UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE 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 [ ] NO [X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of common stock, par value $.001 per share, outstanding as
of November 5, 1999 was 7,732,922.
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
FORM 10-Q/A
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
Item 1. Condensed Financial Statements
<S> <C> <C>
Condensed Consolidated Balance Sheets -
December 31, 1998 and September 30, 1999 (as restated) . . 3
Condensed Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1998 and 1999
(as restated) . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statement of Stockholders'
Equity - Nine Months Ended September 30, 1999
(as restated) . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1999
(as restated) . . . . . . . . . . . . . . . . . . . . . . . 6-7
Notes to Condensed Consolidated Financial Statements
(as restated) . . . . . . . . . . . . . . . . . . . . . . . 8-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . 16-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 25
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . 25
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 25
Item 4. Submission of Matters to a Vote of Security Holders . . . 25
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 25
SIGNATURES 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1998 1999
------------- ----------------
(as restated -
see note 2)
Real estate properties:
<S> <C> <C>
Operating properties, net of accumulated depreciation $ 23,117 $ 29,295
Properties under development. . . . . . . . . . . . . . . . . . . . . 79,418 85,911
Land held for future development or sale. . . . . . . . . . . . . . . 1,349 16,402
------------- ----------------
Total real estate properties. . . . . . . . . . . . . . . . . . . . 103,884 131,608
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 1,331 5,549
Due from Tax Credit Partnerships . . . . . . . . . . . . . . . . . . . 31,997 37,586
Construction contracts receivable, net of allowance for doubtful
accounts of $403 at December 31, 1998 and $231 at September 30, 1999 . 8,773 5,372
Costs and estimated earnings in excess of billings on
uncompleted contracts . . . . . . . . . . . . . . . . . . . . . . . . 2,618 2,100
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 1,117
Investments in joint ventures . . . . . . . . . . . . . . . . . . . . 3,577 3,598
Due from related parties . . . . . . . . . . . . . . . . . . . . . . 154 148
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . 17,661 17,271
------------- ----------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 170,995 $ 204,349
============= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses . . . . . . . . . . . . . . . $ 24,892 $ 28,114
Tenant deposits and other liabilities . . . . . . . . . . . . . . . . 6,295 6,375
Billings in excess of costs and estimated earnings
on uncompleted contracts. . . . . . . . . . . . . . . . . . . . . . . 181 940
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,306 115,485
Notes payable to related parties . . . . . . . . . . . . . . . . . . 12,016 11,662
Long-term capital lease obligations . . . . . . . . . . . . . . . . 1,118 1,091
------------- ----------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 132,808 163,667
Commitments and contingencies (notes 5, 9 and 12)
Stockholders' equity:
Common stock, $.001 par value. Authorized 50,000,000
shares; issued and outstanding 7,732,922 at December 31, 1998
and September 30, 1999. . . . . . . . . . . . . . . . . . . . . . . . 8 8
Preferred stock, $.001 par value. Authorized 5,000,000
shares; no shares issued and outstanding. . . . . . . . . . . . . . . - -
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 21,482 21,482
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,697 19,192
------------- ----------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . 38,187 40,682
------------- ----------------
Total liabilities and stockholders' equity. . . . . . . . . . . . $ 170,995 $ 204,349
============= ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1998 1999 1998 1999
----------- ---------------- ----------- ----------------
(as restated - (as restated -
see note 2) see note 2)
REVENUE:
<S> <C> <C> <C> <C>
Construction revenue, including Tax Credit
Partnership construction revenue of $11,254 and $4,024
for the three months ended September 30, 1998 and 1999,
respectively, and $25,389 and $14,887 for the nine months ended
September 30, 1998 and 1999, respectively . . . . . . . . . . . . $ 11,777 $ 4,989 $ 30,909 $ 17,156
Sales of homes. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,110 29,013 15,070 76,115
Sales of commercial properties. . . . . . . . . . . . . . . . . . . - 3,214 3,819 4,901
Rental revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 802 815 2,569 2,669
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 309 619 1,209 1,778
----------- ---------------- ----------- ----------------
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 18,998 38,650 53,576 102,619
----------- ---------------- ----------- ----------------
COST OF REVENUE:
Cost of construction, including Tax Credit Partnership cost of
construction of $8,735 and $3,068 for the three months ended
September 30, 1998 and 1999, respectively, and $18,785 and $10,725
for the nine months ended September 30, 1998 and 1999,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,469 4,423 24,236 14,205
Cost of homes sold. . . . . . . . . . . . . . . . . . . . . . . . . 5,269 25,551 12,805 66,713
Cost of commercial properties sold. . . . . . . . . . . . . . . . . - 3,156 3,500 4,180
Rental operating cost . . . . . . . . . . . . . . . . . . . . . . . 200 159 622 682
----------- ---------------- ----------- ----------------
Total cost of revenue. . . . . . . . . . . . . . . . . . . . . . . 14,938 33,289 41,163 85,780
----------- ---------------- ----------- ----------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,060 5,361 12,413 16,839
----------- ---------------- ----------- ----------------
General and administrative expense. . . . . . . . . . . . . . . . . 1,164 2,813 3,600 7,215
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 431 627 1,197 1,735
----------- ---------------- ----------- ----------------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . 2,465 1,921 7,616 7,889
----------- ---------------- ----------- ----------------
OTHER EXPENSE:
Interest expense, net of interest income of $201 and $354 for the
three months ended September 30, 1998 and 1999, respectively, and
$764 and $832 for the nine months ended September 30, 1998 and
1999, respectively . . . . . . . . . . . . . . . . . . . . . . . . ( 523) ( 1,193) ( 1,347) ( 4,399)
Joint venture loss . . . . . . . . . . . . . . . . . . . . . . . . ( 10) ( 5) ( 16) ( 29)
----------- ---------------- ----------- ----------------
Total other expense . . . . . . . . . . . . . . . . . . . . . . . ( 533) ( 1,198) ( 1,363) ( 4,428)
----------- ---------------- ----------- ----------------
Income before provision for income taxes. . . . . . . . . . . . . . 1,932 723 6,253 3,461
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . 561 176 1,900 966
----------- ---------------- ----------- ----------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,371 $ 547 $ 4,353 $ 2,495
=========== ================ =========== ================
EARNINGS PER COMMON SHARE:
Basic:
- -------------------------------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.18 $ 0.07 $ 0.57 $ 0.32
=========== ================ =========== ================
Weighted-average number of common shares outstanding . . . . . . . . 7,661,422 7,732,922 7,649,187 7,732,922
=========== ================ =========== ================
Diluted:
- -------------------------------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.18 $ 0.07 $ 0.57 $ 0.32
=========== ================ =========== ================
Weighted-average number of common shares outstanding assuming
dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,661,781 7,733,089 7,655,978 7,734,047
=========== ================ =========== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
ADDITIONAL
SHARES COMMON PAID-IN RETAINED
OUTSTANDING STOCK CAPITAL EARNINGS TOTAL
----------- ------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998. . . . . . . . . 7,733 $ 8 $ 21,482 $ 16,697 $38,187
Net income for the nine months
ended September 30, 1999 (as restated -
see note 2) . . . . . . . . . . . . . . . . . - - - 2,495 2,495
----------- ------- ----------- --------- -------
Balance at September 30, 1999 (as restated -
see note 2) . . . . . . . . . . . . . . . . . 7,733 $ 8 $ 21,482 $ 19,192 $40,682
=========== ======= =========== ========= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1998 1999
------------------- ----------------
(as restated -
see note 2)
Cash flows from operating activities:
- ---------------------------------------------------------------------
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,353 $ 2,495
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 1,197 1,735
Gain on sales of commercial properties . . . . . . . . . . . . . ( 310) ( 906)
Joint venture loss . . . . . . . . . . . . . . . . . . . . . . . 16 29
Increase in Investments in joint ventures. . . . . . . . . . . . - ( 50)
Changes in operating assets and liabilities:
Increase in Due from Tax Credit Partnerships . . . . . . . . . ( 18,377) ( 5,161)
Decrease (increase) in Construction contracts receivable . . . ( 599) 3,401
Decrease in Costs and estimated earnings in excess of billings
