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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended SEPTEMBER 30, 2004

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 0-22999

TARRAGON CORPORATION

(Exact name of registrant as specified in its charter)
     
Nevada   94-2432628
  		 
 
(State or other jurisdiction of incorporation
or organization) 		  (I.R.S. Employer
Identification No.)

1775 Broadway, 23rd Floor, New York, NY 10019

(Address of principal executive offices) (Zip Code)

(212) 949-5000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X]  No [  ]

     
Common Stock, $.01 par value
   15,349,340
(Class)   (Outstanding at November 1, 2004)

1

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 6. EXHIBITS
SIGNATURES
Indenture Agreement
Rule 13a-14(a) Certification by William S. Friedman, CEO
Rule 13a-14(a) Certification by Erin D. Pickens, Executive Vice President and CFO
Section 1350 Certifications

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements for the period ended September 30, 2004, have not been audited by independent certified public accountants, but, in our opinion, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of consolidated financial position, consolidated results of operations, and consolidated cash flows at the dates and for the periods indicated have been included.

TARRAGON CORPORATION

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
                 
    September 30,   December 31,
    2004
   2003
Assets
                
Real estate held for investment (net of accumulated depreciation of $132,730 in 2004 and $110,817 in 2003)
   $ 525,739     $ 395,095  
Homebuilding inventory
     267,029       97,234  
Contracts receivable
     129,870       —  
Investments in and advances to partnerships and joint ventures
     34,425       81,764  
Cash and cash equivalents
     17,867       21,626  
Restricted cash
     35,067       6,573  
Goodwill
     2,691       2,691  
Other assets, net
     45,732       18,834  
 
    
 		      
 
 
   $ 1,058,420     $ 623,817  
 
    
 		      
 		  
Liabilities and Stockholders’ Equity
                
Liabilities
                
Notes and interest payable (including $756 in 2004 due to affiliates)
   $ 800,633     $ 471,262  
8% Senior convertible notes
     50,000       —  
Other liabilities
     55,324       26,886  
 
    
 		      
 		  
 
     905,957       498,148  
Commitments and contingencies
                
Minority interests
     21,882       22,341  
Stockholders’ equity
                
Common stock, $.01 par value; authorized shares, 100,000,000; shares outstanding, 15,377,760 in 2004 and 11,583,973 in 2003
     126       87  
Special stock, $.01 par value; authorized shares, 17,500,000; shares outstanding, none
     —       —  
Cumulative preferred stock, $.01 par value; authorized shares, 2,500,000; shares outstanding, 753,333 in 2004 and 2003; liquidation preference, $9,040 in 2004 and 2003, or $12 per share
     8       8  
Paid-in capital
     352,498       346,372  
Accumulated deficit
     <180,022 >     <202,357 >
Treasury stock, at cost; 6,197,445 shares in 2004 and 4,889,821 shares in 2003
     <42,029 >     <40,782 >
 
    
 		      
 		  
 
     130,581       103,328  
 
    
 		      
 		  
 
   $ 1,058,420     $ 623,817  
 
    
 		      
 		  

The accompanying notes are an integral part of these Consolidated Financial Statements.

2

Table of Contents

TARRAGON CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
                                 
    For the Three Months   For the Nine Months
    Ended September 30,
   Ended September 30,
    2004
   2003
   2004
   2003
Revenue
                                
Rentals
   $ 24,417     $ 21,449     $ 73,162     $ 61,965  
Homebuilding sales
     56,913       20,302       135,062       35,135  
Management fees and other (including $88 and $295 in the three and nine month periods in 2004 and $112 and $310 in the three and nine month periods in 2003 from affiliates)
     318       166       668       402  
 
    
 		      
 		      
 		      
 		  
 
     81,648       41,917       208,892       97,502  
 
    
 		      
 		      
 		      
 		  
Expenses
                                
Property operations
     13,482       12,303       38,651       33,928  
Costs of homebuilding sales
     43,409       15,103       105,687       28,733  
Depreciation
     5,517       4,821       16,469       15,021  
General and administrative
                                
Corporate
     4,490       3,222       12,432       9,748  
Property
     1,076       878       3,181       2,756  
 
    
 		      
 		      
 		      
 		  
 
     67,974       36,327       176,420       90,186  
 
    
 		      
 		      
 		      
 		  
Other income and expenses
                                
Equity in income <loss> of partnerships and joint ventures
     <97 >     7,169       5,713       6,276  
Minority interest in income of consolidated partnerships and joint ventures
     <397 >     <1,166 >     <3,886 >     <2,284 >
Interest income (including $76 and $308 in the three and nine month periods in 2004 from affiliates)
     165       412       578       664  
Interest expense (including $7 and $9 in the three and nine month periods in 2004 to affiliates)
    <6,819 >     <5,520 >     <19,369 >     <19,863 >
Gain on sale of real estate
     —       —       378       1,223  
Gain on disposition of other assets
     —       —       2,075       —  
 
