Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 000-23677
NEWMARK HOMES CORP.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 76-0460831
(State or Other Jurisdiction of (IRS Employer Tax Identification No.)
Incorporation or Organization)
1200 Soldiers Field Drive Sugar Land, TX 77479
(Address of Principal Executive Offices) (Zip Code)
281-243-0100
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Common Stock, par value $.01
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
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
As of March 1, 1999, Registrant had outstanding 11,500,000 shares of common
stock. Of the total shares outstanding, 2,262,000 shares of common stock were
held by non-affiliates of the Registrant, having an aggregate market value on
that date of $15,834,000 (based on the closing sales price on NASDAQ).
Documents incorporated by reference:
Related
Section Documents
- --------------------------------------------------------------------------------
III Definitive Proxy Statement to be filed pursuant to Regularion 14A
on or before April 30, 1999.
PART I
ITEM 1. BUSINESS
GENERAL
Newmark Homes Corp. (the "Company"), a Nevada corporation formed in
December 1994, is a holding company and the parent company of a group of
homebuilding companies which consists of Newmark Home Corporation ("Newmark"),
Westbrooke Communities, Inc. and affiliated entities (collectively,
"Westbrooke") and The Adler Companies, Inc. The Company also owns a lot
development company, Pacific United Development Corp. Through its operating
subsidiaries, the Company designs, builds and sells single-family detached homes
in seven major markets within the Southwest and Southeast United States,
including Houston, Austin, Dallas/Fort Worth, Ft. Lauderdale/Palm Beach/Miami
("South Florida"), Nashville and most recently, Charlotte, and Greensboro/
Winston-Salem. Each of these markets has experienced population and job
growth above the national average over the last several years. The Company
operated in 66 subdivisions in these metropolitan areas, and had 829 homes under
construction at December 31, 1998. In addition, as of December 31, 1998, the
Company owned or had under option contract 2,848 lots available for future
growth. The Company has also been actively engaged in residential land
acquisition and development, which enables it to provide lots for its
homebuilding operations.
In Texas, Tennessee and North Carolina, Newmark offers high-quality homes,
designed principally for the "move-up" and relocation market segments, under the
Newmark(TM) tradename. Typically, Newmark homes range in size from 1,700 square
feet to over 4,500 square feet and range in price from $120,000 to $350,000,
with an average sales price of $245,000 for homes closed during 1998. Newmark
also offers custom homes under the Fedrick, Harris Estate Homes name that range
in size from 3,500 square feet to over 7,000 square feet and range in price from
$250,000 to over $800,000, with an average sales price of $405,000 for homes
closed during 1998. Revenues generated from sales of Fedrick, Harris Estate
Homes were 17.0% and 14.0% of total homebuilding revenues for 1997 and 1998,
respectively.
In the South Florida market, Westbrooke and The Adler Companies, Inc. also
offers high-quality homes designed primarily to appeal to "move-up" homebuyers,
with homes ranging in size from approximately 1,300 square feet to over 3,700
square feet and ranging in price from $114,000 to $274,000, with an average
sales price of $178,000 for homes closed in 1998.
The Company's homebuilding operation is positioned to compete with other
high-volume builders by offering a broader selection of homes with more
amenities and greater design flexibility than typically offered by volume
builders. Homebuyers are given the ability to select various design features in
accordance with their personal preferences. Through a volume building approach,
the Company's custom homes generally offer more value than those offered by
local, lower-volume custom builders, primarily due to the Company's effective
purchasing, construction and marketing programs. While most design modifications
are significant to the homebuyer, they typically involve relatively minor
adjustments that allow the Company to maintain construction efficiencies and
result in greater profitability due to increased sales prices and margins. The
Company believes that its ability to meet the design tastes of prospective
homebuyers at competitive prices distinguishes the Company from many of its
competitors.
Newmark was founded in Houston, Texas in 1983 and was acquired by Pacific
Realty Group, Inc. on October 1, 1993. When the Company was formed in December
1994, Pacific Realty Group transferred its interest in Newmark to the Company.
Westbrooke was founded in Miami, Florida in 1976 and was acquired by the Company
on January 1, 1998. The operations of The Adler Companies, Inc., which was
formed in Miami, Florida in 1990 and acquired by the Company on March 1, 1995,
were merged with the Westbrooke operation in 1998. Newmark and Westbrooke have
achieved consistent profitability throughout their respective histories due to
both innovative and disciplined approaches to home construction, land
acquisition and development as well as lot purchases. The Company believes that
the tenure and experience of its officers and key employees and its disciplined
approach to business have been key factors to the Company's success. There has
been virtually no turnover among officers and key employees since the inception
of both Newmark and Westbrooke.
2
The Company's corporate offices are located in Houston. The Company's
divisions in Houston, Austin, Dallas/Ft. Worth, Nashville, Charlotte and
Greensboro/Winston-Salem are managed from the Houston location. The Company's
South Florida operations are primarily the responsibility of Westbrooke
management with support from, and oversight of, the Company's corporate office
as needed.
STRATEGY
The Company's objective is to provide its customers with homes that offer
both quality and value, while seeking to maximize its return on invested
capital. Management believes that a balanced and disciplined approach to home
construction, land purchases and marketing is essential to the Company's
anticipated growth. To achieve this objective, the Company has developed a
strategy which focuses on the following elements:
GROWTH MARKETS. The Company's primary markets have each experienced
population and job growth in excess of the national average over the past
several years. The Company believes that significant growth opportunities
remain in most these markets. The Company also continues to evaluate new markets
that have significant "move-up" and relocation segments that would satisfy the
Company's profitability, investment return and other criteria. While the Company
anticipates entering new markets primarily through start-up operations, it will
also consider the acquisition of homebuilding companies that have complementary
management styles as exemplified by the Company's acquisition of Westbrooke.
Entry into new markets is preceded by extensive due diligence and research
conducted by management, in conjunction with Pacific Research Group, Inc., an
affiliate corporation wholly-owned by Pacific Realty Group, Inc., and
unaffiliated third-party resources.
SOPHISTICATED MARKETING. The Company employs sophisticated and
comprehensive marketing programs to attract potential homebuyers. Elements of
this marketing program include extensive telemarketing, an Internet web site, a
virtual reality CD-ROM home tour, and an interactive software program. The
Company retains a national marketing consultant to develop its overall
advertising strategy. The Company executes its overall marketing strategy
through advertising campaigns tailored to local markets. Local marketing
campaigns include coordination of realtor promotions, subdivision grand
openings, showcase presentations for custom homes, the Company's newsletters,
realtors' newsletters, product bulletins, billboards, local newspaper
advertisements and other direct sales activities. The Company's web site,
featuring a virtual reality home tour, allows a prospective homebuyer to
download the home tour software to a personal computer and "tour" completely
furnished homes, view the Company's different floor plans, locate the various
subdivisions available in each market, and learn about neighborhood schools,
subdivision amenities and shopping as well as the Company's construction
techniques. The South Florida operation also utilizes an interactive software
program known as "Design Wizard" which enables a homebuyer to customize a home
which meets their needs and lifestyles. While sitting at a computer monitor
located in a sales center, the buyer responds to a series of general lifestyle
and financial questions. Based on the buyer's responses, the interactive
software program then shows the buyer variations of a basic floor plan as well
as the cost of the proposed changes. Design Wizard enhances the Company's
ability to offer customized homes at prices similar to standard floor plans of
competing builders.
MARKET FOCUS. In markets with a significant number of relocation buyers,
such as Texas, Tennessee and North Carolina, the Company aggressively competes
with resales of existing homes, primarily by making available to potential
buyers completed or nearly completed homes. In these relocation markets, the
Company believes that maintaining an inventory of completed or nearly completed
homes provides distinct competitive advantages by (i) allowing home buyers to
physically inspect their future home, in many instances easing their decision to
buy, (ii) providing homes which can be moved into in or close to the same time
frame as purchases of previously owned homes and (iii) allowing homebuyers to
avoid the significant time and monetary costs typically associated with updating
previously owned homes. Since 1993, 78% of the Company's homes were sold prior
to completion of the home. In the South Florida market, the Company primarily
focuses on "move-up" homebuyers, and to a lesser extent, first-time homebuyers.
In this market, substantially all homes are sold prior to commencing
construction.
MANAGEMENT TRAINING. The Company aggressively recruits and hires new
management trainees, typically with some construction experience, following
graduation from college and trains these new hires for increasing levels of
responsibility within the Company. Through continuous "on the job" experience
and classroom training, these associates become knowledgeable, experienced
candidates for middle management positions. The Company believes that one of its
strengths is its depth of middle management. This depth facilitates the
Company's growth strategy as more experienced management relocates to new
markets to conduct start-up operations while top performing middle managers are
promoted to increasing levels of responsibility for continuing expansion of
existing markets. The Company also actively seeks and employs qualified
candidates for sales and marketing positions and provides extensive training
designed to improve marketing skills and educate sales associates with respect
to the uniqueness of the Company's homes which allows them to emphasize product
differentiation in the sales process.
3
DECENTRALIZED OPERATIONS WITH EXPERIENCED MANAGEMENT. The Company believes
that the in-depth knowledge of its experienced management in local markets
enables the Company to better serve its customers. The Company is organized into
operating divisions, each relating to a local market area. Local management of
each operating division is responsible for preliminary site selection and
negotiation of option contracts in accordance with Company policies.
Additionally, each operating division plans its homebuilding schedule, selects
the building plans and architectural scheme for its subdivisions, obtains all
building approvals, and develops a marketing plan for its homes. With the
exception of the South Florida operation, the Company's corporate office retains
responsibility for purchasing, accounting/consolidation, and certain other
management and administrative matters including approval of all lot contracts,
final product selection, securing all financing and marketing plan approval.
With respect to the South Florida operation, management of Westbrooke makes the
majority of the decisions related to the responsibilities described above with
the support from, and oversight of, the Company's corporate office as needed.
CENTRALIZED PURCHASING. The Company utilizes centralized purchasing to
leverage its purchasing power into volume discounts, a practice which reduces
costs, ensures timely deliveries and reduces the risk of supply shortages due to
allocations of materials. The Company has negotiated favorable price
arrangements with high quality national and regional suppliers such as General
Electric, Rheem Manufacturing, Dupont Corian, Owens Corning, Dow Chemical, Royal
Baths, Kwikset and Sherwin-Williams for appliances, heating and air
conditioning, counter tops, bathroom fixtures, roofing and insulation products,
floor coverings, and other housing components. Major materials, such as lumber,
sheetrock, concrete and brick, are also centrally purchased to obtain volume
discounts. There are no minimum purchase requirements for these arrangements.
COST MANAGEMENT. The Company controls construction costs through the
efficient design of its homes and by obtaining favorable pricing, where
possible, from subcontractors based on the high volume of work performed for the
Company. The Company also controls its warranty costs through quality control
that ensures that the home has been totally finished prior to the buyer moving
in, thus enhancing customer satisfaction. The Company controls its advertising
expenses through sophisticated budgeting of expenses with extensive review of
all expenditures. Some of the Company's major suppliers and contractors also
contribute advertising dollars for special promotions of houses and products.
These campaigns feature the key suppliers' products and enhance the image of the
Company's homes through brand recognition. In addition, the Company seeks to
control its corporate overhead costs through efficiencies achieved through its
highly automated and integrated systems.
STRATEGY TO LIMIT REAL ESTATE EXPOSURE. The Company seeks to maximize its
return on invested capital and limit its exposure to changes in land valuation
by obtaining options to purchase lots whenever feasible. The Company will also
directly acquire, where appropriate, quality residential properties that are in
high demand for use in its homebuilding operations and for sale to third-party
builders. The Company's executive management establishes targeted levels of lot
options and land for development based on its strategic plan for the overall
growth of the Company. The Company targets properties for acquisition that are
both suitable for its homebuilding product and in locations which are
anticipated to maintain the homebuyers' property values. The Company believes
this strategy improves inventory turnover and enables the Company to develop and
dispose of the developed lots typically within two to three years. The Company
does not acquire land that is not suitable for lot development and residential
construction and does not speculate on land values by acquiring and holding land
for resale or for future development.
The Company seeks to limit its exposure to real estate inventory risks by
closely monitoring (i) its unsold inventory of new homes and the stage of
completion of homes under construction on an ongoing basis, (ii) the volume of
starts of new homes and (iii) local job market and demographic trends, housing
preferences and related economic developments, such as new job opportunities,
local growth initiatives and trends in work force median income levels.
4
MARKETS
The Company conducts homebuilding activities in seven markets within four
states, including Houston, Austin, Dallas/Fort Worth, Ft. Lauderdale/Palm
Beach/Miami, Nashville, Charlotte and Greensboro/Winston-Salem. The Company
intends to begin building homes in the San Antonio market in the third quarter
of 1999. The Company's operations in each of its markets differ based on a
number of market specific factors.
The following table presents selected lot inventory and homebuilding data
for the Company's current markets:
LOT INVENTORY HOMEBUILDING REVENUES/
HOMES CLOSED
------------------------------ ----------------------------
DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------ ----------------------------
MARKET COMMENCED 1996 1997 1998 1996 1997 1998
- ------------------- -------- ---------- --------- --------- -------- -------- -------- --------
(Dollars in thousands/units)
Houston 1983 339 632 632 $ 79,920 $ 85,690 $126,138
363 361 482
Austin 1984 208 363 697 63,891 66,405 82,970
334 317 386
Dallas/Fort Worth 1995 146 396 292 20,180 30,119 38,078
103 138 159
Ft. Lauderdale/Palm
Beach/Miami 1976 169 368 760 16,819 30,863 144,780
102 156 814
Nashville 1997 -- 261 276 -- -- 12,116
-- -- 33
Charlotte 1998 -- -- 16 -- -- --
Greensboro/ Winston-Salem 1998 -- -- 34 -- -- --
San Antonio 1998 -- -- 141 -- -- --
--------- --------- -------- -------- -------- --------
Total Lots/Revenue 862 (1) 2,020 (1) 2,848 (1) $180,810 $213,077 $404,082
========== ========= ========= ======== ======== ========
Total Units Closed 902 972 1,874
======== ======== ========
__________
(1) Includes 656, 1,267 and 1,880 lots under option contracts as of December 31, 1996,
1997 and 1998, respectively.
