<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number: 0-22299
SAXTON INCORPORATED
(Exact name of registrant as specified in its charter)
NEVADA 88-0223654
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5440 West Sahara Ave., Third Floor
Las Vegas, Nevada 89146
(702) 221-1111
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of common stock, par value $.001 per share, outstanding as
of November 1, 1998 was 7,661,422.
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
FORM 10-Q
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and September 30, 1998 . . . . . . . . . . 3
Condensed Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1997 and 1998. . . 4
Condensed Consolidated Statement of Stockholders'
Equity - Nine Months Ended September 30, 1998. . . . . . . . 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1998. . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . 19
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 19
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
INDEX TO EXHIBITS and EXHIBITS . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
Real estate properties:
Operating properties, net of accumulated depreciation (note 3) . . . . $ 25,933 $ 27,513
Properties under development . . . . . . . . . . . . . . . . . . . . . 21,598 47,955
Land held for future development or sale . . . . . . . . . . . . . . . 3,767 1,860
---------- ---------
Total real estate properties . . . . . . . . . . . . . . . 51,298 77,328
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . 1,110 1,399
Due from Tax Credit Partnerships . . . . . . . . . . . . . . . . . . . . . 17,397 35,774
Construction contracts receivable, net of allowance for doubtful
accounts of $398 at December 31, 1997 and $401 at September 30, 1998 . 3,043 3,642
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 4) . . . . . . . . . . . . . . . . . . . . 4,115 2,095
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,884 1,162
Investments in joint ventures. . . . . . . . . . . . . . . . . . . . . . . 3,602 3,585
Due from related parties (notes 1 and 6) . . . . . . . . . . . . . . . . . 386 104
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . 6,285 9,014
---------- ---------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 90,120 $ 134,103
---------- ---------
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . $ 11,376 $ 17,585
Tenant deposits and other liabilities. . . . . . . . . . . . . . . . . 2,860 6,771
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 4) . . . . . . . . . . . . . . . . . . 1,791 1,333
Notes payable (notes 1 and 5). . . . . . . . . . . . . . . . . . . . . 40,610 70,577
Notes payable to related parties (note 6). . . . . . . . . . . . . . . 2,695 2,430
Capital lease obligations. . . . . . . . . . . . . . . . . . . . . . . 1,144 1,072
---------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 60,476 99,768
---------- ---------
Stockholders' equity:
Common stock, $.001 par value. Authorized 50,000,000 shares;
issued and outstanding 7,619,142 shares at December 31, 1997 and
7,661,422 shares at September 30, 1998 . . . . . . . . . . . . . . 8 8
Preferred stock, $.001 par value. Authorized 5,000,000 shares;
no shares issued and outstanding . . . . . . . . . . . . . . . . . - -
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 20,670 21,008
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,966 13,319
---------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . . 29,644 34,335
Commitments and contingencies (note 9) . . . . . . . . . . . . . . . . . . ---------- ---------
Total liabilities and stockholders' equity . . . . . . . . $ 90,120 $ 134,103
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -----------------------
1997 1998 1997 1998
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Construction revenue, including Tax Credit
Partnership construction revenue of $3,770 and $11,254
for the three months ended September 30, 1997 and 1998,
respectively and $16,876 and $25,389 for the nine months
ended September 30, 1997 and 1998, respectively. . . . . . . . . . . . . . $ 7,561 $ 11,777 $ 26,463 $ 30,909
Sales of homes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,052 6,110 8,916 15,070
Sales of commercial properties . . . . . . . . . . . . . . . . . . . . . . . . - - 5,505 3,819
Rental revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 987 802 2,725 2,569
Other revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530 218 1,250 1,209
---------- ---------- ---------- ---------
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . . . 12,130 18,907 44,859 53,576
---------- ---------- ---------- ---------
COST OF REVENUE:
Cost of construction, including Tax Credit Partnership
cost of construction of $3,321 and $8,735 for the three
months ended September 30, 1997 and 1998, respectively and
$13,304 and $18,785 for the nine months ended September 30,
1997 and 1998, respectively. . . . . . . . . . . . . . . . . . . . . . . . 6,827 9,469 22,574 24,236
Cost of homes sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,750 5,269 7,628 12,805
Cost of commercial properties sold . . . . . . . . . . . . . . . . . . . . . . - - 3,528 3,500
Rental operating cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 109 516 622
---------- ---------- ---------- ---------
Total cost of revenue. . . . . . . . . . . . . . . . . . . . . . 9,677 14,847 34,246 41,163
---------- ---------- ---------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,453 4,060 10,613 12,413
---------- ---------- ---------- ---------
General and administrative expenses. . . . . . . . . . . . . . . . . . . . . . 783 1,164 1,876 3,600
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . 360 431 983 1,197
---------- ---------- ---------- ---------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . 1,310 2,465 7,754 7,616
---------- ---------- ---------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net of interest income of $698 and $201
for the three months ended September 30, 1997 and 1998,
respectively and $792 and $764 for the nine months ended
September 30, 1997 and 1998, respectively. . . . . . . . . . . . . . . . . (44) (523) (1,504) (1,347)
Joint venture earnings (loss). . . . . . . . . . . . . . . . . . . . . . . . . 26 (10) 36 (16)
---------- ---------- ---------- ---------
Total other expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . (18) (533) (1,468) (1,363)
---------- ---------- ---------- ---------
Income before provision for income taxes . . . . . . . . . . . . . . . . . 1,292 1,932 6,286 6,253
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 431 561 1,872 1,900
---------- ---------- ---------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 861 $ 1,371 $ 4,414 $ 4,353
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
EARNINGS PER COMMON SHARE (note 7):
BASIC:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.11 $ 0.18 $ 0.75 $ 0.57
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Weighted-average number of common shares outstanding . . . . . . . . . . . . . . 7,619,142 7,661,422 5,911,446 7,649,187
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
DILUTED:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.11 $0.18 $0.74 $0.57
Weighted-average number of common shares outstanding
assuming dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,640,247 7,661,781 5,933,209 7,655,978
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
ADDITIONAL
SHARES COMMON PAID-IN RETAINED
OUTSTANDING STOCK CAPITAL EARNINGS TOTAL
----------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 . . . . . . 7,619,142 $ 8 $ 20,670 $ 8,966 $29,644
Stock issued in connection with
acquisition of Maxim Homes, Inc.
