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 September 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 November 9, 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 10
ITEM 3. Changes in Information About Market Risk - None. 15
PART II. Other Information 15
ITEM 1. Legal Proceedings - None. 15
ITEM 2. Changes in Securities - None. 15
ITEM 3. Defaults Upon Senior Securities - None 15
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 16
Exhibit 27 - Financial Data Schedule 16
Reports on Form 8-K 16
Signatures 16
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 September 30, December 31,
1999 1998
---------------- ----------------
(unaudited)
Cash ................................................................ $ 6,021 $ 5,794
Receivables.......................................................... 10,387 6,967
Inventory............................................................ 240,977 185,247
Investment in unconsolidated subsidiaries ........................... 713 490
Other assets, net ................................................... 10,308 9,196
Goodwill, net of accumulated amortization of $6,245 and $5,173 in
1999 and 1998, respectively .................................... 36,572 37,644
---------------- ----------------
Total assets $ 304,978 $ 245,338
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Construction loans payable .......................................... $ 149,057 $ 106,839
Acquisition notes payable............................................ 9,873 12,341
Other payables to affiliates ........................................ 394 2,442
Accounts payable and accrued liabilities............................. 26,866 22,935
Other liabilities ................................................... 17,160 10,669
---------------- ----------------
Total liabilities.................................. 203,350 155,226
---------------- ----------------
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............................................... 27,745 16,229
---------------- ----------------
Total stockholders' equity......................... 101,628 90,112
---------------- ----------------
Total liabilities and stockholders' equity......... $ 304,978 $ 245,338
================ ================
<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 September 30,
-------------------
1999 1998
---- ----
Revenues............................................................. $ 126,745 $ 112,907
Cost of sales ...................................................... 103,951 93,900
---------------- ---------------
Gross profit......................................................... 22,794 19,007
Equity in earnings from unconsolidated subsidiaries ................ 195 262
Selling, general and administrative expenses......................... (13,574) (12,055)
Depreciation and amortization........................................ (1,010) (1,163)
---------------- ---------------
Operating income ............................................... 8,405 6,051
Other income (expense):
Interest expense ............................................... (466) (419)
Other income, net .............................................. 315 510
---------------- ---------------
Income before income taxes ................................ 8,254 6,142
Income taxes ........................................................ 2,924 2,301
---------------- ---------------
Net income $ 5,330 $ 3,841
================ ===============
Earnings per common share:
Basic $ .46 $ .33
================ ===============
Diluted $ .46 $ .33
================ ===============
Weighted average number of shares of common stock equivalents outstanding:
Basic 11,500,000 11,500,000
================ ===============
Diluted 11,500,000 11,613,667
================ ===============
<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)
Nine Months
Ended September 30,
-------------------
1999 1998
---- ----
Revenues............................................................. $ 349,957 $ 285,160
Cost of sales ...................................................... 292,518 238,022
-------------- --------------
Gross profit......................................................... 57,439 47,138
Equity in earnings from unconsolidated subsidiaries ................ 516 602
Selling, general and administrative expenses......................... (36,761) (31,199)
Depreciation and amortization........................................ (2,780) (2,673)
-------------- --------------
Operating income ............................................... 18,414 13,868
Other income (expense):
Interest expense ............................................... (1,281) (1,558)
Other income, net .............................................. 742 962
-------------- --------------
Income before income taxes ................................ 17,875 13,272
Income taxes ........................................................ 6,359 4,977
-------------- --------------
Net income $ 11,516 $ 8,295
============== ==============
Earnings per common share:
Basic $ 1.00 $ .76
============== ==============
Diluted $ 1.00 $ .76
============== ==============
Weighted average number of shares of common stock equivalents outstanding:
Basic 11,500,000 10,878,755
============== ==============
Diluted 11,500,000 10,954,949
============== ==============
<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, 1998......................... $ 115 $ 73,768 $ 16,229 $ 90,112
Net income......................................... - - 11,516 11,516
----------- ------------ ------------ -----------
Balance, September 30, 1999........................ $ 115 $ 73,768 $ 27,745 $101,628
=========== ============ ============ ===========
Balance, December 31, 1997 ........................ $ 92 $ 52,165 $ 3,434 $ 55,691
Initial public offering of common stock, net
of issuance of 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......................................... - - 8,295 8,295
----------- ------------ ------------ -----------
Balance, September 30, 1998........................ $ 115 $ 73,768 $ 11,729 $ 85,612
=========== ============ ============ ===========
<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)
Nine Months
