<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1997
REGISTRATION NO. 333-23927
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SAXTON INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
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:
<TABLE>
<S> <C>
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.
================================================================================
<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 24, 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.
<TABLE>
<S> <C> <C> <C>
=====================================================================================================
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 Common Stock will be made in New York, New York on
or about , 1997.
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 development 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 strives to deliver 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 subcontractors, including
concrete,
3
<PAGE> 5
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
<TABLE>
<S> <C>
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
RISK FACTORS
Prospective purchasers should carefully consider the matters discussed
under "Risk Factors" in conjunction with the other information contained in this
Prospectus before purchasing shares of Common Stock in the Offering. These
matters include, among others, the following: concentration of the Company's
business in Las Vegas, Nevada, as a result of which adverse local conditions
could have a substantial effect on the Company; risks associated with the
development and operation of real property, including liability for personal
injury or property damage, losses under fixed-price contracts, inability to sell
properties due to interest rate levels or unavailability of mortgage financing
for purchasers, the potential of uninsured loss, potential liability for
environmental matters, competition and other matters; risks of indebtedness,
including increases in interest rates on variable rate loans and inability to
refinance indebtedness upon maturity; inability to obtain future financing to
satisfy its capital requirements; dependence on James C. Saxton and other key
personnel of the Company; and control of the Company by Mr. Saxton and members
of his immediate family who will own an aggregate of approximately 70% of the
outstanding shares of Common Stock after the Offering.
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.
<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):
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
<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):
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
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, 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
-----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(8) ADJUSTED(9)
------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
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.
7
<PAGE> 9
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.
Potential Losses Under 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.
Increases in Interest Rates; Unavailability of 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.
8
<PAGE> 10
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 ("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
9
<PAGE> 11
circumstances cause a reduction in income from the investment. If the Company's
portfolio 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.
RISKS OF INDEBTEDNESS
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.
RISK OF INABILITY TO OBTAIN FUTURE FINANCING
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
10
<PAGE> 12
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.
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
11
<PAGE> 13
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 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."
RISKS AND COSTS OF 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
12
<PAGE> 14
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.
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, 4,933,254
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
13
<PAGE> 15
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, 410,888 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 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 and $1.6 million
represents indebtedness to other related parties, as set forth in the table
below; (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
the principal 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.
14
<PAGE> 16
The following table sets forth certain additional information with respect
to the indebtedness anticipated to be repaid with a portion of the net proceeds
of the Offering. The Company reserves the right to make such adjustments or
substitutions in the non-related party indebtedness to be repaid as it deems
appropriate.
<TABLE>
<CAPTION>
APPROXIMATE INTEREST
PRINCIPAL BALANCE RATE
----------------- --------
<S> <C> <C>
Loans From Stockholders:
James C. Saxton.................................. $ 695,440 0%
James C. Saxton(1)............................... 931,310 0%
Dorothy J. Saxton(1)............................. 1,199,240 0%
Michele Saxton-Pori(1)........................... 180,440 0%
Lee-Ann Saxton(1)................................ 183,460 0%
James C. Saxton II(1)............................ 204,740 0%
Loans From Other Related Parties:
Dorothy Kidd(2).................................. 770,000 12.0%
Paul Eisenberg(3)................................ 867,950 12.0%
Loans From Non-Related Parties:
U.S. Bank........................................ 600,000 7.2%
U.S. Bank........................................ 200,000 6.2%
U.S. Bank........................................ 20,000 5.9%
Private Lender(4)................................ 2,052,740 24.0%
Private Lender................................... 180,000 18.0%
</TABLE>
- ---------------
(1) Represents the portion of the aggregate $2.7 million to be paid to the
identified principal stockholder in partial satisfaction of the Subordinated
Dividend Notes. See "The Reorganization" and "Certain Relationships and
Related Transactions" for additional information regarding this
indebtedness.
