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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 17, 1998
REGISTRATION NO. 333-42213
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NEWMARK HOMES CORP.
(Exact Name of Registrant as Specified in Its Charter)
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<C> <C> <C>
NEVADA 1521 76-0460831
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
TERRY C. WHITE
CHIEF FINANCIAL OFFICER AND TREASURER
1200 SOLDIERS FIELD DRIVE 1200 SOLDIERS FIELD DRIVE
SUGAR LAND, TEXAS 76459 SUGAR LAND, TEXAS 76459
TELEPHONE (281) 243-0100 TELEPHONE (281) 243-0100
FAX (281) 243-0771 FAX (281) 243-0771
(Address, Including Zip Code, (Name, Address, Including Zip Code,
and Telephone Number, Including Area Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices) of Agent for Service)
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Copies to:
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NORMAN R. MILLER, ESQ. THOMAS P. MASON, ESQ.
WOLIN, RIDLEY & MILLER LLP ANDREWS & KURTH L.L.P.
3100 BANK ONE CENTER 4200 CHASE TOWER
1717 MAIN STREET HOUSTON, TEXAS 77002
DALLAS, TEXAS 75201 TELEPHONE (713) 220-4368
TELEPHONE (214) 939-4906 FAX (713) 220-4285
FAX (214) 939-4949
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED FEBRUARY 17, 1998.
2,000,000 SHARES
NEWMARK LOGO
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by the
Company. Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price per
share will be between $9.00 and $11.00. For information relating to the factors
to be considered in determining the initial public offering price, see
"Underwriting." The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "NHCH."
Prior to this offering, the Company has operated as a wholly owned
subsidiary of Pacific USA, an indirect wholly owned subsidiary of Pacific
Electric Wire & Cable. Pacific Electric Wire & Cable is a limited company
incorporated in Taiwan whose shares are listed on the Taiwan Securities
Exchange. Upon completion of this offering, Pacific USA will continue to own
approximately 82.1% of the outstanding Common Stock of the Company.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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=============================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------------------
Total (3)......................... $ $ $
=============================================================================================================
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting estimated expenses of $1,000,000 payable by the Company,
including a non-accountable expense allowance of $150,000 payable to the
Representatives of the Underwriters.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 300,000 shares of Common Stock, solely to cover
over-allotments, if any. See "Underwriting." If the Underwriters exercise
this option in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to the Company will be $ , $ and
$ , respectively.
------------------------
The shares of Common Stock are offered severally by the Underwriters named
herein subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that certificates
representing the shares will be ready for delivery at the offices of Dain
Rauscher Incorporated, Minneapolis, Minnesota, on or about , 1998.
Dain Rauscher Incorporated Laidlaw Global Securities, Inc.
THE DATE OF THIS PROSPECTUS IS , 1998.
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[PHOTOS OF FINISHED HOME (EXTERIOR),
FINISHED HOME (INTERIOR) AND
HOME UNDER CONSTRUCTION]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
specified, the information in this Prospectus has been adjusted to reflect a
92-for-1 split of Common Stock to be paid as a dividend prior to the closing of
this offering and assumes the Underwriters' over-allotment option is not
exercised. Except as otherwise indicated, the information set forth herein does
not give effect to the acquisition of Westbrooke (as defined) effective January
1, 1998. All references in this Prospectus to the "Company" include Newmark
Homes Corp. and its subsidiaries (other than Westbrooke), unless the context
otherwise requires.
THE COMPANY
The Company designs, builds and sells single-family homes in five major
markets within the Southwest and Southeast United States, including Houston,
Austin, Dallas/Fort Worth, Miami/Ft. Lauderdale and, most recently, Nashville.
Each of these markets has experienced population and job growth above the
national average over the past several years. The Company operated in 49
subdivisions in these metropolitan areas, and had 444 homes under construction
at December 31, 1997. In addition, as of December 31, 1997, the Company owned or
had under option contract 2,020 lots available for future growth. The Company is
also actively engaged in residential land acquisition and development, which
enables it to provide lots for its homebuilding operations.
The Company offers high-quality homes, designed principally for the
"move-up" and relocation market segments under the Newmark name. Typically,
Newmark homes range in size from 1,700 square feet to over 4,500 square feet and
range in price from $120,000 to $350,000, with an average sales price of
$205,000 for homes closed during 1997. The Company also offers custom homes
under the Fedrick, Harris Estate Homes name that range in size from 3,500 square
feet to over 7,000 square feet and range in price from $250,000 to $700,000,
with an average sales price of $352,000 for homes closed during 1997. Revenues
generated from sales of Fedrick, Harris Estate Homes were 15% and 16% of total
homebuilding revenues for 1996 and 1997, respectively.
The Company's homebuilding operation is positioned to compete with
high-volume builders by offering a broader selection of homes with more
amenities and greater design flexibility than typically offered by volume
builders. Newmark homes give the homebuyer the ability to select various design
features in accordance with their personal preferences. Through a volume
building approach, the Company's custom homes generally offer more value than
those offered by local, lower-volume custom builders, primarily due to the
Company's effective purchasing, construction and marketing programs. While most
design modifications are significant to the homebuyer, they typically involve
relatively minor adjustments that allow the Company to maintain construction
efficiencies and result in greater profitability due to increased sales prices
and margins. The Company believes that its ability to meet the design tastes of
prospective homebuyers at competitive prices distinguishes itself from many of
its competitors.
The Company's subsidiary, Newmark Home Corporation ("Newmark"), was founded
in 1983 in Houston, Texas. The Company achieved annual profitability from
inception despite the adverse economic conditions that prevailed in Texas in the
late 1980's and early 1990's. Seven of the Company's eleven executive officers
and key employees have worked together at the Company for more than ten years,
and ten of the Company's executive officers and key employees have worked
together for more than four years. The Company has developed and implemented a
balanced, disciplined approach to home construction and land purchases. This
balanced approach has focused on purchasing, construction, marketing, market
analysis, economic and financial forecasting, management information systems and
accounting. The Company believes the experience of its executive officers and
key employees and its disciplined approach to its business have been key factors
in the Company's success.
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STRATEGY
The Company's objective is to provide its customers with homes that offer
both quality and value, while seeking to maximize its return on invested
capital. The key elements of this strategy include:
- GROWTH MARKETS. The Company's primary markets have each experienced
population and job growth in excess of the national average over the past
several years. The Company believes that there are significant growth
opportunities in these markets. The Company also continues to evaluate new
markets that would satisfy the Company's profitability, investment return
and other criteria.
- SOPHISTICATED MARKETING. The Company employs sophisticated and
comprehensive marketing programs, including telemarketing, an Internet web
site and a virtual reality CD-ROM home tour. The Company executes its
overall marketing strategy through advertising campaigns tailored to local
markets, including coordination of realtor promotions, subdivision grand
openings, showcase presentations for custom homes, the Company's
newsletters, realtors' newsletters, product bulletins, billboards, local
newspaper advertisements and other direct sales activities.
- FOCUS ON RELOCATION MARKET. In markets with a significant number of
relocation buyers, the Company aggressively competes with resales of
existing homes, primarily by making available to potential buyers
completed or nearly completed homes.
- MANAGEMENT TRAINING. The Company aggressively recruits and hires new
management trainees, typically with some construction experience,
following graduation from college and trains these new hires for
increasing levels of responsibility within the Company. Through continuous
"on the job" experience and classroom training, these associates become
knowledgeable, experienced candidates for middle management positions. The
Company believes that the depth of its middle management will facilitate
the Company's expansion into new markets.
- DECENTRALIZED OPERATIONS WITH EXPERIENCED MANAGEMENT. The Company
believes that the in-depth knowledge of its experienced management in
local markets enables the Company to better serve its customers. Each of
the Company's operating divisions focuses on a single market, and local
management is responsible for preliminary site selection and negotiation
of option contracts in accordance with Company policy.
- CENTRALIZED PURCHASING. The Company utilizes centralized purchasing to
leverage its purchasing power into volume discounts, a practice which
reduces costs, ensures timely deliveries and reduces the risk of supply
shortages due to allocations of materials. In addition, the Company has
negotiated favorable price arrangements with several high quality national
and regional suppliers.
- COST MANAGEMENT. The Company controls its divisional overhead costs by
centralizing administrative and accounting functions, eliminating the need
for redundant functions at the city level, and by automating and
integrating its information systems. The Company also controls costs
through the efficient design of its homes and by obtaining favorable
pricing, where possible, from subcontractors and other suppliers of goods
and services.
- LIMITED REAL ESTATE EXPOSURE. The Company seeks to maximize its return on
capital and limit its exposure to changes in land valuation by obtaining
options to purchase lots whenever feasible. The Company also seeks to
limit its exposure to real estate inventory risks by (i) closely
monitoring its unsold inventory of new homes and the stage of completion
of homes under construction on an ongoing basis, (ii) centralizing control
for the start of new homes and (iii) closely monitoring local job market
and demographic trends, housing preferences and related economic
developments. See "Business -- Strategy."
ACQUISITION OF WESTBROOKE
Effective January 1, 1998, the Company acquired Westbrooke Communities,
Inc. and its affiliated entities ("Westbrooke"). Westbrooke, founded in 1976, is
a leading builder of single-family homes in the South Florida market.
Westbrooke's homes are designed primarily to appeal to first time and move-up
home buyers, with homes
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ranging in size from 1,300 square feet to over 3,500 square feet and ranging in
price from $108,000 to $240,000, with an average sales price of $172,000 for
1997. Westbrooke operated in four subdivisions and had 214 homes under
construction as of December 31, 1997. The Company expects the acquisition of
Westbrooke to significantly enhance its competitive position in the South
Florida area. See "Acquisition of Westbrooke."
THE OFFERING
Common Stock offered by the
Company............................. 2,000,000 shares
Common Stock to be outstanding after
this offering....................... 11,200,000 shares(1)
Use of Proceeds..................... To fund the Company's planned growth
and to repay a portion of the
indebtedness assumed in connection with
the acquisition of Westbrooke. Pending
new market expansion and residential
land acquisition opportunities, a
portion of the net proceeds will be
used to repay a portion of the
outstanding balances under the
Company's construction credit
facilities.
Nasdaq National Market Symbol....... NHCH
- ---------------
(1) Excludes 896,000 shares of Common Stock reserved for issuance under the
Company's tandem stock option/ stock appreciation rights plan, options to
purchase 672,000 of which are expected to be granted upon the consummation
of this offering. See "Management -- 1998 Tandem Stock Option/Stock
Appreciation Rights Plan."
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SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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YEAR ENDED DECEMBER 31,
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PRO FORMA
1995 1996 1997 1997(1)
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STATEMENT OF OPERATIONS DATA:
Revenues............................................. $125,427 $190,855 $215,360 $318,781
Gross profit......................................... 22,836 34,591 40,060 55,021
Equity in earnings from unconsolidated
subsidiaries....................................... 1,978 792 465 465
Selling, general and administrative expenses......... 16,572 22,976 26,512 34,409
Depreciation and amortization........................ 1,271 1,524 1,669 2,665
Operating income..................................... 6,971 10,883 12,344 18,412
Income before income taxes........................... 6,246 10,496 10,927 16,473
Net income........................................... 3,769 6,332 6,655 10,038
Net income per share................................. $ 0.41 $ 0.69 $ 0.72 $ 0.90
Weighted average shares outstanding.................. 9,200 9,200 9,200 11,200
OPERATING DATA:
Units:
New sales contracts, net of cancellations.......... 720 998 984 1,625
Closings........................................... 641 902 972 1,573
Backlog at end of period........................... 171 267 279 591
Average sales price per closing...................... $ 188 $ 200 $ 219 $ 201
Sales value of backlog at end of period.............. $ 32,280 $ 50,657 $ 60,048 $113,737
Gross profit as a percentage of revenues............. 18.2% 18.1% 18.6% 17.3%
Selling, general and administrative expenses as a
percentage of revenues............................. 13.2% 12.0% 12.3% 10.8%
</TABLE>
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DECEMBER 31, 1997
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PRO FORMA
ACTUAL AS ADJUSTED(1)
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BALANCE SHEET DATA:
Inventories............................................... $102,547 $144,899
Total assets.............................................. 139,213 199,485
Total debt................................................ 66,100 99,730
Stockholders' equity...................................... 55,691 73,291
</TABLE>
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(1) Gives effect to (i) the acquisition of Westbrooke effective January 1, 1998
and (ii) the sale of the Common Stock offered hereby and the application of
the estimated net proceeds therefrom. See "Use of Proceeds" and Pro Forma
Condensed Financial Statements included elsewhere in this Prospectus.
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RISK FACTORS
Prospective investors should carefully consider the specific factors set
forth below as well as the other information included elsewhere in this
Prospectus before deciding to purchase the shares of Common Stock offered
hereby. Except for historical information contained herein, the discussion in
this Prospectus contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed in this Prospectus. Factors that could
cause or contribute to such difference include those discussed below, as well as
those discussed elsewhere herein.
GENERAL REAL ESTATE, ECONOMIC AND OTHER CONDITIONS. The homebuilding
industry is cyclical and is significantly affected by changes in general and
local economic conditions, such as employment levels, interest rates,
availability of financing for homebuyers, consumer confidence and housing
demand. In addition, homebuilders are subject to various risks, including
competitive overbuilding, availability and cost of lots, materials and labor,
weather conditions, delays in construction schedules, cost overruns, changes in
governmental regulation and increases in real estate taxes and other local
government fees. In addition, to the extent that hurricanes, tornados, droughts,
floods, brushfires or other natural disasters or similar events occur in any of
the Company's markets, the homebuilding industry in general, and the Company's
business in particular, may be adversely affected.
VARIABILITY OF RESULTS; SEASONALITY. The Company and Westbrooke
historically have experienced, and in the future expect to continue to
experience, variability in sales and net income on an annual and a quarterly
basis. Factors expected to contribute to this variability include, among others:
(i) the timing of home closings; (ii) the Company's and Westbrooke's ability to
continue to acquire land and options thereon under 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 in the
Company's and Westbrooke's local markets; (v) the cyclical nature of the
homebuilding industry; (vi) the prevailing interest rates and the availability
of mortgage financing; (vii) pricing policies of 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 and Westbrooke's historical
financial performance is not necessarily a meaningful indicator of future
results and, in particular, the Company expects its financial results to vary
from project to project and from period to period. In addition, the homebuilding
industry is seasonal, generally with more sales in the spring and summer months,
resulting in more home closings in the fall. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality and
Quarterly Results."
DEPENDENCE ON TEXAS AND FLORIDA ECONOMIES AND HOUSING MARKETS. The Company
presently conducts most of its business in Texas and Florida. Economic growth in
Texas has increased considerably in the 1990's, compared to the late 1980's, a
period characterized by a weak economy, excessive home inventories and low sale
prices, while economic growth in Florida has generally been in excess of the
national average over the last several years. A prolonged economic downturn in
Texas or Florida would have a material adverse effect on the Company.
CONCENTRATION OF OWNERSHIP. Following completion of this offering, Pacific
USA Holdings Corp. ("Pacific USA") will indirectly beneficially own
approximately 82.1% of the outstanding Common Stock of the Company (80.0% if the
Underwriters' over-allotment option is exercised in full). Accordingly, Pacific
USA will be in a position to elect the Company's directors and officers, to
control the policies and operations of the Company and to determine the outcome
of corporate transactions or other matters submitted for shareholder approval,
including mergers, consolidations, the sale of the Company's assets or a change
in control of the Company. See "Security Ownership" and "Description of Capital
Stock."
ACCESS TO FINANCING. The homebuilding industry is capital intensive and
requires expenditures for home construction and for land purchases and
development. Accordingly, the Company has incurred substantial indebtedness to
finance its homebuilding, land acquisition and development activities. The
Company believes it will have adequate financial resources after this offering,
including availability under its credit facilities, to meet its working capital,
residential land acquisition and development needs under current market
conditions. However, there can be no assurance that the amounts available from
such sources will be sufficient. If the
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Company identifies significant new acquisition opportunities, or if the
Company's operations do not generate sufficient cash from operations at levels
currently anticipated, the Company may be required to seek additional capital in
the form of equity or debt financing from a variety of potential sources,
including additional bank financings or the issuance of debt or equity
securities. The amount and types of indebtedness which the Company may incur are
limited by the terms of its existing financing agreements. If the Company is not
successful in obtaining sufficient capital to fund its planned expansion and
other expenditures, new projects may be constrained. Any such delay or
abandonment could result in a reduction in sales and may adversely affect the
Company's future results of operations. Prior to this offering, the Company has
been operated as an indirect wholly-owned subsidiary of Pacific USA and has
obtained financing, in part, and loan guarantees from Pacific USA. Pacific USA
will be under no obligation to provide such financing or guarantees to the
Company in the future. Effective December 31, 1997, all outstanding indebtedness
owed by the Company to Pacific USA was contributed to the Company's capital, and
all currently outstanding loan guarantees provided by Pacific USA will continue
in accordance with their terms.
LAND POLICIES AND POSITION. Historically, the Company has made significant
investments in land inventory and lot positions, primarily in the Miami/Ft.
Lauderdale market, principally because land was not available on an option basis
in that market. Due to market conditions, the Company may not be able to obtain
suitable land inventory or sufficient lot positions through the use of options.
This may require the Company to make significant investments in land and lot
positions that the Company may be required to hold as inventory for an extended
period until economic conditions justify the development of such land and lot
positions. Moreover, there can be no assurance that the Company will be
successful in acquiring suitable land for development in additional markets. If
the Company is unable to locate and acquire suitable land which it can
profitably develop, its business, financial condition and results of operations
could be materially and adversely affected.
SPECULATIVE CONSTRUCTION. Since 1993, approximately 65% of the Company's
homes were begun before a sales contract was executed and an earnest money
deposit was received. Because interest and other expenses are capitalized during
construction but expensed after completion, the Company begins to recognize
significant interest and maintenance expense on unsold inventory. At December
31, 1997, the Company had 90 completed homes in inventory and 265 homes under
construction without a sales contract. In the event there is a downturn in
housing sales in the Company's markets, the Company's inventory of completed
homes could increase, leading to additional financing costs and lower margins,
which could have a material adverse effect on the Company's financial results.
RISKS ASSOCIATED WITH ACQUISITIONS AND EXPANSION OF OPERATIONS. In
connection with its acquisitions (including the acquisition of Westbrooke
effective January 1, 1998) and new market expansion, the Company may face risks
commonly encountered with growth through acquisitions and expansions. These
risks include the incurrence of higher than anticipated capital expenditures and
operating expenses, the adverse impact on the Company's ongoing business
resulting from greater attention of management to the acquired businesses or new
market operations, and difficulties encountered in integrating the operations
and personnel of the acquired business. There can be no assurance that the
Company will be successful in overcoming these risks or any other problems
encountered with acquisitions or expansions. To the extent the Company does not
successfully avoid or overcome the risks or problems related to its acquisitions
or expansions, the Company's results of operations and financial condition could
be adversely affected.
To the extent that the Company expands through start-up operations into new
markets or through acquisition, it will need to employ or consult with personnel
that are knowledgeable of such markets. In addition, the success of any
particular acquisition (including the acquisition of Westbrooke) may be
significantly dependent on retaining key members of the acquired company's
existing management. There can be no assurance that the Company will be able to
employ or retain the necessary personnel, that the Company will be able to
successfully implement its disciplined management process and culture with local
management, or that the Company's expansion operations will be successful.
COMPETITION. The homebuilding industry is highly competitive and
fragmented. Homebuilders compete for desirable properties, financing, materials
and skilled labor. The Company competes for residential sales with large
homebuilding companies, some of which have greater financial resources than the
Company, and smaller
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homebuilders, which may have lower administrative costs. The Company also
competes for home sales with individual resales of existing homes and
condominiums. There can be no assurance that the Company will be able to
continue to compete successfully in any of its markets. The inability of the
Company to continue to compete successfully in any of its markets could have a
material adverse effect on the Company's business, financial condition or
results of operations.
INTEREST RATES; MORTGAGE FINANCING. Virtually all purchasers of the
Company's homes finance their acquisitions through third-party lenders providing
mortgage financing. In general, housing demand is adversely affected by
increases in interest rates, decreasing availability of mortgage financing,
increasing housing costs and unemployment. If mortgage interest rates increase
and, as a result, the ability of prospective buyers to finance home purchases is
adversely affected, the Company's operating results may be significantly
negatively impacted. The Company's homebuilding activities are also dependent
upon the availability and cost to home buyers of mortgage financing.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS. The Company and its
competitors are subject to various local and state statutes, ordinances, rules,
and regulations concerning zoning, resource protection (protection of wetlands,
woodlands and hillside areas), building design, construction and similar
matters. The Company may also be subject to periodic delays in its homebuilding
projects due to building moratoriums. Such moratoriums generally relate to
insufficient water supplies, sewage facilities, delays in utility hook-ups, or
inadequate road capacity within specific market areas or subdivisions. In
addition, certain new development projects are subject to various assessments
for schools, parks, streets and highways and other public improvements, the
costs of which can be substantial. By raising the cost of the Company's homes to
its customers, an increase in such assessments could have a negative impact on
the Company's sales.
Federal and state environmental laws and regulations also affect the
Company and its competitors. The particular environmental laws which apply to
any given homebuilding site vary according to the site's location, its
environmental conditions and the present and former uses of the site, as well as
adjoining properties. Environmental laws and conditions may result in delays,
may cause the Company to incur substantial compliance and other costs, and may
prohibit or severely restrict homebuilding activity in environmentally sensitive
markets.
Furthermore, in projects in which the Company is developing land, it must
obtain the approval of numerous governmental authorities regulating such matters
as permitted land uses and levels of density and the installation of utility
services such as electricity, water and waste disposal. The length of time
necessary to obtain permits and approvals increases the carrying cost of
unimproved property acquired for the purpose of development and construction.
There can be no assurance that the time necessary to obtain permits and
approvals will not increase in the future, or that, whether or not such time
periods increase, governmental restrictions and approval processes will not
materially increase the carrying cost of property held by the Company, which
could have a material adverse effect on the Company's business, financial
condition or results of operations.
IMMEDIATE AND SUBSTANTIAL DILUTION. Investors participating in this
offering will experience immediate and substantial dilution in net tangible book
value per share. See "Dilution."
MIAMI/FT. LAUDERDALE OPERATIONS. Certain insurance companies doing business
in the Miami/ Ft. Lauderdale have restricted, curtailed or suspended the
issuance of homeowners' insurance policies on single family and multi-family
homes. This has had the effect of both reducing the availability of hurricane
and other types of natural disaster insurance and, in general, increasing the
cost of such insurance to prospective purchasers of homes in the Miami/Ft.
Lauderdale metroplex. Mortgage financing for a new home is conditioned, among
other things, on the availability of adequate homeowners' insurance. There can
be no assurance that homeowners' insurance will be available or affordable to
prospective purchasers of the Company's homes offered for sale in the Miami/Ft.
Lauderdale market. Long-term restrictions on, or unavailability of, homeowners'
insurance in the Miami/Ft. Lauderdale market could have an adverse effect on the
homebuilding industry in that market in general, and on the Company's business
within that market in particular. Additionally, the availability of permits for
new homes in new and existing developments has been adversely affected by the
significantly limited capacity of the schools, roads, and other infrastructure
in that market.
