vote per share of record on each matter
submitted to a vote of stockholders. Subject to preferential rights with respect
to any outstanding Preferred Stock, holders of Common Stock have the right to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of assets legally available therefor. In the event of liquidation
or dissolution or winding up of the Company, holders of Common Stock are
entitled to share ratably in the assets remaining after payment of all amounts
due to creditors and all preferential amounts due to holders of any Preferred
Stock. Holders of Common Stock have noncumulative voting rights in the election
of directors. Holders of Common Stock have no conversion rights and are not
entitled to any preemptive or subscription rights. The Common Stock is not
subject to redemption or any further calls or assessments.
PREFERRED STOCK
The terms of the Preferred Stock, or any series thereof, may be determined
from time to time by the Board of Directors. Such shares may be convertible into
Common Stock, which could result in dilution of the holders of Common Stock, and
may have a rank superior to the Common Stock in the payment of dividends,
liquidation rights, voting and other rights, preferences and privileges. Future
shares of Preferred Stock may be issued from time to time by authorization of
the Board of Directors of the Company without submitting a proposal regarding
the issuance of such shares to a vote of holders of Common Stock. The issuance
of Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things, adversely
affect the rights of holders of Common Stock and under certain circumstances
make it more difficult for a third party to gain control of the Company. No
shares of Preferred Stock are outstanding, and the Company has no current plans
to issue any shares of Preferred Stock.
CHARTER AND BYLAW PROVISIONS
The Company's Articles of Incorporation provide that no officer or director
will be personally liable to the Company or any stockholder for damages for
breach of fiduciary duty as a director or officer, except for (i) acts or
omissions that involve intentional misconduct, fraud or a knowing violation of
law or (ii) the payment of dividends in violation of the Corporation Law. If the
Corporation Law is amended or interpreted to eliminate or limit further the
personal liability of
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<PAGE> 64
directors or officers, then the liability of all directors and officers
automatically will be eliminated or limited to the full extent then so
permitted. These provisions in the Articles of Incorporation do not eliminate
the fiduciary duties of the directors and officers and, in appropriate
circumstances, equitable remedies such as injunctive relief or other forms of
non-monetary relief will remain available under Nevada law. In addition, these
provisions do not affect responsibilities imposed under any other law, such as
the federal securities laws or state or federal environmental laws.
The Company's Bylaws provide that the Company will indemnify its directors
and officers and may indemnify its employees and other agents to the fullest
extent permitted under the Corporation Law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross negligence
by indemnified parties and permits the Company to advance litigation expenses in
the case of stockholder derivative actions or other actions, against an
undertaking by the indemnified party to repay such advances if it is ultimately
determined that the indemnified party is not entitled to indemnification. The
Company intends to seek liability insurance for its officers and directors.
Prior to the consummation of the Offering, the Company anticipates that it
will enter into separate indemnification agreements with each of its directors
and officers. These agreements will require the Company, among other things, to
indemnify such persons against certain liabilities that may arise by reason of
their status or service as directors or officers (other than liabilities arising
from actions involving intentional misconduct, fraud or a knowing violation of
law), to advance their expenses incurred as a result of any proceeding against
them as to which they could be indemnified and to cover such persons under any
directors' and officers' liability insurance policy maintained by the Company.
These indemnification agreements will be separate and independent of the
indemnification rights under the Bylaws and are irrevocable.
The Company believes that these provisions of the Articles of Incorporation
and Bylaws and the indemnification agreements are necessary to attract and
retain qualified persons as directors and officers. Insofar as indemnification
pursuant to the foregoing provisions against liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers or persons controlling the Company, the Company has been
informed that, in the opinion of the Securities and Exchange Commission (the
"Commission"), such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Company has elected in its Articles of Incorporation to not be subject
to the Nevada Combinations With Interested Stockholders Act and the Nevada
Acquisition of Controlling Interest Act. Such acts, when applicable, have the
effect of delaying or making it more difficult to effect a change in control of
the Company.
The Company's Bylaws permit stockholders to take action by written consent
in lieu of a meeting so long as holders of not less than a majority of the
outstanding shares, or such greater percentage as may be required for the action
proposed to be taken, participate in such consent.
SAXTON WARRANTS AND REGISTRATION RIGHTS
In connection with the Reorganization, the Company will issue to the
Contributing Stockholders the Saxton Warrants to purchase 400,000 shares of
Common Stock in satisfaction of $1.0 million of Subordinated Dividend Notes. The
Saxton Warrants will be exercisable, at an exercise price per share equal to
120% of the initial public offering price per share, for a five-year period
commencing upon the determination of the Company's independent auditors that the
Company had after tax net income of not less than $7.4 million in 1997 and
aggregate after tax net income of not less than $18.4 million for 1997 and 1998
prior to any expense related to such warrants, calculated based on federal and
state income tax rates now in effect. If the Company does not achieve the
specified levels of after tax net income, the Saxton Warrants will lapse.
63
<PAGE> 65
The Saxton Warrants provide certain rights with respect to the registration
under the Securities Act of the shares of Common Stock issuable upon exercise
thereof. The holders of the shares issuable upon exercise of the Saxton Warrants
may require the Company to file a registration statement under the Securities
Act with respect to such shares. In addition, if the Company registers any of
its Common Stock whether for its own account or for the account of other
security holders, the holders of the shares issuable upon exercise of the Saxton
Warrants are entitled to include their shares of Common Stock in the
registration.
REPRESENTATIVES' WARRANTS AND REGISTRATION RIGHTS
The Company has agreed to sell to the Representatives the Representatives'
Warrants to purchase 227,500 shares of Common Stock at an exercise price per
share equal to 120% of the initial public offering price per share. The
Representatives' Warrants are exercisable for a period of five years from the
date of this Prospectus. Neither the Representatives' Warrants nor the shares of
Common Stock issuable upon exercise thereof may be transferred (other than to
affiliates of the Representatives) for a period of one year beginning on the
date of this Prospectus. See "Underwriting."
The Representatives' Warrants provide certain rights with respect to the
registration under the Securities Act of the shares of Common Stock issuable
upon exercise thereof. The holders of the shares issuable upon exercise of the
Representatives' Warrants may require the Company to file a registration
statement under the Securities Act with respect to such shares. In addition, if
the Company registers any of its Common Stock whether for its own account or for
the account of other security holders, the holders of the shares issuable upon
exercise of the Representatives' Warrants are entitled to include their shares
of Common Stock in the registration.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock
Transfer Corporation. Its telephone number is (818) 502-1404.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the Offering, and assuming no exercise of the
Underwriters' over-allotment option, the Company will have 7,619,142 shares of
Common Stock outstanding. Of these shares, the 2,275,000 shares to be sold to
the public in the Offering will have been registered under the Securities Act
and will be freely transferable without restriction or further registration
under the Securities Act, unless purchased by "affiliates" of the Company (as
that term is defined in Rule 144 under the Securities Act ("Rule 144")). Of the
remaining 5,344,142 shares, 4,959,886 shares will be "restricted securities" (as
defined in Rule 144), of which 4,933,256 shares will be immediately eligible for
sale in the public market in the quantities and manner permitted by Rule 144
following expiration of the 180-day lock-up period described below and the
remaining 26,630 shares constituting restricted securities will be eligible for
sale in the public market pursuant to Rule 144 upon the expiration of the
holding period required by Rule 144(d). The 384,256 shares to be acquired
immediately prior to the closing of the Offering as part of the Reorganization
will be issued pursuant to the exemption from registration under the Securities
Act afforded to "intrastate offerings" within the meaning of Section 3(a)(11) of
the Securities Act. Such shares will be eligible for sale in the public market
in the quantities and manner permitted by Rule 144 commencing nine months
following the date such shares are acquired. All of the unregistered outstanding
shares of the Company's Common Stock are held by affiliates of the Company or
the Company's ESOP Trust.
In general, under Rule 144, as currently in effect, an affiliate of the
Company (or persons whose shares are required to be aggregated with an
affiliate) who beneficially owns registered shares or restricted securities with
respect to which at least one year has elapsed since the later of the date such
restricted securities were acquired from the Company or from an affiliate of the
Company is
64
<PAGE> 66
entitled to sell in "brokers' transactions" or to market makers within any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of the Common Stock or (ii) the
average weekly reported trading volume during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Commission. Sales under Rule 144 are also subject to certain requirements
relating to the manner of sale, notice and availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who is not and has not been an affiliate of the Company at any time during the
three months immediately preceding the sale of the restricted securities is
entitled to sell such securities pursuant to Rule 144(k) without regard to the
limitations described above, provided that two years have elapsed since the
later of the date on which such restricted securities were acquired from the
Company or the date they were acquired from an affiliate of the Company. Under
Rule 701 under the Securities Act, persons who purchase shares upon exercise of
options granted prior to this Offering are entitled to sell such shares 90 days
after the Offering in reliance on Rule 144, without having to comply with the
holding period requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the volume limitation or notice filing provisions
of Rule 144. In addition, Rule 144A would permit the resale of restricted
securities to qualified institutional buyers subject to compliance with
conditions of the Rule.
The Company and its directors, officers and holders of 5% or more of the
Common Stock have agreed with the Underwriters that for a period of 180 days
after the date of this Prospectus (the "lock-up period"), they will not sell or
otherwise dispose of any shares of Common Stock without the prior written
consent of the Representatives of the Underwriters. See "Underwriting."
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register Common Stock reserved for issuance to employees and
others pursuant to various stock option agreements, the Option Plan and the
Director Plan. Such registration is expected to become effective as soon as
practicable following the date of this Prospectus. Shares issued pursuant to the
stock option agreements, the Option Plan and the Director Plan if not otherwise
subject to an agreement not to sell any Common Stock during the 180-day period
following the date of this Prospectus after the effective date of such
registration statement generally will be available for sale in the open market.
As of the date of this Prospectus, (i) options to purchase 104,410 shares of
Common Stock are outstanding pursuant to various stock option agreements, of
which options to purchase 47,909 shares are vested and (ii) no options to
purchase shares of Common Stock are outstanding under the Option Plan or
Director Plan.
Holders of shares issuable upon exercise of the Saxton Warrants and the
Representatives' Warrants are entitled to certain registration rights. See
"Description of Capital Stock -- Saxton Warrants and Registration Rights" and
"Description of Capital Stock -- Representatives' Warrants and Registration
Rights."
65
<PAGE> 67
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part, the Underwriters named below (the "Underwriters"),
have severally, and not jointly, agreed, through Ladenburg Thalmann & Co. Inc.
and Stifel, Nicolaus & Company, Incorporated, the Representatives of the
Underwriters (the "Representatives"), to purchase from the Company, and the
Company has agreed to sell to the Underwriters, the aggregate number of shares
of Common Stock set forth opposite their respective names:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------------------------------------------------------ ----------------
<S> <C>
Ladenburg Thalmann & Co. Inc................................
Stifel, Nicolaus & Company, Incorporated....................
---------
Total............................................. 2,275,000
=========
</TABLE>
The Underwriters are committed to take and to pay for all of the shares of
Common Stock offered hereby (other than the shares covered by the over-allotment
option described below), if any are purchased.
The Underwriters have advised the Company that they propose to offer all or
part of the Common Stock offered directly to the public initially at the price
to the public set forth on the cover page of this Prospectus, that they may
offer shares to certain dealers at a price that represents a concession of not
more than $ per share, and that the Underwriters may allow, and such
dealers may reallow, a concession of not more than $ per share to
certain other dealers. After the Offering, the price to the public and the
concessions may be changed from time to time by the Representatives.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase up to 341,250 additional
shares of Common Stock at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with the sale of the shares offered hereby. To the extent the
Underwriters exercise such option, each of the Underwriters will be committed,
subject to certain conditions, to purchase the same percentage thereof as the
percentage of the initial shares to be purchased by that Underwriter.
The Company has agreed to indemnify the Underwriters and certain related
persons against certain liabilities, including certain liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Company and its directors, officers and holders of 5% or more of the
Common Stock have agreed that they will not, directly or indirectly, offer, sell
or otherwise dispose of any equity securities of the Company or any securities
convertible into or exchangeable for, or any rights to purchase or acquire,
equity securities of the Company for a period of 180 days after the date of this
Prospectus, without the prior written consent of the Representatives.
The Company has agreed to issue to the Representatives and their designees,
for their own accounts, warrants to purchase an aggregate of 227,500 shares of
Common Stock. The warrants will be exercisable during the five-year period
commencing on the date hereof, at an exercise price per share equal to 120% of
the initial public offering price. The warrants will contain customary
antidilution provisions and certain rights to register the shares issuable upon
exercise of the warrants under the Securities Act.
66
<PAGE> 68
Prior to the Offering, there has been no public market for the Common
Stock. The initial offering price was determined by negotiations between the
Company and the Representatives. Among the factors considered in such
negotiations were the Company's historical results of operations and financial
condition, prospects for the Company and for the industry in which the Company
operates, the Company's capital structure, and the general condition of the
securities market.
The Representatives have informed the Company that the Underwriters do not
expect sales to discretionary accounts to exceed 5% of the total number of
shares offered hereby, and the Representatives do not intend to confirm sales of
shares to any account over which they exercise discretionary authority.
In connection with the Offering, the Underwriters may over-allot or effect
transactions which stabilize or maintain the market price of the Common Stock at
a level above that which might otherwise prevail in the open market. Such
transactions may be effected on the Nasdaq National Market or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with the legality of the shares offered
by this Prospectus will be passed upon for the Company by Hughes Hubbard & Reed
LLP, Los Angeles, California. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Willkie Farr & Gallagher,
New York, New York.
EXPERTS
The Combined Financial Statements of the Company as of December 31, 1995
and 1996, and for each of the years in the three-year period ended December 31,
1996 have been included herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (of which this Prospectus is a part) under the Securities Act and the rules
and regulations promulgated thereunder with respect to the shares of Common
Stock offered pursuant to this Prospectus. This Prospectus does not contain all
of the information set forth in the Registration Statement and the schedules and
exhibits thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. Statements contained in this Prospectus
as to the content of any contract, agreement or other document referred to
herein are not necessarily complete, and in each instance reference is made to
the copy of such contract, agreement or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement and
such schedules and exhibits, copies of which may be examined without charge at,
or copies obtained upon payment of prescribed fees from, the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and will also be available for inspection and copying at
the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Such material may also be accessed
electronically by means of the Commission's website on the Internet at
http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports
containing consolidated financial statements audited by its independent public
accountants and quarterly reports containing unaudited consolidated financial
statements for three quarters of each fiscal year.
67
<PAGE> 69
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Unaudited Pro Forma Condensed Consolidated Financial Statements...................... F-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1997........ F-4
Unaudited Pro Forma Condensed Consolidated Statement of Income for the year ended
December 31, 1996.................................................................. F-5
Unaudited Pro Forma Condensed Consolidated Statement of Income for the three months
ended March 31, 1997............................................................... F-6
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements............. F-7
Independent Auditors' Report......................................................... F-8
Combined Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997
(Unaudited) and Pro Forma Combined Balance Sheet as of March 31, 1997
(Unaudited)........................................................................ F-9
Combined Statements of Income for the years ended December 31, 1994, 1995 and 1996,
and the three months ended March 31, 1996 and 1997 (Unaudited)..................... F-10
Combined Statements of Stockholders' Equity for the years ended December 31, 1994,
1995 and 1996, and the three months ended March 31, 1997 (Unaudited)............... F-11
Combined Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996, and the three months ended March 31, 1996 and 1997 (Unaudited)............... F-12
Notes to Combined Financial Statements............................................... F-14
</TABLE>
F-1
<PAGE> 70
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying pro forma condensed consolidated financial statements of
the Company present pro forma information giving effect to the Reorganization
and the Offering and the application of the net proceeds and other transactions
expected to be completed concurrently with the Offering, which are described in
the accompanying notes to the pro forma condensed consolidated financial
statements.
Concurrently with the closing of the Offering, the Reorganization will be
consummated by the Company and others for the principal purpose of transferring
to the Company the ownership of all investment properties and all interests in
partnerships which own properties which are currently owned by Mr. Saxton and
his immediate family (the "Contributing Stockholders"), alone or with one or
more third parties. In addition, as part of the Reorganization, certain
outstanding indebtedness between the Company and the Contributing Stockholders
will be satisfied. The Reorganization will be comprised of the transactions
summarized below:
Acquisition of Partnership Interests of Third Parties. The Company
will acquire the noncontrolling partnership interests of five third-party
investors in four partnerships, for an aggregate of approximately $2.8
million in cash from the net proceeds of the Offering. The consideration to
be paid was based on the value of the partnerships' real property and other
assets as determined by negotiation between the Company and the third-party
partners. The third-party noncontrolling interests will be acquired at fair
market value and, accordingly, the book value of the real estate assets
owned by such partnerships will be increased by an amount equal to the
excess purchase price over the net assets acquired in accordance with the
purchase method of accounting.
Contribution of Partnership Interests of the Contributing
Stockholders. The Contributing Stockholders will contribute to the Company
their interests in the partnerships described in the preceding paragraph
and their interests in three additional partnerships. Mr. Saxton will also
contribute to the Company, for no additional consideration, (a) his direct
or indirect general partner interest in four Tax Credit Partnerships,
subject to receiving all required lender, partner and other consents to
such contribution, and (b) an assignment of his 50% economic interest in
the Retail Partnership. All interests in partnerships to be acquired from
the Contributing Stockholders will be acquired by the Company as additional
capital contributions of such stockholders for which the Company will
neither pay any consideration nor issue any shares of Common Stock. The
Company's acquisition of the partnership interests of the Contributing
Stockholders has been accounted for as a combination of entities under
common control and the capital accounts have been classified as additional
paid-in capital.
Satisfaction of Outstanding Indebtedness. The Company is indebted to
the Contributing Stockholders in the aggregate amount of $8.1 million,
represented by non-interest-bearing Subordinated Dividend Notes. The
Company is also indebted to Mr. Saxton in the amount of $695,440 on account
of a non-interest-bearing demand loan made by Mr. Saxton to the Company in
July 1996. The Contributing Stockholders are indebted to the Company in the
aggregate amount of approximately $727,000. As part of the Reorganization,
the Company and the Contributing Stockholders will satisfy their respective
obligations to the other by (i) offsetting the outstanding balance of loans
by the Company to the Contributing Stockholders against an equal amount of
Subordinated Dividend Notes, (ii) the Company issuing 384,256 shares of
Common Stock and the Saxton Warrants in satisfaction of an aggregate of
$4.7 million of Subordinated Dividend Notes and (iii) the Company repaying
the $2.7 million balance of Subordinated Dividend Notes and $695,440 of
other indebtedness utilizing a portion of the net proceeds of the Offering.
The pro forma condensed consolidated balance sheet at March 31, 1997
assumes that the Reorganization occurred on March 31, 1997. The pro forma as
adjusted condensed consolidated balance sheet at March 31, 1997 assumes that the
Reorganization and the Offering occurred on
F-2
<PAGE> 71
March 31, 1997. The pro forma condensed consolidated statements of income for
the year ended December 31, 1996 and for the three months ended March 31, 1997
assume that the Reorganization occurred on January 1, 1996. The pro forma as
adjusted condensed consolidated statements of income for the year ended December
31, 1996 and for the three months ended March 31, 1997 assume that the
Reorganization and the Offering occurred on January 1, 1996.
The pro forma condensed consolidated financial statements should be read in
conjunction with the combined financial statements of the Company, including the
notes thereto, included elsewhere in this Prospectus. The pro forma condensed
consolidated financial statements do not purport to represent the Company's
operating results or financial position at the date or for the periods presented
that would have actually occurred had the Reorganization and the Offering been
completed on January 1, 1996 or on March 31, 1997, or to project the Company's
operating results or financial position for any future period or date.
The pro forma adjustments are based upon available information and upon
certain assumptions that the Company believes are reasonable under the
circumstances.
F-3
<PAGE> 72
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
REORGANIZATION OFFERING PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------- -------------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............ $ 1,088 $ 1,088 $ 3,215(e) $ 4,303
Real estate properties, net of
accumulated depreciation........... 36,967 1,978(a) 38,945 5,843(e) 44,788
Due from tax credit partnerships..... 17,459 17,459 17,459
Due from related parties............. 727 (727)(b) 0 0
Other assets......................... 10,413 10,413 (1,428)(e) 8,825
(130)(e)
(30)(g)
------- ------- ------- -------- -------
Total assets............... $66,654 $ 1,251 $67,905 $ 7,470 $75,375
======= ======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable........................ $38,170 $38,170 $ (3,053)(e) $35,117
Notes payable to related parties..... 2,333 2,333 (2,333)(e) 0
Capital lease obligations............ 1,148 1,148 1,148
Subordinated dividend notes.......... 8,077 $ (727)(b) 2,700 (2,700)(e) 0
(3,650)(c)
(1,000)(d)
------- ------- ------- -------- -------
Total debt................. 49,728 (5,377) 44,351 (8,086) 36,265
Accounts payable and accrued
expenses........................... 8,810 -- 8,810 -- 8,810
Other liabilities.................... 1,452 2,810(a) 4,262 (2,810)(e) 1,319
(133)(e)
------- ------- ------- -------- -------
Total liabilities.......... 59,990 (2,567) 57,423 (11,029) 46,394
------- ------- ------- -------- -------
Common stock......................... 5 5 3(e) 8
Additional paid-in-capital........... 1,021 3,650(c) 5,671 18,526(e) 22,944
1,000(d) (1,253)(f)
Retained earnings.................... 6,059 6,059 (30)(g) 6,029
Partners' capital (deficit).......... (421) (832)(a) (1,253) 1,253(f) 0
------- ------- ------- -------- -------
Total stockholders'
equity................... 6,664 3,818 10,482 18,499 28,981
======= ======= ======= ======== =======
Total liabilities and
stockholders' equity..... $66,654 $ 1,251 $67,905 $ 7,470 $75,375
======= ======= ======= ======== =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements.
F-4
<PAGE> 73
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
REORGANIZATION OFFERING PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------- -------------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Construction revenue........... $41,875 $41,875 $41,875
Sales of homes................. 12,963 12,963 12,963
Sales of commercial
properties................... 4,772 4,772 4,772
Rental revenue................. 3,922 3,922 3,922
Other revenue.................. 536 536 536
------- ----- ------- ------- -------
64,068 $ 0 64,068 $ 0 64,068
------- ----- ------- ------- -------
Cost of construction........... 33,078 33,078 33,078
Cost of homes sold............. 10,967 10,967 10,967
Cost of commercial properties
sold......................... 3,444 3,444 3,444
Rental operating cost.......... 784 784 784
------- ----- ------- ------- -------
48,273 0 48,273 0 48,273
------- ----- ------- ------- -------
Gross profit................... 15,795 0 15,795 0 15,795
------- ----- ------- ------- -------
General and administrative
expenses..................... 3,425 3,425 3,425
Depreciation and
amortization................. 1,079 51(i) 1,130 (75)(j) 1,055
------- ----- ------- ------- -------
Operating income............... 11,291 (51) 11,240 75 11,315
Joint venture earnings
(loss)....................... (43) (43) (43)
Interest expense (net of
interest income)............. (2,748) (2,748) 850(k) (1,898)
------- ----- ------- ------- -------
Income before provision for
income taxes................. 8,500 (51) 8,449 925 9,374
Pro forma income tax
expense(h)................... 2,890 (17) 2,873 314 3,187
------- ----- ------- ------- -------
Net income..................... $ 5,610 $ (34) $ 5,576 $ 611 $ 6,187
======= ===== ======= ======= =======
Net income per common share.... $ 1.04 $ 0.87
Number of shares outstanding... 5,344 1,762(l) 7,106
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements.