on uncompleted contracts . . . . . . . . . . . . . . . . . . 2,020 518
Increase in Properties under development . . . . . . . . . . . ( 19,875) ( 29,572)
Increase in Prepaid expenses and other assets. . . . . . . . . ( 2,208) ( 412)
Increase in Accounts payable and accrued expenses. . . . . . . 6,208 3,222
Increase (decrease) in Billings in excess of costs and
estimated earnings on uncompleted contracts. . . . . . . . . ( 458) 759
Increase in Tenant deposits and other liabilities. . . . . . . 6,591 80
------------------- ----------------
Net cash used in operating activities. . . . . . . . . . . . ( 21,442) ( 23,862)
------------------- ----------------
Cash flows from investing activities:
- ---------------------------------------------------------------------
Expenditures for property acquisitions and improvements. . . . . . . ( 10,053) ( 2,686)
Proceeds from Sales of commercial properties . . . . . . . . . . . . 984 4,901
Increase in Notes receivable from related parties. . . . . . . . . . ( 33) ( 83)
Payments from Notes receivable from related parties. . . . . . . . . 54 89
Increase in Notes receivable . . . . . . . . . . . . . . . . . . . . ( 750) ( 1,046)
Payments from Notes receivable . . . . . . . . . . . . . . . . . . . 2,468 251
Cash paid to acquire net assets of Maxim Homes, Inc. . . . . . . . . ( 793) -
------------------- ----------------
Net cash provided by (used in) investing activities. . . . . ( 8,123) 1,426
------------------- ----------------
Cash flows from financing activities:
- ---------------------------------------------------------------------
Proceeds from issuance of Notes payable. . . . . . . . . . . . . . . 63,994 95,997
Payments on Notes payable and capital lease obligations. . . . . . . ( 34,140) ( 68,989)
Proceeds from issuance of Notes payable to related parties . . . . . - 2,472
Payments on Notes payable to related parties . . . . . . . . . . . . - ( 2,826)
------------------- ----------------
Net cash provided by financing activities. . . . . . . . . . 29,854 26,654
------------------- ----------------
Net increase in cash and cash equivalents. . . . . . . . . . 289 4,218
Cash and cash equivalents:
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . 1,110 1,331
------------------- ----------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,399 $ 5,549
=================== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1998 1999
------------------ ----------------
(as restated -
see note 2)
<S> <C> <C>
Supplemental disclosure of cash flow information:
- -----------------------------------------------------------------------
Cash paid during the period for interest, net of amounts capitalized $ 2,805 $ 5,211
================== ================
Cash paid during the period for income taxes . . . . . . . . . . . . $ 3,122 $ 509
================== ================
Non-cash financing and investing activities:
- -----------------------------------------------------------------------
Common stock issued to acquire net assets of
Maxim Homes, Inc . . . . . . . . . . . . . . . . . . . . . . . . . $ 338 $ -
================== ================
Capital lease obligation recorded in connection with equipment
acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41 $ 144
================== ================
Recognition of revenue for the prior sale of a commercial
property which was subject to certain conditions . . . . . . . . . $ 2,834 $ -
================== ================
Amounts due from related parties applied to notes payable to
related parties. . . . . . . . . . . . . . . . . . . . . . . . . . $ 265 $ -
================== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE>
SAXTON INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. DESCRIPTION OF SAXTON INCORPORATED
Saxton Incorporated ("Saxton" or the "Company") is a leader in the
affordable housing industry and a diversified real estate development company
operating in the fast growing Las Vegas, Phoenix, Salt Lake City, Reno and
Tucson markets. The Company's business is comprised of four components: (i) the
design, development, construction and sale of single-family homes; (ii) the
performance of design-build services for third-party clients, including tax
credit partnerships ("design-build services"); (iii) the design, development and
construction of income producing portfolio properties; and (iv) property
operations and management. The properties consist of office and industrial
buildings, retail centers, apartments, single-family homes and land in various
phases of development. The Company also has non-controlling interests in joint
ventures that are engaged in the acquisition, development, ownership and
operation of real property.
On June 24, 1997, the Company completed its initial public offering (the
"Offering") of 2,275,000 shares of the Company's common stock ("Common Stock")
at $8.25 per share. The net proceeds of approximately $17.3 million were used
as follows: (i) $8.1 million to repay indebtedness, of which $3.4 million
represented indebtedness to the Company's principal stockholders and $1.7
million represented indebtedness to other related parties; (ii) $5.6 million to
acquire land for future development; (iii) $2.8 million to acquire the interests
of various third-party partners in certain properties; and (iv) approximately
$800,000 for development activities and general corporate purposes.
The Company's development experience and expertise enable it to identify
and take advantage of market opportunities and to minimize the risk of real
estate cycles. In 1995, management recognized the need for affordable housing in
the Las Vegas market and began to develop value-priced single-family detached
homes. The Company opened its first single-family home development in April
1996 and its second home development in early 1997.
NOTE 2. REINSTATEMENT OF QUARTERLY INFORMATION
Subsequent to the issuance of the Company's September 30, 1999 condensed
consolidated financial statements, the Company's management determined that
certain interest and indirect construction costs capitalized should have been
charged to expense as incurred, and certain capitalized interest costs were not
appropriately charged to cost of revenue when sales of home and commercial
properties were recognized. As a result, the accompanying financial statements
as and for the three months and nine months ended September 30, 1999 have been
restated from amounts previously reported to appropriately account for these
transactions. The following is a summary of the effects of the restatement
(in thousands, except per share data):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
---------------------------------------
AS PREVIOUSLY REPORTED AS RESTATED
------------------------- ------------
<S> <C> <C>
Balance Sheet Data:
Property under development . . . . . . . . $ 88,477 $ 85,911
Total real estate properties . . . . . . . 134,174 131,608
Prepaid expenses and other assets. . . . . 19,429 17,271
Total assets . . . . . . . . . . . . . . . 209,073 204,349
Accounts payable and accrued expenses. . . 29,486 28,114
Total liabilities. . . . . . . . . . . . . 165,039 163,667
Retained earnings. . . . . . . . . . . . . 22,544 19,192
Stockholders' equity . . . . . . . . . . . 44,034 40,682
Total liabilities and stockholders' equity 209,073 204,349
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
--------------------- ----------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
-------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Statements of Income Data:
Cost of construction . . . . . . . . . . $ 4,447 $ 4,423 $ 14,284 $ 14,205
Cost of homes sold . . . . . . . . . . . 25,403 25,551 66,286 66,713
Total cost of revenue. . . . . . . . . . 33,165 33,289 85,432 85,780
Gross profit . . . . . . . . . . . . . . 5,485 5,361 17,187 16,839
General and administrative expenses. . . 2,606 2,813 6,528 7,215
Operating income . . . . . . . . . . . . 2,252 1,921 8,924 7,889
Interest expense . . . . . . . . . . . . ( 131) ( 1,193) ( 710) ( 4,399)
Total other expense. . . . . . . . . . . ( 136) ( 1,198) ( 739) ( 4,428)
Income before provision for income taxes 2,116 723 8,185 3,461
Provision for income taxes . . . . . . . 593 176 2,338 966
Net income . . . . . . . . . . . . . . . 1,523 547 5,847 2,495
Earnings per common share:
Basic. . . . . . . . . . . . . . . . . . $ 0.20 $ 0.07 $ 0.76 $ 0.32
Diluted. . . . . . . . . . . . . . . . . $ 0.20 $ 0.07 $ 0.76 $ 0.32
</TABLE>
NOTE 3. ACQUISITIONS
On March 20, 1998, the Company acquired all of the capital stock of Maxim
Homes, Inc. ("Maxim"), a Utah homebuilder. The acquisition was accounted for
using the purchase method of accounting. Maxim operates principally as a
single-family residential homebuilder, specializing in building homes generally
ranging in price from $145,000 to $185,000. The consideration paid at closing
for this acquisition consisted of: (i) $224,000 in cash; (ii) approximately
$338,000 in the Company's Common Stock (42,280 shares valued at $8.00 per
share); and (iii) $569,000 in cash to retire a portion of Maxim's debt. In
addition, the Company may make five annual installments ("earn-out payments") on
March 31 of each year beginning in 1999, subject to certain levels of required
income. These earn-out payments are based on a specified percentage of estimated
after-tax net income of the Salt Lake City real estate operations of the Company
and are to be made 50% in the Company's Common Stock and 50% in cash. No
earn-out payments were required to be paid by the Company and no earn-out
payments were paid during 1999.