9
<PAGE> 11
POTENTIAL CONFLICTS OF INTEREST. Conflicts of interest may arise in the
future between the Company and Pacific USA in a number of areas relating to
their ongoing relationships, including dividends, incurrence of indebtedness,
tax matters, financial commitments and issuances and sales of capital stock of
the Company. The Company and Pacific USA have agreed pursuant to a tax
allocation agreement that the Company will pay Pacific USA an amount equal to
the liability that the Company would be required to pay if the Company paid
federal income taxes on a stand-alone basis. A conflict of interest may arise if
Pacific USA chooses to contest, compromise or settle any adjustment or
deficiency proposed by the relevant taxing authority in a manner that may be
beneficial to Pacific USA and detrimental to the Company. In addition, under
federal income tax law, each member of a consolidated group (as determined for
federal income tax purposes) is also jointly and severally liable for the
federal income tax liability of the consolidated group. See "Certain
Transactions -- Tax Allocation Agreement."
TRANSACTIONS WITH AFFILIATES. In the past, the Company has participated in
certain centralized programs with Pacific USA and its subsidiaries, including
payroll and employee benefits administration and the evaluation and negotiation
of national contracts for the purchase of office supplies, long distance
telephone and overnight delivery services. While the Company may have achieved
certain cost savings from participating in these centralized programs, there can
be no assurance that it will continue to do so in the future. In addition, in
the event that any of these entities would be unable or unwilling to continue to
offer these centralized programs to the Company in the future, there can be no
assurance that the Company would be able to obtain substitute services at
reasonable rates.
In addition, Pacific USA has historically loaned funds to the Company, as
well as guaranteed certain of its bank loans. Effective December 31, 1997,
indebtedness owed by the Company to Pacific USA was contributed to the Company's
capital. Pacific USA has indicated that it may not provide loans or guarantees
to the Company in the future, the absence of which could have an adverse effect
on the Company's ability to obtain financing. See "Certain Transactions."
WARRANTY LIABILITY. Various components of homes built by the Company are
warranted against defects in materials or work quality for up to 10 years. The
Company has not experienced any material losses from warranty claims to date and
maintains reserves for normal, recurring warranty expenses. There can be no
assurance that material warranty claims will not be asserted in the future.
These claims could have a material adverse effect on the Company's business,
financial condition or results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend on
the continued services of its executive and senior officers. Certain members of
executive and senior management have employment agreements with the Company. See
"Management -- Employment Agreements." The loss of the services of one or more
key personnel could have a material adverse effect upon the Company's
operations. The Company's success also depends on its ability to attract and
retain qualified personnel. There can be no assurances that the Company will be
successful in attracting and retaining such personnel. See "Management."
SHARES ELIGIBLE FOR FUTURE SALE. Following completion of this offering, the
Company will have outstanding 11,200,000 shares of Common Stock (11,500,000
shares if the underwriters' over-allotment option is exercised in full). The
2,000,000 shares sold in this offering may be publicly offered and sold without
restriction, unless they are purchased by affiliates of the Company. Shares of
Common Stock outstanding prior to completion of this offering will be
"restricted securities" under the Securities Act of 1933, as amended (the
"Securities Act"). These "restricted securities" may be sold only if they are
registered under the Securities Act by the Company or pursuant to an applicable
exemption from the registration requirements of the Securities Act, including
Rule 144 thereunder. All of the shares of Common Stock outstanding prior to this
offering are held indirectly by Pacific USA. Pacific USA does not have any plan
or arrangement with the Company to register its shares under the Securities Act
for resale in the public markets. The Company, Pacific Realty Group, Inc. and
Pacific USA have agreed that they will not, directly or indirectly, sell or
otherwise dispose of any of such shares for a period of 180 days after the date
of this Prospectus, without the prior written consent of Dain Rauscher
Incorporated on behalf of the Representatives of the Underwriters. See
"Underwriting." Dain Rauscher Incorporated does not currently intend to release
Pacific USA from its lock-up agreement. Dain Rauscher Incorporated has indicated
that factors it would consider in potentially releasing Pacific USA from its
lockup agreement include the possible
10
<PAGE> 12
impact of the sale of such shares on the trading market for the Company's Common
Stock. Pacific USA has also indicated that, in order to consolidate the
Company's financial results with its financial results for tax and financial
reporting purposes, it must maintain an 80% ownership in the Company, and it
does not presently intend to request a release of the lock-up from Dain Rauscher
Incorporated or to sell any of its shares of Common Stock of the Company. The
sale of substantial amounts of Common Stock, or the perception that such sales
could occur, could adversely affect the prevailing market price for the Common
Stock. See "Shares Eligible for Future Sale."
ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK
PRICE. Prior to this offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for quotation on the Nasdaq
National Market, there can be no assurance that an active market will develop or
be sustained following this offering. The initial public offering price for the
shares of Common Stock sold in this offering will be determined through
negotiations between the Company and the Representatives and may not necessarily
reflect the market price for the Common Stock following this offering. Market
prices for the Common Stock following this offering will be influenced by a
number of factors, including the Company's operating results and other factors
affecting the Company specifically and the homebuilding industry and financial
markets generally, as well as the depth and liquidity of the market for the
Common Stock. In recent years, the stock market has experienced price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance. See "Underwriting."
ANTI-TAKEOVER PROVISIONS. Nevada law includes a number of provisions that
may have the effect of encouraging persons considering unsolicited tender offers
or other unilateral takeover proposals to negotiate with the Board of Directors
rather than pursue non-negotiated takeover attempts. The Company's Articles of
Incorporation provide for "blank check" preferred stock which may also have the
effect of deterring a non-negotiated take-over attempt. See "Description of
Capital Stock -- Anti-Takeover Provisions of State Law."
11
<PAGE> 13
THE COMPANY
The Company is a wholly-owned, indirect subsidiary of Pacific USA, which
also conducts operations through companies engaged in financial services, other
real estate activities, technology and investment banking. The Company is a
direct subsidiary of Pacific Realty Group, Inc. ("Pacific Realty Group"), which
has investments in companies engaged in other non-homebuilding real estate
activities. Pacific USA is an indirect subsidiary of Pacific Electric Wire &
Cable Co., Ltd., a limited company organized under the laws of Taiwan whose
shares are listed on the Taiwan Securities Exchange ("Pacific Electric Wire &
Cable").
In 1993, Pacific Realty Group acquired Newmark and formed Pacific United
Development Corp., a residential land acquisition and development company
("PUDC"). In 1994, the Company was incorporated, and Pacific Realty Group
contributed Newmark and PUDC to the Company. In March 1995, the Company acquired
the business of The Adler Family Partnership ("Adler"), a builder of
single-family homes in the Miami/ Ft. Lauderdale metropolitan area.
The Company's principal executive offices are located at 1200 Soldiers
Field Drive, Sugar Land, Texas 77479, and its telephone number is (281)
243-0100.
ACQUISITION OF WESTBROOKE
The Company acquired Westbrooke effective January 1, 1998. Westbrooke,
founded in 1976 by James Carr, is a leading builder of single-family homes in
the South Florida market. Westbrooke's homes are designed primarily to appeal to
first time and move-up home buyers, with homes ranging in size from 1,300 square
feet to over 3,500 square feet and ranging in price from $108,000 to $240,000,
with an average sales price of $172,000 for 1997. Westbrooke operated in four
subdivisions and had 214 homes under construction as of December 31, 1997. The
Company expects the acquisition of Westbrooke to significantly enhance its
competitive position in the South Florida market.
The consideration paid for the purchase of Westbrooke consisted of (i)
$18.9 million in the form of promissory notes (the "Acquisition Notes"), $12.3
million of which bear interest at 6.45% per annum and are payable annually over
five years and $6.6 million of which bear interest at 9% and are payable on
January 1, 1999 and (ii) deferred consideration of up to $7.5 million contingent
upon Westbrooke achieving specified cumulative income targets (the "Income
Targets") over a five year period. In order for the Income Targets to be met,
Westbrooke must achieve net income before income tax (as determined in
accordance with the stock purchase agreement entered into in connection with the
acquisition) on a cumulative basis of $3.4 million, $7.0 million, $10.9 million,
$15.0 million and $19.4 million for the fiscal years ending December 31, 1998,
1999, 2000, 2001 and 2002, respectively. Of the $7.5 million of contingent
deferred consideration, Leonard R. Chernys, Diana Ibarria and Harold L.
Eisenacher are eligible to receive an aggregate of up to $1.0 million each over
the five year period. Mr. Carr is eligible to receive the balance. Mr. Chernys,
Ms. Ibarria and Mr. Eisenacher have worked with Westbrooke since January 1978,
January 1980 and March 1985, respectively.
The Company has also agreed to continue to pay incentive compensation to
each of Mr. Chernys, Ms. Ibarria and Mr. Eisenacher equal to 6% (2% to each
individual) of Westbrooke's net income before income tax (as determined in
accordance with the stock purchase agreement).
In connection with the acquisition of Westbrooke by the Company, Westbrooke
borrowed $10.0 million pursuant to a bank loan (the "Westbrooke Bank Loan"). The
proceeds from the Westbrooke Bank Loan were used to repay the $7.5 million
outstanding balance under Westbrooke's subordinated notes and to redeem the
outstanding minority interest in Westbrooke for $2.5 million. The Westbrooke
Bank Loan is secured by a letter of credit furnished by the Company. The Company
intends to use $10.0 million of the proceeds from this offering to repay the
Westbrooke Bank Loan. See "Use of Proceeds."
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds from the sale of the shares of Common Stock offered by the
Company are estimated to be approximately $17.6 million (approximately $20.4
million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $10.00 per share and after
deducting the underwriting discounts and commissions and other estimated
offering expenses.
Of the net proceeds, the Company intends to use $10.0 million to repay the
Westbrooke Bank Loan incurred by Westbrooke in connection with its acquisition
by the Company. The Westbrooke Bank Loan bears interest at a rate of prime less
0.75% (7.75% as of December 31, 1997) and matures on September 30, 1998. The
proceeds from the Westbrooke Bank Loan were used to repay the $7.5 million
outstanding balance under Westbrooke's subordinated notes and to redeem the
outstanding minority interest in Westbrooke for $2.5 million. See "Acquisition
of Westbrooke." The remaining balance of the net proceeds is expected to be used
to fund planned expansion in existing markets. Pending new market expansion or
land acquisition opportunities, a portion of the net proceeds will be used to
repay a portion of the outstanding balances under the Company's construction
credit facilities. Borrowings under such credit facilities bear interest at
rates ranging from prime plus 0.5% to prime plus 1.5% per annum, and mature upon
the closing of the sale of the homes securing the borrowings. Upon application
of the net proceeds as set forth above, the Company will have approximately
$20.6 million available under its credit facilities for future borrowings, which
the Company believes will provide it with financial flexibility as new market
expansion or land acquisition opportunities arise. Pending such uses, the net
proceeds of this offering will be invested in short term, interest bearing
securities.
Effective December 31, 1997, all of the indebtedness owed to Pacific USA
($9.1 million at December 31, 1997) was contributed to the capital of the
Company.
DIVIDEND POLICY
The Company intends to retain all earnings to provide funds for its
operations and expansion, and, therefore, does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The Company's future
dividend policy will be determined by its Board of Directors based on various
factors, including the Company's results of operations, financial condition,
business opportunities, capital requirements, credit restrictions and such other
factors as the Board of Directors may deem relevant. In addition, certain of the
Company's credit agreements restrict the amount of dividends payable by the
Company.
13
<PAGE> 15
DILUTION
At December 31, 1997, after giving effect to the acquisition of Westbrooke,
the Company had pro forma net tangible book value of $1.95 per share of Common
Stock. Net tangible book value per share of Common Stock equals the tangible
assets of the Company, less all liabilities, divided by the total number of
shares of Common Stock outstanding. After giving effect to the sale of shares of
Common Stock offered hereby at an assumed initial public offering price of
$10.00 per share and the application of the net proceeds therefrom, the net
tangible book value of the Company at December 31, 1997 would have been $3.18
per share. This represents an immediate increase of $1.23 per share to the
existing shareholder and an immediate dilution of $6.82 per share to new
investors purchasing shares at the initial public offering price. The following
table illustrates this per share dilution to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $10.00
Pro forma net tangible book value per share as of December
31, 1997............................................... $1.95
Increase per share attributable to new investors.......... 1.23
-----
Net tangible book value per share after offering............ 3.18
------
Dilution per share to new investors......................... $ 6.82
======
</TABLE>
The following table sets forth the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and the
average price paid per share by the sole existing shareholder and new investors
purchasing shares in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ ------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing
shareholder......... 9,200,000 82.1% $52,257,000 72.3% $ 5.68
---------- ------ ----------- ------ ------
New investors......... 2,000,000 17.9% 20,000,000 27.7% 10.00
---------- ------ ----------- ------ ------
Total............ 11,200,000 100.0% $72,257,000 100.0%
========== ====== =========== ======
</TABLE>
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997 (i) on an actual basis, (ii) pro forma to give effect to the
acquisition of Westbrooke which occurred in January 1998 and (iii) pro forma as
adjusted to reflect the sale of the shares of Common Stock offered hereby and
the application of the estimated net proceeds therefrom. See "Use of Proceeds."
This information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Construction loans payable........................ $ 66,100 $ 88,408 $ 80,808
Bank loan......................................... -- 10,000 --
Acquisition Notes(1).............................. -- $ 18,922 18,922
Stockholders' equity:
Preferred stock, $0.01 par value, 3,000,000
shares authorized; no shares issued, actual
or as adjusted............................... -- -- --
Common stock, $0.01 par value, 30,000,000 shares
authorized; 9,200,000 shares issued, actual;
11,200,000 shares issued, as adjusted(2)..... 92 92 112
Additional paid-in capital...................... 52,165 52,165 69,745
Retained earnings............................... 3,434 3,434 3,434
-------- -------- --------
Total stockholders' equity.............. 55,691 55,691 73,291
-------- -------- --------
Total capitalization.................... $121,791 $173,021 $173,021
======== ======== ========
</TABLE>
- ---------------
(1) The Acquisition Notes were incurred in connection with the acquisition of
Westbrooke effective as of January 1, 1998.
(2) Excludes 896,000 shares of Common Stock reserved for issuance under the
Company's tandem stock option/ stock appreciation rights plan, options to
purchase 672,000 of which are expected to be granted upon consummation of
this offering. See "Management -- 1998 Tandem Stock Option/Stock
Appreciation Rights Plan."
15
<PAGE> 17
SELECTED FINANCIAL AND OPERATING DATA
The statement of operations data and balance sheet data presented below
have been derived from the historical financial statements of the Company. The
Company's consolidated financial statements for the years ended December 31,
1994, 1995, 1996 and 1997 have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The selected financial data set forth
below should be read in conjunction with and are qualified by reference to the
Company's consolidated financial statements and notes thereto included elsewhere
in this Prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, -----------------------------------------
1993(1) 1993(2) 1994 1995(3) 1996 1997
------------- ------------ -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 86,445 $24,273 $108,630 $125,427 $190,855 $215,360
Cost of sales............................. 68,980 19,641 86,260 102,591 156,264 175,300
-------- ------- -------- -------- -------- --------
Gross profit.............................. 17,465 4,632 22,370 22,836 34,591 40,060
Equity in earnings from unconsolidated
subsidiaries............................ -- -- -- 1,978 792 465
Selling, general and administrative
expenses................................ (14,101) (2,638) (12,928) (16,572) (22,976) (26,512)
Depreciation and amortization............. (188) (222) (831) (1,271) (1,524) (1,669)
-------- ------- -------- -------- -------- --------
Operating income.......................... 3,176 1,772 8,611 6,971 10,883 12,344
Interest expense.......................... (360) (123) (613) (1,332) (1,238) (1,987)
Other income, net......................... (170) (68) 191 607 851 570
-------- ------- -------- -------- -------- --------
Income before income taxes................ 2,646 1,581 8,189 6,246 10,496 10,927
Income taxes.............................. 202 772 3,205 2,477 4,164 4,272
-------- ------- -------- -------- -------- --------
Net income................................ $ 2,444 $ 809 $ 4,984 $ 3,769 $ 6,332 $ 6,655
======== ======= ======== ======== ======== ========
Net income per common share............... -- $ 0.09 $ 0.54 $ 0.41 $ 0.69 $ 0.72
======= ======== ======== ======== ========
Weighted average shares outstanding....... -- 9,200 9,200 9,200 9,200 9,200
OPERATING DATA:
Units:
New sales contracts, net of
cancellations......................... 500 720 998 984
Closings................................ 534 641 902 972
Backlog at end of period................ 92 171 267 279
Average sales price per closing........... $ 201 $ 188 $ 200 $ 219
Sales value of backlog at end of period... $ 18,579 $ 32,280 $ 50,657 $ 60,048
Gross profit as a percentage of
revenues................................ 20.6% 18.2% 18.1% 18.6%
Selling, general and administrative
expenses as a percentage of revenues.... 11.9% 13.2% 12.0% 12.3%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------------------------
1993(1) 1994 1995 1996 1997
------------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Inventories............................... $ 28,124 $ 36,670 $ 59,689 $ 83,659 $102,547
Total assets.............................. 30,818 68,980 104,545 121,177 139,213
Total debt................................ 14,978 33,086 47,428 60,768 66,100
Stockholders' equity...................... 7,000 35,894 45,813 43,929 55,691
</TABLE>
- ---------------
(1) Data for the year ended September 30, 1993 reflect the results of Newmark
prior to its acquisition by Pacific USA on October 1, 1993.
(2) The Company changed its fiscal year end from September 30 to December 31 in
1993.
(3) Reflects the operating data of Adler subsequent to the Company's
acquisition of the homebuilding assets of The Adler Family Partnership on
March 1, 1995.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
On October 1, 1993, Pacific Realty Group acquired Newmark, a homebuilding
company with a long-term track record of successful performance, established
name in its existing markets, disciplined management culture, process and
systems, and locations in strong growth markets. Since inception, the Company
has sought to achieve profitability and revenue growth by providing quality
homes in markets which have experienced population and job growth in excess of
the national average during the past several years. Newmark has served as the
foundation to support the Company's growth strategy, including expansion within
existing markets, entry into two new markets through start-up operations and the
acquisition of a regional homebuilder. In order to solidify lot position for its
homebuilding operation, Pacific Realty Group formed a residential land
acquisition and development company, PUDC, in 1993.
The Company has experienced significant growth and has positioned itself to
continue to expand its residential land and lot acquisitions significantly in
markets that it has recently entered, such as Nashville and Dallas/Fort Worth,
as well as in Houston. The Company believes that, based on its recently acquired
lot options in a number of master-planned communities in and around Houston,
there are significant opportunities for achieving greater market share in this
market. The Company has continued to expand its operations in Miami/Ft.
Lauderdale through new developments and the acquisition of Westbrooke in January
1998. The Company has also entered into new complementary lines of business
including providing title and mortgage origination services through business
relationships with Stewart Title Co. and CTX Mortgage Ventures Corporation. The
Company expects these ancillary sources of revenues to grow at a rate consistent
with the growth of its core homebuilding business.
The Company recognizes revenue at the time of closing when title to, and
possession of, the property transfers to the buyer. The Company capitalizes in
inventory all homebuilding costs during the construction period, including
interest and maintenance, and charges those capitalized costs to cost of sales
as the related inventories are sold. Interest incurred on inventory following
completion of construction is expensed. Accordingly, as the Company's inventory
level rises and falls, interest expense can vary significantly. Included in the
Company's depreciation and amortization expenses is amortization of goodwill in
excess of $1.0 million in each of 1995, 1996 and 1997 related to the Company's
acquisitions of Newmark and Adler.
Equity in earnings from unconsolidated subsidiaries primarily represents
earnings from a Florida homebuilding partnership, owned 50% by the Company,
which wound-up its home-building operations in October 1997. Currently, all of
the Company's continuing Florida operations are conducted through a wholly-owned
subsidiary and included in the Company's revenues rather than in equity in
earnings of unconsolidated subsidiaries. Equity in earnings from unconsolidated
subsidiaries also includes earnings from Pacific Title, L.L.C. ("Pacific
Title"), a title service business in which the Company owns a 49% interest, and
NHC Mortgage Group, L.P. ("NHC Mortgage"), a mortgage finance joint venture in
which the Company owns a 50% interest, each of which was formed in 1997.
The Company acquired Westbrooke effective January 1, 1998 for consideration
consisting of (i) $18.9 million of Acquisition Notes and (ii) up to $7.5 million
of contingent deferred consideration. See "Acquisition of Westbrooke." The
Company accounted for the acquisition based on the purchase method of accounting
and intends to consolidate all future results of Westbrooke in its consolidated
financial statements. See Pro Forma Condensed Consolidated Financial Statements
and the Combined Financial Statements of Westbrooke Communities, Inc. and
Affiliates contained elsewhere in this Prospectus.
17
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth the homebuilding revenue and number of home
closings by market for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Houston:
Revenues.......................................... $ 51,932 $ 79,920 $ 85,690
Units............................................. 253 363 361
Austin:
Revenues.......................................... $ 53,507 $ 63,891 $ 66,405
Units............................................. 291 334 317
Dallas/Fort Worth:
Revenues.......................................... $ 4,922 $ 20,180 $ 30,119
Units............................................. 27 103 138
Miami/Ft. Lauderdale:
Revenues.......................................... $ 10,229 $ 16,819 $ 30,863
Units............................................. 70 102 156
Nashville(1):....................................... -- -- --
-------- -------- --------
Total homebuilding revenues(2)................. $120,590 $180,810 $213,077
======== ======== ========
Total home closings............................ 641 902 972
======== ======== ========
Average sales price per home........................ $ 188 $ 200 $ 219
</TABLE>
- ---------------
(1) Nashville start-up operations began in August 1997 with home closings
expected to begin in the second quarter of 1998.
(2) Does not include revenues from land sales of $4.8 million, $10.1 million
and $2.3 million in 1995, 1996 and 1997, respectively.
The following table sets forth, as a percentage of revenue, certain
information in the Company's statement of operations for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Cost of sales............................................... 81.8% 81.9% 81.4%
Gross profit................................................ 18.2 18.1 18.6
Selling, general and administrative expenses................ 13.2 12.0 12.3
Income before income taxes.................................. 5.0 5.5 5.1
Income taxes(1)............................................. 39.7 39.7 39.1
Net income.................................................. 3.0 3.3 3.1
</TABLE>
- ---------------
(1) As a percent of income before income taxes.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues increased by 12.8% to $215.4 million in 1997 from $190.9 million
in 1996. This increase in revenues is largely attributable to two factors.