From the results of the research and analysis performed by the Company and
Pacific Research Group, the Company plans to focus its development activity
based on the following factors, among others: regional economic conditions,
projected job growth, land availability, the local land development process,
consumer tastes, competition from other builders of new homes and secondary home
sales activity. The statistical information presented below has been compiled
from a number of public sources by Pacific Research Group.
HOUSTON, TEXAS. According to American Metro Study Corporation, Houston
posted record numbers in the new home market with 22,779 starts in 1998, 21.7%
higher than in 1997. Although Houston experienced a downturn in the energy
industry in late 1998, it has enjoyed a 3.1% rate of annual employment growth,
or an average of 55,000 jobs per year since 1993. Houston has diversified its
employment base between energy-dependent and non-energy-dependent industries,
which has promoted more stable job growth and a strong relocation market.
Houston's population has grown by an average of 90,000 persons per year since
1990. The area's affordable home market, low cost of living (98% of the US
average) and strong population growth (1.8 million people from 1970 to 1995)
continue to favorably impact the demand for single-family homes. Places Rated
Almanac, published in early 1998, ranked Houston third in near-term job growth
just behind Atlanta and Dallas. The mean household income for Houston rose to
an estimated $75,317 in 1998 from $57,192 in 1990, reflective of the strong job
market in the metro area.
5
Historically, the Company has maintained a moderate level of market share
in Houston, but believes that additional expansion in this market is appropriate
based on current and anticipated market conditions. The Company has strong brand
name recognition in Houston and has positioned itself to take advantage of this
anticipated market expansion. The Company builds homes in ten of the top fifteen
performing communities in Houston.
AUSTIN, TEXAS. Like Houston, Austin's new home market had a record setting
year as well in 1998. According to American Metro, Austin started 9,670 homes
and closed approximately 8,738 in 1998. In 1998, homebuilders started 33.1%
more homes and closed 22.2% more than in 1997. Builders were reporting that
they could not finish homes fast enough to keep up with demand due to a
nationwide labor shortage. From 1992 to 1998, Austin created an average of
27,700 jobs per year, an annual growth rate of 5.6%. The metro area has
experienced stellar population growth in the past five years adding an annual
average of 32,800 people in a city of 1 million total people. According to the
RFA Precis Metro Edition for November 1998, Austin's economy slowed slightly in
1997 and 1998, with an average of 24,900 new jobs created, still posting a
strong 4.5% employment growth.
The Company plans to maintain current levels of activity in this market.
The Company believes that this is an appropriate level of activity given the
size of the Austin market.
DALLAS/FORT WORTH, TEXAS. The combined Dallas/Fort Worth metropolitan area
exceeded 4.7 million in total population in 1998. With an employment base of
more than 2.5 million jobs, the metro area has added approximately 97,000 jobs
annually from 1994 to 1998 (a 4.1% annual growth rate). Strong population growth
has accompanied these gains in employment. RFA Precis Metro Edition, November
1998, reports estimates of 2.5% growth in 1997 and 2.3% growth in 1998.
According to American Metro Study, 1998 was a banner year for the Dallas and Ft.
Worth housing markets. Dallas started 20,102 homes, a 16.3% increase over 1997
and 23.9% more than 1996. The "months supply" of finished vacant inventory set
an all time low of 0.96 months or 4 weeks illustrating the tight housing market
in Dallas. Ft. Worth experienced the highest levels for housing starts (8,797)
and closings (8,076) in more than a decade. The regional economy remains
vibrant, with affordability, as well as a viable high-tech core, attracting
corporate moves.
The Company has positioned itself to increase its market share in the
Dallas/Fort Worth market, as this area continues its economic expansion. The
Company entered this market with start-up operations in 1995 and is achieving
the image, brand awareness and improved lot position, which the Company believes
will support its expansion in this market.
FT. LAUDERDALE/PALM BEACH/MIAMI, FLORIDA. The Company's operations in
Florida are concentrated in Broward, Palm Beach and Dade Counties. These
counties include the cities of Ft. Lauderdale, Palm Beach and Miami,
respectively. Broward County experienced an average annual population growth of
30,100 residents from 1991 to 1998, representing a compounded annual growth rate
of 2.1%. The RFA Precis Metro Edition, November 1998, projects that Broward
County's population will increase at a rate of 1.9% annually between 1996 and
2002. Most newcomers to the market are expected to be working-age families, a
majority relocating from the South Dade/Miami area. The service sector dominates
the overall employment in Broward. The service sector job growth rate of 4.7%
between September 1997 and September 1998 is reflected in the 29,200 new jobs
created during that period.
The West Palm Beach economy is expanding very rapidly. Employment growth
is currently the fastest of the three major south Florida markets at 4.7%. By
the year 2005, the employment base in Palm Beach County is projected to total
over 550,000 jobs; a notable increase over 1997's estimated total of nearly
430,000 jobs. Another significant long-term advantage is West Palm Beach's
affluence. The metro area boasts one of the highest per capita incomes in the
nation at $38,081, 35% higher than the national average of $24,436. According
to the RFA Precis Metro Edition, November 1998, Palm Beach County's population
is projected to increase annually by 21,700 people to a total population of 1.08
million by 2000.
6
Fueled by growth in the service and trade industries, Dade County gained
approximately 20,000 new jobs per year from 1997 to 1998, an annual growth rate
of approximately 4.5%. According to the RFA Precis Metro Edition, November 1998,
the Dade County population is projected to increase annually by 16,500 people to
a total population of 2.1 million by 2000. RFA also forecasted an employment
growth rate through the year 2002 of 2.3% for this area, which compares
favorably to a national projected average annual growth rate of 1.4%.
The Company entered this market in 1995 with the acquisition of The Adler
Companies, Inc. Then, in January 1998, the Company acquired Westbrooke, thus
expanding the Company's operations in Broward County and providing an entry into
the Palm Beach County market. The Company believes that it is positioned to
expand into new developments in these markets.
NASHVILLE, TENNESSEE. From 1991 to 1998, Nashville's population grew by
nearly 13%, almost double the national growth rate of 6.6%. With more than
123,500 jobs created from 1992 to 1998, the area's employment growth
rate of 24.0% was 65% better than the national rate of 15.7% for that period.
Nashville's labor market remains very tight and unemployment is at a 30-year low
of 2.7%. Long term, Nashville has several advantages that are expected to
support positive employment growth. As the state capital and locale for many
regional company headquarters, Nashville is expected to remain the principal
driver in Tennessee's economy. It remains a popular tourist destination and
relocation center for corporate headquarters. The Company entered the Nashville
market through a start-up operation, which commenced construction of new homes
in August 1997. Initial home sales began in the first half of 1998, and the
first closings occurred in the second quarter of 1998. The Company plans
continuing expansion in this market over the next three to four years.
CHARLOTTE, NORTH CAROLINA. Charlotte's economy is growing at a sustained
robust pace. According to the RFA Precis Metro Edition for November 1998, annual
employment growth amounted to 3.5% from 1992 to 1998 outpacing both the South
(3.0%) and U.S. (2.4%) growth rates. The primary drivers of growth in this
market are finance, services and retail trade industries. Charlotte has become a
leading financial center, with two financial powerhouses, BankAmerica (formerly
Nations Bank) and First Union now headquartered there. Charlotte experienced an
average annual population growth of 26,700 residents from 1991 to 1998,
representing a compounded annual growth rate of 2.0%. Market Opportunity
Research Enterprises reported a record setting new home market in 1998. The
Charlotte area closed 10,096 homes in 1998, 13.4% more than 1997 and 22.1% more
than 1996.
GREENSBORO/WINSTON-SALEM, NORTH CAROLINA. Known as "The Triad Area", this
area's primary growth drivers are finance, services and durable goods
manufacturing industries. According to the RFA Precis Metro Edition for
November 1998, annual employment growth amounted to 2.4% from 1992 to 1998, just
in line with the national average. The structurally declining non-durable goods
(mainly textile and apparel) manufacturing industry is the principal detractor
from growth. The unemployment rate remains extremely low at 2.7%, substantially
below the state average. Greensboro/Winston-Salem experienced an average annual
population growth of 14,400 residents from 1991 to 1998, representing a
compounded annual growth rate of 1.3%. RFA ranked the Triad Area above average
for long-term growth due to a number of advantages. Greensboro/Winston-Salem is
home to a growing financial services industry and its low cost of doing business
(95% of the national average) should continue to attract industrial relocations
and spur local expansions. Another favorable aspect of the Triad Area is the
growing concentration of high-tech firms that are expected to provide solid
employment growth.
The Company entered the Charlotte and the Greensboro/Winston-Salem markets
through start-up operations in 1998. Construction of new homes commenced in the
fourth quarter of 1998. The first closings should occur in the second quarter
of 1999. The Company plans a steady expansion in both these markets for the
next four to five years.
7
SAN ANTONIO, TEXAS. According to American Metro Study Corporation, San
Antonio has also experienced record setting new home starts in 1998. San
Antonio started 7,723 homes and closed approximately 6,672 homes in 1998.
Homebuilders started 13.6% more homes and closed 9.7% more homes than in 1997.
In the past two years, the Alamo City created an average of 25,500 jobs per
year, an annual growth rate of almost 4.0%, outpacing the south and the nation.
For the past five years, the metro area has experienced an annual average of
1.8% growth in population, adding an average of 23,000 people per year in a city
of 687,400 total people. According to the RFA Precis Metro Edition for November
of 1998, San Antonio's economy has remained solid in 1998. The city's low cost
of doing business (88% of the national average), bilingual labor force, and
strategic location as a gateway to Mexico are notable advantages for attracting
relocations.
The Company began start-up operations in the San Antonio market in 1998.
Construction of homes should commence in July 1999. The first closings should
occur in the first quarter of 2000. The Company plans a steady expansion in
this market for the next three to four years.
BACKLOG
The following table sets forth the Company's sales backlog by market for
the periods indicated below:
DECEMBER 31,
-----------------------------------------------
1996 1997 1998
-------------- -------------- ---------------
SALES SALES SALES
HOMES VALUE HOMES VALUE HOMES VALUE
----- ------- ----- ------- ----- --------
(DOLLARS IN THOUSANDS)
Houston 70 $15,411 97 $23,025 175 $ 44,915
Austin 72 13,773 85 17,806 184 40,712
Dallas/Ft. Worth 28 5,486 42 9,167 57 14,952
Ft. Lauderdale/ 97 15,987 55 10,050 315 61,733
Palm Beach/
Miami
Nashville -- -- -- -- 22 8,090
----- ------- ----- ------- ----- --------
Total 267 $50,657 279 $60,048 753 $170,402
===== ======= ===== ======= ===== ========
Backlog represents home purchase contracts which have been executed and for
which earnest money deposits have been received, but for which the sale has not
yet closed. Home sales are not recorded as revenues until the closings occur.
Sales value represents the product of the number of homes for which earnest
money contracts have been received multiplied by the average home sales price
for the specific city for the period indicated.
Consistent with historical experience, 98% and 100% of the homes in backlog
at December 31, 1996, and 1997, were closed in the subsequent fiscal year. Based
upon unit volume, contract cancellations were approximately 14.0% of the home
sales contracts signed during each of 1996 and 1997, and 12.5% during 1998.
Although cancellations can disrupt anticipated home closings, the Company
believes that cancellations have not had a material negative impact on
operations or liquidity of the Company during the last several years. The
Company attempts to reduce cancellations by reviewing each homebuyer's ability
to obtain mortgage financing early in the sales process and by closely
monitoring the mortgage approval process.
8
IDENTIFICATION OF NEW MARKETS
To achieve the Company's expansion strategy, the Company, together with its
affiliate, Pacific Research Group, has developed a market expansion process
designed to identify and track growing homebuilding markets in the United
States. The Company's program is designed as an ongoing process and consists of
three stages which track economic and demographic activity in primary and
secondary metropolitan markets (Stage I), narrowing the focus on specific
markets and criteria (Stage II and Stage III) as they meet expansion objectives
and timing. As part of its screening process, the Company evaluates
geographically diverse markets because it believes that potential adverse
economic conditions associated with certain markets are often offset by more
favorable economic conditions in other operating areas. Consideration is also
given to those markets located near current operating markets, which could
function as satellite operations. An in-depth description of each of the stages
is set forth below:
Stage I includes the accumulation, maintenance and monitoring of quarterly
economic and demographic data in potential expansion markets through the use of
published databases and U.S. Census Statistics. Local and statewide data in each
market are also analyzed for comparison purposes. The following factors are
tracked on a quarterly basis for each expansion market: population growth and
trends; breakdown of population by age; overall employment growth; employment by
industry; median/average household income; unemployment rate; single-family
housing starts/permits; median/average sales price of new and existing homes;
and resale inventory and months of supply.
The Stage II analysis establishes and analyzes economic and demographic
benchmarks for the selection of three main markets and five back-up markets
based on desired market share and geographic diversity. Following the selection
of the three main markets, an in-depth Stage II market analysis is performed to
determine market viability in these selected markets. If the evaluation of any
of the three selected markets reveals factors unfavorable for expansion, then a
Stage II analysis is performed on one of the selected back-up markets. A Stage
II analysis consists of the following: identifying and engaging a market
research firm that tracks and can produce single-family statistical data;
profiling market (identify submarkets, price bands, and total single-family
starts, closings, inventory levels and competition); assessing the availability
of single-family land and lots (both current and future); assessing the
availability and quality of the local trade base; identifying job growth
corridors and access to submarkets; identifying corporate relocations/expansions
and major employers; identifying tax structure of cities; profiling school
districts; profiling business and political climate for municipalities;
assessing the government/regulatory issues with respect to homebuilding and land
development; assessing market specific environmental issues; determining
availability of utilities in submarkets and future growth corridors; determining
presence of national and regional builders; and assessing office, retail,
industrial and multi-family market activity.