On November 13, 1998, the Company acquired the outstanding capital stock
and ownership interests of Diamond Key Homes, Inc. ("Diamond Key") and certain
related entities. The purchase was accounted for using the purchase method of
accounting and the price was approximately $10.9 million paid in cash at
closing, approximately $250,000 which was paid through September 30, 1999, with
an additional $2.0 million to be paid 50% in cash and 50% in the Company's
Common Stock one year from the date of closing. On November 15, 1999, one year
from the date of closing and pursuant to the purchase agreement, the Company
issued 146,391 shares of the Company's Common Stock to fulfill the stock payment
obligation. Of the $1.0 million to be paid in cash; $300,000 has been paid
through September 30, 1999 and the remaining approximately $700,000 payment has
been extended to December 6, 1999.
On December 22, 1998, the Company acquired the outstanding capital stock of
HomeBanc Mortgage Corporation ("HomeBanc"). The purchase was accounted for using
the purchase method of accounting and the price was $474,000 paid in the form of
71,500 shares of the Company's Common Stock at closing.
Goodwill related to the acquisitions of Maxim, Diamond Key and HomeBanc is
amortized over 15 years. The operations of these three acquisitions were
included in the Company's Consolidated Statements of Income since their
acquisition dates.
9
<PAGE>
The percentage of total revenue by geographic area for the three and nine
months ended September 30, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------------------- ------------------ ------- -------
<S> <C> <C> <C> <C>
Arizona - % 47.5 % - % 44.2 %
------------------- ------------------ ------- -------
Nevada. 86.6 49.4 92.1 47.5
Utah. . 13.4 3.1 7.9 8.3
------------------- ------------------ ------- -------
Total 100.0 % 100.0 % 100.0 % 100.0 %
=================== ================== ======= =======
</TABLE>
NOTE 4. BASIS OF PRESENTATION
The accompanying condensed consolidated unaudited interim financial
statements of the Company have been prepared in conformity with generally
accepted accounting principles ("GAAP") and reflect all adjustments (consisting
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of the results of operations for the three and
nine months ended September 30, 1998 and 1999. These condensed consolidated
unaudited interim financial statements should be read in conjunction with the
Company's audited consolidated financial statements and the notes thereto as of
and for the year ended December 31, 1998, which are included in the Company's
Form 10-K/A filed with the Securities and Exchange Commission for the year ended
December 31, 1998. Certain reclassifications have been made to conform prior
periods with the current period presentation.
The Company historically has experienced, and expects to continue to
experience, variability in quarterly sales and revenues. The combined results of
operations for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risks and Related Factors."
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosure of contingent assets and contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
materially from those estimates.
NOTE 5. REAL ESTATE OPERATING PROPERTIES
Real estate operating properties are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
------------------- ----------------
Cost:
<S> <C> <C>
Buildings $ 19,530 $ 24,447
Tenant improvements 761 653
Land 6,122 7,599
------------------- ----------------
Real estate operating properties at cost 26,413 32,699
Less accumulated depreciation and
amortization. . . . . . . . . . . . . . (3,296) (3,404)
------------------- ----------------
Real estate operating properties, net $ 23,117 $ 29,295
=================== ================
</TABLE>
Depreciation expense relating to real estate operating properties for the
three months ended September 30, 1998 and 1999 was $193,000. Depreciation
expense relating to real estate operating properties for the nine months ended
September 30, 1998 and 1999 was $543,000 and $539,000, respectively.
10
<PAGE>
NOTE 6. CONSTRUCTION CONTRACTS
Construction contracts receivable includes amounts retained pending
contract completion, aggregating approximately $155,000 at December 31, 1998 and
at September 30, 1999. Based on anticipated completion dates, these retentions
are expected to be collected within the next twelve months.
Accounts payable and accrued expenses include amounts retained pending
subcontract completion, aggregating approximately $3.1 million at December 31,
1998 and $3.3 million at September 30, 1999.
Costs and estimated earnings in excess of billings, net, on uncompleted
contracts, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------- --------------------
<S> <C> <C>
Costs incurred to date . . . . . . . . . $ 98,470 $ 112,047
Estimated earnings to date . . . . . . . 30,694 35,070
------------------- --------------------
129,164 147,117
Less billings to date. . . . . . . . . . (126,727) ( 145,957)
------------------- --------------------
Cost and estimated earnings in excess of
billings, net. . . . . . . . . . . . . . $ 2,437 $ 1,160
=================== ====================
</TABLE>
Costs and estimated earnings in excess of billings, net, are shown on the
accompanying Condensed Consolidated Balance Sheets as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------- --------------------
Costs and estimated earnings in excess of
<S> <C> <C>
billings on uncompleted contracts . . . . $ 2,618 $ 2,100
Billings in excess of costs and estimated
earnings on uncompleted contracts . . . . (181) ( 940)
------------------- --------------------
Costs and estimated earnings in excess of
billings, net . . . . . . . . . . . . . . $ 2,437 $ 1,160
=================== ====================
</TABLE>
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 7. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------ -------------------
<S> <C> <C>
Rental and other accounts receivable . . . . . . . . . $ 575 $ 2,033
Goodwill . . . . . . . . . . . . . . . . . . . . . . . 7,877 7,484
Development costs. . . . . . . . . . . . . . . . . . . 2,598 2,734
Deferred tax assets, net . . . . . . . . . . . . . . . 74 95
Furniture and equipment, net . . . . . . . . . . . . . 1,379 1,369
Option and escrow deposits and impounds. . . . . . . . 3,087 1,832
Inventories. . . . . . . . . . . . . . . . . . . . . . 101 -
Other assets, primarily prepaid expenses and loan fees 1,970 1,724
------------------ -------------------
$ 17,661 $ 17,271
================== ===================
</TABLE>
11
<PAGE>
NOTE 8. NOTES PAYABLE
<TABLE>
<CAPTION>
<S> <C> <C>
Notes payable consist of the following (in thousands):. . . . . . . . . . . DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ --------------
Notes payable to various financial institutions, maturing at dates ranging
between November 1999 and November 2027. The notes bear interest
monthly at various rates ranging from 7.9% to 13.0%. (1)(2) $ 72,328 $ 89,174
Notes payable to various individuals, maturing at dates ranging between
October 1999 and November 2000. The notes bear interest at various
rates ranging from 15.0% to 36.0%. 15,875 26,311
Other 103 --
------------ --------------
$ 88,306 $ 115,485
============== ==============
<FN>
(1) On February 9, 1998, the Company entered into a $10.0 million revolving
loan agreement with a financial institution. The line of credit provides for
borrowings of up to $1.0 million for general working capital requirements, $4.0
million for acquisition and development, including strategic acquisitions, and
$5.0 million for land acquisitions. Borrowing under the line of credit is
secured by the pledge of certain Company receivables and any land acquired with
borrowings under the line of credit and bears interest at one percent over the
lender's prime rate in effect from time to time. The agreement is also subject
to certain financial covenants and restrictions. The revolving working capital
line for $1.0 million is payable on November 30, 1999, the maturity date, and
the remainder is payable one year and one day following each advance. These due
dates range from December 1, 2000 to September 14, 2001. As of December 31, 1998
and September 30, 1999, the Company had outstanding indebtedness of $5.0 million
and $8.9 million, respectively, and available borrowings of $5.0 million and
$1.1 million, respectively, under this agreement. The $1.1 million availability
is for land acquisitions only.