First, the number of homes closed by the Company increased by 7.8% to 972 units
in 1997 from 902 units in 1996. Second, the average sales price increased by
9.5% from $200,000 to $219,000 per home sold. This increase in the average sales
price was primarily due to a change in the mix of homes sold. Revenues generated
from sales of Fedrick, Harris Estate Homes increased from 15% of total revenues
in 1996 to 16% of total revenues in 1997. Since the average sales price for
Fedrick, Harris Estate Homes is approximately 70% higher than the average sales
price for homes sold under the Newmark brand name, the increase in the
percentage of revenues from Fedrick, Harris Estate Homes as compared to Newmark
homes resulted in the increase in the average sales price of homes sold in the
1997 period. Home closings increased in
18
<PAGE> 20
the Company's Dallas/Fort Worth and Miami/Ft. Lauderdale markets, and decreased
in Houston and Austin. Although Houston's home closings decreased in 1997
compared to 1996 due to inclement weather in the first quarter of 1997,
Houston's homebuilding revenues increased due to a higher percentage of higher
priced custom homes being closed in 1997 as compared to 1996. Revenues from land
sales were $2.3 million in 1997 and $10.1 million in 1996.
As a percentage of revenues, cost of sales decreased slightly to 81.4% in
1997 compared to 81.9% in 1996. As a percentage of revenues from land sales, the
cost of land sales was 65.2% in 1997 compared to 91.1% in 1996.
Equity in earnings from unconsolidated subsidiaries decreased $327,000 to
$465,000 for 1997 compared to $792,000 for 1996. Earnings from Pacific Title and
NHC Mortgage amounted to approximately $235,000 and $105,000, respectively, for
1997.
Selling, general and administrative expenses increased by 15.2% to $26.5
million in 1997 from $23.0 million in 1996. Of such increase, $375,000 was due
to costs incurred in entering the Nashville in 1997. The balance of the increase
in these expenses was due largely to the increases in sales and construction
activity required to sustain the higher level of revenues. As a percentage of
revenues, selling, general and administrative expenses remained relatively
stable at 12.3% for 1997 compared to 12.0% for 1996.
Interest expense, which primarily reflects the carrying cost of completed
homes, increased 60.5% to $2.0 million in 1997 from $1.2 million in 1996. This
increase was primarily due to the impact of adverse weather on home sales in the
Houston market and an increased inventory level in Florida associated with
increased levels of activity in that market.
The Company's provision for income taxes decreased as a percentage of
earnings before taxes to 39.1% in 1997, compared to 39.7% in 1996. Under a tax
allocation agreement with Pacific USA (the "Tax Allocation Agreement"), the
Company is required to calculate its federal corporate income tax liability as
if it filed a separate federal income tax return for each period and to pay
Pacific USA the sum which would result from such calculation if the Company were
subject to federal corporate income tax and filed a separate tax return. The
Company recognized federal income tax expense under the Tax Allocation Agreement
amounting to $4.0 million in 1997 compared to $3.8 million in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues grew by 52.2% to $190.9 million in 1996 from $125.4 million in
1995. The increase in revenues was largely attributable to the number of homes
closed, which increased by 40.7% to 902 units in 1996 from 641 units in 1995.
This increase in the number of homes closed was due in part to the inclusion of
sales by Adler for the entire 1996 fiscal year compared to only ten months of
sales by Adler in 1995. Home closings also increased in each of the Company's
markets, with the Houston market leading the way with a 43.5% increase in
closings as its units grew to 363 in 1996 from 253 in 1995. The increase in home
closings in Houston reflected the increase in job growth in Houston and the
decrease in interest rates experienced in 1996 as compared to 1995. Dallas/Fort
Worth unit sales nearly quadrupled to 103 from 27 in its first full year of
operations in that market. Revenues from land sales were $10.1 million in 1996
and $4.8 million in 1995.
The Company's overall increase in revenues was also attributable to an
increase in the average home price of 6.4% to $200,000 in 1996 from $188,000 in
1995. Houston, Austin, Dallas and Miami all posted increases in average sales
prices for homes sold ranging from 12.8% in Miami to 4.0% in Austin. These
increases in most cases were due to changes in the product mix of homes sold in
favor of higher priced homes, stimulated by better market conditions. In Miami,
all of the 1995 closings were located in one subdivision. Another subdivision
was added in 1996 in which higher priced homes were sold. This second
subdivision accounted for 43% of the home closings in Miami in 1996.
As a percentage of revenues, cost of sales increased slightly to 81.9% in
1996 compared to 81.8% in 1995. Average cost of units sold increased by 9.4% to
$175,000 in 1996 from $160,000 in 1995. As a percentage of revenues from land
sales, cost of land sales was 91.1% in 1996 compared to 87.0% in 1995.
19
<PAGE> 21
Selling, general and administrative expenses increased in dollars by 38.6%
to $23.0 million in 1996 from $16.6 million in 1995 but decreased as a
percentage of revenues to 12.0% in 1996 from 13.2% in 1995. The dollar increase
in these expenses was primarily due to the increase in sales commissions
associated with an increase in units sold of $2.7 million, additional
advertising to establish the Company name in new markets of $966,000, and costs
associated with a full year of operations in the Company's start-up markets of
$760,000, as well as other administrative expenses associated with the increase
in volume. The decrease in selling, general and administrative expenses as a
percentage of total revenues was due primarily to the costs incurred in
connection with the start-up of the Company's operations in Dallas in 1995. In
1995, the Dallas operations closed only 27 home sales, resulting in revenues of
$4.9 million. In 1996, the Dallas operations closed 103 home sales, resulting in
revenues of $20.2 million, and incurred approximately the same level of selling,
general and administrative expenses that were incurred in 1995.
Interest expense decreased by $94,000 to $1.2 million in 1996 from $1.3
million in 1995. Lower interest expense resulted from improved inventory
turnover during the year primarily in the Houston market.
Other income, which primarily represents management fees from a Florida
homebuilding unconsolidated partnership, grew by $244,000 to $851,000 in 1996
from $607,000 in 1995. The Company expects income from this partnership to
decline as its inventory of land is depleted and homebuilding operations cease.
The Company's provision for income taxes remained at 39.7% of pre-tax
income from 1995 to 1996. The Company recognized federal income tax expense of
$3.8 million under the Tax Allocation Agreement in 1996 compared to $2.3 million
in 1995.
SEASONALITY AND QUARTERLY RESULTS
The homebuilding industry is seasonal, as generally there are more sales in
the spring and summer months, resulting in more home closings in the fall. The
Company operates in the Southwestern and Southeastern markets of the United
States, where weather conditions are more suitable to a year round construction
process than other areas. The Company also believes its geographic dispersion to
be somewhat counter-cyclical, with adverse economic conditions associated with
certain of its markets often being offset by more favorable economic conditions
in other areas. The seasonality of school terms has an impact on the Company's
operations, but it is somewhat mitigated by the fact that many of the Company's
buyers at the higher end of the Company's price range, including Fedrick, Harris
custom homes, no longer have children in school. As a result of these factors,
among others, the Company generally experiences more sales in the spring and
summer months, and more closings in the summer and fall months. Likewise,
Westbrooke has experienced seasonality in its revenues, generally completing
more sales in the spring and summer months and more closings in the fourth
quarter.
The following table presents selected quarterly operating data of the
Company for each of the eight quarters through the period ended December 31,
1997. In the opinion of management, all necessary adjustments (consisting of
normal recurring adjustments) have been included to present fairly the unaudited
selected quarterly
20
<PAGE> 22
operating data. This data is not necessarily indicative of the results of the
operations of the Company for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 30, JUNE 30, SEPT. 30, DEC. 31, MARCH 30, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues.............. $38,181 $50,713 $50,273 $51,688 $46,241 $54,556 $61,507 $53,056
Gross profit.......... 6,631 9,441 9,596 8,923 8,686 10,033 11,251 10,090
Selling, general and
administrative...... 5,403 6,070 5,809 5,694 5,663 6,348 7,110 7,391
Operating income...... 1,246 3,134 3,556 2,947 3,023 3,685 3,179 2,457
MARGIN ANALYSIS:
Gross margin.......... 17.4% 18.6% 19.1% 17.3% 18.8% 18.4% 18.3% 19.0%
Selling, general and
administrative...... 14.2% 12.0% 11.6% 11.0% 12.3% 11.6% 11.6% 13.9%
Operating income...... 3.2% 6.2% 7.1% 5.7% 6.5% 6.8% 5.2% 4.6%
OPERATING DATA:
Homes closed
(units)............. 191 247 248 216 215 249 267 241
Average sales price of
homes closed........ $ 199 $ 203 $ 199 $ 202 $ 213 $ 215 $ 230 $ 217
</TABLE>
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing needs depend primarily upon its sales volume,
inventory levels, inventory turnover and land acquisitions. For the years ending
December 31, 1995, 1996 and 1997, the Company used cash in operations of $8.8
million, $7.8 million and $10.5 million, respectively. The significant use of
cash in operations of the Company has primarily been due to the increasing
inventory levels maintained by the Company as the Company continues to expand
its business. Historically, the Company has financed its operations primarily
through its earnings, borrowings from financial institutions, and capital
contributions and borrowings from Pacific USA, primarily for residential land
development acquisitions. In addition, to date all excess retained earnings not
required to fund lot development and home building activities, service debt or
meet the Company's debt covenants have been distributed to Pacific USA in the
form of cash dividends. Because the Company does not intend to pay such
dividends in the future, the Company will be able to retain those earnings to
fund its expansion and acquisition programs, reducing its need for outside
financing.
The Company has financed in the past, and intends to continue to finance,
its operations with cash from operations and borrowings under construction
credit facilities. Generally these credit agreements are with regional and
national lenders. Each of the credit agreements relates to specific markets and
provides for financing residential land and lot acquisition and construction.
The agreements have restrictive covenants which, among other things, limit
speculative home building, debt to tangible net worth ratios, dividends and set
a minimum requirement for tangible net worth. The agreements have various
maturity dates and bear interest at rates based on Libor and prime. At December
31, 1997, the Company and Westbrooke had $13.2 million and $5.1 million of
available credit under their respective credit facilities. The Company plans to
renew these facilities as they mature.
21
<PAGE> 23
Historically, Pacific USA has guaranteed certain indebtedness and
contingent liabilities of the Company. The total amount of guaranteed
indebtedness and contingent liabilities at December 31, 1997 was $76,000 and
$1.1 million, respectively. The Company does not expect such guarantees to be
required by its commercial lenders following this offering.
The Company generally finances its operations by borrowing for the
acquisition of lot inventory and during the various stages of construction.
Inventories (including finished homes and construction in progress, residential
lots developed and under development) had increased by 22.6% to $102.5 million
at December 31, 1997 from $83.6 million at December 31, 1996. The increase was
due to expansion in the Nashville, Dallas/Fort Worth, Houston and Miami/Ft.
Lauderdale markets. In the Miami/Ft. Lauderdale market, the Company is limited
in its ability to acquire finished lots under option contracts, a factor which
requires the Company to make significant capital expenditures in order to
maintain adequate lot inventory in this market.
The Company utilizes lot options as a method of controlling its investments
in land. At December 31, 1997, the Company had 1,267 lots under option. At
December 31, 1997, the Company had no capital commitments with respect to lot
purchase contracts.
From time to time, the Company has been in breach of certain of its loan
covenants and has obtained waivers from its commercial lenders with respect to
such breaches. Generally, the breached loan covenants related to restrictions on
the Company's level of speculative home inventory. Each of the Company's loan
agreements restricts the number and percentage of units allowed in speculative
inventory. These restrictions range from 50% of the total dollar value of the
respective bank line to 70% of total units committed (sold prior to completion).
In the past, the Company has not experienced difficulty in obtaining appropriate
waivers from its lenders.
The Company also has approximately $18.9 million outstanding under
promissory notes incurred in connection with the acquisition of Westbrooke. See
"Acquisition of Westbrooke." The Company expects to pay these obligations from
cash flow from operations of the Company on a consolidated basis. In addition,
in connection with the acquisition of Westbrooke by the Company, Westbrooke
borrowed $10.0 million from a bank. The proceeds from this loan were used to
repay the $7.5 million outstanding balance under Westbrooke's subordinated notes
and to redeem minority interests in Westbrooke for $2.5 million. The Company
intends to use $10.0 million of the net proceeds from this offering to repay
this bank loan. See "Use of Proceeds."
The Company believes that upon the completion of this offering it will have
adequate financial resources, including availability under its credit
facilities, to meet its working capital and residential land acquisition and
development plans under current market conditions for the next eighteen months.
However, there can be no assurance that the amounts available from such sources
will be sufficient. The Company's and Westbrooke's combined consolidated
outstanding debt was approximately $117 million at December 31, 1997, and is
expected to be approximately $100 million upon the consummation of this offering
and the application of the net proceeds therefrom. Accordingly, the Company
expects to incur interest expense on a consolidated basis at higher levels than
it has in the past. In addition, if the Company identifies significant new
acquisition opportunities outside of the Company's existing markets, or if the
Company's operations do not generate sufficient cash from operations at levels
currently anticipated, the Company may be required to seek additional capital in
the form of equity or debt financing from a variety of potential sources,
including additional bank financings or the issuance of debt or equity
securities. There can be no assurance that the amounts available from such
sources will be sufficient. The amount and types of indebtedness which the
Company may incur are limited by the terms of its existing financing agreements.
In addition, the incurrence of additional debt by the Company would increase its
debt service and interest obligations, which could have an adverse effect on the
Company's results of operations or financial condition. If the Company is not
successful in obtaining sufficient capital to fund its planned expansion and
other expenditures, new projects may be constrained. Any such delay or
abandonment could result in a reduction in sales and may adversely affect the
Company's future business and results of operations.
22
<PAGE> 24
INFLATION
The Company, as well as the homebuilding industry in general, may be
adversely affected during periods of high inflation, primarily because of higher
land and construction costs. In addition, higher mortgage interest rates may
significantly affect the affordability of permanent mortgage financing to
prospective purchasers. The Company attempts to pass through to its customers
any of its costs through increased sales prices. However, there is no assurance
that inflation will not have a material adverse impact on the Company's future
results of operations.
23
<PAGE> 25
BUSINESS
GENERAL
The Company designs, builds and sells single-family homes in five major
markets within the Southwest and Southeast United States, including Houston,
Austin, Dallas/Fort Worth, Miami/Ft. Lauderdale and, most recently, Nashville.
Each of these markets has experienced population and job growth above the
national average over the last several years. The Company operated in 49
subdivisions in these metropolitan areas, and had 444 homes under construction
at December 31, 1997. In addition, as of December 31, 1997, the Company owned or
had under option contract 2,020 lots available for future growth. The Company is
also actively engaged in residential land acquisition and development, which
enables it to provide lots for its homebuilding operations.
The Company offers high-quality homes, designed principally for the
"move-up" and relocation market segments under the Newmark name. Typically,
Newmark homes range in size from 1,700 square feet to over 4,500 square feet and
range in price from $120,000 to $350,000, with an average sales price of
$205,000 for homes closed during 1997. The Company also offers custom homes
under the Fedrick, Harris Estate Homes name that range in size from 3,500 square
feet to over 7,000 square feet and range in price from $250,000 to $700,000,
with an average sales price of $352,000 for homes closed during 1997. Revenues
generated from sales of Fedrick, Harris Estate Homes were 15% and 16% of total
homebuilding revenues for 1996 and 1997, respectively.
The Company's homebuilding operation is positioned to compete with
high-volume builders by offering a broader selection of homes with more
amenities and greater design flexibility than typically offered by volume
builders. Newmark homes give the home buyer the ability to select various design
features in accordance with their personal preferences. Through a volume
building approach the Company's custom homes generally offer more value than
those offered by local, lower-volume custom builders, primarily due to the
Company's effective purchasing, construction and marketing programs. While most
design modifications are significant to the homebuyer, they typically involve
relatively minor adjustments that allow the Company to maintain construction
efficiencies and result in greater profitability due to increased sales prices
and margins. The Company believes that its ability to meet the design tastes of
prospective homebuyers at competitive prices distinguishes itself from many of
its competitors.
STRATEGY
The Company's objective is to provide its customers with homes that offer
both quality and value, while seeking to maximize its return on invested
capital. Management believes that a balanced and disciplined approach to home
construction, land purchases and marketing is essential to the Company's
anticipated growth. To achieve this objective, the Company has developed a
strategy which focuses on the following elements:
GROWTH MARKETS. The Company's primary markets have each experienced
population and job growth in excess of the national average over the past
several years. The Company believes that there are significant growth
opportunities in these markets. The Company also continues to evaluate new
markets that have significant "move-up" and relocation segments that would
satisfy the Company's profitability, investment return and other criteria. While
the Company anticipates entering new markets primarily through start-up
operations, it will also consider the acquisition of homebuilding companies that
have complementary management styles. Entry into new markets is preceded by
extensive due diligence and research conducted by management, in conjunction
with Pacific Research Group and third-party resources.
SOPHISTICATED MARKETING. The Company employs sophisticated and
comprehensive marketing programs to attract potential homebuyers. Elements of
this marketing program include extensive telemarketing, an Internet web site and
a virtual reality CD-ROM home tour. The Company retains a national marketing
consultant to develop its overall advertising strategy. The Company executes its
overall marketing strategy through advertising campaigns tailored to local
markets. Local marketing campaigns include coordination of realtor promotions,
subdivision grand openings, showcase presentations for custom homes, the
Company's newsletters, realtors' newsletters, product bulletins, billboards,
local newspaper advertisements and other direct sales activities. The Company's
telemarketing program is designed to ensure that prospective homebuyers who tour
its model homes
24
<PAGE> 26
receive information regarding the Company's floor plans, optional features,
subdivisions, schools, available financing and other matters. The Company's
telemarketing group also answers requests from prospective homebuyers received
via the Company's web site and toll-free number. The Company's web site,
featuring a virtual reality home tour, has received over 1 million "hits" since
its inception in July 1996 and allows a prospective homebuyer to download the
home tour software to a personal computer and "tour" completely furnished homes,
view the Company's different floor plans, locate the various subdivisions
available in each market, and learn about neighborhood schools, subdivision
amenities and shopping as well as the Company's construction techniques.
FOCUS ON RELOCATION MARKET. In markets with a significant number of
relocation buyers, the Company aggressively competes with resales of existing
homes, primarily by making available to potential buyers completed or nearly
completed homes. Since 1993, approximately 65% of the Company's homes were begun
before a sales contract was executed and an earnest money deposit was received.
As of December 31, 1997, the Company had 90 completed homes in inventory and 265
homes under construction without a sales contract. The Company believes that
maintaining an inventory of completed or nearly completed homes provides
distinct competitive advantages by (i) allowing home buyers to physically
inspect their future home, in many instances easing their decision to buy, (ii)
providing homes which can be moved into in or close to the same time frame as
purchases of previously owned homes and (iii) avoiding the significant time and
monetary costs typically associated with updating previously owned homes. Since
1993, 70% of the Company's homes were sold prior to completion of the home.
MANAGEMENT TRAINING. The Company aggressively recruits and hires new
management trainees, typically with some construction experience, following
graduation from college and trains these new hires for increasing levels of
responsibility within the Company. Through continuous "on the job" experience
and classroom training, these associates become knowledgeable, experienced
candidates for middle management positions. The Company believes that one of its
strengths is its depth of middle management. This depth facilitates the
Company's growth strategy as more experienced management relocates to new
markets to conduct start-up operations while top performing middle managers are
promoted to increasing levels of responsibility for continuing expansion of
existing markets. The Company also actively seeks and employs qualified
candidates for sales and marketing positions and provides extensive training
designed to improve marketing skills and educate sales associates with respect
to the uniqueness of the Company's homes which allows them to emphasize product
differentiation in the sales process.
DECENTRALIZED OPERATIONS WITH EXPERIENCED MANAGEMENT. The Company believes
that the in-depth knowledge of its experienced management in local markets
enables the Company to better serve its customers. The Company is organized into
operating divisions, each relating to a local market area. Local management of
each operating division is responsible for preliminary site selection and
negotiation of option contracts in accordance with Company policies.
Additionally, each operating division plans its homebuilding schedule, selects
the building plans and architectural scheme for its subdivisions, obtains all
building approvals, and develops a marketing plan for its homes. The Company's
corporate office retains responsibility for purchasing, accounting and certain
other management and administrative matters including approval of all lot
contracts, final product selection, securing all financing and marketing plan
approval.
CENTRALIZED PURCHASING. The Company utilizes centralized purchasing to
leverage its purchasing power into volume discounts, a practice which reduces
costs, ensures timely deliveries and reduces the risk of supply shortages due to
allocations of materials. The Company has negotiated favorable price
arrangements with high quality national and regional suppliers such as General
Electric, Rheem Manufacturing, Dupont Corian, Owens Corning, Dow Chemical, Royal
Baths, Weslock National and Sherwin-Williams for appliances, heating and air
conditioning, counter tops, bathroom fixtures, roofing and insulation products,
floor coverings, and other housing components. Major materials, such as lumber,
sheetrock, concrete and brick are also centrally purchased to obtain volume
discounts. There are no minimum purchase requirements for these arrangements.
COST MANAGEMENT. The Company controls its divisional overhead costs by
centralizing administrative and accounting functions, eliminating the need for
redundant functions at the city level. The Company controls construction costs
through the efficient design of its homes and by obtaining favorable pricing,
where possible,
25
<PAGE> 27
from subcontractors based on the high volume of work performed for the Company.
The Company also controls its warranty costs through quality control that
ensures that the home has been totally finished prior to the buyer moving in,
thus enhancing customer satisfaction. The Company controls its advertising
expenses through sophisticated budgeting of expenses with extensive review of
all expenditures. Some of the Company's major suppliers and contractors also
contribute advertising dollars for special promotions of houses and products.
These campaigns feature the key suppliers' products and enhance the image of the
Company's homes through brand recognition. In addition, the Company seeks to
control its corporate overhead costs through efficiencies achieved through its
highly automated and integrated systems.
LIMITED REAL ESTATE EXPOSURE. The Company seeks to maximize its return on
capital and limit its exposure to changes in land valuation by obtaining options
to purchase lots whenever feasible. The Company will also directly acquire,
where appropriate, quality residential properties that are in high demand for
use in its homebuilding operations and for sale to third-party builders. The
Company's executive management establishes targeted levels of lot options and
land for development based on its strategic plan for the overall growth of the
Company. The Company targets properties for acquisition that are both suitable
for its homebuilding product and in locations which are anticipated to maintain
the homebuyers' property values. The Company believes this strategy improves
inventory turnover and enables the Company to develop and dispose of the
developed lots typically within two to three years. The Company does not acquire
land that is not suitable for lot development and residential construction and
does not speculate on land values by acquiring and holding land for resale or
for future development.
The Company seeks to limit its exposure to real estate inventory risks by
(i) closely monitoring its unsold inventory of new homes and the stage of
completion of homes under construction on an ongoing basis, (ii) centralizing
control for the start of new homes and (iii) closely monitoring local job market
and demographic trends, housing preferences and related economic developments,
such as new job opportunities, local growth initiatives and trends in work force
median income levels.
MARKETS
The Company conducts homebuilding activities in five markets within three
states, including Houston, Austin, Dallas/Fort Worth, Miami/Ft. Lauderdale and
Nashville. The Company's operations in each of its markets differ based on a
number of market specific factors. From the results of the research and analysis
performed by the Company and Pacific Research Group, the Company plans to focus
its development activity based on the following factors, among others: regional
economic conditions, job growth, land availability, the local land development
process, consumer tastes, competition from other builders of new homes and
secondary home sales activity. The statistical information presented below has
been compiled from a number of public sources by Pacific Research Group, an
affiliate of the Company.