(unaudited). . . . . . . . . . . . . . 42,280 - 338 - 338
Net income for the nine months
ended September 30, 1998 (unaudited) . - - - 4,353 4,353
----------- -------- ---------- -------- -------
Balance at September 30, 1998 (unaudited) 7,661,422 $ 8 $ 21,008 $ 13,319 $34,335
----------- -------- ---------- -------- -------
----------- -------- ---------- -------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,414 $ 4,353
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 983 1,197
Gain on sales of commercial properties . . . . . . . . . . . . . . (1,816) (310)
Joint venture loss (earnings). . . . . . . . . . . . . . . . . . . (36) 16
Gain on sale of joint venture. . . . . . . . . . . . . . . . . . . (255) -
Changes in operating assets and liabilities:
Increase in Due from Tax Credit Partnerships . . . . . . . . . . (2,589) (18,377)
Decrease in construction contracts receivable. . . . . . . . . . (1,101) (599)
Decrease (increase) in costs and estimated earnings in
excess of billings on uncompleted contracts. . . . . . . . . . (3,316) 2,020
Decrease (increase) in properties under development. . . . . . . 1,720 (19,875)
Increase in prepaid expenses and other assets. . . . . . . . . . (3,966) (2,208)
Increase (decrease) in accounts payable and accrued expenses . . (157) 6,208
Increase (decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts. . . . . . . . . . 392 (458)
Increase in tenant deposits and other liabilities. . . . . . . . 1,845 6,591
--------- ---------
Net cash used in operating activities. . . . . . . . . (3,882) (21,442)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property acquisitions and improvements. . . . . . (11,540) (10,053)
Payment to purchase partnership interests. . . . . . . . . . . . . (2,804) -
Proceeds from sales of commercial properties . . . . . . . . . . . 4,466 984
Decrease (increase) in due from related parties. . . . . . . . . . (213) 21
Decrease in notes receivable . . . . . . . . . . . . . . . . . . . 552 1,718
Capital contributions to joint ventures. . . . . . . . . . . . . . (191) -
Cash paid to acquire net assets of Maxim Homes, Inc. . . . . . . . - (793)
--------- ---------
Net cash used in investing activities. . . . . . . . . (9,730) (8,123)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable. . . . . . . . . . . . . . 22,680 63,994
Prinicipal payments on notes payable and capital lease obligations (22,386) (34,140)
Decrease in notes payable to related parties . . . . . . . . . . . (241) -
Payments on subordinated dividend notes. . . . . . . . . . . . . . (2,698) -
Net proceeds from issuance of common stock . . . . . . . . . . . . 17,323 -
Capital contributions from partners. . . . . . . . . . . . . . . . 819 -
Distributions paid to partners . . . . . . . . . . . . . . . . . . (2,321) -
--------- ---------
Net cash provided by financing activities. . . . . . . 13,176 29,854
--------- ---------
Net increase (decrease) in cash and cash equivalents . (436) 289
Cash and cash equivalents:
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . 1,590 1,110
--------- ---------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,154 $ 1,399
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1998
--------- ---------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest,
net of amounts capitalized . . . . . . . . . . . . . . . . . . . . $ 2,197 $ 2,805
--------- ---------
--------- ---------
Cash paid during the period for income taxes . . . . . . . . . . . . $ - $ 3,122
--------- ---------
--------- ---------
NON-CASH TRANSACTIONS:
Common stock issued to acquire net assets of Maxim Homes, Inc. . . . $ - $ 338
--------- ---------
--------- ---------
Capital lease obligation recorded in connection with equipment
recorded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 136 $ 41
--------- ---------
--------- ---------
Recognition of revenue for the prior sale of a commercial property
which was subject to certain conditions. . . . . . . . . . . . . . $ - $ 2,834
--------- ---------
--------- ---------
Amounts due from related parties applied to notes payable to
related parties. . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 265
--------- ---------
--------- ---------
Deferred offering costs charged against gross proceeds of initial
public offering. . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,321 $ -
--------- ---------
--------- ---------
Common stock issued to reduce subordinated dividend notes. . . . . . $ 3,650 $ -
--------- ---------
--------- ---------
Warrants for common stock issued to reduce subordinated dividend
note obligations . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000 $ -
--------- ---------
--------- ---------
Amounts due from related parties offset against subordinated
dividend notes in satisfaction of the respective obligations . . . $ 729 $ -
--------- ---------
--------- ---------
Properties sold in exchange for note receivable offset by advances
to related parties . . . . . . . . . . . . . . . . . . . . . . . . $ 1,040 $ -
--------- ---------
--------- ---------
Note payable to related parties offset against proceeds from sale of
interest in a joint venture. . . . . . . . . . . . . . . . . . . . $ 500 $ -
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. DESCRIPTION OF SAXTON INCORPORATED
Saxton Incorporated (the "Company") is an integrated real estate development
company which has historically operated primarily in the fast growing Las Vegas
market and has recently entered the Reno, Salt Lake City and Phoenix markets
through expansion and acquisitions. The Company's business is comprised of four
components: (i) the design, development, construction and sale of single-family
homes; (ii) the performance of design-build services for third party clients,
including tax credit partnerships; (iii) the design, development and
construction of portfolio properties; and (iv) property operations and
management. The properties consist of office and industrial buildings, retail
centers, apartments, single-family homes and land in various phases of
development. The Company also has non-controlling interests in joint ventures
that are engaged in the acquisition, development, ownership and operation of
real property. The accompanying condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, Summit
Hills, Inc., Hillcrest, Inc., RealNet Commercial Brokerage, Inc., Big Tyme Food
Marts, Inc. and Maxim Homes, Inc.