(2) Dorothy Kidd is James C. Saxton's sister. See "Certain Relationships and
Related Transactions" for additional information regarding this
indebtedness.
(3) Paul Eisenberg is a proposed director of the Company. See "Certain
Relationships and Related Transactions" for additional information regarding
this indebtedness.
(4) Represents four loans from related private lenders. Each of the four loans
bears interest at 24% per annum.
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."
15
<PAGE> 17
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 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 or other ownership 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. The portion of the book value of the properties being contributed
by the Contributing Stockholders attributable to their partnership interests was
approximately $10.6 million at March 31, 1997.
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, as an additional capital contribution, (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
16
<PAGE> 18
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. The portion of book value of the properties
attributable to the partnership interests being contributed by Mr. Saxton was
approximately $520,000 at March 31, 1997.
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.
Benefits to the Contributing Stockholders. In addition to the consideration
to be received by the Contributing Stockholders in satisfaction of the
Subordinated Dividend Notes and other indebtedness owed to them by the Company
as described above, the Contributing Stockholders will realize the following
benefits in connection with the Reorganization: an immediate increase of $1.84
in the net tangible book value per share of their Common Stock; the assumption
or repayment by the Company, and release from liability of the Contributing
Stockholders, of certain indebtedness secured by property owned by the Company;
and increased liquidity in their investment in the Company; and the opportunity
to further expand the Company as a result of its improved ability to access both
debt and equity capital.
Securities Laws Matters. The issuance of Common Stock and Saxton Warrants
(the "Reorganization Securities") to the Contributing Stockholders by the
Company in partial satisfaction of the Subordinated Dividend Notes has not been
registered under the Securities Act in reliance upon the exemptions from
registration provided by Sections 3(a)(11) and 4(2) of the Securities Act for
"any security which is . . . offered and sold only to persons resident within a
single State or Territory, where the issuer of such security is . . . a
corporation incorporated by, and doing business within, such State or Territory"
and "transactions by an issuer not involving any public offering,"
17
<PAGE> 19
respectively. The issuance of the Reorganization Securities to the Contributing
Stockholders was structured and conducted to comply with the safe harbor
provisions of Rules 147 and 506 promulgated under Sections 3(a)(11) and 4(2) of
the Securities Act, respectively. A question may arise under the federal
securities laws as to whether the issuance of the Reorganization Securities
should be integrated with the Offering of the Common Stock with the effect that
the issuance of the Reorganization Securities should have been registered under
the Securities Act. If it were ultimately determined that the issuance of the
Reorganization Securities should have been registered under the Securities Act,
a holder of Reorganization Securities may have the right under the federal
securities laws to rescind its investment. The Company has obtained an opinion
from its legal counsel to the effect that the issuance of the Reorganization
Securities (including the offer and sale thereof) in connection with the
Reorganization constitutes a transaction that is exempt from the registration
requirements of the Securities Act and is not required to be integrated with the
Offering. The Contributing Stockholders have agreed with the Company that (i)
they will waive any rescission rights they may have with respect to the
acquisition of the Reorganization Securities and (ii) if it is determined that
such waiver is unenforceable under the federal securities laws (including
Section 14 of the Securities Act which provides, in substance, that any
provisions binding any person acquiring a security to waive compliance with the
Securities Act shall be void), they will recontribute any proceeds received by
them as a result of any action to rescind the acquisition of the Reorganization
Securities. Based on, among other things, the opinion of its counsel, the
agreement of the Contributing Stockholders not to seek rescission and/or to
recontribute any rescission proceeds to the Company and the Company's belief
that no Contributing Stockholder is likely to seek rescission, the Company does
not believe that it has any material liability under federal securities laws as
a result of the issuance of the Reorganization Securities without registration
under the Securities Act.
18
<PAGE> 20
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>
19
<PAGE> 21
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."
20
<PAGE> 22
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
<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>
21
<PAGE> 23
<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.