    
 		      
 		      
 		      
 		  
Income <loss> from continuing operations before income tax
     6,526       6,485       17,961       <6,668 >
Income tax <expense> benefit
     <2,632 >     —       2,400       —  
 
    
 		      
 		      
 		      
 		  
Income <loss> from continuing operations
     3,894       6,485       20,361       <6,668 >
Discontinued operations
                                
Income <loss> from operations
     —       <21 >     <13 >     144  
Gain on sale of real estate
     —       7,367       2,666       16,590  
 
    
 		      
 		      
 		      
 		  
Net income
     3,894       13,831       23,014       10,066  
Dividends on cumulative preferred stock
     <226 >     <226 >     <678 >     <559 >
 
    
 		      
 		      
 		      
 		  
Net income allocable to common stockholders
   $ 3,668     $ 13,605     $ 22,336     $ 9,507  
 
    
 		      
 		      
 		      
 		  

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Table of Contents

TARRAGON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Dollars in thousands, except per share data)
(Unaudited)

                                 
    For the Three Months   For the Nine Months
    Ended September 30,
   Ended September 30,
    2004
   2003
   2004
   2003
Earnings per common share
                                
Income <loss> from continuing operations allocable to common stockholders
   $ .24     $ .43     $ 1.32     $ <.49 >
Discontinued operations
     —       .50       .18       1.14  
 
    
 		      
 		      
 		      
 		  
Net income allocable to common stockholders
   $ .24     $ .93     $ 1.50     $ .65  
 
    
 		      
 		      
 		      
 		  
Earnings per common share – assuming dilution
                                
Income <loss> from continuing operations allocable to common stockholders and assumed conversions
   $ .21     $ .37     $ 1.15     $ <.49 >
Discontinued operations
     —       .43       .15       1.14  
 
    
 		      
 		      
 		      
 		  
Net income allocable to common stockholders and assumed conversions
   $ .21     $ .80     $ 1.30     $ .65  
 
    
 		      
 		      
 		      
 		  

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Table of Contents

TARRAGON CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
                 
    For the Nine Months
    Ended September 30,
    2004
   2003
Cash Flows from Operating Activities
                
Net income
   $ 23,014     $ 10,066  
Adjustments to reconcile net income to net cash used in operating activities:
                
Gain on sale of real estate
     <3,044 >     <17,813 >
Gain on disposition of other assets
     <2,075 >     —  
Deferred income tax
     <2,400 >     —  
Minority interests in income of consolidated partnerships and joint ventures
     3,886       2,284  
Depreciation and amortization
     19,206       17,875  
Equity in income of partnerships and joint ventures
     <5,713 >     <6,276 >
Costs of homebuilding sales
     105,687       28,733  
Purchase of homebuilding inventory
     <11,431 >     <12,450 >
Noncash compensation related to stock options
     320       200  
Excess of homebuilding sales revenue over sales collected attributable to commissions and closing costs
     <1,817 >     <2,529 >
Homebuilding renovation and development costs paid
     <78,292 >     <17,232 >
Noncash homebuilding sales recorded under percentage of completion method
     <62,668 >     —  
Changes in other assets and liabilities, net of effects of noncash investing and financing activities:
                
Decrease <increase> in interest receivable
     80       <159 >
Increase in other assets
     <18,699 >     <3,254 >
Increase<decrease> in other liabilities
     13,133       <2,563 >
Increase <decrease> in interest payable
     <17,754 >     337  
 
    
 		      
 		  
Net cash used in operating activities
     <38,567 >     <2,781 >
 
                
Cash Flows from Investing Activities
                
Acquisition of real estate
     <8,696 >     —  
Proceeds from the sale of real estate
     1,203       20,168  
Net cash paid in conjunction with consolidation of partnerships and joint ventures
     <972 >     —  
Property capital improvements
     <6,146 >     <7,256 >
Real estate development costs
     <5,908 >     <10,186 >
Earnest money deposits paid, net
     <6,153 >     <727 >
Advances to partnerships and joint ventures for development costs or for the purchase of land for development
     <16,754 >     <27,010 >
Net distributions related to property operations of partnerships and joint ventures
     968       7,521  
Proceeds from disposition of other assets
     2,075       —  
Distributions to minority partners of consolidated partnerships
     <926 >     <913 >
Buyout of minority partners
     <9,555 >     —  
Other
     <955 >     146  
 
    
 		      
 		  
Net cash used in investing activities
     <50,847 >     <18,257 >

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Table of Contents

TARRAGON CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
                 
    For the Nine Months
    Ended September 30,
    2004
   2003
Cash Flows from Financing Activities
                