(2) On July 30, 1997, the Company entered into a $5.0 million revolving
line of credit with a financial institution. Loans under the agreement bear
monthly interest at 1.5% above the prime rate as defined in the agreement (9.25%
at December 31, 1998 and 9.75% at September 30, 1999), and require the Company
to pay a loan fee of 0.25% for each disbursement. Loans under the agreement are
available only for the acquisition of land and are secured by first trust deeds
on certain real property. As of December 31, 1998 and September 30, 1999, the
Company had outstanding indebtedness of $1.9 million and available borrowings of
$3.1 million under the agreement. Under the terms of the agreement, the Company
is required to meet certain financial covenants. The Company was in compliance
with those covenants at September 30, 1999.
</TABLE>
During 1998 and 1999, the Company entered into various notes payable
representing borrowings from unaffiliated individuals. These notes bear
interest and mature on the following dates:
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Balance Interest Rate Maturity Date
- ----------------- -------------- -----------------------------------
$ 530,000 36% October 8, 1999 (1)
1,000,000 24% December 16, 1999
846,000 20% December 19, 1999 (2)
1,000,000 20% March 17, 2000
1,525,000 24% March 23, 2000
985,000 20% June 26, 2000
430,000 24% June 30, 2000
4,820,000 15% August 1, 2000
1,000,000 24% September 3, 2000
7,520,000 20% September 10, 2000
5,655,000 20% September 28, 2000
1,000,000 20% November 20, 2000
<FN>
(1) This was a 30 day loan and was paid in full on October 8, 1999.
(2) The Company intends to renew this loan with the lender.
</TABLE>
12
<PAGE>
NOTE 9. NOTES PAYABLE TO RELATED PARTIES AND OTHER RELATED PARTY TRANSACTIONS
Notes payable to related parties are unsecured notes payable to certain
stockholders, officers and Directors of the Company for development purposes.
Interest only payments are due monthly at rates ranging from 12% to 19% per
annum, 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 mature on February 1,
2000 and bear interest at 19% and 18% per annum, respectively. During the
second quarter of 1999, the Company's Executive Vice President, Michele Pori,
pledged 530,000 shares of Common Stock, or 6.9% of its outstanding shares, as
collateral for a $1.2 million personal loan. Ms. Pori reloaned the proceeds to
the Company. The note payable bears interest at 12% per annum and matures on
February 3, 2000. At September 30, 1999, the outstanding balance was $1.2
million. The Company used the proceeds from these loans for general operating
expenses.
During the fourth quarter of 1998, Mr. Saxton pledged 3,471,590 shares of
Common Stock, or approximately 44.9% of its outstanding shares, 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 originally aggregating $7.6 million bear interest at 12% per annum and
mature on February 1, 2000. At September 30, 1999, the outstanding balance was
$6.4 million on these loans. 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.
The two personal loans Mr. Saxton has outstanding and the personal loan Ms.
Pori has outstanding, aggregating $7.6 million, are currently past their
maturity date of September 3, 1999. Although the principal amounts are past
due, the interest payments are current. The Company is negotiating with the
lender to restructure the loans. There is no guarantee that the Company will be
successful in doing so. The lender, to-date, has not issued a demand for
repayment of any of the loans.
NOTE 10. EARNINGS PER COMMON SHARE
As required by SFAS No. 128, "Earnings per Share," ("EPS"), the following
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 THREE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------------------ ------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income . . . . . . . . . . $ 1,371 $ 547
Basic EPS
- ------------------------------
Income applicable to
common stockholders. . . . . 1,371 7,661,422 $ 0.18 547 7,732,922 $ 0.07
------- --------- ========== ------- --------- ==========
Effect of dilutive securities:
Stock options. . . . . . . . - 359 - 167
------- --------- ------- ---------
Diluted EPS
- ------------------------------
Income applicable to
common stockholders
and assumed conversions. . . $ 1,371 7,661,781 $ 0.18 $ 547 7,733,089 $ 0.07
======= ========= ========== ======= ========= ==========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------------------ ------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income . . . . . . . . . . $ 4,353 $ 2,495
Basic EPS
- ------------------------------
Income applicable to
common stockholders. . . . . 4,353 7,649,187 $ 0.57 2,495 7,732,922 $ 0.32
------- --------- ========== ------- --------- ==========
Effect of dilutive securities:
Stock options. . . . . . . . - 6,791 - 1,125
------- --------- ------- ---------
Diluted EPS
- ------------------------------
Income applicable to
common stockholders
and assumed conversions. . . $ 4,353 7,655,978 $ 0.57 $ 2,495 7,734,047 $ 0.32
======= ========= ========== ======= ========= ==========
</TABLE>
The Company had options and warrants 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 and
warrants outstanding for the nine months ended September 30, 1998 and 1999 were
415,800 and 732,548, respectively. The antidilutive options and warrants
outstanding for the three months ended September 30, 1998 and 1999 were 617,900
and 761,998, respectively.
NOTE 11. MANAGEMENT STOCK OPTION PLAN
On June 30, 1997, the Company adopted a Management Stock Option Incentive
Plan (the "Option Plan") which provides for the grant of options to employees to
purchase Common Stock up to a maximum of 500,000 shares. Stock options which
terminate without having been exercised, shares forfeited or shares surrendered
will again be available for distribution in connection with future awards under
the Option Plan. On December 7, 1998, the Company's Board of Directors approved
an increase from 500,000 to 750,000 in the number of shares subject to stock
options under the Option Plan. The increase was approved by the stockholders at
the annual meeting of stockholders in June 1999. As of September 30, 1999, the
Company had 447,900 stock options outstanding to certain officers and employees
of the Company pursuant to the Option Plan. These options will vest in equal
annual installments over five years commencing one year from the award date and
will expire between June 30, 2007 and September 30, 2009. Stock options granted
on June 30, 1997 were issued at an exercise price equal to the initial public
offering price of $8.25 per share. Stock options granted after June 30, 1997
were granted at the closing stock price on the grant date as reported on the
Nasdaq Stock Market. On January 2, 1998, the Company gave employees the
opportunity to reprice their stock options. The repricing involved changing
their stock price from $8.25 per share to $6.875 per share (the closing stock
price on January 2, 1998) and changing their grant date from June 30, 1997 to
January 2, 1998. Employees holding 148,300 stock options elected to reprice on
January 2, 1998. As of September 30, 1999, stock options had been granted under
the Option Plan with exercise prices ranging from $3.625 per share to $8.375 per
share.
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
The Company and its two principal stockholders are guarantors on
construction loans relating to Tax Credit Partnerships. Total construction loans
payable for these Tax Credit Partnerships were approximately $37.1 million and
$26.9 million at December 31, 1998 and September 30, 1999, respectively.
NOTE 13. 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.
