FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 1998
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to ___________
Commission file number: 333-42213
NEWMARK HOMES CORP.
(Exact name of Registrant as specified in its charter)
Nevada 76-0460831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Soldiers Field Drive
Sugar Land
Texas
77479
(Address of principal executive offices) (Zip code)
281-243-0100
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock 11,500,000 shares
2
NEWMARK HOMES CORP.
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statement of Operations 4
Condensed Consolidated Statement of Stockholders' Equity 6
Condensed Consolidated Statement of Cash Flows 7
Condensed Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 12
ITEM 3. CHANGES IN INFORMATION ABOUT MARKET RISK - None. 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None. 16
ITEM 2. CHANGE IN SECURITIES 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None. 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 16
SECURITY HOLDERS - None.
ITEM 5. OTHER INFORMATION - None. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
Exhibits
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K
The registrant filed no reports on Form 8-K
during the quarter ended June 30, 1998.
SIGNATURES 17
3
Part I. Financial Information
Item 1. Financial Statements
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
ASSETS June 30, 1998 December 31,
1997
-------------- -----------------
(unaudited)
Cash ................................................................ $ 3,590 $ 746
Receivables.......................................................... 7,906 1,729
Inventory............................................................ 174,776 103,010
Investment in unconsolidated subsidiaries ........................... 256 327
Other assets, net ................................................... 7,276 5,854
Goodwill, net of accumulated amortization of $4,473 and $3,773 in
1998 and 1997, respectively .................................... 37,444 27,547
============== =================
Total assets $ 231,248 $ 139,213
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Construction loans payable .......................................... $ 100,503 $ 66,100
Acquisition notes payable............................................ 16,026 -----
Other payables to affiliates ........................................ 451 1,775
Accounts payable and accrued liabilities............................. 20,076 10,963
Other liabilities ................................................... 12,420 4,684
-------------- -----------------
Total liabilities 149,476 83,522
-------------- -----------------
Stockholders' equity:
Common stock -- $.01 par value; 30,000,000 shares authorized,
9,200,000 at December 31, 1997, and 11,500,000
at June 30, 1998, issued and outstanding............................. 115 92
Additional paid-in capital........................................... 73,768 52,165
Retained earnings.................................................... 7,889 3,434
-------------- -----------------
Total stockholders' equity 81,772 55,691
============== =================
Total liabilities and stockholders' equity $ 231,248 $ 139,213
============== =================
<FN>
See accompanying notes to the condensed consolidated financial statements.
</FN>
4
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three Months
Ended June 30,
----------------
1998 1997
---- ----
Revenues.................................................. $ 103,057 $ 54,556
Cost of sales ........................................... 86,381 44,523
------- ------
Gross profit.............................................. 16,676 10,033
Equity in earnings from unconsolidated subsidiaries ..... 232 75
Selling, general and administrative expenses.............. (11,007) (6,488)
Depreciation and amortization............................. (785) (414)
---- -----
Operating income .................................... 5,116 3,206
Other income (expense):
Interest expense .................................... (314) (402)
Other income, net ................................... 287 167
--- ---
Income before income taxes ..................... 5,089 2,971
Income taxes ............................................. 1,911 1,162
----- -----
Net income ..................................... $ 3,178 $ 1,809
===== =======
Earnings per common share:
Basic $ .28 $ .20
===== =====
Diluted $ .27 $ .20
===== =====
Weighted average number of shares of common stock
equivalents outstanding:
Basic 11,493,407 9,200,000
========== =========
Diluted 11,607,074 9,200,000
========== =========
<FN>
See accompanying notes to the condensed consolidated financial statements.
</FN>
5
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Six Months
Ended June 30,
-----------------
1998 1997
---- ----
Revenues............................................................. $ 172,252 $ 100,797
Cost of sales ...................................................... 144,121 82,078
------- ------
Gross profit......................................................... 28,131 18,719
Equity in earnings from unconsolidated subsidiaries ................ 340 108
Selling, general and administrative expenses......................... (19,144) (12,133)
Depreciation and amortization........................................ (1,510) (813)
------- -----
Operating income ............................................... 7,817 5,881
Other income (expense):
Interest expense ............................................... (1,139) (823)
Other income, net .............................................. 453 336
--- ---
Income before income taxes ................................ 7,131 5,394
Income taxes ........................................................ 2,676 2,109
----- -----
Net income................................................. $ 4,455 $ 3,285
========= =========
Earnings per common share:
Basic $ .42 $ .36
===== =====
Diluted $ .42 $ .36
===== =====
Weighted average number of shares of common stock
equivalents outstanding:
Basic 10,562,983 9,200,000
========== =========
Diluted 10,620,131 9,200,000
========== =========
<FN>
See accompanying notes to the condensed consolidated financial statements.