F-5
<PAGE> 74
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
REORGANIZATION OFFERING PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------- -------------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Construction revenue........... $ 7,563 $ 7,563 $ 7,563
Sales of homes................. 2,958 2,958 2,958
Sales of commercial
properties................... 4,895 4,895 4,895
Rental revenue................. 923 923 923
Other revenue.................. 201 201 201
------ --- ------- ---- -------
16,540 $ 0 16,540 $ 0 16,540
------ --- ------- ---- -------
Cost of construction........... 6,326 6,326 6,326
Cost of homes sold............. 2,435 2,435 2,435
Cost of commercial properties
sold......................... 3,392 3,392 3,392
Rental operating cost.......... 227 227 227
------ --- ------- ---- -------
12,380 0 12,380 0 12,380
------ --- ------- ---- -------
Gross profit................... 4,160 0 4,160 0 4,160
------ --- ------- ---- -------
General and administrative
expenses..................... 794 794 794
Depreciation and
amortization................. 286 12(i) 298 3(j) 301
------ --- ------- ---- -------
Operating income............... 3,080 (12) 3,068 (3) 3,065
Joint venture earnings
(loss)....................... 0 0 0
Interest expense (net of
interest income)............. (739) (739) 182(k) (557)
------ --- ------- ---- -------
Income before provision for
income taxes................. 2,341 (12) 2,329 179 2,508
Pro forma income tax expense
(h).......................... 796 (4) 792 61 853
------ --- ------- ---- -------
Net income..................... $ 1,545 $ (8) $ 1,537 $ 118 $ 1,655
====== === ======= ==== =======
Net income per common share.... $ 0.29 $ 0.23
Number of shares outstanding... 5,344 1,748(l) 7,092
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed
Consolidated Financial Statements.
F-6
<PAGE> 75
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
(a) Reflects the purchase for cash of partnership interests of unaffiliated partners in
predecessor partnerships and the allocation of the excess of the purchase price over
equity acquired to the real estate assets in accordance with the purchase method of
accounting.
Cash purchase price of unaffiliated partners' interests in the predecessor
partnerships................................................................ $ 2,810,000
Less: Acquired equity....................................................... (832,000)
-----------
Excess of purchase price over equity acquired............................... $ 1,978,000
-----------
(b) Reflects the repayment by the Contributing Stockholders of $727,000 of advances and loans
by offsetting this amount against an equal amount of Subordinated Dividend Notes.
(c) Reflects the contribution by the Contributing Stockholders of $3,650,428 of Subordinated
Dividend Notes in exchange for 384,256 shares of Common Stock. See "The Reorganization."
(d) Reflects the contribution by the Contributing Stockholders of $1,000,000 of Subordinated
Dividend Notes in exchange for warrants for 400,000 shares of Common Stock. See "The
Reorganization" and "Description of Capital Stock -- Saxton Warrants and Registration
Rights."
(e) Reflects the issuance of 2,275,000 shares of common stock in the Offering at an assumed
initial public offering price of $9.50 per share and the application of the proceeds as
follows:
Gross proceeds from stock issuance.......................................... $21,612,500
Less use of proceeds:
Issuance costs, including deferred offering costs........................... 3,084,000
-----------
Net increase in stockholders' equity........................................ 18,528,500
Purchase of unaffiliated partners' interests................................ 2,810,000
Purchase of land
Land cost....................................................... 5,843,000
Deposits........................................................ (130,000)
-----------
5,713,000
Retirement of subordinated dividend notes................................... 2,700,000
Retirement of indebtedness to related parties............................... 2,333,000
Retirement of certain third-party indebtedness.............................. 3,053,000
-----------
Net proceeds before previously recorded deferred offering costs............. 1,919,500
</TABLE>
<TABLE>
<S> <C>
Deferred offering costs......................................... 1,428,000
Deferred offering costs payable................................. (133,000)
-----------
</TABLE>
<TABLE>
<S> <C>
Add: Prepaid issuance costs................................................. 1,295,000
-----------
$ 3,214,500
===========
(f) Reflects the allocation of Contributing Stockholders' partnership capital accounts to
additional paid in capital.
(g) Reflects the write-off of deferred loan costs associated with the early repayment of
third-party debt.
(h) Certain of the combined entities are partnerships for federal tax purposes and were,
therefore, subject to no income tax. Pro forma income tax (actual, pro forma and pro forma
as adjusted), computed at a marginal effective rate of 34%, has been computed as if the
combined entities had been subject to income taxes as C corporations during the year ended
December 31, 1996 and the three months ended March 31, 1997.
(i) Reflects depreciation expense for the excess purchase price paid over equity for the
unaffiliated partners' interest in the predecessor partnerships. Excess purchase price is
allocated 25% to land and 75% to buildings and is depreciated on a straight-line basis
over 30 years.
(j) Reflects the reduction in amortization of loan fees resulting from the repayment of debt.
(k) Reflects the reduction in interest expense resulting from the repayment of debt.
(l) Reflects the aggregate number of shares the Company would have to sell at the assumed
initial public offering price of $9.50 per share to acquire the interests of unaffiliated
parties in various properties in connection with the Reorganization, to acquire land for
planned home development and to repay debt utilizing a portion of the net proceeds of the
Offering.
</TABLE>
F-7
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Saxton Incorporated:
We have audited the accompanying combined balance sheets of Saxton Incorporated
and Combined Entities (the "Company") as of December 31, 1995 and 1996, and the
related combined statements of income, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Saxton Incorporated
and Combined Entities as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Las Vegas, Nevada
February 26, 1997
F-8
<PAGE> 77
SAXTON INCORPORATED
AND COMBINED ENTITIES
COMBINED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------- MARCH 31, MARCH 31,
1995 1996 1997 1997
------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Real estate properties (notes 9, 10 and 17):
Operating properties, net of accumulated depreciation (note
3)........................................................ $22,154 $26,051 $23,072 $24,239
Properties under development................................. 7,591 10,504 11,437 11,853
Land held for future development or sale..................... 2,221 2,253 2,458 2,853
------- ------- ------- -------
Total real estate properties......................... 31,966 38,808 36,967 38,945
Cash and cash equivalents...................................... 492 1,590 1,088 1,088
Due from Tax Credit Partnerships (note 4)...................... 6,653 16,215 17,459 17,459
Construction contracts receivable, net of allowance for
doubtful accounts of $55 and $369 at December 31, 1995 and
1996, respectively, and $369 at March 31, 1997 (unaudited)
(note 6)..................................................... 583 973 817 817
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 6)............................... 1,348 2,518 2,015 2,015
Notes receivable (note 5)...................................... 2,183 139 139 139
Investments in joint ventures (note 7)......................... 1,375 1,332 1,332 1,332
Due from related parties (note 4).............................. 1,844 610 727 0
Prepaid expenses and other assets (notes 8 and 16)............. 3,136 5,772 6,110 6,110
------- ------- ------- -------
Total assets......................................... $49,580 $67,957 $66,654 $67,905
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses (note 6)................. $ 5,302 $10,545 $ 8,810 $ 8,810
Tenant deposits and other liabilities (note 11)................ 515 993 980 3,790
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 6)............................... 101 418 472 472
Notes payable (note 9)......................................... 31,281 38,103 38,170 38,170
Notes payable to related parties (note 10)..................... 1,502 2,446 2,333 2,333
Long-term capital lease obligations (note 11).................. 686 1,084 1,148 1,148
Subordinated dividend notes (note 12).......................... 6,500 8,077 8,077 2,700
------- ------- ------- -------
Total liabilities.................................... 45,887 61,666 59,990 57,423
Stockholders' equity (notes 12 and 15)
Common stock, $.001 par value. Authorized 50,000,000 shares,
issued and outstanding 4,933,257 shares in 1995 and
4,950,548 shares in 1996; and 4,959,886 shares at March
31, 1997.................................................. 5 5 5 5
Preferred stock, $.001 par value. Authorized 5,000,000
shares; no shares issued and outstanding.................. -- -- -- --
Additional paid-in capital................................... 2,419 1,014 1,021 5,671
Retained earnings............................................ 479 5,100 6,059 6,059
Partners' capital (deficit).................................. 790 172 (421) (1,253)
------- ------- ------- -------
Total stockholders' equity........................... 3,693 6,291 6,664 10,482
Commitments and contingencies (notes 11 and 19)................
------- ------- ------- -------
Total liabilities and stockholders' equity........... $49,580 $67,957 $66,654 $67,905
======= ======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-9
<PAGE> 78
SAXTON INCORPORATED
AND COMBINED ENTITIES
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Construction revenue, including Tax Credit
Partnership construction revenue of $5,809,
$16,643 and $36,011 for the years ended 1994, 1995
and 1996, respectively, and $7,360 and $6,500 for
the three months ended March 31, 1996 and 1997,
respectively (unaudited).......................... $10,863 $22,090 $41,875 $8,021 $7,563
Sales of homes....................................... -- -- 12,963 2,112 2,958
Sales of commercial properties....................... 8,072 9,850 4,772 -- 4,895
Rental revenue (note 13)............................. 3,288 3,531 3,922 963 923
Other revenue........................................ 137 99 536 84 201
------- ------- ------- ------ ------
Total revenue................................ 22,360 35,570 64,068 11,180 16,540
------- ------- ------- ------ ------
Cost of revenue:
Cost of construction, including Tax Credit
Partnership cost of construction of $4,422,
$14,182 and $27,623 for the years ended 1994, 1995
and 1996, respectively, and $5,598 and $5,185 for
the three months ended March 31, 1996 and 1997,
respectively (unaudited).......................... 10,713 18,194 33,078 6,326 6,326
Cost of homes sold................................... -- -- 10,967 1,762 2,435
Cost of commercial properties sold................... 6,027 9,373 3,444 -- 3,392
Rental operating cost................................ 635 631 784 177 227
------- ------- ------- ------ ------
Total cost of revenue........................ 17,375 28,198 48,273 8,265 12,380
------- ------- ------- ------ ------
Gross profit......................................... 4,985 7,372 15,795 2,915 4,160
------- ------- ------- ------ ------
General and administrative expenses.................. 1,736 1,957 3,425 434 794
Depreciation and amortization........................ 745 722 1,079 246 286
------- ------- ------- ------ ------
Operating income............................. 2,504 4,693 11,291 2,235 3,080
------- ------- ------- ------ ------
Other income (expense):
Interest expense, net of interest income of $497,
$266 and $72 for the years ended December 31,
1994, 1995 and 1996, respectively, and $18 and $57
for the three months ended March 31, 1996 and
1997, respectively (unaudited).................... (1,475) (2,127) (2,748) (607) (739)
Joint venture earnings (loss) (note 7)............... 6 1,131 (43) -- --
------- ------- ------- ------ ------
Total other income (expense)................. (1,469) (996) (2,791) (607) (739)
------- ------- ------- ------ ------
Income before provision for income taxes..... 1,035 3,697 8,500 1,628 2,341
Provision for income taxes (note 16)................... -- 67 2,517 451 497
------- ------- ------- ------ ------
Net income................................... $ 1,035 $ 3,630 $ 5,983 $1,177 $1,844
======== ======== ======== ====== ======
</TABLE>
See accompanying notes to combined financial statements.
F-10
<PAGE> 79
SAXTON INCORPORATED
AND COMBINED ENTITIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND THREE MONTHS ENDED MARCH 31,
1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL PARTNERS'
SHARES COMMON PAID-IN RETAINED CAPITAL
OUTSTANDING STOCK CAPITAL EARNINGS (DEFICIT) TOTAL
----------- ------ ---------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994........ 3 $5 $ 5 $ 6,099 $ 1,623 $ 7,732
Contributions..................... 223 223
Distributions (note 12)........... (6,500) (1,582) (8,082)
Net income........................ 518 517 1,035
--
----- ------- ------- ------- -------
Balance at December 31, 1994...... 3 5 5 117 781 908
Contributions..................... 700 700
Distributions..................... (1,545) (1,545)
Jim Saxton Inc. termination of
S corp election................. 2,240 (2,240) --
Exchange of common stock in
connection with the merger of
Jim Saxton, Inc. into Saxton
Incorporated (1,916 for 1)...... 4,913 --
Stock issued to Employee Stock
Ownership Plan.................. 17 174 (174) --
Net income........................ 2,776 854 3,630
--
----- ------- ------- ------- -------
Balance at December 31, 1995...... 4,933 5 2,419 479 790 3,693
Contributions..................... 256 256
Distributions..................... (1,577) (2,064) (3,641)
Stock issued to Employee Stock
Ownership Plan.................. 17 172 (172) --
Net income........................ 4,793 1,190 5,983
--
----- ------- ------- ------- -------
Balance at December 31, 1996...... 4,950 5 1,014 5,100 172 6,291
Stock issued to Employee Stock
Ownership Plan (unaudited)...... 10 7 (7) --
Contributions (unaudited)......... 500 500
Distributions (unaudited)......... (1,971) (1,971)
Net income (unaudited)............ 966 878 1,844
--
----- ------- ------- ------- -------
Balance at March 31, 1997
(unaudited)..................... 4,960 $5 $1,021 $ 6,059 ($ 421) $ 6,664
===== == ======= ======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-11
<PAGE> 80
SAXTON INCORPORATED
AND COMBINED ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- -----------------
1994 1995 1996 1996 1997
------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 1,035 $ 3,630 $ 5,983 $ 1,177 $ 1,844
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 745 722 1,079 246 286
Gain on sales of commercial properties........... (2,045) (477) (1,327) -- (1,503)
Joint venture (earnings) losses.................. (6) (1,131) 43 -- --
Changes in operating assets and liabilities:
Increase in due from Tax Credit Partnerships..... (1,629) (3,855) (9,562) (7,485) (1,244)
Decrease (increase) in construction contracts
receivable..................................... 1,206 (175) (390) (53) 156
Decrease (increase) in costs and estimated
earnings in excess of billings on uncompleted
contracts...................................... (213) (191) (1,170) 838 503
Decrease (increase) in residential properties
under development.............................. -- (1,909) (2,390) (544) 2,286
Increase in prepaid expenses and other assets.... (335) (1,175) (2,012) (828) (248)
Increase (decrease)in accounts payable and
accrued expenses............................... 135 2,975 5,243 1,002 (1,735)
Increase (decrease) in billings in excess of
costs and estimated earnings on uncompleted
contracts...................................... (167) 84 317 4,023 54
Increase (decrease) in tenant deposits and other
liabilities.................................... (278) 37 478 (51) (13)
------- -------- ------- ------- -------
Net cash provided by (used in) operating
activities................................ (1,552) (1,465) (3,708) (1,675) 386
------- -------- ------- ------- -------
Cash flows from investing activities:
Expenditures for property acquisitions and
improvements..................................... (7,390) (13,658) (7,232) (1,383) (4,125)
Proceeds from sales of commercial properties........ 6,280 9,043 4,772 -- 4,895
(Increase) decrease in due from related parties..... 849 (441) 1,234 78 (117)
Decrease (increase) in notes receivable............. (111) 865 2,044 -- --
Capital contributions to joint ventures............. (1,105) -- -- -- --
Distributions from joint ventures................... 57 874 -- -- --
------- -------- ------- ------- -------
Net cash provided by (used in) investing
activities................................ (1,420) (3,317) 818 (1,305) 653
------- -------- ------- ------- -------
</TABLE>
See accompanying notes to combined financial statements.
F-12
<PAGE> 81
SAXTON INCORPORATED
AND COMBINED ENTITIES
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- -----------------
1994 1995 1996 1996 1997
------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of notes payable............. $18,780 $ 15,880 $13,059 $ 2,442 $ 6,286
Principal payments on notes payable................. (14,591) (9,913) (8,179) (6) (6,219)
Net increase (decrease) in notes payable to related
parties.......................................... 20 799 931 342 (113)
Principal payments on capital lease obligations..... -- -- (15) -- (24)
Proceeds from issuance of subordinated dividend
notes............................................ -- -- 1,577 -- --
Capital contributions............................... 53 -- 256 -- 500
Distributions paid.................................. (1,582) (1,545) (3,641) (205) (1,971)
------- -------- ------- ------- -------
Net cash provided by (used in) financing
activities................................ 2,680 5,221 3,988 2,573 (1,541)
------- -------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................... (292) 439 1,098 (407) (502)
Cash and cash equivalents:
Beginning of period................................. 345 53 492 492 1,590
------- -------- ------- ------- -------
End of period....................................... $ 53 $ 492 $ 1,590 $ 85 $ 1,088
======= ======== ======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of
amounts capitalized (note 2)..................... $ 1,982 $ 2,039 $ 2,799 $ 178 $ 796
======= ======== ======= ======= =======
Cash paid during the period for income taxes........ $ -- $ -- $ 171 $ -- $ --
======= ======== ======= ======= =======
Non-cash financing and investing activities:
Subordinated notes issued for dividends payable..... $ 6,500 $ -- $ -- $ -- $ --
======= ======== ======= ======= =======
Capital contribution of land........................ $ 170 $ 700 $ -- $ -- $ --
======= ======== ======= ======= =======
Properties sold in exchange for notes receivable.... $ 1,832 $ 807 $ -- $ -- $ --
======= ======== ======= ======= =======
Notes payable issued to acquire real estate
properties....................................... $ -- $ -- $ 1,968 $ -- $ --
======= ======== ======= ======= =======
Capital lease obligation recorded in connection with
equipment acquisitions........................... $ -- $ -- $ 400 $ -- $ 88
======= ======== ======= ======= =======
Capital lease obligation recorded in connection with
sale/leaseback transaction....................... $ -- $ 686 $ -- $ -- $ --
======= ======== ======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-13
<PAGE> 82
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
AND MARCH 31, 1997 (UNAUDITED)
(1) ORGANIZATION
The accompanying combined financial statements include the combined
accounts of Saxton Incorporated ("Saxton"), formerly Jim Saxton, Inc. ("JSI"),
Big Tyme Food Marts, Inc. ("Big Tyme"), seven general partnerships, three
limited partnerships and two wholly-owned corporations, Summit Hills, Inc. and
Hillcrest, Inc. Big Tyme and all the partnerships included in the combination
(predecessor partnerships) are under the common management of Saxton or
executive officers of Saxton. Such combined group is collectively referred to as
"Saxton Incorporated and Combined Entities" (the "Company"). The combined
financial statements have been presented on a combined basis because of the
common control (or significant ownership) and management and because the
entities are expected to be the subject of a business combination. All
significant intercompany balances and transactions have been eliminated in
combination.
Stockholders' equity of the Company consists of the net assets of the
predecessor partnerships and Saxton's stockholders' equity. In December 1995,
JSI was acquired by Saxton, a newly formed holding company. The acquisition was
accounted for as the combination of entities under common control using the
as-if pooling of interests method. Each outstanding share of JSI common stock
was exchanged for 1,916 shares of $.001 par value common stock of Saxton.
The Company plans to file with the Securities and Exchange Commission a
Registration Statement on Form S-1 for the sale of 2,275,000 shares of common
stock. Concurrent with the sale of these shares, the Company plans to consummate
a 1 for approximately 0.51312 reverse stock split and effect a plan of
reorganization. All share and per share data included in the accompanying
combined financial statements give effect to the reverse stock split.
The names of the partnerships included in these combined financial
statements are as follows:
<TABLE>
<S> <C>
Saxton Properties Novex, LP
LRC, LP Levitz Plaza, LP
Sahara West SNIC II
Mendenhall & Saxton Partners LB&S Partners
R & D Partners TVS
</TABLE>
Because the unaffiliated partners of the partnerships included in the
combined financial statements are to be issued cash for their ownership
interests in such partnerships as a result of the expected business combination,
no minority interest is included in the combined financial statements.
The Company is engaged in the acquisition, development, construction,
ownership and operation of real property located in the greater Las Vegas area.
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.
Unaudited Pro Forma Information
The accompanying pro forma balance sheet as of March 31, 1997 is a
supplemental presentation to give effect to the proposed reorganization and
recapitalization to be completed by the Company prior to the proposed sale of
2,275,000 shares of its common stock.
F-14
<PAGE> 83
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The terms of the proposed transaction reflected in the accompanying pro
forma balance sheet are as follows:
-- Purchase of the unaffiliated partners interest in the predecessor
partnerships for $2,810,000 with the excess of the purchase price over
net assets acquired of $1,978,000 allocated to the real estate assets in
accordance with the purchase method of accounting.
-- Repayment of $727,000 of amounts due from related parties by offsetting
this amount against subordinated dividend notes.
-- Contribution by existing stockholders of $3,650,428 of subordinated
dividend notes in exchange for 384,256 shares of the Company's common
stock.
-- Contribution by the existing stockholders of $1,000,000 of subordinated
dividend notes in exchange for warrants for 400,000 shares of the
Company's common stock.
Certain of the combining entities are currently non taxable. Pro forma net
income and earnings per share for the year ended December 31, 1996 and the three
months ended March 31, 1997 are summarized as follows assuming the statutory
Federal tax rate of 34% and 5,334,804 shares outstanding after giving effect to
the reverse stock split and the issuance of shares to the existing stockholders
in exchange for subordinated dividend notes.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
(IN THOUSANDS EXCEPT EARNINGS PER SHARE)
<S> <C> <C>
Income before provision for income
tax.................................. $ 8,500 $2,341
Pro forma provision for income tax..... 2,890 796
Pro forma net income................... 5,610 1,545
====== =====
Pro forma earnings per share........... $ 1.05 $ 0.29
====== =====
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate Properties
Real estate operating properties are stated at cost less accumulated
depreciation. Costs incurred for acquisition and betterment of the property are
capitalized. Repair and maintenance costs are expensed as incurred. The Company
adopted the provisions of Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement did not have
a material impact on the Company's financial position, results of operations, or
liquidity.
The Company capitalizes interest costs and real estate taxes in connection
with properties that are under development. Capitalization of interest costs and
real estate taxes is discontinued when a project is substantially complete and
ready for its intended use. The Company incurred interest costs of approximately
$2,427,000, $2,748,000 and $4,091,000 at December 31, 1994, 1995 and 1996,
respectively, and $803,000 and $1,464,000 at March 31, 1996 and 1997
(unaudited),
F-15
<PAGE> 84
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
respectively, of which the Company capitalized approximately $455,000, $355,000
and $1,271,000 for the years ended December 31, 1994, 1995 and 1996,
respectively, and $178,000 and $668,000 for the three-month periods ended March
31, 1996 and 1997 (unaudited), respectively.
Depreciation and Amortization
For financial reporting purposes, the Company depreciates its buildings,
tenant improvements and furniture and equipment over their estimated useful
lives (buildings 31.5 to 40 years, tenant improvements over the term of the
related lease, and furniture and equipment 5 to 7 years) using the straight-line
method. Leasing costs are capitalized and amortized on a straight-line basis
over the term of the lease. Loan fees are deferred and amortized on a
straight-line basis (which approximates the effective interest method) over the
term of the loan. Capitalized leasing costs and loan fees are included in other
assets in the accompanying combined balance sheet.
Rental Revenue Recognition
Rental revenue is recognized on a straight-line basis over the terms of the
respective leases.
Construction Revenue and Cost Recognition
Revenue on fixed-price construction contracts is recognized on the
percentage-of-completion method of accounting based on the proportion of actual
contract costs incurred to total estimated contract costs. Revisions to contract
revenues and cost estimates are reflected in the accounting period in which they
become known. Provisions for estimated losses on uncompleted contracts are made
in the accounting period in which the events that give rise to such losses are
determined. Changes in job performance, job conditions and estimated
profitability, including those arising from contract penalty provisions and
final contract settlements, may result in revisions to costs and revenue and are
recognized in the period in which such revisions are determined.
