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, 1999
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: 000-23677
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, TX 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, par value $.01 11,500,000 shares as of August 3, 1999
2
NEWMARK HOMES CORP.
INDEX
Page
PART I. Financial Information 3
ITEM 1. Financial Statements 3
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
Notes to the Condensed Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
ITEM 3. Changes in Information About Market Risk - None. 16
PART II. Other Information 16
ITEM 1. Legal Proceedings - None. 16
ITEM 2. Changes in Securities - None. 16
ITEM 3. Defaults Upon Senior Securities - None 16
ITEM 4. Submission of Matters to a Vote of Security Holders - None. 16
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, 1999.
Signatures 17
3
Part I. Financial Information
Item 1. Financial Statements
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS December 31, June 30,
1998 1999
---------------- ----------------
(unaudited)
Cash $ 5,794 $ 7,781
Receivables.......................................................... 6,967 8,982
Inventory............................................................ 185,247 223,179
Investment in unconsolidated subsidiaries ........................... 490 475
Other assets, net ................................................... 9,196 10,138
Goodwill, net of accumulated amortization of $5,173 and $5,888 in
1998 and 1999, respectively .................................... 37,644 36,930
--------------- ----------------
Total assets....................................... $ 245,338 $ 287,485
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Construction loans payable .......................................... $ 106,839 $ 140,859
Acquisition notes payable............................................ 12,341 9,873
Other payables to affiliates ........................................ 2,442 78
Accounts payable and accrued liabilities............................. 22,935 25,807
Other liabilities ................................................... 10,669 14,570
---------------- ----------------
Total liabilities.................................. 155,226 191,187
---------------- ----------------
Stockholders'equity:
Common stock -- $.01 par value; 30,000,000 shares authorized,
11,500,000 shares issued and outstanding ............... 115 115
Additional paid-in capital...................................... 73,768 73,768
Retained earnings............................................... 16,229 22,415
---------------- ----------------
Total stockholders'equity.......................... 90,112 96,298
---------------- ----------------
Total liabilities and stockholders'equity.......... $ 245,338 $ 287,485
================ ================
<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 share and per share amounts)
(unaudited)
Three Months
Ended June 30,
---------------
1998 1999
---- ----
Revenues............................................................. $ 103,057 $ 130,380
Cost of sales ...................................................... 86,381 110,228
-------------- -------------
Gross profit......................................................... 16,676 20,152
Equity in earnings from unconsolidated subsidiaries ................ 232 198
Selling, general and administrative expenses......................... (11,007) (12,863)
Depreciation and amortization........................................ (785) (930)
-------------- -------------
Operating income ............................................... 5,116 6,557
Other income (expense):
Interest expense ............................................... (314) (412)
Other income, net .............................................. 287 313
-------------- -------------
Income before income taxes ................................ 5,089 6,458
Income taxes ........................................................ 1,911 2,267
-------------- -------------
Net income................................................. $ 3,178 $ 4,191
============== =============
Earnings per common share:
Basic........................................................... $ .28 $ .36
============== =============
Diluted ........................................................ $ .27 $ .36
============== =============
Weighted average number of shares of common stock equivalents outstanding:
Basic .......................................................... 11,493,407 11,500,000
============== =============
Diluted ........................................................ 11,607,074 11,500,000
============== =============
<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 share and per share amounts)
(unaudited)
Six Months
Ended June 30,
-------------------
1998 1999
---- ----
Revenues............................................................. $ 172,252 $ 223,212
Cost of sales ...................................................... 144,121 188,567
-------------- -------------
Gross profit......................................................... 28,131 34,645
Equity in earnings from unconsolidated subsidiaries ................ 340 321
Selling, general and administrative expenses......................... (19,144) (23,187)
Depreciation and amortization........................................ (1,510) (1,770)
-------------- -------------
Operating income ............................................... 7,817 10,009
Other income (expense):
Interest expense ............................................... (1,139) (815)
Other income, net .............................................. 453 427
-------------- -------------
Income before income taxes ................................ 7,131 9,621
Income taxes ........................................................ 2,676 3,435
-------------- -------------
Net income ................................................ $ 4,455 $ 6,186
============== =============
Earnings per common share:
Basic ........................................................... $ .42 $ .54
============== =============
Diluted ......................................................... $ .42 $ .54
============== =============
Weighted average number of shares of common stock equivalents outstanding:
Basic ........................................................... 10,562,983 11,500,000
============== =============
Diluted ......................................................... 10,620,131 11,500,000
