UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 June 30, 2000 was 8,336,455.
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SAXTON INCORPORATED AND SUBSIDIARIES
FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
<S> <C>
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS -
DECEMBER 31, 1999 AND JUNE 30, 2000. . . . . . . . . . . . . . 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME -
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000. . . . . . . 4
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY - SIX MONTHS ENDED JUNE 30, 2000. . . . . . . . . . . . 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -
SIX MONTHS ENDED JUNE 30, 1999 AND 2000. . . . . . . . . . . . 7-8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS . . . . . 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . 28
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . 28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES AND USE OF PROCEEDS. . . . 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . 28
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . 28
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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2
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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)
(unaudited)
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
---------- --------------
<S> <C> <C>
Real estate properties (all held for sale at December 31, 1999 and
June 30, 2000):
Operating properties, net of accumulated depreciation . . . . . . . $ 29,829 $ 28,215
Properties under development. . . . . . . . . . . . . . . . . . . . . 70,670 89,974
Land held for future development or sale. . . . . . . . . . . . . . 11,211 13,436
---------- --------------
Total real estate properties. . . . . . . . . . . . . . . . . 111,710 131,625
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . 230 6,268
Due from Tax Credit Partnerships (held for sale at December 31, 1999
and June 30, 2000). . . . . . . . . . . . . . . . . . . . . . . . . . 9,087 12,587
Construction contracts receivable, net of allowance for doubtful
accounts of $100 at December 31, 1999 and June 30, 2000 . . . . . . . 393 2,451
Costs and estimated earnings in excess of billings on uncompleted
contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,384 760
Notes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 936
Investments in joint ventures . . . . . . . . . . . . . . . . . . . . . 3,251 3,249
Due from related parties. . . . . . . . . . . . . . . . . . . . . . . . 30 26
Goodwill, net of accumulated amortization of $734 at December 31, 1999
and $389 at June 30, 2000 . . . . . . . . . . . . . . . . . . . . . . 2,148 7,251
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . (211) 1,604
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . 3,620 6,271
---------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 131,954 $ 173,028
========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . $ 26,849 $ 27,576
Tenant deposits and other liabilities . . . . . . . . . . . . . . . . . 332 7,357
Billings in excess of costs and estimated earnings on uncompleted
contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,063 220
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,466 117,763
Notes payable to related parties. . . . . . . . . . . . . . . . . . . . 9,674 10,103
Long-term capital lease obligations . . . . . . . . . . . . . . . . . . 770 1,041
---------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 113,154 164,060
---------- --------------
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . .
Stockholders' equity:
Common stock, $.001 par value. Authorized 50,000,000
shares; issued and outstanding 7,879,313 at December 31, 1999
and 8,336,455 at June 30, 2000. . . . . . . . . . . . . . . . . . . . 8 8
Preferred stock, $.001 par value. Authorized 5,000,000
shares; no shares issued and outstanding. . . . . . . . . . . . . . . - -
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 23,510 22,482
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . (4,718) (13,522)
---------- --------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . 18,800 8,968
---------- --------------
Total liabilities and stockholders' equity. . . . . . . . . . $ 131,954 $ 173,028
========== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
REVENUE:
Construction revenue, including Tax Credit
Partnership construction revenue of $6,949 and $1,972
for the three months ended June 30, 1999 and 2000, respectively, and
$10,862 and $2,342 for the six months ended June 30, 1999 and
2000, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,972 $ 7,417 $ 2,342 $12,167
Sales of homes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,778 25,430 34,062 47,101
Sales of commercial properties. . . . . . . . . . . . . . . . . . . . . - - 3,530 1,550
Sales of land in development and land held for development. . . . . . . 25,028 137 25,795 137
Rental revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 855 844 1,814 1,854
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 590 588 964 1,159
-------- -------- --------- --------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . 43,223 34,416 68,507 63,968
-------- -------- --------- --------
COST OF REVENUE:
Cost of construction, including Tax Credit Partnership cost of
construction of $4,971 and $2,000 for the three months ended
June 30, 1999 and 2000, respectively, and $7,657 and $2,785 for
the six months ended June 30, 1999 and 2000, respectively . . . . . . 2,000 5,914 2,785 9,782
Cost of homes sold. . . . . . . . . . . . . . . . . . . . . . . . . . . 14,559 21,932 32,295 41,162
Cost of commercial properties sold. . . . . . . . . . . . . . . . . . . - - 3,128 1,006
Cost of land in development and land held for development . . . . . . . 26,405 18 27,055 18
Rental operating cost . . . . . . . . . . . . . . . . . . . . . . . . . 244 236 753 523
-------- -------- --------- --------
Total cost of revenue . . . . . . . . . . . . . . . . . . . . . 43,208 28,100 66,016 52,491
-------- -------- --------- --------
Gross profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6,316 2,491 11,477
-------- -------- --------- --------
General and administrative expense. . . . . . . . . . . . . . . . . . . 2,298 2,362 5,942 4,402
Write down of goodwill. . . . . . . . . . . . . . . . . . . . . . . . . 4,847 - 4,847 -
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 221 577 778 1,108
-------- -------- --------- --------
Operating income (loss) . . . . . . . . . . . . . . . . . . . . (7,351) 3,377 (9,076) 5,967
-------- -------- --------- --------
OTHER EXPENSE:
Interest expense, net of interest income of $233 and $8 for the
three months ended June 30, 1999 and 2000, respectively, and $478
and $11 for the six months ended June 30, 1999 and 2000,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,601) (1,854) (3,205) (3,206)
Joint venture income (loss) . . . . . . . . . . . . . . . . . . . . . . 1 (18) 1 (24)
-------- -------- --------- --------
Total other expense . . . . . . . . . . . . . . . . . . . . . . (1,600) (1,872) (3,204) (3,230)
-------- -------- --------- --------
Income (loss) before provision for income taxes . . . . . . . . . . . . . (8,951) 1,505 (12,280) 2,737
Provision (benefit) for income taxes. . . . . . . . . . . . . . . . . . . (2,122) 411 (3,040) 789
-------- -------- --------- --------
Income (loss) before extraordinary gain . . . . . . . . . . . . . . . . . (6,829) 1,094 (9,240) 1,948
Extraordinary gain on troubled debt restructuring, net of income taxes
of $4,910 for the three months and six months ended June 30, 2000. . . 18,044 - 18,044 -
-------- -------- --------- --------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $11,215 $ 1,094 $ 8,804 $ 1,948
======== ======== ========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Continued
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
EARNINGS PER COMMON SHARE:
Basic:
------
Income (loss) before extraordinary gain. . . . . . . . . . . . . . . . $ (0.81) $ 0.14 $ (1.13) $ 0.25
Extraordinary gain on troubled debt restructuring, net of income taxes 2.16 - 2.21 -
----------- ---------- ----------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.35 $ 0.14 $ 1.08 $ 0.25
=========== ========== =========== ==========
Weighted-average number of common shares outstanding . . . . . . . . . 8,336,455 7,732,922 8,153,096 7,732,922
=========== ========== =========== ==========
Diluted:
--------
Income (loss) before extraordinary gain. . . . . . . . . . . . . . . . $ (0.81) $ 0.14 $ (1.13) $ 0.25
Extraordinary gain on troubled debt restructuring, net of income taxes 2.16 - 2.21 -
----------- ---------- ----------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.35 $ 0.14 $ 1.08 $ 0.25
=========== ========== =========== ==========
Weighted-average number of common shares outstanding assuming
dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,336,455 7,734,185 8,153,096 7,734,688
=========== ========== =========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000
(in thousands)
(Unaudited)
ADDITIONAL
SHARES COMMON PAID-IN ACCUMULATED
OUTSTANDING STOCK CAPITAL DEFICIT TOTAL
----------- ------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 . . . . . . . 7,879 $ 8 $ 22,482 $ (13,522) $ 8,968
Stock issued in connection with Volunteers
of America (VOA) purchase agreement. . 457 - 1,028 - 1,028
Net income (loss) for the six months
ended June 30, 2000. . . . . . . . . . . . - - - 8,804 8,804
----------- ------- ----------- ------------- -------
Balance at June 30, 2000 . . . . . . . . . 8,336 $ 8 $ 23,510 $ (4,718) $18,800
=========== ======= =========== ============= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
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SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
-------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,804 $ 1,948
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 778 1,108
Gain on sales of properties. . . . . . . . . . . . . . . . . . (18,513) (789)
Joint venture loss . . . . . . . . . . . . . . . . . . . . . . (1) 24
Write down of goodwill . . . . . . . . . . . . . . . . . . . . 4,847
Increase in investments in joint ventures. . . . . . . . . . . - (50)
Changes in operating assets and liabilities:
Tax Credit Partnerships. . . . . . . . . . . . . . . . . . . 3,500 (999)
Construction contracts receivable. . . . . . . . . . . . . . 2,058 34
Costs and estimated earnings in excess of billings
on uncompleted contracts . . . . . . . . . . . . . . . . . (625) 1,040
Properties under development . . . . . . . . . . . . . . . . - (14,597)
Prepaid expenses and other assets. . . . . . . . . . . . . . (861) 89
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . 1,815 -
Accounts payable and accrued expenses. . . . . . . . . . . . (728) (4,385)
Billings in excess of costs and
estimated earnings on uncompleted contracts. . . . . . . . 842 100
Tenant deposits and other liabilities. . . . . . . . . . . . (1,565) 181
--------- ---------
Net cash provided by (used in) operating activities 351 (16,296)
--------- ---------
Cash flows from investing activities:
-------------------------------------
Expenditures for property acquisitions and improvements. . . . . . - (2,175)
Proceeds from sales of properties. . . . . . . . . . . . . . . . . 5,256 1,686
Increase in notes receivable from related parties . . . . . . . . - (70)
Payments from notes receivable from related parties. . . . . . . . (15) 58
Decrease (increase) in notes receivable. . . . . . . . . . . . . . 639 (780)
--------- ---------
Net cash provided by (used in) investing activities 5,880 (1,281)
--------- ---------
Cash flows from financing activities:
-------------------------------------
Proceeds from issuance of notes payable. . . . . . . . . . . . . . 38,233 54,621
Payments on notes payable and capital lease obligations. . . . . . (50,074) (38,752)
Proceeds from issuance of notes payable to related parties . . . . 1,468 2,472
Payments on notes payable to related parties . . . . . . . . . . . (1,897) (1,705)
--------- ---------
Net cash provided by (used in) financing activities (12,270) 16,636
--------- ---------
Net decrease in cash and cash equivalents . . . . . (6,038) (941)
Cash and cash equivalents:
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . 6,268 1,331
--------- ---------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . $ 230 $ 390
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
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SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
(unaudited)
SIX MONTHS ENDED
JUNE 30,
----------------
2000 1999
------- ------
<S> <C> <C>
Supplemental disclosure of cash flow information:
-------------------------------------------------
Cash paid during the period for interest, net of amounts capitalized $ 510 $5,183
======= ======
Cash paid during the period for income taxes . . . . . . . . . . . . $ - $ 259
======= ======
Non-cash financing and investing activities:
--------------------------------------------
Common stock issued to Volunteers of America (VOA) in
connection with a purchase agreement . . . . . . . . . . . . . . . $ 1,028 $ -
======= ======
Capital lease obligation recorded in connection with equipment
acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 119
======= ======
Extinguishment of troubled debt. . . . . . . . . . . . . . . . . . . $36,159 $
======= ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
8
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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 diversified real
estate company, specializing principally in the affordable homebuilding
industry, operating in the fast-growing Las Vegas, Phoenix, Salt Lake City and
Reno 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 ("design-build
services"), including tax credit partnerships; (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.