Proceeds from borrowings
   $ 283,557     $ 177,698  
Principal payments on notes payable
     <206,230 >     <159,197 >
Distributions from financing activities of partnerships and joint ventures
     4,369       8,837  
Stock repurchases
     <1,261 >     <3,245 >
Dividends to stockholders
     <679 >     <564 >
Proceeds from the exercise of stock options
     5,859       231  
Other
     40       818  
 
    
 		      
 		  
Net cash provided by financing activities
     85,655       24,578  
 
    
 		      
 		  
Net increase in cash and cash equivalents
     <3,759 >     3,540  
Cash and cash equivalents, beginning of period
     21,626       18,023  
 
    
 		      
 		  
Cash and cash equivalents, end of period
   $ 17,867     $ 21,563  
 
    
 		      
 		  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                
Interest paid
   $ 34,934     $ 18,550  
 
    
 		      
 		  
Income taxes paid
   $ 470     $ —  
 
    
 		      
 		  
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
                
Changes in assets and liabilities in connection with the purchase of real estate:
                
Real estate
   $ 19,951     $ —  
Restricted cash
     114       —  
Other assets
     163       —  
Notes and interest payable
     <11,333 >     —  
Other liabilities
     <199 >     —  
 
    
 		      
 		  
Cash paid
   $ 8,696     $ —  
 
    
 		      
 		  
Assets written off and liabilities released in connection with the sale of real estate:
                
Real estate
   $ 2,517     $ 22,006  
Other assets
     137       382  
Notes and interest payable
     <4,402 >     <19,374 >
Other liabilities
     <93 >     <659 >
Gain on sale
     3,044       17,813  
 
    
 		      
 		  
Cash received
   $ 1,203     $ 20,168  
 
    
 		      
 		  

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Table of Contents

TARRAGON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)

                 
    For the Nine Months
    Ended September 30,
    2004
   2003
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES (Continued):
                
Effect on assets and liabilities of the consolidation of four apartment communities, four homebuilding projects, and one commercial property in 2004 and the deconsolidation of one property in 2003:
                
Real estate
   $ 116,567     $ <16,377 >
Homebuilding inventory
     107,414       —  
Contracts receivable
     78,066       —  
Investments in and advances to partnerships and joint ventures
     <65,101 >     2,549  
Restricted cash
     17,073       —  
Other assets
     15,195       <260 >
Notes and interest payable
     <238,715 >     13,424  
Other liabilities
     <23,362 >     664  
Minority interest
     <6,165 >     —  
 
    
 		      
 		  
Net cash paid
   $ <972 >   $ —  
 
    
 		      
 		  
Purchase of mortgage receivable financed with note payable
   $ —     $ 12,826  
 
    
 		      
 		  
Liabilities that financed the purchase of homebuilding inventory
   $ 63,572     $ 60,866  
 
    
 		      
 		  

The accompanying notes are an integral part of these Consolidated Financial Statements.

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Table of Contents

TARRAGON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Operating results for the nine month period ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the Consolidated Financial Statements and Notes included in our Annual Report on Form 10-K for the year ended December 31, 2003. Dollar amounts in tables are in thousands. Certain 2003 balances have been reclassified to conform to the 2004 presentation.

NOTE 2. STOCK OPTION PLANS

In 2002, we adopted the fair value method defined in Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” in accounting for our stock option plans, where previously we applied the Accounting Principles Board’s Opinion No. 25 (“APB No. 25”), “Accounting for Stock Issued to Employees,” and related Interpretations. We elected to apply it prospectively for all options granted or modified since the beginning of 2002, as allowed by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Because some awards under the plans vest over periods ranging from one to five years, the cost related to stock-based employee compensation included in the determination of net income for the three and nine month periods ended September 30, 2004 and 2003, is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123. The following table illustrates the effect on net income and earnings per common share as if the fair value based method had been applied to all outstanding and unvested awards in each period.

                                 
    For The Three Months Ended September 30,
   For The Nine Months Ended September 30,
    2004
   2003
   2004
   2003
Net income allocable to common stockholders, as reported
   $ 3,668     $ 13,605     $ 22,336     $ 9,507  
Add:
                                
Stock-based employee compensation expense included in reported net income
     85       49       320       201  
Deduct:
                                
Total stock-based employee compensation expense determined under fair value based method for all awards
     <96 >     <109 >     <342 >     <387 >
 
    
 		      
 		      
 		      
 		  
Pro forma net income allocable to common stockholders
   $ 3,657     $ 13,545     $ 22,314     $ 9,321  
 
    
 		      
 		      
 		      
 		  
Earnings per common share
                                
Net income allocable to common stockholders, as reported
   $ .24     $ .93     $ 1.50     $ .65  
 
    
 		      
 		      
 		      
 		  
Net income allocable to common stockholders, pro forma
   $ .24     $ .93     $ 1.50     $ .63  
 
    
 		      
 		      
 		      