22
<PAGE> 24
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 development 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.
23
<PAGE> 25
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.
24
<PAGE> 26
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.
25
<PAGE> 27
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.
26
<PAGE> 28
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.
27
<PAGE> 29
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
28
<PAGE> 30
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 $8.5 million in the aggregate, substantially all of
which will be financed with construction loans. 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.
29
<PAGE> 31
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,
30
<PAGE> 32
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.
31
<PAGE> 33
BUSINESS
GENERAL
Saxton Incorporated is an integrated real estate development 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
32
<PAGE> 34
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
33
<PAGE> 35
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.
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 made Summit Hills one of the most affordable newly
constructed single-family detached home
34
<PAGE> 36
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 estimated cost to develop
the Hillcrest development is approximately $6.3 million.
The Company is currently in the initial stages of design and development of
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 Company is unable to make a meaningful estimate of actual
project development costs for Taylor Ranch, Madre Mesa, Silver Springs and
Sunrise Ridge.
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
35
<PAGE> 37
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.
36
<PAGE> 38
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 estimated aggregate cost to construct such
projects is approximately $8.5 million, substantially all of which will be
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."
37
<PAGE> 39
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, representing an aggregate contract amount of
approximately $59.0 million, 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.
38
<PAGE> 40
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
39
<PAGE> 41
Code (the "Housing Tax Credit"). The Company has completed the construction of
three Tax Credit Projects. 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. Through April 30, 1997, the Company had
received aggregate distributions of net cash from operations of the Tax Credit
Partnerships of approximately $24,000. Since none of the Company's Tax Credit
Partnerships has sold its Tax Credit Project, the Company has received no
distributions of sale proceeds. There can be no assurance that the Company will
receive any distribution of sales proceeds upon the eventual sale of the Tax
Credit Projects. 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.
40
<PAGE> 42
The Company has completed the construction of 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, estimated at March 31, 1997.
(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>
41
<PAGE> 43
<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. Other than
Turtle Stop and Las Vegas Sun which are currently owned by the Company, all
properties included on the table will be acquired by the Company in the
Reorganization concurrently with the closing of the Offering. See "The
Reorganization."
(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) At May 15, 1997, the tenant was indebted to the Company for delinquent rent
in the amount of approximately $160,680. 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. Based on leases in effect at
March 31, 1997, leases representing approximately 8.7% 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
42
<PAGE> 44
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 sales contracts to control land
whenever possible and seeks to purchase land only for specific developments.
43
<PAGE> 45
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%
44
<PAGE> 46
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>
<S> <C> <C> <C> <C>
1987 1988 1989 1990 1991
616650 661690 708750 770280 820840
</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>
<S> <C> <C> <C> <C>
1987 1988 1989 1990 1991
348640 379485 416647 456400 471094
</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
45
<PAGE> 47
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>
<S> <C> <C> <C> <C>
1987 1988 1989 1990 1991
5630 7850 11024 11177 12120
</TABLE>
Source: Historical Perspective of Southern Nevada, Spring 1996, by
the Center for Business and Economic Research, UNLV
46
<PAGE> 48
CLARK COUNTY
SINGLE FAMILY HOME MEDIAN SALES
1987-1996
<TABLE>
<S> <C> <C> <C> <C>
1987 1988 1989 1990 1991
77000 78800 85700 93000 101400
</TABLE>
Source: U.S. Housing Markets
CLARK COUNTY
SINGLE FAMILY HOME UNIT SALES
1992-1996
<TABLE>
<S> <C> <C> <C> <C>
1992 1993 1994 1995 1996
8636 9634 11735 17921 19799
</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
47
<PAGE> 49
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>
<S> <C> <C> <C> <C>
1992 1993 1994 1995 1996
93.9 95 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.
48
<PAGE> 50
CLARK COUNTY
COMMERCIAL BUILDING PERMITS
1992-1996
<TABLE>
<S> <C> <C> <C> <C>
1992 1993 1994 1995 1996
421 596 642 809 1435
</TABLE>
Source: Las Vegas Perspective, citing building department
reports.