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. During 1999, the Company sold 924
homes, at an average price of $111,161, an increase from 251 homes sold at an
average price of $110,100 in 1998. Reflecting the Company's commitment to expand
its homebuilding activities, in March 1998, the Company acquired Maxim Homes,
Inc. ("Maxim") and in November 1998, acquired Diamond Key Homes, Inc. ("Diamond
Key"). Maxim, a Salt Lake City, Utah homebuilder, specialized in building homes
generally ranging in price from $145,000 to $185,000. Diamond Key, an Arizona
homebuilder and construction company, specialized in entry-level and move-up
homes generally ranging in price from $90,000 to $120,000. The Company,
including Maxim and Diamond Key, had 12 residential community developments in
process, in three states, as of June 30, 2000. The Company also provides its
construction and design-build development services to clients which have
included large, nationally recognized public companies as well as smaller
regional businesses.
The Company's portfolio of 7 income producing properties at June 30, 2000
included approximately 258,449 square feet of office, retail and industrial
facilities. Management monitors the market for the Company's properties on an
ongoing basis to take advantage of opportunities for strategic sales of its
holdings when conditions are favorable.
WORKOUT PLAN
The Company has experienced a slow down of construction in the fourth
quarter of 1999 and a halt of construction in Nevada and Utah in the first half
of 2000, primarily due to cash flow problems and over expansion, and was in
default on a substantial number of its notes payable at June 30, 2000. The
inadequate cash flow problem was due to several factors, including: the purchase
of Diamond Key Homes in November 1998 for approximately $12.9 million, including
$10.9 million in cash, a portion of which was borrowed funds; over expansion;
purchases of land in Utah in the first and third quarters of 1999 for $4.5
million, which the Company purchased using a combination of high interest rate,
short term debt and funds intended for working capital and other purposes, and
for which the Company was unable to obtain permanent replacement financing on
satisfactory terms; and the Company's failure to adequately monitor and manage
its cash flow. The aforementioned facts and circumstances have raised
substantial doubt that the Company will be able to continue as a going concern
and, therefore, may be unable to realize its assets and discharge its
liabilities in the normal course of business.
In the first quarter of 2000, the Company brought in outside consultants and
legal expertise to assist in formulating a workout business plan (the "Workout
Plan"). The key elements of the Workout Plan are: to establish adequate cash
management controls regarding cash flows and to accelerate the retirement of
debt, especially higher interest rate debt, by raising additional capital from
sources other than the sale of homes, such as the sale of land held for
development and for sale and operating properties, and to negotiate forbearance
agreements with the lenders. The Company believes that the proposed Workout
Plan will help the Company focus on operations, including improved cash
management and monitoring of cash flows and completion of construction and sales
of existing projects.
9
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Although the Company hopes that the Workout Plan will allow the Company to
avoid filing, or being forced into, bankruptcy, there can be no assurances that
the Workout Plan will be approved by the Company's creditors and subcontractors
or, that if approved, the Company will be able to successfully take the steps
necessary under the Workout Plan to avoid filing, or being forced into,
bankruptcy.
Cash Flow Funds Controls. The Company has finalized details of various loan
------------------------
terms with its creditors and subcontractors in Nevada allowing certain controls
on its use of cash, including a voucher control system with Nevada Construction
Services to coordinate payments to lenders and subcontractors. The Company has
also reached agreements with the majority of its Nevada subcontractors to accept
a pro rata share of proceeds from the sales of future units through escrow
disbursements, after the primary lenders have been paid, until the
subcontractors' obligations are satisfied. These payments will be made through
escrow to insure payment is made timely and accurately to the lenders and
subcontractors. The Company has also agreed to weekly monitoring of the
Company's progress to insure adherence to the Workout Plan. With these
agreements in place, construction resumed in Nevada on two multi-family
developments in April 2000 and four single-family subdivisions in July 2000.
The Company is currently attempting to reach similar agreements with its Utah
creditors and subcontractors.
Retirement of Debt and Sale of Properties. An agreement was reached on May
-----------------------------------------
12, 2000 with a group of the Company's various individual debt holders ("Debt
Holder"), which allowed the Company to dispose of certain of its assets so as to
improve its balance sheet and its cash flow. The agreement provided for the
Debt Holder to acquire assets from the Company with a carrying value of $14.2
million, comprised of the Company's rights to a 914 acre parcel of undeveloped
land in Tucson, Arizona, a 112 acre parcel of undeveloped land in North Las
Vegas, Nevada, and two properties under development in Phoenix, Arizona. In
exchange for such assets, the Debt Holder forgave any and all indebtedness of
the Company in favor of the Debt Holder, aggregating approximately $31.6 million
(including assumption of $3.6 million in unrelated debt on two Phoenix, Arizona
properties) at the date of sale, and bearing interest rates ranging from 0.0% to
30.0%. The Company received the Debt Holder's interest in a partnership which
has an investment in a condominium project that has a fair value of
approximately $8.9 million and related debt of $7.7 million. This agreement
eliminated the high interest rate debt the Company has recorded with respect to
these assets and it improves the balance sheet position in that the primary
asset being given in exchange for the extinguishment of debt is a contract to
acquire the 914 acre parcel, which was recorded as a $1.8 million asset on the
Company's Consolidated Balance Sheet. The sale of properties and extinguishment
of debt resulted in debt retirement of approximately $31.6 million of notes
payable and $5.6 million of deposit liabilities. As a result of this
transaction, the Company recognized an extraordinary gain on extinguishment of
troubled debt of $22.9 million in May 2000. Although some of the Debt Holder's
obligations were unsecured, much of the debt was secured. Hence, this
transaction has freed up equity for the purposes of generating cash either
through loans or sales to meet the existing cash flow shortages. Net loss
before provision for income taxes without consideration of the extraordinary
gain was $12.3 million for the six months ended June 30, 2000. By taking the
extraordinary gain into consideration, net income before provision for income
taxes increased to $10.6 million for the same period. In addition to the
aforementioned transaction, through June 30, 2000 the Company has sold three
operating properties and two parcels of land held for development in order to
generate operating cashflow and relieve debt.
The Company has other properties in escrow and anticipates cash flows from
these closings in the coming months. There can be no assurance however that any
of the proposed asset sales will be completed or, that if completed, they would
be completed in a timely enough manner for the Company to avoid filing, or be
forced into, bankruptcy. Similarly, there can be no assurance the Company's
other creditors will forego taking any actions against the Company pending the
completion of these transactions and there can be no assurance that, even if the
transactions are completed, that the Company will be able to avoid filing, or be
forced into, bankruptcy.