14
<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 Commercial
Property and Property Operations and Management. Retail operations and corporate
activities are included in the "Other" column. The financial results of the
Company's operating segments are presented on an accrual basis. There are no
significant differences among the accounting policies of the segments as
compared to the Company's consolidated financial statements. The Company
evaluates the performance of its segments and allocates resources to them based
on revenues and gross profit. There are no material intersegment revenues. The
tables below present information about the Company's operating segments for the
three and nine months ended September 30, 1998 and 1999, respectively (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------
SALES OF PROPERTY
DESIGN-BUILD COMMERCIAL OPERATIONS AND
SERVICES HOMEBUILDING PROPERTY MANAGEMENT OTHER TOTAL
------------- -------------- ----------- ---------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue . . . . . . . $ 11,777 $ 6,110 $ - $ 802 $ 309 $ 18,998
Costs . . . . . . . . 9,469 5,269 - 200 - 14,938
------------- -------------- ----------- ---------------- -------- ---------
Gross profit . . . . $ 2,308 $ 841 $ - $ 602 $ 309 $ 4,060
============= ============== =========== ================ ======== =========
Depreciation and
amortization expense $ - $ 4 $ - $ 194 $ 233 $ 431
Interest expense. . . $ - $ ( 1) $ - $ ( 536) $( 187) $ ( 724)
Interest income . . . $ - $ - $ - $ 201 $ - $ 201
Total assets. . . . . $ 47,232 $ 29,713 $ - $ 48,331 $ 8,827 $ 134,103
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------
SALES OF PROPERTY
DESIGN-BUILD COMMERCIAL OPERATIONS AND
SERVICES HOMEBUILDING PROPERTY MANAGEMENT OTHER TOTAL
------------- -------------- ----------- ---------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue . . . . . . . $ 4,989 $ 29,013 $ 3,214 $ 815 $ 619 $ 38,650
Costs . . . . . . . . 4,423 25,551 3,156 159 - 33,289
-------------- ------------- ----------- ---------------- ------- ----------
Gross profit . . . . $ 566 $ 3,462 $ 58 $ 656 $ 619 $ 5,361
============== ============= =========== ================ ======= ==========
Depreciation and
amortization expense $ - $ 116 $ - $ 181 $ 330 $ 627
Interest expense. . . $ - $ - $ - $ ( 1,536) $( 11) $( 1,547)
Interest income . . . $ ( 8) $ 20 $ - $ 342 $ - $ 354
Total assets. . . . . $ 48,342 $ 100,262 $ - $ 48,100 $ 7,645 $ 204,349
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SALES OF PROPERTY
DESIGN-BUILD COMMERCIAL OPERATIONS AND
SERVICES HOMEBUILDING PROPERTY MANAGEMENT OTHER TOTAL
------------- -------------- ----------- ---------------- -------- ---------
Revenue $ 30,909 $ 15,070 $ 3,819 $ 2,569 $ 1,209 $ 53,576
Costs 24,236 12,805 3,500 622 - 41,163
------------- -------------- ----------- ---------------- -------- ---------
Gross profit $ 6,673 $ 2,265 $ 319 $ 1,947 $ 1,209 $ 12,413
============= ============== =========== ================ ======== =========
Depreciation and
amortization expense $ - $ 7 $ - $ 542 $ 648 $ 1,197
Interest expense $ - $ (1) $ - $ (1,579) $ (531) $ (2,111)
Interest income $ - $ - $ - $ 739 $ 25 $ 764
Total assets $ 47,232 $ 29,713 $ - $ 48,331 $ 8,827 $ 134,103
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------
SALES OF PROPERTY
DESIGN-BUILD COMMERCIAL OPERATIONS AND
SERVICES HOMEBUILDING PROPERTY MANAGEMENT OTHER TOTAL
------------- -------------- ----------- ---------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue . . . . . . . $ 17,156 $ 76,115 $ 4,901 $ 2,669 $ 1,778 $ 102,619
Costs . . . . . . . . 14,205 66,713 4,180 682 - 85,780
-------------- ------------- ----------- ---------------- ------- ----------
Gross profit . . . . $ 2,951 $ 9,402 $ 721 $ 1,987 $ 1,778 $ 16,839
============== ============= =========== ================ ======= ==========
Depreciation and
amortization expense $ - $ 366 $ - $ 530 $ 839 $ 1,735
Interest expense. . . $ - $ - $ - $ ( 5,193) $ ( 38) $( 5,231)
Interest income . . . $ ( 8) $ 20 $ - $ 820 $ - $ 832
Total assets. . . . . $ 48,342 $ 100,262 $ - $ 48,100 $ 7,645 $ 204,349
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto of Saxton
Incorporated (the "Company") appearing elsewhere in this Form 10-Q.
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Restatement of Quarterly Information. Subsequent to the issuance of the
Company's September 30, 1999 condensed consolidated financial statements, the
Company's management determined that certain interest and indirect construction
costs capitalized should have been charged to expense as incurred, and certain
capitalized interest costs were not appropriately charged to cost of revenue
when sales of homes and commercial properties were recognized. As a result the
accompanying financial statements as of and for the three months and nine months
ended September 30, 1999 have been restated from amounts previously reported to
appropriately account for these transactions.
Revenue. Total revenue was $38.7 million for the three months ended
September 30, 1999, representing a $19.7 million, or 103.4%, increase from $19.0
million for the three months ended September 30, 1998. The increase was
primarily due to an increase of $22.9 million, or 374.8%, in sales of homes and
an increase of $3.2 million in sales of commercial properties. The 265
single-family home closings for the three months ended September 30, 1999
represented an increase of 373.2%, compared to 56 closings for the three months
ended September 30, 1998. Home closings for the three months ended September
30, 1999 included 91 in Nevada, 7 in Utah and 167 in Arizona. For the three
months ended September 30, 1998, home closings included 43 in Nevada and 13 in
Utah. The increase in home sales was primarily due to the Company's acquisition
of Diamond Key Homes, Inc. ("Diamond Key") in November 1998 and its increased
focus on homebuilding. Sale of commercial properties was $3.2 million for the
three months ended September 30, 1999 compared to $0 for the three months ended
September 30, 1998. During the three months ended September 30, 1999, the
Company sold a large warehouse and the operations of a retail center. There
were no sales of commercial properties during the comparable period of 1998.
Construction revenue for the three months ended September 30, 1999 was $5.0
million, a decrease of $6.8 million, or 57.6%, from $11.8 million during the
three month ended September 30, 1998. The decrease was primarily due to more
construction activity on larger projects during the three months ended September
30, 1998 compared to the three months ended September 30, 1999. During the 1998
period, the Company continued construction on one large residential development
and three tax credit partnership apartment complexes. During the comparable
1999 period, the Company continued construction of three tax credit partnership
apartment complexes, two of which were near completion, and a senior citizens
care facility. Rental and other revenue increased to $1.4 million for the three
months ended September 30, 1999, a 29.1% increase over the $1.1 million in the
comparable period of the prior year. The increase was primarily due to
additional other revenue recognized by HomeBanc Mortgage Corporation
("HomeBanc") during the three months ended September 30, 1999, primarily for
origination fees and premiums. HomeBanc, an affiliate of Diamond Key, was
acquired by the Company in December 1998.
16
<PAGE>
Cost of Revenue. Total cost of revenue was $33.3 million for the three
months ended September 30, 1999, representing a $18.4 million, or 122.8%,
increase from $14.9 million for the three months ended September 30, 1998. Cost
of revenue for the three months ended September 30, 1999 as a percentage of
revenue was 86.1%, compared to 78.5% for the three months ended September 30,
1998. The increase was primarily due to the Company's increase in the proportion
of revenues it generates from its homebuilding activities due to increased
overhead allocation cost on a per unit basis during 1999 and the write-off of
costs relating to certain jobs. The Company wrote off approximately $698,000
related to development jobs and design-build contracts that the Company
determined would not be completed or collected in the future.
Gross Profit. Gross profit as a percent of revenue decreased to 13.9% for
the three months ended September 30, 1999 from 21.5% for the comparable period
in 1998. Gross margins on the sales of homes decreased to 11.9% during the three
months ended September 30, 1999 compared to 13.8% during the three months ended
September 30, 1998, due to an increased overhead allocation as explained above.
Gross margin on construction revenue decreased to 11.3% in the three months
ended September 30, 1999, compared to 19.6% in the same period of 1998,
primarily due to the timing of the completion of such projects, increased
overhead allocation and certain write-offs as explained above. Gross profit
margins on commercial properties sold in the three months ended September 30,
1999 was 1.8% during the three months ended September 30, 1999 and no such sales
occurred during the same period of 1998. The low profit margin on commercial
sales is a result of the sale of the operations of a convenience retail center,
a business line that the Company does not intend to pursue consistent with its
overall strategy, and the sale of a warehouse, both of which had a higher cost
basis.
