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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

OR

     
o   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 þ No o

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

     
Common Stock, $.01 par value   24,268,935
     
(Class)   (Outstanding at April 29, 2005)
 
 

1

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. 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
INDEX TO EXHIBITS
Rule 13a-14(a) Certification by CEO
Rule 13a-14(a) Certification by Executive VP & CFO
Section 1350 Certifications

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements for the period ended March 31, 2005, have not been audited by independent registered 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
(Unaudited)

                 
    March 31,     December 31,  
    2005     2004  
    (dollars in thousands)  
Assets
                
 
                
Real estate held for investment (net of accumulated depreciation of $73,290 in 2005 and $128,375 in 2004)
   $ 433,268     $ 489,215  
Homebuilding inventory
     412,978       287,353  
Contracts receivable
     46,898       99,744  
Assets held for sale
     108,477       21,870  
Investments in and advances to partnerships and joint ventures
     58,964       48,074  
Cash and cash equivalents
     23,405       22,066  
Restricted cash
     37,267       30,210  
Goodwill
     2,691       2,691  
Other assets, net
     55,702       47,068  
 
            
 
   $ 1,179,650     $ 1,048,291  
 
            
 
                
Liabilities and Stockholders’ Equity
                
 
                
Liabilities
                
Notes and interest payable
   $ 765,258     $ 770,247  
Liabilities related to assets held for sale
     116,993       20,664  
Net deferred tax liability
     12,843       12,720  
Other liabilities
     90,080       71,217  
 
            
 
     985,174       874,848  
Commitments and contingencies
                
 
                
Minority interest
     14,049       21,760  
 
                
Stockholders’ equity
                
Common stock, $.01 par value; authorized shares, 100,000,000; shares outstanding, 33,115,717 in 2005 and 21,179,479 in 2004
     331       212  
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 2005 and 2004; liquidation preference, $9,040 in 2005 and 2004, or $12 per share
     8       8  
Paid-in capital
     344,570       336,877  
Accumulated deficit
     <137,171 >     <158,553 >
Treasury stock, at cost (8,805,379 shares in 2005 and 5,856,587 shares in 2004)
     <27,311 >     <26,861 >
 
            
 
     180,427       151,683  
 
            
 
   $ 1,179,650     $ 1,048,291  
 
            

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

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Table of Contents

TARRAGON CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (dollars in thousands,  
    except per share data)  
Revenue
                
Homebuilding sales
   $ 63,590     $ 36,066  
Rentals
     16,762       15,092  
Management fees and other (including $86 in 2005 and $117 in 2004 from affiliates)
     261       192  
 
            
 
     80,613       51,350  
 
            
Expenses
                
Costs of homebuilding sales
     47,994       29,503  
Property operations
     8,403       7,423  
Depreciation
     3,575       3,470  
General and administrative
               
Corporate
     5,085       4,024  
Property
     1,300       1,115  
 
            
 
     66,357       45,535  
 
            
 
                
Other income and expenses
                
Equity in income of partnerships and joint ventures
     8,430       787  
Minority interests in income of consolidated partnerships and joint ventures
     <836 >     <1,603 >
Interest income (including $232 in 2004 from affiliates)
     142       326  
Interest expense (including $2 in 2004 to affiliates)
     <5,540 >     <4,255 >
Gain on sale of real estate
     2,229       378  
Gain on disposition of other assets
     —       377  
 
            
Income from continuing operations before income taxes
     18,681       1,825  
Income tax expense
     <7,318 >     —  
 
            
Income from continuing operations
     11,363       1,825  
Discontinued operations, net of income taxes
            
Income from operations
     1,257       120  
Gain on sale of real estate
     8,986       —  
 
            
Net income
     21,606       1,945  
Dividends on cumulative preferred stock
     <224 >     <226 >
 
            
Net income allocable to common stockholders
   $ 21,382     $ 1,719  
 
            

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

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Table of Contents

TARRAGON CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (Continued)

                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (dollars in thousands,  
    except per share data)  
Earnings per common share
                
Income from continuing operations allocable to common stockholders
   $ .47     $ .07  
Discontinued operations
     .43       .01  
 
            
Net income allocable to common stockholders
   $ .90     $ .08  
 
            
 
                
Earnings per common share – assuming dilution
                
Income from continuing operations allocable to common stockholders
   $ .38     $ .06  
Discontinued operations
     .32       .01  
 
            
Net income allocable to common stockholders
   $ .70     $ .07  
 
            

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
(Unaudited)

                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (dollars in thousands)  
Cash Flows from Operating Activities
                
Net income
   $ 21,606     $ 1,945  
Adjustments to reconcile net income to net cash used in operating activities:
                