The cash short fall in the initial months, until business operations
stabilize, is dependent on the sales of properties. However, with the Debt
Holder agreement in place, considerable cash has been freed up, and the
Company's cash flow demands from short-term borrowings have diminished
significantly. Additionally, it will take time to fully implement the Workout
Plan and the Company may need to obtain interim financing and there can be no
assurance that the Company will be able to obtain such interim financing on
satisfactory terms or at all.
In March 13, 2000, pursuant to a purchase/settlement agreement with
Volunteers of America (VOA) National Housing Corp., which was approved by the
Company's Board of Directors in the fourth quarter of 1999, the Company agreed
to pay VOA $1,325,000 to acquire their interest in Tax Credit Partnerships. The
purchase/settlement agreement was subsequently reduced to a judgement. A
portion of the judgement, $1,000,000, was to be satisfied by the Company issuing
457,142 shares of Saxton Common Stock (representing approximately 5.8% of the
Company's Common Stock issued and outstanding on March 12, 2000). The balance
of $325,000 was to be paid over a period of time; of which $125,000 was paid in
the first quarter of 2000, with the reminder to be paid in annual installments,
over the next two years. The Company delivered the stock. However, VOA
contested the delivery of the stock. The District Court clarified its judgement
to require not only delivery, but registration of the stock, and ruled that the
Company had not complied with the stock component of the judgment; lifted the
stay, and the $1,000,000 plus interest became executable. The Company appealed
the District Court order clarifying judgement to the Supreme Court. The company
posted a supersedeas bond, and on August 2, 2000 execution on the judgement was
stayed pending its appeal. On June 30, 2000 the Common Stock issued to VOA is
considered issued and outstanding and is recorded as a component of stockholder
equity.
NOTE 2. DISPOSITION OF ASSETS AND GOODWILL IMPAIRMENT
On June 15, 2000, the Company completed the sale of the remaining lots in
four residential subdivisions that comprise the Tucson division of Diamond Key
Homes for $7.9 million in cash, resulting in an equal amount of debt relief.
The Tucson division of Diamond Key Homes was sold to Nevada Diversified Equity,
LLC, doing business as Monterey Homes.
10
<PAGE>
On August 3, 2000, the Company sold all of the assets of its wholly owned
subsidiary, HomeBanc Mortgage Corporation ("HomeBanc") to Affordable Housing
Acceptance LLC, dba The Platinum Investment Group for $12,000 in cash. With
the sale of HomeBanc, the Company will be discontinuing its line of business
as a real estate mortgage broker. The Company will discontinue operation of
HomeBanc when the buyer obtains its FHA license, but no later than November
1, 2000.
Goodwill Impairment
--------------------
Goodwill related to the acquisitions of Maxim, Diamond Key and HomeBanc,
totaling approximately $8.0 million, has historically been amortized over 15
years. In the second quarter of 2000, through the restructuring of troubled
debt, the Company sold 3 Arizona residential subdivisions. Due to these sales,
and the June 15, 2000 sale of the Tucson Division of Diamond Key, and the
Company's inability to finance future projects at this time, the realizability
of the remaining balance of the related Diamond Key goodwill was impaired.
Based on the disposition of the assets, the Company recorded a goodwill
impairment of $4.8 million. Also in the second quarter of 2000, with the sale
of HomeBanc, and the Company's discontinuation of its line of business as a real
estate mortgage broker, the Company expensed $376,000 in related Goodwill.
Additionally, during the second quarter of 2000, Maxim Homes sold one piece of
raw land held for future development and took a goodwill impairment of $78,000.
The operations of these three acquisitions were included in the Company's
Consolidated Statements of Operations since their acquisition dates.
NOTE 3. BASIS OF PRESENTATION
The accompanying condensed consolidated unaudited interim financial
statements have been prepared on a going concern basis. The Company has
experienced a slowdown of construction in the fourth quarter of 1999 and a halt
of construction in Nevada and Utah in the first half of 2000, primarily due to a
shortage of available cash flow. The Company presently is unable to pay
interest or principal amounts outstanding on notes payable and a substantial
number of its notes payable were in default at June 30, 2000. The Company has
cured many of its notes in default and is currently negotiating forbearance
agreements with the remaining lenders. In the event the Company is unable to
successfully renegotiate an appropriate period of forbearance or other
satisfactory restructuring of the remaining notes payable in default, the
lenders thereunder have the right to accelerate the loan and exercise their
remedies under the note agreements, including foreclosure of their security
interest in the Company's assets.
The accompanying condensed consolidated unaudited interim financial
statements of the Company have been prepared in conformity with accounting
principles generally accepted in the United States of America ("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 six months ended June 1999 and 2000. 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, 1999, which are included
in the Company's Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 1999. Certain reclassifications have been made to
conform prior periods with the current period presentation.
Recent Accounting Pronouncements
----------------------------------
In June 1998, the Financial Accounting Standards Board 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, as amended, is effective for all quarters in fiscal years beginning
after June 15, 2000. The adoption of SFAS 133 is not expected to have a
material impact on the consolidated financial statements of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 clarifies existing accounting principles related to revenue
recognition in financial statements. The Company is required to comply with the
provisions of SAB 101 by the fourth quarter of 2000. Management has not yet
completed an analysis of the impact that SAB 101 will have on the Company's
current revenue recognition practices.
11
<PAGE>
NOTE 4. REAL ESTATE OPERATING PROPERTIES
Real estate operating properties are summarized as follows (in thousands):
JUNE 30, 2000 DECEMBER 31, 1999
--------------- -------------------
Cost:
Buildings. . . . . . . . . . . . . . . $ 22,651 $ 24,384
Tenant improvements. . . . . . . . . . 3,977 730
Land . . . . . . . . . . . . . . . . . 6,763 6,687
--------------- -------------------
Real estate operating properties at cost 33,391 31,801
Less accumulated depreciation and
amortization . . . . . . . . . . . . (3,562) (3,586)
--------------- -------------------
Real estate operating properties, net. . $ 29,829 $ 28,215
=============== ===================
Depreciation expense relating to real estate operating properties for the
three months ended June 30, 1999 and 2000 was $191,000 and $0, respectively.
Depreciation expense relating to real estate operating properties for the six
months ended June 30, 1999 and 2000 was $346,000 and $143,000, respectively.
Depreciation on operating properties was discontinued during the second quarter
of 2000 as all operating properties were held for sale.
NOTE 5. CONSTRUCTION CONTRACTS
Construction contracts receivable of $2.4 million and $393,000 at December
31, 1999 and June 30, 2000, respectively, include amounts retained pending
contract completion aggregating approximately $146,000 at December 31, 1999 and
June 30, 2000. Based on anticipated completion dates, these retentions are
expected to be collected within the next twelve months.
Accounts payable and accrued expenses of $27.5 million and $26.8 million at
December 31, 1999 and June 30, 2000, respectively, include amounts retained
pending subcontract completion, aggregating approximately $3.5 million at
December 31, 1999 and $2.6 million at June 30, 2000.
Costs and estimated earnings in excess of billings, net, on uncompleted
contracts, are summarized as follows (in thousands):
JUNE 30, 2000 DECEMBER 31, 1999
--------------- -------------------
Costs incurred to date . . . . . . . . . $ 112,729 $ 110,418
Estimated earnings to date . . . . . . . 32,372 34,902
--------------- -------------------
145,101 145,320
Less billings to date. . . . . . . . . . (144,780) (144,780)
--------------- -------------------
Cost and estimated earnings in excess of
billings, net. . . . . . . . . . . . . . $ 321 $ 540
=============== ===================
12
<PAGE>
Costs and estimated earnings in excess of billings, net, are shown on the
accompanying Condensed Consolidated Balance Sheets as follows (in thousands):
JUNE 30, 2000 DECEMBER 31, 1999
--------------- -------------------
Costs and estimated earnings in excess of
billings on uncompleted contracts . . . $ 1,384 $ 760
Billings in excess of costs and estimated
earnings on uncompleted contracts . . . (1,063) (220)
--------------- -------------------
Costs and estimated earnings in excess of
billings, net . . . . . . . . . . . . . $ 321 $ 540
=============== ===================
The asset "Costs and estimated earnings 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.