CLARK COUNTY
TOTAL COMMERCIAL BUILDING VALUATION (MILLIONS)
1992-1996
<TABLE>
<S> <C> <C> <C> <C>
1992 1993 1994 1995 1996
221.6 273.7 321.4 608 810.2
</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.
49
<PAGE> 51
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.
50
<PAGE> 52
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
51
<PAGE> 53
"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."
52
<PAGE> 54
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.
53
<PAGE> 55
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
54
<PAGE> 56
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. Mikell 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.
55
<PAGE> 57
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)
Jeffrey A. Pori, Vice President of Marketing and
Commercial Development............................. 39,080 -- 129,255(3)
</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.
(3) Represents amounts paid to Mr. Pori with respect to real estate brokerage
services performed for the Company in 1996 by RealNet Commercial Brokerage,
a licensed real estate broker owned by Mr. Pori and James C. Saxton until
May 1997 when it became a subsidiary of the Company. See "Certain
Relationships and Related Transactions."
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
Jeffrey A. Pori............ -- -- 2,045 3,067 6,953 10,428
</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
56
<PAGE> 58
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 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 and options to purchase 5,112 shares to
Jeffrey A. Pori. 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
57
<PAGE> 59
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.
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 251,800 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 and options to
purchase 25,000 shares of Common Stock to be granted to Jeffrey A. Pori. Options
to purchase an aggregate of 55,000 additional shares are anticipated to be
granted to other executive officers of the Company, including Messrs. Hechter,
Adams 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
58
<PAGE> 60
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.
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."
59
<PAGE> 61
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 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
60
<PAGE> 62
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.
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 Turtle Stop convenience
store ("Turtle Stop") 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. Under the terms of the agreement, either the Company or L'MEDD had
the right to terminate the agreement if permanent financing was not obtained. To
date, financing has not been obtained, the sale has not been consummated and, on
June 18, 1997, the Company advised L'MEDD that it was terminating the agreement.
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.
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 $279,600, of which $160,680 represented delinquent rent and
$118,920 represented amounts advanced by the Company to OMG for operating
capital. If the Company and L'MEDD are unable to enter into a purchase and sale
agreement, the Company intends to operate the Turtle Stop until a purchaser of
the property is located. While there can be no assurance that the Company will
be able to operate the Turtle Stop profitably, management believes that neither
the property nor its operations are material to the Company as a whole. The
Company has orally agreed with L'MEDD that it will hold the Turtle Stop
available for purchase by L'MEDD until July 31, 1997 in order to permit L'MEDD
to obtain a commitment for financing for the purchase of the Turtle Stop. In the
event that by such date the Company does not receive satisfactory evidence of a
commitment for financing and has not entered into a mutually satisfactory
purchase and sale agreement for the Turtle Stop with L'MEDD, the Company intends
to pursue its legal remedies to evict OMG from the premises and to collect the
delinquent rent and advances. The Company has assisted in the operation of
Turtle Stop by maintaining the store books and records and providing a Company
employee to train on-site personnel and oversee store operations, for no
compensation.
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
61
<PAGE> 63
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 approximately $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 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."
62
<PAGE> 64
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(6)................ 535,152 9.9% 7.0%
Lee-Ann Saxton(7)..................... 531,378 9.9% 7.0%
James C. Saxton II.................... 530,000 9.9% 7.0%
Douglas W. Hensley(7)(8)(9)........... 33,664 * *
Marc S. Hechter(8)(9)................. 10,225 * *
Timothy J. Adams(7)(9)................ -- -- --
Paul Eisenberg(9)..................... -- -- --
Bernard J. Mikell, Jr.(9)............. -- -- --
Robert L. Seale(9).................... -- -- --
Directors, proposed directors and
executive officers as a group (11
persons)(10)........................ 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 may each be deemed to beneficially own the
shares owned by the other.