Ended September 30,
-------------------
1999 1998
-------------- ----------------
Cash flows from operating activities:
Net income....................................................... $ 11,516 $ 8,295
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization.................................. 2,780 2,673
Net (gain) loss on sale of property, premises and equipment.... (35) 25
Equity in earnings from unconsolidated subsidiaries............ (516) (602)
Changes in operating assets and liabilities, net of effects
from purchase of Westbrooke Communities, Inc.:
Inventory and land held for development, net............... (55,211) (43,778)
Receivables................................................ (3,420) (4,128)
Other assets .............................................. (1,592) 1,666
Payable to affiliates...................................... (2,048) (710)
Accounts payable and accrued liabilities................... 3,932 1,547
Other liabilities.......................................... 6,490 7,710
-------------- ----------------
Net cash used in operating activities .................... (38,104) (27,302)
-------------- ----------------
Cash flows from investing activities:
Purchases of property, premises and equipment ................... (1,841) (1,544)
Proceeds from sales of property, premises and equipment.......... 129 ---
Increase in goodwill ............................................ --- (444)
Cash acquired in purchase of Westbooke Communities, Inc.......... --- 3,618
Investment in unconsolidated subsidiaries (348) ---
Distributions from unconsolidated subsidiaries .................. 641 668
-------------- ----------------
Net cash provided by (used in) investing activities ....... (1,419) 2,298
-------------- ----------------
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 ............ 263,707 207,685
Principal payments on construction loans payable................. (221,489) (188,536)
Principal payments on acquisition notes payable.................. (2,468) (13,381)
-------------- ----------------
Net cash provided by financing activities.................. 39,750 27,394
-------------- ----------------
Increase in cash .................................................. 227 2,390
Cash, beginning of period .......................................... 5,794 746
-------------- ----------------
Cash, end of period ................................................ $ 6,021 $ 3,136
============== ================
Supplemental disclosures of cash flow information:
Cash paid for:
Interest ...................................................... $ 9,494 $ 6,876
============== ================
Income taxes .................................................. $ 8,481 $ 6,391
============== ================
<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 Residential lot development in Texas and Tennessee
.....(PUDC) -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 September 30, 1999 and 1998 and for the nine months ended
September 30, 1999 and 1998.
9
Three Months Ended September 30, 1999 Three Months Ended September 30, 1998
--------------------------------------------- ---------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ----------------- -------------- --------------- --------------- ---------------
Basic EPS
Income available to
common shareholders $5,330,000 11,500,000 $.46 $3,84100 11,500,000 $.33
============== ===============
Effect of Dilutive Securities
1998 Tandem Stock
Option Plan ----- ----- ----- 113,667
-------------- ----------------- --------------- ---------------
Diluted EPS
Income available to
common shareholders +
assumed conversions $5,330,000 11,500,000 $.46 $3,841,000 11,613,667 $.33
============== ================= ============== =============== =============== ===============
Nine Months Ended September 30, 1999 Nine Months Ended September 30, 1998
----------------------------------------------- -----------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- ----------------- -------------- --------------- --------------- -------------
Basic EPS
Income available to
Common shareholders $11,516,000 11,500,000 $1.00 $8,295,000 10,878,755 $.76
============== =============
Effect of Dilutive Securities
1998 Tandem Stock
Option Plan ----- ----- ----- 76,194
-------------- ----------------- --------------- ---------------
Diluted EPS
Income available to
common shareholders +
assumed conversions $11,516,000 11,500,000 $1.00 $8,295,000 10,954,949 $.76
============== ================= ============== =============== =============== =============
10
Note 2. Inventory
The inventory as of September 30, 1999 and December 31, 1998 consists of the
following:
Carrying value
Number of homes (in thousands)
-------------------------------------- --------------------------------------
September 30, December 31, September 30, December 31,
1999 1998 1999 1998
----------------- ----------------- ---------------- -----------------
Completed ............................... 129 118 $ 27,603 $ 23,224
Under construction ...................... 1,181 829 135,971 98,692
Models .................................. 85 74 19,146 15,401
Residential lots.......................... --- --- 58,257 47,930
----------------- ----------------- ---------------- -----------------
Total 1,395 1,021 $ 240,977 $ 185,247
================= ================= ================ =================
Note 3. Capitalized Interest
A summary of interest capitalized in inventory is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ----------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- ----------------
Interest capitalized, beginning of period ..... $ 5,814 $ 5,542 $ 5,516 $ 2,572
Capitalized interest acquired in purchase of
Westbrooke Communities, Inc.............. --- - --- 2,597
Interest incurred ............................. 3,197 2,690 9,017 7,859
Less interest included in:
Cost of sales ........................... 2,544 2,412 7,251 6,069
Other income (expense) .................. 466 419 1,281 1,558
-------------- ------------- -------------- ----------------
Interest capitalized, end of period ........... $6,001 $ 5,401 $ 6,001 $ 5,401
============== ============= ============== ================
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.