Upon completion of the Stage II analysis, one or more of the three main
markets will be selected as an expansion market. Once a market is identified as
an expansion market, a market penetration and positioning strategy is developed
by the Company to evaluate the Stage III analysis data which includes the
following: profile of existing communities in each submarket based on activity
levels (starts, closings, inventory levels), price point and product; profile of
existing communities based on location and lot product size; and profile of
builders by submarket.
LAND POLICIES AND POSITION
The Company provides lot positions for its homebuilding operations by
acquiring lot options and by purchasing land for the development of lots. When
appropriate, developed lots are sold to third-party builders to increase
inventory turnover and to enhance earnings for the Company. Historically, the
Company has been able to option substantially all of its lot positions in the
Houston and Austin markets due to the brand awareness of the Newmark(TM) and
Fedrick, Harris Estate Homes names among both consumers and developers, in
addition to the willingness of developers in those markets to option available
lots. The Company also acquires lot options in the Dallas/Fort Worth and
Nashville markets. With the continuing strength in the housing sector, the
Company has been required to acquire some of its developed lots under specific
performance purchase contracts. The Company has developed residential lots in
the South Florida, Dallas/Fort Worth and Nashville markets and intends to
continue to do so in the future. Additionally, residential land developments may
be purchased when the Company enters new markets. Prior to any land
acquisitions, the Company conducts extensive due diligence utilizing regional
expertise, including on-site inspection and soil testing.
9
DESIGN
The Company's home designs and floor plans are prepared by outside
architects in each of the Company's markets to appeal to the local tastes and
preferences of the community. Using its design department and Design Wizard, the
Company has the capability to change its standard floor plans to accommodate the
individual homebuyer. While most design modifications are significant to the
homebuyer, they typically involve relatively minor adjustments that allow the
Company to maintain construction efficiencies and result in greater
profitability due to increased margins.
CONSTRUCTION
Substantially all of the Company's construction work is performed by
subcontractors. The Company's construction superintendents monitor the
construction of each home, coordinate the activities of subcontractors and
suppliers, subject the work of subcontractors to quality and cost controls and
monitor compliance with zoning and building codes. Subcontractors typically are
retained pursuant to a contract that obligates the subcontractor to complete
construction in a workmanlike manner and that provides standard indemnifications
and warranties. Typically, the Company works with the same subcontractors in
each city. The Company's subcontractors are not subject to any collective
bargaining agreements. While the Company competes with other homebuilders for
qualified subcontractors, it has established long-standing relationships with
many of its subcontractors. To date, by providing both timely payments and
steady work assignments, the Company has not experienced any inability to obtain
qualified subcontractors.
The Company's purchasing and cost accounting practices are designed to
facilitate construction flexibility. This process permits homebuyers to modify
their designs, while allowing the Company to monitor and maintain its
profitability. Construction time for the Company's homes depends on weather,
availability of labor, materials, supplies and other factors. The Company
typically completes the construction of a home within four to five months.
The Company does not maintain significant inventories of construction
materials, except for work in process materials for homes under construction.
Typically, the construction materials used in the Company's operations are
readily available from numerous sources. The Company has favorable price
arrangements or contracts with suppliers of certain of its building materials,
but it is not under any specific purchasing requirements. In recent years, the
Company has not experienced any significant delays in construction due to
shortages of materials or labor.
MARKETING AND SALES
The Company markets and sells its homes through commissioned employees and
cooperates with independent real estate brokers. The Company targets the
"move-up" and relocation market segments and employs sophisticated marketing
techniques to attract potential homebuyers through its Internet web site,
extensive telemarketing, interactive software programs and other marketing
programs. Home sales are typically conducted from sales offices located in
furnished model homes used in each subdivision. At December 31, 1998, the
Company owned 74 model homes. The Company's sales personnel assist prospective
buyers by providing them with floor plans, price information, tours of model
homes and the selection of options and other custom features. Such personnel are
trained by both the Company and external independent experts in sales expertise.
These sales and marketing personnel are kept informed as to the availability of
financing, construction schedules and marketing and advertising plans. The
Company has also formed sales teams comprised of a sales person and other
employees from throughout the Company to provide sales support and motivation.
In addition to using model homes, the speculative homes built in most
subdivisions enhance the Company's marketing and sales activities. Construction
of these speculative homes is also necessary to satisfy the requirements of
relocated personnel, "move-up" buyers, and independent brokers, who often
represent homebuyers requiring a completed home within sixty days. The number of
speculative homes the Company builds in any given subdivision is influenced by
local market factors, such as new employment opportunities, significant job
relocations, growing housing demand and the length of time the Company has built
in the market.
10
The Company advertises in newspapers and in real estate and mortgage broker
company publications, brochures, newsletters and billboards. Because real estate
brokers are important to sales, the Company sponsors realtor breakfasts,
contests and other events to increase awareness of the Company's subdivisions
and products. Certain of the Company's suppliers participate with the Company in
its advertising and promotional materials, either through co-branding and
cost-sharing or through rebates.
Sales of the Company's homes generally are made pursuant to a standard
sales contract which requires a down payment of $2,000 to $5,000, or 5% to 10%
of the sales price, on custom homes. The contract includes a financing
contingency which permits the customer to cancel in the event mortgage financing
at prevailing interest rates is unobtainable within a specified period,
typically four to six weeks, and may include other contingencies, such as the
sale of an existing home. The Company includes a home sale in its backlog upon
execution of the sales contract and receipt of the initial down payment. The
Company does not recognize revenue until the home is closed and title passes to
the homebuyer. The Company estimates that the average period between the
execution of a sales contract for a home and closing is approximately four to
five months for presold homes.
TITLE SERVICES
In 1997, the Company acquired a 49% interest in Pacific Title, L.C., which
serves as a title insurance agent and provides title insurance policies and
closing services to purchasers of homes built and sold by the Company in Texas.
The Company assumes no title insurance risk associated with these title
policies, which are issued by Stewart Title Co., one of the oldest title
companies in Texas. Stewart Title Co. owns the balance of the interests of
Pacific Title.
CUSTOMER FINANCING
In 1997, the Company acquired a 49.99% limited partnership interest in NHC
Mortgage Group, L.P., a mortgage origination company owned jointly with CTX
Mortgage Ventures Corporation, one of the nation's largest mortgage companies.
NHC Mortgage underwrites, originates and sells mortgages for the homes the
Company builds and for other homebuilders. The Company's capital is not at risk
in connection with these mortgages.
CUSTOMER SERVICE AND QUALITY CONTROL
The Company's operating divisions are responsible for pre-closing, quality
control inspections and responding to customer's post-closing needs. The Company
believes that the prompt, courteous response to homebuyers' needs during and
after construction reduces post-closing repair costs, enhances the Company's
reputation for quality and service, and ultimately leads to significant repeat
and referral business. The Company conducts pre-closing inspections with
homebuyers immediately prior to closing. In conjunction with the inspections, a
list of items for home completion is created.
All warranty requests are processed through the customer service
departments located in each of the markets. In most instances, a customer
service manager inspects the warranty request within 48 hours of receipt. If
appropriate, the repair work is scheduled to be approved by the homeowner upon
satisfactory completion. An integral part of the Company's customer service
program revolves around post-closing interviews. In most markets, a customer
service representative is sent into each home within 45 days of closing to
evaluate the homeowner's satisfaction with both their home and their home-buying
experience. The post-closing interview involves an analysis of the homebuyer's
experiences with the sales counselor, the title company, the mortgage company
and the construction department as well as their satisfaction with the product.
Typically, after a year, another interview is conducted with the homeowner to
determine their continued satisfaction. The subsequent interview provides
management a direct link to the customer's perception of the entire buying
experience as well as valuable feedback on the quality of the product.
11
WARRANTY PROGRAM
The Company provides up to a two-year limited warranty (one-year in the
case of its South Florida operations) of workmanship and materials with each of
its homes. The Company subcontracts its homebuilding work to subcontractors who
provide the Company with an indemnity and a certificate of insurance prior to
receiving payments for their work and, therefore, claims relating to workmanship
and materials are generally the primary responsibility of the Company's
subcontractors. In all markets except South Florida, the Company provides an
additional eight year limited homeowners' warranty covering major structural
defects through a single national agreement with the Residential Warranty
Corporation. An appropriate warranty reserve is established to cover anticipated
warranty expenses not borne by the Company's subcontractors. The Company's
historical experience is such that warranty expenses generally fall within the
amount established for such reserve. The Company does not currently have any
material litigation or claims regarding warranties or latent defects with
respect to construction of homes. Current claims and litigation are expected to
be substantially covered by the Company's reserve or insurance. Generally,
warranty claims are handled by the construction superintendent who built the
particular home to ensure that prompt and appropriate corrective action is taken
by the appropriate subcontractor.
COMPETITION
The development and sale of residential properties is highly competitive
and fragmented. The Company competes for residential sales on the basis of a
number of interrelated factors, including location, reputation, amenities,
design, quality and price, with numerous large and small homebuilders, including
some homebuilders with nationwide operations and greater financial resources
and/or lower costs than the Company. The Company also competes for residential
sales with individual resales of existing homes, available rental housing and,
to a lesser extent, resales of condominiums. The Company believes that it
compares favorably to other builders in the markets in which it operates, due
primarily to: (i) its experience within its geographic markets, which allows it
to vary its product offerings to reflect changing market conditions; (ii) its
responsiveness to market conditions, enabling it to capitalize on the
opportunities for advantageous land acquisitions in desirable locations; and
(iii) its reputation for service and quality.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Homes and residential communities built by the Company must comply with
state and local regulations relating to, among other things, zoning, treatment
of waste, construction materials which must be used, density requirements,
certain aspects of building design and minimum elevation of properties and other
local ordinances. These include laws requiring use of construction materials
which reduce the need for energy-consuming heating and cooling systems. These
laws and regulations are subject to frequent change and often increase
construction costs. In some cases, there are laws which require that commitments
to provide roads and other offsite infrastructure be in place prior to the
commencement of new construction. The provisions of these laws are usually
administered by individual counties and municipalities and may result in
additional fees and assessments or building moratoriums. In addition, certain
new development projects, particularly in Southern Florida, are subject to
assessments for schools, parks, streets and highways and other public
improvements, the costs of which can be substantial.
The residential homebuilding industry also is subject to a variety of local,
state and federal statutes, ordinances, rules and regulations concerning the
protection of health and the environment. Environmental laws and conditions may
result in delays, may cause the Company to incur substantial compliance and
other costs, and can prohibit or severely restrict homebuilding activity in
certain environmentally sensitive regions or areas. Additionally, the climate
and geology of some parts of Florida and Texas present risks of natural
disasters that could adversely affect the homebuilding industry in those areas
in general, and the Company's business in particular.
The Company's title insurance affiliate must comply with applicable
insurance laws and regulations. The Company's mortgage origination affiliate
must comply with applicable real estate lending laws and regulations.
EMPLOYEES
At December 31, 1998, the Company employed 438 persons, of whom 111 were
sales and marketing personnel, 156 were executive, administrative and clerical
personnel, and 171 were involved with construction. None of the Company's
employees is covered by collective bargaining agreements. The Company believes
its relations with its employees are good.
12
ITEM 2. PROPERTIES
The Company owns a 16,000 square foot facility in Sugar Land, Texas, which
serves as the Company's headquarters and primary residential homebuilding
office. The Company leases an aggregate of approximately 19,700 square feet in
Dallas, Austin, Nashville, Charlotte/Greensboro, and Miami for its division
operations. The Company believes its existing facilities are adequate for the
Company's current and planned levels of operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of the Company's management, the
ultimate disposition of these matters is not expected to have a material adverse
effect on the financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on the NASDAQ National Market
System on March 12, 1998 under the trading symbol "NHCH". The range of high and
low closing sales prices per share by quarter for calendar year 1998, as
reported by the NASDAQ national market, appear in the following table.
1998
- -----------------------------------------
QUARTER HIGH LOW
- ----------------- ------ ------
First (commencing $ 11.38 $ 10.50
March 12, 1998)
Second 11.63 9.06
Third 10.63 6.00
Fourth 9.00 6.13
- ----------------- ------ ------
1999
- -----------------------------------------
First (through March 8.50 6.25
19, 1999)
As of March 19, 1999, there were 7 shareholders of record. The Company
believes there are approximately 1,000 beneficial owners of its common stock.
The Company did not declare any cash dividends on its common stock in
fiscal year 1998 and the Board of Directors intends to retain all the Company's
earnings for use in the expansion of the Company's business for the foreseeable
future. The Company's credit agreements generally contain covenants that limit
the amount of dividends or distributions it can pay on its common stock and the
amount of stock the Company can repurchase.
13
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data and balance sheet data presented below
have been derived from the historical financial statements of the Company. The
Company's consolidated financial statements for the years ended December 31,
1994, 1995, 1996 and 1997, have been audited by KPMG LLP, independent certified
public accountants. The Company's consolidated financial statements for the year
ended December 31, 1998, have been audited by BDO Siedman, LLP, independent
certified public accountants. The selected financial data set forth below should
be read in conjunction with and are qualified by reference to the Company's
consolidated financial statements and notes thereto included elsewhere in this
Form 10-K and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995(1) 1996 1997 1998 (2)
--------- --------- --------- --------- ---------
(Dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Revenues $108,630 $125,427 $190,855 $215,360 $406,353
Cost of Sales 86,260 102,591 156,264 175,300 339,094
--------- --------- --------- --------- ---------
Gross Profit 22,370 22,836 34,591 40,060 67,259
Equity in earnings from unconsolidated
Subsidiaries --- 1,978 792 465 812
Selling, general and administrative
Expenses (12,928) (16,572) (22,976) (26,512) (43,614)
Depreciation and amortization (831) (1,271) (1,524) (1,669) (3,287)
--------- --------- --------- --------- ---------
Operating income 8,611 6,971 10,883 12,344 21,170
Interest expense (613) (1,332) (1,238) (1,987) (1,939)
Other income, net 191 607 851 570 1,201
--------- --------- --------- --------- ---------
Income before income taxes 8,189 6,246 10,496 10,927 20,432
Income taxes 3,205 2,477 4,164 4,272 7,637
--------- --------- --------- --------- ---------
Net income $ 4,984 $ 3,769 $ 6,332 $ 6,655 $ 12,795
========= ========= ========= ========= =========
Net income per common share $ 0.54 $ 0.41 $ 0.69 $ 0.72 $ 1.16
========= ========= ========= ========= =========
Weighted averages shares outstanding 9,200 9,200 9,200 9,200 11,035
Operating Data:
Units:
New sales contracts, net of cancellations 500 720 998 984 2,036
Closings 534 641 902 972 1,874
Backlog at end of period 92 171 267 279 753
Average sales price per closing $ 201 $ 188 $ 200 $ 219 $ 216
Sales value of backlog at end of period $ 18,579 $ 32,280 $ 50,657 $ 60,048 $170,402
Gross profit as a percentage of revenues 20.6% 18.2% 18.1% 18.6% 16.5%
Selling, general and administrative
expenses as a percentage of revenues 11.9% 13.2% 12.0% 12.3% 10.7%
14
DECEMBER 31,
-------------------------------------------------
1994 1995(1) 1996 1997 1998 (2)
------- --------- -------- -------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Inventories $36,670 $ 59,689 $ 83,659 $102,547 $185,247
Total assets 69,890 104,545 121,177 139,213 245,338
Total construction debt 33,086 47,428 60,768 66,100 106,839
Stockholders' equity 35,894 45,813 43,929 55,691 90,112
_____________
(1) Reflects the operating data of Adler subsequent to the Company's
acquisition of the homebuilding assets of The Adler Family Partnership
on March 1, 1995.