</FN>
6
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(unaudited)
Additional
Common paid-in Retained
Stock Capital earnings Total
----------- ----------- --------- -----------
Balance, December 31, 1996 .................. $92 $42,415 $1,422 $43,929
Capital contribution......................... 124 124
Dividends paid ............................ (1,355) (1,355)
Net income................................... 3,285 3,285
=========== =========== ========= ===========
Balance, June 30, 1997....................... $92 $42,539 $3,352 $45,983
=========== =========== ========= ===========
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,
March 13, 1998............................... 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, April 3, 1998.... 3 2,876 2,879
Capital contribution......................... 301 301
Net income................................... 4,455 4,455
=========== =========== ========= ===========
Balance, June 30, 1998....................... $ 115 $73,768 $7,889 $81,772
=========== =========== ========= ===========
<FN>
See accompanying notes to the condensed consolidated financial statements.
</FN>
7
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months
Ended June 30,
1998 1997
-------------- -------------
Cash flows from operating activities:
Net income....................................................... $4,455 $3,285
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization.................................. 1,510 813
Net (gain) loss on sale of property, premises and equipment.... 11 10
Equity in earnings from unconsolidated subsidiaries............ (340) (108)
Changes in operating assets and liabilities, net of effects
from purchase of Westbrooke Communities Inc.
Inventory and land held for development, net............... ( 29,877) (6,279)
Receivables................................................ (4,637) (873)
Other assets .............................................. 1,447 (829)
Payable to affiliates...................................... (1,324) 389
Accounts payable and accrued liabilities................... 71 889
Other liabilities.......................................... 7,736 677
-------------- -------------
Net cash used in operating activities .................... (20,948) (2,026)
-------------- -------------
Cash flows from investing activities:
Proceeds from maturing certificate of deposit ----- 1,000
Purchases of property, premises and equipment ................... (624) (1,365)
Increase in Goodwill ............................................ (438) (40)
Cash acquired in purchase of Westbooke Communities, Inc.......... 3,618 ----
Investment in unconsolidated subsidiaries ----- (943)
Distributions from unconsolidated subsidiaries .................. 411 149
-------------- -------------
Net cash provided by (used in) investing activities ....... 2,967 (1,199)
-------------- -------------
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 .................................. 301 124
Dividends paid .................................................. ----- (1,355)
Proceeds from advances on construction loans payable ............ 118,086 75,664
Principal payments on construction loans payable ................ (105,991) (73,846)
Principal payments on acquisition notes payable.................. (12,896) -----
Proceeds from advances on notes payable to affiliate............. ----- 2,318
Principal payments on notes payable to affiliate ................ ----- (178)
-------------- -------------
Net cash provided by financing activities.................. 20,825 2,727
-------------- -------------
Increase (decrease) in cash ........................................ 2,844 (498)
Cash, beginning of period .......................................... 746 642
============== =============
Cash, end of period ................................................ $3,590 $144
============== =============
Supplemental disclosures of cash flow information: Cash paid for:
Interest ...................................................... $4,492 $3,001
============== =============
Income taxes .................................................. $1,964 $1,961
============== =============
<FN>
See accompanying Note 2 for supplemental disclosure of non-cash investing and
financing activities. See accompanying notes to the condensed consolidated
financial statements.
</FN>
8
Notes to the Condensed Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Newmark Homes Corp. and subsidiaries (the Company) is a majority-owned
subsidiary of Pacific Realty Group and ultimately a subsidiary of Pacific USA
Holdings Corp. (PUSA). The Company was formed in December 1994 to serve as a
real estate holding company.
The Company's primary subsidiaries are as follows:
Subsidiary Nature of Business
Newmark Home Corporation (Newmark) ......... Single-family residential homebuilding in Texas and
Tennessee - formed in 1983.
Westbrooke Communities, Inc. (Westbrooke)... Single-family residential homebuilding in
Florida - formed in 1976.