NOTE 6. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
-------------- ------------------
<S> <C> <C>
Rental and other accounts receivable . . . . . . . . . $ 945 $ 2,036
Development costs. . . . . . . . . . . . . . . . . . . 479 151
Furniture and equipment, net . . . . . . . . . . . . . 830 1,368
Option and escrow deposits and impounds. . . . . . . . 495 1,319
Other assets, primarily prepaid expenses and loan fees 871 1,397
-------------- ------------------
$ 3,620 $ 6,271
============== ==================
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NOTE 7. NOTES PAYABLE
Notes payable consist of the following (in thousands):
OUTSTANDING BALANCE AT
------------------------
DECEMBER 31, JUNE 30, INTEREST MATURITY APPROXIMATE
------------ ---------- RATES AT DATES AT MONTHLY
1999 2000 JUNE 30, 2000 JUNE 30, 2000 PAYMENTS
------------- --------- ------------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Notes payable to various financial institutions,
collateralized by first trust deeds on real
property with a carrying value of $114.0 February 2007-
million at June 30, 2000. . . . . . . . . . . . $ 84,722 $ 69,927 7.9% - 15.3% November 2027 $ 546
Notes payable to various financial institutions,
collateralized by second deeds of trust on September 2000-
real property . . . . . . . . . . . . . . . . . - 3,837 20.0% December 2000 21
Notes payable to various financial institutions,
unsecured . . . . . . . . . . . . . . . . . . . 2,108 - -
Notes payable to various financial institutions,
collateralized by other assets. Includes
$521,000 collateralized by Common Stock
personally owned by the Company's President
and principal stockholder, James C. Saxton,
and includes $181,000 payable at June 30,
2000 to VOA to acquire interests in VOA's March 2000 -
tax credit partnerships . . . . . . . . . . . . 3,146 702 9.0% - 12.0% January 2002 4
------------- ---------
Subtotal of various financial
institutions 89,976 74,466
------------- ---------
Notes payable to various individuals, secured by
first trust deeds on real property 14,132 - -
Notes payable to various individuals,
unsecured . . . . . . . . . . . . . . . . . . 6,355 - -
Notes payable to various individuals,
collateralized by other assets, including
$1.9 million collateralized by Common Stock
personally owned by the Company's President
and principal stockholder, James C. Saxton
Also includes $5.2 million collateralized
by second deeds of trust on commercial
properties owned by the Company . . . . . . . . 7,300 - -
------------- ---------
Subtotal of notes payable to
various individuals . . . . . . . . . . . . 27,787 -
------------- ---------
Total . . . . . . . . . . . . . . . . . . . $ 117,763 $ 74,466
============= =========
</TABLE>
A substantial number of the above notes payable were in default but not in
foreclosure at June 30, 2000.
The Company had 5 properties in foreclosure as of August 15, 2000. The
Company is attempting to prevent foreclosure sales by completing pending
property sales and other sales, which could provide sufficient cash flows to
payoff the related debt. There can be no assurance that the Company will be
successful in preventing the foreclosure sales of these properties.
14
<PAGE>
The properties in foreclosure as of August 15, 2000 and their related debt
outstanding at June 30, 2000 are as follows:
COLLATERAL AMOUNT FORECLOSURE
CARRYING VALUE OUTSTANDING AND/OR EXPIRATION OF
PROPERTY AT JUNE 30, 2000 AT JUNE 30, 2000 FORBEARANCE DATE
-------------------- ----------------- ----------------- --------------------
Sahara Vista B . . . $ 6,612,000 $ 3,731,691 August 23, 2000
Regency Plaza. . . . 2,732,000 1,459,094 August 23, 2000
Sahara West. . . . . 1,854,000 1,451,153 September 18, 2000
Sahara Vista A (1) . 4,809,000 3,927,648 N/A
Silver Springs C (2) 7,083,000 3,808,986 N/A
----------------- -----------------
Total. . . . . . . $ 23,090,000 $ 14,378,572
================= =================
(1) The Company has met the requirements of the forbearance agreement and is
awaiting release.
(2) The Company has agreed to terms with the lender that will allow the loan
to become current and the remaining balance in use by the Company
as a homebuilding production loan.
Notes secured by real property and refinanced at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
COLLATERAL
CARRYING VALUE AMOUNT INTEREST RATE MATURITY
PROPERTY AT JUNE 30, 2000 REFINANCED ON NEW NOTE DATE
-------------------------- ----------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Smoke Ranch. . . . . . . . $ 2,531,000 $ 1,498,844 Prime + 1.5% June 1, 2001
Madre Mesa North and South 3,699,000 1,328,902 Prime + 1.5% June 1, 2001
----------------- -----------
Total. . . . . . . . . . $ 6,230,000 $ 2,827,746
================= ===========
</TABLE>
Unsecured notes payable refinanced at June 30, 2000 are as follows:
AMOUNT INTEREST RATE MATURITY
NEW NOTE COLLATERALIZED BY: REFINANCED ON NEW NOTE DATE
------------------------------ ----------- -------------- --------------
2nd Deed of Trust Corte Madera $ 1,790,000 10% April 30, 2001
For the remaining notes payable with maturity dates in 2000, management is
negotiating refinancing alternatives with the applicable lenders.
On July 30, 1997, the Company entered into a $5,000,000 revolving line of
credit agreement with a financial institution. Loans under the agreement bear
monthly interest at 1.5% above the prime rate as defined in the agreement (8.50%
at December 31, 1999 and 9.50% at June 30, 2000), 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 June 30, 2000, the Company had outstanding
indebtedness of $2,300,000 maturing on August 1, 2000 and $500,000 maturing on
March 12, 2000 for a total indebtedness of $2,800,000 (included in notes payable
to financial institutions). Under the terms of the agreement, the Company is
required to meet certain financial covenants. At June 30, 2000, the Company was
in default on this loan.
On February 9, 1998, the Company entered into a $10,000,000 revolving loan
agreement with a financial institution. The line of credit provides for
borrowings of up to $1,000,000 for general working capital requirements,
$4,000,000 for acquisition and development, including strategic acquisitions and
$5,000,000 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 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 restrictions. The revolving working capital
line for $1,000,000 was payable on November 30, 1999, the maturity date, and the
remainder is payable one year and one day following each advance. The due dates
range from December 1, 2000 to September 14, 2001. As of December 31, 1999 and
June 30, 2000, the Company had outstanding indebtedness of $5,000,000 (included
in notes payable to financial institutions). At June 30, 2000, the Company was
in default on this line of credit.
15
<PAGE>
The approximate principal maturities of notes payable outstanding as of
June 30, 2000 are as follows (in thousands):
Year ending December 31,
2000. . . . . . . . . . $ 44,764
2001. . . . . . . . . . 13,424
2002. . . . . . . . . . 1,694
2003. . . . . . . . . . -
2004. . . . . . . . . . -
Thereafter. . . . . . . 14,584
---------
$ 74,466
=========
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 12.0% to 19.0%,
with all amounts due at various dates in 2000. During the first quarter of
1999, the Company borrowed $724,000 and $300,000 from the Company's President
and principal stockholder, James C. Saxton. The notes matured on February 1,
2000 and bear interest at 19.0% and 18.0% per annum, respectively. At June 30,
2000, the outstanding balances were $724,000 and $300,000, respectively and
these loans were in default.
On November 15, 1999, (the first anniversary of the closing of the Diamond
Key acquisition), in connection with the purchase of Diamond Key, the Company
issued 146,391 shares of the Company's Common Stock to Larison P. Clark. The
Company was also obligated to pay Mr. Clark $1.0 million in cash on November
15, 1999. The Company paid Mr. Clark $300,000 through December 31, 1999. The
remainder was recorded as a note payable for $700,000 with an interest rate of
18.0% per annum, due on May 3, 2000 of which $225,000 was paid in the first
quarter of 2000. The outstanding balance at June 30, 2000 was $475,000. As of
June 30, 2000 this loan was in default.
During the second quarter of 1999, the Company's Executive Vice President,
Michele Saxton Pori, pledged 530,000 shares of Common Stock, or 6.9% of the
Company's outstanding shares as of December 31, 1999, as collateral for a $1.2
million personal loan. Ms. Pori reloaned the proceeds to the Company. The
note payable bears interest at 12.0% per annum and matured on February 3, 2000.
The outstanding balance at June 30, 2000 was $591,000. At June 30, 2000, this
loan was in default. The Company understands that Ms. Pori intends to repay,
in full, the loan from the lender upon repayment of the loan she has made to the
Company.
During the fourth quarter of 1998, the Company's President and principal
stockholder, James C. Saxton, pledged 3,471,590 shares of common stock, or
approximately 44.1% of the Company's outstanding shares at December 31, 1999, as
collateral for two personal loans to Mr. Saxton and three loans to the Company.
Mr. Saxton reloaned the proceeds from the two personal 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 12.0% per annum and
matured on February 1, 2000. The outstanding balance at June 30, 2000 was $5.4
million. As of June 30, 2000, these loans were in default. 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.
