<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXHANGE ACT OF 1934
For the transition period from _______ to _______
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 May 5, 1999 was 7,732,922.
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
FORM 10-Q
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and March 31, 1999............................ 3
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 1998 and 1999...................... 4
Condensed Consolidated Statement of Stockholders'
Equity Three Months Ended March 31, 1999...................... 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1999...................... 6-7
Notes to Condensed Consolidated Financial Statements............ 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 14-19
Item 3. Quantative and Qualitative Disclosures About Market Risk........ 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 20
Item 2. Changes in Securities........................................... 20
Item 3. Defaults Upon Senior Securities and Use of Proceeds............. 20
Item 4. Submission of Matters to a Vote of Security Holders............. 20
Item 5. Other Information............................................... 20
Item 6. Exhibits and Reports on Form 8-K................................ 20
SIGNATURES....................................................................... 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1998 1999
-------------------------------------
(unaudited)
<S> <C> <C>
Real estate properties:
Operating properties, net of accumulated depreciation................. $ 23,117 $ 22,078
Properties under development.......................................... 79,418 85,814
Land held for future development or sale.............................. 1,349 6,812
------------ ------------
Total real estate properties........................................ 103,884 114,704
Cash and cash equivalents................................................ 1,331 863
Due from Tax Credit Partnerships......................................... 31,997 31,634
Construction contracts receivable, net of allowance for doubtful
accounts of $403 at December 31, 1998 and March 31, 1999.............. 8,773 8,657
Costs and estimated earnings in excess of billings on
uncompleted contracts................................................. 2,618 1,990
Notes receivable......................................................... 1,000 1,451
Investments in joint ventures............................................ 3,577 3,622
Due from related parties................................................. 154 145
Prepaid expenses and other assets........................................ 17,661 17,747
------------ ------------
Total assets.................................................... $ 170,995 $ 180,813
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses.................................... $ 24,892 $ 25,505
Tenant deposits and other liabilities.................................... 6,295 6,085
Billings in excess of costs and estimated earnings
on uncompleted contracts.............................................. 181 888
Notes payable............................................................ 88,306 96,057
Notes payable to related parties......................................... 12,016 11,111
Long-term capital lease obligations...................................... 1,118 1,179
------------ ------------
Total liabilities............................................... 132,808 140,825
Commitments and contingencies (note 9)
Stockholders' equity:
Common stock, $.001 par value. Authorized 50,000,000
shares; issued and outstanding 7,732,922 at December 31, 1998
and March 31, 1999.................................................... 8 8
Preferred stock, $.001 par value. Authorized 5,000,000
shares; no shares issued and outstanding.............................. - -
Additional paid-in capital............................................... 21,482 21,482
Retained earnings........................................................ 16,697 18,498
------------ ------------
Total stockholders' equity...................................... 38,187 39,988
------------ ------------
Total liabilities and stockholders' equity...................... $ 170,995 $ 180,813
------------ ------------
------------ ------------
</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
MARCH 31,
-------------------------------------
1998 1999
-------------------------------------
<S> <C> <C>
REVENUE:
Construction revenue, including Tax Credit
Partnership construction revenue of $4,230 and $3,913
for the three months ended March 31, 1998 and 1999, respectively.... $ 5,737 $ 4,750
Sales of homes........................................................ 2,785 21,671
Sales of commercial properties........................................ 2,834 1,550
Rental revenue........................................................ 924 1,010
Other revenue......................................................... 429 571
------------ ------------
Total revenue................................................... 12,709 29,552
------------ ------------
COST OF REVENUE:
Cost of construction, including Tax Credit Partnership cost of
construction of $3,012 and $2,698 for the three months ended
March 31, 1998 and 1999, respectively............................... 4,503 3,888
Cost of homes sold.................................................... 2,344 19,074
Cost of commercial properties sold.................................... 2,580 1,006
Rental operating cost................................................. 175 287
------------ ------------
Total cost of revenue........................................... 9,602 24,255
------------ ------------
Gross profit.......................................................... 3,107 5,297
------------ ------------
General and administrative expenses................................... 752 1,866
Depreciation and amortization......................................... 391 531
------------ ------------
Operating income................................................ 1,964 2,900
------------ ------------
OTHER EXPENSE:
Interest expense, net of interest income of $293 and $245 for the
three months ended March 31, 1998 and 1999, respectively............ (367 ) (295 )
Joint venture loss.................................................... (2 ) (6 )
------------- ------------
Total other expense............................................. (369 ) (301 )
------------- ------------
Income before provision for income taxes................................. 1,595 2,599
Provision for income taxes............................................... 444 798
------------ ------------
Net income...................................................... $ 1,151 $ 1,801
------------ ------------
------------ ------------