The Adler Companies, Inc. (Adler) .......... Single-family residential homebuilding in Florida -
formed in 1990.
Pacific United Development Corporation
(PUDC)...................................... Residential lot development in Texas and Tennessee -
formed in 1993.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The accounting and reporting policies of the Company conform
to generally accepted accounting principles and general practices within the
homebuilding industry. All significant intercompany balances and transactions
have been eliminated in the consolidated financial statements.
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.
Interim presentation
The accompanying condensed consolidated financial statements have been prepared
by the Company and are unaudited. Certain information and footnote disclosures
normally included in financial statements presented in accordance with generally
accepted accounting principles have been omitted from the accompanying
statements. The Company's management believes the disclosures made are adequate
to make the information presented not misleading. However, the financial
statements should be read in conjunction with the financial statements and notes
thereto of the Company for the year ended December 31, 1997 which were a part of
the Company's Registration Statement on Form S-1 (Commission File No. 333-42213)
that was declared effective March 12, 1998.
9
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.
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.
The following tables reconcile the computation of basic and diluted EPS for the
three months ended June 30, 1998 and 1997 and for the six months ended June 30,
1998 and 1997.
Three Months Ended June 30, 1998 Three Months Ended June 30, 1997
------------------------------------------- -------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ----------------- ------------ --------------- --------------- ------------
Basic EPS
Income available to
common shareholders $3,178,000 11,493,407 $.28 $1,809,000 9,200,000 $.20
============ ============
Effect of Dilutive
Securities
1998 Tandem Stock
Option Plan ----- 113,667 ----- -----
Diluted EPS
Income available to
common shareholders
+ assumed conversions $3,178,000 11,607,074 $.27 $1,809,000 9,200,000 $.20
============ ============
Six Months Ended June 30, 1998 Six Months Ended June 30, 1997
--------------------------------------------- ---------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ----------------- ------------ --------------- --------------- -----------
Basic EPS
Income available to
Common shareholders $4,454,000 10,562,983 $.42 $3,285,000 9,200,000 $.36
============ ===========
Effect of Dilutive
Securities
1998 Tandem Stock
Option Plan ----- 57,148 ----- -----
-------------- ----------------- --------------- ---------------
Diluted EPS
Income available to
common shareholders
+assumed conversions $4,454,000 10,620,131 $.42 $3,285,000 9,200,000 $.36
============ ===========
10
NOTE 2. ACQUISITIONS
Effective January 1, 1998, the Company acquired all of the outstanding stock of
Westbrooke and its affiliated entities, a single-family home builder in South
Florida. The initial purchase price for Westbrooke was $18.9 million in the form
of promissory notes. ($12.3 million of notes payable bearing interest at 6.45%
payable annually over five years and a $6.6 million note payable bearing
interest at 9.0% due on or before one year from closing.) 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.
The following unaudited pro forma financial information for the three months and
six months ended June 30, 1997 is presented as if the Westbrooke acquisition had
occurred on January 1, 1997 (dollars in thousands). This 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.
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
------------- -------------
Revenues.......................... $77,720 $138,511
Cost of sales ................... 64,763 114,991
------ -------
Gross profit...................... 12,957 23,520
------ ------
Net income $ 2,301 $ 3,787
======= =======
Earnings per common share:
Basic $.25 $.41
==== ====
Weighted average number of
shares of common
stock equivalents outstanding:
Basic 9,200,000 9,200,000
========= =========
NOTE 3. INVENTORY
The inventory as of June 30, 1998 and December 31, 1997 consists of the
following:
Carrying value
Number of homes (in thousands)
------------------------------ ------------------------------
June 30, December June 30, December 31,
1998 31, 1997 1998 1997
------------- ------------- ------------ --------------
Completed .................................. 122 90 $24,899 $18,564
Under construction ......................... 943 444 97,933 48,352
Models ..................................... 90 40 17,722 8,490
Residential lots............................. ----- ----- 33,753 27,141
Land held for development.................... ----- ----- 469 463
============= ============= ============ ==============
Total 1,155 574 $174,776 $103,010
============= ============= ============ ==============
11
NOTE 4. CAPITALIZED INTEREST
A summary of interest capitalized in inventory is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -- ------------------------
1998 1997 1998 1997
------------ ----------- ---------- ----------
Interest capitalized, beginning of period .... $5,383 $1,747 $2,572 $1,494
Capitalized interest acquired in purchase of
Westbrooke Communities, Inc............. ----- ----- 2,597 -----
Interest incurred ............................ 2,578 1,569 5,169 3,015
Less interest included in:
Cost of sales .......................... 2,105 847 3,657 1,619
Other (income) expense ................. 314 402 1,139 823
------------ ----------- -------- -------
Interest capitalized, end of period .......... $5,542 $2,067 $5,542 $2,067
============ =========== ========== ==========
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain pending or threatened litigation and other
claims. Management, after review and consultation with legal counsel, believes
the Company has meritorious defenses to these matters and that any potential
liability from these matters would not materially affect the Company's
consolidated financial statements.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
This Quarterly Report on Form 10-Q may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth below.