16
<PAGE>
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 JUNE 30, 2000 THREE MONTHS ENDED JUNE 30, 1999
-------------------------------- --------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- --------- ----------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
extraordinary gain . . . . . $(6,829) $ 1,094
Basic EPS
---------
Income (loss) before
extraordinary gain . . . . . (6,829) 8,336,455 $ (0.81) 1,094 7,732,922 $ 0.14
-------- --------- =========== ------- --------- ==========
Effect of dilutive securities:
Stock options. . . . . . . . . - - - 1,263
-------- --------- ------- ---------
Diluted EPS
-----------
Income (loss) before
extraordinary gain. . . . . $(6,829) 8,336,455 $ (0.81) $ 1,094 7,734,185 $ 0.14
======== ========= =========== ======= ========= ==========
SIX MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 1999
------------------------------- ------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- --------- ----------- ------- --------- ----------
Income (loss) before
extraordinary gain . . . . . $(9,240) $ 1,948
Basic EPS
---------
Income (loss) before
extraordinary gain . . . . . (9,240) 8,153,096 $ (1.13) 1,948 7,732,922 $ 0.25
-------- --------- =========== ------- --------- ==========
Effect of dilutive securities:
Stock options. . . . . . . . . - - - 1,766
-------- --------- ------- ---------
Diluted EPS
-----------
Income (loss) before
extraordinary gain . . . . . $(9,240) 8,153,096 $ (1.13) $ 1,948 7,734,688 $ 0.25
======== ========= =========== ======= ========= ==========
THREE MONTHS ENDED JUNE 30, 2000 THREE MONTHS ENDED JUNE 30, 1999
-------------------------------- --------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- --------- ---------- ------- --------- ----------
Extraordinary gain on
troubled debt restructuring . $18,044 $ -
Basic EPS
---------
Extraordinary gain on
troubled debt restructuring . 18,044 8,336,455 $ 2.16 - 7,732,922 $ -
------- --------- ========== ------- --------- ==========
Effect of dilutive securities:
Stock options. . . . . . . . . - - - 1,263
------- --------- ------- ---------
Diluted EPS
-----------
Extraordinary gain on
troubled debt restructuring . $18,044 8,336,455 $ 2.16 $ - 7,734,185 $ -
======= ========= ========== ======= ========= ==========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 1999
------------------------------- ------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Extraordinary gain on
troubled debt restructuring . $18,044 $ -
Basic EPS
---------
Extraordinary gain on
troubled debt restructuring. 18,044 8,153,096 $ 2.21 - 7,732,922 $ -
------- --------- ========== ------- --------- ==========
Effect of dilutive securities:
Stock options. . . . . . . . . - - - 1,766
------- --------- ------- ---------
Diluted EPS
-----------
Extraordinary gain on
troubled debt restructuring. $18,044 8,153,096 $ 2.21 $ - 7,734,688 $ -
======= ========= ========== ======= ========= ==========
THREE MONTHS ENDED JUNE 30, 2000 THREE MONTHS ENDED JUNE 30, 1999
-------------------------------- --------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- --------- ---------- ------- --------- ----------
Net income . . . . . . . . . . $11,215 $ 1,094
Basic EPS
---------
Income applicable to
Common stockholders. . . . . 11,215 8,336,455 $ 1.35 1,094 7,732,922 $ 0.14
------- --------- ========== ------- --------- ==========
Effect of dilutive securities:
Stock options. . . . . . . . . - - - 1,263
------- --------- ------- ---------
Diluted EPS
-----------
Income applicable to
Common stockholders
and assumed conversions. . . $11,215 8,336,455 $ 1.35 $ 1,094 7,734,185 $ 0.14
======= ========= ========== ======= ========= ==========
SIX MONTHS ENDED JUNE 30, 2000 SIX MONTHS ENDED JUNE 30, 1999
------------------------------- ------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- --------- ---------- ------- --------- ----------
Net income . . . . . . . . . . $ 8,804 $ 1,948
Basic EPS
---------
Income applicable to
Common stockholders. . . . . 8,804 8,153,096 $ 1.08 1,948 7,732,922 $ 0.25
------- --------- ========== ------- --------- ==========
Effect of dilutive securities:
Stock options. . . . . . . . . - - - 1,766
------- --------- ------- ---------
Diluted EPS
-----------
Income applicable to
Common stockholders
and assumed conversions. . . $ 8,804 8,153,096 $ 1.08 $ 1,948 7,734,688 $ 0.25
======= ========= ========== ======= ========= ==========
</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
June 30, 1999 and 2000 were 736,198 and 615,115, 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. On December 7, 1998,
the Company's Board of Directors approved an increase from 500,000 to 750,000 in
number of shares subject to stock options under the Option Plan. The increase
was approved by the stockholders at the annual meeting of stockholders in June
1999. All officers, employees (including employees who are Directors),
18
<PAGE>
consultants, advisers, independent contractors and agents are eligible to
receive options under the Option Plan, except that only employees will be
eligible to receive incentive stock options. No person eligible to receive
options under the Option Plan may receive options for the purchase of more than
an aggregate of 25,000 shares in any year. As of June 30, 2000, there were
289,300 options outstanding under the Option Plan. 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.
As of January 2, 1998, the Compensation Committee determined that it would
be in the best interests of the Company to offer all option holders the
opportunity to elect to reduce the exercise price of existing options from $8.25
per share to $6.875 per share (the closing price of the Company's stock as
reported on the Nasdaq Stock Market on January 2, 1998), subject to extension of
the five year vesting schedule to commence January 2, 1998. Holders of options
for 148,300 shares elected to have their stock options repriced. These options
are exercisable for a period of ten years and six months from the date of grant,
and vest ratably over a five year period commencing on the date of grant. In
the event that the employment of any optionee terminates during the exercise
period, the options lapse 30 days following such termination of employment.
The Option Plan may be administered by the Board of Directors or, in its
discretion, by a committee of the Board of Directors appointed for that purpose
(the "Committee"), which, subject to the terms of the Option Plan, will have the
authority in its sole discretion to determine: (i) the individuals to whom
options shall be granted; (ii) the time or times at which options may be
exercised; (iii) the number of shares subject to each option, the option price
and the duration of each option granted; and (iv) all of the other terms and
conditions of options granted under the Option Plan, including the period during
which options may be exercised following the optionee's termination of
employment or other relationship with the Company. The exercise price of
incentive stock options granted under the Option Plan must be at least equal to
the fair market value of the shares on the date of grant (110% of fair market
value in the case of optionees who own more than 10% of the combined voting
power of the Company and its subsidiaries) and may not have a term in excess of
10 years from the date of grant (five years in the case of optionees who own
more than 10% of the combined voting power of the Company and its subsidiaries).
These limits do not apply to non-qualified options. Options granted under the
Option Plan will not be transferable other than by will or the laws of descent
and distribution.
Upon the occurrence of certain extraordinary events, appropriate
adjustments will be made by the Board of Directors to preserve, but not to
increase, the benefits to option holders, including adjustments to the aggregate
number and kind of shares subject to outstanding options and the per share
exercise price.
The Option Plan is of indefinite duration, however, no grant of incentive
stock options will be permitted to be made under the Option Plan more than 10
years after its date of adoption. The Board of Directors will have authority to
terminate or to amend the Option Plan without the approval of the Company's
stockholders unless stockholder approval is required by law or by stock exchange
requirements applicable to the Company. The Board of Directors or the Committee
may amend the terms of any option granted under the Option Plan. No amendment of
any option or amendment or termination of the Option Plan that impairs the
rights of any holder of outstanding options may be made without the consent of
such holder.
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 $29.9 million and
$33.8 million at December 31, 1999 and June 30, 2000, 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.