 		  
Earnings per common share – assuming dilution
                                
Net income allocable to common stockholders, as reported
   $ .21     $ .80     $ 1.30     $ .65  
 
    
 		      
 		      
 		      
 		  
Net income allocable to common stockholders, pro forma
   $ .21     $ .80     $ 1.30     $ .63  
 
    
 		      
 		      
 		      
 		  

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TARRAGON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 3. VARIABLE INTEREST ENTITIES

In December 2003, the Financial Accounting Standards Board issued Interpretation 46-R (“FIN 46R”), “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin 51, “Consolidated Financial Statements.” FIN 46R changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46R requires a variable interest entity (“VIE”) to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE’s activities or entitled to receive a majority of the entity’s residual returns or both. Additionally, if the holders of equity at risk as a group do not have controlling financial interest, the entity may be defined as a VIE. Once an entity is determined to be a VIE, the primary beneficiary must consolidate the VIE into its financial statements. We adopted the provisions of FIN 46R on January 1, 2004.

We have identified eight partnerships and joint ventures, over which we exercise significant influence but do not control, which qualify as VIEs and of which we are the primary beneficiary. These eight entities, which were previously accounted for using the equity method, have been consolidated in accordance with FIN 46R. Their assets and liabilities were recorded at carrying value. The eight entities consist of three limited partnerships and one limited liability company engaged in homebuilding and one partnership and three limited liability companies which own and operate rental apartment communities with 1,226 units. The consolidation of these eight entities increased assets by $365.1 million as of September 30, 2004. Gross revenue for the three and nine month periods ended September 30, 2004, includes rentals of $2.8 million and $9 million, respectively, and respective homebuilding sales of $6.5 million and $46 million produced by these eight consolidated entities. One Las Olas, Ltd. is the most significant of the VIEs with $209.9 million in assets as of September 30, 2004, and gross revenue of $6.5 million and $46 million for the three and nine months ended September 30, 2004, respectively. One Las Olas, Ltd. is a limited partnership currently developing Las Olas River House, a luxury high-rise condominium development in Ft. Lauderdale, FL. Two of these VIEs have mortgages of $53.9 million that are non-recourse to the general assets of Tarragon.

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TARRAGON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

NOTE 4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES

Investments in and advances to partnerships and joint ventures consisted of the following carrying values:

                         
    Tarragon’s        
    Interest   September 30,   December 31,
    in Profits
   2004
   2003
601 Ninth Street Development, L.L.C.
     50 %   $ —     $ 477  
801 Pennsylvania Avenue
     50 %     24       15  
900 Monroe Street Development, L.L.C.
     50 %     407       —  
Adams Street Development, L.L.C.
     40 %     4,217       1,567  
Ansonia Apartments, L.P.
     70 %     —       —  
Ansonia Liberty, L.L.C.
     90 %     —       —  
Block 88 Development, L.L.C.
     40 %     2,729       610  
Block 99/102 Development, L.L.C.
     40 %     2,820       233  
Block 144 Development, L.L.C.
     50 %     279       —  
Cypress Grove, L.L.C.
     50 %     4,043       —  
Danforth Apartment Owners, L.L.C.
     99 %     —       80  
Delaney Square, L.L.C.
     50 %     3,317       —  
Fenwick Tarragon Apartments, L.L.C.(1)
    70 %     —       1,830  
Guardian-Jupiter Partners, Ltd.(1)
     70 %     —       3,315  
Lake Sherwood Partners, L.L.C. (1)
     70 %     —       —  
Larchmont Associates, L.P.
     57 %     3,051       2,619  
Madison Warehouse Development, L.L.C.
     50 %     355       —  
Merritt 8 Acquisitions, L.L.C.
     80 %     —       907  
Merritt Stratford, L.L.C.
     50 %     219       497  
Metropolitan Sarasota (1)
    70 %     —       15,910  
One Las Olas, Ltd. (1)
    70 %     —       33,993  
100 East Las Olas, Ltd., and East Las Olas, Ltd. (1)
     70 %     —       6,408  
Sacramento Nine
     70 %     369       443  
Summit/Tarragon Murfreesboro, L.L.C. (1)
     70 %     —       416  
Tarragon Calistoga, L.L.C.
     80 %     632       557  
Tarragon Savannah I & II, L.L.C.
     99 %     2,268       2,514  
Thirteenth Street Development, L.L.C.
     50 %     9,440       8,393  
Upper Grand Realty, L.L.C.
     50 %     255       —  
Vineyard at Eagle Harbor, L.L.C.
     99 %     —       —  
Warwick Grove Company, L.L.C. (1)
     50 %     —       980  
 
            
 		      
 		  
 
           $ 34,425     $ 81,764  
 
            
 		      
 		  

(1)   The Company adopted the provisions of FIN46R as of January 1, 2004, and as