26
<PAGE> 28
The following table presents selected lot inventory and homebuilding data
for the Company's current markets:
<TABLE>
<CAPTION>
HOMEBUILDING REVENUES /
LOT INVENTORY HOMES CLOSED
--------------------- ------------------------------
DECEMBER 31, YEAR ENDED DECEMBER 31,
OPERATIONS --------------------- ------------------------------
MARKET COMMENCED 1995 1996 1997 1995 1996 1997
------ ---------- ---- ---- ----- -------- -------- --------
(DOLLARS IN THOUSANDS / UNITS)
<S> <C> <C> <C> <C> <C> <C> <C>
Houston..................... 1983 222 339 632 $ 51,952 $ 79,920 $ 85,690
253 363 361
Austin...................... 1984 272 208 363 53,507 63,891 66,405
291 334 317
Dallas/Fort Worth........... 1995 160 146 396 4,922 20,180 30,119
27 103 138
Miami/Ft. Lauderdale........ 1995 345 169 368 10,229 16,819 30,863
70 102 156
Nashville................... 1997 -- -- 261 -- -- --
-- -- --
--- --- ----- -------- -------- --------
Total Lots/Revenue... 999(1) 862(1) 2,020(1) $120,590 $180,810 $213,077
=== === ===== ======== ======== ========
Total Units Closed... 641 902 972
======== ======== ========
</TABLE>
- ---------------
(1) Includes 743, 656 and 1,267 lots under option contracts as of December 31,
1995, 1996 and 1997, respectively.
HOUSTON, TEXAS. Growth in the energy sector combined with a healthy
national economy are the key elements behind Houston's recent economic
expansion. Houston has enjoyed a 2.7% rate of annual employment growth, or an
average of 51,000 jobs per year since 1993. Houston has diversified its
employment base between energy-dependent and energy-independent industries,
which the Company believes should promote more stable job growth and a strong
relocation market. Houston's population has grown by an average of more than
80,000 persons per year since 1990. Houston's affordable homes, low cost of
living and strong population growth continue to favorably impact the demand for
single-family homes. The median household income for Houston rose to an
estimated $36,342 in 1996 from $31,503 in 1990, reflective of the strong job
market in the metro area.
Historically, the Company has maintained a moderate level of market share
in Houston, but believes that additional expansion in this market is appropriate
based on current and anticipated market conditions. The Company has strong brand
name recognition in Houston and has positioned itself to take advantage of this
anticipated market expansion.
AUSTIN, TEXAS. From 1993 to 1996, Austin had created an average of 26,100
jobs per year, an annual growth rate of 5.5%. According to the American Metro
Study Corporation Residential Survey for the second quarter of 1997, Austin's
economy has slowed somewhat in 1996 and 1997, with an average of 18,000 new jobs
per year projected over the next two years, reflecting a slower forecasted
growth rate of approximately 2.2% per annum. Despite this slowdown, the rate of
Austin's job growth remains stronger than that of the national economy. The
Austin economy is dominated by four major sectors: high-technology
manufacturing, software development, back-office operations and state
government, including the University of Texas. The Austin Metropolitan
Statistical Area ("MSA") has added an average of more than 100 families per week
since 1994 and Austin's population exceeded one million persons in 1996 for the
first time, aided by favorable cost of living factors and steady corporate
expansions and relocations. The MSA continues to have a young (average age
29.5), well educated (64% of adults have at least some college education)
workforce with a median income of $34,420, all factors which are favorable to
growth in the single-family housing market.
The Company plans to maintain current levels of activity in this market.
The Company believes that this is an appropriate level of activity given the
size of the Austin market.
27
<PAGE> 29
DALLAS/FORT WORTH, TEXAS. The combined Dallas/Fort Worth metropolitan area
exceeded 4.5 million in total population in 1996. With an employment base of
more than 2.3 million jobs, the metro area has added between 80,000 and 90,000
jobs annually during 1994 to 1996 (a 3.4% annual growth rate). This growth is
partially attributable to the emergence of the "Telecom Corridor," a new center
for high-technology communication companies in north Dallas and the Alliance
Airport region, a hub for the manufacturing and service industries in Fort
Worth. The metroplex has positioned itself as an attractive market for corporate
relocations and expansions due to the relatively low cost of living and ease of
accessibility to the metroplex. The median household income in 1996 was $44,300
and has risen an average of 5.4% annually since 1980. The single-family market
in Dallas/ Fort Worth is characterized by rising home values in a market which
has grown at an average rate of 21,000 units per year over the period 1993 to
1996.
The Company has positioned itself to increase its market share in the
Dallas/Fort Worth market, as this area continues its economic expansion. The
Company entered this market with start-up operations in 1995 and is achieving
the image, brand awareness and improved lot position which the Company believes
will support its expansion in this market.
MIAMI/FT. LAUDERDALE, FLORIDA. The Company's operations in Florida are
concentrated in Broward and Dade Counties, which include the cities of Ft.
Lauderdale and Miami, respectively. Broward County experienced an average annual
population growth of 29,900 residents from 1990 to 1996, representing a
compounded annual growth rate of 2.2%. The 1997 Urban Land Institute Profiles
projects that Broward County's population will increase at a rate of 1.9%
annually between 1996 and 2001. Most newcomers to the market are expected to be
working-age families, a majority relocating from the South Dade/Miami area. The
service sector dominates the overall employment in Broward. The service sector
job growth rate of 3.5% between 1995 and 1996 is reflected in the 20,900 new
jobs created during that period.
Fueled by growth in the service and trade industries, Dade County has
averaged approximately 20,000 new jobs per year during 1995 and 1996, an annual
growth rate of approximately 2.2%. According to the American Metro Study
Corporation Business Forecast for 1997, the Dade County population is projected
to increase annually by 25,000 people to a total population of 2.1 million by
2000. According to the American Demographics 1997 MSA Profile for Miami/Ft.
Lauderdale, the forecasted employment average annual growth rate through the
year 2000 of 2.2% for this area compares favorably to a national projected
average annual growth rate of 1.2%.
The Company entered this market with the 1995 acquisition of a regional
homebuilder. In addition, in January 1998 the Company acquired Westbrooke, an
acquisition which expands the Company's operations in Dade and Broward counties
and provides an entry into homebuilding operations in Palm Beach County. The
Company believes that each of these acquisitions has positioned it to expand
into new developments in this market.
NASHVILLE, TENNESSEE. From 1990 to 1996, middle Tennessee's population grew
by 11.1%, double the U.S. rate of 5.4%. With more than 100,000 new jobs created
from 1990 through 1995, the area's employment growth rate of 17.9% was almost
triple the national rate of 6.6% over that period, largely due to heavy
immigration of relocating workers and new job seekers. Growing demand for labor
pushed unemployment rates to their lowest sustained levels in 30 years,
averaging 3.2% for the Nashville MSA. The Nashville MSA had a median household
income of $40,405 and average household income of $49,880. The Company believes
that the low cost of living, strong job growth and steady increase in per capita
personal income will continue to have a favorable impact on demand for
single-family homes in Nashville.
The Company entered the Nashville market through a start-up operation,
which commenced construction of new homes in August 1997. Initial home closings
are expected to begin in the first half 1998.
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BACKLOG
The following table sets forth the Company's sales backlog by market for
the periods indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
SALES SALES SALES
HOMES VALUE HOMES VALUE HOMES VALUE
----- ------- ----- ------- ----- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Houston.......................... 65 $13,342 70 $15,411 97 $23,025
Austin........................... 77 14,158 72 13,773 85 17,806
Dallas........................... 15 2,734 28 5,486 42 9,167
Miami............................ 14 2,046 97 15,987 55 10,050
Nashville........................ -- -- -- -- -- --
--- ------- --- ------- --- -------
Total....................... 171 $32,280 267 $50,657 279 $60,048
=== ======= === ======= === =======
</TABLE>
Backlog represents home purchase contracts which have been executed and for
which earnest money deposits have been received. Home sales are not recorded as
revenues until the closings occur. Sales value represents the product of the
number of homes for which earnest money contracts have been received multiplied
by the average home sales price for the specific city for the period indicated.
Consistent with historical experience, 98% of the homes in backlog at
December 31, 1996 were closed by December 31, 1997. Based upon dollar volume,
contract cancellations were approximately 14% of the home sales contracts signed
during each of 1995, 1996 and 1997. Although cancellations can disrupt
anticipated home closings, the Company believes that cancellations have not had
a material negative impact on operations or liquidity of the Company during the
last several years. The Company attempts to reduce cancellations by reviewing
each homebuyer's ability to obtain mortgage financing early in the sales process
and by closely monitoring the mortgage approval process.
IDENTIFICATION OF NEW MARKETS
To achieve the Company's expansion strategy, the Company, together with its
affiliate, Pacific Research Group, has developed a new market expansion process
designed to identify and track growing homebuilding markets in the United
States. The Company's program is designed as an ongoing process and consists of
three stages which track economic and demographic activity in primary and
secondary metropolitan markets (Stage I), narrowing the focus on specific
markets and criteria (Stage II and Stage III) as they meet expansion objectives
and timing. As part of its screening process, the Company evaluates
geographically diverse markets because it believes that potential adverse
economic conditions associated with certain markets are often offset by more
favorable economic conditions in other operating areas. Consideration is also
given to those markets located near current operating markets, which could
function as satellite operations. An in-depth description of each of the stages
is set forth below:
Stage I includes the accumulation, maintenance and monitoring of quarterly
economic and demographic data in potential expansion markets through the use of
published databases and U.S. Census Statistics. Local and statewide data in each
market are also analyzed for comparison purposes. The following factors are
tracked on a quarterly basis for each expansion market: population growth and
trends; breakdown of population by age; overall employment growth; employment by
industry; median/average household income; unemployment rate; single-family
housing starts/permits; median/average sales price of new and existing homes;
and resale inventory and months of supply.
The Stage II analysis establishes and analyzes economic and demographic
benchmarks for the selection of three main markets and five back-up markets
based on desired market share and geographic diversity. Following the selection
of the three main markets, an in-depth Stage II market analysis is performed to
determine market viability in these selected markets. If the evaluation of any
of the three selected markets reveal factors unfavorable for expansion, then a
Stage II analysis is performed on one of the selected back-up markets. A Stage
II analysis
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<PAGE> 31
consists of the following: identifying and engaging a market research firm that
tracks and can produce single-family statistical data; profiling market
(identify submarkets, price bands, and total single-family starts, closings,
inventory levels and competition); assessing the availability of single-family
land and lots (both current and future); assessing the availability and quality
of the local trade base; identifying job growth corridors and access to
submarkets; identifying corporate relocations/expansions and major employers;
identifying tax structure of cities; profiling school districts; profiling
business and political climate for municipalities; assessing the
government/regulatory issues with respect to homebuilding and land development;
assessing market specific environmental issues; determining availability of
utilities in submarkets and future growth corridors; determining presence of
national and regional builders; and assessing office, retail, industrial and
multi-family market activity.
Upon completion of the Stage II analysis, one or more of the three markets
will be selected as an expansion market. Once a market is identified as an
expansion market, a market penetration and positioning strategy is developed by
the Company to evaluate the Stage III analysis data which includes the
following: profile of existing communities in each submarket based on activity
levels (starts, closings, inventory levels), price point and product; profile of
existing communities based on location and lot product size; and profile of
builders by submarket.
LAND POLICIES AND POSITION
The Company provides lot positions for its homebuilding operations by
acquiring lot options and by purchasing land for the development of lots. When
appropriate, developed lots are sold to third-party builders to increase
inventory turnover and to enhance earnings for the Company. The Company has
typically optioned lot positions in the Houston and Austin markets due to the
brand awareness of the Newmark and Fedrick, Harris Estate Homes names among both
consumers and developers, in addition to the vast amount of available lots being
optioned in those markets by developers. The Company also acquires lot options
in the Dallas/Fort Worth and Nashville markets. The Company has developed land
in the Miami/Ft. Lauderdale, Dallas/Fort Worth and Nashville markets and intends
to continue to do so in the future. Additionally, residential land developments
may be purchased when the Company enters new markets. Prior to any land
acquisitions, the Company conducts extensive due diligence utilizing regional
expertise, including on-site inspection and soil testing.
DESIGN
The Company's home designs and floor plans are prepared by outside
architects in each of the Company's markets to appeal to the local tastes and
preferences of the community. The Company offers six hours of interior decorator
consultation without cost to homebuyers who purchase the Company's Fedrick,
Harris Estate Homes. For its Newmark homes, the Company offers optional interior
and exterior features to enhance the basic home design. The Company's design
department has the capability to change its standard floor plans to accommodate
the individual homebuyer. While most design modifications are significant to the
homebuyer, they typically involve relatively minor adjustments that allow the
Company to maintain construction efficiencies and result in greater
profitability due to increased margins. The design department also verifies that
each floor plan will fit on a particular lot before construction begins. To
contain costs, the design department periodically alters the Company's most
popular floor plans, so that they remain current with design trends, product
updates and consumer tastes.
CONSTRUCTION
Substantially all of the Company's construction work is performed by
subcontractors. The Company's construction superintendents monitor the
construction of each home, coordinate the activities of subcontractors and
suppliers, subject the work of subcontractors to quality and cost controls and
monitor compliance with zoning and building codes. Subcontractors typically are
retained pursuant to a contract that obligates the subcontractor to complete
construction in a workmanlike manner and that provides standard indemnifications
and warranties. The subcontractor is paid on a per unit basis which fluctuates
depending on the size of the home. The contracted price is a part of each
purchase order. Typically, the Company works with the same subcontractors in
each city. The Company's subcontractors are not subject to any collective
bargaining agreements. While the
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<PAGE> 32
Company competes with other homebuilders for qualified subcontractors, it has
established long-standing relationships with many of its subcontractors. To
date, by providing both timely payments and steady work assignments, the Company
has not experienced any inability to obtain qualified subcontractors.
The Company's purchasing and cost accounting practices are designed to
facilitate construction flexibility. This process permits homebuyers to modify
their designs, while allowing the Company to monitor and maintain its
profitability. Construction time for the Company's homes depends on weather,
availability of labor, materials and supplies and other factors. The Company
typically completes the construction of a home within four to five months.
The Company does not maintain significant inventories of construction
materials, except for work in process materials for homes under construction.
Typically, the construction materials used in the Company's operations are
readily available from numerous sources. The Company has favorable price
arrangements or contracts with suppliers of certain of its building materials,
but it is not under any specific purchasing requirements. In recent years, the
Company has not experienced any significant delays in construction due to
shortages of materials or labor.
MARKETING AND SALES
The Company markets and sells its homes through commissioned employees and
cooperates with independent real estate brokers. The Company targets the
"move-up" and relocation market segments and employs sophisticated marketing
techniques to attract potential homebuyers through its Internet web site,
extensive telemarketing and other marketing programs. The Company pioneered the
development of the virtual reality CD-ROM home tour that allows a prospective
homebuyer to download the home tour software to a personal computer and "tour"
completely furnished homes, view the Company's different floor plans, locate the
various subdivisions available in each market, and learn about neighborhood
schools, subdivision amenities and shopping as well as the Company's
construction techniques. Home sales are typically conducted from sales offices
located in furnished model homes used in each subdivision. At December 31, 1997,
the Company owned 40 model homes. In some cases, these model homes are sold and
then leased back until the completion of the respective subdivision. The
Company's sales personnel assist prospective buyers by providing them with floor
plans, price information, tours of model homes and the selection of options and
other custom features. Such personnel are trained by both the Company and
external independent experts in sales expertise. These sales and marketing
personnel are kept informed as to the availability of financing, construction
schedules and marketing and advertising plans. The Company has also formed sales
teams comprised of a sales person and other employees from throughout the
Company to provide sales support and motivation.
In addition to using model homes, the speculative homes built in each
subdivision enhance the Company's marketing and sales activities. Construction
of these speculative homes is also necessary to satisfy the requirements of
relocated personnel, "move-up" buyers, and independent brokers, who often
represent homebuyers requiring a completed home within sixty days. Approximately
70% of these speculative homes were sold while under construction in 1997. The
number of speculative homes the Company builds in any given subdivision is
influenced by local market factors, such as new employment opportunities,
significant job relocations, growing housing demand and the length of time the
Company has built in the market. At December 31, 1997, the Company was operating
in 49 subdivisions.
The Company advertises in newspapers and in real estate and mortgage broker
company publications, brochures, newsletters and billboards. Because real estate
brokers are important to sales, the Company sponsors realtor breakfasts,
contests and other events to increase awareness of the Company's subdivisions
and products. Certain of the Company's suppliers participate with the Company in
its advertising and promotional materials, either through co-branding and
cost-sharing or through rebates.
Sales of the Company's homes generally are made pursuant to a standard
sales contract which requires a down payment of $2,000 to $5,000, or 5% to 10%
of the sales price, on custom homes. The contract includes a financing
contingency which permits the customer to cancel in the event mortgage financing
at prevailing interest rates is unobtainable within a specified period,
typically four to six weeks, and may include other contingencies, such as the
sale of an existing home. The Company includes a home sale in its backlog upon
execution of the
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<PAGE> 33
sales contract and receipt of the initial down payment. The Company does not
recognize revenue until the home is closed and title passes to the homebuyer.
The Company estimates that the average period between the execution of a sales
contract for a home and closing is approximately four to five months for presold
homes.
TITLE SERVICES
In 1997, the Company acquired a 49% interest in Pacific Title, which serves
as a title insurance agent and provides title insurance policies and closing
services to purchasers of homes built and sold by the Company in Texas. The
Company assumes no title insurance risk associated with these title policies,
which are issued by Stewart Title Co., one of the oldest title companies in
Texas. Stewart Title Co. owns the balance of the shares of Pacific Title.
CUSTOMER FINANCING
In 1997, the Company acquired a 50% interest in NHC Mortgage, a joint
venture with CTX Mortgage Ventures Corporation, one of the nation's largest
mortgage companies. The joint venture underwrites, originates and sells
mortgages for the homes the Company builds and for other homebuilders. The
Company's capital is not at risk in connection with these mortgages.
MANAGEMENT INFORMATION SYSTEMS
The primary application software for the Company is The Homebuilder
Software Package from Systems Analysis, Inc. This package was written
specifically for production homebuilders in RPGIII language and operates in
OS/400 on an IBM AS/400. The Company recently migrated the application software
and the data files to native OS/400 from System 36 mode to increase the speed of
on-line processing and utilize current tools offered by IBM and IBM Business
Partners. The Homebuilder Software Package is a fully-integrated accounting
package which has general ledger, accounts payable, job costs, purchasing,
payroll, warranty and production status modules. Communication to the AS/400
from remote offices is managed utilizing TCP/IP protocol over a frame relay
network provided by Network MCI. Locally attached devices such as personal
computers, printers, and terminals communicate with the AS/400 via TCP/IP
protocol over an Ethernet network. Hardware for the wide area network includes
IBM hubs, Motorola, Inc. DSU/CSUs, Cisco Systems, Inc. routers, and Perle
protocol converters. Network software for the Company is Microsoft Windows NT.
Data is protected on the AS/400 using RAID-5 data protection, daily tape
backups and redundant data archive on a second AS/400 at the corporate office. A
third AS/400 is maintained off-site as a contingency backup in case of fire or
other disaster.
Telecommunications for the Company is provided by a Siemens Rolm digital
switch utilizing a T-1 line from MCI Telecommunications for local direct inward
dialing (DID Smart Trunks), caller ID and long distance calling. Long distance
rates are substantially reduced by utilizing several channels of a fractional
T-1 from MCI.
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.
CUSTOMER SERVICE AND QUALITY CONTROL
The Company's operating divisions are responsible for pre-closing, quality
control inspections and responding to customer's post-closing needs. The Company
believes that the prompt, courteous response to homebuyers' needs during and
after construction reduces post-closing repair costs, enhances the Company's
reputation for quality and service, and ultimately leads to significant repeat
and referral business. The Company conducts pre-closing inspections with
homebuyers immediately prior to closing. In conjunction with the inspections, a
list of items for home completion is created. It is the Company's policy that
the sale is not closed until all items are completed to the homebuyer's
satisfaction.
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<PAGE> 34
All warranty requests are processed through the customer service
departments located in each of the markets. In most instances, a customer
service manager inspects the warranty request within 48 hours of receipt. If
appropriate, the repair work is scheduled to be approved by the homeowner upon
satisfactory completion. An integral part of the Company's customer service
program revolves around post-closing interviews. Generally, a customer service
representative is sent into each home within 45 days of closing to evaluate the
homeowner's satisfaction with both their home and their home-buying experience.
The post-closing interview involves an analysis of the homebuyer's experiences
with the sales counselor, the title company, the mortgage company and the
construction department as well as their satisfaction with the product.
Typically, after a year, another interview is conducted with the homeowner to
determine their continued satisfaction. The subsequent interview provides
management a direct link to the customer's perception of the entire buying
experience as well as valuable feedback on the quality of the product.
WARRANTY PROGRAM
The Company provides a two-year limited warranty of workmanship and
materials with each of its homes. The first year of such warranty, the Company
provides coverage on workmanship and materials, plumbing, electrical, heating,
cooling, ventilation systems and major structural defects. The second year the
Company is responsible for major structural defects and specific types of
defects in plumbing, electrical, heating, cooling and ventilation systems
exclusive of effects in appliances, fixtures and equipment. The Company
subcontracts its homebuilding work to subcontractors who provide the Company
with an indemnity and a certificate of insurance prior to receiving payments for
their work and, therefore, claims relating to workmanship and materials are
generally the primary responsibility of the Company's subcontractors. The next
eight years the Company provides a limited homeowners' warranty covering major
structural defects through a single national agreement with the Residential
Warranty Corporation. A reserve of approximately 0.75% of the sale price of a
home is established to cover warranty expenses, although this reserve is subject
to adjustment in special circumstances. The Company's historical experience is
that such warranty expenses generally fall within the amount established for
such reserve. The Company does not currently have any material litigation or
claims regarding warranties or latent defects with respect to construction of
homes. Current claims and litigations are expected to be substantially covered
by the Company's reserve or insurance. Generally, warranty claims are handled by
the construction superintendent who built the particular home to ensure that
prompt and appropriate corrective action is taken by the appropriate
subcontractor.
COMPETITION
The development and sale of residential properties is highly competitive
and fragmented. The Company competes for residential sales on the basis of a
number of interrelated factors, including location, reputation, amenities,
design, quality and price, with numerous large and small homebuilders, including
some homebuilders with nationwide operations and greater financial resources
and/or lower costs than the Company. The Company also competes for residential
sales with individual resales of existing homes, available rental housing and,
to a lesser extent, resales of condominiums. The Company believes that it
compares favorably to other builders in the markets in which it operates, due
primarily to: (i) its experience within its geographic markets, which allows it
to vary its product offerings to reflect changing market conditions; (ii) its
responsiveness to market conditions, enabling it to capitalize on the
opportunities for advantageous land acquisitions in desirable locations; and
(iii) its reputation for service and quality. There can be no assurance that the
Company will be able to continue to compete successfully in any of its markets.