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.
11
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 September 30, Ended September 30,
------------------------ ------------------------
1999 1998 1999 1998
---- ---- ---- ----
Houston 149 124 170 148
Austin 131 119 131 110
Dallas/Ft. Worth 27 47 48 42
Nashville 27 20 27 8
Charlotte/
Greensboro 2 - 5 -
Ft. Lauderdale/
Palm Beach/Miami 223 180 120 200
--- --- --- ---
Total 559 490 501 508
=== === === ===
New Sales Contracts, Homes in
Net of Cancellations Home Closings Sales Backlog
------------------------- ------------------------ ---------------------------
Nine Months Nine Months As of
Ended September 30, Ended September 30, September 30,
------------------------- ------------------------ ---------------------------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Houston 449 456 473 349 151 204
Austin 455 385 378 297 261 173
Dallas/Ft. Worth 112 143 119 116 50 69
Nashville 63 40 63 14 22 26
Charlotte/
Greensboro 7 - 5 - 2 -
Ft. Lauderdale/
Palm Beach/Miami 654 618 368 546 601 439
--- --- --- --- --- ---
Total 1,740 1,642 1,406 1,322 1,087 911
===== ===== ===== ===== ===== ===
12
As a Percentage of Revenue As a Percentage of Revenue
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------------- ----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Cost of sales 82.0% 83.2% 83.6% 83.5%
Gross profit 18.0% 16.8% 16.4% 16.5%
Selling, general and administrative expenses 10.7% 10.7% 10.5% 10.9%
Income before income taxes 6.5% 5.4% 5.1% 4.7%
Income taxes (1) 35.4% 37.5% 35.6% 37.5%
Net income 4.2% 3.4% 3.3% 2.9%
<FN>
(1) As a percent of income before income taxes.
</FN>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998.
Revenues for the three months ended September 30, 1999 increased by 12.3% to
$126.7 million from $112.9 million for the comparable period of 1998 due to an
increase in the average selling prices due to increased level of closings in the
Company's higher priced markets. However, the total number of homes closed by
the Company decreased by 1.3% to 501 homes in the three months ended September
30, 1999 from 508 homes in the same period of 1998. The Company's average
selling price of homes closed in the three months ended September 30, 1999 was
$247,209, an increase of 11.5% from the $221,797 average selling price in the
comparable period of 1998. Revenue from land sales for the three months ended
September 30, 1999 increased to $2.9 million from $.2 million for the comparable
period of 1998.
New net sales contracts increased 14.1% to 559 homes for the three months ended
September 30, 1999 from 490 homes for the three months ended September 30, 1998.
The dollar amount of new net sales contracts increased 23.1% to $133.2 million.
The Company was operating in 73 subdivisions at September 30, 1999 compared to
60 subdivisions at September 30, 1998. At September 30, 1999, the Company's
backlog of sales contracts was 1,087 homes, a 19.3% increase over comparable
figures at September 30, 1998.
Cost of sales increased by 10.7% to $103.9 million in the three months ended
September 30, 1999 from $93.9 million in the comparable period of 1998 primarily
due to increased revenues from home closings. Cost of land sales for the three
months ended September 30, 1999 increased to $2.2 million from $.1 million for
the comparable period of 1998. As a percentage of revenues, cost of sales for
the three months ended September 30, 1999 decreased to 82.0% in 1999 from 83.2%
in 1998 due to strong gains in the level of closings in the Company's most
profitable markets.
Selling, general and administrative (SG&A) expense increased by 12.6% to $13.6
million in the three months ended September 30, 1999, from $12.1 million in the
comparable period of 1998. As a percentage of revenues, SG&A expense remained
consistent at 10.7% in 1999 and 1998. The 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 19.3% increase in the backlog at the end of September 1999 versus September
1998.
Interest expense amounted to $.5 million in the three months ended September 30,
1999 compared to $.4 million 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 September 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 35.4% for the three months ended September 30, 1999 compared to
37.5% for the three months ended September 30, 1998. The decrease is
attributable to a state income tax benefit for Adler. 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 $2.9 million for the three months ended
September 30, 1999 compared to $2.2 million for the three months ended September
30, 1998.
Net income increased by 38.8% to $5.3 million in the three months ended
September 30, 1999, from $3.8 million in the comparable period of 1998. The
increase is primarily attributable to the strong gains in revenues and increased
gross profits in the Company's most profitable markets.