RESULTS OF OPERATIONS
The following tables set forth certain operating and financial data for the
Company:
New sales contracts,
net of cancellations Home closings
---------------------
----------------------
Three Months Three Months
Ended June 30, Ended June 30,
--------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
Houston 170 104 128 95
Austin 123 75 101 87
Dallas 58 38 40 38
Nashville 14 0 6 0
South Florida 233 20 208 29
--- -- --- --
Total 598 237 483 249
=== === === ===
New sales contracts, Homes in
net of cancellations Home closings sales backlog
--------------------- ---------------------- ----------------------
Six Months Six Months As of
Ended June 30, Ended June 30, June 30,
--------------------- ---------------------- ----------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Houston 332 211 201 166 228 115
Austin 226 178 187 160 164 90
Dallas 96 74 74 64 64 38
Nashville 20 0 6 0 14 0
South Florida 438 51 346 74 459 74
--- -- --- -- --- --
Total 1,152 514 814 464 929 317
===== === === === === ===
As a Percentage of Revenue As a Percentage of Revenue
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------------ ----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Cost of sales 83.8% 81.6% 83.7% 81.4%
Gross profit 16.2% 18.4% 16.3% 18.6%
Selling, general and administrative expenses 10.7% 11.9% 11.1% 12.0%
Income before income taxes 4.9% 5.4% 4.1% 5.3%
Income taxes (1) 37.5% 39.1% 37.5% 39.1%
Net income 3.1% 3.3% 2.6% 3.3%
<FN>
(1) As a percent of income before income taxes.
</FN>
13
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997.
Revenues for the three months ended June 30, 1998, increased by 88.9%, to $103.1
million, from $54.6 million for the comparable period of 1997. The number of
homes closed by the Company increased by 94% to 483 homes in the three months
ended June 30, 1998 from 249 homes in the same period of 1997. The increases in
both revenues and homes closed were due in part to the acquisition of Westbrooke
in January 1998. In the three months ended June 30, 1998, Westbrooke closed 176
homes, with revenues totaling $30.0 million. Westbrooke comprised 36.4% of the
homes closed in the period, and 30.0% of the revenues generated. Excluding
Westbrooke, revenues increased by 32.2%, to $72.1 million in the three months
ended June 30, 1998.
The average selling price of homes closed in the three months ended June 30,
1998 was $212,362, a decrease of 1.8% from $216,209 selling price in the
comparable period of 1997. Westbrooke's average selling price was $175,882.
Excluding Westbrooke, the average selling price for homes closed in the three
months ending June 30, 1998 was $233,275, an increase of 7.9%.
New net sales contracts increased 152%, to 598 homes for the three months ended
June 30, 1998, from 237 homes for the three months ended June 30, 1997. The
dollar amount of new net sales contracts increased 159.1%, to $129.9 million.
Westbrooke had 172 home sales contracts during the current period. Excluding
Westbrooke, sales contracts were 448 homes in the current three-month period, an
89% increase over 1997.
The Company was operating in 58 subdivisions at June 30, 1998, compared to 45
subdivisions at June 30, 1997. At June 30, 1998, the Company's backlog of sales
contracts was 929 homes, a 193.1% increase over comparable figures at June 30,
1997. At June 30, 1998, Westbrooke had 337 homes in sales backlog. Excluding
Westbrooke, the sales backlog at June 30, 1998, was 592 homes, an 86.8% increase
over 1997.