EARNINGS PER COMMON SHARE:
BASIC:
Net income............................................................... $ 0.15 $ 0.23
------------ ------------
------------ ------------
Weighted-average number of common shares outstanding..................... 7,624,310 7,732,922
------------ ------------
------------ ------------
DILUTED:
Net income............................................................... $ 0.15 $ 0.23
------------ ------------
------------ ------------
Weighted-average number of common shares outstanding assuming
dilution.............................................................. 7,679,049 7,734,817
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL
SHARES COMMON PAID-IN RETAINED
OUTSTANDING STOCK CAPITAL EARNINGS TOTAL
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998............... 7,733 $ 8 $ 21,482 $ 16,697 $ 38,187
Net income for the three months
ended March 31, 1999 (unaudited)........ - - - 1,801 1,801
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1999 (unaudited)...... 7,733 $ 8 $ 21,482 $ 18,498 $ 39,988
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</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>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
1998 1999
-------------------------------------
<S> <C> <C>
Cash flows from operating activities:
-------------------------------------
Net income............................................................ $ 1,151 $ 1,801
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization..................................... 391 531
Gain on sales of commercial properties............................ (254) (671)
Joint venture loss................................................ 2 5
Increase in investments in joint ventures......................... - (50)
Changes in operating assets and liabilities:
Decrease (increase) in due from Tax Credit Partnerships......... (4,971) 363
Decrease (increase) in construction contracts receivable........ (846) 116
Decrease in costs and estimated earnings in excess of billings
on uncompleted contracts...................................... 2,704 628
Increase in properties under development........................ (3,590) (10,541)
Decrease (increase) in prepaid expenses and other assets........ 587 (93)
Increase (decrease) in accounts payable and accrued expenses ... (1,382) 613
Increase (decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts................... (662) 707
Increase (decrease) in tenant deposits and other liabilities.... 123 (210)
------- ---------
Net cash used in operating activities.................. (6,747) (6,801)
------- ---------
Cash flows from investing activities:
-------------------------------------
Expenditures for property acquisitions and improvements............... (3,394) (1,313)
Proceeds from sales of commercial properties.......................... - 1,550
Increase in notes receivable from related parties .................... (19) (28)
Payments from notes receivable from related parties................... 2 37
Increase in notes receivable.......................................... (404) (949)
Payments from notes receivable........................................ 120 248
Cash paid to acquire net assets of Maxim Homes, Inc................... (785) -
------- ---------
Net cash used in investing activities.................. (4,480) (455)
------- ---------
Cash flows from financing activities:
- -------------------------------------
Proceeds from issuance of notes payable................................. 17,145 26,176
Payments on notes payable and capital lease obligations................. (5,286) (18,483)
Proceeds from issuance of notes payable to related parties ............. 903 300
Payments on notes payable to related parties ........................... (902) (1,205)
------- ---------
Net cash provided by financing activities................ 11,860 6,788
------- ---------
Net increase (decrease) in cash and cash equivalents..... 633 (468)
Cash and cash equivalents:
Beginning of period.................................................. 1,110 1,331
------- ---------
End of period........................................................ $ 1,743 $ 863
------- ---------
------- ---------
</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>
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
1998 1999
-------------------------------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
-------------------------------------------------
Cash paid during the period for interest, net of amounts capitalized $ 1,303 $ 1,194
------------ ------------
------------ ------------
Cash paid during the period for income taxes........................ $ 2,369 $ 9
------------ ------------
------------ ------------
Non-cash financing and investing activities:
- ---------------------------------------------
Common stock issued to acquire net assets of
Maxim Homes, Inc.................................................. $ 338 $ -
------------ ------------
------------ ------------
Capital lease obligation recorded in connection with equipment
acquisitions...................................................... $ 18 $ 119
------------ ------------
------------ ------------
Recognition of revenue for the prior sale of a commercial
property which was subject to certain conditions.................. $ 2,834 $ -
------------ ------------
------------ ------------
</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 ("Saxton" or the "Company") is a leader in the
affordable housing industry and a diversified real estate development company
operating in the fast growing Las Vegas, Phoenix, Salt Lake City, Reno and
Tucson markets. 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 ("design-build services"); (iii) the design,
development and construction of income producing 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.
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.
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. The Company opened its first single-family home development
in April 1996 and its second home development in early 1997.
NOTE 2. ACQUISITIONS
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 the Company's Common Stock (42,280 shares valued 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. No earn-out payments were required or paid for
the first quarter of 1999.
On November 13, 1998, the Company acquired the outstanding capital stock
and ownership interests of Diamond Key Homes, Inc. ("Diamond Key") and
certain related entities. The purchase was accounted for using the purchase
method of accounting and the price was approximately $10.9 million paid in
cash at closing, approximately $250,000 expected to be paid in 1999, with an
additional amount of $2.0 million to be paid 50% in cash and 50% in the
Company's Common Stock one year from the date of closing.