Sale of Properties
Profit is generally recognized on sales of properties at the time escrow is
closed provided that (i) there has been a minimum down payment, ranging from 10%
to 25% depending upon the type of property sold, (ii) the buyer has met adequate
continuing investment criteria, and (iii) the Company, as the seller, has no
continuing involvement in the property. Where the Company has an obligation to
complete certain future development, profit is deferred in the ratio of the cost
of development to be completed to the total cost of the property being sold
under percentage of completion accounting.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Applying the percentage-of-completion method of recognizing revenue
requires the Company to estimate the outcome of its long-term contracts. The
Company forecasts such outcomes to the best of its knowledge and belief of
current and expected conditions, and its expected course of action. Differences
between the Company's estimates and actual results often occur resulting in
F-16
<PAGE> 85
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
changes to reported revenue and earnings. Such changes could have a material
effect on future financial statements.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents.
Investments in Joint Ventures
The equity method of accounting is used for investments in entities in
which the Company has the ability to exercise significant influence over
operating and financial policies. Under the equity method of accounting, the
Company recognizes its share of the net earnings or losses of these entities as
earned or incurred, increases the carrying value of its investment by the amount
of contributions made, and reduces the carrying value of its investment by the
amount of all distributions received.
Income Taxes
Prior to October 1, 1995, Saxton elected to be taxed as an S corporation
under sections of the Internal Revenue Code of 1986, as amended (the "Code"),
which provide that in lieu of corporate income tax, the stockholders separately
account for items of income, deductions, losses and credits. The partners of the
predecessor partnerships also report their share of taxable income in their
individual income tax returns. Accordingly, no provision for federal or state
income taxes is included in the accompanying combined financial statements for
the year ended December 31, 1994.
Effective October 1, 1995, Saxton revoked its election to be taxed as an S
corporation and began to be taxed as a C corporation. A C corporation accounts
for its income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes, which requires recognition of deferred tax assets and liabilities for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. See Note 16.
Stock Options
Prior to January 1, 1996, the Company accounted for its stock options in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
See Note 15.
F-17
<PAGE> 86
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Per Share Data
Per share data is not relevant because the Company is a presentation of
combined operations of partnerships and corporations.
Reclassifications
Certain amounts in prior periods have been reclassified to conform to the
current period's presentation.
Unaudited Interim Statements
The combined financial statements as of March 31, 1997 and for the three
months ended March 31, 1996 and 1997 are unaudited. In the opinion of management
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of such combined financial statements have been included. The
results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the Company's future results of operations for the
full year ending December 31, 1997.
(3) REAL ESTATE OPERATING PROPERTIES
Real estate operating properties are summarized as follows (in thousands):
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION
AND
COST AMORTIZATION NET
------- ------------ -------
<S> <C> <C> <C>
December 31, 1995:
Buildings....................................... $17,224 $ (1,873) $15,351
Tenant improvements............................. 884 (122) 762
Land............................................ 6,041 -- 6,041
------- ------- -------
$24,149 $ (1,995) $22,154
======= ======= =======
December 31, 1996:
Buildings....................................... $21,188 $ (2,327) $18,861
Tenant improvements............................. 900 (170) 730
Land............................................ 6,460 -- 6,460
------- ------- -------
$28,548 $ (2,497) $26,051
======= ======= =======
March 31, 1997 (unaudited):
Buildings....................................... $17,917 $ (2,191) $15,726
Tenant improvements............................. 1,487 (105) 1,382
Land............................................ 5,964 -- 5,964
------- ------- -------
$25,368 $ (2,296) $23,072
======= ======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1995 and 1996
was approximately $534,000, $537,000 and $858,000, respectively, and for the
three months ended March 31, 1996 and 1997 was approximately $184,000 and
$159,000 (unaudited), respectively, for the above assets. For further
information on real estate properties see Note 17.
F-18
<PAGE> 87
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(4) DUE FROM RELATED PARTIES AND DUE FROM TAX CREDIT PARTNERSHIPS
Amounts due from related parties consist of receivables from stockholders
of the Company. The receivables are unsecured, bear no interest and are payable
on demand.
Amounts due from Tax Credit Partnerships ("TCPs") relate to developer fees,
land acquisition and construction costs receivable pertaining to low-income
housing tax credit projects of the Company at various stages of completion. TCPs
are limited partnerships formed for the purpose of constructing, owning and
operating eligible low-income housing projects (as defined under Section 42(d)
of the Code). The Company generally retains approximately a 1% general
partnership interest and sells the remaining 99% to a large institutional
investor which, in turn, publicly syndicates the interest to third party
purchasers. These third party purchasers acquire the limited partnership
interests to receive tax credits. Amounts due from TCPs will be collected from
loan proceeds, contributions from partners, and cash flow from operations and
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------ MARCH 31,
1995 1996 1997
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Developer fees receivable........................ $3,419 $ 5,405 $ 6,168
Land acquisition and construction costs
receivable..................................... 3,234 10,810 11,291
------ ------- -------
$6,653 $16,215 $17,459
====== ======= =======
</TABLE>
(5) NOTES RECEIVABLE
Notes receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------- MARCH 31,
1995 1996 1997
------ ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Promissory notes from nonaffiliated entities, bearing
interest ranging between 8.5% and 11%, secured by
deeds of trust, due April 1998...................... $ 171 $106 $ 106
Promissory note from a nonaffiliated entity, bearing
interest at 1% greater than "A" rated new issue
long-term industrial bond rate as reported by
Salomon Brothers Inc (8.33% at December 31, 1995),
secured by deed of trust, principal and interest
paid in full in July 1996........................... 1,810 -- --
Other................................................. 202 33 33
------ ---- ----
$2,183 $139 $ 139
====== ==== ====
</TABLE>
Interest income recorded on notes receivable for the years ended December
31, 1994, 1995 and 1996 was approximately $242,000, $155,000 and $80,000,
respectively. There was no interest income recorded on notes receivable for the
three months ended March 31, 1996 and 1997 due to the insignificance of such
amounts.
F-19
<PAGE> 88
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(6) CONSTRUCTION CONTRACTS
Construction contracts receivable include amounts retained pending contract
completion aggregating approximately $279,000 and $265,000 at December 31, 1995
and 1996, respectively, and approximately $386,000 at March 31, 1997
(unaudited). 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 $1,203,000 and $1,220,000 at
December 31, 1995 and 1996, respectively, and approximately $1,374,000 at March
31, 1997 (unaudited).
Costs and estimated earnings on uncompleted contracts are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------- MARCH 31,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Costs incurred to date........................ $ 22,753 $ 53,002 $ 59,900
Estimated earnings to date.................... 4,650 14,279 15,906
-------- ------- -------
27,403 67,281 75,806
Less billings to date......................... (26,156) (65,181) (74,263)
-------- ------- -------
Costs and estimated earnings in excess of
billings, net............................... $ 1,247 $ 2,100 $ 1,543
======== ======= =======
</TABLE>
Costs and estimated earnings in excess of billings, net, are shown on the
accompanying combined balance sheets as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------- MARCH 31,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts........... $ 1,348 $ 2,518 $ 2,015
Billings in excess of costs and estimated
earnings on uncompleted contracts........... (101) (418) (472)
------ ------ ------
$ 1,247 $ 2,100 $ 1,543
====== ====== ======
</TABLE>
The asset "costs and estimated earnings in excess of billings on
uncompleted contracts" represents construction revenue recognized in excess of
amounts billed on the respective construction contracts. The liability "billings
in excess of costs and estimated earnings on uncompleted contracts" represents
amounts billed in excess of revenue recognized on the respective construction
contracts.
F-20
<PAGE> 89
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(7) INVESTMENTS IN JOINT VENTURES
The Company participates in several real estate development joint ventures.
The joint ventures have projects at various stages of completion and
development. The Company provides development and construction services to these
joint ventures. The Company's interests in these joint ventures range from 1% to
50%. Summary financial information for the joint ventures are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------- MARCH 31,
FINANCIAL POSITION 1995 1996 1997
-------------------------------------------------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Real estate properties............................ $22,538 $59,884 $67,941
Other assets...................................... 491 1,421 980
------- ------- -------
Total assets............................ 23,029 61,305 68,921
Notes payable..................................... 13,540 41,043 45,138
Other liabilities................................. 7,853 15,922 17,806
------- ------- -------
Net assets.............................. $ 1,636 $ 4,340 $ 5,977
======= ======= =======
Company's share of net assets..................... $ 1,375 $ 1,332 $ 1,332
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31 MARCH 31
------------------------------ ------------------
RESULTS OF OPERATIONS 1994 1995 1996 1996 1997
------------------------------- ------ ------- ------- ----- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Rental revenues................ $1,609 $ 1,147 $ 2,197 $ 224 $1,127
Sale of properties............. -- 10,741 -- -- --
------ ------- ------- ----- -------
1,609 11,888 2,197 224 1,127
Interest expense............... 467 518 1,551 232 700
Cost of properties sold........ -- 7,988 -- -- --
Other expense.................. 1,142 875 1,933 223 812
------ ------- ------- ----- -------
Net earnings (loss)....... $ -- $ 2,507 $(1,287) $(231) $ (385)
====== ======= ======= ===== =======
Company's share of net earnings
(loss)....................... $ 6 $ 1,131 $ (43) $ -- $ --
====== ======= ======= ===== =======
</TABLE>
In 1995, two of the Company's joint ventures sold the majority of their
properties. There were no adjustments made for the three months ended March 31,
1996 and 1997 for the Company's share of net earnings (loss) due to the
insignificance of such amounts.
F-21
<PAGE> 90
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(8) PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------- MARCH 31,
1995 1996 1997
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Rental and other accounts receivable................ $ 63 $ 298 $ 204
Other assets, primarily leasing costs and loan
fees.............................................. 2,068 2,728 2,896
Deferred offering costs............................. 523 1,161 1,437
Deferred tax assets, net............................ 98 154 154
Furniture and equipment, net........................ 384 1,008 1,099
Inventories......................................... -- 423 320
------ ------ -------
$3,136 $5,772 $ 6,110
====== ====== =======
</TABLE>
(9) NOTES PAYABLE
Notes payable, substantially all guaranteed by the two principal
stockholders of the Company, consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- MARCH 31,
1995 1996 1997
------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to various financial institutions
maturing at dates ranging between April 1997 and
July 2014. The notes bear interest monthly at
various rates ranging between 7.62% and 18%.
Monthly principal and interest payments
approximate $260. The notes are collateralized by
first trust deeds on real property............... $28,074 $29,592 $27,117
Notes payable to various individuals maturing at
dates ranging between April 1997 and December
1997. The notes bear interest at various rates
ranging between 13% and 24%. Monthly interest
payments approximate $112. The notes are
collateralized by first trust deeds on real
property......................................... 1,146 4,990 6,750
Other.............................................. 2,061 3,521 4,303
------- ------- -------
$31,281 $38,103 $38,170
======= ======= =======
</TABLE>
F-22
<PAGE> 91
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Approximate principal maturities as of December 31, 1996 and March 31, 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Year ending December 31:
1997............................................ $ 18,212 $14,034
1998............................................ 2,995 8,595
1999............................................ 740 678
2000............................................ 790 722
2001............................................ 2,144 2,068
Thereafter...................................... 13,222 12,073
-------- -------
$ 38,103 $38,170
======== =======
</TABLE>
For notes payable with maturity dates in 1997, management is negotiating
refinancing alternatives with the applicable lenders.
(10) NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties are unsecured notes payable for
development purposes. Interest only payments are due monthly at rates ranging
from 10.5% to 12%, with all amounts due at various dates in 1997.
(11) LEASE OBLIGATIONS
The Company is obligated under various capital leases for equipment and
vehicles that expire at various dates over the next five years. These equipment
and vehicle leases require minimum monthly payments ranging from $240 to $2,200
with interest at rates ranging from 7.9% to 11.73%.
In addition, the Company is party to a sale and leaseback agreement for a
convenience store that the Company constructed and the related land. The lease
does not contain a bargain purchase option nor does the lease transfer ownership
of the property upon expiration of the lease. The land portion of the leaseback
has been classified as an operating lease and the building portion of the
leaseback has been classified as a capital lease in accordance with SFAS No. 13,
Accounting for Leases.
The book value of the land of approximately $709,000 was removed from the
accounts and the related gain on the sale of approximately $103,000 was
deferred. The deferred gain is being recognized over the lease term.
The lease is for a 20-year period with four 5-year options to extend. The
lease obligation requires monthly minimum lease payments of approximately
$16,000 with fixed annual step increases plus contingent rent based on 4% of
annual sales in excess of $1,200,000 excluding gasoline sales and gaming
revenue.
During 1996, the Company sold a property to a third party which the Company
leased back under a master lease agreement requiring monthly payments of $20,700
until the property reaches a certain level of occupancy. Management of the
Company expects to reach that level of occupancy in June 1997. The Company has
accounted for this transaction using the deposit method and accordingly has
recognized no revenue or costs in connection with this sale. Cash received of
F-23
<PAGE> 92
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
$773,000 has been recorded as a deposit liability and is included in tenant
deposits and other liabilities in the accompanying 1996 combined balance sheet.
Future minimum lease payments under lease obligations, excluding contingent
rents are as follows at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
TOTAL PORTION PORTION
------ -------- ---------
<S> <C> <C> <C>
Year ending December 31:
1997............................................. $ 322 $ 236 $ 86
1998............................................. 323 235 88
1999............................................. 323 234 89
2000............................................. 308 217 91
2001............................................. 247 154 93
Thereafter....................................... 3,401 1,905 1,496
------ -------- -------
Total minimum payments................... $4,924 $ 2,981 $ 1,943
====== =======
Amount representing interest (at rates ranging from (1,897)
7.9% to 11.73%)..................................
--------
Net present value.................................. $ 1,084
========
</TABLE>
Assets leased under capital leases consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
---- ------
<S> <C> <C>
Operating properties............................................. $686 $ 686
Equipment........................................................ -- 584
---- ------
686 1,270
Less accumulated amortization.................................... -- (116)
---- ------
$686 $1,154
==== ======
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
(12) SUBORDINATED DIVIDEND NOTES
On December 31, 1994, the Board of Directors of Saxton declared a dividend
of $1,300 per share on its 5,000 outstanding shares of common stock. In August
1996, the Board declared and, in September 1996, paid a dividend of
approximately $0.165 per share for 9,580,020 outstanding shares of common stock
at the date of declaration. These dividends were issued in order to distribute
retained earnings through December 31, 1994 and the period from January 1, 1995
through September 30, 1995, respectively. These earnings had been taxed at the
stockholders level due to the corporation's election to be taxed as an S
corporation. These actions were taken in anticipation of and as a result of
Saxton revoking its S corporation election on September 30, 1995. The September
1996 dividends were paid in cash and then loaned back to the Company as
subordinated dividend notes. The 1994 dividends were paid through the issuance
of subordinated dividend notes to the stockholders. These notes have 10-year
terms and are, and will be, subordinate to all existing and future corporate and
combined entity debt.
F-24
<PAGE> 93
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(13) RENTAL INCOME
Operating properties are leased to tenants under various arrangements
classified as operating leases. The leases provide for rent and reimbursement of
various common area maintenance charges paid by the Company. Minimum future
rentals (excluding percentage rents and renewal options) on noncancelable leases
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
(UNAUDITED)
<S> <C> <C>
Year ending December 31:
1997......................................... $ 2,982 $ 2,672
1998......................................... 2,838 2,512
1999......................................... 2,701 2,369
2000......................................... 2,626 2,289
2001......................................... 2,252 2,036
Thereafter................................... 10,520 8,851
------- -------
$ 23,919 $20,729
======= =======
</TABLE>
Approximately 24%, 23% and 22% for the years ended 1994, 1995 and 1996,
respectively, and 23% and 26% for the three months ended March 31, 1996 and
1997, respectively (unaudited), of each year's rental revenue reflected in the
accompanying combined financial statements is derived from one tenant.
(14) EMPLOYEE STOCK OWNERSHIP PLAN
On December 31, 1994, the Company established a profit sharing plan (the
Profit Sharing Plan) for its eligible employees. On December 29, 1995, the
Company adopted an employee stock ownership plan (the "ESOP") and trust (the
"ESOP Trust"). In connection with the merger of Saxton and JSI on December 31,
1995, the Profit Sharing Plan was merged into the ESOP and the assets of the
trust established under the Profit Sharing Plan have been transferred to the
ESOP Trust.
An "employee stock ownership plan" (as defined in Section 407(d)(6) of
ERISA and Section 4975(e)(7) of the Code) is designed to invest primarily in
"qualifying employer securities." The account balances of participants in the
Profit Sharing Plan transferred to the ESOP Trust have been invested by the ESOP
Trust in the Company's common stock. Thereafter, the Company may make periodic
contributions to the ESOP Trust out of its net profits in amounts determined by
the Board of Directors, which contributions may be made in cash or in shares of
the Company's common stock. Amounts contributed in cash will be used to purchase
shares of the Company's common stock.
Participants in the Profit Sharing Plan on December 31, 1995 were
immediately eligible to participate in the ESOP. All other employees become
eligible to participate in the ESOP on the date coinciding with or next
following the date the employee completes one year of service with the Company.
Contributions by the Company to the ESOP for the benefit of a participating
employee vest over a seven-year period of participation in the ESOP and are held
in trust until distributed pursuant to the terms of the ESOP. The Company made
contributions to the Plan of $172,000, $172,000 and $0 for 1994, 1995 and 1996,
respectively.
F-25
<PAGE> 94
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(15) STOCK OPTIONS
In December 1994, the Company granted options to purchase an aggregate of
127,907 shares of common stock to various officers and other key employees under
separate letter agreements. In 1995, options to purchase 23,497 shares lapsed
without vesting upon certain employees' termination of employment with the
Company. Options granted to one officer of the Company vested 20% on December
29, 1995, 30% on December 29, 1996 and 50% vests on December 29, 1997. The
remaining options vest 20% per year on December 29 for five years beginning
December 29, 1995. All options are exercisable from the date of vesting through
December 28, 2004 at an exercise price of $6.10 per share. No options were
granted in 1995 or 1996.
(16) INCOME TAXES
Income tax expense in the statements of income includes the following
amounts for the three-month period from October 1, 1995 to December 31, 1995 and
for the year ended December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ------
<S> <C> <C>
Federal:
Current.................................................. $165 $2,573
Deferred................................................. (98) (56)
---- ------
Total................................................. $ 67 $2,517
==== ======
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before taxes. The sources and
tax effects of the differences at December 31, 1995 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Computed "expected" federal income tax expense........... $1,257 $2,890
Reduction in income taxes resulting from:
Earnings prior to C corporation election............... (640) --
Earnings of combined entities not subject to
taxation............................................ (364) (373)
Deferred tax asset recognized upon change in tax
status.............................................. (186) --
------ ------
$ 67 $2,517
====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1995 and 1996
are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Bad debt reserve........................................... $ 68 $ 90
Investment in related party................................ 34 75
---- ----
Total deferred tax assets............................... 102 165
---- ----
Deferred tax liabilities:
Depreciation/amortization.................................. (4) (11)
---- ----
Total deferred tax liabilities.......................... (4) (11)
---- ----
Net deferred tax assets...................................... $ 98 $154
==== ====
</TABLE>
F-26
<PAGE> 95
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The Company considers recording a valuation allowance in accordance with
the provisions of SFAS No. 109 to reflect the estimated amount of deferred tax
assets which may not be realized. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences.
F-27
<PAGE> 96
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(17) REAL ESTATE PROPERTIES
Schedule of real estate properties as of December 31, 1996:
<TABLE>
<CAPTION>
COST CAPITALIZED CAPITALIZED COST AT
INITIAL COST SUBSEQUENT TO ACQ. CLOSE OF PERIOD
DESCRIPTION --------------- ------------------ -----------------------
- --------------------------------------------- ENCUM- BLDGS & IMPROVE- CARRYING BLDGS & ACCUM.
PROPERTY TYPE BRANCES LAND IMPROV. MENTS COSTS LAND IMPROV. TOTAL DEPR.
- --------------------------------------------- ------ ------- ------ ------- -------- -------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING PROPERTIES
Nellis Express Village....................... Retail 1,039 151 -- 823 91 151 914 1,065 223
Levitz I..................................... Retail 8,013 1,694 -- 4,419 568 1,694 4,987 6,681 746
Furniture Expo............................... Retail 385 714 -- 1,473 203 714 1,676 2,390 249
Rain. & Char., C & E......................... Retail 1,340 308 -- 989 120 308 1,109 1,417 28
Big Tyme..................................... Retail -- -- -- 644 60 -- 704 704 19
Lev. Pad B (Woody's)......................... Retail -- 209 -- 328 50 209 378 587 37
TS-MLK & Owens............................... Retail 915 148 -- 758 84 148 842 990 53
Sahara Retail................................ Retail 500 205 -- 342 51 205 393 598 7
Nellis and Stewart........................... Retail 344 269 -- 224 46 269 270 539 --
Las Vegas Sun................................ Office 1,118 192 -- 806 93 192 899 1,091 288
SI/Americana................................. Office 1,538 500 -- 1,076 146 500 1,222 1,722 210
GSA.......................................... Office 1,195 447 -- 1,173 150 447 1,323 1,770 82
Flamingo Point, Lot 4........................ Office 608 216 -- 442 61 216 503 719 14
Sahara Vista Bldg. A......................... Office 4,116 842 -- 2,844 342 842 3,186 4,028 59
Arcata Park.................................. Indus. 890 140 -- 715 79 140 794 934 157
JCH Wire & Cable............................. Indus. 1,287 236 -- 1,062 121 236 1,183 1,419 21
Diamondhead Apts............................. Resid. 2,024 189 -- 1,544 161 189 1,705 1,894 304
------ ------ -- ------ ----- ------ ------ ------ -----
Subtotal................................. 25,312 6,460 -- 19,662 2,426 6,460 22,088 28,548 2,497
PROPERTIES IN DEVELOPMENT
Levitz Mineral Ave........................... Retail -- 577 -- 81 -- 577 81 658 --
Ali Baba & Wynn.............................. Land 768 521 -- 1,050 137 521 1,187 1,708 --
Summit Hills................................. Resid. 2,106 114 -- 2,897 205 114 3,102 3,216 --
Hillcrest.................................... Resid. 2,100 291 -- 897 -- 291 897 1,188 --
Sahara Vista Bldg. B......................... Office -- 837 -- 152 -- 837 152 989 --
Regency,Lot B & C............................ Land 557 752 -- 35 -- 752 35 787 --
Andrews...................................... Land 452 353 -- 840 6 353 846 1,199 --
Rancho/Vegas................................. Land 22 83 -- -- -- 83 -- 83 --
Northpark II................................. Land -- 276 -- 367 -- 276 367 643 --
Other........................................ 33 33 --
------ ------ -- ------ ----- ------ ------ ------ -----
Subtotal................................. 6,005 3,804 -- 6,319 348 3,804 6,700 10,504 --
LAND HELD FOR DEV & SALE
East II Retail............................... Land 300 518 -- -- -- 518 -- 518 --
Silver Springs............................... Land 2,700 1,056 -- -- -- 1,056 -- 1,056 --
Flamingo Point, Lot 6........................ Land 418 679 -- -- -- 679 -- 679 --
------ ------ -- ------ ----- ------ ------ ------ -----
Subtotal................................. 3,418 2,253 -- -- -- 2,253 -- 2,253 --
------ ------ -- ------ ----- ------ ------ ------ -----
TOTAL.................................... 34,735 12,517 -- 25,981 2,774 12,517 28,788 41,305 2,497
====== ====== == ====== ===== ====== ====== ====== =====
<CAPTION>
LIFE
ON WHICH
DEPR. IN
DESCRIPTION LATEST INC.