Cost of sales increased by 94.0%, to $86.4 million in the three months ended
June 30, 1998, from $44.5 million in the comparable period of 1997. The increase
was attributable to the increase in revenues. As a percentage of revenues, cost
of sales for the quarter increased to 83.8% in 1998 from 81.6 % 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 will carry 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 82.2% in 1998 from 81.6% in 1997.
Selling, general and administrative (SG&A) expense increased by 69.7%, to $11.0
million in the three months ended June 30, 1998, from $6.5 million in the
comparable period of 1997. As a percentage of revenues, SG&A expense decreased
slightly to 10.7% in 1998, from 11.9% in 1997. Excluding Westbrooke, SG&A
expense increased by 41.8% to $9.2 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 32.2% increase in revenues second quarter 1998 and
the 86.8% increase in the backlog at the end of June 1998 versus June 1997. Both
numbers exclude Westbrooke's results.
Interest expense amounted to $314,000 in the three months ended June 30, 1998,
compared to $402,000 in the comparable period of 1997. The Company follows a
policy of capitalizing interest only on inventory under construction or
development. During the three months ended June 30, 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 quarter ending
June 30, 1998 compared to the quarter ending June 30, 1997. Capitalized interest
and other financing costs are included in cost of sales at the time of home
closings.
The Company's provision for income taxes decreased as a percentage of earnings
before taxes to 37.5% for the three months ended June 30, 1998, compared to
39.1% for the three months ended June 30, 1997. Under a 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 $1,911,000 for the three months
ended June 30, 1998 compared to $1,162,000 for the three months ended June 30,
1997.
Net income increased by 75.7% to $3.2 million for the three months ending June
30, 1998 from $1.8 million for the corresponding period in 1997. Westbrooke
comprised 40.3% of the net income for the three months ending June 30, 1998.
14
Six months Ended June 30, 1998 Compared to Six months Ended June 30, 1997.
Revenues for the six months ended June 30, 1998, increased by 70.9%, to $172.3
million, from $100.8 million for the comparable period of 1997. The number of
homes closed by the Company increased by 75.4% to 814 homes in the six months
ended June 30, 1998 from 464 homes in the same period of 1997. The increases in
both revenues and homes closed were due in part to the acquisition of Westbrooke
in January 1998. In the six months ended June 30, 1998, Westbrooke closed 297
homes, with revenues totaling $51.2 million. Westbrooke comprised 36.5% of the
homes closed in the period, and 29.7% of the revenues generated. Excluding
Westbrooke, revenues increased by 20.1%, to $121.0 million in the six months
ended June 30, 1998.
The average selling price of homes closed in the six months ended June 30, 1998
was $209,891, a decrease of 2.0% from $214,271 selling price in the comparable
period of 1997. Westbrooke's average selling price was $172,509. Excluding
Westbrooke, the average selling price for homes closed in the six months ending
June 30, 1998 was $231,366, an increase of 8.0%.
New net sales contracts increased 124.1%, to 1152 homes for the six months ended
June 30, 1998, from 514 homes for the six months ended June 30, 1997. The dollar
amount of new net sales contracts increased 129.3%, to $247.6 million.
Westbrooke had 322 home sales contracts during the current period. Excluding
Westbrooke, sales contracts were 830 homes in the current six-month period, a
61.5% increase over 1997.
Cost of sales increased by 75.6%, to $144.1 million in the six months ended June
30, 1998, from $82.1 million in the comparable period of 1997. The increase was
attributable to the increase in revenues. As a percentage of revenues, cost of
sales for the quarter increased to 83.7% 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 will carry 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 82.0% in 1998 from 81.4% in 1997.
Selling, general and administrative (SG&A) expense increased by 44.2%, to $19.1
million in the six months ended June 30, 1998, from $12.1 million in the
comparable period of 1997. As a percentage of revenues, SG&A expense decreased
slightly to 11.1% in 1998, from 12.0% in 1997. Excluding Westbrooke SG&A,
expense increased by 30.5% to $15.8 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 20% increase in revenues and the 61% increase in the
backlog, excluding Westbrooke, at the end of June 1998 versus June 1997.
Interest expense amounted to $1,139,000 in the six months ended June 30, 1998,
compared to $823,000 in the comparable period of 1997. The Company follows a
policy of capitalizing interest only on inventory under construction or
development. During the six months ended June 30, 1998 and 1997, the Company
expensed a portion of incurred interest and other financing costs of finished
homes. Capitalized interest and other financing costs are included in cost of
sales at the time of home closings.