Deferred income tax expense
     123       —  
Gain on disposition of other assets
     —       <377 >
Gain on sale of real estate
     <16,991 >     <378 >
Minority interests in income of consolidated partnerships and joint ventures
     836       1,603  
Depreciation and amortization
     5,321       5,986  
Equity in income of partnerships and joint ventures
     <8,430 >     <787 >
Costs of homebuilding sales
     47,994       29,503  
Purchase of homebuilding inventory
     <170,761 >     <28,509 >
Noncash compensation related to stock options
     446       139  
Excess of homebuilding sales revenue over sales collected attributable to commissions and closing costs
     <6,565 >     <1,016 >
Homebuilding renovation and development costs paid
     <42,455 >     <25,013 >
Noncash homebuilding sales recorded under percentage of completion method
     73,469       <16,955 >
Changes in other assets and other liabilities, net of effects of non-cash investing and financing activities:
                
Increase in interest receivable
     <22 >     <229 >
Increase in other assets
     <11,731 >     <1,213 >
Increase <decrease> in other liabilities
     12,599       <2,908 >
Decrease in interest payable
     <627 >     <891 >
 
            
Net cash used in operating activities
     <95,188 >     <39,100 >
 
            
 
                
Cash Flows from Investing Activities
                
Purchase of rental apartment communities
     <39,667 >     —  
Proceeds from the sale of real estate
     37,336       510  
Property capital improvements
     <1,460 >     <2,011 >
Costs of developing rental apartment communities
     <11,450 >     <856 >
Earnest money deposits paid, net
     <5,494 >     <627 >
Distributions from investing activities of partnerships and joint ventures
     1,665       —  
Advances to partnerships and joint ventures for development costs or for the purchase of land for development
     <10,060 >     <6,587 >

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
(Unaudited) (Continued)

                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (dollars in thousands)  
Cash Flows from Investing Activities (continued)
                
Net distributions from operating activities of partnerships and joint ventures
   $ 9,001     $ 1,223  
Distributions to minority partners of consolidated partnerships and joint ventures
     <295 >     —  
Buyout of minority partners
     <12,000 >     —  
Other
     3       222  
 
            
Net cash used in investing activities
     <32,421 >     <8,126 >
 
            
 
                
Cash Flows from Financing Activities
                
Proceeds from borrowings
     317,487       67,460  
Principal payments on notes payable
     <193,422 >     <21,748 >
Stock repurchases
     <584 >     —  
Dividends to stockholders
     <224 >     <226 >
Proceeds from the exercise of stock options
     5,729       2,746  
Other
     <38 >     <80 >
 
            
Net cash provided by financing activities
     128,948       48,152  
 
            
 
                
Net increase in cash and cash equivalents
     1,339       926  
Cash and cash equivalents, beginning of period
     22,066       21,626  
 
            
Cash and cash equivalents, end of period
   $ 23,405     $ 22,552  
 
            
 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                
 
                
Interest paid
   $ 6,330     $ 6,662  
 
            
Income taxes paid
   $ 763     $ 350  
 
            

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
(Unaudited) (Continued)

                 
    For the Three Months  
    Ended March 31,  
    2005     2004  
    (dollars in thousands)  
 
                
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
                
 
                
Changes in assets and liabilities in connection with the purchase of rental apartment communities:
                
Real estate
   $ 39,342     $ —  
Restricted cash
     172       —  
Other assets
     555       —  
Other liabilities
     <402 >     —  
 
            
Cash paid
   $ 39,667     $ —  
 
            
 
                
Assets written off and liabilities released in connection with the sale of real estate:
                
Real estate
   $ 58,803     $ 674  
Other assets
     2,787       —  
Notes and interest payable
     <40,935 >     <505 >
Other liabilities
     <270 >     <37 >
Minority interest
     <39 >     —  
Net gain on sale
     16,990       378  
 
            
Cash received
   $ 37,336     $ 510  
 
            
 
                
Effect on assets and liabilities of the consolidation of four apartment communities and three homebuilding projects in 2004:
                
Real estate
   $ —     $ 95,962  
Homebuilding inventory
     —       99,882  
Contracts receivable
     —       78,066  
Investments in and advances to partnerships and joint ventures
     —       <61,872 >
Restricted cash
     —       16,833  
Other assets
     —       13,550  
Notes and interest payable
     —       <213,645 >
Other liabilities
     —       <22,693 >
Minority interest
     —       <6,165 >
 
            
Increase in cash from consolidation
   $ —     $ <82 >
 
            
 
                
Liabilities that financed the purchase of homebuilding inventory
   $ —     $ 25,160  
 
            

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 three month period ended March 31, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. 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, 2004. Dollar amounts in tables are in thousands. Certain 2004 balances have been reclassified to conform to the 2005 presentation.