(2) Reflects the operating data of Westbrooke subsequent to the Company's
acquisition of the homebuilding assets of Westbrooke Communities,
Inc. on January 1, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
As a cautionary note, except for the historical information contained
herein, certain matters discussed in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 7A
"Quantitative and Qualitative Disclosures About Market Risk", are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such matters involve risks and uncertainties,
including: the Company's exposure to certain market risks, changes in economic
conditions, tax and interest rates, increases in raw material and labor costs,
weather conditions, and general competitive factors, that may cause actual
results to differ materially; its ability to correct all material applications
addressing the Year 2000 problem; as well as the ability of the Company's
vendors to correct all material applications addressing the Year 2000 problem,
and the Company's assessment of the Year 2000 problem's impact on its financial
results and operations.
GENERAL
Since inception, the Company has sought to achieve profitability and
revenue growth by providing quality homes in markets which have experienced
population and job growth in excess of the national average during the past
several years. Newmark has served as the foundation to support the Company's
growth strategy, including expansion within existing markets, entry into two new
markets through start-up operations and the acquisition of a regional
homebuilder.
The Company has experienced significant growth and has positioned itself to
continue to expand its residential land and lot acquisitions significantly in
markets that it has recently entered, such as Charlotte, Greensboro/Winston-
Salem, Nashville and Dallas/Fort Worth, as well as in Houston. The Company
believes that, based on its recently acquired lot options in a number of
master-planned communities in and around Houston, there are significant
opportunities for achieving greater market share in this market. The Company
entered the Ft. Lauderdale/Miami market through its acquisition of The Adler
Companies on March 1, 1995, and then significantly expanded its market share
in the South Florida market, including Palm Beach, by acquiring Westbrooke on
January 1, 1998. The Company also achieved synergies in its South Florida
operation by merging the operations of The Adler Companies with Westbrooke's
operations in 1998.
15
The Company recognizes revenue at the time of closing when title to, and
possession of, the property transfers to the buyer. The Company capitalizes in
inventory all homebuilding costs during the construction period, including
interest and maintenance, and charges those capitalized costs to cost of sales
as the related inventories are sold. Interest incurred on inventory following
completion of construction is expensed. Accordingly, as the Company's inventory
level rises and falls, interest expense can vary significantly. Included in the
Company's depreciation and amortization expenses is amortization of goodwill in
excess of $1.0 million in each of 1996 and 1997 related to the Company's
acquisitions of Newmark and Adler and approximately $1.4 million in 1998 which
also included goodwill related to the Westbrooke acquisition.
Equity in earnings from unconsolidated subsidiaries includes earnings from
Pacific Title, L.C. ("Pacific Title"), a title service business in which the
Company owns a 49% interest, and NHC Mortgage Group, L.P. ("NHC Mortgage"), a
mortgage origination company, in which the Company owns a 49.99% interest, each
of which was formed in 1997. The Company expects these ancillary sources of
revenues to grow at a rate consistent with the growth of its core homebuilding
business. Additionally, equity in earnings from unconsolidated subsidiaries
includes earnings from a Florida homebuilding partnership, owned 50% by the
Company, which wound-up its home-building operations in October 1997. Currently,
all of the Company's South Florida operations are conducted through wholly-owned
subsidiaries and are included in the Company's revenues rather than in equity in
earnings of unconsolidated subsidiaries.
RESULTS OF OPERATIONS
The following table sets forth the homebuilding revenue and number of home
closings by market for the periods indicated (dollars in thousands):
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
-------- -------- --------
Houston:
Revenues $ 79,920 $ 85,690 $126,138
Units 363 361 482
Austin:
Revenues $ 63,891 $ 66,405 $ 82,970
Units 334 317 386
Dallas/Fort Worth:
Revenues $ 20,180 $ 30,119 $ 38,078
Units 103 138 159
Ft. Lauderdale/Palm Beach/Miami:
Revenues $ 16,819 $ 30,863 $144,780
Units 102 156 814
Nashville:
Revenues -0- -0- $ 12,116
Units -0- -0- 33
-------- -------- --------
Total homebuilding revenues (1) $180,810 $213,077 $404,082
======== ======== ========
Total home closings 902 972 1,874
======== ======== ========
Average sales price per home $ 200 $ 219 $ 216
________________
(1) Does not include revenues from land sales of $10.1 million, $2.3
million and $2.3 million in 1996, 1997 and 1998, respectively.
16
The following table sets forth, as a percentage of revenue, certain
information in the Company's statement of operations for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
Cost of sales 81.9% 81.4% 83.4%
Gross profit 18.1 18.6 16.6
Selling, general and administrative expenses 12.0 12.3 10.7
Income before income taxes 5.5 5.1 5.0
Income taxes (1) 39.7 39.1 37.4
Net income 3.3 3.1 3.1
____________________
(1) As a percent of income before income taxes.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues increased by 89% to $406.4 million in 1998 from $215.4 million in
1997. The number of homes closed increased by 93% to 1,874 homes in 1998 from
972 in 1997. The increase in revenues is largely attributable to the acquisition
of Westbrooke. In 1998, Westbrooke accounted for 29% of the revenue and 36% of
the homes closed. Without Westbrooke, revenues increased by 35% and homes closed
increased by 24%. The increase, excluding Westbrooke's contribution, was
attributable to the addition of the Nashville market as well as increases in the
existing markets. Revenues increased 47% in Houston, 25% in Austin and 26% in
Dallas. The average sales price of homes decreased from $219,000 in 1997 to
$216,000 in 1998 due to the fact that Westbrooke's average sales price is less
than Newmark's. The average sales price, excluding Westbrooke, has increased
from $219,000 in 1997 to $239,000 in 1998. Also, revenues generated from sales
of custom homes under Fedrick, Harris Estate Homes increased from $36 million in
1997 to $56 million in 1998, due primarily to increased unit sales in Houston,
Austin and Nashville. Revenues from land sales were $2.3 million in both 1998
and 1997.
Cost of sales increased by 93.4%, to $339.1 million in the year ended
December 31, 1998, from $175.3 million in 1997. The increase was attributable to
the increase in the number of homes closed as described above. As a percentage
of revenues, cost of sales increased to 83.4% in 1998 from 81.4% in 1997. The
increase in cost of sales as a percentage of revenues is due primarily to the
acquisition of Westbrooke. Generally, the margins on the homes sold in South
Florida earn lower margins due to the impact of higher land cost relative to
sales price. Excluding Westbrooke, as a percentage of revenues, cost of sales
increased slightly to 81.7% in 1998 from 81.4% in 1997.
Equity earnings from unconsolidated subsidiaries increased $347,000 to
$812,000 for 1998 compared to $465,000 for 1997. This increase was attributed
totally to the increased earnings of Pacific Title and NHC Mortgage.
Selling, general and administrative (SG&A) expense increased by 64.5% to
$43.6 million in 1998, from $26.5 million in 1997. As a percentage of revenues,
SG&A expense decreased slightly to 10.7% in 1998, from 12.3% in 1997. Excluding
Westbrooke, SG&A expense increased by 39% to $36.8 million. This increase was
caused by the expansion into Nashville, Tennessee as well as the growth in the
Company's Texas markets as reflected in the 34.9% increase in revenues in 1998
and the 112% increase in the backlog at the end of December 1998 versus December
1997.
Interest expense amounted to $1.9 million in 1998 compared to $2.0 million
in the previous year. The Company follows a policy of capitalizing interest
only on inventory under construction or development. During the year ended
December 31, 1998 and 1997, the Company expensed a portion of incurred interest
and other financing costs on those completed homes held in inventory. This
expense decreased due to the decrease in the average number of completed homes
held in inventory for the year ending December 31, 1998 compared to 1997.
Capitalized interest and other financing costs are included in cost of sales at
the time of home closings.
17
The Company's provision for income taxes decreased as a percentage of
earnings before taxes to 37.4% for the year ended December 31, 1998, compared to
39.1% for 1997. Under a tax allocation agreement with Pacific USA (the "Tax
Allocation Agreement"), the Company is required to calculate its federal
corporate income tax liability as if it filed a separate federal income tax
return for each period and to pay Pacific USA the sum of which would result from
such calculation if the Company were subject to federal corporate income tax and
filed a separate tax return. The Company recognized federal income tax expense
under the Tax Allocation Agreement amounting to $7.6 million for the year ended
December 31, 1998 compared to $4.3 million for 1997.
Net income increased by 91.0% to $12.8 million for the year ended December
31, 1998 from $6.7 million for the corresponding period in 1997. Westbrooke
comprised 30.8% of the net income for the year ending December 31, 1998.
Excluding Westbrooke, net income increased by 33.1% to $8.9 million in 1998 from
$6.7 million.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues increased by 12.8% to $215.4 million in 1997 from $190.9 million
in 1996. This increase in revenues is largely attributable to two factors.
First, the number of homes closed by the Company increased by 7.8% to 972 units
in 1997 from 902 units in 1996. Second, the average sales price increased by
9.5% from $200,000 to $219,000 per home sold. This increase in the average
sales price was primarily due to a change in the mix of homes sold. Revenues
generated from sales of Fedrick, Harris Estate Homes increased from 15% of total
revenues in 1996 to 16% of total revenues in 1997. Since the average sales
price for Fedrick, Harris Estate Homes is approximately 70% higher than the
average sales price for homes sold under the Newmark brand name, the increase in
the percentage of revenues from Fedrick, Harris Estate Homes as compared to
Newmark homes resulted in the increase in the average sales price of homes sold
in the 1997 period. Home closings increased in the Company's Dallas/Forth Worth
and Ft. Lauderdale/Miami markets, and decreased in Houston and Austin. Although
Houston's home closings decreased in 1997 compared to 1996 due to inclement
weather in the first quarter of 1997, Houston's homebuilding revenues increased
due to a higher percentage of higher priced custom homes being closed in 1997 as
compared to 1996. Revenues from land sales were $2.3 million in 1997 and $10.1
million in 1996.
As a percentage of revenues, cost of sales decreased slightly to 81.4% in
1997 compared to 81.9% in 1996. As a percentage of revenues from land sales, the
cost of land sales was 65.2% in 1997 compared to 91.1% in 1996.
Equity in earnings from unconsolidated subsidiaries decreased $327,000 to
$465,000 for 1997 compared to $792,000 for 1996. Earnings from Pacific Title and
NHC Mortgage amounted to approximately $235,000 and $105,000, respectively, for
1997.
Selling, general and administrative expenses increased by 15.2% to $26.5
million in 1997 from $23.0 million in 1996. Of such increase, $375,000 was due
to costs incurred in entering the Nashville market in 1997. The balance of the
increase in these expenses was due largely to the increases in sales and
construction activity required to sustain the higher level of revenues. As a
percentage of revenues, selling, general and administrative expenses remained
relatively stable at 12.3% for 1997 compared to 12.0% for 1996.
Interest expense, which primarily reflects the carrying cost of completed
homes, increased 60.5% to $2.0 million in 1997 from $1.2 million in 1996. This
increase was primarily due to the impact of adverse weather on home sales in the
Houston market and an increased inventory level in Florida associated with
increased levels of activity in that market.
The Company's provision for income taxes decreased as a percentage of
earnings before taxes to 39.1% in 1997, compared to 39.7% in 1996. Under the
Tax Allocation Agreement with Pacific USA, the Company is required to calculate
its federal corporate income tax liability as if it filed a separate federal
income tax return for each period and to pay Pacific USA the sum which would
result from such calculation if the Company were subject to federal corporate
income tax and filed a separate tax return. The Company recognized federal
income tax expense under the Tax Allocation Agreement amounting to $4.0 million
in 1997 compared to $3.8 million in 1996.
18
SEASONALITY AND QUARTERLY RESULTS
The homebuilding industry is seasonal, as generally there are more sales in
the spring and summer months, resulting in more home closings in the fall. The
Company operates in the Southwestern and Southeastern markets of the United
States, where weather conditions are more suitable to a year round construction
process than other areas. The Company also believes its geographic dispersion to
be somewhat counter-cyclical, with adverse economic conditions associated with
certain of its markets often being offset by more favorable economic conditions
in other areas. The seasonality of school terms has an impact on the Company's
operations, but it is somewhat mitigated by the fact that many of the Company's
buyers at the higher end of the Company's price range, including Fedrick, Harris
custom homes, no longer have children in school. As a result of these factors,
among others, the Company generally experiences more sales in the spring and
summer months, and more closings in the summer and fall months. Likewise,
Westbrooke has experienced seasonality in its revenues, generally completing
more sales in the spring and summer months and more closings in the fourth
quarter.