On December 22, 1998, the Company acquired the outstanding capital stock
of HomeBanc Mortgage Corporation ("HomeBanc"). The purchase was accounted
for using the purchase method of accounting and the price was $474,000 paid
in the form of 71,500 shares of the Company's Common Stock at closing.
Goodwill related to the acquisitions of Maxim, Diamond Key and HomeBanc is
amortized over 15 years. The operations of these three acquisitions were
included in the Company's Consolidated Statements of Income since their
acquisition dates.
All revenue was generated from Nevada for the three months ended March 31,
1998. For the three months ended March 31, 1999, 44.5% of total revenue was
from Nevada, 42.2% from Arizona and 13.3% from Utah.
8
<PAGE>
NOTE 3. 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 adjustments) which are, in the opinion of
management, necessary for a fair statement of the results of operations for
the three months ended March 31, 1998 and 1999. 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, 1998, which are included in the
Company's Form 10-K/A filed with the Securities and Exchange Commission for
the year ended December 31, 1998. 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 combined results
of operations for the three months ended March 31, 1999 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 effect 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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, ("SFAS 130") which is effective for fiscal years
beginning after December 15, 1997. SFAS 130 requires companies to classify
items of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the statement of
financial position. The adoption of SFAS 130, in 1998, did not affect the
consolidated financial statements of the Company.
In 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE RELATED INFORMATION ("SFAS 131"). SFAS 131 supersedes SFAS No.
14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments, SFAS 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS 131, in 1998, did not affect the consolidated financial statements of
the Company.
In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURE ABOUT
PENSIONS AND OTHER POST-RETIREMENT BENEFITS--AN AMENDMENT OF SFAS NOS. 87, 88
AND 106 ("SFAS 132"). SFAS 132 standardized the disclosure requirements for
pensions and other post-retirement plans, requires additional information on
changes in the benefit obligations and fair value of plan assets and
eliminates certain disclosures previously required under SFAS Nos. 87, 88 and
106. SFAS 132 is effective for fiscal years beginning after December 31,
1997. The adoption of SFAS 132, in 1998, did not affect the consolidated
financial statements of the Company.
In June 1998, the FASB issued, SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS 133 requires recognition of all derivative instruments in
the statement of financial position as either assets or liabilities and the
measurement of derivative instruments at fair value. SFAS 133 is effective
for fiscal years beginning after June 15, 1999. The adoption of SFAS 133 is
not expected to have an effect on the consolidated financial statements of
the Company.
In October 1998, the FASB issued SFAS No. 134, ACCOUNTING FOR
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE
LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE, AND AMENDMENT OF SFAS
NO. 65 ("SFAS 134"). SFAS 134 requires mortgage banking enterprises to
classify loans held for sale that they have securitized, based on their
intent to sell or hold those investments. SFAS 134 is effective for the first
fiscal quarter beginning after December 15, 1998. The adoption of SFAS 134,
in the first quarter of 1999 did not affect the consolidated financial
statements of the Company.
9
<PAGE>
NOTE 4. REAL ESTATE OPERATING PROPERTIES
Real estate operating properties are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
-----------------------------------------------
(unaudited)
<S> <C> <C>
Cost:
Buildings................................. $19,530 $18,830
Tenant improvements....................... 761 510
Land...................................... 6,122 5,867
------- -------
Real estate operating properties at cost... 26,413 25,207
Less accumulated depreciation and
amortization.......................... (3,296) (3,129)
------- -------
Real estate operating properties, net...... $23,117 $22,078
------- -------
------- -------
</TABLE>
Depreciation expense relating to real estate operating properties for the
three months ended March 31, 1998 and 1999 was $178,000 and $167,000,
respectively.
NOTE 5. CONSTRUCTION CONTRACTS
Construction contracts receivable includes amounts retained pending contract
completion, aggregating approximately $155,000 at December 31, 1998 and March
31, 1999. 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 $3.1 million at December 31,
1998 and $3.3 million at March 31, 1999.
Costs and estimated earnings in excess of billings, net, on uncompleted
contracts, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
-----------------------------------------------
(unaudited)
<S> <C> <C>
Costs incurred to date..................... $ 98,470 $ 101,655
Estimated earnings to date................. 30,694 32,033
--------- ---------
129,164 133,688
Less billings to date...................... (126,727) (132,586)
--------- ---------
Cost and estimated earnings in excess of
billings, net........................... $ 2,437 $ 1,102
--------- ---------
--------- ---------
</TABLE>
Costs and estimated earnings in excess of billings, net, are shown on the
accompanying Condensed Consolidated Balance Sheets as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
-----------------------------------------------
(unaudited)
<S> <C> <C>
Costs and estimated earnings in excess of
billings on uncompleted contracts....... $2,618 $1,990
Billings in excess of costs and estimated
earnings on uncompleted contracts....... (181) (888)
------ ------
Costs and estimated earnings in excess of
billings, net........................... $2,437 $1,102
------ ------
------ ------
</TABLE>
The asset "Costs and estimated earnigns in excess of billings on uncompleted
contracts" represents construction revenue recognized in excess of amounts
billed in the respective construction contracts. The liability "Billings in
excess of costs estimated earnings on uncompleted contracts" represents amounts
billed in excess of revenue recognized on the respective construction contracts.