On June 24, 1997, the Company completed its initial public offering (the
"Offering") of 2,275,000 shares of the Company's common stock ("Common Stock")
at $8.25 per share. The net proceeds of approximately $17.3 million were used
as follows: (i) $8.1 million to repay indebtedness, of which $3.4 million
represented indebtedness to the Company's principal stockholders and $1.7
million represented indebtedness to other related parties; (ii) $5.6 million to
acquire land for future development; (iii) $2.8 million to acquire the interests
of various third party partners in certain properties; and (iv) approximately
$800,000 for development activities and general corporate purposes.
Concurrently with the closing of the Offering, certain stockholders of the
Company (the "Contributing Stockholders") contributed their partnership
interests in certain properties to the Company. In addition, certain
obligations to the Contributing Stockholders represented by subordinated
dividend notes (the "Notes") were satisfied as follows: (i) approximately
$700,000 of outstanding amounts due to the Company by the principal stockholders
were offset against the Notes; (ii) $3.7 million was repaid through the issuance
by the Company of 384,256 shares of Common Stock; and (iii) $1.0 million was
repaid through the issuance by the Company of warrants for 400,000 shares of
Common Stock. The warrants were exercisable at $9.90 per share if the Company
achieved specified levels of after-tax net income in 1997 and 1998. The actual
level of after-tax net income in fiscal 1997 was below the specified level and
therefore the warrants lapsed.
On March 20, 1998, the Company acquired all of the capital stock of Maxim
Homes, Inc. ("Maxim"), a Utah homebuilder. The acquisition was accounted for
using the purchase method of accounting. Maxim operates principally as a
single-family residential homebuilder, specializing in building homes generally
ranging in price from $145,000 to $185,000. The consideration paid at closing
for this acquisition consisted of: (i) $224,000 in cash; (ii) approximately
$338,000 in Common Stock (42,280 shares at $8.00 per share); and (iii) $569,000
in cash to retire a portion of Maxim's debt. In addition, the Company may make
five annual installments ("earn-out payments") on March 31 of each year
beginning in 1999, subject to certain levels of required income. These earn-out
payments are based on a specified percentage of estimated after-tax net income
of the Salt Lake City real estate operations of the Company and are to be made
50% in the Company's Common Stock and 50% in cash.
The accompanying condensed consolidated financial statements for the three and
nine months ended September 30, 1997 present the financial position and results
of operations and cash flows of the Company, including the operations of seven
general partnerships and three limited partnerships ("Predecessor") that were
under the common management and control (or significant ownership) of the
Company or its executive officers prior to the Offering. Upon completion of
certain transactions consummated by Predecessor and others in connection with
the Offering, the Company owns 100% of the economic interests in the
partnerships. Therefore, the partnerships were dissolved by operation of law
and all assets, subject to all liabilities, of such partnerships were
transferred to the Company.
NOTE 2. BASIS OF PRESENTATION
The accompanying condensed consolidated unaudited interim financial statements
of the Company have been prepared in conformity with generally accepted
accounting principles ("GAAP") and reflect all adjustments (consisting of normal
recurring
8
<PAGE>
adjustments) which are, in the opinion of management, necessary for a fair
statement of the results of operations for the three and nine months ended
September 30, 1997 and 1998. These condensed consolidated unaudited interim
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and the notes thereto as of and for the year
ended December 31, 1997, which are included in the Company's Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
1997. Certain reclassifications have been made to conform prior periods with
the current period presentation.
The Company historically has experienced, and expects to continue to
experience, variability in quarterly sales and revenues. The consolidated
results of operations for the three and nine months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risks and Related Factors."
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
materially from those estimates.
NOTE 3. REAL ESTATE OPERATING PROPERTIES
Real estate operating properties are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(unaudited)
<S> <C> <C>
Cost:
Buildings. . . . . . . . . . . . . . . $ 21,257 $ 23,300
Tenant improvements. . . . . . . . . . 886 760
Land . . . . . . . . . . . . . . . . . 6,574 6,715
--------- --------
Real estate operating properties at cost 28,717 30,775
Less accumulated depreciation. . . . . . (2,784) (3,262)
--------- --------
Real estate operating properties, net $ 25,933 $ 27,513
--------- --------
--------- --------
</TABLE>
NOTE 4. CONSTRUCTION CONTRACTS
Construction contracts receivable, net includes amounts retained pending
contract completion aggregating approximately $173,000 at December 31, 1997
and $401,000 at September 30, 1998. Based on anticipated completion dates,
these retentions are expected to be collected within the next twelve months.
Accounts payable and accrued expenses include amounts retained pending
subcontract completion aggregating approximately $1.2 million at December 31,
1997 and $2.0 million at September 30, 1998.
Costs and estimated earnings in excess of billings on uncompleted contracts
and billings in excess of costs and estimate earnings on uncompleted
contracts, are shown on the accompanying Condensed Consolidated Balance
Sheets as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(unaudited)
<S> <C> <C>
Costs incurred to date . . . . . . . . . $ 61,309 $ 88,402
Estimated earnings to date . . . . . . . 17,273 28,319
--------- --------
78,582 116,721
Less Billings to Date. . . . . . . . . . (76,258) (115,959)
--------- --------
Cost in excess of billings on uncompleted
contracts . . . . . . . . . . . . . . $ 2,324 $ 762
--------- --------
--------- --------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
(unaudited)
<S> <C> <C>
Cost and estimated earnings in excess
of billings on completed contracts . . $ 4,115 $ 2,095
Billings in excess of costs and estimated
earnings on uncompleted contracts. . . (1,791) (1,333)
--------- --------
Costs in excess of billings on uncompleted
contracts . . . . . . . . . . . . . . . $ 2,324 $ 762
--------- --------
--------- --------
</TABLE>
NOTE 5. NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable consist of the following (in thousands): DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
Notes payable to various financial institutions,
maturing at dates ranging between October 1998
and November 2027. The notes bear interest . .