13
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998.
Revenues for the nine months ended September 30, 1999 increased by 22.7% to
$350.0 million from $285.2 million for the comparable period of 1998 due to an
increase in the average selling prices due to increased level of closings in the
Company's higher priced markets. The number of homes closed by the Company
increased by 6.4% to 1,406 homes in the nine months ended September 30, 1999
from 1,322 homes in the same period of 1998. The Company's average selling price
of homes closed in the nine months ended September 30, 1999 was $240,288, an
increase of 12.0% from the $214,466 average selling price in the comparable
period of 1998. Revenue from land sales for the nine months ended September 30,
1999 increased to $12.1 million from $2.9 million for the comparable period of
1998.
New net sales contracts increased 6.0% to 1,740 homes for the nine months ended
September 30, 1999 from 1,642 homes for the nine months ended September 30,
1998. The dollar amount of new net sales contracts increased 14.8% to $406.9
million.
Cost of sales increased by 22.9% to $292.5 million in the nine months ended
September 30, 1999 from $238 million in the comparable period of 1998 primarily
due to increased revenues from home closings. Cost of land sales for the nine
months ended September 30, 1999 increased to $10.2 million from $1.6 million for
the comparable period of 1998. As a percentage of revenues, cost of sales for
the nine months ended September 30, 1999 increased to 83.6% in 1999 from 83.5%
in 1998 due to strong gains in the level of closings in the Company's most
profitable markets.
Selling, general and administrative (SG&A) expense increased by 17.8% to $36.8
million in the nine months ended September 30, 1999 from $31.2 million in the
comparable period of 1998. As a percentage of revenues, SG&A expense decreased
slightly to 10.5% in 1999 from 10.9% 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 19.3% increase in the backlog at the end of
September 1999 versus September 1998.
Interest expense amounted to $1.3 million in the nine months ended September 30,
1999 compared to $1.6 million in the comparable period of 1998. The Company
follows a policy of capitalizing interest only on inventory under construction
or development. During the nine months ended September 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 nine
months ended September 30, 1999 compared to the nine months ended September 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 35.6% for the nine months ended September 30, 1999, compared to
37.5% for the nine months ended September 30, 1998. The decrease is attributable
to a state income tax benefit for Adler. 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 $6.4 million for the nine months ended September 30, 1999
compared to $4.7 million for the nine months ended September 30, 1998.
Net income increased by 38.9% to $11.5 million in the nine months ended
September 30, 1999 from $8.3 million in the comparable period of 1998. The
increase is primarily attributable to the strong gains in revenues and increased
gross profits in the Company's most profitable markets.
14
Financial Condition, Liquidity and Capital Resources
At September 30, 1999, the Company had available cash and cash equivalents of
$6.0 million. Inventories (including finished homes and construction in
progress, developed residential lots and other land) at September 30, 1999
increased by $55.8 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 60.4% at September 30, 1999 from
56.0% at December 31, 1998. The equity to total assets ratio decreased during
the nine months to 33.3% at September 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 September 30, 1999, the Company had unused lines of credit for construction
loans totaling approximately $243.9 million of which $25.2 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
September 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 December
31, 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.
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.
16
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on August 4, 1999.
Proxies were solicited by the Company pursuant to Regulation 14 under the
Securities Exchange Act of 1934 to elect directors of the Company for the
ensuing year.
Proxies and shareholders present representing 11,021,000 shares of stock
eligible to vote at the meeting, or 95.8 percent of the outstanding shares, were
voted in connection with the election of directors. The following is a separate
tabulation with respect to the vote for each nominee:
Name Total Votes For Total Votes Withheld
------ ----------------- -----------------------
Michael K. McCraw 11,021,000 0
Larry D. Horner 11,021,000 0
Bill C. Bradley 11,021,000 0
William A. Hasler 11,021,000 0
Jon P. Newton 11,021,000 0
Lonnie M. Fedrick 11,021,000 0
James M. Carr 11,021,000 0
Item 5. Other Information
.........No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibit 27 - Financial Data Schedule.
2........Reports on Form 8-K.
Report on Form 8-K dated as of August 12, 1999 pertaining to the
Registrant being advised that its majority owner, Pacific Realty Group,
Inc. ("PRG"), has entered into discussions with a foreign company for a
transaction involving all or a portion of the Registrant's common stock.
PRG currently owns 80% of the Registrant's common stock.
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.
November 9, 1999 By: /s/ Terry C. White
Date _______________________________________
Terry C. White, Senior Vice President,
Chief Financial Officer, Treasurer and
Secretary