- --------------------------------------------- NET BOOK DATE OF DATE STMT. IS
PROPERTY VALUE CONSTR. ACQ. COMPUTED
- --------------------------------------------- -------- ------- ---- -----------
<S> <C> <C> <C> <C>
OPERATING PROPERTIES
Nellis Express Village....................... 842 1987 1986 40
Levitz I..................................... 5,935 1991 1990 40
Furniture Expo............................... 2,141 1992 1990 32
Rain. & Char., C & E......................... 1,389 1993 1993 40
Big Tyme..................................... 685 1995 1995 20
Lev. Pad B (Woody's)......................... 550 1993 1990 34
TS-MLK & Owens............................... 937 1994 1987 40
Sahara Retail................................ 591 1996 1995 32
Nellis and Stewart........................... 539 1996 1995 40
Las Vegas Sun................................ 803 1987 1987 32
SI/Americana................................. 1,512 1991 1991 32
GSA.......................................... 1,688 1994 1989 40
Flamingo Point, Lot 4........................ 705 1995 1990 40
Sahara Vista Bldg. A......................... 3,969 1996 1989 40
Arcata Park.................................. 777 1989 1987 40
JCH Wire & Cable............................. 1,398 1991 1995 32
Diamondhead Apts............................. 1,590 1988 1988 32
------
Subtotal................................. 26,051
PROPERTIES IN DEVELOPMENT
Levitz Mineral Ave........................... 658 -- 1990 --
Ali Baba & Wynn.............................. 1,708 -- 1996 --
Summit Hills................................. 3,216 -- 1995 --
Hillcrest.................................... 1,188 -- 1996 --
Sahara Vista Bldg. B......................... 989 -- 1989 --
Regency,Lot B & C............................ 787 -- 1991 --
Andrews...................................... 1,199 -- 1990 --
Rancho/Vegas................................. 83 -- 1988 --
Northpark II................................. 643 -- 1996 --
Other........................................ 33
------
Subtotal................................. 10,504
LAND HELD FOR DEV & SALE
East II Retail............................... 518 -- 1996 --
Silver Springs............................... 1,056 -- 1996 --
Flamingo Point, Lot 6........................ 679 -- 1990 --
------
Subtotal................................. 2,253
------
TOTAL.................................... 38,808
======
</TABLE>
F-28
<PAGE> 97
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following table reconciles the historical cost of properties from
January 1, 1994 to December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period.................. $ 26,495 $ 26,846 $ 33,961
Additions during period:
Acquisitions, improvements, etc............... 7,322 16,722 20,617
Deductions during period:
Cost of real estate sold...................... (6,971) (9,607) (13,273)
-------- -------- --------
Balance at close of period...................... $ 26,846 $ 33,961 $ 41,305
======== ======== ========
</TABLE>
The following table reconciles the accumulated depreciation on properties
from January 1, 1994 to December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period...................... $ 2,102 $ 1,692 $ 1,995
Additions during period:
Depreciation for the year......................... 534 537 858
Deductions during period:
Cost of real estate sold.......................... (944) (234) (356)
-------- -------- --------
Balance at close of period.......................... $ 1,692 $ 1,995 $ 2,497
======== ======== ========
</TABLE>
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, construction contracts
receivable, costs and estimated earnings in excess of billings on uncompleted
contracts, accounts payable and accrued expenses, tenant deposits and other
liabilities and billings in excess of costs and estimated earnings on
uncompleted contracts, approximate fair value because of the short maturity of
these instruments.
Due From Related Parties and Due from Tax Credit Partnerships
Management has determined that it is not practicable to estimate the fair
value of due from related parties and due from tax credit partnerships because
of the difficulty in evaluating the timing of payments.
Notes Receivable, Notes Payable and Notes Payable to Related Parties
The fair value of the Company's notes receivable, notes payable and notes
payable to related parties approximates their respective carrying values using a
market discount rate of 10%.
Subordinated Dividend Notes
The fair value of the Company's subordinated dividend notes is estimated by
discounting the future cash flows of the notes at 10%. The estimated fair market
value of these notes at December 31, 1996 is $5,500,000.
F-29
<PAGE> 98
SAXTON INCORPORATED
AND COMBINED ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(19) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's combined financial position, results of operations or liquidity.
The Company and its two principal stockholders are guarantors on
construction loans relating to the TCPs described in Note 4. Total construction
loans payable for these TCPs was approximately $13,300,000 and $26,600,000 at
December 31, 1995 and 1996, respectively, and $31,320,000 at March 31, 1997.
F-30
<PAGE> 99
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE COMMON STOCK TO WHICH IT RELATES OR
AN OFFER IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 14
Dividend Policy....................... 14
The Reorganization.................... 14
Dilution.............................. 17
Capitalization........................ 18
Selected Combined and Pro Forma
Financial and Operating
Information......................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 30
Management............................ 52
Certain Relationships and Related
Transactions........................ 57
Principal Stockholders................ 61
Description of Capital Stock.......... 62
Shares Eligible for Future Sale....... 64
Underwriting.......................... 66
Legal Matters......................... 67
Experts............................... 67
Additional Information................ 67
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE COM-
MENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
2,275,000 SHARES
LOGO
COMMON STOCK
--------------------
PROSPECTUS
--------------------
LADENBURG THALMANN & CO. INC.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
, 1997
======================================================
<PAGE> 100
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the issuance and distribution of
the securities registered hereby, other than underwriting discounts and
commissions, are set forth in the following table:
<TABLE>
<S> <C>
SEC Registration Fee.................................... $ 7,928
NASD Fee................................................ 3,116
Nasdaq National Market Application Fee.................. 36,548
Blue Sky Fees and Expenses.............................. 7,500
Legal Fees and Expenses................................. 800,000
Accounting Fees and Expenses............................ 550,000
Printing and Engraving expenses......................... 125,000
Transfer Agent and Registrar Fee........................ 5,000
Miscellaneous........................................... 10,000
--------
Total................................................. $1,545,092
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 78.751 of the Nevada General Corporation Law (the "GCL") and
Article VIII of the Bylaws of the Registrant contain provisions for
indemnification of officers and directors of the Registrant. Section 78.751 of
the GCL also contains provisions permitting the indemnification of employees and
agents of the Registrant. The provisions of the Bylaws permit the Registrant to
indemnify officers and directors to the full extent permitted under law. Each
person will be indemnified in any proceeding if such person acted in good faith
and in a manner which such person reasonably believed to be in or not opposed to
the best interest of the Registrant. Indemnification would cover expenses
including attorneys' fees, judgments, fines and amounts paid in settlement.
Prior to the consummation of the Offering, the Registrant anticipates that it
will also enter into separate indemnification agreements with each of its
officers and directors. These indemnification agreements will be separate and
independent of the indemnification rights under the Bylaws and will be
irrevocable.
The Articles of Incorporation eliminate each director's and officer's
liability to the Registrant or its stockholders for damages for breach of
fiduciary duty except for (i) acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law or (ii) the payment of dividends
in violation of Section 78.300 of the GCL.
The Underwriting Agreement contains provisions under which the Registrant,
on the one hand, and the Underwriters, on the other hand, have agreed to
indemnify each other (including officers and directors of the Registrant and the
Underwriters, and any person who may be deemed to control the Registrant or the
Underwriters) against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has made the following sales of its unregistered securities
within the past three years:
(i) In connection with the initial capitalization of the Company, on
December 26, 1995, the Company issued to James C. Saxton, Dorothy J.
Saxton, Michele Saxton-Pori, Lee-Ann Saxton
II-1
<PAGE> 101
and James C. Saxton II an aggregate of 10 shares of its common stock, par
value $0.001 per share ("Common Stock"), in exchange for an aggregate
contribution of $200.
(ii) In connection with the merger of Jim Saxton, Inc. ("JSI") into
the Company on December 31, 1995 (the "Merger"), the Company issued an
aggregate of 4,915,734 shares of Common Stock to the then stockholders of
JSI. In addition, options to purchase an aggregate of 104,410 shares of
Common Stock were granted in connection with the merger to employees in
exchange for their options to purchase shares of JSI's common stock.
(iii) In January 1996, the Company issued 17,513 of shares of Common
Stock to the Saxton Incorporated Employee Stock Ownership Plan and Trust
(the "ESOP") in exchange for $174,256.
(iv) In September 1996, the Company issued 17,291 shares of Common
Stock to the ESOP in exchange for $172,000.
(v) In March 1997, the Company issued 2,774 shares of Common Stock to
the ESOP in exchange for $23,216.
(vi) In March 1997, the Company issued 6,564 additional shares of
Common Stock to the ESOP to reflect a recalculated price per share of $8.37
(equal to 93% of the lowpoint in the initial public offering price range)
for the shares purchased in 1996 rather than the estimated value of the
shares used at the time of purchase.
(All numbers of shares of Common Stock are stated after giving effect to a
1-for-0.51312465 reverse split of the Common Stock to be accomplished prior to
the closing of the initial public offering). Exemption from registration is
claimed under Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
See Exhibit Index.
(b) Financial Statements and Schedules
(1) Financial Statements
Unaudited Pro Forma Condensed Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 1997
Unaudited Pro Forma Condensed Consolidated Statement of Income for
the year
ended December 31, 1996
Unaudited Pro Forma Condensed Consolidated Statement of Income for
the three
months ended March 31, 1977
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
Independent Auditors' Report
Combined Balance Sheets as of December 31, 1995 and 1996 and March
31, 1997
(Unaudited)
Combined Statements of Income for the years ended December 31,
1994, 1995 and
1996, and the three months ended March 31, 1997 (Unaudited)
Combined Statements of Stockholders' Equity for the years ended
December 31,
1994, 1995 and 1996, and the three months ended March 31, 1997
(Unaudited)
Combined Statements of Cash Flows for the years ended December 31,
1994, 1995
and 1996, and the three months ended March 31, 1997 (Unaudited)
II-2
<PAGE> 102
Notes to Combined Financial Statements
(2) Financial Statement Schedules
Combined financial statement schedules have been omitted because either
they are not required or the information required to be set forth therein is
included in the Combined Financial Statements or in the Notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
the Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of Las
Vegas, State of Nevada, on June 6, 1997.
SAXTON INCORPORATED
Registrant
By: /s/ JAMES C. SAXTON
------------------------------------
James C. Saxton,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to Registration Statement has been signed below on the 6th day of
June , 1997 by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
- -------------------------------------------- --------------------------------------------
<S> <C>
/s/ JAMES C. SAXTON President, Chief Executive Officer and
- -------------------------------------------- Chairman of the Board of Directors
James C. Saxton (Principal Executive Officer)
/s/ DOUGLAS W. HENSLEY Chief Financial Officer (Principal Financial
- -------------------------------------------- and Accounting Officer)
Douglas W. Hensley
/s/ MICHELE SAXTON-PORI Director
- --------------------------------------------
Michele Saxton-Pori
</TABLE>
II-4
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
- ------- ------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement(1)
2.1 Plan of Merger between Jim Saxton, Inc. and the Company, dated December 26, 1995, as
filed with Nevada Secretary of State on December 29, 1995(1)
2.2 Reorganization documents(2)
3.1 Articles of Incorporation of the Company(1)
3.2 Articles of Merger merging Jim Saxton, Inc. into the Company, as filed with Nevada
Secretary of State on December 29, 1995(1)
3.3 Bylaws of the Company, as amended(1)
4.1 Specimen Common Stock Certificate(2)
4.2 Form of Representatives' Warrants(1)
4.3 Form of Saxton Warrants
5 Opinion of Hughes Hubbard & Reed LLP
10.1 Saxton Incorporated Employee Stock Ownership Plan and Trust, adopted December 29,
1995(1)
10.1.1 Amendment to Saxton Incorporated Employee Stock Ownership Plan and Trust, adopted
December 10, 1996(1)
10.1.2 Amendment to Saxton Incorporated Employee Stock Ownership Plan and Trust, adopted
June 5, 1997
10.2 Management Stock Option Incentive Plan
10.3 Non-Employee Director Stock Option Plan
10.4 1994 Stock Option Agreement between the Company and Douglas W. Hensley
10.5 Employment Agreement between the Company and James C. Saxton, dated March 10,
1997(1)
10.6 Form of Indemnification Agreement between the Company and each director and officer
of the Company
10.7 Form of Indemnification Agreement regarding liability on Company loans between the
Company and James C. Saxton and Dorothy J. Saxton(2)
21.1 List of subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Hughes Hubbard & Reed LLP (included in Exhibit 5)
24 Power of Attorney (included on page II-4)(1)
27 Financial Data Schedule
99.1 Consents of Douglas W. Hensley, Marc S. Hechter, Timothy J. Adams, Bernard J.
Mikell, Jr. and Robert L. Seale to be named as proposed directors(1)
99.2 Consent of Paul Eisenberg to be named as proposed director
</TABLE>
- ---------------
(1) Previously filed with Registration Statement filed on March 25, 1997.
(2) To be filed by amendment.
<PAGE> 1
EXHIBIT 4.3
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THIS WARRANT MAY NOT BE SOLD OR
TRANSFERRED, EXCEPT UPON SUCH REGISTRATION OR UPON DELIVERY TO MAKER OF AN
OPINION OF COUNSEL SATISFACTORY TO MAKER THAT REGISTRATION IS NOT REQUIRED FOR
SUCH SALE OR TRANSFER. IN ADDITION, FOR A PERIOD OF NINE MONTHS FROM THE DATE OF
THE LAST SALE BY THESE WARRANTS, ALL RESALES OF THE WARRANTS, BY ANY PERSON,
SHALL BE MADE ONLY TO PERSONS RESIDENT WITHIN THE STATE OF NEVADA.
SAXTON INCORPORATED
Warrant for the Purchase of Shares of Common Stock
No. _____ _______ Shares
FOR VALUE RECEIVED, Saxton Incorporated, a Nevada corporation
(the "Company"), hereby certifies that __________________ or its permitted
assigns, is entitled to purchase from the Company, at any time or from time to
time during the Exercise Period (as hereinafter defined)
_________________________________________________________ (_______) fully paid
and non-assessable shares of the common stock, $.001 par value per share, of the
Company for an aggregate purchase price of $_______ (computed on the basis of $
* per share). As used herein, Exercise Period shall mean the period commencing
on the date the Company's independent auditors determine that the Company has
achieved "after tax net income" of not less than $7.4 million for the year
ending December 31, 1997 and aggregate "after tax net income" of not less than
$18.4 million for the year ending December 31, 1997 and 1998 (the "Commencement
Date") and ending on 5:00 p.m., Las Vegas time on the fifth anniversary of the
Commencement Date. As used herein, "after tax net income" for any year shall
mean the amount presented as net income on the Company's audited Combined
Statement of Income calculated in accordance with generally accepted accounting
principles and in a manner consistent with the calculation of net income in the
Company's audited Combined Statement of Income for the year ended December 31,
1996 ("1996 Income Statement"); provided, however, that in calculating "after
tax net income" for purposes of this Agreement (i) provision for income taxes
shall be made at the federal, state and local rates in effect for 1996 and
utilized in the 1996 Income Statement and (ii) any expenses related to the
Warrants charged against the Company's income before provision for income taxes
shall be added back. Hereinafter, (i) said common stock, together with any other
equity securities which may be issued by the Company with respect thereto or in
substitution therefor, is referred to as the "Common Stock," (ii) the shares of
the Common Stock purchasable hereunder or under any other Warrant (as
hereinafter defined) are referred to individually as a "Warrant Share" and
collectively as the "Warrant Shares," (iii) the aggregate purchase price payable
for the Warrant Shares hereunder is referred to as the "Aggregate Warrant
Price," (iv) the price payable for each of the Warrant Shares hereunder is
referred to as the "Per Share Warrant Price," (v) this Warrant,
- --------
* Amount to be 120% of the per share initial public offering price.
<PAGE> 2
all similar Warrants issued on the date hereof and all Warrants hereafter issued
in exchange or substitution for this Warrant or such similar Warrants are
referred to as the "Warrants", and (vi) the holder of this Warrant is referred
to as the "Holder" and the holder of this Warrant and all other Warrants or
Warrant Shares issued upon the exercise of any Warrant are referred to as the
"Holders." The Aggregate Warrant Price is not subject to adjustment. The Per
Share Warrant Price is subject to adjustment as hereinafter provided, and in the
event of any such adjustment, the number of Warrant Shares shall be adjusted to
equal the number determined by dividing the Aggregate Warrant Price by the Per
Share Warrant Price in effect immediately after such adjustment.
1. Exercise of Warrant. (a) This Warrant may be
exercised in whole at any time or in part from time to time, during the Exercise
Period, by the Holder by the surrender of this Warrant (with the subscription
form at the end of this Warrant duly executed) at the address set forth in
Section 10(a) hereof, together with proper payment of the Aggregate Warrant
Price, or the proportionate part thereof if this Warrant is exercised in part.
Payment for Warrant Shares shall be made by certified or official bank check
payable to the order of the Company. If this Warrant is exercised in part, this
Warrant must be exercised for a number of whole shares of the Common Stock, and
the Holder is entitled to receive a new Warrant covering the Warrant Shares in
respect of which this Warrant has not been exercised and setting forth the
proportionate part of the Aggregate Warrant Price applicable to such Warrant
Shares. Upon such exercise and surrender of this Warrant, the Company will (i)
issue a certificate or certificates in the name of the Holder for the largest
number of whole shares of the Common Stock to which the Holder shall be entitled
and, if this Warrant is exercised in whole, in lieu of any fractional share of
the Common Stock to which the Holder shall be entitled, pay to the Holder cash
in an amount equal to the fair value of such fractional share (determined in
such reasonable manner as the Board of Directors of the Company shall determine)
and (ii) deliver the other securities and properties receivable upon the
exercise of this Warrant, or the proportionate part thereof if this Warrant is
exercised in part, pursuant to the provisions of this Warrant.
(b) In lieu of exercising this Warrant in the manner
set forth in Section 1(a) above, this Warrant may be exercised in whole at any
time or in part from time to time during the Exercise Period, by the Holder by
surrendering the Warrant at the address set forth in Section 10(a) hereof,
without payment of any other consideration, commission or remuneration, together
with the subscription form at the end of this Warrant, duly executed. The number
of shares of the Common Stock to be issued by the Company shall be calculated
using the following formula:
X = Y(A-B)
------
A
Where X = the number of shares of the Common
Stock to be issued to the Holder
Y = the number of shares of the
Common Stock purchasable under
this Warrant or, if this
-2-
<PAGE> 3
Warrant is being exercised in part,
under the portion of the Warrant
being exercised (at the date of the
surrender of this Warrant and the
subscription form)
A = the Market Price (at the date of the
surrender of this Warrant and the
subscription form)
B = the Per Share Warrant Price (as
adjusted to the date of the
surrender of this Warrant and the
subscription form)
If this Warrant is exercised in part pursuant to this Section 1(b), this Warrant
must be exercised for a number of whole shares of the Common Stock, and the
Holder is entitled to receive a new Warrant covering the Warrant Shares in
respect of which this Warrant has not been exercised and setting forth the
proportionate part of the Aggregate Warrant Price applicable to such Warrant
Shares. Upon such exercise and surrender of this Warrant, the Company will (i)
issue a certificate or certificates in the name of the Holder for the largest
number of whole shares of the Common Stock to which the Holder shall be entitled
and, if this Warrant is exercised in whole, in lieu of any fractional share of
the Common Stock to which the Holder shall be entitled, pay cash equal to the
fair value of such fractional share (determined in such reasonable manner as the
Board of Directors of the Company shall determine) and (ii) deliver the other
securities and properties receivable upon the exercise of this Warrant, or the
proportionate part thereof if this Warrant is exercised in part, pursuant to the
provisions of this Warrant.
(c) The market price of a share of the Common Stock
(the "Market Price") on any date of determination shall be (i) the last reported
sale price per share of the Common Stock on the business day immediately
preceding the date of determination as reported on the Nasdaq National Market
(the "National Market"), or (ii) if there is no such reported sale on the date
in question, the average of the closing bid and asked quotations as so reported
on the National Market, or (iii) if the Common Stock is not then listed on the
National Market, the last reported sale price per share of the Common Stock on
such national securities exchange upon which the Common Stock is then listed, or
(iv) if the Common Stock is not then listed on any national securities exchange,
the average of the closing bid and asked quotations in the over-the-counter
market as reported by Nasdaq, or if not so reported, as reported by the National
Quotations Bureau or a similar organization. In the absence of such quotations,
the Board of Directors of the Company shall determine in good faith the fair
market value per share of the Common Stock, which shall for these purposes be
deemed to be the Market Price, which determination shall be set forth in a
certificate executed by an officer of the Company showing the facts upon which
the Market Price is based.
2. Reservation of Warrant Shares; Listing. The Company agrees
that, prior to the expiration of this Warrant, the Company will at all times (a)
have authorized and in reserve, and will keep available, solely for issuance or
delivery upon the exercise of this Warrant, the shares of the Common Stock and
other securities and properties as from time to time shall be receivable upon
the exercise of this Warrant, free and clear
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<PAGE> 4
of all restrictions on sale or transfer (other than restrictions imposed
hereunder or under applicable securities laws) and free and clear of all
preemptive rights and rights of first refusal and (b) if the Company hereafter
lists the Common Stock on any national securities exchange, keep the shares of
the Common Stock receivable upon the exercise of this Warrant authorized for
listing on such exchange upon notice of issuance.
3. Protection Against Dilution. (a) If, at any time or
from time to time after the date of this Warrant, the Company shall issue or
distribute to the holders of shares of the Common Stock (i) securities, other
than shares of the Common Stock, or (ii) property, other than cash, without
payment therefor, with respect to the Common Stock, then, and in each such case,
the Holder, upon the exercise of this Warrant, shall be entitled to receive the
securities and property which the Holder would hold on the date of such exercise
if, on the date of this Warrant, the Holder had been the holder of record of the
number of shares of the Common Stock subscribed for upon such exercise and,
during the period from the date of this Warrant to and including the date of
such exercise, had retained such shares and the securities and properties
receivable by the Holder during such period. Notice of each such distribution
shall be forthwith mailed to the Holder.
(b) If, at any time or from time to time after the
date of this Warrant, the Company shall (i) pay a dividend or make a
distribution on its capital stock in shares of the Common Stock, (ii) subdivide
its outstanding shares of the Common Stock into a greater number of shares,
(iii) combine its outstanding shares of the Common Stock into a smaller number
of shares or (iv) issue by reclassification of the Common Stock any shares of
capital stock of the Company, the Per Share Warrant Price shall be adjusted so
that the Holder upon the exercise hereof shall be entitled to receive the number
of shares of the Common Stock or other capital stock of the Company which the
Holder would have owned immediately following such action had such Warrant been
exercised immediately prior thereto. An adjustment made pursuant to this Section
3(b) shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification.