monthly at various rates ranging from 7.9%
to 15.0%. (1)(2) . . . . . . . . . . . . . . . $ 31,743 $ 52,084
Notes payable to various individuals, maturing at
dates ranging between October 1998 and September
1999. The notes bear interest at various rates
ranging from 15.0% to 24.0%. (3). . . . . . . . 8,720 18,390
Other. . . . . . . . . . . . . . . . . . . . . . 147 103
--------- ----------
$ 40,610 $ 70,577
--------- ----------
--------- ----------
</TABLE>
(1) On February 9, 1998, the Company signed a definitive loan agreement for a
$10.0 million revolving line of credit with a financial institution. The line
of credit provides for borrowings of up to $1.0 million for general working
capital requirements, $4.0 million for acquisition and development, including
strategic acquisitions and $5.0 million for land acquisitions. Borrowings under
the line of credit are secured by the pledge of certain Company receivables and
any land acquired with borrowings under the line of credit and bear interest at
1.0% over the lender's prime rate in effect from time to time (9.25% at
September 30, 1998). As of September 30, 1998, $5.0 million was outstanding and
$5.0 million was available to borrow under this line of credit. The agreement
is also subject to certain financial covenants.
(2) On July 30, 1997, the Company entered into a $5.0 million revolving line
of credit agreement (the "Agreement") with a financial institution. Loans under
the Agreement bear monthly interest at 1.5% above the prime rate as defined in
the Agreement (9.75% at September 30, 1998), mature on August 1, 1999 and
require the Company to pay a loan fee of 0.25% for each disbursement. Loans
under the Agreement are available only for the acquisition of land and are
secured by first trust deeds on certain real property. As of September 30,
1998, the Company had outstanding indebtedness of $3.7 million and available
borrowings of $1.3 million under the Agreement. Under the terms of the
Agreement, the Company is required to meet certain financial covenants.
(3) Through October 30, 1998, $2.3 million of notes payable maturing in
October 1998 have been extended with new maturity dates ranging from April 1999
to October 1999.
NOTE 6. NOTES PAYABLE TO AND RECEIVABLE FROM RELATED PARTIES
Notes payable to related parties are unsecured notes payable to certain
stockholders, officers and Directors of the Company for development purposes.
Interest only payments are due monthly at rates ranging from 12.0% to 18.0%,
with all amounts due at various dates in 1998 and 1999.
The Company has a note receivable of $265,000 from James C. Saxton, the
Company's President and principal stockholder. The note receivable bears
interest at 10.25% and matured on September 30, 1998, at which time the
receivable was used to apply to other related party notes payable to Mr. Saxton.
The receivable is considered paid in full and related party notes payable to Mr.
Saxton was reduced by $265,000.
10
<PAGE>
NOTE 7. EARNINGS PER COMMON SHARE
As required by Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," ("EPS"), the following unaudited tables reconcile net
income applicable to common stockholders, basic and diluted shares and EPS for
the following periods (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997 THREE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------- -------------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income . . . . . . . . . . $ 861 $ 1,371
BASIC EPS
Income applicable to
common stockholders. . . . . 861 7,619,142 $ 0.11 1,371 7,661,422 $ 0.18
------- ---------- ---------- -------- --------- ---------
Effect of dilutive securities:
Stock options. . . . . . . . - 21,105 - 359
------- ---------- -------- ---------
DILUTED EPS
Income applicable to
common stockholders
and assumed conversions. . . $ 861 7,640,247 $ 0.11 $ 1,371 7,661,781 $ 0.18
------- ---------- ---------- -------- --------- ---------
------- ---------- ---------- -------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------- -------------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income . . . . . . . . . . $ 4,414 $ 4,353
BASIC EPS
Income applicable to
common stockholders. . . . . 4,414 5,911,446 $ 0.75 4,353 7,649,187 $ 0.57
------- ---------- ---------- -------- --------- ---------
Effect of dilutive securities:
Stock options. . . . . . . . - 21,763 - 6,791
------- ---------- -------- ---------
DILUTED EPS
Income applicable to
common stockholders
and assumed conversions. . . $4,414 5,933,209 $ 0.74 $ 4,353 7,655,978 $ 0.57
------- ---------- ---------- -------- --------- ---------
------- ---------- ---------- -------- --------- ---------
</TABLE>
The Company had options outstanding to purchase Common Stock that were
excluded from the computation of diluted EPS since their exercise price was
greater than the average market price. The antidilutive options outstanding for
the three and nine months ended September 30, 1998 were 390,400 and 188,300,
respectively.
NOTE 8. MANAGEMENT STOCK OPTION PLAN
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. In August 1998, options to purchase 5,112 shares were forfeited upon a
certain employee's termination of employment with the Company. These options
remain exercisable, to the extent vested, for 90 days from the date of
termination. Options granted to one officer of the Company vested 20% on
December 29, 1995, 30% on December 29, 1996 and 50% on December 29, 1997. The
remaining options vest 20% per year on December 29th 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 after December 1994.
On June 30, 1997, the Company adopted a Management Stock Option Incentive Plan
(the "Option Plan") which provides for the grant of options to employees to
purchase Common Stock up to a maximum of 500,000 shares. Stock options which
terminate without having been exercised, shares forfeited or shares surrendered
will again be available for distribution in connection with future awards under
the Option Plan. As of September 30, 1998, the Company had outstanding 362,650
stock options to certain executive officers and employees of the Company
pursuant to the Option Plan. These options generally vest
11
<PAGE>
in equal annual installments over five years commencing eighteen months from the
award date and will expire between June 30, 2007 and September 30, 2008.
NOTE 9. 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 consolidated financial position, results of operations or liquidity.
The Company and its two principal stockholders are guarantors on construction
loans relating to Tax Credit Partnerships ("TCPs"). Total construction loans
payable for these TCPs were approximately $30.6 million and $30.7 million at
December 31, 1997 and September 30, 1998, respectively.