General and Administrative Expenses. General and administrative expenses
were $2.8 million for the three months ended September 30, 1999, representing a
$1.6 million, or 141.7%, increase from $1.2 million for the three months ended
September 30, 1998. The increase was primarily due to increased activities
related to the growth in the Company's revenues, including an increase in
homebuilding activities, the acquisition of Diamond Key in November 1998 and the
write-off of approximately $341,000 related to the Company's efforts in a
private placement financing that was terminated. Of this increase, $590,000 of
marketing and advertising costs reflect the increased number of housing
subdivisions in production during the three months ended September 30, 1999
compared to the same period in 1998. The Company had 23 home developments open
for sale at September 30, 1999 compared to only 3 at September 30, 1998. In
addition, accounting, legal and agency fees increased $274,000, vehicle and
repairs and maintenance expenses increased $106,000 and rent, utility, travel
and other general office expenses increased $331,000 as the number of employees
increased to 622 at September 30, 1999 from 608 at September 30, 1998. General
and administrative expenses as a percentage of total revenue was 7.3% for the
three months ended September 30, 1999 as compared to 6.2% for the three months
ended September 30, 1998.
Depreciation and Amortization. Depreciation and amortization expense was
$627,000 for the three months ended September 30, 1999, representing a $196,000,
or 45.5%, increase from $431,000 for the three months ended September 30, 1998.
The increase was primarily due to the increase in goodwill amortization expense
of $107,000 related to the acquisitions of Diamond Key and HomeBanc in the
fourth quarter of 1998 and the increase in amortization expense related to loan
fees of $72,000. The remaining increase was due to depreciation expense related
to furniture, fixtures and equipment due to the Company's growth.
Interest Expense, Net. Interest expense, net, was $1.2 million for the
three months ended September 30, 1999, representing a $670,000 or 128.1%,
increase from $523,000 for the three months ended September 30, 1998. The
increase was primarily the result of higher levels of debt and higher interest
rates on the debt.
Income Before Provision for Income Taxes. As a result of the foregoing
factors, income before provision for income taxes was $723,000 for the three
months ended September 30, 1999, representing a $1.2 million, or 62.6%, decrease
from $1.9 million for the three months ended September 30, 1998. Income before
provision for income taxes as a percentage of total revenue was 1.9% for the
three months ended September 30, 1999 as compared to 10.2% for the three months
ended September 30, 1998.
17
<PAGE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenue. Total revenue was $102.6 million for the nine months ended
September 30, 1999, representing a $49.0 million, or 91.5%, increase from $53.6
million for the nine months ended September 30, 1998. The increase was primarily
due to an increase of $61.0 million, or 405.1%, in sales of homes to $76.1
million during the nine months ended September 30, 1999 compared to $15.1
million during the nine months ended September 30, 1998. The 689 single-family
home closings for the nine months ended September 30, 1999 represented a 359.3%
increase over the 150 closings for the nine months ended September 30, 1998.
Home closings during the nine months ended September 30, 1999, included 245 in
Nevada, 30 in Utah and 414 in Arizona compared to 128 in Nevada and 22 in Utah
for the comparable period in 1998. The increase in home sales was primarily due
to the Company's increased focus on homebuilding and its acquisition of Diamond
Key and Maxim Homes, Inc. ("Maxim") in November 1998 and March 1998,
respectively. Construction revenue decreased $13.8 million, or 44.5% from $30.9
million during the nine months ended September 30, 1998 to $17.2 million during
the nine months ended September 30, 1999. The decrease is primarily the result
of more active projects and construction activity during the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1999. Three
large projects under construction during the nine months ended September 30,
1998 were completed in early 1999; therefore, lower revenues were recognized on
these projects as they neared completion during the first part of 1999. Sale of
commercial properties was $4.9 million for the nine months ended September 30,
1999 compared to $3.8 million for the nine months ended September 30, 1998. The
increase was due to four commercial sales during 1999 compared to only two
during 1998. The 1999 sales were a retail center, a parcel of land, a warehouse
and the operations of a retail store compared to the 1998 sales which were a
warehouse and a commercial center. Rental and other revenue for the nine months
ended September 30, 1999 was $4.4 million compared to $3.8 million for the
nine months ended September 30, 1998. The increase was due primarily to premiums
and origination fees collected by HomeBanc during the nine months ended
September 30, 1999.
Cost of Revenue. Total cost of revenue was $85.8 million for the nine
months ended September 30, 1999, representing a $44.6 million, or 108.4%,
increase from $41.2 million for the nine months ended September 30, 1998. Cost
of revenue for the nine months ended September 30, 1999 as a percentage of
revenue was 83.6%, compared to 76.8% for the nine months ended September 30,
1998. The increase was primarily due to the Company's significant increase in
the proportion of revenues it generates from its homebuilding activities which
has lower margins than construction margins, the increased overhead allocation
to the Company's homebuilding activities on a per unit basis during 1999 and the
write-off of costs relating to certain jobs. During 1999, the Company wrote off
approximately $685,000 related to development jobs and design-build contracts
that the Company determined would not be completed or collected in the future.
Gross Profit. Gross profit as a percent of revenue decreased to 16.4% for
the nine months ended September 30, 1999 from 23.2% for the comparable period in
1998. Gross margins on the sales of homes decreased to 12.4% during the nine
months ended September 30, 1999 compared to 15.0% during the nine months ended
September 30, 1998, due to an increased overhead allocation to the Company's
homebuilding activities on a per unit basis. Gross margin on construction
revenue decreased to 17.2% in the nine months ended September 30, 1999, compared
to 21.6% in the same period of 1998, primarily due to the timing of the
completion of such projects, increased overhead allocation and certain
write-offs explained previously. Gross profit margin on commercial properties
sold in the nine months ended September 30, 1999 increased to 14.7% from 8.4% in
the nine months ended September 30, 1998 primarily due to the overall lower cost
basis of the properties sold during the 1999 period compared to the properties
sold during the 1998 period.
General and Administrative Expenses. General and administrative expenses
were $7.2 million for the nine months ended September 30, 1999, representing a
$3.6 million, or 100.4%, increase from $3.6 million for the nine months ended
September 30, 1998. The increase was primarily due to increased activities
related to the growth in the Company's revenues, including an increase in
homebuilding activities and the acquisitions of Diamond Key and Maxim. Of this
increase, $1.6 million of marketing and advertising costs reflect the increased
number of housing subdivisions in production during the nine months ended
September 30, 1999 compared to the same period in 1998. The Company had 23 home
developments open for sale at September 30, 1999 compared to only 3 at September
30, 1998. In addition, accounting, legal and agency fees increased $712,000,
vehicle and repairs and maintenance expense increased $285,000 and rent,
utility, travel and other general office expenses increased $726,000 as the
number of employees increased to 622 at September 30, 1999 from 608 at September
30, 1998. General and administrative expenses as a percentage of total revenue
was 7.0% for the nine months ended September 30, 1999 as compared to 6.7% for
the nine months ended September 30, 1998.
Depreciation and Amortization. Depreciation and amortization expense was
$1.7 million for the nine months ended September 30, 1999, representing a
$538,000, or 44.9%, increase from $1.2 million for the nine months ended
September 30, 1998. The increase was primarily due to the increase in goodwill
amortization expense of $371,000 related to the acquisitions of Diamond Key,
Maxim and HomeBanc in 1998 and the increase in amortization expense related to
loan fees of $109,000. The remaining increase was due to depreciation expense
related to furniture, fixtures and equipment purchased or acquired, due to the
Company's growth.
18
<PAGE>
Interest Expense, Net. Interest expense, net, was $4.4 million for the nine
months ended September 30, 1999, representing a $3.1 million or 224.9%, increase
from $1.3 million for the nine months ended September 30, 1998. The increase was
primarily the result of higher levels of debt and higher interest rates on the
debt.