============== =============
<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, 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
=========== ============ ============ ===========
Balance, December 31, 1998..................... $ 115 $ 73,768 $ 16,229 $ 90,112
Net income..................................... - - 6,186 6,186
----------- ------------ ------------ -----------
Balance, June 30, 1999......................... $ 115 $ 73,768 $ 22,415 $ 96,298
=========== ============ ============ ===========
<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 1999
-------------- --------------
Cash flows from operating activities:
Net income............................................................ $ 4,455 $ 6,186
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization....................................... 1,510 1,770
Net (gain) loss on sale of property, premises and equipment......... 11 (35)
Equity in earnings from unconsolidated subsidiaries................. (340) (321)
Changes in operating assets and liabilities, net of effects
from purchase of Westbrooke Communities, Inc.:
Inventory and land held for development, net.................... ( 29,877) (37,412)
Receivables..................................................... (4,637) (2,015)
Other assets ................................................... 1,447 (1,482)
Payable to affiliates........................................... (1,324) (2,364)
Accounts payable and accrued liabilities........................ 71 2,872
Other liabilities............................................... 7,736 3,901
-------------- --------------
Net cash used in operating activities ......................... (20,948) (28,900)
-------------- --------------
Cash flows from investing activities:
Purchases of property, premises and equipment ........................ (624) (1,130)
Proceeds from sales of property, premises and equipment .............. - 129
Increase in goodwill ................................................. (438) -
Cash acquired in purchase of Westbooke Communities, Inc............... 3,618 -
Investment in unconsolidated subsidiaries ............................ - (50)
Distributions from unconsolidated subsidiaries ....................... 411 386
-------------- --------------
Net cash provided by (used in) investing activities ............ 2,967 (665)
-------------- --------------
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 -
Proceeds from advances on construction loans payable ................. 118,086 175,400
Principal payments on construction loans payable ..................... (105,991) 141,380)
Principal payments on acquisition notes payable....................... (12,896) (2,468)
-------------- --------------
Net cash provided by financing activities....................... 20,825 31,552
-------------- --------------
Increase in cash ....................................................... 2,844 1,987
Cash, beginning of period ............................................... 746 5,794
-------------- --------------
Cash, end of period ..................................................... $ 3,590 $ 7,781
============== ==============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest ...................................................... $ 4,492 $ 6,419
============== ==============
Income taxes .................................................. $ 1,964 $ 5,879
============== ==============
<FN>
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, Inc. (PRG) 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,
Tennessee and North Carolina -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 included in the Company's December 31, 1998 Annual Report on Form 10-K.
Earnings per share
Basic earnings per share is computed by dividing earnings attributable to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
The following tables reconcile the computation of basic and diluted EPS for the
three months ended June 30, 1998 and 1999 and for the six months ended June 30,
1998 and 1999.
9
Three Months Ended June 30, 1998 Three Months Ended June 30, 1999
------------------------------------------- ------------------------------------------
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 $4,191,000 11,500,000 $.36
============ ============
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 $4,191,000 11,500,000 $.36
============== ================= ============ =============== =============== ============
Six Months Ended June 30, 1998 Six Months Ended June 30, 1999
--------------------------------------------- --------------------------------------------
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 $6,186,000 11,500,000 $.54
============ ==========
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 $6,186,000 11,500,000 $.54
============== ================= ============ =============== =============== ==========
10
Note 2. Inventory
The inventory as of December 31, 1998 and June 30, 1999 consists of the
following:
Carrying Value
Number of Homes (in thousands)
---------------------------------- ------------------------------------
December 31, June 30, 1999 December 31, 1998 June 30, 1999
1998
---------------- -------------- ------------------ --------------
Completed .................................. 118 87 $ 23,224 $ 18,170
Under construction ......................... 829 981 98,692 124,995
Models ..................................... 74 83 15,401 19,964
Residential lots............................. - - 47,930 60,050
---------------- -------------- ------------------ --------------
Total 1,021 1,151 $ 185,247 $223,179
================ ============== ================== ==============
Note 3. 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 1999 1998 1999
-------------- ------------- -------------- --------------
Interest capitalized, beginning of period ...... $ 5,383 $ 6,139 $ 2,572 $ 5,516
Capitalized interest acquired in purchase of
Westbrooke Communities, Inc............... - - 2,597 -
Interest incurred .............................. 2,578 3,096 5,169 5,820
Less interest included in:
Cost of sales ............................ 2,105 3,009 3,657 4,707
Other income (expense) ................... 314 412 1,139 815
-------------- ------------- -------------- --------------
Interest capitalized, end of period ............ 5,542 $ 5,814 $ 5,542 $ 5,814
============== ============= ============== ==============
Note 4. 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.