The inability of the Company to continue to compete successfully in any of its
markets could have a material adverse effect on the Company's business,
financial condition or results of operations.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
All of the Company's land is purchased with the right to obtain building
permits upon compliance with specified conditions, which generally are within
the Company's control. Upon compliance with such conditions, the Company seeks
building permits. The length of time necessary to obtain such permits and
approvals affects the carrying costs of unimproved property acquired for the
purpose of development and construction. In addition,
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<PAGE> 35
the continued effectiveness of permits already granted is subject to several
factors, such as changes in policies, rules and regulations and their
interpretation and application. To date, the governmental approval processes
discussed above have not had a material adverse effect on the Company's
development activities. There can be no assurance, however, that these and other
restrictions will not adversely affect the Company in the future.
Local and state governments also have broad discretion regarding the
imposition of development fees for projects in their jurisdiction. These are
normally established, however, when the Company receives recorded final maps and
building permits. The Company is also subject to a variety of local, state and
federal statutes, ordinances, rules and regulations concerning the protection of
health, zoning and the environment. These laws may result in delays, cause the
Company to incur compliance and other costs, and prohibit or restrict
development in certain environmentally sensitive markets.
EMPLOYEES
At December 31, 1997, the Company employed 257 persons, of whom 71 were
sales and marketing personnel, 97 were executive, administrative and clerical
personnel, and 89 were involved with construction. None of the Company's
employees are covered by collective bargaining agreements. The Company believes
its relations with its employees are good.
PROPERTIES
The Company owns a 16,000 square foot facility in Sugar Land, Texas, which
serves as the Company's headquarters and primary residential homebuilding
office. The Company leases an aggregate of approximately 7,500 square feet in
Dallas, Austin, Nashville and Miami for its division operations.
LITIGATION
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of the Company's management, the
ultimate disposition of these matters is not expected to have a material adverse
effect on the financial condition or results of operations of the Company.
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<PAGE> 36
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS. The Company's directors and executive
officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- ---- --------
<S> <C> <C>
Lonnie M. Fedrick..................... 53 President and Chief Executive Officer
and Director
James M. Carr......................... 47 Executive Vice President and Director
J. Eric Rome.......................... 38 Executive Vice
President -- Homebuilding
B. Coleman Bradley.................... 37 Executive Vice President -- Land
Acquisition and Development
Terry C. White........................ 48 Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
Michael K. McCraw..................... 46 Chairman of the Board
Larry D. Horner....................... 63 Director
Bill C. Bradley....................... 64 Director
William A. Hasler(1).................. 56 Director Designate
Jon P. Newton(1)...................... 56 Director Designate
</TABLE>
- ---------------
(1) Messrs. Hasler and Newton have agreed to become directors of the Company
upon completion of this offering and are expected to serve on the Company's
audit and compensation committees.
Lonnie M. Fedrick has served as President and Chief Executive Officer of
the Company since 1997. Mr. Fedrick has also been President and Chief Executive
Officer of Newmark since 1994 and was Executive Vice President of Newmark from
1984 to 1994. Mr. Fedrick co-founded Newmark in 1983 and has more than 31 years
experience in the homebuilding industry. Mr. Fedrick began his career with
Norwood Homes in 1967, most recently serving as the Vice President of
Construction. From 1974 to 1983, he served as Vice President of Operations of
Monarch Homes. He is a member of the board of directors of the Greater Houston
Builders Association.
James M. Carr became Executive Vice President and a Director of the Company
upon the closing of the acquisition of Westbrooke by the Company in January
1998. Mr. Carr founded Westbrooke in 1976, and has served as Chairman, Chief
Executive Officer and President of Westbrooke since its inception. Mr. Carr is a
graduate of the University of Miami. He is also the Chairman of the Baptist
Hospital Foundation and a director of Baptist Health Systems.
J. Eric Rome has served as Executive Vice President -- Homebuilding of the
Company since 1997. Mr. Rome has served as President of the Texas Division of
Newmark since 1996. He was Executive Vice President of the Newmark's Central
Texas Division from 1995 to 1996, a Vice President from 1984 to 1994, and
Construction Manager of Newmark's Houston division from 1983 to 1984. From 1981
to 1983, Mr. Rome was employed by Monarch Homes as a construction
superintendent. He has also served as an officer in various capacities with the
Texas Capitol Area Builders Association.
B. Coleman Bradley has served as Executive Vice President -- Land
Acquisition and Development of the Company since 1997. Additionally, he has
served as President and Chief Executive Officer of PUDC since its formation in
1993. From 1990 to 1993, he directed the land development activities of Pacific
USA. From 1986 to 1990, Mr. Bradley served as Executive Vice President of Real
Estate Decision Systems, and from 1982 to 1986, Mr. Bradley served as President
of a Dallas/Fort Worth custom homebuilding company.
Terry C. White has served as Chief Financial Officer and Treasurer of the
Company since 1997. Mr. White is also Senior Vice President, Chief Financial
Officer and Treasurer of Newmark, which he joined in 1984 as Controller. Prior
thereto, Mr. White was employed by Wood Bros. Homes as a division controller and
prior to that he served in various accounting and finance positions with Safeway
Stores, Inc. He has played a key role in establishing the Company's accounting
controls and management information systems. Mr. White is a certified public
accountant and a graduate of the University of North Texas.
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<PAGE> 37
Michael K. McCraw, Chairman of the Board, has served as Chief Financial
Officer of Pacific USA since 1992. He is also the President and Chief Operating
Officer of Pacific Realty Group, Inc., the immediate parent of the Company. From
1989 to 1992, Mr. McCraw served as Chief Financial Officer of Pacific Southwest
Bank, an affiliate of the Company. He was formerly associated with KPMG Peat
Marwick LLP for 15 years. He is a certified public accountant and a graduate of
Texas A & I University.
Larry D. Horner, a director of the Company, has served as Chairman of
Pacific USA since 1994. He is also Chairman of the Board and Chief Executive
Officer of Asia Pacific Wire & Cable Corporation Limited, a Bermuda corporation
with operations in Southeast Asia, which is publicly traded on the New York
Stock Exchange, and a director of American General Corp., Phillips Petroleum
Company, Atlantis Plastics, Inc., Biological & Popular Cultures, Inc. and
Laidlaw Holdings Inc., an affiliated company. Mr. Horner was formerly associated
with KPMG Peat Marwick LLP for 35 years, retiring as Chairman and Chief
Executive Officer of both the U.S. and International firms. He is a certified
public accountant and a graduate of the University of Kansas and the Stanford
Executive Program.
Bill C. Bradley, a director of the Company, has served as Chief Executive
Officer and a director of Pacific USA since 1991. Mr. Bradley was formerly
associated with KPMG Peat Marwick LLP for 23 years and also served as a member
of its board of directors. He is a graduate of the University of Texas.
William A. Hasler has agreed to become a director of the Company following
consummation of this offering. Mr. Hasler has served as Dean of the Haas School
of Business at the University of California at Berkeley since August 1991. Prior
to that, he was Vice Chairman and director of KPMG Peat Marwick LLP. Mr. Hasler
also serves on the boards of The Gap, TCSI, Walker Interactive, Aphton
Corporation and Asia Pacific Wire and Cable Corporation Limited, and is a member
of the board of governors of the Pacific Stock Exchange. In addition, he serves
on the Visiting Board of the Hong Kong University of Science and Technology
School of Business and the Advisory Board of the Critical Technologies
Institute, a Congressionally mandated advisor to the President's Office of
Science and Technology. Mr. Hasler is a member of the Bay Area Council and The
Berkeley Foundation Board and a trustee of Pomona College. He is a graduate of
Pomona College and the Harvard Business School.
Jon P. Newton has agreed to become a director of the Company following
consummation of this offering. Mr. Newton has worked for American General
Corporation, one of the nation's largest diversified financial services company,
since 1993, and is currently its Vice Chairman and a director. From 1979 to
1993, he was engaged in the practice of law as a partner with the law firm of
Clark, Thomas, Winters & Newton in Austin, Texas. Mr. Newton also served as a
Commissioner of the Texas Railroad Commission from 1977 to 1978 and as a member
of the Board of Regents the University of Texas System from 1979 to 1985, and
was Chairman of the Board of Regents from 1983 to 1985. He is a graduate of the
University of Texas at Austin, the University of Texas Law School and the
Harvard University Advanced Management Program.
Bill C. Bradley and B. Coleman Bradley are father and son. There are no
other familial relationships among the executive officers and directors of the
Company.
TERMS OF OFFICE. Directors of the Company are elected annually by the
stockholders to serve for a term of one year or until their successors are duly
elected and qualified. Vacancies in unexpired terms and any additional positions
created are filled by action of the Board of Directors. The executive officers
of the Company are appointed annually by the Board of Directors and serve for a
term of one year, or until their successors are appointed or their earlier
resignation or removal.
The Company's Articles of Incorporation provide that the Board of Directors
will consist of not less than one nor more than ten members, with the exact
number to be determined from time to time by resolution of the Board of
Directors. However, no decrease in the number of directors constituting the
Board of Directors may shorten the term of any incumbent director, unless the
director is removed in accordance with the removal provisions of the Articles.
Upon completion of this offering, the number of Board members will be set at
six.
AUDIT COMMITTEE. The Board of Directors has established an Audit Committee
to be comprised of independent directors. The functions of the Audit Committee
are to make recommendations to the Board of Directors regarding the engagement
of the Company's independent accountants and to review with management
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<PAGE> 38
and the independent accountants the Company's financial statements, basic
accounting and financial policies and practices, audit scope and competency of
accounting personnel. Members of the Audit Committee will be appointed annually
by the Board of Directors and serve at the discretion of the Board of Directors
until their successors are appointed or their earlier resignation or removal.
COMPENSATION COMMITTEE. The Board of Directors has established a
Compensation Committee to be comprised of independent directors. The
Compensation Committee is responsible for reviewing and making recommendations
to the Board of Directors with respect to compensation of executive officers,
other compensation matters and awards under the Company's 1998 Tandem Stock
Option/Stock Appreciation Rights Plan. Members of the Compensation Committee
will be appointed annually by the Board of Directors and serve at the discretion
of the Board of Directors until their successors are appointed or their earlier
resignation or removal.
COMPENSATION OF DIRECTORS. Independent directors of the Company will
receive an annual fee of $15,000 and $2,000 per board meeting attended and will
be reimbursed for out-of-pocket expenses incurred for attendance at meetings.
Additionally, each of these independent directors will receive a stock option
grant for the purchase of 5,000 shares of Common Stock upon consummation of this
offering under the Company's 1998 Tandem Stock Option/Stock Appreciation Rights
Plan.
KEY EMPLOYEES. In addition to its executive officers, the following persons
are key employees of the Company:
J. Mike Beckett is Senior Vice President -- Purchasing of Newmark. Mr.
Beckett has been employed by Newmark since its inception in 1983. He was
promoted to his current position in 1992. Mr. Beckett oversees all purchases for
Newmark's operations in five metropolitan markets and has successfully
negotiated with major suppliers for substantial price reductions. Additionally,
he has established arrangements with suppliers that have resulted in substantial
savings on advertising expenses through co-branding, cost sharing and
advertising rebates. Mr. Beckett received a science and construction technology
degree from Bowling Green State University.
Ray G. Hurlbut is Executive Vice President -- Houston Division of Newmark.
Mr. Hurlbut joined Newmark in 1984 as a sales associate after ten years of
experience with two national homebuilders. He was awarded Sales Manager of the
Year and Marketing Director of the Year by the Greater Houston Builders
Association in 1987 and 1992, respectively. In 1995, he received the Texas
Capital Area Builders' Award for Marketing Director of the Year. He served as
Vice President -- Sales and Marketing of Newmark until his promotion to
Executive Vice President -- Houston Division in 1994.
Steve J. Von Hofe is Senior Vice President -- Houston Division of Newmark.
He joined Newmark in 1984 as a construction superintendent. In 1985, he was
named Manager of Construction Operations, in 1992, he became Vice
President -- Construction, and in 1997, Mr. Von Hofe was promoted to his current
position as a Senior Vice President. He is a member of the Greater Houston
Builders Association Builder Council and a graduate of Western Michigan
University.
Brian K. Shields is Senior Vice President -- Central Texas Division of
Newmark. In 1985, Mr. Shields joined Newmark as a construction superintendent
and later served as Vice President -- Construction. In 1996, Mr. Shields was
promoted to his current position as a Senior Vice President. He serves on the
Government Relations Committee of Texas Capitol Area Builder's Association.
Steve A. Treece is Executive Vice President -- North Texas Division of
Newmark. Mr. Treece joined Newmark in 1991 as Director of Sales and Marketing.
From 1993 to 1995, he served as Vice President of Fedrick, Harris Estate Homes,
overseeing all aspects of custom home construction and sales. In 1995, he was
promoted to his current position as Executive Vice President of Newmark.
Mike M. Moody is Senior Vice President -- Nashville Division of Newmark. He
began his career with Newmark in 1990 as a construction superintendent and was
promoted to Sales Manager -- Central Texas in 1992. He served in this capacity
until his promotion in 1995 to Senior Vice President. He was recently selected
to begin start-up operations for Newmark in Nashville. Mr. Moody is a graduate
of the University of Texas.
37
<PAGE> 39
Leonard R. Chernys is Senior Vice President -- Operations of Westbrooke and
has worked with Westbrooke since 1978. He oversees all construction and
purchasing activities and has been instrumental in developing long-term
relationships with subcontractors and suppliers and establishing Westbrooke's
purchasing, quality control and construction scheduling systems. Mr. Chernys is
a graduate of Kent State University and the University of Miami.
Diana Ibarria is Senior Vice President -- Sales and Marketing of
Westbrooke. Ms. Ibarria has worked with Westbrooke since 1980 and oversees the
sales and marketing function. She is a graduate of Florida International
University.
Harold L. Eisenacher is Executive Vice President and Chief Financial
Officer of Westbrooke. Mr. Eisenacher has worked with Westbrooke since 1985 and
oversees all accounting, finance and administrative functions. Mr. Eisenacher is
a certified public accountant and a graduate of the University of Florida. He is
also an Executive Director of the Building Industry Association of South
Florida.
EXECUTIVE COMPENSATION. The following tables sets forth a summary of annual
and long-term compensation for the fiscal year ended December 31, 1997, for the
chief executive officer and for the three other executive officers of the
Company whose compensation exceeded $100,000 for such year.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
NAME AND ----------------------- ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION
------------------ -------- -------- ------------
<S> <C> <C> <C> <C>
Lonnie M. Fedrick, 1997 $360,000 $432,826 $10,589(2)
President and Chief 1996 325,000 454,862 10,630(2)
Executive Officer
J. Eric Rome, 1997 225,000 296,307 7,355(2)
Executive Vice President -- 1996 200,000 290,614 7,744(2)
Homebuilding
B. Coleman Bradley, 1997 225,000 90,000 14,063(2)
Executive Vice President -- 1996 200,000 80,000 9,830(2)
Land Acquisition and
Development
Terry C. White, 1997 137,500 155,456 7,682(2)
Senior Vice President, 1996 125,000 152,088 7,492(2)
Chief Financial Officer
and Treasurer
</TABLE>
- ---------------
(1) Information with respect to certain prerequisites and other personal
benefits has been omitted because the aggregate value of such items does not
meet the minimum amount required for disclosure under the regulations of the
Securities and Exchange Commission.
(2) Includes contributions pursuant to a 401(k) plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Prior to this
offering, the Board of Directors had no Compensation Committee, and, prior to
October 1997, the sole director was Bill C. Bradley. Upon consummation of this
offering Messrs. Hasler and Newton will be appointed to serve on the
Compensation Committee.
EMPLOYMENT AGREEMENTS. James Carr, Eric Rome, Coleman Bradley and Terry
White have employment agreements with the Company or a subsidiary of the
Company. Mr. Fedrick's agreement has a five year term and provides for a base
salary of $400,000 for 1998, increasing to $500,000 for 2002. Mr. Carr's
agreement has a four year term and provides for a base salary of $409,500 for
1998, subject to adjustment annually beginning January 1, 1999. Mr. Rome's
agreement has a five year term and provides for a base salary of $250,000 for
1998, increasing to $400,000 for 2002. Mr. Bradley's agreement expires on
December 31, 1999, and provides for a base salary of $250,000 and $275,000 for
1998 and 1999, respectively. Mr. White's agreement has a five year term and
provides for a base salary of $150,000 for 1998, increasing to $220,000 for
2002. In addition, Messrs. Beckett, Hurlbut, Von Hofe, Shields, Treece, Moody,
Eisenacher and Chernys and Ms. Ibarria, key employees of the Company, also have
employment agreements. Each of these employees is permitted to participate in
such pension, profit-sharing, bonus, life insurance, hospitalization, major
medical, and other employee benefit plans of the Company that may be in effect
from time to time.
38
<PAGE> 40
1998 TANDEM STOCK OPTION/STOCK APPRECIATION RIGHTS PLAN. In February 1998,
the Company adopted the 1998 Tandem Stock Option/Stock Appreciation Rights Plan
(the "Plan"). The Company reserved 896,000 shares of Common Stock for issuance
pursuant to non-qualified tandem stock options/stock appreciation rights
("incentive awards") to be granted under the Plan. Under the Plan and pursuant
to action of the Board of Directors, the Compensation Committee may grant to
officers, directors and employees of the Company non-transferable incentive
awards for terms not longer than ten years at prices to be determined by the
committee. The exercise price of the stock options under the incentive award
granted may not be less than 100% of the fair market value of the Common Stock
on the date of grant. Upon exercise of the incentive award, the grantee may
receive shares of Common Stock, or, at his discretion, stock appreciation
payments equal to 80% of the appreciated value of the stock underlying the
initial incentive award granted. Incentive awards granted under the Plan are
exercisable with respect to 50% of the shares on the fourth anniversary of the
grant date, 30% on the fifth anniversary of the grant date and the remaining 20%
on the sixth anniversary of the grant date. In addition, if the cumulative
dividends or other distributions with respect to the Company's Common Stock for
any calendar year exceed 5% of the fair market value of the Common Stock, a
grantee shall be awarded at the end of such year an additional incentive award
for the number of shares of Common Stock obtained by dividing the cumulative
dividends or other distributions for such calendar year that the grantee would
have received had his or her incentive award been exercised prior to the payment
of the dividends or distributions by the fair market value of the Common Stock
on December 31 of such year. The additional incentive award shall vest along
with the initial incentive award to which such additional incentive award
relates and shall have an exercise price equal to the fair market value of the
Common Stock on the date of grant. Each grantee must execute an incentive plan
agreement, which includes nondisclosure and noncompetition provisions with
respect to the grantee. In the event of a change of control of the Company, all
incentive awards then outstanding become immediately and fully exercisable.
Unless otherwise terminated, the Plan shall terminate in February 2008.
Upon consummation of this offering, the Company intends to grant to
officers and employees incentive awards covering an aggregate of 672,000 shares
of Common Stock at an exercise price equal to the price to the public in this
offering, including the following named executive officers: Mr. Fedrick, 134,400
shares; Mr. Rome, 100,800 shares; Mr. Coleman Bradley, 80,640 shares; and Mr.
White, 67,200 shares.
CERTAIN TRANSACTIONS
LOANS FROM PACIFIC USA. The Company owed $4.3 million to Pacific USA at
December 31, 1996, and $9.1 million at December 31, 1997. Interest paid to
Pacific USA during the years ended December 31, 1995, 1996 and 1997 was
approximately $432,000, $439,000 and $557,000 respectively. All amounts
outstanding under these loans have been contributed to capital of the Company
effective December 31, 1997.
TAX ALLOCATION AGREEMENT. Pursuant to the Tax Allocation Agreement, the
Company is included in the consolidated federal income tax returns filed by
Pacific USA. The amount of the Company's liability to (or entitlement to payment
from) Pacific USA under the Tax Allocation Agreement will equal the amount of
taxes that the Company would owe (or refund that it would receive) had it
prepared tax returns on a stand-alone basis. A conflict of interest may arise if
Pacific USA chooses to contest, compromise or settle any adjustment or
deficiency proposed by the relevant taxing authority in a manner that may be
beneficial to Pacific USA and detrimental to the Company. In addition, under
federal income tax law, each member of a consolidated group (as determined for
federal income tax purposes) is also jointly and severally liable for the
federal income tax liability of the consolidated group. Pursuant to the Tax
Allocation Agreement, Pacific USA has agreed to indemnify the Company for any
federal income tax liability for which Pacific USA has already received payment
from the Company or with respect to any tax liabilities of Pacific USA or its
affiliated entities other than the Company. Payments of $1.8 million, $3.0
million and $3.9 million, respectively, were made by the Company to Pacific USA
during 1995, 1996 and 1997 under this agreement.
RISK MANAGEMENT SERVICES. The Company purchases all of its insurance
policies through an affiliated insurance broker, Pacific Agency, Inc. Pacific
Agency, Inc. earned commissions of $69,000, $89,000 and $93,000 in 1995, 1996
and 1997, respectively, with respect to such policies. The Company believes that
these commissions are comparable to amounts it would pay to an independent third
party for similar services.
39
<PAGE> 41
PACIFIC USA GUARANTEES. Certain of the Company's construction and lot loans
are guaranteed by Pacific USA. The outstanding balance of Company loans
guaranteed by Pacific USA was $112,000 at December 31, 1996, with no balance at
December 31, 1997. Additionally, the Company and Pacific USA had guaranteed
certain construction loans payable by a partnership that is 50% owned by the
Company. The partnership's loans guaranteed by the Company and Pacific USA
totaled approximately $950,000 at December 31, 1996, were secured by lots and
single family residences. The partnership loans were repaid in full prior to
December 31, 1997. In addition, Pacific USA has guaranteed or secured certain of
the obligations of the Company with respect to the acquisition of Westbrooke.
Following the completion of this offering, the Company expects that
guarantees from Pacific USA will not be required. Pacific USA will be under no
obligation to provide such guarantees to the Company in the future.
ADMINISTRATIVE SERVICES. Pacific USA provides certain administrative
services for the Company because it can obtain lower costs and achieve greater
efficiencies and reduce expenses for the Company. Functions which are performed
by Pacific USA include payroll and employee benefits administration and the
evaluation and negotiation under national contracts for the purchase of office
supplies, long distance telephone and overnight delivery services. The costs of
these office supplies, long distance and overnight delivery services may differ
from those available to the Company if it were to negotiate these contracts on
its own.
DEMOGRAPHIC RESEARCH SERVICES. An affiliated company, Pacific Research
Group, provides demographic and economic research to the Company and four other
affiliated real estate entities owned by Pacific Realty Group pursuant to a
services agreement. The direct costs of research services provided in 1997
totaled $167,000, of which the Company's pro rata (one-fifth) share was $33,400.
The Board of Directors has adopted a policy that any future transactions
with affiliates of the Company will be on terms no less favorable to the Company
than are reasonably available from unrelated third parties and shall have been
approved by a majority of the Company's directors who do not have a material
interest in the transactions.