Income Before Provision for Income Taxes. As a result of the foregoing
factors, income before provision for income taxes was $3.5 million for the nine
months ended September 30, 1999, representing a $2.8 million, or 44.7%, decrease
from $6.3 million for the nine months ended September 30, 1998. Income before
provision for income taxes as a percentage of total revenue was 3.4% for the
nine months ended September 30, 1999 as compared to 11.7% for the nine months
ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically relied upon land and project financing, as
applicable, partner and joint venture contributions in the form of land or cash,
developer's equity (value in excess of cost), other forms of debt, including
loans from affiliates, and cash flow from operations to provide capital for land
acquisitions and portfolio construction. The Company intends to continue to
provide for its capital requirements from some or all of these sources.
Management believes that cash generated from operations, sales of properties,
and funds available from external sources of debt; including extension of
maturities or obtaining new financing, and equity financing, together with cash
on hand at September 30, 1999, will be sufficient to provide for its capital
requirements for at least the next 12 months. The Company is currently
exploring alternative methods of financing and negotiating with various lenders
as well as in the process of selling certain properties in order to raise cash.
There can be no assurance that the Company will be able to obtain such
financing.
The Company has two loans maturing during the fourth quarter of 1999; a
$1.0 million loan maturing on December 16, 1999 and a $846,000 loan maturing on
December 19, 1999. The Company intends to pay in full the $1.0 million loan and
renew the $846,000 loan.
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 44.9% of the Company's outstanding shares at September 30, 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% per
annum and mature on February 1, 2000. The outstanding balance at September 30,
1999 was $6.4 million. 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.
During the second quarter of 1999, the Company's Executive Vice President,
Michele Pori, pledged 530,000 shares of Common Stock, or 6.9% of its outstanding
shares, as collateral for a $1.2 million personal loan. Ms. Pori reloaned the
proceeds to the Company. The note payable bears interest at 12% per annum and
matures on February 3, 2000. At September 30, 1999, the outstanding balance was
$1.2 million.
The two personal loans Mr. Saxton has outstanding and the personal loan Ms.
Pori has outstanding, aggregating $7.6 million, are currently past their
maturity date of September 3, 1999. Although the principal amounts are past
due, the interest payments are current. The Company is negotiating with the
lender to restructure the loans. There is no guarantee that the Company will be
successful in doing so. The lender, to-date, has not issued a demand for
repayment of any of the loans.
On February 9, 1998, the Company entered into a $10.0 million revolving loan
agreement with a financial institution. The line of credit provides for
borrowings of up to $1.0 million for general working capital requirements, $4.0
million for acquisition and development, including strategic acquisitions, and
$5.0 million for land acquisitions. Borrowing under the line of credit is
secured by the pledge of certain Company receivables and any land acquired with
borrowings under the line of credit and bears interest at one percent over the
lender's prime rate in effect from time to time. The agreement is also subject
to certain financial covenants and restrictions. The revolving working capital
line for $1.0 million is payable on November 30, 1999, the maturity date, and
the remainder is payable one year and one day following each advance. These due
dates range from December 1, 2000 to September 14, 2001. As of December 31,
1998 and September 30, 1999, the Company had outstanding indebtedness of $5.0
million and $8.9 million, respectively, and available borrowings of $5.0 million
and $1.1 million, respectively, under this agreement. The $1.1 million
availability is for land acquisitions only.
On July 30, 1997, the Company entered into a $5.0 million 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 (9.25%
at December 31, 1998 and 9.75% at September 30, 1999), and require the Company
to pay a loan fee of 0.25% for each disbursement. Loans under the agreement are
available only for the acquisition of land and are secured by first trust deeds
on certain real property. As of December 31, 1998 and September 30, 1999, the
Company had outstanding indebtedness of $1.9 million and available borrowings of
$3.1 million under the agreement. Under the terms of the agreement, the Company
is required to meet certain financial covenants. The Company was in compliance
with the covenants at September 30, 1999.
19
<PAGE>
Operating Activities. Net cash used in operating activities was $23.9
million for the nine months ended September 30, 1999 compared to $21.4 million
for the nine months ended September 30, 1998. The increase in net cash used in
operating activities was primarily due to a $29.6 million increase in net cash
used for properties under development related to single-family homes during the
nine months ended September 30, 1999 compared to a $19.9 million net increase
during the nine months ended September 30, 1998. The number of home developments
under construction increased to 27 for $74.6 million at September 30, 1999 from
10 for $28.9 million at September 30, 1998.
Investing Activities. Net cash provided by investing activities was $1.4
million for the nine months ended September 30, 1999 compared to net cash used
of $8.1 million for the nine months ended September 30, 1998. The decrease in
net cash used was primarily due to lower expenditures for property acquisitions
and improvements during the 1999 period compared to the 1998 period as the
Company focused more on homebuilding activities during 1999. The Company spent
$10.1 million on property acquisitions and improvements during the 1998 period
compared to $2.7 million during 1999. The decrease in net cash used in
investing activities was also attributable to increased proceeds from the sales
of commercial properties from $4.9 million during the nine months ended
September 30, 1999 compared to $984,000 during the nine months ended September
30, 1998. The Company sold a retail center, a parcel of land, a warehouse and
the operations of a retail store during the 1999 period compared to only a
warehouse and a commercial center during the comparable 1998 period.
Financing Activities. Net cash provided by financing activities was $26.7
million for the nine months ended September 30, 1999 compared to $29.9 million
for the nine months ended September 30, 1998. The decrease in cash provided by
financing activities was primarily due to lower net borrowings of $27.0 million
during the nine months ended September 30, 1999 compared to $29.9 million during
the nine months ended September 30, 1998.
Interest costs incurred, expensed and capitalized were as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest incurred:
Residential . . . . . . . . . . . . . $1,524 $2,071 $2,843 $6,521
Commercial. . . . . . . . . . . . . . 674 554 1,813 1,764
------ ------ ------ ------
Total incurred. . . . . . . . . . . $2,198 $2,625 $4,656 $8,285
====== ====== ====== ======
Interest expensed:
Residential . . . . . . . . . . . . . $ 146 $1,070 $ 477 $3,728
Commercial. . . . . . . . . . . . . . 579 477 1,634 1,503
------ ------ ------ ------
Total expensed. . . . . . . . . . . $ 725 $1,547 $2,111 $5,231
====== ====== ====== ======
Interest capitalized at end of period:
Residential . . . . . . . . . . . . . $1,378 $1,001 $2,366 $2,793
Commercial. . . . . . . . . . . . . . 95 77 179 261
------ ------ ------ ------
Total interest capitalized. . . . . $1,473 $1,078 $2,545 $3,054
====== ====== ====== ======
</TABLE>
Properties under development and land held for future development or sale
increased by $21.5 million from $80.8 million at December 31, 1998 to $102.3
million at September 30, 1999.
The Company anticipates that during the next twelve months, portfolio
projects already in development will cost approximately $518,000 in the
aggregate, substantially all of which the Company plans to finance through
construction loans. The Company also anticipates that it will spend
approximately $1.2 million for planned portfolio projects during the next twelve
months. The real estate development business is capital intensive and requires
significant up-front expenditures to acquire and entitle land and commence
development. The Company typically finances, and will continue to finance, its
land acquisition and portfolio development activities utilizing the proceeds of
institutional loans secured by real property. In some cases, the Company plans
to utilize private financing, typically on a short-term or interim basis. In
cases where the Company holds a property after completion of construction, the
Company plans to obtain permanent financing secured by the property.
20
<PAGE>
The Company is exposed to changes in interest rates primarily as a result
of its borrowing activities, which includes borrowings under lines of credit.
These lines, along with cash flow from operations, are used to maintain
liquidity and fund business operations. The Company typically replaces
borrowings under its lines of credit, as necessary, with long-term fixed rate
and shorter termed variable rate financing generally secured by real estate.