(c) Except as provided in Section 3(f), in case
the Company shall hereafter issue or sell any shares of the Common Stock for a
consideration per share less than the then current Market Price in effect
immediately prior to the date of such issuance or sale, the Per Share Warrant
Price shall be adjusted as of the date of such issuance or sale so that the same
shall equal the price determined by dividing (i) the sum of (A) the number of
shares of the Common Stock outstanding immediately prior to such issuance or
sale multiplied by the Per Share Warrant Price plus (B) the consideration
received by the Company upon such issuance or sale by (ii) the total number of
shares of the Common Stock outstanding after such issuance or sale. Except as
provided in Section 3(f), in case the Company shall hereafter issue or sell any
rights, options, warrants or securities convertible into the Common Stock
entitling the holders thereof to purchase the Common Stock or to convert such
securities into the Common Stock at a price per share (determined by dividing
(i) the total amount, if any, received or receivable by the Company in
consideration of the issuance or sale of such rights, options, warrants or
convertible securities plus the total consideration, if any, payable to the
Company upon exercise or conversion thereof (the "Total Consideration") by (ii)
the number of additional shares of the Common Stock
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<PAGE> 5
issuable upon exercise or conversion of such securities) less than the then
current Market Price in effect on the date of such issuance or sale, the Per
Share Warrant Price shall be adjusted as of the date of such issuance or sale so
that the same shall equal the price determined by dividing (i) the sum of (A)
the number of shares of the Common Stock outstanding on the date of such
issuance or sale multiplied by the Per Share Warrant Price plus (B) the Total
Consideration by (ii) the number of shares of the Common Stock outstanding on
the date of such issuance or sale plus the maximum number of additional shares
of the Common Stock issuable upon exercise or conversion of such securities. No
adjustment in the Per Share Warrant Price shall be required in the case of (i)
the issuance of up to 1,054,410 shares of the Common Stock upon the exercise of
options and warrants outstanding or issuable on the date hereof as described in
the Company's Registration Statement on Form S-1, Registration No. ____, as
declared effective by the Securities and Exchange Commission on ___________,
1997, (ii) the issuance by the Company of the Common Stock pursuant to the
exercise of any Warrant or (iii) the issuance by the Company of any shares of
the Common Stock pursuant to the exercise of the over-allotment option granted
in the Underwriting Agreement, dated ________, 1997, by and between the Company
and Ladenburg Thalmann & Co. Inc. and Stifel, Nicolaus & Company Incorporated,
as representatives of the several underwriters named therein.
(d) In case of any consolidation or merger to
which the Company is a party other than a merger or consolidation in which the
Company is the continuing corporation, or in case of any sale or conveyance to
another entity of the property of the Company as an entirety or substantially as
an entirety, or in the case of any statutory exchange of securities with another
entity (including any exchange effected in connection with a merger of another
corporation with the Company), the Holder of this Warrant shall have the right
thereafter to receive on the exercise of this Warrant the kind and amount of
securities, cash or other property which the Holder would have owned or have
been entitled to receive immediately after such consolidation, merger, statutory
exchange, sale or conveyance had this Warrant been exercised immediately prior
to the effective date of such consolidation, merger, statutory exchange, sale or
conveyance and, in any such case, if necessary, appropriate adjustment shall be
made in the application of the provisions set forth in this Section 3 with
respect to the rights and interests thereafter of the Holder of this Warrant to
the end that the provisions set forth in this Section 3 shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in relation
to any shares of stock or other securities or property thereafter deliverable on
the exercise of this Warrant. In the event of a merger described in Section
368(a)(2)(E) of the Internal Revenue Code of 1986, as amended, in which the
Company is the surviving corporation, the right to purchase Warrant Shares
pursuant to the Warrants shall terminate on the date of such merger and
thereupon the Warrants shall become null and void, but only if the controlling
corporation shall agree to substitute for the Warrants its warrant which
entitles the holder thereof to purchase upon its exercise the kind and amount of
shares and other securities and property which it would have owned or been
entitled to receive had the Warrants been exercised immediately prior to such
merger. The above provisions of this Section 3(d) shall similarly apply to
successive consolidations, mergers, statutory exchanges, sales or conveyances.
The issuer of any shares of stock or other securities or property thereafter
deliverable on the exercise of this Warrant shall be responsible for all of the
agreements and obligations of the Company hereunder. Notice of any such
consolidation, merger, statutory exchange, sale or conveyance and of said
provisions so
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<PAGE> 6
proposed to be made, shall be mailed to the Holders of the Warrants not less
than 10 days prior to such event. A sale of all or substantially all of the
assets of the Company for a consideration consisting primarily of securities
shall be deemed a consolidation or merger for the foregoing purposes.
(e) In case any event shall occur as to which
the other provisions of this Section 3 are not strictly applicable but as to
which the failure to make any adjustment would not fairly protect the purchase
rights represented by this Warrant in accordance with the essential intent and
principles hereof, then, in each such case, if the Holders of Warrants
representing the right to purchase a majority of the Warrant Shares subject to
all outstanding Warrants and the Company are unable to agree on an appropriate
adjustment, such Holders of Warrants representing the rights to purchase a
majority of the Warrant Shares subject to all outstanding Warrants may appoint a
firm of independent public accountants of recognized national standing
reasonably acceptable to the Company, which may be the Company's regular
accounting firm which shall give their opinion as to the adjustment, if any, on
a basis consistent with the essential intent and principles established herein,
necessary to preserve the purchase rights represented by the Warrants. Upon
receipt of such opinion, the Company will promptly mail a copy thereof to the
Holder of this Warrant and shall make the adjustments described therein. The
fees and expenses of such independent public accountants shall be borne by the
Company if the Company's regular accounting firm is retained to provide such
opinion or the Holders of the Warrants if any accounting firm other than the
Company's regular accounting firm is retained to provide such opinion.
(f) No adjustment in the Per Share Warrant Price
shall be required unless such adjustment would require an increase or decrease
of at least $0.05 per share of the Common Stock; provided, however, that any
adjustments which by reason of this Section 3(f) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment;
provided further, however, that adjustments shall be required and made in
accordance with the provisions of this Section 3 (other than this Section 3(f))
not later than such time as may be required in order to preserve the tax-free
nature of a distribution to the Holder of this Warrant or the Common Stock
issuable upon exercise hereof. All calculations under this Section 3 shall be
made to the nearest cent or to the nearest 1/100th of a share, as the case may
be. Anything in this Section 3 to the contrary notwithstanding, the Company
shall be entitled to make such reductions in the Per Share Warrant Price, in
addition to those required by this Section 3, as it in its discretion shall deem
to be advisable in order that any stock dividend, subdivision of shares or
distribution of rights to purchase stock or securities convertible or
exchangeable for stock hereafter made by the Company to its stockholders shall
not be taxable.
(g) Whenever the Per Share Warrant Price is
adjusted as provided in this Section 3 and upon any modification of the rights
of a Holder of Warrants in accordance with this Section 3, the Company shall
promptly prepare a notice of such adjustment and a certificate of the chief
financial officer of the Company setting forth the Per Share Warrant Price and
the number of Warrant Shares after such adjustment or the effect of such
modification, a brief statement of the facts requiring such adjustment or
modification and the manner of
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<PAGE> 7
computing the same, and cause copies of such certificate to be mailed to the
Holders of the Warrants.
(h) If the Board of Directors of the Company
shall (i) declare any dividend or other distribution with respect to the Common
Stock, other than a cash dividend payable otherwise than out of earnings or
earned surplus, (ii) offer to the holders of shares of the Common Stock any
additional shares of the Common Stock, any securities convertible into or
exercisable for shares of the Common Stock or any rights to subscribe thereto or
(iii) propose a dissolution, liquidation or winding up of the Company, the
Company shall mail notice thereof to the Holders of the Warrants not less than
10 days prior to the record date fixed for determining stockholders entitled to
participate in such dividend, distribution, offer or subscription right or to
vote on such dissolution, liquidation or winding up.
(i) Upon the expiration of any rights, options,
warrants or conversion privileges, if such shall not have been exercised, the
number of Warrant Shares purchasable upon exercise of the Warrants, to the
extent the Warrants have not then been exercised, shall, upon such expiration,
be readjusted and shall thereafter be such as they would have been had they been
originally adjusted (or had the original adjustment not been required, as the
case may be) on the basis of (A) the fact that the only shares of Common Stock
so issued were the shares of Common Stock, if any, actually issued or sold upon
the exercise of such rights, options, warrants or conversion privileges, and (B)
the fact that such shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise plus the
consideration, if any, actually received by the Company for the issuance, sale
or grant of all such rights, options, warrants or conversion privileges whether
or not exercised; provided, however, that no such readjustment shall have the
effect of decreasing the number of Warrant Shares purchasable upon exercise of
the Warrants by an amount in excess of the amount of the adjustment initially
made in respect of the issuance, sale or grant of such rights, options, warrants
or conversion privileges.
(j) Except as provided in this Section 3, no
adjustment in respect of any dividends or distributions out of earnings shall be
made during the term of the Warrants or upon the exercise of the Warrants.
(k) If, as a result of an adjustment made
pursuant to this Section 3, the Holder of any Warrant thereafter surrendered for
exercise shall become entitled to receive shares of two or more classes of
capital stock or shares of the Common Stock and other capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
conclusive and shall be described in a written notice to the Holder of any
Warrant promptly after such adjustment) shall determine the allocation of the
adjusted Per Share Warrant Price between or among shares or such classes of
capital stock or shares of the Common Stock and other capital stock and any
subsequent adjustments made pursuant to this Section 3 shall apply equally to
each such resulting class of capital stock.
4. Fully Paid Stock; Taxes. The Company agrees that the shares
of the Common Stock represented by each and every certificate for Warrant Shares
delivered on the
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<PAGE> 8
exercise of this Warrant shall, at the time of such delivery, be validly issued
and outstanding, fully paid and nonassessable, and not subject to preemptive
rights, rights of first refusal or other contractual rights to purchase
securities of the Company, and the Company will take all such actions as may be
necessary to assure that the par value or stated value, if any, per share of the
Common Stock is at all times equal to or less than the then Per Share Warrant
Price. The Company further covenants and agrees that it will pay, when due and
payable, any and all federal and state stamp, original issue or similar taxes
which may be payable in respect of the issuance of any Warrant Share or
certificate therefor.
5. Registration Under Securities Act of 1933.
(a) If the Holders of the Warrants and holders
of the Warrant Shares have not been previously offered the opportunity, pursuant
to Section 5(b) hereof, to include all of such securities in a registration
statement which was subsequently declared effective, the Company agrees that if,
at any time during the Exercise Period, (i) the Holders of any Warrants and
Warrant Shares who or which shall hold, collectively, not less than 50% of the
Warrants and/or Warrant Shares outstanding at such time shall request that the
Company file a registration statement under the Securities Act of 1933, as
amended (the "Act"), covering more than 50% of the Warrant Shares issued or
issuable upon the exercise of the Warrants, the Company will (i) promptly notify
each Holder of the Warrants and each holder of Warrant Shares that such
registration statement will be filed and that the Warrant Shares which are then
held, or may be acquired upon exercise of the Warrants by the Holder and such
Holders, will be included in such registration statement at the Holder's and
such Holders' request, (ii) cause such registration statement to cover all
Warrant Shares which it has been so requested to include, (iii) use its best
efforts to cause such registration statement to become effective as soon as
practicable and (iv) take all other action necessary under any federal or state
law or regulation of any governmental authority to permit all Warrant Shares
which it has been so requested to include in such registration statement to be
sold or otherwise disposed of, and will maintain such compliance with each such
federal and state law and regulation of any governmental authority for the
period, but in no event to exceed nine months, necessary for such Holders to
effect the proposed sale or other disposition. The Company shall be required to
effect a registration or qualification pursuant to this Section 5(a) on one
occasion only.
(b) The Company agrees that if, at any time and
from time to time during the Exercise Period, the Board of Directors of the
Company shall authorize the filing of a registration statement (any such
registration statement being hereinafter called a "Subsequent Registration
Statement") under the Act (otherwise than pursuant to Section 5(a) hereof, and
other than a registration statement on Form S-8 or other form which does not
permit secondary sales or include substantially the same information as would be
required in a form for the general registration of securities) in connection
with the proposed offer of any of its securities by it or any of its
stockholders, the Company will (i) promptly notify each Holder of the Warrants
and each holder of Warrant Shares not previously sold pursuant to this Section
5(b) that such Subsequent Registration Statement will be filed and that the
Warrant Shares which are then held, and which may be acquired upon the exercise
of the Warrants, by the Holder and such Holders, will, at the Holder's and such
Holders' request, be included in such Subsequent Registration
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<PAGE> 9
Statement, (ii) upon the written request of a Holder made within 10 days after
the giving of such notice by the Company, include such request therefor setting
forth the facts with respect to such proposed disposition and all other
information with respect to such person reasonably necessary to be included in
such Subsequent Registration Statement, in the securities covered by such
Subsequent Registration Statement all Warrant Shares which it has been so
requested to include, (iii) use its best efforts to cause such Subsequent
Registration Statement to become effective as soon as practicable and (iv) take
all other action necessary under any federal or state law or regulation of any
governmental authority to permit all Warrant Shares which it has been so
requested to include in such Subsequent Registration Statement to be sold or
otherwise disposed of, and will maintain such compliance with each such federal
and state law and regulation of any governmental authority for the period, but
in no event to exceed nine months, necessary for the Holder and such Holders to
effect the proposed sale or other disposition. In the event that the managing
underwriter for any such offering advises the Company in writing that the
inclusion of all or any portion of such securities in the offering would be
detrimental to the offering, such securities shall not be included in the
Subsequent Registration Statement; provided, however, that if any securities
held by persons with similar registration rights are to be included in the
Subsequent Registration Statement, the Warrant Shares which have been requested
to be so included shall be included on a pro rata basis.
(c) Whenever the Company is required pursuant to
the provisions of this Section 5 to include Warrant Shares in a registration
statement or a post-effective amendment to a registration statement, the Company
shall (i) furnish each Holder of any such Warrant Shares and each underwriter of
such Warrant Shares with such copies of the prospectus, including the
preliminary prospectus, conforming to the Act (and such other documents as each
such Holder or each such underwriter may reasonably request) in order to
facilitate the sale or distribution of the Warrant Shares, (ii) use its best
effort to register or qualify such Warrant Shares under the blue sky laws (to
the extent applicable) of such jurisdiction or laws (to the extent applicable)
of such jurisdiction or jurisdictions as the Holders of any such Warrant Shares
and each underwriter of Warrant Shares being sold by such Holders shall
reasonably request and (iii) take such other actions as may be reasonably
necessary or advisable to enable such Holders and such underwriters to
consummate the sale or distribution in such jurisdiction or jurisdictions in
which such Holders shall have reasonably requested that the Warrant Shares be
sold, including entering into an underwriting agreement in customary form for
transactions of this nature.
(d) The Company shall pay all expenses incurred
in connection with any registration or other action pursuant to the provisions
of this Section 5, including reasonable out-of-pocket expenses of the Holder(s)
of the Warrant Shares covered by such registration incurred in connection with
such registration or other action, other than (i) underwriting discounts and
applicable transfer taxes relating to the Warrant Shares and (ii) attorneys'
fees of the Holders.
(e) If any Holder of Warrants or holder of
Warrant Shares shall be entitled to registration of any Warrant or Warrant
Shares as provided in this Section 5 and so request, in lieu of such
registration the Company shall have the right, for a period of 60 days following
such request, to purchase or cause to be purchased all of the securities to
which such
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<PAGE> 10
request for registration pertains, at the Current Market Price (as defined in
Section 1(c)) less the Per Share Warrant Price, if any, of the Warrants or
Warrant Shares otherwise entitled to such registration.
(f) The Company shall not be required by this
Section 5 to file any such registration statement if, in the opinion of counsel
for the Company, the proposed public offering or other transfer as to which such
registration statement is requested is exempt from applicable federal and state
securities laws and will result in all purchasers or transferees obtaining
securities which are not "restricted securities" as defined in Rule 144 under
the Act.
6. Indemnification.
(a) The Company agrees to indemnify and hold
harmless each selling holder (including, for purposes of this Section 6, any
Holder) of Warrant Shares and each person who controls any such selling holder
within the meaning of Section 15 of the Act, and each and all of them ("Holder
Indemnified Parties"), from and against any and all losses, claims, damages,
liabilities or actions, joint or several, to which any selling holder of Warrant
Shares or they or any of them may become subject under the Act or otherwise and
to reimburse the persons indemnified above for reasonable legal or other
expenses (including the cost of any investigation and preparation) incurred by
them in connection with any litigation or threatened litigation, whether or not
resulting in any liability, but only insofar as such losses, claims, damages,
liabilities or actions arise out of, or are based upon, (i) any untrue statement
or alleged untrue statement of a material fact contained in any registration
statement pursuant to which Warrant Shares were registered under the Act
(hereinafter called a "Registration Statement"), any preliminary prospectus, the
final prospectus or any amendment or supplement thereto (or in any application
or document filed in connection therewith) or document executed by the Company
based upon written information furnished by or on behalf of the Company filed in
any jurisdiction in order to register or qualify the Warrant Shares under the
securities laws thereof or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or (ii) the employment by the Company of any device, scheme or
artifice to defraud, or the engaging by the Company in any act, practice or
course of business which operates or would operate as a fraud or deceit, or any
conspiracy (other than with a Holder Indemnified Party) with respect thereto, in
which the Company shall participate, in connection with the issuance and sale of
any of the Warrant Shares; provided, however, that (i) the indemnity agreement
contained in this Section 6(a) shall not extend to any selling holder of Warrant
Shares in respect of any such losses, claims, damages, liabilities or actions
arising out of, or based upon, any such untrue statement or alleged untrue
statement, or any such omission or alleged omission, if such statement or
omission was based upon and made in conformity with information furnished in
writing to the Company by a selling holder of Warrant Shares specifically for
use in connection with the preparation of such Registration Statement, any final
prospectus, any preliminary prospectus or any such amendment or supplement
thereto. The Company agrees to pay any legal and other expenses for which it is
liable under this Section 6(a) from time to time (but not more frequently than
monthly) within 30 days after its receipt of a bill therefor.
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<PAGE> 11
(b) Each selling holder (including, for purposes
of this Section 6, any Holder) of Warrant Shares, and each person who controls
any such selling holder within the meaning of Section 15 of the Act, severally
and not jointly, will indemnify and hold harmless the Company, its directors,
its officers who shall have signed the Registration Statement and each person,
if any, who controls the Company within the meaning of Section 15 of the Act to
the same extent as the foregoing indemnity from the Company, but in each case to
the extent, and only to the extent, that any statement in or omission from or
alleged omission from such Registration Statement, any final prospects, any
preliminary prospectus or any amendment or supplement thereto was made in
reliance upon information furnished in writing to the Company by such selling
holder specifically for use in connection with the preparation of the
Registration Statement, any final prospectus or the preliminary prospectus or
any such amendment or supplement thereto; provided, however, that the obligation
of any holder of Warrant Shares to indemnify the Company under the provisions of
this Section 6(b) shall be limited to (X) the product of the Market Price and
the number of the Warrant Shares being sold by the selling holder minus (Y) the
product of the Per Share Warrant Price and the number of such Warrant Shares.
Each selling holder of Warrant Shares agrees to pay any legal and other expenses
for which it is liable under this Section 6(b) from time to time (but not more
frequently than monthly) within 30 days after receipt of a bill therefor.
(c) If any action is brought against a person
entitled to indemnification pursuant to the foregoing Section 6(a) or Section
6(b) (an "Indemnified Party") in respect of which indemnity may by sought
against a person granting indemnification (an "Indemnifying Party") pursuant to
such section, such Indemnified Party shall promptly notify such Indemnifying
Party in writing of the commencement thereof; but the omission so to notify the
Indemnifying Party of any such action shall not release the Indemnifying Party
from any liability it may have to such Indemnified Party otherwise than on
account of the indemnity agreement contained in Section 6(a) or Section 6(b)
hereof. In case any such action is brought against an Indemnified Party and it
notifies an Indemnifying Party of the commencement thereof, the Indemnifying
Party against which a claim is to be made will be entitled to participate
therein at its own expense and, to the extent that it may wish, to assume at its
own expense the defense thereof, with counsel reasonably satisfactory to such
Indemnified Party; provided, however, that if the Indemnified Party shall have
reasonably concluded based upon written advice of counsel that there may be
legal defenses available to it and/or other Indemnified Parties which are
different from or additional to those available to the Indemnifying Party, the
Indemnified Party shall have the right to select separate counsel to assume such
legal defenses and otherwise to participate in the defense of such action on
behalf of such Indemnified Party or Parties. Upon receipt of notice from the
Indemnifying Party to such Indemnified Party of its election so to assume the
defense of such action and approval by the Indemnified Party of counsel, the
Indemnifying Party will not be liable to such Indemnified Party under this
Section 6 for any legal or other expenses subsequently incurred by such
Indemnified Party in connection with the defense thereof unless (i) the
Indemnified Party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the next
preceding sentence (it being understood, however, that the Indemnifying Party
shall not be liable for the expenses of more than one separate counsel), (ii)
the Indemnifying Party shall not have employed counsel reasonably satisfactory
to the Indemnified Party to represent the Indemnified
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<PAGE> 12
Party within a reasonable time after notice of commencement of the action or
(iii) the Indemnifying Party has authorized the employment of counsel for the
Indemnified Party at the expense of the Indemnifying Party. An Indemnifying
Party shall not be liable for any settlement of any action or proceeding
effected without its written consent (which consent shall not be unreasonably
withheld).
(d) In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 6(a) or (b) hereof is unavailable in accordance with its terms, the
Company and the selling holder of Warrant Shares shall contribute to the
aggregate losses, claims, damages and liabilities, of the nature contemplated by
said indemnity agreement, incurred by the Company and the selling holder of
Warrant Shares, in such proportions as is appropriate to reflect the relative
benefits received by the Company, on the one hand, and the selling holder of
Warrant Shares, on the other hand, from any offering of the Warrant Shares;
provided, however, that if such allocation is not permitted by applicable law or
if the Indemnified Party failed to give the notice required under Section 6(c),
then the relative fault of the Company and the selling holder of Warrant Shares
in connection with the statements or omissions which result in such losses,
claims, damages and liabilities and other relevant equitable considerations will
be considered together with such relative benefits.
(e) The respective indemnity and contribution
agreements by the Company and the selling holder of Warrant Shares in Sections
6(a), (b), (c) and (d) hereof shall remain operative and in full force and
effect regardless of (i) any investigation made by any selling holder of Warrant
Shares or by or on behalf of any person who controls such selling holder or by
the Company or any controlling person of the Company or any director or any
officer of the Company, (ii) the exercise of this Warrant or (iii) payment for
any of the Warrant Shares, and shall survive the delivery of the Warrant Shares,
and any successor of the Company, or of any selling holder of Warrant Shares, or
of any person who controls the Company, or of any selling holder of Warrant
Shares, as the case may be, shall be entitled to the benefit of such respective
indemnity and contribution agreements. The respective indemnity and contribution
agreements by the Company and the selling holders of Warrant Shares contained in
Sections 6(a), (b), (c) and (d) hereof shall be in addition to any liability
which the Company and the selling holders of Warrant Shares may otherwise have.
7. Limitations of Transfer of the Warrant; Legend on
Certificates; Investment Representation.
(a) The Holder agrees that prior to making any
transfer or disposition of the Warrant or the Warrant Shares or any interest
therein, the Holder shall give written notice to the Company describing briefly
the manner in which any such proposed transfer or disposition is to be made; and
no such transfer or disposition shall be made if the Company has notified the
Holder that in the opinion of counsel to the Company (i) a registration
statement or other notification or post-effective amendment thereto (hereinafter
collectively a "Registration Statement") under the Act is required with respect
to such transfer or disposition and no such registration Statement has been
filed by the Company with, and declared effective, if necessary, by, the
Commission, or (ii) unfulfilled requirements under any federal or state
securities laws
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<PAGE> 13
prohibit or restrict the proposed transfer or disposition. The Company shall not
be required to cause the Warrant or the Warrant Shares to be registered under
any securities laws except as otherwise expressly provided herein.
(b) Each certificate for the Warrant or Warrant
Shares shall bear substantially the following legend, unless, at the time of
exercise, such Warrant or Warrant Shares are subject to a currently effective
Registration Statement under the Act and, if required, are subject to a
currently effective qualification or registration under any applicable
securities laws of any other jurisdiction:
THIS WARRANT HAS [THESE SHARES HAVE] BEEN ACQUIRED FOR INVESTMENT AND
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE. THIS WARRANT [THESE SHARES] MAY
NOT BE SOLD OR TRANSFERRED, EXCEPT UPON SUCH REGISTRATION OR UPON
DELIVERY TO MAKER OF AN OPINION OF COUNSEL SATISFACTORY TO MAKER THAT
REGISTRATION IS NOT REQUIRED FOR SUCH SALE OR TRANSFER.