The following table presents selected quarterly operating data of the
Company for each of the eight quarters through the period ended December 31,
1998. In the opinion of management, all necessary adjustments (consisting of
normal recurring adjustments) have been included to present fairly the unaudited
selected quarterly operating data. This data is not necessarily indicative of
the results of the operations of the Company for any future period.
QUARTER ENDED
--------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
STATEMENT OF
OPERATIONS DATA:
Revenues $ 46,241 $ 54,556 $ 61,507 $ 53,056 $ 69,195 $ 103,057 $ 112,907 $ 121,194
Gross profit 8,686 10,033 11,251 10,090 11,455 16,676 19,007 20,121
Selling, general and
administrative 5,663 6,348 7,110 7,391 8,137 11,007 12,055 12,414
Operating income 2,676 3,206 4,005 2,457 2,701 5,116 6,051 7,302
MARGIN ANALYSIS:
Gross margin 18.8% 18.4% 18.3% 19.0% 16.6% 16.2% 16.8% 16.6%
Selling, general and
administrative 12.3% 11.6% 11.6% 13.9% 11.8% 10.7% 10.7% 10.2%
Operating income 5.8% 5.9% 6.5% 4.6% 3.9% 5.0% 5.4% 6.0%
OPERATING DATA:
Homes closed (units) 215 249 267 241 331 483 508 552
Average sales price of
homes closed $ 213 $ 215 $ 230 $ 217 $ 209 $ 213 $ 222 $ 220
The Company historically has experienced, and in the future expects to
continue to experience, variability in revenues on a quarterly basis. Factors
expected to contribute to the variability include, among others: (i) the timing
of home closings; (ii) the Company's ability to continue to acquire land and
options on acceptable terms; (iii) the timing of receipt of regulatory approvals
for the construction of homes; (iv) the condition of the real estate market and
general economic conditions; (v) the cyclical nature of the homebuilding
industry; (vi) prevailing interest rates and the availability of mortgage
financing; (vii) pricing policies of the Company's competitors; (viii) the
timing of the opening of new residential projects; (ix) weather; and (x) the
cost and availability of materials and labor. The Company's historical financial
performance is not necessarily a meaningful indicator of future results and the
Company expects its financial results to vary from project to project from
quarter to quarter.
19
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing needs depend primarily upon its sales volume,
inventory levels, inventory turnover and land acquisitions. For the years ended
December 31, 1996, 1997 and 1998, the Company used cash in operations of $7.8
million, $10.5 million and $19.3 million, respectively. The significant use of
cash in operations of the Company has primarily been due to the increasing
inventory levels maintained by the Company as the Company continues to expand
its business. Historically, the Company has financed its operations primarily
through its earnings, borrowings from financial institutions, and, prior to the
Company's initial public offering on March 12, 1998, capital contributions and
borrowings from Pacific USA, primarily for residential land development
acquisitions.
The Company has financed in the past, and intends to continue to finance,
its operations with cash from operations and borrowings under construction and
lot development credit facilities. Generally these credit agreements are with
regional and national lenders. Each of the credit agreements relates to specific
markets and provides for financing residential land and lot acquisition and
construction. The agreements have restrictive covenants which, among other
things, limit speculative home building, debt to tangible net worth ratios,
dividends and set a minimum requirement for tangible net worth. The agreements
have various maturity dates and bear interest at rates based on Libor and prime.
At December 31, 1998, the Company had $18.1 million of available credit under
its existing credit facilities. The Company plans to renew these facilities as
they mature.
With the exception of the South Florida operation, the Company utilizes lot
options as a method of controlling its investments in land. At December 31,
1998, the Company had 1,880 lots under option. At December 31, 1998, the
Company had no material capital commitments with respect to specific performance
lot purchase contracts. In the Ft. Lauderdale/Palm Beach/Miami market, the
Company is limited in its ability to acquire finished lots under option
contracts, a factor which requires the Company to make significant capital
expenditures in order to maintain adequate lot inventory in this market.
At the date hereof the Company had approximately $9,872 million outstanding
under promissory notes incurred in connection with the acquisition of
Westbrooke. The promissory notes are to be repaid in equal annual installments
from 1999 through 2003.
The Company believes it will have adequate financial resources, including
availability under its credit facilities, to meet its working capital and
residential land acquisition and development plans under current market
conditions. However, there can be no assurance that the amounts available from
such sources will be sufficient. The Company's combined consolidated outstanding
debt was approximately $119 million at December 31, 1998. Accordingly, the
Company expects to incur interest charges on a consolidated basis at higher
levels than it has in the past. In addition, if the Company identifies
significant new acquisition opportunities outside of the Company's existing
markets, or if the Company's operations do not generate sufficient cash from
operations at levels currently anticipated, the Company may be required to seek
additional capital in the form of equity or debt financing from a variety of
potential sources, including additional bank financings or the issuance of debt
or equity securities. There can be no assurance that the amounts available from
such sources will be sufficient. The amount and types of indebtedness which the
Company may incur are limited by the terms of its existing financing agreements.
In addition, the incurrence of additional debt by the Company would increase its
debt service and interest obligations, which could have an adverse effect on the
Company's results of operations or financial condition. If the Company is not
successful in obtaining sufficient capital to fund its planned expansion and
other expenditures, new projects may be constrained. Any such delay or
abandonment could result in a reduction in sales and may adversely affect the
Company's future business and results of operations.
INFLATION
The Company, as well as the homebuilding industry in general, may be
adversely affected during periods of high inflation, primarily because of higher
land and construction costs. In addition, higher mortgage interest rates may
significantly affect the affordability of permanent mortgage financing to
prospective purchasers. The Company attempts to pass through to its customers
any of its costs through increased sales prices. However, there is no assurance
that inflation will not have a material adverse impact on the Company's future
results of operations.
20
YEAR 2000 READINESS DISCLOSURE
The Company has assessed and is continuing to assess its operating systems,
computer software applications, computer equipment and other equipment with
embedded electronic circuits ("Programs") that it currently uses to identify
whether they are year 2000 compliant and, if not, what steps are needed to bring
them into compliance. The Company expects that the majority of all Programs,
including computer information systems utilized in its homebuilding and
residential lot development operations, will be year 2000 compliant by the end
of the second quarter of calendar 1999. For those Programs that will not be
compliant by then, the Company is reviewing the potential impact on the Company
and the alternatives that are available to it if the Programs cannot be brought
into compliance by December 31, 1999. The Company believes that the required
changes to its Programs will be made on a timely basis without causing material
operational issues or having a material impact on its results of operations or
its financial position.
The Company believes that, should a reasonably likely worst case Year 2000
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 costs incurred and expected to be
incurred in the future regarding Year 2000 compliance have been and are expected
to be immaterial to the results of operation and financial position of the
company. Costs related to Year 2000 compliance are expensed as incurred.
The Company has been reviewing whether its significant subcontractors,
suppliers, financial institutions and other service providers ("Providers") are
Year 2000 compliant. The Company is not aware of any Providers that do not
expect to be compliant; however, the Company has no means of ensuring that its
Providers will be Year 2000 ready. The inability of Providers to be Year 2000
ready in a timely fashion could have an adverse impact on the Company. The
Company plans to respond to any such contingency involving any of its Providers
by seeking to utilize alternative sources for such goods and services, where
practicable. In addition, widespread disruptions in the national or
international economy, including, for example, disruptions affecting financial
markets, commercial and investment banks, governmental agencies and utility
services, such as heat, lights, power and telephones, could also have an adverse
impact on the Company. The likelihood and effects of such disruptions are not
determinable at this time.
IMPACT OF NEW ACCOUNTING STANDARDS
Derivative and Hedging Activities - In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires companies to recognize all derivative contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedge risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivative contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000 to affect its
financial statements.
Start-up Activities - In June 1998, the Accounting Standards Executive
Committee of the AICPA issued SOP 98-5, Reporting on the Costs of Start-up
Activities. SOP 98-5 requires all start-up and organizational costs to be
expensed as incurred. It also requires all remaining historically capitalized
amounts of these costs existing at the date of adoption to be expensed and
reported as the cumulative effect of a change in accounting principles. SOP
98-5 is effective for all fiscal years beginning after December 31, 1998. The
Company believes that the adoption of SOP 98-5 on January 1, 2000 will not have
a significant effect on its financial statements.
21
FASB Amendments and Clarifications - In February 1999, the FASB issued SFAS
No. 135, Rescission of Financial Accounting Standards Board No. 75 ("SFAS 75")
and Technical Corrections. SFAS 135 rescinds SFAS 75 and amends SFAS No. 35.
SFAS 135 also amends other existing authoritative literature to make various
technical statements issued for fiscal years ending after February 15, 1999.
The Company believes that the adoption of SFAS 135 will not have a significant
effect on its financial statements.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not materially affected by any market risk sensitive
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements are set forth in Item 14(a)(1) and (2), and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for by this Item is incorporated by reference to the
Company's Current Report on Form 8-K, dated February 9, 1999 which has been
included as Exhibit 20.1 to this Form 10-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about the Company's directors is incorporated by reference to
the Company's definitive proxy statement, which will be filed with the
Securities and Exchange Commission not later than April 30, 1999 (120 days after
the end of the Company's fiscal year). The following people were the executive
officers of the Company on March 1, 1999.
EXECUTIVE OFFICERS. The Company's executive officers are as follows:
NAME AGE POSITION
- ---------------------------------- --- -----------------------------------------------
Lonnie M. Fedrick 54 President, Chief Executive Officer and Director
James M. Carr 48 Executive Vice President and Director
J. Eric Rome 39 Executive Vice President -- Homebuilding
B. Coleman Bradley 38 Executive Vice President -- Land
Acquisition and Development
Terry C. White 49 Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
Lonnie M. Fedrick has served as President and Chief Executive Officer of
the Company since 1997. Mr. Fedrick has also been President and Chief Executive
Officer of Newmark since 1994 and was Executive Vice President of Newmark from
1984 to 1994. Mr. Fedrick co-founded Newmark in 1983 and has more than 31 years
experience in the homebuilding industry. Mr. Fedrick began his career with
Norwood Homes in 1967, most recently serving as the Vice President of
Construction. From 1974 to 1983, he served as Vice President of Operations of
Monarch Homes. He is a member of the board of directors of the Greater Houston
Builders Association.
James M. Carr became Executive Vice President and a Director of the Company
upon the closing of the acquisition of Westbrooke by the Company in January
1998. Mr. Carr founded Westbrooke in 1976, and has served as Chairman, Chief
Executive Officer and President of Westbrooke since its inception. Mr. Carr is a
graduate of the University of Miami. He is also the Chairman of the Baptist
Hospital Foundation and a director of Baptist Health Systems.
J. Eric Rome has served as Executive Vice President - Homebuilding of the
Company since 1997. Mr. Rome has served as President of the Texas Division of
Newmark since 1996. He was Executive Vice President of the Newmark's Central
Texas Division from 1995 to 1996, a Vice President from 1984 to 1994, and
Construction Manager of Newmark's Houston division from 1983 to 1984. From 1981
to 1983, Mr. Rome was employed by Monarch Homes as a construction
superintendent. He has also served as an officer in various capacities with the
Texas Capitol Area Builders Association.
B. Coleman Bradley has served as Executive Vice President-Land Acquisition
and Development of the Company since 1997. Additionally, he has served as
President and Chief Executive Officer of PUDC since its formation in 1993.
From 1990 to 1993, he directed the land development activities of Pacific USA.
From 1986 to 1990, Mr. Bradley served as Executive Vice President of Real Estate
Decision Systems, and from 1982 to 1986, Mr. Bradley served as President of a
Dallas/Fort worth custom homebuilding company.
Terry C. White has served as Chief Financial Officer and Treasurer of the
Company since 1997. Mr. White is also Senior Vice President, Chief Financial
Officer and Treasurer of Newmark, which he joined in 1984 as Controller. Prior
thereto, Mr. White was employed by Wood Bros. Homes as a division controller and
prior to that he served in various accounting and finance positions with Safeway
Stores, Inc. He has played a key role in establishing the Company's accounting
controls and management information systems. Mr. White is a certified public
accountant and a graduate of the University of North Texas.
Bill C. Bradley, a director of the Company, and B. Coleman Bradley are
father and son. There are no other familial relationships among the executive
officers and directors of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement, which will be filed with the Securities
and Exchange Commission not later than April 30, 1999 (120 days after the end of
the Company's fiscal year).
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement, which will be filed with the Securities
and Exchange Commission not later than April 30, 1999 (120 days after the end of
the Company's fiscal year).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated by reference to the
Company's definitive proxy statement, which will be filed with the Securities
and Exchange Commission not later than April 30, 1999 (120 days after the end of
the Company's fiscal year).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
1. Financial Statements
Reports of independent certified public accountants
Consolidated Balance Sheets as of December 31, 1997 and 1998
22
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant Parent
Company Only Balance Sheets as of December 31, 1997
and 1998
Condensed Financial Information of Registrant Parent
Company Only Statements of Operations Years Ended
December 31, 1996, 1997, and 1998
Condensed Financial Information of Registrant Parent
Company Only Statements of Cash Flows For the Years Ended
December 31, 1996, 1997, and 1998
Schedule II- Valuation and Qualifying Accounts for the Years Ended
December 31, 1996, 1997, and 1998.
Schedule III-Properties and Accumulated Depreciation as of
December 31, 1998
3. Exhibits required to be filed by Item 601 of Regulation S-K.
EXHIBIT
NUMBER EXHIBIT
- -------- ------------------------------------------------------------------------------------------------
2.1 Stock Purchase Agreement dated January 15, 1998 among James Carr, Westbrooke
Communities, Inc., Westbrooke at West Lake, Inc., Westbrooke at Winston Trails, Inc.,
Westbrooke at Pembroke Pines, Inc., Westbrooke at Oak Ridge Inc., Harold L. Eisenacher,
Leonard R. Chernys, Diana Ibarria, The Westbrooke Partnership, Pacific USA Holdings Corp.,
Newmark Homes Corp., and Westbrooke Acquisition Corp is hereby incorporated by
reference to Exhibit 10.27 of the Registrant's Registration Statement on Form S-1,
Amendment Number 3, filed with the Securities and Exchange Commission on March 5, 1998,
File No. 333-42213.