10
<PAGE>
NOTE 6. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
---------------------- ----------------------
(unaudited)
<S> <C> <C>
Rental and other accounts receivable................... $ 575 $ 650
Goodwill............................................... 7,877 7,770
Development costs...................................... 2,598 2,531
Deferred tax assets, net............................... 74 95
Furniture and equipment, net........................... 1,379 1,425
Option and escrow deposits and impounds................ 3,087 3,301
Inventories............................................ 101 112
Other assets, primarily prepaid expenses and loan fees. 1,970 1,863
------- -------
$17,661 $17,747
------- -------
------- -------
</TABLE>
NOTE 7. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------- -------------
(unaudited)
<S> <C> <C>
Notes payable to various financial institutions, maturing at dates ranging
between April 1999 and November 2027. The notes bear interest
monthly at various rates ranging from 7.9% to 13.0%. (1)(2)(3)............. $72,328 $78,682
Notes payable to various individuals, maturing at dates ranging between June
1999 and March 2000. The notes bear interest at various rates
ranging from 15.0% to 24.0%................................................ 15,875 17,375
Other........................................................................ 103 -
------- -------
$88,306 $96,057
------- -------
------- -------
</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.
Borrowing under the line of credit is secured by the pledge of certain
Company receivables and any land acquired with borrowings under the line of
credit and bears interest at one percent over the lender's prime rate in
effect from time to time. The agreement is also subject to certain financial
covenants and matures May 1, 1999. As of December 31, 1998 and March 31,
1999, the Company had outstanding indebtedness of $5.0 million and $7.9
million, respectively, and available borrowings of $5.0 million and $2.1
million, respectively, under this agreement.
(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 (9.25% at December 31, 1998 and March 31, 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 December
31, 1998 and March 31, 1999, the Company had outstanding indebtedness of $1.9
million and $2.2 million, respectively, and available borrowings of $3.1
million and $2.8 million, respectively, under the Agreement. Under the terms
of the Agreement, the Company is required to meet certain financial covenants.
(3) Through April 30, 1999, $3.2 million of notes payable maturing in
April 1999 have been extended with new maturity dates ranging from June 1999
to February 2000. For the remaining notes payable with maturity dates in
1999, management is negotiating refinancing alternatives with the applicable
lenders.
During 1997, 1998 and 1999, the Company entered into various notes payable
representing borrowings from an unaffiliated individual. These notes bear
interest and mature on the following dates: $7.6 million at 20% maturing on
September 23, 1999; $1.0 million at 20% maturing on November 20, 1999; $1.0
million at 20% maturing on
11
<PAGE>
March 17, 2000; $500,000 at 24% maturing on July 9, 1999; $1.0 million at 24%
maturing on September 3, 1999; $5.3 million at 15% maturing on August 1,
1999; and $985,347 at 20% maturing on June 26, 1999.
NOTE 8. NOTES PAYABLE TO RELATED PARTIES AND OTHER RELATED PARTY TRANSACTIONS
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% to 18%, with
all amounts due at various dates in 1999.
During the fourth quarter of 1998, the Company's President and principal
stockholder, James C. Saxton, pledged 3,111,560 shares of Common Stock, or
approximately 40.6% of its outstanding shares, as collateral for two loans to
Mr. Saxton. Mr. Saxton reloaned the proceeds from such loans to the Company
for use in connection with the acquisition of Diamond Key. The two notes
payable to Mr. Saxton aggregating $7.6 million bear interest at 12% per annum
and mature on August 1, 1999. The Company intends to refinance the loans
from Mr. Saxton prior to their maturities. The Company understands that Mr.
Saxton intends to repay, in full, the loans from the two lenders upon
repayment of the loans he has made to the Company.
NOTE 9. EARNINGS PER COMMON SHARE
As required by 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 MARCH 31, 1998 THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------------------------------------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income................. $ 1,151 $ 1,801
BASIC EPS
Income applicable to
common stockholders...... 1,151 7,624,310 $ 0.15 1,801 7,732,922 $ 0.23
---------- ---------- ---------- ---------- ---------- ----------
---------- ----------
Effect of dilutive
securities:
Stock options.............. - 54,739 - 1,895
---------- ---------- ----------- ----------
DILUTED EPS
Income applicable to
common stockholders
and assumed conversions.. $ 1,151 $7,679,049 $ 0.15 $ 1,801 7,734,817 $ 0.23
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</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
March 31, 1998 and 1999 were 51,050 and 419,450, respectively.