The Company's provision for income taxes decreased as a percentage of earnings
before taxes to 37.5% for the six months ended June 30, 1998, compared to 39.1%
for the six months ended June 30, 1997. Under a 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 $2,676,000 for the six months ended June 30,
1998 compared to $2,109,000 for the six months ended June 30, 1997.
Net income increased by 35.6% to $4.5 million for the six months ending June 30,
1998 from $3.3 million for the corresponding period in 1997. Westbrooke
comprised $33.9% of the net income for the six months ending June 30, 1998.
15
Financial Condition, Liquidity and Capital Resources
At June 30, 1998, the Company had available cash and cash equivalents of $3.6
million. Inventories (including finished homes and construction in progress,
developed residential lots and other land) at June 30, 1998, increased by $71.8
million from December 31, 1997, due to a general increase in business activity;
the acquisition of Westbrooke and the expansion of operations in the newer
market areas. Because a portion of the net proceeds from the initial public
offering was used to repay a portion of the outstanding balances under the
Company's construction credit facilities, the Company's ratio of construction
loans payable to total capital assets decreased to 56.3% at June 30, 1998, from
62.5% at December 31, 1997. The equity to total assets ratio decreased during
the six months, to 35.4% at June 30, 1998, from 40% at December 31, 1997 due to
the acquisition of Westbrooke (see Note 2).
The Company's financing needs depend upon the results of its operations, sales
volume, inventory levels, inventory turnover, and acquisitions. The Company has
financed its operations through borrowings from financial institutions, through
funds from earnings, and, in 1998, from the sale of common stock.
At June 30, 1998, the Company had unused lines of credit for construction loans
totaling approximately $148.8 million of which $22.3 million is available to
draw down.
The Company's rapid growth requires significant amounts of cash. It is
anticipated that future home construction, lot and land purchases and
acquisitions will be funded through internally generated funds and new and
existing borrowing relationships. The Company continuously evaluates its capital
structure and, in the future, may seek to further increase secured debt and
obtain additional equity to fund ongoing operations as well as to pursue
additional growth opportunities.
Except for ordinary expenditures for the construction of homes and, to a limited
extent, the acquisition of land and lots for development and sale of homes, at
June 30, 1998, the Company had no material commitments for capital expenditures.
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
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 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.
MANAGEMENT INFORMATION SYSTEMS
The Company has conducted a review of its computer systems to identify how its
computer systems could be affected by the "Year 2000" issue. Based upon this
review, the Company believes that it has adequately addressed the Year 2000
issue, and that any further modifications to the Company's systems with respect
to the Year 2000 issue will not result in significant future capital
expenditures. There can be no assurance that the year 2000 issue will not
adversely effect the company or its business.
Item 3. Changes in Information About Market Risk
No disclosure required.
16
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities
Use Of Proceeds of Initial Public Offering:
The Company's Registration Statement on Form S-1 (Commission File No. 333-42213)
was declared effective March 12, 1998. Dain Rauscher Incorporated was the
managing underwriter.
The Company registered 2,000,000 shares of common stock at a price of $10.50 per
share and granted the underwriters an option to purchase up to an additional
300,000 shares of common stock solely to cover over-allotments at a price of
$10.50 per share.
On March 13, 1998 2,000,000 shares of common stock were issued at a price of
$10.50 per share and on April 3, 1998 300,000 shares of common stock were issued
under the Underwriters' over-allotment option at a price of $10.50 per share.
The expenses incurred in connection with the issuance and distribution of the
common stock for underwriting discounts and commissions, finders' fees, expenses
paid to and for underwriters and legal fees were $ 2,825,000.
The net proceeds from the sale of the shares of Common Stock offered by the
Company was $21,325,500 after the Underwriters' over-allotment option was
exercised and after deducting the underwriting discounts and commissions and
other offering expenses.
Of the net proceeds, the Company used $10.0 million to pay the bank loan
incurred by Westbrooke in connection with its acquisition by the Company. The
remaining balance of net proceeds was used to pay a portion of the outstanding
balances under the Company's construction credit facilities.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibit 27 - Financial Data Schedule.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEWMARK HOMES CORP.
August 3, 1998 By: /s/ Terry C. White
Date -------------------------------------
Terry C. White, Senior Vice President,
Chief Financial Officer, Treasurer
and Secretary