SECURITY OWNERSHIP
The following table sets forth as of December 31, 1997, certain information
with respect to the beneficial ownership of Common Stock by each person who is
the beneficial owner of more than 5% of the outstanding Common Stock. None of
the Company's directors and executive officers own beneficially or of record any
equity securities of the Company.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON STOCK
STOCK BENEFICIALLY BENEFICIALLY OWNED
OWNED BEFORE OFFERING AFTER OFFERING(1)
---------------------- -----------------------
NAME AND ADDRESS OF PERCENT PERCENT
BENEFICIAL OWNER NUMBER OF CLASS NUMBER OF CLASS
------------------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Pacific USA Holdings Corp.(2)............... 9,200,000 100% 9,200,000 82.1%
5999 Summerside Drive
Suite 112
Dallas, Texas 75252
</TABLE>
- ---------------
(1) Assumes the Underwriters' over-allotment option will not be exercised. If
such option is exercised in full, Pacific USA's percentage ownership
interest would be 80.0%.
(2) Pacific USA is an indirect subsidiary of Pacific Electric Wire & Cable which
directs the voting and investment of its indirect holdings of Pacific USA's
Common Stock. No natural person owns greater than five percent of the
outstanding stock of Pacific Electric Wire and Cable. All of the Company's
outstanding shares of Common Stock are held of record by Pacific Realty
Group, a direct subsidiary of Pacific USA. Pacific USA directs the voting
and investment of its indirect holdings of the Company's Common Stock. The
Company is not aware of any arrangement which may at a subsequent date
result in a change in control of the Company or Pacific USA. Pacific USA is
currently evaluating several alternative financing arrangements and it is
possible that an alternative could include the pledge of all or a portion of
its shares of Common Stock as security for its financings.
40
<PAGE> 42
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 30,000,000 shares of Common Stock, $.01 par value, of
which 9,200,000 shares were issued and outstanding as of December 31, 1997, and
3,000,000 shares of Preferred Stock, $.01 par value, of which no shares will be
issued and outstanding as of December 31, 1997.
COMMON STOCK. Holders of Common Stock are entitled to one vote for each
share held in the election of directors and on all other matters submitted to a
vote of shareholders. Cumulative voting of shares of Common Stock is prohibited.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election.
Subject to the prior rights of the holders of any outstanding Preferred
Stock, holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." Upon the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to receive ratably the assets
of the Company remaining after payment of all liabilities and payment to holders
of Preferred Stock if such Preferred Stock has an involuntary liquidation
preference over the Common Stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Common
Stock are, and the shares offered by the Company in this offering will be, when
issued and paid for, validly issued, fully paid and nonassessable.
PREFERRED STOCK. The Board of Directors is authorized, without any further
notice or action of the shareholders, to issue 3,000,000 shares of Preferred
Stock in one or more series and to determine the relative rights, preferences
and privileges of the shares of any such series. The Company has no present
plans to issue any shares of Preferred Stock.
LIMITATION ON LIABILITY. The Company's Restated Articles of Incorporation
and Bylaws provide for indemnification of officers and directors of the Company
to the fullest extent permitted by Nevada law. Under the Articles, Directors and
officers of the Company are not liable to the Company or its shareholders for
damages for breach of fiduciary duty as directors or officers, except for acts
or intentional misconduct, fraud or a knowing violation of the law, or the
payment of unlawful dividends. The Company has directors and officers' liability
insurance.
ANTI-TAKEOVER PROVISIONS OF STATE LAW. Nevada's "Combination with
Interested Stockholders Statute," Nevada Revised Statutes Sections 78.411
through 78.444, which applies to any Nevada corporation subject to the reporting
requirements of section 12 of the Securities Exchange Act of 1934, as amended,
and which has at least 200 shareholders prohibits an "interested stockholder"
from entering into a "combination" with the corporation, unless certain
conditions are met. Pursuant to the Company's Restated Articles of
Incorporation, the Company will expressly elect to be governed by the provisions
of Sections 78.411 through 78.444 of the Nevada Revised Statutes. A
"combination" includes (a) any merger with an "interested stockholder," or any
other corporation which is or after the merger would be, an affiliate or
associate of the interested stockholder, (b) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of assets, in one transaction or
a series of transactions, to or with an "interested stockholder," having (i) an
aggregate market value equal to 5% or more of the aggregate market value of the
corporation's assets, (ii) an aggregate market value equal to 5% or more of the
aggregate market value of all outstanding shares of the corporation, or (iii)
representing 10% or more of the earning power or net income of the corporation,
(c) any issuance or transfer of shares of the corporation or its subsidiaries,
to the "interested stockholder," having an aggregate market value equal to 5% or
more of the aggregate market value of all the outstanding shares of the
corporation, (d) the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by the "interested stockholder," (e)
certain transactions which would result in increasing, directly or indirectly,
the proportionate share of shares of the corporation owned by the "interested
stockholder," or (f) the receipt of benefits by an "interested stockholder,"
except proportionately as a stockholder, of any loans, advances or other
financial benefits provided by the corporation. An "interested stockholder" is a
person who (i) directly or indirectly owns 10% or more of the voting power of
the outstanding voting shares of the corporation or (ii) an affiliate or
associate of the corporation which at any time within three years before the
date in question was the beneficial owner, directly or indirectly, of 10% or
more of the voting power of the then outstanding shares of the corporation.
41
<PAGE> 43
A corporation to which the statute applies may not engage in a
"combination" within three years after the interested stockholder acquired its
shares, unless the combination or the interested stockholder's acquisition of
shares was approved by the board of directors before the interested stockholder
acquired the shares. If this approval is not obtained, the combination may be
consummated after the three year period expires if either (a) (i) the board of
directors of the corporation approved, prior to such person becoming an
interested stockholder, the combination or the purchase of shares by the
interested stockholder or (ii) the combination is approved by the affirmative
vote of holders of a majority of voting power not beneficially owned by the
interested stockholder at a meeting called no earlier than three years after the
date the interested stockholder became such or (b) the aggregate amount of cash
and the market value of consideration other than cash to be received by holders
of common shares and holders of any other class or series of shares meets the
minimum requirements set forth in Section 78.441 through 78.443, inclusive, and
prior to the consummation of the combination, except in limited circumstances,
the "interested stockholder" would not have become the beneficial owner of
additional voting shares of the corporation.
Nevada's "Control Share Acquisition Statute," Nevada Revised Statues
sec. 78.378-78.3793, prohibits an "acquiring person", under certain
circumstances, from voting shares of a target corporation's stock after crossing
certain threshold ownership percentages, unless the acquiror obtains the
approval of the target corporation's stockholders. The Control Share Acquisition
Statute only applies to Nevada corporations with at least 200 stockholders,
including at least 100 record stockholders who are Nevada residents, and which
do business directly or indirectly in Nevada. The Company does not intend to "do
business" in Nevada within the meaning of the Control Share Acquisition Statute.
Therefore, it is unlikely that the Control Share Acquisition Statute will apply
to the Company. The statute specifies three thresholds: at least one-fifth but
less than one-third, at least one-third but less than a majority, and a majority
or more, of the outstanding voting power. Once an acquiror crosses one of the
above thresholds, shares which it acquired in the transaction taking it over the
threshold or within ninety days thereof become "Control Shares" which are
deprived of the right to vote until a majority of the disinterested stockholders
restore that right. A special stockholders' meeting may be called at the request
of the acquiror to consider the voting rights of the acquiror's shares no more
than 50 days (unless the acquiror agrees to a later date) after the delivery by
the acquiror to the corporation of an information statement which sets forth the
range of voting power that the acquiror has acquired or proposes to acquire and
certain other information concerning the acquiror and the proposed control share
acquisition. If no such request for a stockholders' meeting is made,
consideration of the voting rights of the acquiror's shares must be taken at the
next special or annual stockholders' meeting. If the stockholders fail to
restore voting rights to the acquiror, or if the acquiror fails to timely
deliver an information statement to the corporation, the corporation may, if so
provided in its Articles or Bylaws, call certain of the acquiror's shares for
redemption at the average price paid for the control shares by the acquiror. The
Company's Articles and Bylaws do not currently permit it to call an acquiror's
shares for redemption under these circumstances. The Control Share Acquisition
Statute also provides that in the event the stockholders restore full voting
rights to a holder of Control Shares that owns a majority of the voting stock,
then all other stockholders who do not vote in favor of restoring voting rights
to the Control Shares may demand payment for the "fair value" of their shares
(which is generally equal to the highest price paid by the acquiror in the
transaction subjecting the acquiror to the statute).
The provisions described above, together with the ability of the Board of
Directors to issue Preferred Stock as described under "-- Preferred Stock," may
have the effect of delaying or deterring a change in the control or management
of the Company.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for the
Common Stock is First Chicago Trust Company of New York.
42
<PAGE> 44
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
11,200,000 shares of Common Stock (11,500,000 shares if the underwriters'
over-allotment option is exercised in full). Of these shares of Common Stock,
the 2,000,000 shares sold in this offering may be publicly offered and sold
without restriction, unless they are purchased by affiliates of the Company.
Shares of Common Stock outstanding prior to completion of this offering will be
"restricted securities" under the Securities Act (the "Restricted Shares"). The
Restricted Shares may be sold only if they are registered under the Securities
Act by the Company or pursuant to an applicable exemption from the registration
requirements of the Securities Act, including Rule 144 thereunder. The Company,
Pacific Realty Group and Pacific USA have agreed that, for a period of 180 days
after the date of this Prospectus, they will not offer, sell or otherwise
dispose of shares of Common Stock, without the prior written consent of Dain
Rauscher Incorporated on behalf of the Representatives. See "Underwriting."
In general, under Rule 144 as currently in effect, Pacific USA or any
subsequent transferee (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year but less than two
years is entitled to sell within any three-month period a number of shares that
does not exceed the greater of 1% of the then outstanding shares of the Common
Stock (approximately 112,000 shares immediately after the offering) or the
average weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an "affiliate" of the Company at any
time during the 90 days preceding a sale, and who has beneficially owned
Restricted Shares for at least two years, would be entitled to sell such shares
under Rule 144 without regard to the volume or manner of sale limitations
referred to above.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sales, will have on the market
price of the Common Stock. The sale of substantial amounts of Common Stock, or
the perception that such sales could occur, could adversely affect the
prevailing market price for the Common Stock.
43
<PAGE> 45
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for whom Dain Rauscher Incorporated and Laidlaw Global
Securities, Inc. are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company, the respective number of shares
of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OF COMMON
UNDERWRITER STOCK
----------- ------------
<S> <C>
Dain Rauscher Incorporated..................................
Laidlaw Global Securities, Inc. ............................
---------
Total ............................................ 2,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the Representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 300,000
additional shares of Common Stock, at the public offering price less the
underwriting discounts and commissions, as set forth on the cover of the
Prospectus. If the Underwriters exercise their over-allotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
2,000,000 shares of Common Stock offered. The Underwriters may exercise such
option only to cover overallotments, if any, made in connection with the sale of
Common Stock offered hereby.
The Company, Pacific Realty Group and Pacific USA have agreed that, during
the period beginning from the date of this Prospectus and continuing to and
including the date 180 days after the date of this Prospectus, they will not
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock, any securities of the Company which are substantially similar to the
shares of Common Stock or which are convertible or exchangeable for securities
which are substantially similar to the shares of Common Stock without the prior
written consent of Dain Rauscher Incorporated, except for the shares of Common
Stock offered in connection with this offering.
The Representatives have informed the Company that they do not expect sales
to accounts over which the Underwriters exercise discretionary authority.
Prior to this offering, there has been no public market for the shares. The
initial public offering price was negotiated among the Company and the
Representatives. Among the factors considered in determining the initial public
offering price of the Common Stock, in addition to prevailing market conditions,
were the Company's historical performance, estimates of the business potential
and earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
44
<PAGE> 46
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "NHCH".
In connection with this offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with this offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock than
they are required to purchase from the Company in this offering. The
Underwriters may also impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the Common Stock sold
in this offering for their account may be reclaimed by the syndicate if such
shares of Common Stock are repurchased by the syndicate in stabilizing or
covering transactions. These activities may stabilize, maintain or otherwise
affect the market price of the Common Stock, which may be higher than the price
that might otherwise prevail in the open market; and these activities, if
commenced, may be discontinued at any time. These transactions may be effected
on the Nasdaq National Market, in the over-the-counter market or otherwise.
The Company has agreed to pay the Representatives a nonaccountable expense
allowance of $150,000 upon consummation of this offering. The Company has agreed
to indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933.
Laidlaw Global Securities, Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and the comanager of this offering, is a
partially owned, indirect subsidiary of Pacific USA. The Company is a
wholly-owned, indirect subsidiary of Pacific USA. Larry D. Horner and Bill C.
Bradley, each a director of the Company, are also Chairman of the Board and a
director, respectively, of Laidlaw Holdings, Inc., the sole shareholder of
Laidlaw Global Securities, Inc. As a result of the foregoing, this offering is
subject to the provisions of Section 2720 of the Conduct Rules of the NASD
(formerly Schedule E to the Bylaws of the NASD) ("Section 2720"). Accordingly,
the underwriting arrangements for this offering will conform with the
requirements set forth in Section 2720. In particular, the price at which such
offering is to be distributed to the public must be at a price no higher than
that recommended by a "qualified independent underwriter" who has also
participated in the preparation of the Registration Statement and the prospectus
and who meets certain standards. In accordance with this requirement, Dain
Rauscher Incorporated will serve in such role and will recommend the public
offering price in compliance with the requirements of Section 2720. Dain
Rauscher Incorporated, in its role as qualified independent underwriter, has
performed the due diligence investigations and reviewed and participated in the
preparation of the Prospectus and the Registration Statement of which the
Prospectus forms a part.
LEGAL MATTERS
The validity of the Common Stock offered hereby is being passed upon for
the Company by Wolin, Ridley & Miller LLP, Dallas, Texas. Certain legal matters
in connection with this offering will be passed upon for the Underwriters by
Andrews & Kurth L.L.P., Houston, Texas. Andrews & Kurth L.L.P. has represented
other subsidiaries of Pacific USA from time to time in connection with asset
securitization matters.
EXPERTS
The financial statements and schedules of Newmark Homes Corp. as of
December 31, 1996 and 1997, and for each of the years in the three-year period
ended December 31, 1997, have been included herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of the Westbrooke Communities, Inc. and Affiliates
at December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent certified public
accountants, as set
45
<PAGE> 47
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (as amended and together with
all exhibits thereto, the "Registration Statement") under the Securities Act,
with respect to the shares of Common Stock offered pursuant to this Prospectus.
This Prospectus has been filed as part of the Registration Statement and does
not contain all of the information set forth in the Registration Statement, as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the contents of any contract, agreement or other
document referred to herein are not necessarily complete and, where such
agreement or other document is an exhibit to the Registration Statement, each
such statement is qualified in all respects by the provisions of such exhibit,
to which reference is hereby made for a full statement of the provisions
thereof. For further information with respect to the Company and the Common
Stock, reference is hereby made to the Registration Statement and to the
schedules and exhibits thereto.
The Registration Statement and the exhibits may be inspected, without
charge, and copies may be obtained, at prescribed rates, at the public reference
facilities of the Commission maintained at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, DC 20549, or on the Internet at http://www.sec.gov. Copies of
the Registration Statement and the exhibits may also be inspected, without
charge, at the Commission's regional offices at 7 World Trade Center, Suite
1300, New York, New York 10048, and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. In addition, copies of the Registration Statement and
the exhibits may be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, DC 20549 and its public reference
facilities in New York, New York and Chicago, Illinois, at prescribed rates.
As a result of this offering, the Company will become subject to the
information and periodic reporting requirements of the Exchange Act, and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the public
reference facilities and regional offices referred to above. The Company intends
to furnish its shareholders with annual reports containing consolidated
financial statements certified by its independent auditors and with quarterly
reports for each of the first three quarters of each fiscal year containing
unaudited consolidated financial information.
46
<PAGE> 48
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Newmark Homes Corp.:
Pro Forma Condensed Consolidated Financial Statements
(unaudited)............................................ F-2
Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1997..................................... F-3
Pro Forma Condensed Consolidated Statement of
Operations for the Year Ended December 31, 1997....... F-4
Notes to Pro Forma Condensed Consolidated Financial
Statements............................................ F-5
Historical Financial Statements:
Independent Auditors' Report........................... F-7
Consolidated Balance Sheets as of December 31, 1996 and
1997.................................................. F-8
Consolidated Statements of Operations for the Years
Ended December 31, 1995, 1996 and 1997................ F-9
Consolidated Statements of Stockholder's Equity for the
Years Ended December 31, 1995, 1996 and 1997.......... F-10
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995,
1996 and 1997........................................ F-11
Notes to Consolidated Financial Statements............. F-12
Westbrooke Communities, Inc. and Affiliates:
Report of Independent Certified Public Accountants........ F-22
Combined Balance Sheets as of December 31, 1996 and
1997................................................... F-23
Combined Statements of Income for the Years Ended December
31, 1995, 1996 and 1997................................ F-24
Combined Statements of Changes in Capital for the Years
Ended December 31, 1995, 1996 and 1997................. F-25
Combined Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997....................... F-26
Notes to Combined Financial Statements.................... F-27
</TABLE>
F-1
<PAGE> 49
NEWMARK HOMES CORP. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma financial statements are derived from the
historical financial statements of the Company and Westbrooke Communities, Inc.
and certain of its affiliates ("Westbrooke") included elsewhere in this
Prospectus. The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1997 is presented as if the Westbrooke acquisition (the "Westbrooke
Acquisition") and the sale of Common Stock offered hereby (the "Offering") had
occurred on December 31, 1997. The Pro Forma Condensed Consolidated Statements
of Operations for the year ended December 31, 1997 are presented as if the
Westbrooke Acquisition, the contribution of notes payable to Pacific USA to
capital of the Company (the "Capital Contribution") and the Offering had
occurred on January 1, 1997.
The Pro Forma Condensed Consolidated Financial Statements should be read in
conjunction with the historical consolidated financial statements of Newark
Homes Corp. and subsidiaries, including the notes thereto, included elsewhere in
the Prospectus. The Pro Forma Condensed Consolidated Financial Statements do not
purport to represent the Company's financial position as of December 31, 1997 or
the results of operations for the year ended December 31, 1997 that would
actually have occurred had the Westbrooke Acquisition, the Capital Contribution
and the Offering been completed on December 31, 1997 or the beginning of the
period presented, or to project the Company's financial position or results of
operations as of any future date or any future period.
F-2
<PAGE> 50
NEWMARK HOMES CORP. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
COMBINED
NEWMARK
COMPANY WESTBROOKE ACQUISITION AND OFFERING PRO
HISTORICAL HISTORICAL ADJUSTMENTS WESTBROOKE ADJUSTMENTS FORMA
---------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash...................... $ 746 $ 4,280 $ (662)(a) $ 4,364 $ -- $ 4,364
Receivables............... 1,729 1,540 -- 3,269 -- 3,269
Inventory................. 103,010 44,707 (2,818)(b) 144,899 -- 144,899
Investment in
unconsolidated
subsidiary.............. 327 -- -- 327 -- 327
Other assets.............. 5,854 3,066 -- 8,920 -- 8,920
Goodwill, net............. 27,547 -- 10,159(b) 37,706 -- 37,706
-------- ------- -------- -------- -------- --------
Total assets.... $139,213 $53,593 $ 6,679 $199,485 $ -- $199,485
======== ======= ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Construction loans
payable................. $ 66,100 $22,308 $ -- $ 88,408 $ (7,600)(c) $ 80,808
Bank loan................. -- -- 10,000(a) 10,000 (10,000)(c) --
Acquisition notes
payable................. -- -- 18,922(b) 18,922 -- 18,922
Notes payable to
affiliates.............. -- -- -- -- -- --
Payable to affiliates..... 1,775 -- -- 1,775 -- 1,775
Accounts payable and
accrued liabilities..... 10,963 9,042 -- 20,005 -- 20,005
Other liabilities......... 4,684 -- -- 4,684 -- 4,684
Subordinated notes
payable................. -- 7,500 (7,500)(a) -- -- --
-------- ------- -------- -------- -------- --------
Total liabilities....... 83,522 38,850 21,422 143,794 (17,600) 126,194
-------- ------- -------- -------- -------- --------
Minority interest in
Westbrooke.............. -- 3,162 (3,162)(a) -- -- --
Stockholders' equity:
Common stock............ 92 45 (45)(b) 92 20(c) 112
Additional paid-in
capital.............. 52,165 9,955 (9,955)(b) 52,165 17,580(c) 69,745
Retained earnings....... 3,434 1,581 (1,581)(b) 3,434 -- 3,434
-------- ------- -------- -------- -------- --------
Total stockholders'
equity............... 55,691 11,581 (11,581) 55,691 17,600 73,291
-------- ------- -------- -------- -------- --------
Total liabilities and
stockholders'
equity............... $139,213 $53,593 $ 6,679 $199,485 $ -- $199,485
======== ======= ======== ======== ======== ========
</TABLE>
F-3
<PAGE> 51
NEWMARK HOMES CORP. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
COMPANY WESTBROOKE ACQUISITION NEWMARK AND OFFERING
HISTORICAL HISTORICAL ADJUSTMENTS WESTBROOKE ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................. $215,360 $103,421 $ -- $318,781 $ -- $318,781
(1,459)(i)
Cost of sales............. 175,300 90,960 (687)(d) 265,573 (354)(j) 263,760
-------- -------- ------- -------- ------- --------
40,060 12,461 687 53,208 1,813 55,021
Equity in earnings of
unconsolidated
subsidiaries............ 465 -- -- 465 -- 465
Selling, general and
administrative
expenses................ (26,512) (7,897) -- (34,409) -- (34,409)
Depreciation and
amortization............ (1,669) (657) (339)(g) (2,665) -- (2,665)
-------- -------- ------- -------- ------- --------
Operating
income............... 12,344 3,907 348 16,599 1,813 18,412
Other income:
Interest expense........ (1,987) -- (1,370)(f) (3,357) -- (3,357)
Other income, net....... 570 848 -- 1,418 -- 1,418
-------- -------- ------- -------- ------- --------
Income before income
taxes and minority
interests............ 10,927 4,755 (1,022) 14,660 1,813 16,473
Income taxes.............. 4,272 -- 1,456(h) 5,728 707(k) 6,435
-------- -------- ------- -------- ------- --------
Income before minority
interests............... 6,655 4,755 (2,478) 8,932 1,106 10,038
Minority interests in
Westbrooke.............. -- 732 (732)(e) -- -- --
-------- -------- ------- -------- ------- --------
Net income.............. $ 6,655 $ 4,023 $(1,746) $ 8,932 $ 1,106 $ 10,038
======== ======== ======= ======== ======= ========
Net income per common
share................ $ 0.72 $ 0.97 $ 0.90
======== ======== ========
Weighted average common
shares outstanding... 9,200 9,200 11,200
</TABLE>
F-4
<PAGE> 52
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
Effective January 1, 1998, the Company acquired Westbrooke, a leading
builder of single-family homes in the South Florida market. Pursuant to the
Stock Purchase Agreement between the Company, Pacific USA and Westbrooke, the
consideration for the purchase of all of the outstanding capital stock of
Westbrooke consisted of (i) $18.9 million in the form of promissory notes (the
"Acquisition Notes"), $12.3 million of which bear interest at 6.45% per annum
and are payable annually over five years and $6.6 million of which bear interest
at 9% and are payable on January 1, 1999 and (ii) deferred consideration of up
to $7.5 million contingent upon Westbrooke achieving specified cumulative income
targets over a period of five years. In order for the income targets to be met,
Westbrooke must achieve net income before income tax (as determined in
accordance with the stock purchase agreement) on a cumulative basis of $3.4
million, $7.0 million, $10.9 million, $15.0 million and $19.4 million for the
fiscal years ending December 31, 1998, 1999, 2000, 2001 and 2002, respectively.