NOTE 10. MANAGEMENT STOCK OPTION PLAN
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. On December 7, 1998, the Company's Board
of Directors approved an increase from 500,000 to 750,000 in the number of
shares subject to stock options under the Option Plan. The increase is
subject to majority ratification or approval, in accordance with Section 14
of the Securities Exchange Act of 1934, by the stockholders not later than
the next annual meeting of stockholders. Any such additional options granted
under the Plan will be subject to such stockholder approval. As of March 31,
1999, the Company had outstanding 441,100 stock options to certain officers
and employees of the Company pursuant to the Option Plan. These options will
vest in equal annual installments over five years commencing one year from
the award date and will expire between June 30, 2007 and March 31, 2009.
Stock options granted on June 30, 1997 were issued at an exercise price equal
to the initial public offering price of $8.25 per share. Stock options
granted after June 30, 1997 were granted at the closing stock price on the
grant date as reported on the Nasdaq Stock Market. On January 2, 1998, the
Company gave employees the opportunity to reprice their stock options. The
repricing involved changing their stock price from $8.25 per share to $6.875
per share (the closing stock price on January 2, 1998) and changing their
grant date from June 30, 1997 to January 2, 1998.
12
<PAGE>
Employees holding 148,300 of stock options elected to reprice on January 2,
1998. As of March 31, 1999, stock options had been granted under the Option
Plan with exercise prices ranging from $5.125 per share to $8.375 per share.
NOTE 11. 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. Total construction
loans payable for these Tax Credit Partnerships were approximately $37.1
million and $43.1 million at December 31, 1998 and March 31, 1999,
respectively.
NOTE 12. INFORMATION REGARDING BUSINESS SEGMENTS
In 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE RELATED INFORMATION ("SFAS 131"). SFAS 131 supersedes SFAS No.
14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments, SFAS 131 also requires disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS 131 did not affect the consolidated financial results of the Company.
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which disaggregates its
business by certain lines of business components. The Company's four
reportable operating segments are: Homebuilding, Design-Build Services,
Sales of Commercial Property and Property Operations and Management. Retail
operations and corporate activities are included in the "Other" column. The
financial results of the Company's operating segments are presented on an
accrual basis. There are no significant differences among the accounting
policies of the segments as compared to the Company's consolidated financial
statements. The Company evaluates the performance of its segments and
allocates resources to them based on revenues and gross profit. There are no
material intersegment revenues. The tables below present information about
the Company's operating segments for the three months ended March 31, 1998
and 1999, respectively (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------------------------------------------------------------
SALES OF PROPERTY
DESIGN-BUILD COMMERCIAL OPERATIONS AND
SERVICES HOMEBUILDING PROPERTY MANAGEMENT OTHER TOTAL
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue................... $ 5,737 $ 2,785 $ 2,834 $ 924 $ 429 $ 12,709
Costs..................... 4,503 2,344 2,580 175 - 9,602
----------- ----------- ------------ ------------ --------- ---------
Gross profit........... $ 1,234 $ 441 $ 254 $ 749 $ 429 $ 3,107
----------- ----------- ------------ ------------ --------- ---------
----------- ----------- ------------ ------------ --------- ---------
Depreciation and
amortization expense... $ - $ - $ - $ 168 $ 223 $ 391
Interest expense.......... $ - $ - $ - $ (501 ) $ (159) $ (660)
Interest income........... $ - $ - $ - $ 198 $ 95 $ 293
Total assets.............. $ 27,851 $ 20,380 $ - $ 39,803 $ 10,852 $ 98,886
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------------------------------------------------------------------
SALES OF PROPERTY
DESIGN-BUILD COMMERCIAL OPERATIONS AND
SERVICES HOMEBUILDING PROPERTY MANAGEMENT OTHER TOTAL
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue................... $ 4,750 $ 21,671 $ 1,550 $ 1,010 $ 571 $ 29,552
Costs..................... 3,888 19,074 1,006 287 - 24,255
----------- ----------- ------------ ------------ --------- ---------
Gross profit........... $ 862 $ 2,597 $ 544 $ 723 $ 571 $ 5,297
----------- ----------- ------------ ------------ --------- ---------
----------- ----------- ------------ ------------ --------- ---------
Depreciation and
amortization expense... $ - $ 126 $ - $ 158 $ 247 $ 531
Interest expense.......... $ - $ (29) $ - $ (511) $ (540)
$ -
Interest income........... $ - $ - $ - $ 223 $ 22 $ 245
Total assets.............. $ 43,039 $ 81,530 $ - $ 48,061 $ 8,183 $ 180,813
</TABLE>
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 MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUE. Total revenue was $29.6 million for the three months ended
March 31, 1999, representing a $16.8 million, or 132.5%, increase from $12.7
million for the three months ended March 31, 1998. The increase was primarily
due to an increase of $18.9 million, or 678.1%, in sales of homes to $21.7
million in the first three months of 1999 compared to $2.8 million in the
first three months of 1998. The 190 single-family home closings for the first
three months of 1999 represented an increase of 476.0%, compared to the 33
closings for the first three months of 1998. Home closings for the three
months ended March 31, 1999 included 60 in Nevada, 18 in Utah and 112 in
Arizona. In the first three months of 1998, all home closings were in
Nevada. Construction revenue for the first three months of 1999 was $4.8
million, a decrease of $987,000, or 17.2%, from $5.7 million during the first
three months of 1998. The decrease was primarily due to the Company's
increased focus on homebuilding operations. Sale of commercial properties
was $1.6 million for the three months ended March 31, 1999 compared to $2.8
million for the three months ended March 31, 1998. One commercial property
was sold during each period. Rental and other revenue increased to $1.6
million for the three months ended March 31, 1999, a 16.9% increase over the
$1.4 million in the comparable period of the prior year. The increase was
primarily due to loan related revenue from HomeBanc Mortgage Corporation, an
affiliate of Diamond Key Homes, Inc. ("Diamond Key"), which was acquired in
December 1998.