NOTE 10. SUBSEQUENT EVENTS
On October 14, 1998, Mr. James C. Saxton, the President, CEO and majority
shareholder of the Company, facilitated a short-term interim construction loan
for the Company by borrowing $2.5 million from a commercial bank, at an interest
rate of 8.75% per annum, and concurrently loaned the Company $2.5 million.
Because the commercial bank relied on the credit of Mr. Saxton, rather than the
security of Company owned real estate, (which would have resulted in a
substantial delay to obtain appraisals and satisfy other requirements) the
arrangement allowed the Company to obtain the interim financing on an expedited
basis. The loan from Mr. Saxton is evidenced by a promissory note, bears
interest at 12.0% per annum and matures on the sooner of (1) January 14, 1999
or (2) the date the Company obtains a construction loan for this project.
On November 5, 1998, for similar reasons, Mr. Saxton facilitated
short-term financing for the acquisition of Diamond Key Homes by borrowing
$5.0 million from commercial banks at interest rates ranging from prime plus
0.5% (currently 8.5%) to a fixed rate of 9.0% and concurrently loaned $5.0
million to the Company. The loan from Mr. Saxton is evidenced by a
promissory note, bears interest at 12.0% per annum and matures on February 3,
1999.
On October 8, 1998, the Company entered into a definitive agreement with
Diamond Key Homes, Inc., and certain related entities (collectively, "Diamond
Key"), to acquire all of the capital stock and ownership interests of Diamond
Key. Diamond Key specializes in entry-level and move-up homes in the greater
Phoenix and Tuscon areas. This transaction closed on November 13, 1998 for a
purchase price of approximately $10.8 million paid in cash at closing with an
additional $2.0 million to be paid 50% in cash and 50% in Saxton Incorporated
Common Stock one year after closing.
NOTE 11. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued and is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for segment
reporting in the financial statements.
The Company will comply with the requirements of this statement in Form 10-K
for fiscal year ending December 31, 1998. Management has not yet determined the
disclosure impact of this statement.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto of Saxton
Incorporated (the "Company") appearing elsewhere in this Form 10-Q.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUE. Total revenue for the three months ended September 30, 1998 was
$18.9 million, representing a $6.8 million, or 55.9% increase over the $12.1
million reported for the three months ended September 30, 1997. Increases in
construction revenues from design-build contracts of $4.2 million and
increased sales of homes of $3.1 million were primary reasons for the overall
revenue gain. These increases were offset by a decrease in rental and other
revenue of $497,000. Construction revenues increased to $11.8 million during
the quarter ended September 30, 1998, up from $7.6 million in the comparable
1997 period. Additional construction revenue of $7.1 million from the
Company's Corte Madera project, which the Company had anticipated recording
during the three months ended September 30, 1998, have been deferred under
the appropriate accounting treatment due to a timing difference between the
amount of work completed and the cash collected during the period. The
revenues and accompanying gross profit deferred during the third quarter are
expected to be recognized as revenues during the fourth quarter of 1998.
Construction revenue increases were due to three Tax Credit Partnerships
("TCP") projects (as later described) under construction during the three
months ended September 30, 1998 compared to only one TCP during the three
months ended September 30, 1997. Revenue from sales of homes increased to
$6.0 million in the September 1998 quarter, due to the Company having two
home developments ready for sale which sold 56 homes, compared to one home
development which sold 36 homes for $3.1 million during the three months
ended September 30, 1997. Of the 56 homes sold in the three months ended
September 30, 1998, 13 were semi-custom homes sold by the Company's Utah
subsidiary, Maxim Homes.
Rental and other revenue was higher in the third quarter of 1997, as compared
to the third quarter of 1998 primarily due to the inclusion of a one-time gain
from the sale of a partnership interest. During the three months ended September
30, 1997, the Company sold its interest in a real estate joint venture,
resulting in a gain of $255,000. There was no comparable transaction in the
third quarter of 1998, resulting in lower rental and other revenue when compared
to 1997.
COST OF REVENUE. Total cost of revenue was $14.9 million for the three
months ended September 30, 1998, representing a $5.2 million, or 53.4% increase
from $9.7 million for the three months ended September 30, 1997. Cost of
revenue for the third quarter of 1998 as a percentage of revenue was 78.5%,
compared to 79.8% in the third quarter of 1997. This decrease of
1.3% was primarily due to increased volume, resulting in lower construction
overhead absorption rates per project. Cost of revenue in absolute dollars
increased due to the increase in revenues.
GROSS PROFIT. Gross profit increased to $4.1 million for the three months
ended September 30, 1998, representing a $1.6 million, or 65.5% increase from
$2.5 million for the three months ended September 30, 1997 due to increased
revenue and lower cost of revenue percentages as discussed above.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$1.2 million for the three months ended September 30, 1998, representing a
$381,000, or 48.7% increase from $783,000 for the three months ended September
30, 1997. This was primarily due to increased payroll expenses related to an
increase in the number of employees at September 30, 1998 as compared to
September 30, 1997. The increase is a result of the Company's expansion into
the Reno, Nevada market, the acquisition of Maxim Homes and other administrative
related expansion costs. General and administrative expenses as a percentage of
total revenue was 6.2% for the three months ended September 30, 1998 compared to
6.5% for the three months ended September 30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $431,000 for
the three months ended September 30, 1998, representing a $71,000, or 19.7%
increase from $360,000 for the three months ended September 30, 1997. This was
primarily due to an increase in the cost basis of operating properties of $2.1
million to $30.8 million at September 30, 1998, from $28.7 million at September
30, 1997.
INTEREST EXPENSE, NET. Interest expense, net, was $523,000 for the three
months ended September 30, 1998, representing a $479,000 increase from $44,000
for the three months ended September 30, 1997. This was primarily due to an
increase in notes payable from $38.5 million at September 30, 1997 to $70.2
million at September 30, 1998 as a result of the Company's
13
<PAGE>
increase in real estate properties and geographic expansion. Interest income for
the three months ended September 30, 1998 was $201,000, a decrease of $482,000
from $683,000 of interest income from TCPs recognized in September 1997.