In connection with the acquisition of Westbrooke by the Company, Westbrooke
borrowed $10.0 million under a bank loan (the "Westbrooke Bank Loan") to repay
the $7.5 million outstanding balance of its subordinated notes (the
"Subordinated Notes") and to redeem $2.5 million of minority interests in
Westbrooke (collectively, the pre-acquisition transactions). Upon the
acquisition of Westbrooke and the subsequent funding of this offering, the
Company intends to use $10.0 million of the net proceeds of the offering to
repay the Westbrooke Bank Loan.
In contemplation of this Offering and the Westbrooke Acquisition, $9.1
million, representing all of the indebtedness owed to Pacific USA, was
contributed to capital of the Company (the "Capital Contribution") on December
31, 1997.
The pro forma adjustments to the Pro Forma Condensed Consolidated Balance Sheet
as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
(a) To record the pre-acquisition transactions by
Westbrooke:
Proceeds from the Westbrooke Bank Loan............... $ 10,000
Reduction in cash.................................... (662)
Repayment of the Subordinated Notes.................. (7,500)
Redemption of minority interest in Westbrooke........ (3,162)
Minority interest in Westbrooke in excess of $2.5
million were distributed to the minority owner from
available cash.
(b) To record the Westbrooke Acquisition and related
purchase accounting adjustments:
Issuance of the Acquisition Notes.................... $ 18,922
Reduction of inventory............................... (2,818)
Goodwill............................................. 10,159
Elimination of stockholders' equity of Westbrooke:
Common Stock...................................... $ (45)
Additional paid-in capital........................ (9,955)
Retained earnings................................. (1,581)
--------
$ 11,581
========
</TABLE>
F-5
<PAGE> 53
(c) To record the estimated proceeds from the Offering (net
of estimated underwriting discounts and commissions
and other offering expenses of $2.4 million) and the
anticipated use of proceeds therefrom:
Common Stock......................................... $ 20
Additional paid in capital........................... 17,580
--------
Net proceeds from the Offering.................... $ 17,600
Repayment of the Westbrooke Bank Loan................ (10,000)
Repayment of construction notes payable.............. (7,600)
The pro forma adjustments to the Pro Forma Condensed Consolidated Statement
of Operations for the year ended December 31, 1997 are as follows.
<TABLE>
<S> <C>
(d) To record the net decrease in cost of sales due to the
reduction of interest incurred resulting from the
repayment of the Subordinated Notes (which bear
interest at 19.5%) and the borrowings under the
Westbrooke Bank Loan (at an estimated interest rate of
7.8%):
Interest on the Subordinated Notes................... $(1,462)
Interest on the Westbrooke Bank Loan................. 775
--------
$ (687)
========
(e) To record the elimination of minority interests in
Westbrooke............................................ $ (732)
(f) To record interest on the Acquisition Notes............. $(1,370)
(g) Amortization of goodwill acquired in the Westbrooke
Acquisition........................................... $ (339)
(h) Tax effect of Westbrooke income and pro forma
adjustments resulting from the Westbrooke
Acquisition........................................... $ 1,456
Westbrooke qualified as a Subchapter S corporation for
tax purposes; accordingly, no taxes have been recorded
on the historical financial statements of Westbrooke.
The pro forma adjustments for income taxes have been
recorded at the estimated effective tax rate of the
Company of 39%.
(i) To record the decrease in cost of sales due to the
reduction of interest incurred resulting from the
repayment of the Westbrooke Bank Loan (with an
estimated interest rate of 7.8%) and $7.7 million of
construction notes payable (which bear interest at
9.0%) from the net proceeds from the Offering:
Interest on the Westbrooke Bank Loan................. $ (775)
Interest on construction notes payable............... (684)
--------
$(1,459)
========
(j) To record the decrease in cost of sales due to the
reduction of interest incurred resulting from the
Capital Contribution.................................. $ (354)
(k) To record tax effect of pro forma adjustments related to
the Capital Contribution and the use of net proceeds
from the Offering..................................... $ 707
</TABLE>
F-6
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
WHEN THE TRANSACTION REFERRED TO IN NOTE 2(J) OF THE NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER
THE FOLLOWING REPORT.
KPMG Peat Marwick LLP
The Board of Directors
Newmark Homes Corp.:
We have audited the accompanying consolidated balance sheets of Newmark
Homes Corp. and subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholder's equity, and cash flows for
each of the years for the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Newmark
Homes Corp. and subsidiaries as of December 31, 1996 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Dallas, Texas
January 23, 1998, except as to
Note 2(j), which is as of
F-7
<PAGE> 55
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
------------ --------
<S> <C> <C>
Cash........................................................ $ 642 $ 746
Certificate of deposit (note 6)............................. 1,000 --
Receivables:
Title companies........................................... 1,364 842
Affiliates................................................ 50 656
Other..................................................... 842 231
Inventory (notes 4, 6 and 7):
Single family residences.................................. 67,141 75,411
Lots...................................................... 16,518 27,136
-------- --------
83,659 102,547
Land held for development (notes 4 and 7)................... 325 463
Investment in unconsolidated subsidiaries (note 5).......... 1,448 327
Property, premises and equipment, net of accumulated
depreciation of $676 and $952 in 1996 and 1997,
respectively.............................................. 1,691 2,790
Deferred tax asset, net (note 8)............................ 966 857
Other assets (note 4)....................................... 955 2,207
Goodwill, net of accumulated amortization of $2,740 and
$3,773 in 1996 and 1997, respectively (note 3)............ 28,235 27,547
-------- --------
Total assets...................................... $121,177 $139,213
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Construction loans payable (note 6)......................... $ 56,462 $ 66,100
Notes payable to affiliates (note 7)........................ 4,306 --
Other payables to affiliates (notes 7 and 8)................ 2,062 1,775
Accounts payable and accrued liabilities.................... 10,162 10,963
Other liabilities (note 9).................................. 4,256 4,684
-------- --------
Total liabilities................................. 77,248 83,522
-------- --------
Stockholder's equity (note 6):
Common stock -- $.01 par value; 30,000,000 shares
authorized, 9,200,000 shares issued and outstanding.... 92 92
Additional paid-in capital................................ 42,415 52,165
Retained earnings......................................... 1,422 3,434
-------- --------
Total stockholder's equity........................ 43,929 55,691
Commitments and contingencies (notes 3, 6 and 9)
-------- --------
Total liabilities and stockholder's equity........ $121,177 $139,213
======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-8
<PAGE> 56
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... $125,427 $190,855 $215,360
Cost of sales (note 4)...................................... 102,591 156,264 175,300
-------- -------- --------
Gross profit................................................ 22,836 34,591 40,060
Equity in earnings from unconsolidated subsidiaries(note
5)........................................................ 1,978 792 465
Selling, general and administrative expenses................ (16,572) (22,976) (26,512)
Depreciation and amortization............................... (1,271) (1,524) (1,669)
-------- -------- --------
Operating income.......................................... 6,971 10,883 12,344
Other income (expense):
Interest expense (notes 4 and 7).......................... (1,332) (1,238) (1,987)
Other income, net (note 7)................................ 607 851 570
-------- -------- --------
Income before income taxes............................. 6,246 10,496 10,927
Income taxes (note 8)....................................... 2,477 4,164 4,272
-------- -------- --------
Net income............................................. $ 3,769 $ 6,332 $ 6,655
======== ======== ========
Net income per common share................................. $ 0.41 $ 0.69 $ 0.72
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-9
<PAGE> 57
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- -------
<S> <C> <C> <C> <C>
Balance, December 31, 1994............................ $94 $29,790 $ 5,793 $35,677
Contribution of Newmark Homes Corporation and Pacific
United Development Corporation (note 2)............. (2) 2 -- --
Acquisition of The Adler Companies, Inc. (note 3)..... -- 13,211 -- 13,211
Capital contribution.................................. -- 436 -- 436
Dividends Paid........................................ -- -- (7,280) (7,280)
Net income............................................ -- -- 3,769 3,769
--- ------- ------- -------
Balance, December 31, 1995............................ 92 43,439 2,282 45,813
Capital contribution.................................. -- 1,247 -- 1,247
Dividends paid........................................ -- (2,271) (7,192) (9,463)
Net income............................................ -- -- 6,332 6,332
--- ------- ------- -------
Balance, December 31, 1996............................ 92 42,415 1,422 43,929
Capital contribution (note 7)......................... -- 9,917 -- 9,917
Dividends paid........................................ -- (167) (4,643) (4,810)
Net income............................................ -- -- 6,655 6,655
--- ------- ------- -------
Balance, December 30, 1997............................ $92 $52,165 $ 3,434 $55,691
=== ======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-10
<PAGE> 58
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 3,769 $ 6,332 $ 6,655
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 1,271 1,524 1,669
Net (gain) loss on sale of property, premises and
equipment............................................ (14) (82) 44
Equity in earnings from unconsolidated subsidiaries.... (1,978) (792) (465)
Deferred tax (benefit) expense......................... 254 (518) 109
Compensation costs paid by parent...................... -- -- 313
Changes in operating assets and liabilities:
Inventory and land held for development, net......... (16,104) (18,664) (19,026)
Receivables -- title companies...................... 146 (269) 522
Receivables -- affiliates and other................. (329) (438) 5
Other assets......................................... 504 (49) (1,252)
Payable to affiliates................................ 207 1,091 (287)
Accounts payable and accrued liabilities............. 2,887 2,473 801
Other liabilities.................................... 561 1,612 428
-------- --------- ---------
Net cash used in operating activities................ (8,826) (7,780) (10,484)
-------- --------- ---------
Cash flows from investing activities:
Proceeds from maturity of certificate of deposit.......... 1,000 1,000 1,000
Purchase of certificate of deposit........................ (1,000) (1,000) --
Advance on note receivable................................ (3,034) -- --
Repayment of note receivable.............................. -- 3,034 --
Purchases of property, premises and equipment............. (709) (1,285) (1,812)
Proceeds from sales of property, premises and equipment... 82 216 33
Other..................................................... 27 (34) (32)
Investment in unconsolidated subsidiaries................. (17) -- (105)
Distributions from unconsolidated subsidiaries............ 144 1,117 1,691
-------- --------- ---------
Net cash provided by (used in) investing
activities........................................ (3,507) 3,048 775
-------- --------- ---------
Cash flows from financing activities:
Capital contributions received............................ 436 1,247 181
Dividends paid............................................ (7,280) (9,463) (4,810)
Proceeds from advances on construction loans payable...... 91,398 133,349 140,101
Principal payments on construction loans payable.......... (74,024) (116,746) (130,463)
Proceeds from advances on notes payable
to affiliate........................................... 1,269 4,455 8,373
Principal payments on notes payable to affiliate.......... -- (7,718) (3,569)
-------- --------- ---------
Net cash provided by financing activities............ 11,799 5,124 9,813
-------- --------- ---------
Increase (decrease) in cash................................. (534) 392 104
Cash, beginning of period................................... 784 250 642
-------- --------- ---------
Cash, end of period......................................... $ 250 $ 642 $ 746
======== ========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest............................................... $ 3,739 $ 4,928 $ 5,939
======== ========= =========
Income taxes........................................... $ 2,307 $ 3,164 $ 4,182
======== ========= =========
</TABLE>
See accompanying notes 3 and 7 for supplemental disclosure of noncash investing
and financing activities.
See accompanying notes to the consolidated financial statements.
F-11
<PAGE> 59
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(1) ORGANIZATION
Newmark Homes Corp. (NHC) and subsidiaries (the Company) is a wholly owned
subsidiary of Pacific Realty Group (PRG) and ultimately a subsidiary of Pacific
USA Holdings Corp. (PUSA). NHC was formed in December 1994 to serve as a real
estate holding company.
NHC's primary subsidiaries are as follows:
<TABLE>
<CAPTION>
SUBSIDIARY NATURE OF BUSINESS
---------- ------------------
<S> <C>
Newmark Home Corporation (Newmark)................. Single-family residential homebuilding in Texas and
Tennessee
The Adler Companies, Inc. (Adler).................. Single-family residential homebuilding in Florida
Pacific United Development Corporation
(PUDC)........................................... Residential lot developer in Texas and Tennessee
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and general practices within the homebuilding
industry. The following summarizes the more significant of these policies.
(a) Basis of Presentation
The consolidated financial statements include the accounts of NHC and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements. On February 24, 1995 and
May 1, 1995 the common stock of Newmark and PUDC, respectively, which were both
wholly-owned subsidiaries of PRG, were contributed to the Company. The
contributions were accounted for at historical cost in a manner similar to
pooling of interests. As a result, these consolidated financial statements have
been restated on a combined basis for all periods prior to the combination.
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.
Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (Statement
121). Statement 121 addresses the accounting for the impairment of long-lived
assets, certain identifiable intangibles and goodwill when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is evaluated by estimating future undiscounted cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows is less than the carrying amount of
the assets, an impairment loss is recognized. Fair value, for purposes of
calculating impairment, is measured based on discounted future cash flows using
a risk-adjusted discount rate. The Company's adoption of Statement 121 had no
effect on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 130, issued in June 1997,
established standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
does not believe that this statement will have an impact on future results from
operations or liquidity. This statement is effective for fiscal periods
beginning after December 15, 1997.
Statement of Financial Accounting Standards No. 131, issued in June 1997,
requires that public business enterprises report certain information about
operating segments, products and services, the geographic areas in
F-12
<PAGE> 60
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which they operate and their major customers. The Company does not believe that
this statement will have an impact on future results from operations or
liquidity. This statement is effective for fiscal years beginning after December
15, 1997.
The Company conducts business primarily in Texas, Florida and Tennessee.
Accordingly, the market value of the Company's inventory is susceptible to
changes in market conditions that may occur in Texas, Florida and Tennessee.
(b) Receivables from Title Companies
Receivables from title companies consist of sales proceeds due for homes
sold and closed, less amounts withheld by the title companies for disbursement
to third parties.
(c) Inventory and Land Held for Development
Single family residences and land held for development are recorded at the
lower of cost or estimated net realizable value. Net realizable value is defined
as the estimated proceeds upon disposition, less applicable future costs to
complete and sell. Construction costs are accumulated during the period of
construction. The Company utilizes the specific identification method of
charging construction costs to cost of sales as units are sold. Common
construction overhead costs are allocated to each individual unit (home) in the
various subdivisions based upon the total number of units to be constructed in
each subdivision community.
Interest cost and overhead related to construction activities, primarily
salaries and benefits of supervisors and support staff, are capitalized as
construction costs during the construction period and charged to cost of sales
as the related inventories are sold. General and administrative costs and
selling costs are expensed at the time they are incurred.
(d) Property, Premises and Equipment
Property, premises and equipment, consisting primarily of office premises,
transportation equipment, office furniture and fixtures, and model home
furniture, are carried at cost net of accumulated depreciation. Office premises
and transportation equipment are depreciated using the straight-line method over
thirty years and five years, respectively. Furniture and fixtures and model home
furniture are depreciated over estimated useful lives of three to seven years
using the declining balance method switching to the straight-line method in the
year that depreciation, computed on the straight-line method, equals or exceeds
that determined under the declining-balance method.
(e) Purchase Options
The Company enters into lot option contracts and contracts to purchase
undeveloped land. When the Company does not exercise an option, its liability is
limited to the forfeiture of the related deposit (note 4). Consequently, the
Company's policy is to record the lots or land and the related liabilities at
the time such are purchased and legal title has passed.
(f) Goodwill
The excess of the purchase price paid by the Company over the fair value of
net assets acquired is recorded as goodwill and is being amortized on a
straight-line basis over 30 years.
The Company evaluates goodwill for impairment periodically by determining
whether the amortization of the balance over its remaining life can be recovered
through future operations of the Company.
F-13
<PAGE> 61
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) Revenue Recognition
Revenue is generally recognized at the time of the closing of the sale,
when title to and possession of the property transfers to the buyer.
(h) Advertising Costs
As incurred, the Company expenses advertising costs, consisting primarily
of newspaper and trade publications, signage and the cost of maintaining an
internet web site. Advertising expense included in selling, general and
administrative expenses for the years ended December 31, 1995, 1996 and 1997 was
approximately $1.9 million, $3.1 million and $3.5 million, respectively.
(i) Income Taxes
The Company is included in the consolidated federal income tax return of
PUSA. Under a tax sharing agreement with PUSA, the Company is required to
calculate its federal income tax on a separate company basis and pay to PUSA the
amount of the liability. The Company is entitled to receive payments from PUSA.
Such payment is only available to the extent the benefits calculated can be
utilized to offset prior separate company income through carryback or, if
carried forward, at the time such benefits are utilized to offset separate
company income.
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(j) Earnings Per Share
The Company has filed a registration statement on Form S-1 with the
Securities and Exchange Commission for the issuance of common stock (the
"Offering"). In connection with the Offering, the Company is expected to declare
a 92-for-1 split of its common stock outstanding. The accompanying consolidated
financial statements have been restated to reflect this split. Earnings per
share are computed using the weighted average number of shares outstanding of
9,200,000 for the years ending December 31, 1995, 1996 and 1997.
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share." Because of the Company's simple capital
structure the adoption of SFAS No. 128 had no effect on the Company's
consolidated financial statements.
(k) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires companies to disclose the
estimated fair value of their financial instrument assets and liabilities. Fair
value estimates are made at a specific point in time, based upon relevant market
information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. The carrying values of
cash, other receivables, accounts payable and accrued liabilities approximate
their fair values due to their short-term nature. The carrying value of
construction loans payable approximates its fair value as substantially all of
the debt has a fluctuating interest rate based upon a current market index.
F-14
<PAGE> 62
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) ACQUISITION
On March 1, 1995, NHC Florida Acquisition Company (subsequently renamed The
Adler Companies, Inc.), a wholly owned subsidiary of PRG, acquired the Miami,
Florida homebuilding operations of The Adler Family Partnership for an initial
purchase price of $12.9 million, consisting of $9.6 million in cash and a note
payable due from PUSA of $3.3 million. PUSA subsequently contributed Adler to
the Company. This acquisition has been accounted for using the purchase method
and, accordingly, the operating results of Adler have been included in the
Company's consolidated operating results since the effective date of the
acquisition.
The note payable from PUSA to The Adler Family Partnership was not assumed
by the Company. The Company is a guarantor on a letter of credit issued by a
financial institution as security for the note. The amount of this note payable
at December 31, 1996 and 1997 was $2.7 million and $2.0 million, respectively.
As of March 1, 1995, the fair values of assets acquired and liabilities
assumed, exclusive of cash acquired of $174,000, were as follows (in thousands):
<TABLE>
<S> <C>
Inventory................................................... $ 2,744
Receivables -- title company................................ 139
Property and equipment...................................... 86
Investment in partnership................................... (78)
Other assets................................................ 601
Goodwill.................................................... 12,416
Construction loans payable.................................. (2,378)
Other liabilities........................................... (755)
-------
$12,775
=======
</TABLE>
Additional acquisition costs of $263,000 and $147,000 were incurred by PUSA
and the Company, respectively, and recorded to goodwill.
(4) INVENTORY
The inventory of single family residences as of December 31, 1996 and 1997
consists of the following:
<TABLE>
<CAPTION>
NUMBER OF
HOMES CARRYING VALUE
------------ ------------------
DECEMBER 31, DECEMBER 31,
------------ ------------------
1996 1997 1996 1997
---- ---- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Completed......................................... 110 90 $18,359 $18,564
Under construction................................ 398 444 43,218 48,352
Models............................................ 28 40 5,564 8,490
--- --- ------- -------
536 574 $67,141 $75,411
=== === ======= =======
</TABLE>
F-15
<PAGE> 63
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of interest capitalized in inventory is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Interest capitalized, beginning of period................ $ 820 $1,061 $1,494
Interest incurred........................................ 3,302 4,596 6,518
Less interest included in:
Cost of sales.......................................... 1,729 2,925 3,453
Other income (expense)................................. 1,332 1,238 1,987
------ ------ ------
Interest capitalized, end of period...................... $1,061 $1,494 $2,572
====== ====== ======
</TABLE>
In the ordinary course of business, the Company enters into contracts to
purchase lots and land for development. At December 31, 1996 and 1997, the
Company had nonrefundable deposits aggregating $452,000 and $1,118,000 included
in other assets in the accompanying consolidated balance sheets, for lots and
land with a related purchase price of approximately $30.3 million and $26.9
million, respectively. The Company's liability for nonperformance under such
contracts is limited to forfeiture of the related deposits.
(5) INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
Investment in unconsolidated subsidiaries at December 31, 1996 and 1997
represents the Company's 50% general partnership interest in the Twin Acres
Partnership (Twin Acres). Twin Acres owns certain land in Broward County,
Florida, for the purpose of developing, constructing and selling single family
residences. The Company obtained its investment in Twin Acres in 1995 in the
acquisition of Adler (see note 3). The Company does not have control of Twin
Acres and therefore has accounted for its partnership interest using the equity
method.
During 1997, Twin Acres closed on the sale of the remaining homes in its
inventory and is winding down its operations. Therefore, the Company's future
equity in earnings from Twin Acres will not be material to the Company's
operations.
Summarized financial information for Twin Acres is as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- ----
<S> <C> <C>
Assets:
Cash and receivables...................................... $ 441 $357
Lot inventory............................................. 1,988 --
Single family residence inventory......................... 1,833 --
Other assets.............................................. 93 90
------- ----
$ 4,355 $447
======= ====
Liabilities:
Accounts payable.......................................... $ 126 $249
Customer deposits......................................... 396 --
Construction loans payable................................ 950 --
------- ----
1,472 249
Partners' capital........................................... 2,883 198
------- ----
$ 4,355 $447
======= ====
</TABLE>
F-16
<PAGE> 64
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues.............................................. $38,872 $19,869 $10,618
Cost of sales......................................... 29,352 15,488 8,515
------- ------- -------
9,520 4,381 2,103
Subdivision overhead.................................. 5,495 2,819 1,932
Other, net............................................ (62) (29) (82)
------- ------- -------
Net income.......................................... $ 4,087 $ 1,591 $ 253
======= ======= =======
</TABLE>
During 1997, the Company acquired a 49% interest in Pacific Title L.L.C., a
title agency, for $24,000 and a 50% interest in NHC Mortgage, a mortgage finance
company, for $81,000. The Company does not have control of these entities and
therefore has accounted for its interests using the equity method.