19
<PAGE>
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
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 and six months ended June 30, 1999 and 2000, respectively (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
----------------------------------------------------------------------------------
PROPERTY
DESIGN-BUILD SALES OF OPERATIONS AND
SERVICES HOMEBUILDING PROPERTY MANAGEMENT OTHER TOTAL
-------------- -------------- ---------- ---------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue . . . . . . . . $ 1,972 $ 14,778 $ 25,028 $ 855 $ 590 $ 43,223
Costs . . . . . . . . . 2,000 14,559 26,405 244 - 43,208
-------------- -------------- ---------- ---------------- -------- ----------
Gross profit (loss) . $ (28) $ 219 $ (1,377) $ 611 $ 590 $ 15
============== ============== ========== ================ ======== ==========
Depreciation and
amortization expense. $ - $ 124 $ - $ 220 $ (123) $ 221
Interest expense. . . . $ - $ - $ - $ (451) $(1,158) $ (1,609)
Interest income . . . . $ - $ 1 $ - $ - $ - $ 1
Total assets. . . . . . $ 10,864 $ 71,368 $ 209 $ 44,211 $ 5,301 $ 131,953
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
----------------------------------------------------------------------------
PROPERTY
DESIGN-BUILD SALES OF OPERATIONS AND
SERVICES HOMEBUILDING PROPERTY MANAGEMENT OTHER TOTAL
------------- ------------- --------- ---------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue. . . . . . . . $ 7,417 $ 25,430 $ 137 $ 844 $ 588 $ 34,416
Costs. . . . . . . . . 5,914 21,932 18 236 - 28,100
------------- ------------- --------- ---------------- ------- ---------
Gross profit . . . . $ 1,503 $ 3,498 $ 119 $ 608 $ 588 $ 6,316
============= ============= ========= ================ ======= =========
Depreciation and
amortization expense $ - $ 124 $ - $ 191 $ 262 $ 577
Interest expense . . . $ - $ - $ - $ (2,060) $ (27) $ (2,087)
Interest income. . . . $ - $ - $ - $ 233 $ - $ 233
Total assets . . . . . $ 43,441 $ 83,847 $ - $ 49,398 $8,908 $185,594
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
PROPERTY
DESIGN-BUILD SALES OF OPERATIONS AND
SERVICES HOMEBUILDING PROPERTY MANAGEMENT OTHER TOTAL
-------------- ------------- ---------- ---------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue. . . . . . . . $ 2,342 $ 34,062 $ 29,325 $ 1,814 $ 964 $ 68,507
Costs. . . . . . . . . 2,785 32,295 30,183 753 - 66,016
-------------- ------------- ---------- ---------------- -------- ---------
Gross profit (loss) . $ (443) $ 1,767 $ (858) $ 1,061 $ 964 $ 2,491
============== ============= ========== ================ ======== =========
Depreciation and
amortization expense. $ - $ 240 $ - $ 227 $ 311 $ 778
Interest expense . . . $ - $ - $ - $ (1,070) $(2,146) $ (3,216)
Interest income. . . . $ - $ 4 $ - $ - $ 7 $ 11
Total assets . . . . . $ 10,864 $ 71,368 $ 209 $ 44,211 $ 5,301 $131,953
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
----------------------------------------------------------------------------
PROPERTY
DESIGN-BUILD SALES OF OPERATIONS AND
SERVICES HOMEBUILDING PROPERTY MANAGEMENT OTHER TOTAL
------------- ------------- --------- ---------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue . . . . . . . $ 12,167 $ 47,101 $ 1,687 $ 1,854 $1,159 $ 63,968
Costs . . . . . . . . 9,782 41,162 1,024 523 - 52,491
------------- ------------- --------- ---------------- ------- ---------
Gross profit . . . . $ 2,385 $ 5,939 $ 663 $ 1,331 $1,159 $ 11,477
============= ============= ========= ================ ======= =========
Depreciation and
amortization expense $ - $ 250 $ - $ 349 $ 509 $ 1,108
Interest expense. . . $ - $ - $ - $ (3,657) $ (27) $ (3,684)
Interest income . . . $ - $ - $ - $ 478 $ - $ 478
Total assets. . . . . $ 43,441 $ 83,847 $ - $ 49,398 $8,908 $185,594
</TABLE>
Revenues as a percentage of total revenues generated by geographic location
are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- ------- --------
Arizona 48.2% 42.2% 59.4% 42.2%
Nevada. 43.6 48.0 35.4 46.4
Utah. . 8.2 9.8 5.2 11.4
-------- -------- ------- --------
Total 100.0% 100.0% 100.0% 100.0%
======== ======== ======= ========
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 June 30, 2000 Compared to Three months Ended June 30, 1999
--------------------------------------------------------------------------------
Revenue. Total revenue was $43.2 million for the three months ended June
30, 2000, representing a $8.8 million, or 25.6%, increase from $34.4 million for
the three months ended June 30, 1999, primarily due to the sale of land in
development and land held for sale for which the Company recognized an
additional extraordinary gain of $22.9 million. The Company had 126
single-family home closings for the three months ended June 30, 2000
representing a decrease of 46.2%, from the 234 closings for the three months
ended June 30, 1999. This decrease was primarily a result of a halt in
construction in Nevada and Utah during the quarter. Home closings for the three
months ended June 30, 2000 included 18 in Nevada, 1 in Utah and 107 in Arizona.
For the three months ended June 30, 1999, home closings included 94 in Nevada, 5
in Utah and 135 in Arizona. Construction revenue for the three months ended
June 30, 2000 was $2.0 million, a decrease of $5.4 million, or 73.0%, from $7.4
million during the three months ended June 30, 1999. Sale of commercial
properties was $0 for the three months ended June 30, 2000 compared to $137,000
for the three months ended June 30, 1999. Rental and other revenue increased to
$855,000 for the three months ended June 30, 2000, or 1.3%, from $844,000 in the
second quarter of 1999. This increase was primarily due to increased occupancy
levels.
Cost of Revenue. Total cost of revenue was $43.2 million for the three
months ended June 30, 2000, representing a $15.1 million, or 53.8%, increase
from $28.1 million for the three months ended June 30, 1999. Cost of revenue
for the three months ended June 30, 2000 as a percentage of revenue was 100.0%,
compared to 81.6% for the three months ended June 30, 1999. Costs increased due
to the Company's use of new vendors which were more expensive than the
previously contracted vendors.
Gross Profit. Gross profit as a percent of revenue decreased to 0.03% for
the three months ended June 30, 2000 from 18.4% for the comparable period in
1999. Primarily due to higher construction costs associated with the Company's
credit problems and non-payment issues. Gross margins on the sales of homes
decreased to 1.5% in the three months ended June 30, 2000 compared to 13.8% in
the three months ended June 30, 1999, also due to the Company's credit problems
and non-payment issues. The Company was unable to utilize some of the
subcontracting workforce it previously used. Therefore, new contracts had to be
written to complete the work, which resulted in higher costs. In addition, the
interest capitalized to each home increased due to the Company's production of
fewer homes to carry the burden. Gross margin on construction revenue decreased
to (1.4)% in the three months ended June 30, 2000, compared to 20.3% in the same
period of 1999.
21
<PAGE>
General and Administrative Expenses. General and administrative expenses
were $2.3 million for the three months ended June 30, 2000, representing a
$100,000, or 4.2%, decrease from $2.4 million for the three months ended June
30, 1999, primarily due to a decrease in payroll offset by higher professional
fees.
Depreciation and Amortization. Depreciation and amortization expense was
$221,000 for the three months ended June 30, 2000, representing a $356,000, or
61.7%, decrease from $577,000 for the three months ended June 30, 1999,
primarily due to the discontinuation of depreciation on operating properties
held for sale at June 30, 2000.
Interest Expense, Net. Interest expense, net, was $1.6 million for the
three months ended June 30, 2000, representing a $300,000 or 15.8%, decrease
from $1.9 million for the three months ended June 30, 1999. This was primarily
due to the reduction in notes payable as a result of the extinguishment of
troubled debt in May 2000.
Income (Loss) Before Provision for Income Taxes. As a result of the
foregoing factors, without consideration of extraordinary gain, loss before
provision for income taxes was $8.9 million for the three months ended June 30,
2000, representing a $10.4 million, or 693.3% decrease from $1.5 million for the
three months ended June 30, 1999. Income (loss) before provision for income
taxes as a percentage of total revenue was (20.7)% for the three months ended
June 30, 2000 as compared to 4.4% for the three months ended June 30, 1999.
Six months Ended June 30, 2000 Compared to Six months Ended June 30, 1999
--------------------------------------------------------------------------------
Revenue. Total revenue was $68.5 million for the six months ended June
30, 2000, representing a $4.5 million, or 7.1%, increase from $64.0 million for
the six months ended June 30, 1999, primarily due to the sale of land in
development and land held for sale for which the Company recognized an
extraordinary gain of $22.9 million. The Company had 290 single-family home
closings for the six months ended June 30, 2000 representing a decrease of
31.6%, from the 424 closings for the six months ended June 30, 1999. Home
closings for the six months ended June 30, 2000 included 28 in Nevada, 4 in Utah
and 258 in Arizona. For the six months ended June 30, 1999, home closings
included 154 in Nevada, 23 in Utah and 247 in Arizona. This decrease was
primarily a result of a halt in construction in Nevada and Utah during the first
half of 2000. Construction revenue for the six months ended June 30, 2000 was
$2.3 million, a decrease of $9.9 million, or 81.2%, from $12.2 million during
the six months ended June 30, 1999. Sale of commercial properties was $3.5
million for the six months ended June 30, 2000 compared to $1.6 million for the
six months ended June 30, 1999. Three commercial operating properties were sold
in the first half of 2000, compared to a small retail center and parcel of land
in the comparable period of 1999. Rental and other revenue decreased to $2.8
million for the six months ended June 30, 2000, a 7.8% decrease from $3.0
million in the comparable period of the prior year. The decrease was primarily
due to a write-off of $128,000 in uncollectable rents and $114,000 in
commissions on new leases. Additionally, the Company retained the services of
outside property management companies to manage the TCP properties and three
Homeowners Associations in the fourth quarter of 1999, resulting in a reduction
in management fees billed. These amounts were offset in the first half of 2000
by increased revenue as a result of higher levels of tenant occupancy.
Cost of Revenue. Total cost of revenue was $66.0 million for the six
months ended June 30, 2000, representing a $13.5 million, or 25.8%, increase
from $52.5 million for the six months ended June 30, 1999. Cost of revenue for
the six months ended June 30, 2000 as a percentage of revenue was 96.4%,
compared to 82.0% for the six months ended June 30, 1999 costs increased due to
the Company's use of new vendors which were more expensive than the previously
contracted vendors.
Gross Profit. Gross profit as a percent of revenue decreased to 3.7% for
the six months ended June 30, 2000 from 17.9% for the comparable period in 1999.