The nature and amount of the Company's debt may vary as a result of business
requirements, market conditions and other factors. The extent of the Company's
interest rate risk is not quantifiable or predictable because of the variability
of interest rates and business financing requirements, but the Company does not
believe such risk is material. The Company does not currently use derivative
instruments to adjust the Company's interest rate risk profile.
The Company has made its capital contributions to the six Tax Credit
Partnerships. The Company is obligated, however, to make operating expense
loans, not to exceed an aggregate of $3.0 million, to meet operating deficits,
if any, of such Tax Credit Partnerships.
The Company does not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial instruments. On
the basis of the fair value of the Company's market sensitive instruments at
September 30, 1999, the Company does not consider the potential near-term losses
in future earnings, fair values and cash flows from reasonably possible
near-term changes in interest rates to be material.
BACKLOG
The Company's homes are generally offered for sale in advance of their
construction. The majority of the Company's homes are sold pursuant to standard
sales contracts entered into prior to commencement of construction. Such sales
contracts are typically subject to certain contingencies such as the buyer's
ability to qualify for financing. Homes covered by such sales contracts are
considered by the Company as backlog. The Company does not recognize revenue on
homes covered by such contracts until the sales are closed and the risk of
ownership has been legally transferred to the buyer. At September 30, 1999, the
Company had 445 homes in backlog, representing an aggregate sales value of
approximately $48.6 million. At September 30, 1998, the Company's backlog was
41 homes representing an aggregate sales value of $4.5 million.
The Company is also involved in the design-build development of commercial
projects. Backlog for such commercial projects is defined as the uncompleted
work remaining under a signed fixed-price contract. The Company uses the
percentage-of-completion method to account for revenue from its design-build
contracts. At September 30, 1999, the Company had backlog under its design-build
contracts of approximately $18.0 million. At September 30, 1998, the Company's
design-build backlog was approximately $35.8 million.
YEAR 2000
The Company's process for becoming Year 2000 ("Y2K") compliant has been to
perform an ongoing comprehensive study and review of computer hardware, software
and systems, both internal and external, and non-computer related systems which
may be affected by certain computerized functions. The Company does not believe
the non-computer related systems, whether Y2K compliant or not, will have a
material impact on the Company's operations. The Company has contacted or will
contact its significant service providers, vendors, suppliers, subcontractors,
financial institutions, consultants and various government agencies, to obtain
information regarding the assurance of Y2K compliance. However, there can be no
guarantee that the systems of others upon which the Company's systems rely will
be Y2K compliant in a timely manner. Failure to convert by an external source
or provider or the failure to convert properly would have a material adverse
effect on the Company, as would the Company's failure to convert, or convert
properly, an internal system.
Through September 30, 1999, the Company has completed a majority of its Y2K
resolution efforts on its business critical internal hardware and software. The
Company increased the awareness of the Y2K issue across the Company, assessed
the Company's Y2K issues, determined proposed resolutions, validated those
proposed resolutions and implemented most system solutions.
21
<PAGE>
Given the information known at this time about the Company's systems and
Y2K issues, coupled with the Company's ongoing, normal course-of-business
efforts to upgrade or replace business critical systems and software
applications as necessary, Y2K costs, the majority of which have been incurred
in fiscal 1999. Current Y2K expenditures have been approximately $72,000 thus
far due to much of the work performed by existing internal staff. Estimated
remaining costs should not exceed $10,000 - $20,000. These costs include
incremental personnel costs, consulting costs and costs for the modification of
or replacement of existing hardware and software. These costs have been and
will be funded through cash flows from operations and are expensed as incurred.
Purchased hardware and software has been and will be capitalized in accordance
with the Company's normal accounting policy. The costs of the project and the
timing in which the Company believes it will complete the necessary Y2K
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but
are not limited to, the success of the Company in identifying systems and
programs having Y2K issues, the nature and amount of programming required to
upgrade or replace the affected programs, the availability and cost of personnel
trained in this area and the extent to which the Company might be adversely
impacted by third-party (vendors, subcontractors, lenders, bond trustees, etc.)
failure to remediate their own Y2K issues. Failure by the Company and/or its
vendors and subcontractors and in particular, the local governments, on which
the Company is materially dependent to complete Y2K compliance work in a timely
manner could have a material adverse effect on the Company's operations. The
Company believes that its business operations are not heavily dependent on Y2K
compliance of its systems and that, should a reasonably likely worst case Y2K
situation occur, the Company, because of the basic nature of its systems, many
of which can be executed manually, would not likely suffer material loss or
disruption in remedying the situation.
The Company currently has not established a formal contingency plan in the
event the Company is not successful with its attempts to be fully Y2K compliant;
however, the Company may make provisions that would include the stockpiling of
construction raw materials, automated reports and the development of back-up
systems as an alternative to computers prior to December 31, 1999.
RISKS AND RELATED FACTORS
Liquidity. The two personal loans Mr. Saxton has outstanding and the
personal loan Ms. Pori has outstanding, aggregating $7.6 million, are currently
past their maturity date of September 3, 1999. Although the principal amounts
are past due, the interest payments are current. The Company is negotiating
with the lender to restructure the loans. There is no guarantee that the
Company will be successful in doing so. The lender, to-date, has not issued a
demand for repayment of any of the loans. The Company has two loans maturing
during the fourth quarter of 1999; a $1.0 million loan maturing on December 16,
1999 and a $846,000 loan maturing on December 19, 1999. The Company intends to
pay in full the $1.0 million loan and renew the $846,000 loan. Management
believes that cash generated from operations, sales of properties, and funds
available from external sources of debt, including extension of maturities or
obtaining new financing, and equity financing, together with cash on hand at
September 30, 1999, will be sufficient to provide for its capital requirements
for at least the next 12 months. The Company is currently exploring alternative
methods of financing and negotiating with various lenders as well as in the
process of selling certain properties. There can be no assurance that the
Company will be able to obtain such financing.
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.
22
<PAGE>
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
$77.4 million of floating rate debt (exclusive of the indebtedness of
unconsolidated partnerships of which the Company is a general partner),
currently bearing a weighted-average interest rate of 9.05% per annum at
September 30, 1999. 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.
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.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," in the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1998. There have been no significant changes
since the filing of the aforementioned report, except for new debt of $52.9
million, due between 1999 and 2001 with annualized interest rates ranging from
8.75% to 36.0%.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Form 8-K, dated November 8, 1999, Item 5. Other Events, Announcement of
termination of former chief financial officer.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAXTON INCORPORATED
May 15, 2000 By: /s/ James C. Saxton
----------------------
James C. Saxton
Chairman of the Board of Directors,
President, Chief Executive Officer,
Interim Chief Financial Officer and Director
(Principal Executive Officer)
By: /s/ Melody J. Sullivan
-------------------------
Melody J. Sullivan
Vice President and Chief Accounting
Officer
(Principal Accounting Officer)
26
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
-------- ----------- ----
27 Financial Data Schedule for the quarter ended September 30, 1999 26
27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5549
<SECURITIES> 0
<RECEIVABLES> 44454 <F1>
<ALLOWANCES> 231
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 140817
<DEPRECIATION> 5274
<TOTAL-ASSETS> 204349
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 40674
<TOTAL-LIABILITY-AND-EQUITY> 204349
<SALES> 98172
<TOTAL-REVENUES> 103451
<CGS> 85098
<TOTAL-COSTS> 85780
<OTHER-EXPENSES> 8979 <F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5231
<INCOME-PRETAX> 3461
<INCOME-TAX> 966
<INCOME-CONTINUING> 2495
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2495
<EPS-BASIC> .32
<EPS-DILUTED> .32
<FN>
<F1> Receivables are comprised of "Due form Tax Credit Partnerships,"
"Construction Contracts Receivable," "Notes Receivable," and "Due from
Related Parties."
<F2> Other Expenses are comprised of "General and Administrative," "Depreciation
and Amortization," and "Joint Venture Losses."
</TABLE>