COST OF REVENUE. Total cost of revenue was $24.3 million for the three
months ended March 31, 1999, representing a $14.7 million, or 152.6%,
increase from $9.6 million for the three months ended March 31, 1998. Cost of
revenue for the three months ended March 31, 1999 as a percentage of revenue
was 82.1%, compared to 75.6% for the three months ended March 31, 1998. The
increase was primarily due to the higher cost basis of the commercial
property sold in 1999 and an increase in overhead allocation due to the
Company's increased homebuilding operations during 1999.
GROSS PROFIT. Gross profit as a percent of revenue decreased to 17.9% for
the three months ended March 31, 1999 from 24.4% for the comparable period in
1998. Gross margins on the sales of homes decreased to 12.0% in the first
three months of 1999 compared to 15.8% in the first three months of 1998, due
to an increased overhead allocation to the Company's homebuilding activities
on a per unit basis. Gross profit margin on home closings from Diamond Key
in the first three months of 1999 was 13.9%. Diamond Key was acquired in
November 1998. Gross margin on construction revenue decreased to 18.1% in
the three months ended March 31, 1999, compared to 21.5% in the same period
of 1998, primarily due to the timing of the completion of such projects and
increased overhead allocation. Gross profit margin on commercial properties
sold in the three months ended March 31, 1999 increased to 35.1% from 9.0% in
the three months ended March 31, 1998. In the first three months of 1999, one
retail commercial property was sold, which yielded a higher gross profit
margin than the one rental property that was sold in the same period of 1998.
14
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $1.9 million for the three months ended March 31, 1999, representing a
$1.1 million, or 148.1%, increase from $752,000 for the three months ended
March 31, 1998. The increase was primarily due to increased activities
related to the growth in the Company's revenue, including the acquisitions of
Diamond Key and Maxim. Of this increase, $261,000 of marketing and
advertising costs reflect the increased number of housing subdivisions in
production during the three months ended March 31, 1999 compared to the same
period in 1998. The Company added 14 projects in Arizona and two in Utah
during the first quarter of 1999. In addition, accounting, legal and other
professional fees increased $259,000, vehicle, equipment and repairs and
maintenance expense increased $145,000 and rent, utility, travel and other
general office expenses increased $405,000. As a result, general and
administrative expenses as a percentage of total revenue was 6.3% for the
three months ended March 31, 1999 as compared to 5.9% for the three months
ended March 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$531,000 for the three months ended March 31, 1999, representing a $140,000,
or 35.8%, increase from $391,000 for the three months ended March 31, 1998.
The increase was primarily due to goodwill amortization expense of $145,000
for the three months ended March 31, 1999 for Diamond Key, Maxim and
HomeBanc Mortgage Corporation, which were acquired in 1998 utilizing the
purchase method of accounting. This increase was partially offset by a
$29,000 decrease in depreciation expense due to a decrease in the cost basis
of properties due to operating properties and equipment sold in prior periods.
INTEREST EXPENSE, NET. Interest expense, net, was $295,000 for the three
months ended March 31, 1999, representing a $72,000 or 19.6%, decrease from
$367,000 for the three months ended March 31, 1998. The decrease was
primarily the result of a $120,000 decrease in interest expense due to
increased interest capitalization, partially offset by a $52.0 million
increase in debt, a portion of which was used in connection with the 1998
acquisitions. Interest income decreased $48,000, or 16.4%, for the three
months ended March 31, 1999 compared to the same period in 1998, due to a
decrease in notes receivable to $1.5 million at March 31, 1999 from $3.2
million at March 31, 1998.