INCOME BEFORE PROVISION FOR INCOME TAXES. As a result of higher revenues and
gross profit, partially offset by higher general and administrative expenses and
increased interest expense, income before provision for income taxes was $1.9
million for the three months ended September 30, 1998, representing a $640,000,
or 49.5% increase from $1.3 million for the three months ended September 30,
1997. Income before provision for income taxes as a percentage of total revenue
was 10.2% for the three months ended September 30, 1998 as compared to 10.7% for
the three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
REVENUE. Total revenue was $53.6 million for the nine months ended
September 30, 1998, representing an $8.7 million, or 19.4% increase as
compared to the $44.9 million reported for the nine months ended September
30, 1997. This was primarily due to an increase of $6.2 million in revenue
from the sales of homes to $30.1 million compared to $26.4 million in the
comparable period of the prior year, and an increase of $4.4 million in
construction revenue to $15.1 million, compared to $8.9 million. These
increases were partially offset by a decrease in sales of commercial
properties of $1.7 million, from $5.5 million in the nine months ended
September 30, 1997, to $3.8 million in the nine months ended September 30,
1998. Additional construction revenue of $7.1 million from the Company's
Corte Madera project, which the Company had anticipated recording during the
three months ended September 30, 1998 have been deferred under the
appropriate accounting treatment due to a timing difference between the
amount of work completed and the cash collected during the period. The
revenues and accompanying gross profit deferred during the third quarter are
expected to be recognized as revenues during the fourth quarter of 1998.
Revenue from home sales increased due to the Company having two home
developments which sold 150 homes during 1998 compared to one home
development which sold 109 homes during 1997. Of the 150 home sales in the
nine months ended September 30, 1998, 22 were semi-custom homes sold from the
Company's Utah subsidiary, Maxim Homes. The increase in construction revenue
is primarily due to the addition of two TCP projects, which were started
during 1998, compared to only one active TCP project in 1997. The decrease
in revenue from sales of commercial properties is due to two commercial
property sales during 1998 compared to three sales in 1997.
COST OF REVENUE. Total cost of revenue was $41.2 million for the nine months
ended September 30, 1998, representing a $6.9 million, or 20.2% increase from
$34.2 million for the nine months ended September 30, 1997. This was due to
the same factors explained above for revenue. Cost of revenue for the nine
months ended September 30, 1998 as a percentage of revenue was 76.8%, almost
unchanged compared to 76.3% for the same nine month period in 1997. Cost of
revenue in absolute dollars increased due to the increase in revenues.
GROSS PROFIT. Gross profit increased to $12.4 million for the nine months
ended September 30, 1998, representing a $1.6 million, or 22.1% increase from
$10.2 million for the nine months ended September 30, 1997, due to increased
revenue as discussed above. Gross profit as a percentage of revenue decreased to
23.2% for the nine months ended September 30, 1998 from 23.7% for the comparable
period in 1997. Contributing to this slight percentage decrease was the fact
that gross profit on commercial properties sold in 1997 was significantly higher
than in 1998 primarily due to a large property sold in 1997. The 1997 sale was
a parcel of land adjacent to a retail center held by the Company as an operating
property, thus the basis of the land sold was significantly lower than the
appraised value.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$3.6 million for the nine months ended September 30, 1998, representing a $1.7
million, or 91.9% increase from $1.9 million for the nine months ended September
30, 1997. This was primarily due to increased payroll expenses related to an
increase in the number of employees at September 30, 1998, as compared to
September 30, 1997, as a result of the Company's expansion into the Reno, Nevada
market, the acquisition of Maxim Homes and other administrative related
expansion. General and administrative expenses as a percentage of total revenue
was 6.7% for the nine months ended September 30, 1998 compared to 4.2% for the
nine months ended September 30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $1.2 million
for the nine months ended September 30, 1998, representing a $214,000, or 21.8%
increase from $983,000 for the nine months ended September 30, 1997. This was
primarily due to an increase in the cost basis of operating properties of $2.1
million to $30.8 million at September 30, 1998 from $28.7 million at September
30, 1997.
INTEREST EXPENSE, NET. Interest expense, net, was $1.3 million for the nine
months ended September 30, 1998, representing a $157,000, or 10.4% decrease from
$1.5 million for the nine months ended September 30, 1997. The amount of gross
interest
14
<PAGE>
expense for the nine months ended September 30, 1998 was $2.8 million
compared to $2.2 million for the nine months ended September 30, 1997. Interest
capitalized into the cost of real state properties increased to $1.5 million
from $700,000, due to the increase in properties under development from $21.6
million to $48.0 million.
INCOME BEFORE PROVISION FOR INCOME TAXES. As a result of the higher
revenues and gross profit, partially offset by higher general and
administrative expenses and depreciation, income before provision for income
taxes was $6.3 million for the nine months ended September 30, 1998, no
significant change from the $6.3 million for the nine months ended
September 30, 1997. Income before provision for income taxes as a percentage
of total revenue was 11.7% for the nine months ended September 30, 1998 as
compared to 14.0% for the nine months ended September 30, 1997, as a result
of higher general and administrative expenses as a percentage of revenue.
LIQUIDITY AND CAPITAL RESOURCES
On June 24, 1997, the Company completed its initial public offering of
2,275,000 shares of the Company's common stock ("Common Stock") at $8.25 per
share. The net proceeds of approximately $17.3 million were used as follows:
(i) $8.1 million to repay indebtedness, of which $3.4 million represented
indebtedness to the Company's principal stockholders and $1.7 million
represented indebtedness to other related parties; (ii) $5.6 million to acquire
land for future development; (iii) $2.8 million to acquire the interests of
various third party partners in certain properties; and (iv) approximately
$800,000 for development activities and general corporate purposes.