2.1(b) Form of Addendum to Stock Purchase Agreement, effective January 15, 1998 is hereby
incorporated by reference to Exhibit 10.27(b) of the Registrant's Registration Statement on
Form S-1, Amendment Number 3, filed with the Securities and Exchange Commission on
March 5, 1998, File No. 333-42213.
3.1 Amended and Restated Articles of Incorporation is hereby incorporated by reference to
Exhibit 3.1 of the Registrant's Registration Statement on Form S-1, Amendment Number 3,
filed with the Securities and Exchange Commission on March 5, 1998, File No. 333-42213.
3.2 Bylaws are hereby incorporated by reference to Exhibit 3.2 of the Registrant's registration
Statement on Form S-1, Amendment Number 3, filed with the Securities and Exchange
Commission on March 5, 1998, File No. 333-42213.
4.1 Specimen of Registrant's Stock Certificate is hereby incorporated by reference to Exhibit 4.1
of the Registrant's Registration Statement on Form S-1, Amendment Number 3, filed with the
Securities and Exchange Commission on March 5, 1998, File No. 333-42213.
10.1 Form of Tax Allocation Agreement ("Tax Agreement") between Pacific USA and various
affiliates and subsidiaries, of Pacific USA, including the Registrant. Dated April 28. 1992 is
hereby incorporated by reference to Exhibit 10.6(a) of the Registrant's Registration Statement
on Form S-1, Amendment Number 3, filed with the Securities and Exchange Commission on
March 5, 1998, File No. 333-42213.
10.2 Form of Amendment to Tax Agreement is hereby incorporated by reference to Exhibit 10.6(b)
of the Registrant's Registration Statement on Form S-1, Amendment Number 3, filed with the
Securities and Exchange Commission on March 5, 1998, File No. 333-42213.
23
EXHIBIT
NUMBER EXHIBIT
- -------- ------------------------------------------------------------------------------------------------
10.3 1998 Tandem Stock Option/Stock Appreciation Rights Plan, with form of incentive plan
agreement is hereby incorporated by reference to Exhibit 10.14 of the Registrant's
Registration Statement on Form S-1, Amendment Number 3, filed with the Securities and
Exchange Commission on March 5, 1998, File No. 333-42213.
10.4 Employment Agreement between Newmark Homes Corp. and Terry White dated January 1,
1998 is hereby incorporated by reference to Exhibit 10.17 of the Registrant's Registration
Statement on Form S-1, Amendment Number 3, filed with the Securities and Exchange
Commission on March 5, 1998, File No. 333-42213.
10.5 Employment Agreement Between Newmark Homes Corp. and Eric Rome dated January 1,
1998 is hereby incorporated by reference to Exhibit 10.18 of the Registrant's Registration
Statement on Form S-1, Amendment Number 3, filed with the Securities and Exchange
Commission on March 5, 1998, File No. 333-42213.
10.6 Employment Agreement between Pacific United Development Corp. and Coleman Bradley
effective January 1, 1998.
10.7 Employment Agreement Between Newmark Homes Corp. and James Carr dated January 1,
1998 is hereby incorporated by reference to Exhibit 10.26 of the Registrant's Registration
Statement on Form S-1, Amendment Number 3, filed with the Securities and Exchange
Commission on March 5, 1998, File No. 333-42213.
10.8 Employment Agreement between Newmark Homes Corp. and Lonnie M. Fedrick dated
January 1, 1998 is hereby incorporated by reference to Exhibit 10.28 of the Registrant's
Registration Statement on Form S-1, Amendment Number 3, filed with the Securities and
Exchange Commission on March 5, 1998, File No. 333-42213.
11.1 Statement relating to computation of per share earnings.
12.1 Statement relating to computation of ratios.
16.1 Letter relating to change in certifying accountant is incorporated by reference to Exhibit 16.1
of Registrant's Current Report on Form 8-K dated February 9, 1999.
20.1 Registrant's Current Report on Form 8-K dated February 9, 1999
21.1 List of subsidiaries.
24.1 Power of Attorney is contained on the Signature Page hereof.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant did not file any Current Report on Form 8-K during the quarter ended
December 31, 1998.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NEWMARK HOMES CORP.
March 31, 1999 By: /S/ Lonnie M. Fedrick
-----------------------------------------
Date Name: Lonnie M. Fedrick
Title: Chief Executive Officer
(Principal Executive Officer)
March 31, 1999 By: /S/ Terry C. White
-----------------------------------------
Date Name: Terry C. White
Title: Senior Vice President, Chief
Financial Officer, Treasurer
and Secretary (Principal Financial
and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael K. McCraw and Larry D. Horner,
and each of them, his true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, to sign any and all amendments
(including post-effective amendments) to this Annual Report on Form 10-K and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact, or their substitute or substitutes, or any of them, shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 31, 1999 /S/ William A. Hassler
-----------------------------------
Date Name: William A. Hassler
Title: Director
March 31, 1999 /S/ Jon P. Newton
-----------------------------------
Date Name: Jon P. Newton
Title: Director
March 31, 1999 /S/ Larry D. Horner
-----------------------------------
Date Name: Larry D. Horner
Title: Director
25
March 31, 1999 /S/ Bill C. Bradley
-----------------------------------
Date Name: Bill C. Bradley
Title: Director
March 31, 1999 /S/ Michael K. McCraw
-----------------------------------
Date Name: Michael K. McCraw
Title: Director
March 31, 1999 /S/ James M. Carr
-----------------------------------
Date Name: James M. Carr
Title: Director
March 31, 1999 /S/ Lonnie M. Fedrick
-----------------------------------
Date Name: Lonnie M. Fedrick
Title: Director
26
NEWMARK HOMES CORP. AND SUBSIDIARIES
============================================
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 2-3
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 4-5
Statements of operations 6
Statements of stockholders' equity 7
Statements of cash flows 8-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10-28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Newmark Homes Corp.:
We have audited the accompanying consolidated balance sheet of Newmark Homes
Corp. and subsidiaries (the "Company"), a subsidiary of Pacific USA Holdings
Corp., as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
1998. We have also audited the schedules listed in the accompanying index.
These consolidated financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our audit. We did not
audit the financial statements of Westbrooke Acquisition Corp., a consolidated
subsidiary, for the year ended December 31, 1998, which statements reflect the
total assets and total revenues constituting 27% and 29%, respectively, of the
related consolidated totals for that year. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Westbrooke Acquisition Corp., for the
year ended December 31, 1998 is based solely on the report of the other
auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and schedules are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements and schedules. We believe that our audit and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements, referred to above, present fairly, in all
material respects, the financial position of the Company and subsidiaries as of
December 31, 1998, and the results of their operations and their cash flows for
the year ended December 31, 1998 in conformity with generally accepted
accounting principles.
Also, in our opinion, the schedules present fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
Los Angeles, California
February 12, 1999
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Newmark Homes Corp.:
We have audited the accompanying consolidated balance sheet of Newmark Homes
Corp. and subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1997. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedules as of December 31, 1997, and for each of the
years in the two-year period ended December 31, 1997, as listed in the
accompanying index at Item 14. These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Newmark Homes Corp.
and subsidiaries as of December 31, 1997, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 1997, in conformity with generally accepted accounting principles. Also in
our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Dallas, Texas
January 23, 1998
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
==================================================================================================
December 31, 1997 1998
- ------------------------------------------------------------------------------ -------- --------
ASSETS
CASH $ 746 $ 5,794
RECEIVABLES:
Title companies 842 2,293
Affiliates 656 -
Other 231 4,674
-------- --------
Total Receivables 1,729 6,967
-------- --------
INVENTORIES (Notes 4 and 6):
Single family residences 75,411 137,317
Lots 27,136 47,930
-------- --------
Total Inventories 102,547 185,247
-------- --------
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES (Note 5) 327 490
PROPERTY, PREMISES AND EQUIPMENT, net of accumulated depreciation of $952 and
$2,278 in 1997 and 1998, respectively 2,790 5,381
DEFERRED TAX ASSET net (Note 9) 857 723
OTHER ASSETS (Note 4) 2,670 3,092
GOODWILL, net of accumulated amortization of $3,773 and $5,173 in 1997 and
1998, respectively (Note 3) 27,547 37,644
- ------------------------------------------------------------------------------ -------- --------
Total assets $139,213 $245,338
============================================================================== ======== ========
December 31, 1997 1998
- -------------------------------------------------------------------------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CONSTRUCTION LOANS PAYABLE (Note 6) $ 66,100 $106,839
ACQUISITION NOTES PAYABLE (Note 3) - 12,341
PAYABLES TO AFFILIATES (Notes 7 and 9) 1,775 2,442
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (Notes 3) 10,963 22,935
OTHER LIABILITIES (Note 10) 4,684 10,669
-------- --------
Total liabilities 83,522 155,226
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 6 and 10)
STOCKHOLDERS' EQUITY (Note 6):
Common stock - $.01 par value; 30,000,000 shares authorized, 9,200,000 at
December 31, 1997 and 11,500,000 at December 31, 1998, issued and
outstanding 92 115
Additional paid-in capital 52,165 73,768
Retained earnings 3,434 16,229
-------- --------
Total stockholders' equity 55,691 90,112
-------- --------
Total liabilities and stockholders' equity $139,213 $245,338
========================================================================== ======== ========
See accompanying notes to consolidated financial statements.
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
==================================================================================================
Year ended December 31, 1996 1997 1998
- ------------------------------------------------------------- ----------- ----------- ------------
REVENUES $ 190,855 $ 215,360 $ 406,353
COST OF SALES (Note 4) 156,264 175,300 339,094
----------- ----------- ------------
GROSS PROFIT 34,591 40,060 67,259
EQUITY IN EARNINGS FROM UNCONSOLIDATED SUBSIDIARIES
(Note 5) 792 465 812
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (22,976) (26,512) (43,614)
DEPRECIATION AND AMORTIZATION (1,524) (1,669) (3,287)
----------- ----------- ------------
OPERATING INCOME 10,883 12,344 21,170
OTHER INCOME (EXPENSE):
Interest expense (Notes 4 and 7) (1,238) (1,987) (1,939)
Other income, net (Note 8) 851 570 1,201
----------- ----------- ------------
INCOME BEFORE INCOME TAXES 10,496 10,927 20,432
INCOME TAXES (Note 9) 4,164 4,272 7,637
----------- ----------- ------------
NET INCOME $ 6,332 6,655 $ 12,795
============================================================= =========== =========== ============
EARNINGS PER COMMON SHARE:
Basic $ 0.69 0.72 $ 1.16
Diluted 0.69 0.72 1.16
============================================================= =========== =========== ============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK EQUIVALENTS OUTSTANDING:
Basic 9,200,000 9,200,000 11,035,342
Diluted 9,200,000 9,200,000 11,035,342
============================================================= =========== =========== ============
See accompanying notes to consolidated financial statements.
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
==================================================================================================
Additional
Common Paid-in Retained
Stock Capital Earnings Total
------- ------------ ---------- --------
BALANCE, December 31, 1995 $ 92 $ 43,439 $ 2,282 $45,813
Capital contribution - 1,247 - 1,247
Dividends paid - (2,271) (7,192) (9,463)
Net income - - 6,332 6,332
- ------------------------------------------------ ------- ------------ ---------- --------
BALANCE, December 31, 1996 92 42,415 1,422 43,929
Capital contribution (Note 7) - 9,917 - 9,917
Dividends paid - (167) (4,643) (4,810)
Net income - - 6,655 6,655
- ------------------------------------------------ ------- ------------ ---------- --------
BALANCE, December 31, 1997 92 52,165 3,434 55,691
Initial public offering of common stock, net of
issuance costs of $2,554,000 20 18,426 - 18,446
Issuance of common stock due to the exercise of
underwriters over-allotment option, net of
issuance costs of $271,000
3 2,876 - 2,879
Capital contribution - 301 - 301
Net income - - 12,795 12,795
- ------------------------------------------------ ------- ------------ ---------- --------
BALANCE, December 31, 1998 $ 115 $ 73,768 $ 16,229 $90,112
================================================ ======= ============ ========== ========
See accompanying notes to consolidated financial statements.
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
==================================================================================================
INCREASE (DECREASE) IN CASH
Year ended December 31, 1996 1997 1998
- -------------------------------------------------------------- ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,332 $ 6,655 $ 12,795
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 1,524 1,669 3,287
Net (gain) loss on sale of property, premises and equipment (82) 44 27
Equity in earnings from unconsolidated subsidiaries (792) (465) (812)
Deferred tax (benefit) expense (518) 109 134
Compensation costs paid by parent - 313 -
Changes in operating assets and liabilities net of effects
from purchase of Westbrooke Communities, Inc.:
Inventory and land held for development, net (18,664) (19,026) (41,998)
Receivables - title companies (269) 522 (1,451)
Receivables - affiliates and other (438) 5 (2,247)
Other assets (49) (1,252) 1,417
Payable to affiliates 1,091 (287) 667
Accounts payable and accrued liabilities 2,473 801 2,930
Other liabilities 1,612 428 5,985
- -------------------------------------------------------------- ---------- ---------- ----------
Net cash used in operating activities (7,780) (10,484) (19,266)
- -------------------------------------------------------------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of certificate of deposit 1,000 1,000 -
Purchase of certificate deposit (1,000) - -
Repayment of note receivable 3,034 - -
Purchases of property, premises and equipment (1,285) (1,812) (2,134)
Proceeds from sales of property, premises and equipment 216 33 44
Increase in goodwill for acquisition costs - - (1,338)
Purchase of Westbrooke, net of cash acquired - - 3,618
Other (34) (32) -
Investment in unconsolidated subsidiaries - (105) (255)
Distributions from unconsolidated subsidiaries 1,117 1,691 903
- -------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by investing activities 3,048 775 838
- -------------------------------------------------------------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from initial public offering of common stock - - 18,446
Net proceeds from underwriters over-allotment option - - 2,879
Capital contributions received 1,247 181 301
Dividends paid (9,463) (4,810) -
Proceeds from advances on construction loans payable 133,349 140,101 279,694
Principal payments on construction loans payable (116,746) (130,463) (261,263)
Principal payments on acquisition notes payable - - (16,581)
Proceeds from advances on notes payable to affiliate 4,455 8,373 -
Principal payments on notes payable to affiliate (7,718) (3,569) -
- -------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by financing activities 5,124 9,813 23,476
- -------------------------------------------------------------- ---------- ---------- ----------
INCREASE IN CASH 392 104 5,048
CASH, beginning of year 250 642 746
- -------------------------------------------------------------- ---------- ---------- ----------
CASH, end of year $ 642 $ 746 $ 5,794
============================================================== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 4,928 $ 5,939 $ 9,501
Income taxes $ 3,164 $ 4,182 $ 7,456
============================================================== ========== ========== ==========
See accompanying Notes 3 and 7 for supplemental disclosure of noncash investing
and financing activities.