11
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 1999 1998 1999
---- ---- ---- ----
Houston 170 109 128 182
Austin 123 116 101 129
Dallas/Ft. Worth 58 17 40 36
Nashville 14 10 6 21
Charlotte/
Greensboro - 4 - -
Ft. Lauderdale/
Palm Beach/Miami 233 271 208 123
--- --- --- ---
Total 598 527 483 491
=== === === ===
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 1999 1998 1999 1998 1999
---- ---- ---- ---- ---- ----
Houston 332 300 201 303 228 172
Austin 266 324 187 247 164 261
Dallas/Ft. Worth 96 85 74 71 64 71
Nashville 20 36 6 36 14 22
Charlotte/
Greensboro - 5 - - - 5
Ft. Lauderdale/
Palm Beach/Miami 438 431 346 248 459 498
--- --- --- --- --- ---
Total 1,152 1,181 814 905 929 1,029
===== ===== === === === =====
12
As a Percentage of Revenue As a Percentage of Revenue
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------------- ----------------------------------
1998 1999 1998 1999
---- ---- ---- ----
Cost of sales 83.8% 84.5% 83.7% 84.5%
Gross profit 16.2% 15.5% 16.3% 15.5%
Selling, general and administrative expenses 10.7% 9.9% 11.1% 10.4%
Income before income taxes 4.9% 5.0% 4.1% 4.3%
Income taxes (1) 37.6% 35.1% 37.5% 35.7%
Net income 3.1% 3.2% 2.6% 2.8%
<FN>
(1) As a percent of income before income taxes.
</FN>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998.
Revenues for the three months ended June 30, 1999, increased by 26.5%, to $130.4
million, from $103.1 million for the comparable period of 1998. The number of
homes closed by the Company increased by 1.7% to 491 homes in the three months
ended June 30, 1999 from 483 homes in the same period of 1998. Revenue from land
sales for the three months ended June 30, 1999 increased to $8.7 million from
$.6 million for the comparable period of 1998.
The average selling price of homes closed in the three months ended June 30,
1999 was $247,885, an increase of 16.7% from the $212,362 average selling price
in the comparable period of 1998.
New net sales contracts decreased 11.9%, to 527 homes for the three months ended
June 30, 1999, from 598 homes for the three months ended June 30, 1998. The
dollar amount of new net sales contracts decreased 10.2%, to $116.6 million.
The Company was operating in 69 subdivisions at June 30, 1999, compared to 58
subdivisions at June 30, 1998. At June 30, 1999, the Company's backlog of sales
contracts was 1,027 homes, a 11% increase over comparable figures at June 30,
1998.
Cost of sales increased by 27.6%, to $110.2 million in the three months ended
June 30, 1999, from $86.4 million in the comparable period of 1998. The increase
was attributable to the increase in revenues. Cost of land sales for the three
months ended June 30, 1999 increased to $7.5 million from $.4 million for the
comparable period of 1998. As a percentage of revenues, cost of sales for the
three months ended June 30, 1999 increased to 84.5% in 1999 from 83.8% in 1998.
Selling, general and administrative (SG&A) expense increased by 16.9%, to $12.9
million in the three months ended June 30, 1999, from $11.0 million in the
comparable period of 1998. As a percentage of revenues, SG&A expense decreased
slightly to 9.9% in 1999, from 10.7% in 1998. This increase was caused by the
expansion into the new markets of Nashville, Tennessee and Charlotte and
Greensboro, North Carolina as well as the expansion in the Company's Texas
markets as indicated by the 11% increase in the backlog at the end of June 1999
versus June 1998.
Interest expense amounted to $412,000 in the three months ended June 30, 1999,
compared to $314,000 in the comparable period of 1998. The Company follows a
policy of capitalizing interest only on inventory under construction or
development. During the three months ended June 30, 1999 and 1998, the Company
expensed a portion of interest incurred and other financing costs on those
completed homes held in inventory. 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 35.1% for the three months ended June 30, 1999, compared to
37.6% for the three months ended June 30, 1998. The decrease is attributable to
a state income tax benefit for Adler. The Company is included in the
consolidated federal income tax return of PUSA. Under a tax allocation agreement
with PUSA, 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 PUSA 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 $2.3 million for the three months ended June 30, 1999
compared to $1.8 million for the three months ended June 30, 1998.