The Company has historically relied upon land and project financing, as
applicable, partner and joint venture contributions in the form of land or cash,
developer's equity (value in excess of cost), other forms of debt and cash flow
from operations to provide capital for land acquisitions and portfolio
construction. The Company intends to continue to provide for its capital
requirements from these sources. Management believes that cash generated from
future operations, funds available from external sources of debt and equity
financing, together with cash on hand at September 30, 1998 will be sufficient
to provide for its capital requirements for at least the next 12 months. All
material transactions have been approved by at least a majority of the Board of
Directors of the Company, including a majority of the disinterested members of
the Board of Directors, when applicable, and were made on terms no less
favorable to the Company than could have been obtained from unaffiliated third
parties.
OPERATING ACTIVITIES. Net cash used in operating activities was $21.4 million
for the nine months ended September 30, 1998 compared to $3.9 million for the
nine months ended September 30, 1997. The change in operating cash flow was
primarily due to an increase in properties under development and an increase in
Due from TCPs. Properties under development increased to $48.0 million at
September 30, 1998 from $21.6 million at December 31, 1997 primarily due to $5.7
million of additions to the Corte Madera project, the acquisition of Maxim
Homes, Inc., an increase in the Silver Springs and Taylor Ranch developments and
the addition of five properties which began development during the nine months
ended September 30, 1998. Due from TCPs increased to $35.8 million at September
30, 1998 from $17.4 million at December 31, 1997 primarily due to the addition
of two new TCP projects (South Valley and Spanish Hills) and the continued
development of another (Rancho Mesa) during the nine months ended September 30,
1998.
INVESTING ACTIVITIES. Net cash used in investing activities was $8.1 million
for the nine months ended September 30, 1998 compared to $9.7 million for the
nine months ended September 30, 1997. This was primarily due to a $2.8 million
payment to purchase partnership interests during 1997 and no similar transaction
occurred in 1998, partially offset by a larger decrease in notes receivable
during the 1998 period compared to the 1997 period.
FINANCING ACTIVITIES. Net cash provided by financing activities was $29.9
million for the nine months ended September 30, 1998, representing a $16.7
million increase from $13.2 million for the nine months ended September 30,
1997. This was primarily due to $17.3 million in net proceeds from the IPO
during 1997, offset by net proceeds from notes payable of $29.9 million during
1998 compared to $294,000 in 1997.
The Company anticipates the remaining development of portfolio projects during
the next twelve months will cost approximately $4.5 million, which the Company
plans to finance through construction financing. The real estate development
business is capital intensive and requires significant up-front expenditures to
acquire and entitle land and commence development. The Company typically
finances, and expects to finance, its land acquisition and portfolio development
activities utilizing the proceeds of institutional loans secured by real
property. In some cases, the Company plans to utilize private financing,
typically on a short-term or interim basis. In cases where the Company holds a
property after completion of
15
<PAGE>
construction, the Company plans to obtain permanent financing secured by the
property. The Company also estimates that it will spend less than $500,000 for
construction and computer equipment during the remainder of 1998.
In each of its last three fiscal years, the Company has derived a significant
portion of its construction revenue from the development of apartment complexes
("Tax Credit Projects") for limited partnerships ("Tax Credit Partnerships")
organized to take advantage of the low income housing tax credit provided by
Section 42 of the Internal Revenue Code. At September 30, 1998, the Tax Credit
Partnerships or TCPs as previously defined, were indebted to the Company in the
aggregate amount of approximately $35.8 million, representing developer fees
and land and construction costs. Of such amount, approximately $9.9 million
is payable to the Company by the TCPs from loan proceeds and additional capital
contributions of the investor limited partners. The balance of approximately
$25.8 million is payable to the Company by the TCPs 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 has made its capital contributions to the TCPs, 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 $3.4 million, to meet operating deficits, if any, of such TCPs.
BACKLOG
The Company's homes are generally offered for sale in advance of their
construction. The majority of the Company's homes are 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 that
are not yet closed 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
September 30, 1998 and December 31, 1997, the Company had 41 and 37 homes,
respectively, in backlog, representing an aggregate sales value of approximately
$4.5 million and $3.0 million, respectively. The Company is also involved in
the design-build development of commercial projects. Backlog for such
commercial projects is defined as the unrecognized revenue on the uncompleted
work remaining under a signed fixed-price contract. The Company generally uses
the percentage-of-completion method to account for revenue from its design-build
contracts. At September 30, 1998 and December 31, 1997, the Company had backlog
under its design-build contracts of approximately $35.8 million and $36.4
million, respectively.
SELF-FUNDED INSURANCE
As of June 1, 1998, the Company (including all Nevada wholly-owned
subsidiaries and divisions) has been approved and certified as a self-insured
employer for workers' compensation purposes. The Company's policy has certain
cap loss limitations.
YEAR 2000
The Company's process for becoming Year 2000 ("Y2K") compliant has been to
perform an ongoing comprehensive study and review of computer hardware, software
and systems, both internal and external, and non-computer related systems which
may be affected by certain computerized functions. The Company does not believe
the non-computer related systems, whether Y2K compliant or not, will have a
material impact on the Company's operations. The Company has formally contacted
or will contact significant third parties, including service providers, vendors,
suppliers, subcontractors, financial institutions, consultants and various
government agencies, to obtain assurance of Y2K compliance. However, there can
be no guarantee that the systems of other companies upon which the Company's
systems rely will be Y2K compliant in a successful, timely manner. Failure to
convert by an external source or provider or the failure to convert properly
would have a material adverse effect on the Company, as would the Company's
failure to convert, or convert properly, an internal system.
The Company has also included activities to increase awareness of the Y2K
issue across the Company, assess where the Company has issues, determine
proposed resolutions, validate those proposed resolutions and implement system
solutions. The Company has not completed its assessment of applications within
the Company that are not Y2K compliant and is in varying stages of determining
appropriate resolutions to the issues identified. The Company currently expects
to complete all business critical internal hardware and software modification
and testing by early calendar 1999.