In addition, if the Warrant or Warrant Shares are being issued in
reliance on Rule 147 under the Act, the following additional sentence shall be
included in the legend:
FOR A PERIOD OF NINE MONTHS FROM THE DATE OF SALE OF THIS WARRANT [THE
SHARES], ALL RESALES THEREOF SHALL BE MADE ONLY TO PERSONS RESIDENT
WITHIN THE STATE OF NEVADA.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a registered distribution) shall also bear the above legends unless, in the
opinion of the Company's counsel, the securities represented thereby need no
longer be subject to such restrictions.
(c) By accepting delivery of this Warrant, the
Holder represents and warrants (i) that it is acquiring the Warrant for its own
account for investment purposes only and not with a view to or for sale in
connection with a distribution of the Warrant or the Warrant Shares and (ii) it
is a bona fide resident of the State of Nevada, is not a temporary or transient
resident of the State of Nevada and is at least 21 years of age.
8. Loss, etc., of Warrant. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and of indemnity reasonably satisfactory to the Company, if lost,
stolen or destroyed, and upon surrender and cancellation of this Warrant, if
mutilated, the Company shall execute and deliver to the Holder a new Warrant of
like date, tenor and denomination.
9. Warrant Holder Not Stockholder. Except as otherwise
provided herein, this Warrant does not confer upon the Holder any right to vote
or to consent to or receive notice
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<PAGE> 14
as a stockholder of the Company, as such, in respect of any matters whatsoever,
or any other rights or liabilities as a stockholder, prior to the exercise
hereof.
10. Communication. No notice or other communication
under this Warrant shall be effective unless, but any notice or other
communication shall be effective and shall be deemed to have been given if, the
same is in writing and is mailed by first-class mail, postage prepaid, addressed
to:
(a) the Company at 5440 West Sahara Avenue, Las
Vegas, NV 89102, or such other address as the Company has
designated in writing to the Holder, with a copy to Hughes
Hubbard & Reed LLP, 350 South Grand Avenue, Suite 3600, Los
Angeles, California 90071, Attention: Theodore H. Latty, Esq.,
or
(b) the Holder at _____________________________
__________________________________________, or such other
address as the Holder has designated in writing to the
Company.
11. Headings. The headings of this Warrant have been
inserted as a matter of convenience and shall not affect the construction
hereof.
12. Applicable Law. This Warrant shall be governed by
and construed in accordance with the law of the State of Nevada without giving
effect to the principles of conflicts of law thereof.
IN WITNESS WHEREOF, Saxton Incorporated has caused this
Warrant to be signed by its President and its corporate seal to be hereunto
affixed and attested by its Secretary this _____ day of ______________, 1997.
SAXTON INCORPORATED
By: _______________________________
Name: James C. Saxton
Title: President
ATTEST:
- -----------------------------
Name: Timothy J. Adams
Title: Secretary
[Corporate Seal]
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<PAGE> 15
ASSIGNMENT
FOR VALUE RECEIVED __________________________ hereby sells,
assigns and transfers unto _______________________________ the foregoing Warrant
and all rights evidenced thereby, and does irrevocably constitute and appoint
_________________________, attorney, to transfer said Warrant on the books of
Saxton Incorporated
Dated: ________________ Signature: _____________________________
Address: _______________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED __________________________ hereby sells,
assigns and transfers unto __________________________ the right to purchase
_____________ shares of the Common Stock of Saxton Incorporated covered by the
foregoing Warrant, and a proportionate part of said Warrant and the rights
evidenced thereby, and does irrevocably constitute and appoint
__________________________, attorney, to transfer that part of said Warrant on
the books of Saxton Incorporated
Dated: ________________ Signature: _____________________________
Address: _______________________________
<PAGE> 16
SUBSCRIPTION FORM
The undersigned hereby irrevocably elects to exercise the
right of purchase represented by the attached Warrant for, and to purchase
thereunder, _____________ shares of the Common Stock of Saxton Incorporated, as
provided for in Section 1 thereof.
The undersigned herewith makes payment for such shares in full
at the price per share provided by such Warrant in the following manner (please
check the type or types of payment and indicate the portion of the aggregate
payment to be paid by each type of payment):
____ Exercise for cash as provided in Section 1(a) of such
Warrant.
____ Exercise by surrender of such Warrant (or a portion
thereof) in accordance with Section 1(b) of such Warrant.
Please issue a certificate or certificates for such shares in
the name of, and pay any cash for any fractional share to:
Name ___________________________________
(Please Print Name, Address and Social
Security No. or Taxpayer Identification
No.)
Address ________________________________
--------------------------------
Social Security No. or Taxpayer
Identification No. _____________
Signature ______________________________
NOTE: The above signature
should correspond
exactly with the name
on the first page of
such Warrant or with
the name of the
assignee appearing in
the assignment form
attached to the
Warrant.
And if such number of shares shall not be all the shares
purchasable under the attached Warrant, a new Warrant is to be issued in the
name of said undersigned for the balance remaining of the shares purchasable
thereunder and delivered to the address set forth above.
<PAGE> 1
EXHIBIT 5
[HUGHES HUBBARD & REED LLP LETTERHEAD]
May 31, 1997
6749.0150
6749.0142
Saxton Incorporated
5440 West Sahara Avenue, Third Floor
Las Vegas, Nevada 89102
RE: SAXTON INCORPORATED
REGISTRATION STATEMENT ON FORM S-1
Gentlemen:
We have represented Saxton Incorporated, a Nevada corporation (the "Company"),
as special securities counsel, in connection with the proposed issuance and sale
by the Company of up to 2,275,000 shares of the Company's Common Stock (plus up
to an additional 341,250 shares to cover underwriters' over-allotments, if any)
(collectively, the "Shares") pursuant to an underwriting agreement (the
"Underwriting Agreement") to be entered into by the Company and certain
underwriters represented by Ladenburg Thalmann & Co. Inc and Stifel, Nicolaus &
Company Incorporated. The Shares are being registered by the Company pursuant to
a Registration Statement on Form S-1 (File No. 333-23927) under the Securities
Act of 1933, as amended (the "Act"), filed with the Securities and Exchange
Commission (the "Commission").
As such counsel, we have considered such matters of law, including consultation
with local counsel, and examined originals or copies, certified or otherwise
identified to our satisfaction, of such records, certificates, documents and
other instruments as we have deemed appropriate under the circumstances.
On the basis of the foregoing, we are of the opinion that the Shares, when
issued, sold and paid for pursuant to the Underwriting Agreement, will
constitute legally issued, fully paid and non-assessable shares of Common Stock
of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this Firm in the Prospectus
forming a part of the Registration Statement under the heading "Legal Matters."
In giving this consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission promulgated thereunder.
Very truly yours,
Hughes Hubbard & Reed LLP
<PAGE> 1
EXHIBIT 10.1.2
SAXTON INCORPORATED
EMPLOYEE STOCK OWNERSHIP PLAN
PLAN AMENDMENT II
The undersigned, constituting all of the directors of a corporation
organized under the laws of the State of Nevada, hereby unanimously consent to
and adopt the following resolutions.
WHEREAS, Saxton Incorporated (hereinafter the "Employer"), maintains
the Saxton Incorporated Employee Stock Ownership Plan (hereinafter the "Plan");
and
WHEREAS, pursuant to Article XVII, the Employer may amend the Plan from
time to time;
WHEREAS, the Internal Revenue Service has requested that certain
amendments to the Plan document be made in order for the Plan to receive a
favorable determination letter;
NOW THEREFORE, BE IT RESOLVED, that the Plan shall be amended effective
as of December 29, 1995 as follows:
1. Section 2.12 shall be amended to by replacing the reference to
Section "402(a)(8)" with "402(e)(3)" in the last sentence of the first paragraph
therein.
2. Section 2.12 shall be further amended by adding the following
paragraph before the last paragraph of such section:
"For plan years beginning before January 1, 1997, if a
Participant is a Family Member (as defined in Section 12.02)
of one of the ten highest-paid individuals or of a 5 percent
owner of the Employer, those Family Members shall be treated
as one individual for purposes of determining Compensation."
3. Section 2.44 shall be amended to replace the phrase "Break in
Service" with the phrase "Break in Employment".
4. Section 3.01(a) shall be amended by replacing the phrase "one
(1) Year of Service" with "a Period of Service of one (1) year".
5. Section 3.01(b) as previously amended shall be further amended
to add the following sentence to the end of such section:
"For purposes of this section, the term Laborer means any
person who performs construction labor duties and is
compensated on an hourly basis."
<PAGE> 2
6. Section 7.01 shall be amended by replacing all references to
"Normal Retirement Date" with "Normal Retirement Age".
7. Section 7.03 shall be amended by replacing the reference to
"Normal Retirement Date" with "Normal Retirement Age".
8. Section 10.06(b)(i) shall be amended by replacing the phrase
"the first six (6) Years of Service" with "the first Period of Service of six
(6) years", and by inserting the work "Prior" at the beginning of the last
sentence thereof.
9. Section 11.03(c) shall be amended by adding the following to
the end of such section:
"If the Employer is required to repurchase the Company Stock
pursuant to an exercise of such right, the amount to be paid
for the Company Stock shall be paid in substantially equal
periodic payments (not less frequently than annually) over a
period beginning not later than thirty (30) days after the
exercise of such right and not exceeding five (5) years."
10. Section 12.02(g) shall be amended by adding the following
sentence to the end of such section:
"Each Participant's interest in his Qualified Matching
Contributions shall be, at all times, 100% vested and
nonforfeitable."
11. Section 12.02(h) shall be amended by adding the following to
the end of such section:
"Qualified Nonelective Contributions may be treated as
matching contributions for purposes of the ACP test, provided
that the conditions described in Section 1.401(m)-l(b)(5) of
the Income Tax Regulations are met. Each Participant's
interest in his Qualified Nonelective Contributions shall be,
at all times, 100% vested and nonforfeitable."
12. Section 12.03 shall be amended by adding new subsection
12.03(f) as follows.
(f) "For purposes of this section, deferrals made by Highly
Compensated Employees shall be considered Employer
Contributions and deferrals by Non-Highly Compensated
Employees shall be treated as Employee Contributions."
-2-
<PAGE> 3
13. Section 22.03 shall be amended to replace the phrase "five (5)
years of Vesting Service" with "three (3) years of Vesting Service".
14. Section 16.16 shall be amended by adding the following to the
end of such section:
"Voting rights granted herein to each Participant shall
devolve to any Beneficiary or Alternate Payee entitled thereto
as otherwise provided by the Plan."
Executed this 5th day of June, 1997.
SAXTON INCORPORATED
By: /s/ James C. Saxton
-----------------------------------
By: /s/ Michele Saxton-Pori
-----------------------------------
By:
-----------------------------------
By:
-----------------------------------
By:
-----------------------------------
By:
-----------------------------------
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<PAGE> 1
EXHIBIT 10.2
SAXTON INCORPORATED
MANAGEMENT STOCK OPTION INCENTIVE PLAN
SECTION 1. PURPOSE
The purpose of the Saxton Incorporated Management Stock Option
Incentive Plan (the "Plan") is to further the interests of Saxton Incorporated,
a Nevada corporation (the "Company"), and its subsidiaries by encouraging and
enabling selected officers, employees (including employees who are directors),
consultants, advisors, independent contractors, and agents of the Company and
its subsidiaries, whose judgment, initiative and effort contribute to the
successful conduct of the Company's business, to acquire and retain a
proprietary interest in the Company by ownership of its stock through the
exercise of stock options, and thereby to encourage such persons to put forth
maximum efforts for the growth and success of the Company.
SECTION 2. DEFINITIONS
Whenever used herein the following terms shall have the
following meanings, respectively:
(a) "Board" shall mean the Board of Directors of
the Company.
(b) "Code" shall mean the Internal Revenue Code
of 1986, as amended, and the regulations promulgated thereunder.
(c) "Committee" shall mean the committee
appointed by the Board to administer the Plan or, if no committee has
been so appointed, the Board.
(d) "Common Stock" shall mean the Company's
Common Stock, $0.001 par value.
(e) "Company" shall mean Saxton Incorporated, a
Nevada corporation.
(f) "Employee" shall mean an employee of the
Company or of any Subsidiary or Parent Corporation of the Company.
(g) "Fair Market Value" of the Common Stock on
any date shall mean the value determined in good faith by the
Committee, by formula or otherwise. In the absence of a determination
by the Committee, "Fair Market Value" shall mean (i) the mean between
the highest and lowest quoted selling prices of the Common Stock on
such date or if there were no sales on the date in question, the mean
of such prices on the most recent Trading Day before such date; or (ii)
if applicable, the mean between the bona fide bid and asked prices of
the Common Stock on such date, or if there were no bid and
<PAGE> 2
asked prices on the date in question, the mean of such prices on the
most recent Trading Day before such date.
(h) "Incentive Option" shall mean a Stock
Option granted under the Plan which both is designated as an Incentive
Option and qualifies as an incentive stock option within the meaning of
Section 422 of the Code.
(i) "Non-Employee Director" shall have the
meaning set forth in Rule 16b-3 promulgated by the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as
amended, or any successor rule.
(j) "Non-Qualified Option" shall mean a Stock
Option granted under the Plan which either is designated as a
Non-Qualified Option or does not qualify as an incentive stock option
within the meaning of Section 422 of the Code.
(k) "Optionee" shall mean any person who has
been granted a Stock Option under the Plan or who is otherwise entitled
to exercise a Stock Option.
(l) "Outside Director" shall have the meaning
set forth in Section 162(m) of the Code.
(m) "Parent Corporation" shall have the meaning
set forth in Section 424(e) of the Code.
(n) "Plan" shall mean the Saxton Incorporated
Management Stock Option Incentive Plan.
(o) "Relationship" shall mean the status of
employee, officer, director, consultant, advisor, independent
contractor or agent of the Company or any Subsidiary or Parent
Corporation of the Company.
(p) "Stock Option" shall mean an Incentive
Option or a Non-Qualified Option.
(q) "Subsidiary" shall have the meaning set
forth in Section 424(f) of the Code.
(r) "Trading Day" shall mean a day on which the
Common Stock is traded on a national securities exchange, on the Nasdaq
National Market or other automated quotation system, or in the
over-the-counter market.
SECTION 3. ADMINISTRATION
3.1 The Plan shall be administered by the Compensation
Committee of the Board or such other committee of directors as the Board shall
designate, which shall consist of not less than two directors, each of whom is
both a Non-Employee Director and an Outside
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<PAGE> 3
Director. In the event the Board fails to designate a committee to administer
the Plan, the Plan shall be administered by the Board.
3.2 The Committee shall have the following authority with
respect to awards under the Plan: to grant awards to eligible persons under the
Plan; to adopt, alter and repeal such administrative rules, guidelines and
practices governing the Plan as it shall deem advisable; to interpret the terms
and provisions of the Plan and any award granted under the Plan; and to make all
other determinations necessary or advisable for the administration of the Plan.
In particular, and without limiting its authority and powers, the Committee
shall have the authority:
(a) to select the persons to whom awards will
be granted from among those eligible;
(b) to determine the number of shares of Common
Stock to be covered by each award granted hereunder subject to the
limitations contained herein;
(c) to determine the terms and conditions of
any award granted hereunder, including, but not limited to, any vesting
or other restrictions based on such performance objectives and such
other factors as the Committee may establish, and to determine whether
the terms and conditions of the award have been satisfied;
(d) to determine the treatment of awards upon
an Employee's retirement, disability, death, termination for cause, or
other termination of employment or upon an Optionee's termination of
Relationship;
(e) to amend the terms of any award,
prospectively or retroactively; provided, however, that no amendment
shall impair the rights of the award holder without his or her written
consent;
(f) to substitute new Stock Options for
previously granted Stock Options, or for options granted under other
plans or agreements, in each case including previously granted options
having higher option prices; and
(g) to delegate such administrative duties as
it may deem advisable to one or more of its members or to one or more
employees or agents.
3.3 All determinations and interpretations made by the
Committee pursuant to the provisions of the Plan shall be final and binding on
all persons, including the Company and Optionees. Determinations by the
Committee under the Plan relating to the form, amount, and terms and conditions
of awards need not be uniform, and may be made selectively among persons who
receive or are eligible to receive awards under the Plan, whether or not such
persons are similarly situated.
3.4 The Committee shall act either by a majority of its
members at a meeting (present in person or participating by conference
telephone) or by unanimous written consent.
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<PAGE> 4
3.5 The Committee may from time to time delegate to one or
more officers of the Company any or all of its authorities granted hereunder
except with respect to awards granted to persons subject to Section 16 of the
Securities Exchange Act of 1934. The Committee shall specify the maximum number
of shares that may be awarded by the officer or officers to whom such authority
is delegated.
SECTION 4. STOCK SUBJECT TO PLAN
4.1 The total number of shares of Common Stock which may be
issued under the Plan shall not exceed 500,000 (subject to adjustment as
provided below). Such shares may consist of authorized but unissued shares or
shares that have been issued and reacquired by the Company.
4.2 To the extent a Stock Option terminates without having
been exercised, or shares received upon exercise of a Stock Option are
forfeited, the shares subject to such award shall again be available for
distribution in connection with future awards under the Plan. Shares of Common
Stock equal in number to the shares surrendered in payment of the option price,
and shares of Common Stock which are withheld in order to satisfy federal, state
or local tax liability, shall not count against the above limit, and shall again
be available for awards under the Plan.
4.3 In the event of any merger, reorganization, consolidation,
sale of substantially all assets, recapitalization, stock dividend, stock split,
spin-off, distribution of assets, or other change in corporate structure
affecting the Common Stock such that an adjustment is determined by the Board to
be appropriate under the Plan, then the Board shall, in such a manner as it may
deem equitable, adjust any or all of (i) the aggregate number and kind of shares
reserved for issuance under the Plan, (ii) the number and kind of shares subject
to outstanding awards, (iii) the number and kind of shares with respect to which
Stock Options may be granted to a single Optionee pursuant to Section 5.2, and
(iv) the exercise price of outstanding Stock Options; provided, however, that no
such adjustment shall increase the aggregate value of any outstanding award. In
addition, upon the dissolution or liquidation of the Company or upon any
reorganization, merger, or consolidation as a result of which the Company is not
the surviving corporation or becomes a subsidiary of another corporation, or
upon a sale of substantially all the assets of the Company, the Board may take
such action as it in its discretion deems appropriate to (i) accelerate the time
when Stock Options may be exercised, (ii) terminate Stock Options at or
immediately prior to the date of any such event, (iii) cash out such Stock
Options at or immediately prior to the date of such event, or (iv) provide for
the assumption of outstanding Stock Options by surviving, successor or
transferee corporations. The Board's determination as to which adjustments shall
be made and the extent thereof shall be final, binding and conclusive.
SECTION 5. ELIGIBILITY
5.1 Non-Qualified Options may be granted to any person who has
a Relationship with the Company or any of its Subsidiaries or its Parent
Corporation, except that no Stock Option shall be granted to a director who is
not an Employee. Incentive Options may
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<PAGE> 5
be granted to any Employee. Stock Option grantees under the Plan shall be
selected from time to time by the Committee, in its sole discretion, from among
those eligible.
5.2 In no event shall the aggregate number of shares of Common
Stock with respect to which Stock Options may be granted to a single Optionee
during any year exceed 25,000 shares.
SECTION 6. NON-QUALIFIED OPTIONS
6.1 Subject to the following provisions, Non-Qualified Options
awarded under the Plan shall be in such form and shall have such terms and
conditions as the Committee may determine:
(a) Option Price. The option price per share
of Common Stock purchasable under a Non-Qualified Option shall be
determined by the Committee, and may be less than the fair market value
of the Common Stock on the date of the award of the Stock Option.
(b) Option Term. The term of each
Non-Qualified Option shall be fixed by the Committee.
(c) Exercisability. Non-Qualified Options
shall be exercisable at such time or times and subject to such terms
and conditions as shall be determined by the Committee. The Committee
may waive such exercise provisions or accelerate the exercisability of
the Stock Option at any time in whole or in part.
(d) Method of Exercise. Non-Qualified Options
may be exercised in whole or in part at any time during the option
period by giving written notice of exercise to the Company specifying
the number of shares to be purchased, accompanied by payment of the
purchase price. Payment of the purchase price shall be made in such
manner as the Committee may provide in the award, which may include (i)
cash (including cash equivalents), (ii) delivery of shares of Common
Stock already owned by the Optionee or subject to awards hereunder,
(iii) broker-assisted "cashless exercise," (iv) a loan from the Company
(to the extent permitted by applicable law), (v) any other manner
permitted by law determined by the Committee, or (vi) any combination
of the foregoing.
(e) No Stockholder Rights. An Optionee shall
have neither rights to dividends or other rights of a stockholder with
respect to shares subject to a Stock Option until the Optionee has duly
exercised such Stock Option and become the holder of record of such
shares.
(f) Termination of Employment. Following the
termination of an Optionee's employment or other Relationship with the
Company or a Subsidiary or Parent Corporation of the Company, the
Non-Qualified Option shall be exercisable to the extent determined by
the Committee. The Committee may provide different post-
-5-
<PAGE> 6
termination exercise provisions with respect to termination of
employment or other Relationship for different reasons. The Committee
may provide that, notwithstanding the option term fixed pursuant to
Section 6.1(b), a Non-Qualified Option which is outstanding on the date
of an Optionee's death shall remain outstanding for an additional
period after the date of such death. The Committee shall have absolute
discretion to determine the date and circumstances of any termination
of employment.
(g) Non-transferability. Non-Qualified Options
shall not be transferable by the Optionee, either voluntarily or by
operation of law, other than by will or by the laws of descent and
distribution. During the grantee's lifetime, all Non-Qualified Options
shall be exercisable only by the grantee.
SECTION 7. INCENTIVE OPTIONS
7.1 Subject to the following provisions, Incentive Options
awarded under the Plan shall be in such form and shall have such terms and
conditions as the Committee may determine:
(a) Option Price. The option price per share
of Common Stock purchasable under an Incentive Option shall not be less
than the Fair Market Value of the Common Stock on the date of the award
of the Incentive Option. No Incentive Option granted to an Employee who
at the time of grant owns (within the meaning of Code Section 424(d))
more than 10% of the total combined voting power of all classes of
stock of the Company or any Subsidiary or Parent Corporation of the
Company shall have an option price which is less than 110% of the Fair
Market Value of the Common Stock on the date of the award of the
Incentive Option.
(b) Option Term. The term of each Incentive
Option shall be fixed by the Committee but shall not exceed ten years.
No Incentive Option granted to an Employee who at the time of grant
owns (within the meaning of Code Section 424(d)) more than 10% of the
total combined voting power of all classes of stock of the Company or
any Subsidiary or Parent Corporation of the Company shall have a term
in excess of five years.
(c) Exercisability. Incentive Options shall be
exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee. The Committee may
waive any exercise provisions contained in an award or accelerate the
exercisability of the Incentive Option at any time in whole or in part.
Notwithstanding the foregoing, the aggregate Fair Market Value
(determined as of the time the Incentive Option is granted) of the
shares with respect to which Incentive Options (granted under the Plan
or any other plans of the Company or any Subsidiary or Parent
Corporation of the Company) are exercisable for the first time by a
grantee in any calendar year shall not exceed $100,000.