NOTE 2. STOCK-BASED AWARDS

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 month periods ended March 31, 2005 and 2004, 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  
    March 31,  
    2005     2004  
 
                
Net income allocable to common stockholders, as reported
   $ 21,382     $ 1,719  
Add:
                
Stock-based employee compensation expense included in reported net income, net of income tax
     210       139  
Deduct:
                
Total stock-based employee compensation expense determined under fair value based method for all awards, net of income tax
     <216 >     <149 >
 
            
 
                
Pro forma net income allocable to common stockholders
   $ 21,376     $ 1,709  
 
            
 
                
Earnings per common share
                
Net income allocable to common stockholders, as reported
   $ .90     $ .08  
 
            
Net income allocable to common stockholders, pro forma
   $ .90     $ .08  
 
            
 
                
Earnings per common share – assuming dilution
                
Net income allocable to common stockholders, as reported
   $ .70     $ .07  
 
            
Net income allocable to common stockholders, pro forma
   $ .70     $ .07  
 
            

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Table of Contents

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

NOTE 3. VARIABLE INTEREST ENTITIES

We have consolidated five variable interest entities (“VIEs”) of which we are the primary beneficiary in accordance with the Financial Accounting Standards Board’s Interpretation 46-R, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin 51, “Consolidated Financial Statements.” The five VIEs consist of one partnership and three limited liability companies that own and operate rental apartment communities with 1,226 units and one limited liability company engaged in homebuilding with a 215-unit age-restricted traditional new development. The aggregate total assets of these VIEs were $108.6 million as of March 31, 2005. Of the total assets, $93.1 million is classified as real estate held for investment and $12.6 million is classified as homebuilding inventory in the accompanying March 31, 2005, Consolidated Balance Sheet. Three of these VIEs have mortgages totaling $85.7 million that are non-recourse to the general assets of Tarragon.

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

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

                     
        March 31,     December 31,  
    Profits Interest   2005     2004  
801 Pennsylvania Avenue
   50%   $ 40     $ 30  
Ansonia Apartments, L.P.
   70%     —       367  
Ansonia Liberty, L.L.C
   90%     —       10  
Orchid Grove, L.L.C
   50%     6,889       4,646  
Danforth Apartment Owners, L.L.C
   99%     —       —  
Delaney Square, L.L.C
   50%     484       5,778  
Hoboken joint ventures :
                    
900 Monroe Street Development, L.L.C.
   63%     1,888       1,792  
Block 99/102 Development, L.L.C
   55%     8,709       5,622  
Block 144 Development, L.L.C
   63%     299       282  
Madison Warehouse Development, L.L.C.
   63%     1,998       1,975  
TDC/Ursa Hoboken Sales Center, LLC
   48%     1,416       1,140  
Thirteenth Street Development, L.L.C.
   50%     10,407       12,749  
Upper Grand Realty, L.L.C
   50%     435       345  
Larchmont Associates, L.P.
   57%     —       2,026  
Merritt Stratford, L.L.C
   50%     231       229  
Orion Towers Tarragon L.L.P.
   70%     11,056       2,100  
Park Avenue Tarragon, L.L.C
   50%     12,373       6,119  
Tarragon Calistoga, L.L.C
   80%     632       632  
Tarragon Savannah I & II, L.L.C
   99%     2,107       2,232  
Vineyard at Eagle Harbor, L.L.C
   99%     —       —  
 
                
 
       $ 58,964     $ 48,074  
 
                

We exercise significant influence over but hold noncontrolling interests in each of the above partnerships or joint ventures or our outside partners have significant participating rights, as defined in the Financial Accounting Standard Board’s Emerging Issues Task Force’s 96-16 Abstract, or important rights, as defined by the American Institute of Public Accountants’ Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures.” Therefore, we account for our investments in these partnerships and joint ventures using the equity method.

We have guaranteed $21.5 million of mortgages of three unconsolidated properties. We have also guaranteed construction loans totaling $120.6 million of three unconsolidated properties. The construction loans have

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Table of Contents

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

NOTE 4. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES (Continued)

an aggregate balance as of March 31, 2005, of $81.1 million. We have recorded liabilities totaling $2.1 million in connection with three of these guarantees. Estimated fair values of other guarantees provided since January 1, 2004, are not significant.

Below are unaudited summarized financial data for our unconsolidated partnerships and joint ventures for the three month periods ended March 31, 2005 and 2004.

                         
    Thirteenth                
    Street             Total All  
    Development     Other     Partnerships  
Three Months Ended March 31, 2005
                        
 
                        
Homebuilding sales
   $ 14,337     $ 42,119     $ 56,456  
Costs of homebuilding sales
     <7,734 >     <28,699 >     <36,433 >
Rental revenue
     —       8,074       8,074  
Property and other operating expenses
     <1 >     <3,845 >     <3,846 >
Interest expense
     <192 >     <2,882 >     <3,074 >
Depreciation expense
     —       <1,284 >     <1,284 >
 
                  
Income from continuing operations
     6,410       13,483       19,893  
Discontinued operations
                       
Loss from operations(a)
     —       <172 >     <172 >
Loss on sale of real estate
     —       <350 >     <350 >
 
                  
Net income
     6,410       12,961       19,371  
Elimination of interest and management fees paid to Tarragon
     —       362       362  
 
                  
 
                        
Net income before interest and management fees paid to Tarragon
   $ 6,410     $ 13,323     $ 19,733  
 
                  
 
                        
Equity in income of partnerships and joint ventures
   $ 2,657     $ 5,659     $ 8,316  
 
                  
 
             &nb