Given the information known at this time about the Company's systems having
such issues, coupled with the Company's
16
<PAGE>
ongoing, normal course-of-business efforts to upgrade or replace business
critical systems and software applications as necessary, it is currently
expected that Y2K costs, the majority of which are expected to be incurred in
fiscal 1999, will approximate $100,000-$150,000. Current expenditures related
to this issue have been negligible thus far and performed by existing internal
staff. These expected costs will be incorporated into the Company's operating
plan for fiscal 1999. These costs include incremental personnel costs,
consulting costs and costs for the modification of or replacement of existing
hardware and software. These costs will be funded through cash flows from
operations and are expensed as incurred. Purchased hardware and software will
be capitalized in accordance with the Company's normal accounting policy. The
costs of the project and the timing in which the Company believes it will
complete the necessary Y2K modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated.
Specific factors that might cause such material differences include, but
are not limited to, the success of the Company in identifying systems and
programs having Y2K issues, the nature and amount of programming required to
upgrade or replace the affected programs, the availability and cost of personnel
trained in this area and the extent to which the Company might be adversely
impacted by third party (vendors, subcontractors, lenders, bond trustees, etc.)
failure to remediate their own Y2K issues. Failure by the Company and/or its
vendors and subcontractors and in particular, the local governments, on which
the Company is materially dependent to complete Y2K compliance work in a timely
manner could have a material adverse effect on the Company's operations.
The Company currently has not established a formal contingency plan in the
event the Company is not successful with its attempts to be fully Y2K compliant;
however, the Company believes that it will develop a more formal contingency
plan that may include the stockpiling of construction raw materials, automated
reports and the development of back-up systems as an alternative to computers in
the months prior to December 31, 1999.
RISKS AND RELATED FACTORS
Variability of Results/Seasonality. The Company historically has experienced,
and in the future expects to continue to experience, variability in revenue on a
quarterly basis. Factors expected to contribute to this variability include,
among others, (i) the timing of home and other property sale closings, (ii) the
Company's ability to continue to acquire land and options thereon on acceptable
terms, (iii) the timing of the receipt of regulatory approvals for the
construction of homes and other development projects, (iv) the condition of the
real estate market and the general economic and environmental conditions in the
greater Las Vegas, Reno, Phoenix and Salt Lake City metropolitan areas, (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 their
new home purchase either prior to the start of a new school year or prior to the
end of year holiday season.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THE FOREGOING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SECTION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND
INFORMATION RELATING TO THE COMPANY THAT ARE BASED ON THE BELIEFS OF MANAGEMENT
AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO
MANAGEMENT. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THE
COMPANY'S EXPECTATION AND ESTIMATES AS TO THE COMPANY'S BUSINESS OPERATIONS,
INCLUDING THE INTRODUCTION OF NEW PRODUCTS AND FUTURE FINANCIAL PERFORMANCE,
INCLUDING GROWTH IN REVENUES AND NET INCOME AND CASH FLOWS. IN ADDITION,
INCLUDED HEREIN THE WORDS "ANTICIPATES," "BELIEVES," "ESTIMATES," "EXPECTS,"
"PLANS," "INTENDS" AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY OR ITS
MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
REFLECT THE CURRENT VIEWS OF THE COMPANY'S MANAGEMENT, WITH RESPECT TO FUTURE
EVENTS AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. IN
ADDITION, THE COMPANY SPECIFICALLY WISHES TO ADVISE READERS THAT THE FACTORS
LISTED UNDER THE CAPTIONS "LIQUIDITY AND CAPITAL RESOURCES," "RISKS AND RELATED
FACTORS" AND OTHER RISK FACTORS INCLUDING BUT NOT LIMITED TO: THE PRIMARY
DEPENDENCE ON THE GREATER LAS VEGAS AREA; HOMEBUILDING AND OTHER REAL
ESTATE DEVELOPMENT AND
17
<PAGE>
INVESTMENTS; INDEBTEDNESS; POTENTIAL INABILITY TO OBTAIN FUTURE FINANCING;
VARIABILITY, ERRATIC WEATHER CONDITIONS AND SEASONALITY OF RESULTS; DEPENDENCE
ON KEY PERSONNEL; CONTROL BY CURRENT STOCKHOLDERS; REGULATORY AND ENVIRONMENTAL
RISKS; AND ACQUISITIONS AND EXPANSION INTO NEW MARKETS COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENT. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR
SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY FROM THOSE DISCUSSED HEREIN AS ANTICIPATED, BELIEVED, ESTABLISHED OR
EXPECTED.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits - Refer to Index on page 20 of this filing.
b) Form 8-K, Item 5. filed September 23, 1998.
c) Form 8-K, Item 5. and Item 7. filed October 28, 1998.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAXTON INCORPORATED
November 16, 1998 By:/s/ Kirk Scherer
-----------------------------------------
Kirk Scherer
Executive Vice-President of Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ Melody J. Sullivan
-----------------------------------------
Melody J. Sullivan
Vice-President and
Chief Accounting Officer
(Principal Accounting Officer)
20
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
27 Financial Data Schedule. 22
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,399
<SECURITIES> 0
<RECEIVABLES> 41,083<F1>
<ALLOWANCES> 401
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 83,105
<DEPRECIATION> 4,558
<TOTAL-ASSETS> 134,103
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 34,327
<TOTAL-LIABILITY-AND-EQUITY> 134,103
<SALES> 49,798
<TOTAL-REVENUES> 54,340
<CGS> 40,541
<TOTAL-COSTS> 41,163
<OTHER-EXPENSES> 4,813<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,111
<INCOME-PRETAX> 6,253
<INCOME-TAX> 1,900
<INCOME-CONTINUING> 4,353
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,353
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
<FN>
<F1>RECEIVABLES ARE COMPRISED OF DUE FROM TAX CREDIT PARTNERSHIPS, CONSTRUCTION
CONTRACTS RECEIVABLE, NOTES RECEIVABLE AND DUE FROM RELATED PARTIES
<F2>OTHER EXPENSES ARE COMPRISED OF GENERAL AND ADMINISTRATIVE DEPRECIATION AND
AMORTIZATION EXPENSES AND JOINT VENTURE LOSSES.
</FN>
</TABLE>