INCOME BEFORE PROVISION FOR INCOME TAXES. As a result of the foregoing
factors, income before provision for income taxes was $2.6 million for the
three months ended March 31, 1999, representing a $1.0 million, or 62.9%,
increase from $1.6 million for the three months ended March 31, 1998. Income
before provision for income taxes as a percentage of total revenue was 8.8%
for the three months ended March 31, 1999 as compared to 12.6% for the three
months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
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,
including loans from affiliates 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 some or all of these
sources. Management believes that cash generated from operations, funds
available from external sources of debt and equity financing, together with
cash on hand at March 31, 1999 will be sufficient to provide for its capital
requirements for at least the next 12 months. The Company is exploring the
refinancing of these and other indebtedness through the issuance of up to
$50.0 million of longer term notes during 1999. There can be no assurance
that the Company will be able to do so.
During the fourth quarter of 1998, the Company's President and principal
stockholder, James C. Saxton, pledged 3,111,560 shares of Common Stock, or
approximately 40.2% of the Company's outstanding shares at March 31, 1999, as
collateral for two personal loans to Mr. Saxton. Mr. Saxton reloaned the
proceeds from such loans to the Company for use in connection with the
acquisition of Diamond Key. The two notes payable to Mr. Saxton aggregating
$7.6 million bear interest at 12% per annum and mature on August 1, 1999.
The Company intends to refinance the loans from Mr. Saxton prior to their
maturities. The Company understands that Mr. Saxton intends to repay, in
full, the loans from the two lenders upon repayment of the loans he has made
to the Company.
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
15
<PAGE>
$5.0 million for land acquisitions. Borrowing under the line of credit is
secured by the pledge of certain Company receivables and any land acquired
with borrowings under the line of credit and bears interest at one percent
over the lender's prime rate in effect from time to time. The agreement is
also subject to certain financial covenants and matures May 1, 1999. As of
December 31, 1998 and March 31, 1999, the Company had outstanding
indebtedness of $5.0 million and $7.9 million, respectively, and available
borrowings of $5.0 million and $2.1 million, respectively, under this
agreement.
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 (9.25% at December 31, 1998 and March 31, 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 December 31, 1998 and
March 31, 1999, the Company had outstanding indebtedness of $1.9 million and
$2.2 million, respectively, and available borrowings of $3.1 million and $2.8
million, respectively, under the Agreement. Under the terms of the
Agreement, the Company is required to meet certain financial covenants.
OPERATING ACTIVITIES. Net cash used in operating activities was $6.8
million for the three months ended March 31, 1999 compared to $6.7 million
for the three months ended March 31, 1998. The increase in net cash used in
operating activities was primarily due to the increase in properties under
development related to single-family homes. The number of home developments
increased to 35 for $67.3 million at March 31, 1999 from 10 for $20.0 million
at March 31, 1998. This increase was partially offset by a $363,000
collection of amounts Due from Tax Credit Partnerships during the three
months ended March 31, 1999 compared to a $5.0 million increase in the
receivable during the three months ended March 31, 1998.
INVESTING ACTIVITIES. Net cash used in investing activities was $455,000
for the three months ended March 31, 1999 and $4.5 million for the three
months ended March 31, 1998. The decrease was primarily due to a reduction
in expenditures for property and land acquisitions, improvements and proceeds
received from the sale of a commerical property during the three months ended
March 31, 1999 while no commercial properties were sold during the three
months ended March 31, 1998.
FINANCING ACTIVITIES. Net cash provided by financing activities was $6.8
million for the three months ended March 31, 1999 compared to $11.9 million
for the three months ended March 31, 1998. The decrease in cash provided by
financing activities was primarily due to reduced net borrowings of $7.7
million during the quarter ended March 31, 1999 compared to $11.9 million
during the quarter ended March 31, 1998.
Interest costs incurred, expensed and capitalized were as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1998 1999
-----------------------------------------
<S> <C> <C>
Interest incurred:
Residential...................................... $ 515 $ 2,169
Commercial....................................... 622 601
-------------- --------------
Total incurred................................. $ 1,137 $ 2,770
-------------- --------------
-------------- --------------
Interest expensed:
Residential...................................... $ 133 $ 29
Commercial 527 511
-------------- --------------
Total expensed................................. $ 660 $ 540
-------------- --------------
-------------- --------------
Interest capitalized at end of period:
Residential...................................... $ 382 $ 2,140
Commercial....................................... 95 90
-------------- --------------
Total interest capitalized..................... $ 477 $ 2,230
-------------- --------------
-------------- --------------
</TABLE>
Properties under development and land held for future development or sale
increased $11.9 million from $80.7 million at December 31, 1998 to $92.6
million at March 31, 1999.
16
<PAGE>
The Company anticipates that during the next twelve months portfolio
projects in development will cost approximately $351,000 in the aggregate,
substantially all of which the Company plans to finance through construction
loans. The Company also anticipates that it will spend approximately $3.9
million for planned portfolio projects during the next twelve months. 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 is exposed to changes in interest rates primarily as a result
of its borrowing activities, which includes borrowings under lines of credit.