Net income increased by 31.9% to $4.2 million in the three months ended June 30,
1999, from $3.2 million in the comparable period of 1998. The increase was
attributable to the increase in revenues.
13
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998.
Revenues for the six months ended June 30, 1999, increased by 29.6%, to $223.2
million, from $172.3 million for the comparable period of 1998. The number of
homes closed by the Company increased by 11.2% to 905 homes in the six months
ended June 30, 1999 from 814 homes in the same period of 1998. Revenue from land
sales for the six months ended June 30, 1999 increased to $9.2 million from $1.4
million for the comparable period of 1998.
The average selling price of homes closed in the six months ended June 30, 1999
was $236,456, an increase of 12.7% from the $209,891 average selling price in
the comparable period of 1998.
New net sales contracts increased 2.5%, to 1,181 homes for the six months ended
June 30, 1999, from 1,152 homes for the six months ended June 30, 1998. The
dollar amount of new net sales contracts increased 10.8% to $274.3 million.
Cost of sales increased by 30.8%, to $188.6 million in the six months ended June
30, 1999, from $144.1 million in the comparable period of 1998. The increase was
attributable to the increase in revenues. Cost of land sales for the six months
ended June 30, 1999 increased to $8.0 million from $.9 million for the
comparable period of 1998. As a percentage of revenues, cost of sales for the
six months ended June 30, 1999 increased to 84.5% in 1999 from 83.7% in 1998.
Selling, general and administrative (SG&A) expense increased by 21.1%, to $23.2
million in the six months ended June 30, 1999, from $19.1 million in the
comparable period of 1998. As a percentage of revenues, SG&A expense decreased
slightly to 10.4% in 1999, from 11.1% in 1998. This increase was caused by the
expansion into the new markets of Nashville, Tennessee and Charlotte and
Greensboro, North Carolina as well as the expansion in the Company's Texas
markets as indicated by the 11% increase in the backlog at the end of June 1999
versus June 1998.
Interest expense amounted to $815,000 in the six months ended June 30, 1999,
compared to $1,139,000 in the comparable period of 1998. The Company follows a
policy of capitalizing interest only on inventory under construction or
development. During the six months ended June 30, 1999 and 1998, the Company
expensed a portion of interest incurred 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 six months ended
June 30, 1999 compared to the six months ended June 30, 1998. 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 35.7% for the six months ended June 30, 1999, compared to 37.5%
for the six months ended June 30, 1998. The decrease is attributable to a state
income tax benefit for Adler. The Company is included in the consolidated
federal income tax return of PUSA. Under a tax allocation agreement with PUSA,
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
PUSA 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 $3.5 million for the six months ended June 30, 1999 compared to
$2.5 million for the six months ended June 30, 1998.
Net income increased by 38.9% to $6.2 million in the six months ended June 30,
1999, from $4.5 million in the comparable period of 1998. The increase was
attributable to the increase in revenues.
14
Financial Condition, Liquidity and Capital Resources
At June 30, 1999, the Company had available cash and cash equivalents of $7.8
million. Inventories (including finished homes and construction in progress,
developed residential lots and other land) at June 30, 1999, increased by $37.9
million from $185.2 at December 31, 1998, due to a general increase in business
activity and the expansion of operations in the newer market areas. Because of
the increased business activity and expansion of operations in the newer
markets, the Company's ratio of construction loans payable to total capital
assets increased to 61.6% at June 30, 1999, from 56.0% at December 31, 1998. The
equity to total assets ratio decreased during the six months, to 33.5% at June
30, 1999, from 36.7% at December 31, 1998.
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 and
through funds from earnings.
At June 30, 1999, the Company had unused lines of credit for construction loans
totaling approximately $280.5 million of which $20.9 million is available to
draw down.
The Company's 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, 1999, 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.
15
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 used 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 third quarter of calendar 1999. For those Programs that will not be
compliant by them, 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.
16
Item 3. Changes in Information About Market Risk
No disclosure required.
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities
No disclosure required.
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.
The registrant filed no reports on Form 8-K during the quarter ended
June 30, 1999.
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, 1999 By: /s/ Terry C. White
Date --------------------------------------
Terry C. White, Senior Vice President,
Chief Financial Officer, Treasurer and
Secretary