(6) Includes 2,045 shares which may be acquired by Ms. Saxton-Pori's husband,
Jeffrey A. Pori, upon exercise of options exercisable within 60 days and
1,496 shares allocated to the account of Mr. Pori under the Company's ESOP.
Ms. Saxton-Pori and Mr. Pori each disclaim beneficial ownership of the
shares owned by the other.
(7) 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.
(8) Represents shares which may be acquired upon exercise of options
exercisable within 60 days.
(9) 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.
(10) Includes 1,855,000 shares owned by Dorothy J. Saxton, as to which James C.
Saxton may be deemed to beneficially own, 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.
63
<PAGE> 65
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 4,959,884 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
64
<PAGE> 66
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.
65
<PAGE> 67
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 4,933,254 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 26,632 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
66
<PAGE> 68
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."
67
<PAGE> 69
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.
At the request of the Company, the Underwriters have reserved up to 40,000
shares of Common Stock for sale at the initial public offering price to James C.
Saxton and his wife. The number of shares available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares not so purchased will be offered by the
68
<PAGE> 70
Underwriters to the general public on the same basis as the other shares offered
hereby. Except as restricted by applicable securities laws, and subject to their
agreement not to offer, sell or otherwise dispose of any equity securities of
the Company for a period of 180 days after the date of this Prospectus, reserved
shares purchased by Mr. and Mrs. Saxton will be available for resale following
the Offering.
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.
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.
69
<PAGE> 71
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.
70
<PAGE> 72
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Unaudited Pro Forma Condensed Consolidated Financial Statements...................... F-1
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> 73
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 or other ownership 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> 74
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> 75
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> 76
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> 77
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> 78
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
(a) Reflects the purchase for cash of partnership or other ownership interests of
unaffiliated parties 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> 79
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
================================================================================
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....................... 15
The Reorganization.................... 16
Dilution.............................. 19
Capitalization........................ 20
Selected Combined and Pro Forma
Financial and Operating
Information......................... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 32
Management............................ 54
Certain Relationships and Related
Transactions........................ 60
Principal Stockholders................ 63
Description of Capital Stock.......... 64
Shares Eligible for Future Sale....... 66
Underwriting.......................... 68
Legal Matters......................... 69
Experts............................... 69
Additional Information................ 70
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT 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
LOGO
LOGO
, 1997
======================================================
<PAGE> 103
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> 104
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> 105
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> 106
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 23, 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 23rd 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> 107
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 Asset Contribution and Reorganization Agreement(3)
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(3)
4.2 Form of Representatives' Warrants(3)
4.3 Form of Saxton Warrants(2)
5 Opinion of Hughes Hubbard & Reed LLP(2)
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(2)
10.2 Management Stock Option Incentive Plan(2)
10.3 Non-Employee Director Stock Option Plan(2)
10.4 1994 Stock Option Agreement between the Company and Douglas W. Hensley(2)
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(2)
10.7 Form of Indemnification Agreement regarding liability on Company loans between the
Company and James C. Saxton and Dorothy J. Saxton (included as Exhibit I to Exhibit
2.2)
10.8 1994 Stock Option Agreement between the Company and Jeffrey A. Pori(3)
21.1 List of subsidiaries of the Company(2)
23.1 Consent of KPMG Peat Marwick LLP(2)
23.2 Consent of Hughes Hubbard & Reed LLP (included in Exhibit 5)(2)
24 Power of Attorney (included on page II-4)(1)
27 Financial Data Schedule(2)
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(2)
</TABLE>
- ---------------
(1) Previously filed with Registration Statement filed on March 25, 1997.
(2) Previously filed with Amendment No. 1 to Registration Statement filed on
June 9, 1997.
(3) Previously filed with Amendment No. 2 to Registration Statement filed on
June 19, 1997.