These lines, along with cash flow from operations, are used to maintain
liquidity and fund business operations. The Company typically replaces
borrowings under its lines of credit, as necessary, with long-term fixed rate
and shorter termed variable rate financing generally secured by real estate.
The nature and amount of the Company's debt may vary as a result of business
requirements, market conditions and other factors. The extent of the
Company's interest rate risk is not quantifiable or predictable because of
the variability of interest rates and business financing requirements, but
the Company does not believe such risk is material. The Company does not
currently use derivative instruments to adjust the Company's interest rate
risk profile.
The Company has made its capital contributions to the six Tax Credit
Partnerships. 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.
The Company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial instruments.
On the basis of the fair value of the Company's market sensitive instruments
at March 31, 1999, the Company does not consider the potential near-term
losses in future earnings, fair values and cash flows from reasonably
possible near-term changes in interest rates to be material.
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 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, 1999, the Company had 316 homes in backlog, representing an
aggregate sales value of approximately $33.9 million.
The Company is also involved in the design-build development of commercial
projects. Backlog for such commercial projects is defined as the uncompleted
work remaining under a signed fixed-price contract. The Company uses the
percentage-of-completion method to account for revenue from its design-build
contracts. At March 31, 1999, the Company had backlog under its design-build
contracts of approximately $15.4 million.
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 contacted or will contact its significant service providers, vendors,
suppliers, subcontractors, financial institutions, consultants and various
government agencies, to obtain information regarding the assurance of Y2K
compliance. However, there can be no guarantee that the systems of others
upon which the Company's systems rely will be Y2K compliant in a 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 increased the awareness of the Y2K issue across the
Company, assessed the Company's Y2K issues, determined proposed resolutions,
validated those proposed resolutions and implemented most system
17
<PAGE>
solutions. The Company has substantially 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 the end of the second quarter of
1999.
Given the information known at this time about the Company's systems and
such issues, coupled with the Company's 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 Y2K expenditures have been negligible
thus far due to much of the work performed by existing internal staff. Any
further 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 believes that its business operations
are not heavily dependent on Y2K compliance of its systems and that, should a
reasonably likely worst case Y2K situation occur, the Company, because of the
basic nature of its systems, many of which can be executed manually, would
not likely suffer material loss or disruption in remedying the situation.
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 AND 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, Phoenix, Salt
Lake City, Reno and Tucson, 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 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.
EFFECTS OF CHANGING PRICES, INFLATION AND 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. The Company had
outstanding approximately $67.3 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 8.74%
per annum at March 31, 1999. If the interest rates on the
18
<PAGE>
floating rate debt increase in accordance with changes to the indices upon
which the rates are based, debt service obligations of the Company will
increase.
Management believes that the Company's future homebuilding activities may
be affected by fluctuations in interest rates and changing prices. Higher
interest rates may decrease the demand for new homes by making it more
difficult for homebuyers 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, 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
operations.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THE FOREGOING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AND BUSINESS SECTIONS CONTAIN 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," "PROPOSES,"
"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,"
"EFFECTS OF CHANGING PRICES, INFLATION AND INTEREST RATES" AND OTHER RISK
FACTORS INCLUDING BUT NOT LIMITED TO: THE PRIMARY DEPENDENCE ON THE GREATER
LAS VEGAS AND PHOENIX AREAS; INSUFFICIENT HISTORY IN GEOGRAPHIC AREAS OTHER
THAN LAS VEGAS; RISKS OF HOMEBUILDING AND OTHER REAL ESTATE DEVELOPMENT AND
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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," in the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1998. There have been no significant changes
since the filing of the aforementioned report.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES AND USE OF PROCEEDS
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.
Exhibit 27 - Financial Data Schedule for the quarter ended March 31, 1999.
20
<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
May 14, 1999 By: /s/ Kirk Scherer
-----------------------------------
Kirk Scherer
Executive Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Melody J. Sullivan
-----------------------------------
Melody J. Sullivan
Vice President and Chief Accounting
Officer
(Principal Accounting Officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001014488
<NAME> SAXTON INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 863
<SECURITIES> 0
<RECEIVABLES> 42,290<F1>
<ALLOWANCES> 403
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 121,076
<DEPRECIATION> 4,903
<TOTAL-ASSETS> 180,813
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 39,980
<TOTAL-LIABILITY-AND-EQUITY> 180,813
<SALES> 27,971
<TOTAL-REVENUES> 29,797
<CGS> 23,968
<TOTAL-COSTS> 24,255
<OTHER-EXPENSES> 2,403<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 540
<INCOME-PRETAX> 2,599
<INCOME-TAX> 798
<INCOME-CONTINUING> 1,801
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 1,801
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
<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>