See accompanying notes to consolidated financial statements.
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
1. ORGANIZATION
Newmark Homes Corp. (NHC) and subsidiaries (the Company) is an 80% owned
subsidiary of Pacific Realty Group (PRG) and ultimately a subsidiary of
Pacific USA Holdings Corp. (PUSA). NHC was formed in December 1994 to serve
as a real estate holding company.
NHC's primary subsidiaries are as follows:
SUBSIDIARY NATURE OF BUSINESS
- --------------------------- -----------------------------------------
Newmark Home Corporation Single-family residential homebuilding in
(Newmark) Texas, Tennessee and North Carolina-
formed in 1983.
Westbrooke Communities, Single-family residential homebuilding in
Inc. (Westbrooke) Florida-formed in 1976.
The Adler Companies, Inc. Single-family residential homebuilding in
(Adler) Florida-formed in 1990.
Pacific United Development Residential lot developer in Texas and
Corporation (PUDC) Tennessee-formed in 1993.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and general practices within the
homebuilding industry. The following summarizes the more significant of
these policies.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of NHC and
itssubsidiaries. All significant intercompany balances and transactions
have been eliminated in the consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(Statement 121). Statement 121 addresses the accounting for the impairment
of long-lived assets, certain identifiable intangibles and goodwill when
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Impairment is evaluated by estimating future
undiscounted cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows is
less than the carrying amount of the assets, an impairment loss is
recognized. Fair value, for purposes of calculating impairment, is measured
based on undiscounted future cash flows. The Company's adoption of
Statement 121 had no effect on the Company's financial position or results
of operations.
GEOGRAPHIC CONCENTRATION OF BUSINESS
The Company conducts business primarily in Texas, Florida, Tennessee and
North Carolina. Accordingly, the market value of the Company's inventory is
susceptible to changes in market conditions that may occur in Texas,
Florida, Tennessee and North Carolina.
RECEIVABLES FROM TITLE COMPANIES
Receivables from title companies consist of sales proceeds due for homes
sold and closed, less amounts withheld by the title companies for
disbursement to third parties.
INVENTORY
Single family residences and lots are recorded at the lower of cost or
estimated net realizable value. Net realizable value is defined as the
estimated proceeds upon disposition, less applicable future costs to
complete and sell. Construction costs are accumulated during the period of
construction. The Company utilizes the specific identification method of
charging construction costs to cost of sales as units are sold. Common
construction overhead costs are allocated to each individual unit (home) in
the various subdivisions based upon the total number of units to be
constructed in each subdivision community.
Interest cost and overhead related to construction activities, primarily
salaries and benefits of supervisors and support staff, are capitalized as
construction costs during the construction period and charged to cost of
sales as the related inventories are sold. General and administrative costs
and selling costs are expensed at the time they are incurred.
PROPERTY, PREMISES AND EQUIPMENT
Property, premises and equipment, consisting primarily of office premises,
transportation equipment, office furniture and fixtures, and model home
furniture, are carried at cost net of accumulated depreciation. Office
premises and transportation equipment are depreciated using the
straight-line method over thirty years and five years, respectively.
Furniture and fixtures and model home furniture are depreciated over
estimated useful lives of three to seven years using the declining balance
method switching to the straight-line method in the year that depreciation,
computed on the straight-line method, equals or exceeds that determined
under the declining-balance method.
PURCHASE OPTIONS
The Company enters into lot option contracts and contracts to purchase land
for lot development. When the Company does not exercise an option, its
liability is limited to the forfeiture of the related deposit (note 4).
Consequently, the Company's policy is to record the lots or land and the
related liabilities at the time such are purchased and legal title has
passed.
GOODWILL
The excess of the purchase price paid by the Company over the fair value of
net assets acquired is recorded as goodwill and is being amortized on a
straight-line basis over 30 years.
The Company evaluates goodwill for impairment periodically by determining
whether the amortization of the balance over its remaining life can be
recovered through future cash flows of the Company.
REVENUE RECOGNITION
Revenue is recognized at the time of the closing of the sale, when title to
and possession of the property transfers to the buyer.
ADVERTISING COSTS
As incurred, the Company expenses advertising costs, consisting primarily
of newspaper and trade publications, signage and the cost of maintaining an
internet web site. Advertising expense included in selling, general and
administrative expenses for the years ended December 31, 1996, 1997 and
1998 was approximately $3.1 million, $3.5 million and $6.7 million,
respectively.
INCOME TAXES
The Company is included in the consolidated federal income tax return of
PUSA. Under a tax sharing agreement with PUSA, the Company is required to
calculate its federal income tax on a separate company basis and pay to
PUSA the amount of the liability. When applicable, the Company is entitled
to receive payments from PUSA. Such payment is only applicable to the
extent the benefits calculated can be utilized to offset prior separate
company income through carryback or, if carried forward, at the time such
benefits are utilized to offset separate company income.
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax basis. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards board issued Statements
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No.
128). This Statement establishes new standards for computing and presenting
earnings per share (EPS). SFAS No. 128 replaces the presentation of primary
EPS previously prescribed by Accounting Principles Board Opinion No. 15
(APB No. 15) with a presentation of basic EPS which is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period.
EARNINGS PER SHARE (CONTINUED)
SFAS No. 128 also requires dual presentation of basic and diluted EPS.
Diluted EPS is computed similarly to fully diluted EPS pursuant to APB No.
15. Diluted earnings per share are computed based on the weighted average
number of shares of common stock and dilutive securities outstanding during
the period. Dilutive securities are options that are freely exercisable
into common stock at less than market exercise prices. Dilutive securities
are not included in the weighted average number of shares when inclusion
would increase the earnings per share or decrease the loss per share.
The following tables reconcile the computation of basic and diluted EPS for
the years ended December 31, 1996, 1997 and 1998.
Year Ended December 31,
-----------------------------------
1996 1997 1998
---------- ---------- -----------
Income available to common
shareholders (Numerator) $6,332,000 $6,655,000 $12,795,000
Weighted average of shares
outstanding (Denominator) 9,200,000 9,200,000 11,035,342
Basic EPS $ 0.69 $ 0.72 $ 1.16
Effect of dilutive securities
1998 Tandem Stock Option Plan - - -
Diluted EPS $ 0.69 $ 0.72 $ 1.16
- --------------------------------- ---------- ---------- -----------
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires companies to disclose the
estimated fair value of their financial instrument assets and liabilities.
Fair value estimates are made at a specific point in time, based upon
relevant market information about the financial instrument. These estimates
do not reflect any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a particular instrument.
The carrying values of cash, other receivables, accounts payable and
accrued liabilities approximate their fair values due to their short-term
nature. The carrying value of construction loans and notes payable
approximates its fair value as substantially all of the debt has a
fluctuating interest rate based upon a current market index. The carrying
amount of the acquisition notes payable approximate their fair value.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard No. 133 (SFAS 133), "Accounting
for Derivative Instruments and Hedging Activities," issued by the Financial
Accounting Standards Board is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The Company does not expect adoption to have any effect on its
financial position, results of operations and cash flows.
3. ACQUISITIONS
WESTBROOKE ACQUISITION
Effective January 1, 1998, the Company, through its wholly-owned subsidiary
Westbrooke Acquisition Corp., acquired all of the outstanding stock of
Westbrooke Communities, Inc. and its affiliated entities ("Westbrooke"), a
single-family home builder in South Florida. The initial purchase price for
Westbrooke was $18.9 million in the form of three promissory notes. The
note of $6.6 million bearing an interest rate of 9%, was paid in full in
December 1998. The remaining notes totaling $12.3 million bear interest at
6.45% payable annually. The notes are payable in annual installments of
$2,468,200 beginning in January 1999 and are guaranteed by PUSA. In
addition to the promissory notes, the purchase agreement requires the
Company to pay additional consideration of up to $7.5 million contingent
upon Westbrooke achieving specified income targets over the next five
years. In order for the consideration to be paid, Westbrooke must achieve
net income before income tax (as defined in the stock purchase agreement)
on a cumulative basis of $3,400,000, $7,040,000, $10,920,000, $15,040,000
and $19,400,000 for the fiscal years ending December 31, 1998, 1999, 2000,
2001 and 2002, respectively. The deferred consideration will be recorded as
an adjustment to the purchase price once the income targets are met and
will be paid out from 2000 through 2002. For the year ended December 31,
1998, the income target was met, and accordingly the Company recorded an
additional purchase price of $900,000.
The Company also agreed to continue to pay incentive compensation to the
minority interest owners of Westbrooke equal to 6% of net income before
income taxes, as defined in the purchase agreement. Such payments will be
recorded as compensation expense in the period in which they are earned.
This acquisition has been accounted for using the purchase method and,
accordingly, the operating results of Westbrooke have been included in the
Company's consolidated operating results since the effective date of the
acquisition.
As of January 1, 1998, the fair values of assets acquired and liabilities
assumed, exclusive of cash acquired of $3,618,000, were as follows (in
thousands):
Amount
---------
Inventory $ 40,759
Receivables 1,540
Property and equipment 1,980
Other assets 2,216
Goodwill 10,159
Construction loans payable (22,308)
Acquisition notes payable (28,922)
Other liabilities (9,042)
- -------------------------- ---------
$ (3,618)
---------
Additional acquisition costs of $1,272,000 were incurred by the Company and
recorded to goodwill.
The following unaudited pro forma financial information for the year ended
December 31, 1997 is presented as if the Westbrooke acquisition had
occurred on January 1, 1997 (dollars in thousands except per share
information). This unaudited pro forma financial information does not
necessarily reflect the results of operations as if they had occurred or
the results that may occur in the future.
Year ended December 31, 1997
- ------------------------------------------- -----------
Revenues $ 318,781
Cost of sales 265,573
- ------------------------------------------- -----------
Gross profit 53,208
Net income $ 8,932
- ------------------------------------------- -----------
Earnings per common share:
Basic $ .97
- ------------------------------------------- -----------
Weighted average number of shares of common
stock equivalents outstanding:
Basic 11,200,000
- ------------------------------------------- -----------
4. INVENTORY
The inventory of single family residences as of December 31, 1997 and 1998
consists of the following:
Number of Homes Carrying value
------------ -----------------
December 31, December 31,
------------ -----------------
1997 1998 1997 1998
---- ------ ------- --------
(IN THOUSANDS)
Completed 90 118 $18,564 $ 23,224
Under construction 444 829 48,352 98,692
Models 40 74 8,495 15,401
- ------------------ ---- ------ ------- --------
574 1,021 $75,411 $137,317
---- ------ ------- --------
A summary of interest capitalized in inventory is as follows (in
thousands):
Year ended December 31, 1996 1997 1998
- ------------------------------------------------------- ------ ------ -------
Interest capitalized, beginning of period $1,061 $1,494 $ 2,572
Capitalized interest acquired in purchase of Westbrooke - - 2,597
Interest incurred 4,596 6,518 11,163
Less interest included in:
Cost of sales 2,925 3,453 8,877
Interest expense 1,238 1,987 1,939
- ------------------------------------------------------- ------ ------ -------
Interest capitalized, end of period $1,494 $2,572 $ 5,516
- ------------------------------------------------------- ------ ------ -------
In the ordinary course of business, the Company enters into contracts to
purchase lots and land for lot development. At December 31, 1997 and 1998,
the Company had nonrefundable deposits aggregating $1,118,000 and
$1,289,000 included in other assets in the accompanying consolidated
balance sheets, for lots and land with a related purchase price of
approximately $26.9 million and $64.4 million, respectively. The Company's
liability for non-performance under such contracts is limited to forfeiture
of the related deposits.
5. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
Included in investment in unconsolidated subsidiaries at December 31, 1997
and 1998 is the Company's 50% general partnership interest in the Twin
Acres Partnership (Twin Acres). Twin Acres owns certain land in Broward
County, Florida, for the purpose of developing, constructing and selling
single family residences. The Company obtained its investment in Twin Acres
in 1995 in the acquisition of Adler. The Company does not have control of
Twin Acres and therefore has accounted for its partnership interest using
the equity method.
During 1997, Twin Acres closed on the sale of the remaining homes in its
inventory and is winding down its operations. Therefore, the Company's
future equity in earnings from Twin Acres will not be material to the
Company's operations.
Summarized financial information for Twin Acres is as follows (in
thousands):
December 31, 1997 1998
- ----------------------------------- ----- -----
Assets:
Cash and receivables $ 357 $ 64
Other assets 90 -
- ----------------------------------- ----- -----
$ 447 $ 64
=================================== ===== =====
Liabilities:
Accounts payable $ 249 $ 60
Partners' capital 198 4
- ----------------------------------- ----- -----
$ 447 $ 64
=================================== ===== =====
Year ended December 31 1996 1997 1998
- ---------------------- -------- -------- ------
Revenues $19,869 $10,618 $ -
Cost of sales 15,488 8,515 -
- ---------------------- -------- -------- ------
4,381 2,103 -
Subdivision overhead 2,819 1,932 -
Other net (29) (82) (57)
- ---------------------- -------- -------- ------
Net income $ 1,591 $ 253 $ 57
====================== ======== ======== ======
Also included in the investments in unconsolidated subsidiaries, the
Company, during 1997, acquired a 49% interest in Pacific Title L.L.C., a
title agency, for $24,000 and a 50% interest in NHC Mortgage, a mortgage
finance company, for $81,000. The Company does not have control of these
entities and therefore has accounted for its interests using the equity
method. The operations are immaterial to the consolidated financial
statements.