Gross margins on the sales of homes decreased to 5.2% in the six months ended
June 30, 2000 compared to 12.6% in the six months ended June 30, 1999, primarily
due to higher construction costs associated with the Company's credit problems
and non-payment issues. Gross margin on construction revenue decreased to
(18.9)% in the six months ended June 30, 2000, compared to 19.6% in the same
period of 1999, also due to the Company's credit problems and non-payment
issues. The Company was unable to utilize some of the subcontracting workforce
it previously used. Therefore, new contracts had to be written to complete the
work, which resulted in higher costs. In addition, the interest capitalized to
each home increased due to the Company production of fewer homes to carry the
burden. Gross profit margin on commercial properties sold in the six months
ended June 30, 2000 decreased to 11.4% from 39.3% in the six months ended June
30, 1999, primarily due to yielding a lower gross profit margin on the three
commercial operating properties sold in the first half of 2000 as compared to
the one property that was sold in the same period of 1999.
22
<PAGE>
General and Administrative Expenses. General and administrative expenses
were $5.9 million for the six months ended June 30, 2000, representing a
$1.5million, or 34.1%, increase from $4.4 million for the six months ended June
30, 1999. This was primarily a result of increased legal, accounting and
consulting fees as a result of a cash flow shortage, in addition to fewer
job-costed wages resulting from of a halt in construction in Nevada and Utah .
General and administrative expense as a percentage of total revenue was 8.7% for
the six months ended June 30, 2000 as compared to 6.9% for the six months ended
June 30, 1999.
Depreciation and Amortization. Depreciation and amortization expense was
$778,000 for the six months ended June 30, 2000, representing a $322,000, or
29.3%, decrease from $1.1 million for the six months ended June 30, 1999,
primarily due to the discontinuation of depreciation on operating properties
held for sale at June 30, 2000.
Interest Expense, Net. Interest expense, net, was $3.2 million for the six
months ended June 30, 2000 and six months ended June 30, 1999.
Income (Loss) Before Provision for Income Taxes. As a result of the
foregoing factors, before consideration of extraordinary gain, loss before
provision for income taxes was $12.3 million for the six months ended June 30,
2000, representing a $15.0 million, or 555.6%, decrease from $2.7 million for
the six months ended June 30, 1999. Income (loss) before provision for income
taxes as a percentage of total revenue was (17.9)% for the six months ended June
30, 2000 as compared to 4.3% for the six months ended June 30, 1999.
As of March 31, 2000, loss before provision for income taxes was $3.2
million as a result of which the Company accrued a tax benefit of $918,000. As
a result of the extraordinary gain on troubled debt restructing that the Company
recognized in the second quarter, as of June 30, 2000, income before provision
for income taxes but including the extraordinary gain was $10.6 million. As a
result of this gain, the Company accrued a tax liability of $2.8 million thereby
converting the accrued tax benefit of $918,000 as of March 31, 2000, into an
accrued tax liability of $1.9 million as of June 30, 2000. These amounts are
reflected on the Condensed Consolidated Statements of Income as an accrued
liability for income taxes on the extraordinary gain from troubled debt
restructuring of $4.9 million offset by an accrued benefit for income taxes from
operations of $3.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Workout Plan
-------------
The Company has experienced a slow down of construction in the fourth
quarter of 1999 and a halt of construction in Nevada and Utah in the first half
of 2000, primarily due to cash flow problems and over expansion, and was in
default on a substantial number of its notes payable at June 30, 2000. The
inadequate cash flow problem was due to several factors, including: the purchase
of Diamond Key Homes in November 1998 for approximately $12.9 million, including
$10.9 million in cash, a portion of which was borrowed funds; over expansion;
purchases of land in Utah in the first and third quarters of 1999 for $4.5
million, which the Company purchased using a combination of high interest rate,
short term debt and funds intended for working capital and other purposes, and
for which the Company was unable to obtain permanent replacement financing on
satisfactory terms; and the Company's failure to adequately monitor and manage
its cash flow. The aforementioned facts and circumstances have raised
substantial doubt that the Company will be able to continue as a going concern
and, therefore, may be unable to realize its assets and discharge its
liabilities in the normal course of business.
In the first quarter of 2000, the Company brought in outside consultants
and legal expertise to assist in formulating a workout business plan (the
"Workout Plan"). The key elements of the Workout Plan are: to establish
adequate cash management controls regarding cash flows and to accelerate the
retirement of debt, especially higher interest rate debt, by raising additional
capital from sources other than the sale of homes, such as the sale of land held
for development and for sale and operating properties, and to negotiate
forbearance agreements with the lenders. The Company believes that the proposed
Workout Plan will help the Company focus on operations, including improved cash
management and monitoring of cash flows and completion of construction and sales
of existing projects.
Although the Company hopes that the Workout Plan will allow the Company to
avoid filing, or being forced into, bankruptcy, there can be no assurances that
the Workout Plan will be approved by the Company's creditors and subcontractors
or, that if approved, the Company will be able to successfully take the steps
necessary under the Workout Plan to avoid filing, or being forced into,
bankruptcy.
Cash Flow Funds Controls. The Company has finalized details of various loan
terms with its creditors and subcontractors in Nevada allowing certain controls
on its use of cash, including a voucher control system with Nevada Construction
Services to coordinate payments to lenders and subcontractors. The Company has
also reached agreements with the majority of its Nevada subcontractors to accept
a pro rata share of proceeds from the sales of future units through escrow
disbursements, after the primary lenders have been paid, until the
subcontractors' obligations are satisfied. These payments will be made through
escrow to insure payment is made timely and accurately to the lenders and
subcontractors. The Company has also agreed to weekly monitoring of the
Company's progress to insure adherence to the Workout Plan. With these
agreements in place, construction resumed in Nevada on two multi-family
developments in April 2000 and five single-family subdivisions in July 2000.
The Company is currently attempting to reach similar agreements with its Utah
creditors and subcontractors.
23
<PAGE>
Retirement of Debt and Sale of Properties. An agreement was reached on May
12, 2000 with a group of the Company's various individual debt holders ("Debt
Holder"), which allowed the Company to dispose of certain of its assets so as to
improve its balance sheet and its cash flow. The agreement provided for the
Debt Holder to acquire assets from the Company with a carrying value of $14.2
million, comprised of the Company's rights to a 914 acre parcel of undeveloped
land in Tucson, Arizona, a 112 acre parcel of undeveloped land in North Las
Vegas, Nevada, and two properties under development in Phoenix, Arizona. In
exchange for such assets, the Debt Holder forgave any and all indebtedness of
the Company in favor of the Debt Holder, aggregating approximately $31.6 million
(including assumption of $3.6 million in unrelated debt on two Phoenix, Arizona
properties) at the date of sale, and bearing interest rates ranging from 0.0% to
30.0%. The Company received the Debt Holder's interest in a condominium project
that has a fair value of approximately $8.9 million and related debt of $7.7
million (assumed by the Company). This agreement eliminated the high interest
rate debt the Company has recorded with respect to these assets and it improves
the balance sheet position in that the primary asset being given in exchange for
the extinguishment of debt is a contract to acquire the 914 acre parcel, which
was recorded as a $1.8 million asset on the Company's Consolidated Balance
Sheet. The sale of properties and extinguishment of debt resulted in debt
retirement of approximately $31.6 million of notes payable and $5.6 million of
deposit liabilities. As a result of this transaction, the Company recognized an
extraordinary gain on extinguishment of troubled debt of $22.9 million in May
2000. Although some of the Debt Holder's obligations were unsecured, much of
the debt was secured. Hence, this transaction has freed up equity for the
purposes of generating cash either through loans or sales to meet the existing
cash flow shortages. Net income (loss) before provision for income taxes without
consideration of the extraordinary gain was (12.8) million for the six months
ended June 30, 2000. By taking the extraordinary gain into consideration, net
income (loss) before provision for income taxes increased to $10.6 million for
the same period. In addition to the aforementioned transaction, through June
30, 2000 the Company has sold three operating properties and two parcels of land
held for development in order to generate operating cashflow and relieve debt.
The Company has other properties in escrow and anticipates cash flows from
these closings in the coming months. There can be no assurance however that any
of the proposed asset sales will be completed or, that if completed, they would
be completed in a timely enough manner for the Company to avoid filing, or be
forced into, bankruptcy. Similarly, there can be no assurance the Company's
other creditors will forego taking any actions against the Company pending the
completion of these transactions and there can be no assurance that, even if the
transactions are completed, that the Company will be able to avoid filing, or be
forced into, bankruptcy.
The cash short fall in the initial months, until business operations
stabilize, is dependent on the sales of properties. However, with the Debt
Holder agreement in place, considerable cash has been freed up, and the
Company's cash flow demands from short-term borrowings have diminished
significantly. Additionally, it will take time to fully implement the Workout
Plan and the Company may need to obtain interim financing and there can be no
assurance that the Company will be able to obtain such interim financing on
satisfactory terms or at all.
The Company's claim for a federal income tax refund due to the net
operating loss for the taxable years ended December 31, 1998 was processed by
the Internal Revenue Service and resulted in a refund of taxes paid in the
amount of $3,614. The Company did not incur a tax liability for the year ended
December 31, 1999.
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.