(d) Method of Exercise. Incentive Options may
be exercised in whole or in part at any time during the option period
by giving written notice of exercise to the
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<PAGE> 7
Company specifying the number of shares to be purchased, accompanied by
payment of the purchase price. Payment of the purchase price shall be
made in such manner as the Committee may provide in the award, which
may include (i) cash (including cash equivalents), (ii) delivery of
shares of Common Stock already owned by the Optionee or subject to
awards hereunder, (iii) broker-assisted "cashless exercise," (iv) a
loan from the Company (to the extent permitted by applicable law), (v)
any other manner permitted by law determined by the Committee, or (vi)
any combination of the foregoing.
(e) No Stockholder Rights. An Optionee shall
have neither rights to dividends or other rights of a stockholder with
respect to shares subject to a Stock Option until the Optionee has duly
exercised such Stock Option and become the holder of record of such
shares.
(f) Termination of Employment. Following the
termination of an Employee's employment with the Company or a
Subsidiary or Parent Corporation, the Incentive Option shall be
exercisable to the extent determined by the Committee. The Committee
may provide different post-termination exercise provisions with respect
to termination of employment for different reasons. The Committee shall
have absolute discretion to determine the date and circumstances of any
termination of employment.
(g) Non-transferability. Incentive Options
shall not be transferable by the Optionee, either voluntarily or by
operation of law, other than by will or by the laws of descent and
distribution. During the grantee's lifetime, all Incentive Options
shall be exercisable only by the grantee.
(h) Last Grant Date. No Incentive Option shall
be granted more than ten years from the earlier of the date of adoption
of the Plan by the Board or approval of the Plan by the Company's
stockholders.
7.2 Notwithstanding the foregoing provisions, the Committee
may, with the consent of the Optionee, amend an Incentive Option in a manner
that would cause loss of Incentive Option status, provided the Stock Option as
so amended satisfies the requirements of Section 6.
SECTION 8. TAX WITHHOLDING
8.1 Each Optionee shall, no later than the exercise date of
the respective Stock Option (or other date as of which an amount with respect to
an award first becomes includible in such person's gross income for applicable
tax purposes), pay to the Company, or make arrangements satisfactory to the
Committee regarding payment of, any federal, state, local or other taxes of any
kind required by law to be withheld with respect to the award. The obligations
of the Company under the Plan shall be conditional on such payment or
arrangements. The Company (and, where applicable, any Subsidiary or Parent
Corporation of the Company), shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to the
Optionee.
-7-
<PAGE> 8
8.2 To the extent permitted by the Committee, and subject to
such terms and conditions as the Committee may provide, an Employee may elect to
have the withholding tax obligation, or any additional tax obligation with
respect to any awards hereunder, satisfied by (i) having the Company withhold
shares of Common Stock otherwise deliverable to such person with respect to the
award or (ii) delivering to the Company shares of Common Stock. Alternatively,
the Committee may require that a portion of the shares of Common Stock otherwise
deliverable to an Employee be applied to satisfy the withholding tax obligations
with respect to the award.
SECTION 9. AMENDMENTS AND TERMINATION
9.1 The Plan shall be of unlimited duration. The Board may
discontinue the Plan at any time and may amend it from time to time. No
amendment or discontinuation of the Plan shall adversely affect any award
previously granted without the award holder's written consent. Amendments may be
made without stockholder approval except as required to satisfy applicable laws
or regulations, or the requirements of any stock exchange or automated quotation
system on which the Common Stock is listed or quoted.
9.2 The Committee may amend the terms of any award,
prospectively or retroactively; provided, however, that no amendment shall
impair the rights of the award holder without his or her written consent.
SECTION 10. RESTRICTIONS ON OPTION EXERCISE
10.1 The Company shall have the right to postpone the time of
exercise of any Stock Option for such period as may be required for it to
comply, with reasonable diligence, with any applicable listing requirements of
any national securities exchange or automated quotation system on which the
Common Stock is listed or quoted, or any federal, state or local law.
10.2 If at any time the Committee determines that any
agreement by an Optionee with respect to the disposition of Common Stock to be
received under the Plan is necessary or desirable in order to satisfy any legal
requirement, the respective Stock Option shall not be granted or deemed
exercised until such agreement has been obtained free of any conditions not
acceptable to the Committee.
SECTION 11. GENERAL PROVISIONS
11.1 Nothing in the Plan or in any Stock Option shall confer
upon any Optionee any rights with respect to continuation of his/her employment
by or other Relationship with the Company or any Subsidiary or Parent
Corporation of the Company, or interfere in any way with the rights of the
Company or any Subsidiary or Parent Corporation of the Company to terminate such
employment or other Relationship.
11.2 Nothing set forth in this Plan shall prevent the Board
from adopting other or additional compensation arrangements.
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<PAGE> 9
11.3 The Company will provide financial information to the
Optionees on the same basis as the Company provides such information to its
stockholders.
11.4 No member of the Board or the Committee, nor any officer
or employee of the Company acting on behalf of the Board or the Committee, shall
be personally liable for any action, determination or interpretation taken or
made with respect to the Plan or any award hereunder. The Company shall
indemnify all members of the Board and the Committee and all officers and
employees of the Company acting on their behalf, to the extent permitted by law,
from and against any and all liabilities, costs and expenses incurred by such
persons as a result of any act, or omission to act, in connection with the
performance of such persons' duties, responsibilities and obligations under the
Plan, other than such liabilities, costs and expenses as may result from the
negligence, bad faith, willful misconduct or criminal acts of such persons.
SECTION 12. EFFECTIVE DATE OF PLAN
The Plan shall be effective on June 15, 1997, subject to
approval by the Company's stockholders within 12 months of such date.
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<PAGE> 1
EXHIBIT 10.3
SAXTON INCORPORATED
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
SECTION 1. PURPOSE
The purpose of the Saxton Incorporated Non-Employee Director
Stock Option Plan (the "Plan") is to further the interests of Saxton
Incorporated, a Nevada corporation (the "Company"), and its subsidiaries by
encouraging and enabling the non-employee members of the Company's Board of
Directors to acquire and retain a proprietary interest in the Company by
ownership of its stock through the exercise of non-qualified stock options, and
thereby to encourage such persons to put forth maximum efforts for the growth
and success of the Company.
SECTION 2. DEFINITIONS
Whenever used herein the following terms shall have the
following meanings, respectively:
(a) "Board" shall mean the Board of Directors of
the Company.
(b) "Code" shall mean the Internal Revenue Code
of 1986, as amended, and the regulations promulgated thereunder.
(c) "Common Stock" shall mean the Company's
Common Stock, $0.001 par value.
(d) "Company" shall mean Saxton Incorporated, a
Nevada corporation.
(e) "Disability" shall mean a director's
inability to perform his or her duties as a director by reason of any
medically determinable physical or mental impairment that has lasted or
is expected to last for a continuous period of not less than twelve
months.
(f) "Fair Market Value" of the Common Stock on
any date shall mean the value determined in good faith by the Board, by
formula or otherwise. In the absence of a determination by the Board,
"Fair Market Value" shall mean (i) the mean between the highest and
lowest quoted selling prices of the Common Stock on such date or if
there were no sales on the date in question, the mean of such prices on
the most recent Trading Day before such date; or (ii) if applicable,
the mean between the bona fide bid and asked prices of the Common Stock
on such date, or if there were no bid and asked prices on the
<PAGE> 2
date in question, the mean of such prices on the most recent Trading
Day before such date.
(g) "Non-Employee Director" shall mean a member
of the Board who is not an employee of the Company or any of its
subsidiaries.
(h) "Optionee" shall mean any person who has
been granted an Option under the Plan or who is otherwise entitled to
exercise an Option.
(i) "Plan" shall mean the Saxton Incorporated
Non-Employee Director Stock Option Plan.
(j) "Stock Option" shall mean an option granted
under the Plan.
(k) "Trading Day" shall mean a day on which the
Common Stock is traded on a national securities exchange, on the Nasdaq
National Market or other automated quotation system, or in the
over-the-counter market.
SECTION 3. ADMINISTRATION
3.1 The Plan shall be administered by the Board. The Board
shall have authority to interpret the Plan; to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it may deem
advisable; to interpret the terms of the Plan and any award granted under the
Plan; and to make all other determinations necessary or advisable for the
administration of the Plan. However, the Board shall have no discretion to vary
the amount or terms of awards under the Plan, except as provided in Section 4.3.
3.2 All determinations and interpretations made by the Board
pursuant to the provisions of the Plan shall be final and binding on all
persons, including the Company and Optionees.
SECTION 4. STOCK SUBJECT TO PLAN
4.1 The total number of shares of Common Stock which may be
issued under the Plan shall not exceed 50,000 (subject to adjustment as provided
below). Such shares may consist of authorized but unissued shares or shares that
have been issued and reacquired by the Company.
4.2 To the extent a Stock Option terminates without having
been exercised, or shares received upon exercise of a Stock Option are
forfeited, the shares subject to such award shall again be available for
distribution in connection with future awards under the Plan. Shares of Common
Stock equal in number to the shares surrendered in payment of the option price,
and shares which are withheld in order to satisfy federal, state, or local tax
liability, shall not count against the above limit, and shall again be available
for awards under the Plan.
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<PAGE> 3
4.3 In the event of any merger, reorganization, consolidation,
sale of substantially all assets, recapitalization, stock dividend, stock split,
spin-off, distribution of assets, or other change in corporate structure
affecting the Common Stock such that an adjustment is determined by the Board to
be appropriate under the Plan, then the Board shall, in such a manner as it may
deem equitable, adjust any or all of (i) the aggregate number and kind of shares
reserved for issuance under the Plan, (ii) the number and kind of shares subject
to outstanding awards, (iii) the number and kind of shares with respect to which
Stock Options may be granted to a single Optionee pursuant to Section 6, and
(iv) the exercise price of outstanding Stock Options; provided, however, that no
such adjustment shall increase the aggregate value of any outstanding award. In
addition, upon the dissolution or liquidation of the Company or upon any
reorganization, merger, or consolidation as a result of which the Company is not
the surviving corporation or becomes a subsidiary of another corporation, or
upon a sale of substantially all the assets of the Company, the Board may take
such action as it in its discretion deems appropriate to (i) accelerate the time
when Stock Options may be exercised, (ii) terminate Stock Options at or
immediately prior to the date of any such event, (iii) cash out such Stock
Options at or immediately prior to the date of such event, or (iv) provide for
the assumption of outstanding Stock Options by surviving, successor or
transferee corporations. The Board's determination as to which adjustments shall
be made and the extent thereof shall be final, binding and conclusive.
SECTION 5. ELIGIBILITY
5.1 Only Non-Employee Directors shall be eligible to
participate in the Plan. Non-Employee Directors shall automatically be granted
Options as provided in Section 6.
SECTION 6. GRANT OF STOCK OPTIONS
6.1 Each person who is a Non-Employee Director on the closing
date of the Company's initial public offering shall be granted, as of such date,
and each person who thereafter becomes a Non-Employee Director shall be granted,
on the first Trading Day coincident with or immediately following the date of
his or her election as a Non-Employee Director, a Stock Option to purchase 500
shares of Common Stock.
6.2 On the first Trading Day of every April commencing with
April 1998, every Non-Employee Director then serving on the Board and who has
served for at least three months shall be granted a Stock Option to purchase 500
shares of Common Stock.
6.3 Notwithstanding the foregoing, if, on any date on which
Stock Options are to be granted, the remaining shares reserved for issuance
under the Plan are insufficient to enable each Non-Employee Director to receive
a Stock Option to purchase the applicable number of shares of Common Stock set
forth in Sections 6.1 and 6.2, each Non-Employee Director who is entitled to be
granted a Stock Option pursuant to Section 6.1 or 6.2 shall be granted a Stock
Option to purchase his or her pro rata portion of such remaining shares.
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<PAGE> 4
SECTION 7. TERMS AND CONDITIONS OF STOCK OPTIONS
7.1 All Stock Options granted under the Plan shall have the
following terms and conditions:
(a) Option Price. The option price per share of
Common Stock purchasable under a Stock Option shall be the Fair Market
Value of the Common Stock on the date of grant of the Stock Option.
(b) Option Term. The term of each Stock Option
shall be ten years from the date of grant, subject to earlier
termination in the event of termination of service as a director, as
set forth in paragraphs (f) and (g) below.
(c) Exercisability. Subject to paragraph (i)
below, each Stock Option shall become exercisable in full on the first
anniversary of the date of grant, provided that the Optionee is a
director of the Company on such date, and shall not be exercisable
prior to such date. The Stock Options may be exercised in whole or in
part at any time during the option period, but any partial exercise
shall be for at least 100 shares or, if less, for the remaining shares
subject to the Stock Option.
(d) Method of Exercise. To the extent a Stock
Option has become exercisable, it may be exercised by giving written
notice of exercise to the Company specifying the number of shares to be
purchased, accompanied by payment of the purchase price. Payment of the
purchase price shall be made in cash (including cash equivalents) or by
delivery of shares of Common Stock already owned by the Optionee for at
least six months, by broker-assisted "cashless exercise" if the Company
has a "cashless exercise" program in effect, or by any combination of
the foregoing. Shares delivered in payment of the exercise price shall
be valued at the Fair Market Value of the Common Stock on the date of
exercise .
(e) No Stockholder Rights. An Optionee shall
have neither rights to dividends or other rights of a stockholder with
respect to shares subject to a Stock Option until the Optionee has duly
exercised such Stock Option and become the holder of record of such
shares.
(f) Termination of Service as Director. If an
Optionee's service as a director of the Company is terminated for any
reason other than death or Disability or a Change of Control (as
defined in Section 11.1), such Optionee's Stock Options may be
exercised only within 30 days of such termination of service, and only
to the extent such Stock Options were exercisable on the date of such
termination of service and have not expired prior to the date of
exercise.
(g) Death or Disability of Director. If an
Optionee's service as a director of the Company is terminated by reason
of death or Disability, such Optionee's Stock Options may be exercised
only within one year following such termination of service, and only to
the extent such Stock Options were exercisable on the date of such
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<PAGE> 5
termination of service and have not expired prior to the date of
exercise. In the event of the director's death, the Stock Options may
be exercised by the persons to whom the Optionee's rights under the
Stock Option shall pass by will or by the laws of descent and
distribution.
(h) Non-transferability. Stock Options shall not
be transferable by the Optionee, either voluntarily or by operation of
law, other than by will or by the laws of descent and distribution.
During the grantee's lifetime, all Stock Options shall be exercisable
only by the grantee.
(i) Change of Control. Notwithstanding any other
provision of the Plan, upon the occurrence of a Change of Control (as
defined in Section 11.1) all Stock Options outstanding at the time of
such Change of Control shall become immediately exercisable and shall
remain exercisable for one year after the director's termination of
service (but not beyond the term of the Stock Option).
(j) Tax Status. Stock Options granted under this
Plan shall be "non-qualified" options, and shall not be incentive stock
options as defined in Section 422 of the Internal Revenue Code.
SECTION 8. TAX WITHHOLDING
8.1 Each Optionee shall, no later than the exercise date of
the respective Stock Option (or other date as of which an amount with respect to
an award first becomes includible in such person's gross income for applicable
tax purposes), pay to the Company, or make arrangements satisfactory to the
Company regarding payment of, any federal, state, local or other taxes of any
kind which are then required by law to be withheld with respect to the award.
The obligations of the Company under the Plan shall be conditional on such
payment or arrangements. The Company (and, where applicable, any subsidiary of
the Company), shall, to the extent permitted by law, have the right to deduct
any such taxes from any payment of any kind otherwise due to the Optionee.
SECTION 9. AMENDMENTS AND TERMINATION
9.1 The Plan shall be of unlimited duration. The Board may
discontinue the Plan at any time and may amend it from time to time. No
amendment or discontinuation of the Plan shall adversely affect any award
previously granted without the award holder's written consent. Amendments may be
made without stockholder approval except as required to satisfy applicable laws
or regulations, or the requirements of any stock exchange or automated quotation
system on which the Common Stock is listed or quoted.
SECTION 10. RESTRICTIONS ON OPTION EXERCISE
10.1 The Company shall have the right to postpone the time of
exercise of any Stock Option for such period as may be required for it to
comply, with reasonable diligence, with
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<PAGE> 6
any applicable listing requirements of any national securities exchange or
automated quotation system on which the Common Stock is listed or quoted, or any
federal, state or local law.
10.2 If at any time the Board determines that any agreement by
an Optionee with respect to the disposition of Common Stock to be received under
the Plan is necessary or desirable in order to satisfy any legal requirement,
the respective Stock Option shall not be granted or deemed exercised until such
agreement has been obtained free of any conditions not acceptable to the Board.
SECTION 11. CHANGE OF CONTROL
11.1 A "Change of Control" shall be deemed to have occurred
upon:
(a) the date that any person or group deemed a
person under Sections 3(a)(9) and 13(d)(3) of the Securities Exchange
Act of 1934 (other than the Company and its subsidiaries as determined
immediately prior to that date or an employee benefit plan of the
Company or its subsidiaries) has become the beneficial owner, directly
or indirectly (with beneficial ownership determined as provided in Rule
13d-3, or any successor rule, under the Securities Exchange Act of
1934) of 25% or more of the outstanding securities of the Company
having the right under ordinary circumstances to vote at an election of
the Board;
(b) the date on which a majority of the members
of the Board shall consist of persons other than Current Members (for
these purposes, a "Current Member" shall mean any member of the Board
as of the effective date of the Plan and any successor of a Current
Member whose nomination or election has been approved by a majority of
the Current Members then on the Board);
(c) the date of approval by the stockholders of
the Company of an agreement providing for the merger or consolidation
of the Company with another corporation where (i) the stockholders of
the Company, immediately prior to the merger or consolidation, would
not beneficially own, immediately after the merger or consolidation,
shares entitling such stockholders to 50% or more of all votes (without
consideration of the rights of any class of stock to elect directors by
a separate class vote) to which all stockholders of the corporation
issuing cash or securities in the merger or consolidation would be
entitled in the election of directors, or (ii) where the members of the
Board, immediately prior to the merger or consolidation, would not,
immediately after the merger or consolidation, constitute a majority of
the board of directors of the corporation issuing cash or securities in
the merger; or
(d) the date of approval by the stockholders of
the Company of an agreement providing for the sale or other disposition
of all or substantially all of the assets of the Company.
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<PAGE> 7
SECTION 12. GENERAL PROVISIONS
12.1 Nothing in the Plan or in any Stock Option shall be
deemed to create any obligation on the part of the Company to nominate any
director for re-election to the Board.
12.2 Nothing set forth in this Plan shall prevent the Board
from adopting other or additional compensation arrangements for directors.
12.3 The Company will provide financial information to the
Optionees on the same basis as the Company provides such information to its
stockholders.
12.4 No member of the Board, nor any officer or employee of
the Company acting on behalf of the Board, shall be personally liable for any
action, determination or interpretation taken or made with respect to the Plan
or any award hereunder. The Company shall indemnify all members of the Board and
all officers and employees of the Company acting on their behalf, to the extent
permitted by law, from and against any and all liabilities, costs and expenses
incurred by such persons as a result of any act, or omission to act, in
connection with the performance of such persons' duties, responsibilities and
obligations under the Plan, other than such liabilities, costs and expenses as
may result from the negligence, bad faith, willful misconduct or criminal acts
of such persons.
SECTION 13. EFFECTIVE DATE OF PLAN
The Plan shall be effective on June 15, 1997, subject to
approval by the Company's stockholders within 12 months of such date.
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<PAGE> 1
EXHIBIT 10.4
JIM SAXTON, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
Douglas Hensley Date Option Granted: 12/29/94
- -------------------------------------- --------
Name of Optionee
9416 Low Tide Ct. No. of Shares: 62.5
- ------------------------------------------ ----
Residence Address
Las Vegas, NV 89117
- ------------------------------------------
City, State and Zip Code
THIS AGREEMENT is made as of the date set forth above, between Jim
Saxton, Inc., a Nevada corporation (hereinafter called the "Company"), and the
optionee named above (hereinafter called the "Optionee").
RECITAL
The Board of Directors of the Company has determined that it is to the
advantage and interest of the Company and its stockholders to grant the option
provided for herein to the Optionee as an inducement to remain in the service of
the Company and as an incentive for increased effort during such service. In
consideration of the mutual covenants herein contained, the parties agree as
follows:
1. Grant of Option. The Company hereby grants to the Optionee the right
and option (the "Option") to purchase on the terms and conditions hereinafter
set forth all or any part of an aggregate of 62.5 shares (the "Shares") of the
presently authorized and unissued Common Stock of the Company at the purchase
price of $6,000 per Share as the Optionee may, from time to time, elect. Subject
to Section 4 hereof, the Option shall vest and become exercisable on a
cumulative basis as follows:
(i) On or after December 29, 1995, to and
including December 28, 2004, 12.5 shares;
<PAGE> 2
(ii) On or after December 29, 1996, to and
including December 28, 2004, 18.75 shares;
and
(iii) On or after December 29, 1997, to and
including December 28, 2004, 31.25 shares.
Nothing contained herein shall be construed to limit or restrict the
right of the Company or any of its subsidiaries to terminate the Optionee's
employment or other Relationship at any time, with or without cause, or to
increase or decrease the Optionee's compensation from the rate in existence at
the time the Option is granted. As used herein, the term "Relationship" shall
mean that the Optionee is or has agreed to become an officer, director,
employee, consultant, adviser, independent contractor or agent of the Company or
any subsidiary of the Company.
2. Term of Option. The right to exercise the Option granted hereunder,
to the extent unexercised, shall remain in effect until 5:00 p.m., Pacific Time,
on the date preceding the tenth anniversary of the grant of this Option, unless
sooner terminated in accordance with Section 4 hereof.
3. Method of Exercise. To the extent that the Option has become
exercisable hereunder, the Option may be exercised from time to time by written
notice to the Company stating the number of Shares with respect to which the
Option is being exercised, together with payment in full, in cash or by
certified or cashier's check payable to the order of the Company, of the
purchase price for the number of Shares being exercised. If requested by the
Board of Directors, prior to the delivery of any Shares, the Optionee, or any
other person entitled to exercise the Option, shall supply the Board of
Directors with a representation that the Shares are not being acquired with a
view to distribution and will be sold or otherwise disposed of only in
accordance with applicable federal and state statutes, rules and regulations.
As a condition to the exercise of the Option, in whole or in part, the
Optionee shall pay to the Company, or at the sole discretion of the Board of
Directors make arrangements satisfactory to the Board of Directors regarding
payment of, any federal, state, local or other taxes of any kind required by law
to be withheld with respect to the exercise of the Option. The obligations of
the Company under the Option shall be conditional
2
<PAGE> 3
on such payment or arrangements, and the Company shall, to the extent permitted
by law, have the right to deduct any such taxes from any payment of any kind
otherwise due to the Optionee.
As soon after the notice of exercise as the Company is reasonably able
to comply, the Company shall, without transfer or issue tax to the Optionee or
other person entitled to exercise the Option, deliver to the Optionee or such
other person, at the principal office of the Company or such other place as
shall be mutually acceptable, a certificate or certificates for the Shares being
purchased. Notwithstanding the foregoing, the Company shall have the right to
postpone the time of delivery of the Shares for such period as may be required
for it with reasonable diligence to comply with any applicable listing
requirements of any national securities exchange or any federal, state or local
law.
4. Termination of Option.
(a) If the Optionee ceases to have a Relationship for any
reason other than his death or Permanent Disability as defined in Section 4(c)
hereof, the Option shall terminate 90 days from the date on which such
Relationship terminates unless the Optionee has resumed or initiated a
Relationship and has a Relationship on such date. During such 90-day period, the
Optionee may exercise the Option but only to the extent the Option was
exercisable on the date of termination of his Relationship and provided that the
Option has not expired in accordance with Section 2 or otherwise terminated as
provided herein. A leave of absence approved in writing by the Board of
Directors shall not be deemed a termination of Relationship for purposes of this
Section 4, but the Option may not be exercised during any such leave of absence,
except during the first 90 days thereof.