6. CONSTRUCTION LOANS PAYABLE
Construction loans payable consist of the following at December 31, 1998
(in thousands):
1997 1998
------- --------
Construction and lot loans with financial institutions,
collateralized by lots and single family residences
completed or under construction, bearing interest at
the prime rate to prime plus 1.5% (7.75% to 9.25%
at December 31, 1998), maturing upon completion
and sale of the homes as defined in the loan
agreement $62,565 $ 94,526
Development and land acquisition loans with financial
institutions, collateralized by deeds of trust on
property, with maturing dates ranging from February
1999 through April 2002, bearing interest at 7.0% to
prime plus 1.0%, (8.75% at December 31, 1998) 603 11,564
Promissory note with a bank, collateralized by
property, bearing interest at 7.45%, payable monthly,
maturing in March, 2008 800 749
4,500,000 revolving construction loan with a financial
institution collateralized by single-family residences,
with final maturity in August 1998 71 -
Promissory note with a bank, maturing in June 1988 2,052 -
Other 9 -
- ----------------------------------------------------------- ------- --------
$66,100 $106,839
=========================================================== ======= ========
Maturities on construction loans payable at December 31, 1998 are as
follows (in thousands):
Amount
--------
1999 $103,794
2000 2,420
2001 69
2002 74
2003 80
Thereafter 402
- -------------- --------
$106,839
============== ========
Construction and lot loans are generally repaid as sales of individual
homes are closed and therefore are considered current at December 31, 1998.
At December 31, 1998, the Company had unused lines of credit for
construction loans totaling approximately $153 million of which $18.1
million was available to draw down.
Certain of the Company's lenders require, among other things, that the
Company maintain minimum tangible net worth levels and debt to tangible net
worth ratios. At December 31, 1998, the Company was in compliance with such
requirements. Certain debt agreements of NHC's subsidiaries restrict the
subsidiaries' ability to pay dividends or advance funds to NHC to the
extent that the payment would put the subsidiary in violation of debt
covenants. Under the most restrictive of these covenants, there was no
restriction on the amount of retained earnings available to pay dividends
at December 31, 1998.
7. PAYABLE TO AFFILIATES
Payable to affiliates consists of amounts owed by the Company to PUSA. At
December 31, 1997, PUSA forgave the balance of outstanding notes payable
due from the Company of $9.1 million, and has recorded this transaction as
a capital contribution. Total interest paid to PUSA, relating to these
notes payable, during the years ended December 31, 1996, 1997 and 1998 was
approximately $439,000, $557,000 and $0, respectively.
8. RELATED PARTY TRANSACTIONS
The Company purchases insurance policies from an affiliated insurance
broker. The affiliated entity earned commissions of $89,000, $93,000 and
$152,000 in 1996, 1997 and 1998, respectively, with respect to such
policies. The Company also purchases demographic and economic research
information through an affiliate for $10,000 per year.
The Company provides various managerial services to Twin Acres for which it
receives a fee. For the years ended December 31, 1996, 1997 and 1998,
management fees included in other income were $851,000, $246,000, and $0
respectively.
9. INCOME TAXES
Components of income tax expense (benefit) consist of (in thousands):
Year ended December 31, 1996 1997 1998
- ----------------------- ------- ------- ------
Current:
Federal $4,231 $4,038 $7,183
State 451 125 320
- ----------------------- ------- ------- ------
4,682 4,163 7,503
------- ------- ------
Deferred:
Federal (459) (1) 134
State (59) 110 -
- ----------------------- ------- ------- ------
(518) 109 134
------- ------- ------
$4,164 $4,272 $7,637
======================= ======= ======= ======
The difference between total reported income taxes and expected income tax
expense computed using the federal statutory income tax rate of 35% for
1996, 1997 and 1998 is reconciled as follows (in thousands):
Year ended December 31, 1996 1997 1998
- ----------------------------------- ------ ------ ------
Computed "expected" tax expense $3,674 $3,825 $7,151
Goodwill amortization 211 211 216
State taxes, net of federal benefit 255 153 208
Other 24 83 62
- ----------------------------------- ------ ------ ------
$4,164 $4,272 $7,637
=================================== ====== ====== ======
Significant temporary differences that give rise to the deferred tax assets
and liabilities are as follows (in thousands):
December 31, 1997 1998
- ---------------------------------------------------- ------- -------
Deferred tax assets:
Warranty/advertising reserve $ 367 $ 441
Property, premises and equipment, principally due to
differences in depreciation 44 1
Capitalized interest 163 172
Accrued bonuses 397 551
Partnership investment 132 (15)
Other 113 111
- ---------------------------------------------------- ------- -------
Total gross deferred tax assets 1,216 1,261
- ---------------------------------------------------- ------- -------
Deferred tax liabilities:
Amortizable intangibles (343) (522)
Other (16) (16)
- ---------------------------------------------------- ------- -------
Total gross deferred tax liabilities (359) (538)
- ---------------------------------------------------- ------- -------
Net deferred tax asset $ 857 $ 723
==================================================== ======= =======
Management of the Company believes that it is more likely than not that the
gross deferred tax assets will be realized or settled due to the Company's
ability to generate taxable income exclusive of reversing timing
differences. Accordingly, no valuation allowance was established at
December 31, 1997 and 1998.
Included in payable to affiliates at December 31, 1997 and 1998 is $1.8
million and $2.4 million payable to PUSA under terms of the tax sharing
agreement. Payments of $3.0 million, $3.9 million, and $7.4 million,
respectively, were made to PUSA for federal income taxes during 1996, 1997
and 1998, under the aforementioned agreement.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office premises and equipment under noncancellable
operating leases. Future minimum payments under these noncancellable
operating leases for the fiscal years ending on December 31 are as follows:
December 31, Amount
- ------------ --------
1999 $311,000
2000 309,000
2001 216,000
2002 8,000
2003 1,000
- ------------ --------
$845,000
============ ========
Rental expense for the year ended December 31, 1996, 1997 and 1998
aggregated, $340,000, $332,000 and $327,000, respectively.
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.
The Company provides homebuyers with a one year limited warranty of
workmanship and materials from the date of sale. The Company generally has
recourse against its subcontractors for claims relating to workmanship and
materials. The Company also provides a ten-year homeowner's warranty
through a single national contract through a third party. This warranty
generally covers major structural defects. Estimated warranty costs are
recorded at the time of sale. Total warranty expense for the year ended
December 31, 1996, 1997 and 1998 was $881,973, $1,567,442 and $2,138,017,
respectively. As of December 31, 1997 and 1998, the liability for warranty
costs was $881,000 and $1,149,000 respectively, and was included in other
liabilities.
The Company has an unsecured letter of credit facility which is used to
issue letters of credit which guarantee Westbrooke's performance of certain
development and construction obligations. At December 31, 1998 letters of
credit aggregating $900,000 were outstanding under this facility. No
additional amounts are available under this facility.
The Company is a guarantor on a letter of credit issued by a financial
institution as security for a note. The amount of this note payable at
December 31, 1997 and 1998 was $2.0 million and $1.3 million, respectively.
11. EMPLOYEE BENEFIT PLAN
The Company has a 401 (k) Profit Sharing Plan (the Plan). Under the terms
of the Plan, the Company matches 50% of employee's voluntary contributions
up to a maximum of 6% of each participant's earnings. The Company's
matching contributions to the Plan for the year ended December 31, 1996,
1997 and 1998 were $252,668, $256,880 and $446,000, respectively.
12. STOCK OPTIONS
During the year ended December 31, 1998, Tandem Stock Option / Stock
Appreciation Rights to acquire 682,000 shares at an exercise price of
$10.50 were granted to certain officers and employees of the Company under
the Company's stock option plan. During this same period, no options were
exercised.
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise
price.
FASB Statement 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income and earnings
per share as if compensation cost for the Company's stock option plans had
been determined in accordance with the fair value based method prescribed
in FASB Statement 123. The Company estimates the fair value of each stock
option, using the Black Scholes method, at the weighted-average assumption
used for grants in fiscal 1998 dividend yield of zero percent; expected
volatility of 21.5%; risk free interest rate of 6%; and expected life of 10
years.
The weighted average fair value of options granted during the year ended
December 31, 1998 was $5.23.
Under the accounting provisions of FASB Statement 123, the Company's net
income and net income per share for the year ended December 31, 1998 would
have been reduced to the pro forma amounts indicated below:
Year ended December 31, 1998
- ---------------------------- -----------
Net income
As reported $12,795,000
Pro forma $ 9,228,000
Basic net income per share
As reported $ 1.16
Pro forma $ .84
Diluted net income per share
As reported $ 1.16
Pro forma $ .84
============================ ===========
13. QUARTERLY RESULTS (UNAUDITED)
Quarterly results for the years ended December 31, 1997 and 1998 in
thousands, except per share amounts.
1997 FIRST SECOND THIRD FOURTH
- -------------------------- ------- -------- -------- --------
Revenues $46,241 $ 54,556 $ 61,507 $ 53,056
Operating income $ 2,676 $ 3,206 $ 4,005 $ 2,457
Net income $ 1,476 $ 1,809 $ 2,064 $ 1,306
Basic earnings per share $ 0.16 $ 0.20 $ 0.22 $ 0.14
Diluted earnings per share $ 0.16 $ 0.20 $ 0.22 $ 0.14
1998
- --------------------------
Revenues $69,195 $103,057 $112,907 $121,194
Operating income $ 2,701 $ 5,116 $ 6,051 $ 7,302
Net income $ 1,276 $ 3,178 $ 3,841 $ 4,500
Basic earnings per share $ 0.13 $ 0.28 $ 0.33 $ 0.39
Diluted earnings per share $ 0.13 $ 0.28 $ 0.33 $ 0.39
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore the sum of per share amounts for the quarters may
not agree with the per share amounts for the year.
SCHEDULE I
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
ASSETS
1997 1998
------- -------
Cash and short-term investments $ 11 $ 359
Investments in and equity in net assets of subsidiaries 55,690 90,471
Other assets 1,793 12
------- -------
Total assets $57,494 $90,842
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 1,803 $ 730
------- -------
Total liabilities 1,803 730
------- -------
STOCKHOLDERS' EQUITY
Common stock 92 115
Additional paid in capital 52,165 73,768
Retained earnings 3,434 16,229
------- -------
Total Stockholders' Equity 55,691 90,112
------- -------
Total Liabilities and Stockholders' Equity $57,494 $90,842
======= =======
SCHEDULE I
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)
1996 1997 1998
------- --------- -------
Equity in earnings of subsidiaries $ 6,332 $ 6,655 $13,091
Other expenses -0- $ -0- $ 296
------- --------- -------
Net income $ 6,332 $ 6,655 $12,795
======= ========= =======
SCHEDULE I
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)
1996 1997 1998
--------- ----------- ---------
Cash flows from operating activities:
Net income $ 6,332 $ 6,655 $ 12,795
Adjustments to reconcile net income to cash from operating
activities:
Change in other assets (470) (446) 1,781
Change in other liabilities 470 456 (1,073)
Equity in undistributed earnings of subsidiaries (6,332) (6,655) (13,091)
--------- ----------- ---------
Net cash provided by operating activities -- 10 412
--------- ----------- ---------
Cash flows from investing activities:
Dividends from subsidiaries 9,463 4,810 ---
Capital contributions to subsidiaries (1,247) (181) (21,690)
--------- ----------- ---------
Net cash provided by (used in) investing activities 8,216 4,629 (21,690)
Cash flows from financing activities:
Net proceeds from initial public offering of common stock -- -- 18,446
Net proceeds from underwriters over-allotment option -- -- 2,879
Capital contributions from parent 1,247 181 301
Dividends paid to parent (9,463) (4,810) (---)
--------- ----------- ---------
Net cash provided by (used in) financing activities (8,216) (4,629) 21,626
Net change in cash and short-term investments -- 10 348
Cash at the beginning of the year 1 1 11
--------- ----------- ---------
Cash at the end of the year $ 1 $ 11 $ 359
========= =========== =========
SCHEDULE II
NEWMARK HOMES CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS (WARRANTY RESERVES)
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)
ADDITIONS
-----------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING OF COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------- ------------ ---------- ----------- -------------- ----------
December 31, 1996 560 1,130 --- (1,121) 569
December 31, 1997 569 1,643 --- (1,331) 881
December 31, 1998 881 2,138 --- (1,870) 1,149
SCHEDULE III
NEWMARK HOMES CORP. AND SUBSIDIARIES
PROPERTIES AND ACCUMULATED DEPRECIATION
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COSTS ACQUISITION
------------------- ----------------------
BUILDINGS
AND CARRYING
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COSTS
- --------------------- ------------ ----- ------------ ------------ --------
PROPERTIES:
Landmark Retail Tract
Dallas, TX -0- $ 325 -0- -0- -0-
===================== ============ ===== ============ ============ ========
TOTAL COSTS
-------------------------------------
DATE OF
BUILDINGS AND TOTAL ACCUMULATED ACQUIS.
DESCRIPTION LAND IMPROVEMENTS DEPRECIATION CONSTR.
- ----------------------- ----- -------------- -------------- ----------------- -----------
PROPERTIES:
Landmark Retail Tract
Dallas, TX $ 325 $ 195 $ 520 $ -0- 1984
======================= ===== ============== ============== ================= ===========
NOTES:
The following table reconciles the historical cost of the Company's
properties from January 1, 1996 to December 31, 1998:
FOR THE YEAR ENDED
DECEMBER 31,
1996 1997 1998
Balance, beginning of period $ 5,631 $ 325 $ 463
Additions during period (acquisition, improvements, etc.) 1,378 138 57
Deductions during period (cost of real estate sold, etc.) (6,684) -0- -0-
-------- ----- -----
Balance, close of period $ 325 $ 463 $ 520
========================================================= ======== ===== =====