24
<PAGE>
Interest costs incurred, expensed and capitalized were as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
Interest incurred:
Residential . . . . . . . . . . . . $ 2,989 $ 2,281 5,156 $ 4,450
Commercial. . . . . . . . . . . . . 501 609 1,118 1,210
-------- -------- -------- --------
Total incurred. . . . . . . . . . $ 3,490 $ 2,890 $ 6,274 $ 5,660
======== ======== ======== ========
Interest expensed:
Residential . . . . . . . . . . . . $ 1,111 $ 1,572 $ 2,098 $ 2,658
Commercial. . . . . . . . . . . . . 501 515 1,118 1,026
-------- -------- -------- --------
Total expensed. . . . . . . . . . $ 1,612 $ 2,087 $ 3,216 $ 3,684
======== ======== ======== ========
Interest capitalized at end of period:
Residential . . . . . . . . . . . . $ 1,878 $ 709 $ 3,058 $ 1,792
Commercial. . . . . . . . . . . . . - 94 - 184
-------- -------- -------- --------
Total interest capitalized. . . . $ 1,878 $ 803 $ 3,058 $ 1,976
======== ======== ======== ========
The Company has utilized, and may continue to utilize, options and
contingent sales contracts as a method of controlling and subsequently acquiring
land. By controlling land through these methods on the future discretionary
purchase of land, the Company attempts to minimize its cash outlays and reduce
its risk from changing market conditions. While the Company attempts to
prudently manage its acquisition and development of property, the development of
such property can have a negative impact on liquidity due to the timing of
acquisition and development activities.
If strategic acquisitions or joint venture opportunities arise, the capital
resources of the Company may be utilized, if available, to undertake such
opportunities. The timing and nature of these opportunities cannot be predicted
and the financing of any future strategic acquisition or joint venture may take
a variety of forms.
The Company anticipates that development of portfolio projects during 2000
will cost approximately $8.5 million in the aggregate, substantially all of
which is expected to be financed with construction loans, which there is no
assurance the Company will be able to obtain. 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 generally seeks to obtain
permanent financing secured by the property. There can be no assurance,
however, that the Company will be able to obtain satisfactory financing for the
development of any of its projects and the failure to obtain satisfactory
financing would have a material adverse effect on the Company, its operations
and its financial condition. The Company also expects purchases of construction
and computer equipment during 2000 to be nominal, based on the Company's debt
restructuring.
At June 30, 2000, the Tax Credit Partnerships were indebted to the Company
in the aggregate amount of approximately $33.0 million, representing developer
fees and land and construction costs. This amount has been written down to
their fair value of $9.1 million.
During the fourth quarter of 1999, the Company began to explore the
possibility of selling the Tax Credit Project general partnership interests and
receivables to strengthen the Company's cash flow position. As such, the Due
from TCP's and the Investments in the TCP Joint Ventures are held for sale at
June 30, 2000 and are actively being marketed for sale. Therefore, at June 30,
2000, the amounts are recorded at the lower of cost or fair value, less selling
expenses. The Company has obtained a fair market valuation from an independent
third party for the general partnership interests and the receivables from the
eight TCP properties.
Until the fourth quarter of 1999, the Company had not attempted to market
these general partnership interests and receivables and based on all available
information, the Company believed that it would be able to collect the
receivable balances plus interest as provided for in the agreements. In
addition, management's estimated future cash flows exceeded the gross receivable
balance at June 30, 2000.
25
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The Company has made its capital contributions to the eight Tax Credit
Partnerships. 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 Tax Credit Partnerships. The Company does not plan to pursue
any new Tax Credit Projects in the foreseeable future.
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 December 31, 1999 and
June 30, 2000, the Company had 356 homes and 150 homes in backlog, respectively,
representing aggregate sales values of approximately $40.1 million and $18.1
million, respectively. The decrease in backlog at June 30, 2000 is primarily
attributable to cancellations as a result of the construction work slowdown in
Nevada and Utah in the fourth quarter of 1999 and halt of construction in the
first half of 2000. There can be no assurance that the buyers will remain in
place long enough for the Company to close the sales.
As part of its sales and marketing efforts, the Company builds and
maintains model homes in each of its active communities. The Company also builds
homes which are under construction or completed for which the Company does not
yet have sales contracts ("speculative homes") on a project-by-project basis.
It is possible that, in the event of adverse economic or other business
conditions affecting home buying activity in the Company's markets, the Company
may be required to reduce prices or provide sales incentives to liquidate its
inventory of model or speculative homes. It is also possible that the Company
could be required to reduce prices or provide sales incentives to sell its model
homes at the conclusion of a particular community. Either of these actions, if
taken, could have the effect of depressing the Company's gross margin for the
relevant periods.
The Company is also involved in the design-build development of commercial
projects. Backlog for such commercial projects are 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 December 31, 1999 and June 30, 2000, the Company had backlog under
its design-build contracts of approximately $10.9 million. There was no change
in design-build backlog due to the decline in construction activity in Nevada in
the fourth quarter of 1999 and a halt in construction in the first half of 2000
due to the Company's weakend cash flow position.
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
$58.1 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 10.1% per annum at June
30, 2000. If the interest rates on the floating rate debt increase in
accordance with changes to the indices upon which the rates are based, debt
service obligations of the Company will increase.
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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 for
the year ended December 31, 1999. There have been no significant changes since
the filing of the aforementioned report.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1996, Dorothy Kidd initiated litigation against the Company in
connection with TVS Joint Venture and TVS General Partnership, a single asset
partnership in which Ms. Kidd and the Company were partners. A partnership
dispute arose and Ms. Kidd filed suit seeking unspecified damages. Per the
partnership agreement, the litigation was converted into a binding arbitration
and in May 2000, the parties resolved the matter via a settlement agreement.
Ms. Kidd was awarded $750,000 subject to the terms and conditions set forth in
said settlement agreement and stipulated arbitration award.
In March 13, 2000, pursuant to a purchase/settlement agreement with
Volunteers of America (VOA) National Housing Corp., which was approved by the
Company's Board of Directors in the fourth quarter of 1999, the Company agreed
to pay VOA $1,325,000 to acquire their interest in Tax Credit Partnerships. The
purchase/settlement agreement was subsequently reduced to a judgement. A
portion of the judgement, $1,000,000, was to be satisfied by the Company issuing
457,142 shares of Saxton Common Stock (representing approximately 5.8% of the
Company's Common Stock issued and outstanding on March 12, 2000). The balance
of $325,000 was to be paid over a period of time; of which $125,000 was paid in
the first quarter of 2000, with the reminder to be paid in annual installments,
over the next two years. The Company delivered the stock. However, VOA
contested the delivery of the stock. The District Court clarified its judgement
to require not only delivery, but registration of the stock, and ruled that the
Company had not complied with the stock component of the judgment; lifted the
stay, and the $1,000,000 plus interest became executable. The Company appealed
the District Court order clarifying judgement to the Supreme Court. The company
posted a supersedeas bond, and on August 2, 2000 execution on the judgement was
stayed pending its appeal. On June 30, 2000 the Common Stock issued to VOA is
considered issued and outstanding and is recorded as a component of stockholder
equity.
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 10.21 - Sale of the Tucson, Arizona division of Diamond Key Homes.
Exhibit 10.22 - Dorothy Kidd vs. Saxton, settlement agreement and
stipulated arbitration award.
Exhibit 10.23 - Disposition of Assets, HomeBanc Mortgage Corporation.
Exhibit 10.24 - Extinguishment of troubled debt, workout agreement.
Exhibit 10.25 - VOA - Order granting stay and limited remand for
determination of bond amount.
Exhibit 27 - Financial Data Schedule for the quarter ended June 30, 2000.
(b) Reports on Form 8-K. The following reports on Form 8-K were filed during
or dated for the first half of fiscal year ended December 31, 2000 and for
the period between January 1, 2000 and the date hereof:
Form 8-K dated and filed March 24, 2000 relating to press release with respect
to pending fourth quarter loss issued on March 23, 2000.
Form 8-K dated April 12, 2000 and filed April 24,2000 related to resignation of
two directors, non-timely filing of Form 10-K and potential delisting from
Nasdaq.
Form 8-K dated April 27, 2000 and filed May 8, 2000 related to the resignation
of a director and Chief Accounting Officer.
Form 8-K dated May 5, 2000 and filed May 9, 2000 related to additional Nasdaq
delisting notification.
Form 8-K dated June 14, 2000 and filed June 16, 2000 related to the delisting
from the Nasdaq Stock Market and resignation of an Executive Vice-President -
Corporate Development and Director of the Company.
Form 8-K dated and filed August 11, 2000 related to the sale of the Tucson,
Arizona division of Diamond Key Homes, the sale of the fixed assets of HomeBanc
Mortgage and the resignation of two directors of the Company.
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INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------
10.21 Sale of the Tucson, Arizona division of Diamond Key Homes 33
10.22 Dorothy Kidd vs. Saxton, settlement agreement and stipulated 56
arbitration award
10.23 Disposition of Assets, HomeBanc Mortgage Corporation 58
10.24 Extinguishment of troubled debt, workout agreement 61
10.25 VOA - Order granting stay and limited remand for determination 65
of bond amount
27 Financial Data Schedule for the quarter ended June 30, 2000 67
28
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