(b) For purposes hereof, termination of Optionee's
Relationship for reasons other than death or Permanent Disability shall be
deemed to take place upon the earliest to occur of the following: (i) the date
of the Optionee's retirement from employment under the normal retirement
policies of the Company or any subsidiary of the Company; (ii) the date of the
Optionee's retirement from employment with the approval of the Board of
Directors because of disability other than Permanent Disability; (iii) the date
the Optionee receives notice or advice that his employment or other Relationship
is terminated; or (iv) the date the Optionee ceases to render the services which
he was employed,
3
<PAGE> 4
engaged or retained to render to the Company or any subsidiary (absences for
temporary illness, emergencies and vacations or leaves of absence approved in
writing by the Board of Directors excepted). The fact that the Optionee may
receive payment from the Company or any subsidiary of the Company after
termination for vacation pay, for services rendered prior to termination, for
salary in lieu of notice or for other benefits shall not affect the termination
date.
(c) If the Optionee shall die at a time when he is in a
Relationship with the Company or if the Optionee shall cease to have a
Relationship by reason of Permanent Disability, the Option shall terminate one
year after the date of his death or termination of Relationship due to Permanent
Disability, unless by its terms it shall expire before such date or otherwise
terminate as provided herein. In the case of death, the Option may be exercised
by the person or persons to whom the Optionee's rights under the Option shall
pass by will or by the laws of descent and distribution.
In the event of the death or Permanent Disability of the Optionee while
in a Relationship with the Company and while the Option granted hereunder has
not otherwise expired or terminated, any unvested installments of the Option
shall be accelerated as of the date of the Optionee's death or termination of
Relationship due to Permanent Disability. The Option shall thereupon be
exercisable in full without regard to the installment exercise provisions of
Section 1 hereof.
As used herein, the term "Permanent Disability" shall mean termination
of a Relationship with the Company or any subsidiary of the Company with the
consent of the Company or such subsidiary by reason of permanent and total
disability within the meaning of Section 22(e)(3) of the Internal Revenue Code
of 1986, as amended.
5. Adjustments. If there is any change in the capitalization of the
Company affecting in any manner the number or kind of outstanding shares of
Common Stock of the Company, whether by stock dividend, stock split,
reclassification or recapitalization of such stock, or because the Company has
merged or consolidated with one or more other corporations (and provided the
Option does not thereby terminate pursuant to Section 6 hereof), then the number
and kind of Shares then subject to the Option and the price to be paid therefor
shall be appropriately and proportionately adjusted by the Board of Directors,
whose
4
<PAGE> 5
determination as to which adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive.
6. Cessation of Corporate Existence. Upon the dissolution or
liquidation of the Company, the reorganization, merger or consolidation of the
Company with one or more corporations as a result of which the Company is not
the surviving corporation, or the sale of all or substantially all of the assets
of the Company to another corporation or entity, the Board of Directors may take
such action, if any, as it in its discretion may deem appropriate to accelerate
the time within which and the extent to which the Option may be exercised, to
terminate the Option at or prior to the date of any such event or to provide for
the assumption of the Option by surviving, consolidated, successor or transferee
corporations. Any action so taken by the Board of Directors hereunder shall be
final, binding and conclusive.
7. Non-Transferability. The Option is not assignable or
transferable by the Optionee, either voluntarily or by operation of law,
otherwise than by will or by the laws of descent and distribution, and is
exercisable, during the Optionee's lifetime, only by the Optionee.
8. No Stockholder Rights. The Optionee or other person entitled to
exercise the Option shall have no rights or privileges as a stockholder with
respect to any Shares subject hereto until the Optionee or such person has
become the holder of record of such Shares, and no adjustment (except such
adjustments as may be effected pursuant to the provisions of Section 5 hereof)
shall be made for dividends or distributions of rights in respect of such Shares
if the record date is prior to the date on which the Optionee or such person
becomes the holder of record.
9. Investment Representation. The Optionee hereby represents that the
Option and any Shares purchased hereunder are being acquired for the Optionee's
own account and not with a view to or for sale in connection with any
distribution thereof except as may be permitted by the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder.
10. Conditions to Issuance of Shares. THE COMPANY'S OBLIGATION TO ISSUE
SHARES OF ITS COMMON STOCK UPON EXERCISE OF THE OPTION IS EXPRESSLY CONDITIONED
UPON THE COMPLETION BY THE COMPANY OF ANY REGISTRATION OR OTHER QUALIFICATION OF
SUCH SHARES UNDER ANY STATE OR FEDERAL LAW OR RULINGS OR REGULATIONS OF ANY
GOVERNMENT REGULATORY BODY OR THE MAKING OF SUCH INVESTMENT
5
<PAGE> 6
REPRESENTATIONS OR OTHER REPRESENTATIONS AND AGREEMENTS BY THE OPTIONEE OR ANY
PERSON ENTITLED TO EXERCISE THE OPTION IN ORDER TO COMPLY WITH THE REQUIREMENTS
OF ANY EXEMPTION FROM ANY SUCH REGISTRATION OR OTHER QUALIFICATION OF SUCH
SHARES WHICH THE BOARD OF DIRECTORS SHALL, IN ITS SOLE DISCRETION, DEEM
NECESSARY OR ADVISABLE. SUCH REQUIRED REPRESENTATIONS AND AGREEMENTS MAY INCLUDE
REPRESENTATIONS AND AGREEMENTS THAT THE OPTIONEE, OR ANY OTHER PERSON ENTITLED
TO EXERCISE THE OPTION, (A) IS NOT PURCHASING SUCH SHARES FOR DISTRIBUTION AND
(B) AGREES TO HAVE PLACED UPON THE FACE AND REVERSE OF ANY CERTIFICATES FOR SUCH
SHARES A LEGEND SETTING FORTH ANY REPRESENTATIONS AND AGREEMENTS WHICH HAVE BEEN
GIVEN TO THE BOARD OF DIRECTORS OR A REFERENCE THERETO.
11. Satisfaction in Full. The Optionee hereby acknowledges and
agrees that the acceptance of the Option constitutes satisfaction in full of any
and all pre-existing understandings or commitments between the Company and
Optionee relating to Optionee's right to acquire equity securities of the
Company.
EXECUTED as of the 29th day of December, 1994.
JIM SAXTON, INC.
By: /s/ JAMES C. SAXTON
-----------------------------
Name:
Title: President
OPTIONEE
/s/ DOUGLAS W. HENSLEY
-----------------------------
Name:
6
<PAGE> 1
EXHIBIT 10.6
INDEMNIFICATION AGREEMENT
This Indemnification Agreement is made as of ________ __, 1997, by and
between SAXTON INCORPORATED, a Nevada corporation (the "Company"), and
________________________ (the "Indemnitee").
R E C I T A L S
WHEREAS, Article VIII of the Company's Bylaws provides that the
Company shall indemnify the Indemnitee to the full extent permitted by
the laws of the State of Nevada as from time to time in effect; and
WHEREAS, the General Corporation Law of Nevada (the "Corporation
Law") provides that the indemnification authorized by that Law shall not
be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled by law,
agreement or otherwise; and
WHEREAS, in connection with the Company's obligation to indemnify
to the full extent permitted by Nevada law, the Board of Directors has
considered the following, among other factors: (A) it is essential to
the Company to attract and retain as directors and officers the most
capable persons available; (B) the substantial increase in corporate
litigation that may subject directors and officers to litigation costs
and risks and the recent limitations on the availability of directors
and officers liability insurance have made and will make it increasingly
difficult for the Company to attract and retain such persons; and (C)
when obtainable, insurance policies relating to indemnification are
often subject to retentions by the insured, co-insurance requirements,
exclusions and other limitations on coverage; and
WHEREAS, in view of the foregoing and in recognition of the
Indemnitee's need for substantial protection against personal liability
in order to assure the Indemnitee's continued service to the Company in
an effective manner and the Indemnitee's reliance on the provisions of
the Company's Bylaws, and in part to provide the Indemnitee with
specific contractual assurance that the protection promised by the
Bylaws will be available to the Indemnitee (regardless of, among other
things, any amendment to or revocation of the Bylaws or any change in
the composition of the Company's Board of Directors or any acquisition
transaction relating to the Company), the Company wishes to provide in
this Agreement for the indemnification of and the advancing of expenses
to the Indemnitee to the full extent (whether partial or complete)
permitted by law and as set forth in this Agreement, and, to the extent
insurance is maintained, for the continued coverage of the Indemnitee
under the Company's directors' and officers' liability insurance
policies.
<PAGE> 2
NOW, THEREFORE, in consideration of Indemnitee's continued service to
the Company, the Company hereby agrees with the Indemnitee as follows:
SECTION 1. DEFINITIONS.
(a) Change in Control: shall be deemed to have occurred if (i) any
"person" (which term as used in this Section 1(a) and in Section 1(c) shall be
as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of
1934, as amended), other than (y) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company acting in such
capacity, or (z) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock and voting power of the Company, is or becomes the beneficial
owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing 25% or more of the total voting power
represented by the Company's then outstanding Voting Securities, or (ii) there
shall occur a change in the composition of a majority of the Board of Directors
of the Company within a three-year period which change shall not have been
approved by a majority of the persons then serving as directors who were also
directors immediately prior to the commencement of such period, or (iii) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which would
result in the Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into Voting Securities of the surviving entity) at least 75% of the
total voting power represented by the Voting Securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
(iv) the stockholders of the Company approve a plan of complete liquidation of
the Company or an agreement for the sale or disposition by the Company (in one
transaction or a series of transactions) of all or substantially all of the
Company's assets.
(b) Claim: any threatened, pending or completed action, suit or
proceeding, or any inquiry or investigation that the indemnitee in good faith
believes might lead to the institution of any such action, suit or proceeding,
whether civil, criminal, administrative, investigative or other.
(c) Reviewing Party: any appropriate person or body appointed by the
Company's Board of Directors (including a member or members of the Board of
Directors) and, if there has been a Change in Control (other than a Change in
Control which has been approved by a majority of the persons then serving as
directors who were also directors immediately prior to such Change in Control),
the Reviewing Party shall be the special independent counsel referred to in
Section 5 of this Agreement.
(d) Voting Securities: any securities having the right under ordinary
circumstances to vote in an election of the Board of Directors.
-2-
<PAGE> 3
SECTION 2. GENERAL RIGHT TO INDEMNIFICATION. Subject to Sections 3 and
4(d), the Company shall indemnify the Indemnitee in the event that the
Indemnitee was or is a party or is threatened to be made a party to or is
involved or is threatened to be involved (as a witness or otherwise) in or
otherwise requires representation by counsel in connection with any Claim, by
reason of the fact that Indemnitee is or was a director or officer of the
Company or is or was serving at the request of the Company as a director,
trustee, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, and the basis of such Claim is alleged action or
inaction in an official capacity or in any other capacity while serving as such
a director, trustee, officer, employee or agent, and Indemnitee shall be
indemnified and held harmless by the Company to the full extent permitted by the
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment with reference to events occurring prior to the
effective date thereof, only to the extent that such amendment permits the
Company to provide broader indemnification rights than such law permitted the
Company to provide prior to such amendment), against all costs, charges,
expenses, liabilities and losses (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to the Indemnitee when the Indemnitee has
ceased to be a director or officer (or to serve another entity at the request of
the Company) and shall inure to the benefit of the Indemnitee's heirs, personal
representatives and estate.
SECTION 3. REVIEWING PARTY. Notwithstanding the foregoing, the
obligations of the Company under Section 2 of this Agreement shall be subject to
the condition that the Reviewing Party shall not have determined (in a written
opinion, in any case in which the special, independent counsel referred to in
Section 5 of this Agreement is involved) that the Indemnitee would not be
permitted to be indemnified under applicable law.
SECTION 4. RIGHT OF INDEMNITEE TO BRING SUIT. The rights of the
Indemnitee to bring suit against the Company under this Agreement include the
following:
(a) If there has been no determination by the Reviewing Party or if the
Reviewing Party determines that the Indemnitee substantively would not be
permitted to be indemnified in whole or in part under applicable law, the
Indemnitee shall have the right to bring suit seeking an initial determination
by the court or challenging any such determination by the Reviewing Party or any
aspect thereof, and the Company hereby consents to service of process and to
appear in any such proceeding. Any determination by the Reviewing Party
otherwise shall be conclusive and binding on the Company and the Indemnitee.
(b) If a claim for advances under Section 7 is not paid in full by the
Company within 30 days after a written claim has been received by the Company,
the Indemnitee may at any time thereafter bring suit against the Company to
recover the unpaid amount. If successful in whole or in part, the Indemnitee
shall be entitled to be paid also the expense of prosecuting such claim.
-3-
<PAGE> 4
(c) In any action brought by the Indemnitee to enforce a right to
indemnification hereunder, or by the Company to recover payments by the Company
of expenses incurred by the Indemnitee in connection with a Claim in advance of
its final disposition, the burden of proving that the Indemnitee is not entitled
to be indemnified under this Agreement or otherwise shall be on the Company.
Neither the failure of the Company (including its Board of Directors, special,
independent counsel, other Reviewing Party or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the Indemnitee is proper in the circumstances because the Indemnitee has met the
applicable standard of conduct set forth in the Corporation Law, nor an actual
determination by the Company (including its Board of Directors, special,
independent counsel, other Reviewing Party or its stockholders) that the
Indemnitee has not met such applicable standard of conduct, shall create a
presumption that the Indemnitee has not met the applicable standard of conduct
or, in the case of such an action brought by the Indemnitee, be a defense to the
action.
(d) Prior to a Change in Control, notwithstanding any provisions to the
contrary and except as provided in this Section, the Company shall indemnify the
Indemnitee in connection with a proceeding (or part thereof) initiated by the
Indemnitee against the Company only if such proceeding (or part thereof) was
authorized prior to its initiation by a majority of the disinterested members of
the Board of Directors of the Company or the Indemnitee is successful on the
merits in such proceeding. The rights to indemnification confirmed by this
paragraph shall include the right to be paid by the Company any expenses
incurred in defending such proceeding in advance of its final disposition.
SECTION 5. CHANGE IN CONTROL. The Company agrees that if there is a
Change in Control of the Company (other than a Change in Control which has been
approved by a majority of the persons then serving as directors who were also
directors immediately prior to such Change in Control) then with respect to all
matters thereafter arising concerning the rights of the Indemnitee to indemnity
payments and advances under this Agreement, the Company shall seek legal advice
only from special, independent counsel selected by the Indemnitee and approved
by the Company (which approval shall not be unreasonably withheld), and who has
not otherwise performed services within the last 5 years for the Company or any
"person" referred to in clause (i) of Section 1(a) hereof or "other corporation"
referred to in clause (iii) of that Section (other than in connection with such
matters) or for the Indemnitee. Such counsel, among other things, shall render
its written opinion to the Company and the Indemnitee as to whether and to what
extent the Indemnitee would be permitted to be indemnified under applicable law.
The Company agrees to provide full cooperation to and to pay the reasonable fees
of the special, independent counsel referred to above and to indemnify fully
such counsel against any and all expenses (including attorneys' fees), claims,
liabilities and damages arising out of or relating to this Agreement or its
engagement pursuant hereto.
SECTION 6. INDEMNIFICATION FOR COSTS, CHARGES AND EXPENSES OF SUCCESSFUL
PARTY. Notwithstanding the other provisions of this Agreement, to the extent
that the Indemnitee has been successful on the merits or otherwise, including,
without limitation, the dismissal of an action without prejudice, in defense of
any Claim covered by this
-4-
<PAGE> 5
Agreement, or in defense of any claim, issue or matter therein, the Indemnitee
shall be indemnified against all costs, charges and expenses, including
attorneys' fees, actually and reasonably incurred by the Indemnitee or on
Indemnitee's behalf in connection therewith.
SECTION 7. ADVANCES. Expenses incurred by the Indemnitee in defending
any Claim, including attorneys' fees, judgments, fines and amounts paid in
settlements must be paid by the Company in advance of the final disposition of
the Claim upon delivery to the Company of an undertaking, by or on behalf of the
Indemnitee, to repay all amounts so advanced if it shall ultimately be
determined that the Indemnitee is not entitled to be indemnified by the Company
under Nevada law.
SECTION 8. PROCEDURE FOR INDEMNIFICATION. After the final disposition of
any Claim covered by this Agreement, the Indemnitee shall send to the Company a
written request for any indemnification sought under this Agreement. No later
than 30 days following receipt by the Company of such request, the Company shall
deliver such request to an appropriate Reviewing Party for its review pursuant
to this Agreement and shall cause the indemnification provided hereunder to be
authorized and paid, so long as during such 30-day period, the Reviewing Party
has not determined that indemnification would not be permitted under applicable
law. The Indemnitee and Indemnitee's counsel shall be given an opportunity to be
heard and to present evidence on his behalf in connection with consideration by
the Reviewing Party.
SECTION 9. INSURANCE. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance, the
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any director
or officer of the Company.
SECTION 10. NOTICE TO COMPANY. The Indemnitee must provide prompt
written notice to the Company of any Claim in connection with which the
Indemnitee may assert a right to be indemnified hereunder; however, failure to
provide such notice shall not be construed as a waiver of any right of the
Indemnitee to an advance or indemnification hereunder.
SECTION 11. OTHER RIGHTS; CONTINUATION OF RIGHT TO INDEMNIFICATION. The
indemnification and advances provided by this Agreement shall not be deemed
exclusive of any other rights to which the Indemnitee seeking indemnification
may be entitled under any law (common or statutory), provision of the Company's
Articles of Incorporation or Bylaws, vote of stockholders or disinterested
directors, or otherwise, both as to action in the Indemnitee's official capacity
and as to action in another capacity while holding office or while employed by
or acting as agent for the Company, and shall continue as to a person who has
ceased to be a director or officer, and shall inure to the benefit of the
estate, heirs, executors and administrators of the Indemnitee.
SECTION 12. SUBROGATION. In the event of payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery
-5-
<PAGE> 6
of the Indemnitee, who shall execute all papers required and shall do everything
that may be necessary to secure such rights, including the execution of such
documents necessary to enable the Company effectively to bring suit to enforce
such rights.
SECTION 13. NO DUPLICATION OF PAYMENTS. The Company shall not be liable
under this Agreement to make any payment in connection with any claim made
against the Indemnitee to the extent the Indemnitee has otherwise actually
received payment (under any insurance policy or otherwise) of the amounts
otherwise indemnifiable hereunder.
SECTION 14. AMENDMENTS. This Agreement may not be amended without the
agreement in writing of the Company and the Indemnitee.
SECTION 15. SAVINGS CLAUSE. If this Agreement or any portion hereof
shall be deemed invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not in any way be affected or impaired thereby, and the Company shall
nevertheless indemnify the Indemnitee as to costs, charges and expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
with respect to any Claim to the full extent permitted by any applicable portion
of this Agreement that shall not have been invalidated and to the full extent
permitted by applicable law.
SECTION 16. SURVIVAL CLAUSE. The Company acknowledges that in continuing
to provide services to the Company, the Indemnitee is relying on this Agreement.
Accordingly, the Company agrees that its obligations hereunder will survive (a)
any actual or purported termination of this Agreement by the Company or its
successors or assigns whether by operation of law or otherwise, and (b)
termination of the Indemnitee's services to the Company, whether such services
were terminated by the Company or the Indemnitee, with respect to any Claim,
whether or not such Claim is made, threatened or commenced before or after the
actual purported termination of this Agreement or the termination of the
Indemnitee's services to the Company.
SECTION 17. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns, including any direct or indirect successor by
purchase, merger, consolidation or otherwise to all or substantially all of the
business and/or assets of the Company, spouses, heirs, and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by written
agreement in form and substance satisfactory to the Indemnitee, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform if no such succession had
taken place.
-6-
<PAGE> 7
SECTION 18. GOVERNING LAW. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of Nevada (without giving effect to the provisions thereof relating to
conflicts of law).
IN WITNESS WHEREOF, this Agreement has been executed by the parties
thereto, and in the case of the Company, by a duly authorized officer thereof on
its behalf.
SAXTON INCORPORATED
By:____________________________
James C. Saxton, President
Attest:
_________________________
Corporate Secretary
________________________________
-7-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF SAXTON INCORPORATED1,2
<TABLE>
<CAPTION>
STATE OF
NAME ORGANIZATION BUSINESS NAMES
---- ------------ --------------
<S> <C> <C>
Big Tyme Food Marts, Inc. Nevada
Summit Hills, Inc. Nevada Perennial Homes
Nevada Housing Opportunities Manager Nevada
Nevada Housing Opportunities LLC Nevada
Lake Tonopah Limited Liability Company Nevada
Tonopah Manager Inc. Nevada
Hillcrest, Inc. Nevada Perennial Homes
Real Net Commercial Brokerage Nevada
Taylor Ranch Apartments Limited Partnership Nevada
Meadow Mesa Apartments Limited Partnership Nevada
</TABLE>
- --------
1 Includes only those subsidiaries which will exist after the
consummation of the reorganization described in the section of the
Company's prospectus, included in its Form S-1 Registration Statement
No. 333-23927, entitled "The Reorganization."
2 Saxton Incorporated uses the following business names in addition to
those used by its subsidiaries: Saratoga Land and Development Compnay
and Walden Building Services.
<PAGE> 1
Exhibit 23.1
The Board of Directors and Stockholders
Saxton Incorporated:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
- -------------------------
Las Vegas, Nevada
June 4, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (i) THE
AUDITED COMBINED FINANCIAL STATEMENTS OF SAXTON INCORPORATED AT DECEMBER 31,
1996 AND FOR THE YEAR THEN ENDED AND (ii) THE UNAUDITED COMBINED FINANCIAL
STATEMENTS OF SAXTON INCORPORATED AT MARCH 31, 1997 AND FOR THE THREE MONTHS
THEN ENDED. THIS SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS INCLUDED IN AMENDMENT NO. 1 TO FORM S-1 REGISTRATION
STATEMENT OF SAXTON INCORPORATED, REGISTRATION NO. 333-23927.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 1,590 1,088
<SECURITIES> 0 0
<RECEIVABLES> 18,338 19,511
<ALLOWANCES> 369 369
<INVENTORY> 7,123 7,481
<CURRENT-ASSETS> 0 0
<PP&E> 36,271 33,907
<DEPRECIATION> 3,155 3,003
<TOTAL-ASSETS> 67,957 66,654
<CURRENT-LIABILITIES> 0 0
<BONDS> 41,633 41,651
0 0
0 0
<COMMON> 5 5
<OTHER-SE> 6,286 6,659
<TOTAL-LIABILITY-AND-EQUITY> 67,957 66,654
<SALES> 60,146 15,617
<TOTAL-REVENUES> 64,068 16,540
<CGS> 47,489 12,153
<TOTAL-COSTS> 48,273 12,380
<OTHER-EXPENSES> 4,547 1,080
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,820 796
<INCOME-PRETAX> 8,500 2,341
<INCOME-TAX> 2,517 497
<INCOME-CONTINUING> 5,983 1,844
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,983 1,844
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE> 1
EXHIBIT 99.2
June 5, 1997
James C. Saxton
Chairman of the Board of Directors
Saxton Incorporated
5440 West Sahara Avenue, Third Floor
Las Vegas, Nevada 89102
Dear Mr. Saxton:
I hereby consent to being named in the Registration Statement of Saxton
Incorporated as a proposed director of that company.
Sincerely,
/s/ Paul Eisenberg
------------------
Paul Eisenberg