(6) CONSTRUCTION LOANS PAYABLE
Construction loans payable consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Construction and lot loans with financial institutions,
collateralized by lots and single family residences
completed or under construction, bearing interest at the
prime rate plus 0.50% to 1.50% (9.00% to 10.00% at
December 31, 1997), maturing upon completion and sale of
the homes as defined in the loan agreement. $52,635 $62,565
$4,500,000 revolving construction loan with a financial
institution collateralized by single-family residences
completed and under construction, interest payable monthly
at prime plus 1.50% (10.00% at December 31, 1997), with
final maturity in August 1998. 1,421 71
Promissory note drawn on line of credit with a bank,
collateralized by a deed of trust on property, bearing
interest at a reference rate plus 0.75%. Paid in full
during 1997. 1,391 --
Revolving line of credit with a financial institution,
collateralized by a certificate of deposit, due on demand
on or before January 31, 1997; interest due monthly at
1.00% in excess of the rate earned on the collateral. Paid
in full during 1997. 1,000 --
Promissory note with a bank, collateralized by property,
bearing interest at the prime rate (8.50% at December 31,
1997), payable monthly, due on demand. -- 800
Promissory note with a bank, collateralized by a deed of
trust on property, bearing interest at 9.50% payable
monthly, maturing in June 1988. -- 2,052
Promissory note with a bank, collateralized by a deed of
trust on property, bearing interest at prime plus 0.75%
(9.25 at December 31, 1997) payable monthly, principal
payable in quarterly installments of $300,000 or proceeds
from the sale of lots, whichever is greater, maturing
August 1999. -- 603
Other 15 9
------- -------
$56,462 $66,100
======= =======
</TABLE>
F-17
<PAGE> 65
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contractual maturities on notes payable at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998........................................................ $65,497
1999........................................................ 603
-------
$66,100
=======
</TABLE>
Construction and lot loans are generally repaid as sales of individual
homes are closed and therefor are considered current at December 31, 1997. At
December 31, 1997, the Company had unused lines of credit for construction loans
totaling approximately $150 million of which $13.2 million is available to draw
down.
Certain of the Company's lenders require, among other things, that the
Company maintain minimum tangible net worth levels and debt to tangible net
worth ratios. At December 31, 1997, the Company was in compliance with such
requirements after receipt of certain debt waivers from the lenders. Certain
debt agreements of NHC's subsidiaries restrict the subsidiaries' ability to pay
dividends or advance funds to NHC to the extent that the payment would put the
subsidiary in violation of debt covenants. Under the most restrictive of these
covenants, there was no restriction on the amount of retained earnings available
to pay dividends at December 31, 1997.
(7) PAYABLE TO AFFILIATES
Payable to affiliates consists of amounts owed by the Company to PUSA. At
December 31, 1996, $4.3 million was in the form of notes payable that accrue
interest at various rates. Certain notes payable are collateralized by land held
for commercial development and single family residential lots. Total interest
paid to PUSA during the years ended December 31, 1995, 1996 and 1997 was
approximately $432,000, $439,000 and $557,000, respectively.
At December 31, 1997, PUSA forgave all of the outstanding notes payable due
from the Company of $9.1 million, and has recorded this transaction as a capital
contribution.
The Company purchases insurance policies from an affiliated insurance
broker. The affiliated entity earned commissions of $69,000, $89,000 and $93,000
in 1995, 1996 and 1997, respectively, with respect to such policies. PUSA
provides certain administrative services to the Company including payroll and
benefit processing for which the Company expensed $10,000 in 1997. In 1995 and
1996 the Company did not accrue for the cost of such services provided by PUSA
because amounts were not material to the Company's results from operations. The
Company also purchases demographic and economic research information through an
affiliate for $10,000 per year.
F-18
<PAGE> 66
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company provides various managerial services to Twin Acres for which it
receives a fee. For the years ended December 31, 1995, 1996 and 1997, management
fees included in other income were $607,000, $851,000 and $246,000,
respectively.
(8) INCOME TAXES
Components of income tax expense (benefit) consist of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................... $2,057 $4,231 $4,038
State..................................................... 166 451 125
------ ------ ------
2,223 4,682 4,163
Deferred:
Federal................................................... 224 (459) (1)
State..................................................... 30 (59) 110
------ ------ ------
254 (518) 109
------ ------ ------
$2,477 $4,164 $4,272
====== ====== ======
</TABLE>
The difference between total reported income taxes and expected income tax
expense computed using the federal statutory income tax rate of 34% for 1995 and
35% for 1996 and 1997, is reconciled as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense............................. $2,124 $3,674 $3,825
Goodwill amortization....................................... 205 211 211
State taxes, net of federal benefit......................... 129 255 153
Other....................................................... 19 24 83
------ ------ ------
$2,477 $4,164 $4,272
====== ====== ======
</TABLE>
F-19
<PAGE> 67
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant temporary differences that give rise to the deferred tax assets
and liabilities as of December 31, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Deferred tax assets:
Warranty reserve.......................................... $ 214 $ 143
Advertising reserve....................................... 60 224
Property, premises and equipment, principally due to
differences in depreciation............................ 50 44
Capitalized interest...................................... 201 163
Accrued bonuses........................................... 401 397
Partnership Investment.................................... -- 132
Other..................................................... 142 113
------ ------
Total gross deferred tax assets................... 1,068 1,216
------ ------
Deferred tax liabilities:
Amortizable intangibles................................... (95) (343)
Partnership investment.................................... (517) --
Other..................................................... (20) (16)
------ ------
Total gross deferred tax liabilities.............. (632) (359)
------ ------
Net deferred tax asset............................ $ 436 $ 857
====== ======
</TABLE>
Management of the Company believes that it is more likely than not that the
gross deferred tax assets will be realized or settled due to the Company's
ability to generate taxable income exclusive of reversing timing differences.
Accordingly, no valuation allowance was established at December 31, 1996 and
1997.
Included in payable to affiliates at December 31, 1996 and 1997 is $2.0
million and $1.8 million payable to PUSA under terms of the tax sharing
agreement. Payments of $1.8 million, $3.0 million, and $3.9 million,
respectively, were made to PUSA for federal income taxes during 1995, 1996 and
1997, under the aforementioned agreement.
(9) COMMITMENTS AND CONTINGENCIES
The Company leases office premises and equipment under noncancelable
operating leases. Future minimum payments under these noncancelable operating
leases for the fiscal years ending on December 31 are as follows:
1998 -- $191,000; 1999 -- $107,000; 2000 -- $82,000; and 2001 -- $6,000; and
2002 -- $2,000.
Rental expense for the year ended December 31, 1995, 1996 and 1997
aggregated $268,000, $340,000 and $332,000 respectively.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position.
The Company provides homebuyers with a two year limited warranty of
workmanship and materials from the date of sale. The Company generally has
recourse against its subcontractors for claims relating to workmanship and
materials. The Company also provides a ten-year homeowner's warranty through a
single national contract through a third party. This warranty generally covers
major structural defects. Estimated warranty costs are recorded at the time of
sale. As of December 31, 1996 and 1997, the liability for warranty costs was
$569,000 and $881,000, respectively, and was included in other liabilities.
F-20
<PAGE> 68
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) WESTBROOKE ACQUISITION
Effective January 1, 1998, the Company acquired all of the outstanding
stock of Westbrooke Communities, Inc. and its affiliated entities
("Westbrooke"), a single-family home builder in South Florida. The initial
purchase price for Westbrooke was $18.9 million in the form of promissory notes.
($12.3 million 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. In order for the income targets to be met, Westbrooke must
achieve net income before income tax (as defined in the stock purchase
agreement) on a cumulative basis of $3,400,000, $7,040,000, $10,920,000,
$15,040,000 and $19,400,000 for the fiscal years ending December 31, 1998, 1999,
2000, 2001 and 2002, respectively.
The Company also agreed to continue to pay incentive compensation to the
minority interest owners of Westbrooke equal to 6% of net income before income
taxes, as defined in the purchase agreement. Such payments will be recorded as
compensation expense in the period in which they are earned.
F-21
<PAGE> 69
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Shareholder
Westbrooke Communities, Inc.
We have audited the accompanying combined balance sheets of Westbrooke
Communities, Inc. and Affiliates (the Companies) as of December 31, 1996 and
1997, and the related combined statements of income, changes in capital and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Westbrooke
Communities, Inc. and Affiliates at December 31, 1996 and 1997, and the combined
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Miami, Florida
January 27, 1998
F-22
<PAGE> 70
WESTBROOKE COMMUNITIES, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Cash........................................................ $ 2,105 $ 3,838
Restricted cash............................................. 2,823 442
Receivables................................................. 1,877 1,540
Real estate inventory....................................... 43,553 44,707
Furniture and equipment, net of accumulated depreciation of
$399 and $520 at December 31, 1996 and 1997,
respectively.............................................. 332 850
Prepaid expenses and other assets, net...................... 1,877 2,216
------- -------
$52,567 $53,593
======= =======
LIABILITIES AND CAPITAL
Liabilities:
Accounts payable.......................................... $ 2,291 $ 4,228
Customer deposits......................................... 2,862 3,200
Accrued expenses and other liabilities.................... 2,458 1,614
Notes payable............................................. 21,063 22,308
Subordinated notes payable................................ 7,500 7,500
------- -------
36,174 38,850
Minority interest........................................... 3,627 3,162
Commitments and contingencies
Capital:
Common stock.............................................. 45 45
Additional paid-in-capital................................ 9,955 9,955
Partners' capital/retained earnings....................... 2,766 1,581
------- -------
Total capital..................................... 12,766 11,581
------- -------
$52,567 $53,593
======= =======
</TABLE>
See accompanying notes.
F-23
<PAGE> 71
WESTBROOKE COMMUNITIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... $55,241 $124,301 $103,421
Cost of sales............................................... 47,793 108,950 90,960
------- -------- --------
Gross profit................................................ 7,448 15,351 12,461
Selling, general and administrative expenses................ 4,019 7,999 7,897
Depreciation and amortization............................... 436 586 657
------- -------- --------
Operating income............................................ 2,993 6,766 3,907
Other income:
Interest income........................................... 174 144 155
Other..................................................... 261 529 693
------- -------- --------
Total other income.......................................... 435 673 848
------- -------- --------
Net income before minority interest......................... 3,428 7,439 4,755
Minority interest........................................... 694 1,384 732
------- -------- --------
Net income.................................................. $ 2,734 $ 6,055 $ 4,023
======= ======== ========
</TABLE>
See accompanying notes.
F-24
<PAGE> 72
WESTBROOKE COMMUNITIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN- RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1994....................... $45 $9,955 $ -- $10,000
Distributions.................................... -- -- (1,947) (1,947)
Net income....................................... -- -- 2,734 2,734
--- ------ ------- -------
Balance at December 31, 1995....................... 45 9,955 787 10,787
Distributions.................................... -- -- (4,076) (4,076)
Net income....................................... -- -- 6,055 6,055
--- ------ ------- -------
Balance at December 31, 1996....................... 45 9,955 2,766 12,766
Distributions.................................... -- -- (5,208) (5,208)
Net income....................................... -- -- 4,023 4,023
--- ------ ------- -------
Balance at December 31, 1997....................... $45 $9,955 $ 1,581 $11,581
=== ====== ======= =======
</TABLE>
See accompanying notes
F-25
<PAGE> 73
WESTBROOKE COMMUNITIES, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 2,734 $ 6,055 $ 4,023
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization............................. 436 586 657
Minority interest......................................... 694 1,384 732
Changes in operating assets and liabilities:
Restricted cash........................................ (294) (693) 2,381
Receivables............................................ (868) (361) 337
Real estate inventory.................................. (25,373) 4,646 (1,154)
Prepaid expenses and other assets...................... (1,941) 308 (854)
Accounts payable....................................... 854 (996) 1,937
Customer deposits...................................... 1,746 (1,248) 338
Accrued expenses and other liabilities................. 28 1,824 (844)
-------- -------- --------
Net cash (used in) provided by operating activities......... (21,984) 11,505 7,553
FINANCING ACTIVITIES
Proceeds from notes payable................................. 55,991 86,613 67,986
Payments on notes payable................................... (38,485) (92,305) (66,377)
Payments on notes payable to Westbrooke shareholders........ (3,624) -- --
Proceeds from issuance of subordinated notes payable........ 7,500 -- --
-------- -------- --------
Net cash provided by (used in) financing activities......... 21,382 (5,692) 1,609
INVESTING ACTIVITIES
Additions to furniture and equipment, net................... (185) (70) (1,349)
Minority interest contributions -- cash..................... 2,500 -- --
Distribution to minority interest........................... (186) (765) (1,197)
Distribution to partners.................................... (1,947) (4,076) (4,883)
-------- -------- --------
Net cash provided by (used in) investing activities......... 182 (4,911) (7,429)
-------- -------- --------
(Decrease) increase in cash................................. (420) 902 1,733
Cash at beginning of year................................... 1,623 1,203 2,105
-------- -------- --------
Cash at end of year......................................... $ 1,203 $ 2,105 $ 3,838
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest, net of amount
capitalized............................................... $ -- $ -- $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ITEMS
Distribution of property and equipment to stockholder....... $ -- $ -- $ 325
======== ======== ========
</TABLE>
See accompanying notes
F-26
<PAGE> 74
WESTBROOKE COMMUNITIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND BUSINESS
Principles of Combination
The accompanying combined financial statements include the accounts of
Westbrooke Communities, Inc., and its affiliated entities, Westbrooke at West
Lake, Inc., Westbrooke at Spring Valley, Inc., Westbrooke at Rock Creek, Inc.,
Westbrooke at Pembroke Pines, Inc., Westbrooke at Winston Trails, Inc.,
Westbrooke at Winston Park, Inc., and Westbrooke at Oakridge, Inc. (referred to
collectively as Westbrooke). These entities are under common control and have a
75% controlling interest in The Westbrooke Partnership (the Partnership), which
has been consolidated in the combined financial statements. During 1995
Westbrooke at Rock Creek, Inc., Westbrooke at Spring Valley, Inc. and Westbrooke
at Winston Park, Inc. (collectively the Inactive Entities) ceased operations.
All significant intercompany transactions have been eliminated in combination.
The Westbrooke Partnership
The Partnership, a Florida general partnership, was formed on January 1,
1995 pursuant to an Agreement of Partnership (the Agreement) among the
Westbrooke entities and Athena Westbrooke Investors, L.P. (Athena). Athena's
partnership interest is shown on the accompanying combined financial statements
as minority interest.
The Partnership continued the business of Westbrooke which was engaged
principally in the development, construction, marketing and sale of residential
single family homes in southeast Florida. In addition, the Partnership has, from
time to time, managed the development and sale of large tracts of undeveloped
land for the benefit of third parties.
Capital Contributions and Profit Allocations
The initial capital contributions to the Partnership consisted of a
contribution by Westbrooke of $10 million and a contribution by Athena of $2.5
million in cash. The Westbrooke contribution included the contribution of all of
its assets, including unrestricted cash of $1,623,000 and net assets of
$8,377,000 consisting of restricted cash of $1,836,000, receivables of $648,000,
inventory of $22,826,000, furniture and equipment of $179,000, and prepaid
expenses and other assets of $1,164,000, net of the assumption by the
Partnership of all of Westbrooke's liabilities, including accounts payable of
$2,433,000, accrued expenses and other liabilities of $540,000, customer
deposits of $2,364,000, notes payable to banks and others of $9,315,000 and
notes payable to Westbrooke shareholders of $3,624,000. The non-cash
contribution made by Westbrooke was recorded at historical cost. Concurrent with
the initial contributions to the Partnership, the Partnership completed a
private placement of $7.5 million of subordinated notes payable which is
described in Note 7.
The Agreement provides for a priority return on the partners' initial
capital contributions of 12% and interest on each partners' capital account in
excess of the initial capital contributions at a rate of prime plus 1%, both of
which are payable quarterly. Subsequent to December 31, 1997, the entire
partnership interest of Athena was redeemed. See Note 11.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Restricted Cash
Restricted cash consists of deposits received from buyers of single-family
homes which are held in escrow. The concentration of credit risk associated with
cash and restricted cash is considered low due to the credit quality of the
financial institutions in which deposits are maintained.
F-27
<PAGE> 75
WESTBROOKE COMMUNITIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Real Estate Inventory
Real estate inventory is stated at the lower of cost or estimated net
realizable value and consists of residential homes under construction and
completed and land held for development. Interest and real estate taxes are
capitalized during the construction period. Interest incurred and capitalized
during the years ended December 31, 1995, 1996 and 1997 was $3,870,000,
$4,799,000 and $4,352,000, respectively.
The costs of development and construction not specifically identified to a
particular house are allocated to individual houses based on their relative fair
value within each development.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Partnership adopted Statement 121 in the first quarter of 1996 and the effect of
the adoption was not material to its financial statements.
Furniture and Equipment
Furniture and equipment is carried at cost. Depreciation of furniture,
equipment, and computer software is provided on the straight-line method over
the estimated useful lives of the assets, which are generally three years.
Prepaid Expenses and Other Assets
Included in prepaid expenses and other assets are $801,000 and $527,000 of
deferred financing fees at December 31, 1996 and 1997, respectively.
Amortization of deferred financing fees is provided on the straight-line method
over the life of the respective loan. At December 31, 1996 and 1997, accumulated
amortization of deferred financing fees totaled $792,000 and $1,348,000,
respectively.
Income Taxes
Each Westbrooke entity, other than The Westbrooke Partnership, has
individually elected to be treated as an S Corporation for federal and state
income tax purposes. As such, Westbrooke's taxable income or loss is included in
the individual income tax return of the shareholder. Accordingly, Westbrooke is
not subject to federal or state income taxes.
Since the income of the Partnership will also be included in the taxable
income reportable on the income tax returns of its partners, Westbrooke and
Athena, no provision for income taxes has been provided on such income.
Profit Recognition
Revenues from sales of homes are recognized when closings occur and
ownership of the home has transferred to the customer. Customers' deposits
received prior to closing are recorded as liabilities, and if required, are held
in escrow until closing.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
$1,487,000, $1,944,000 and $1,472,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
Reclassifications
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
F-28
<PAGE> 76
WESTBROOKE COMMUNITIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity 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.
3. RECEIVABLES
The West Lake Community Development District (the West Lake District) has
authorized the issuance of bonds to finance the acquisition, construction and
installation of the West Lake District's water, sewer, drainage and offsite
roadway improvements. Under the Purchase and Sale and Option Agreement for lots
purchased in this district, Westbrooke is entitled to 44% of the net proceeds of
these bonds which was estimated to be $1,336,000. In 1996, the decision was made
to sell the bonds in a public issuance. The bonds were subsequently issued on
January 30, 1997 and approximately $930,000 of the proceeds due to the
Partnership were received on January 31, 1997. The balance of the proceeds is
expected to be received over a two year period. Accordingly, at December 31,
1996 and 1997, receivables in the amount of $922,000 and $144,000, respectively,
have been recorded to reflect the estimated bond proceeds on units delivered
through the respective periods.
The Oakridge Community Development District (the Oakridge District) has
authorized the issuance of bonds to finance the acquisition, construction and
installation of the Oakridge District's drainage and certain roadway
improvements. Under the Purchase and Sale and Option Agreement for lots
purchased in this district, Westbrooke is entitled to 50% of the net proceeds of
these bonds which is estimated to be $795,000. Accordingly, at December 31, 1996
and 1997, a receivable in the amount of $182,000 and $485,000, respectively, has
been recorded to reflect the estimated bond proceeds on units delivered through
the respective periods.
On December 31, 1995, the Partnership terminated its interest in the
Winston Park Joint Venture (the Venture) which was formed to construct, market
and sell single-family residences in Coconut Creek, Florida. Pursuant to a
termination agreement, the Partnership's guarantee of $734,000 of construction
loans of the Venture will continue until such loans are repaid. The balance of
these construction loans at December 31, 1996 and 1997 is $332,000.
4. REAL ESTATE INVENTORY
Real estate inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Construction in-progress.................................... $23,487 $29,998
Completed homes............................................. 1,828 1,157
Models and model furnishings................................ 7,462 7,282
Developed lots.............................................. 10,776 6,270
------- -------
$43,553 $44,707
======= =======
</TABLE>
5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
trade accounts payable and accrued expenses approximate fair value because of
their short duration to maturity. The carrying amounts of the notes payable and
subordinated notes payable approximate fair value because the interest rate is
tied to a quoted variable index.
F-29
<PAGE> 77
WESTBROOKE COMMUNITIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE
Notes payable consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Construction loans with banks, payable in 1998, with
interest at prime (8.5% at December 31, 1996 and 1997) to
prime plus 1.5%........................................... $16,600 $18,821
Development loan with bank, payable in 1998, with interest
at prime plus 1.5%........................................ 2,495 3,487
Land acquisition loan with interest at prime plus 1.5%...... 1,968 --
------- -------
$21,063 $22,308
======= =======
</TABLE>
Notes payable are collateralized by substantially all real estate
inventory. The construction and development loans require the payment of release
prices as collateralized units are closed. At December 31, 1996 and 1997,
release prices ranged from $16,000 to $164,000 and from $16,000 to $198,000,
respectively. Notes payable are guaranteed by the sole shareholder of
Westbrooke. At December 31, 1996 and 1997, the Partnership had construction loan
facilities totaling $42,000,000. Eligible borrowings under these facilities
totaled $21,249,000 and $23,704,000, at December 31, 1996 and 1997,
respectively, of which $4,649,000 and $5,077,000 were available in addition to
the amount outstanding.
7. SUBORDINATED NOTES PAYABLE
On January 11, 1995, the Partnership issued $7,500,000 of unsecured notes
payable (the Notes) which are subordinated in right of payment to all
liabilities and indebtedness of the Partnership. The Notes mature on January 1,
2000, and require minimum principal payments of $1,875,000 in 1998, $1,875,000
in 1999 and $3,750,000 in 2000.
The Notes bear interest at a base rate of 12% (Basic Interest), payable
monthly, and provide for additional interest of 7.5% (Additional Interest), the
payment of which may be deferred until such time as principal payments of the
Notes are due. The Partnership, however, is required to pay all accrued
Additional Interest prior to distributing profits to the partners in excess of
priority returns. In each of the years ended December 31, 1996 and 1997, the
Partnership accrued $900,000, of Basic Interest, and $563,000 of Additional
Interest. For the years ended December 31, 1995, 1996 and 1997, $800,000,
$900,000 and $975,000, respectively, of Basic Interest and $347,000, $497,000
and $828,000 of Additional Interest, respectively, were paid.
Subsequent to December 31, 1997, the Notes were paid in full (See Note 11).
8. COMMITMENTS AND CONTINGENCIES
Westbrooke purchases certain developed lots under option agreements and
contracts which provide for the payment of additional amounts, in excess of the
base lot price, in the event the net income of the respected project exceeds
certain agreed upon levels. Amounts accrued under these option agreements and
contracts are included in cost of sales in the period incurred. For the years
ended December 31, 1995, 1996 and 1997, additional amounts in excess of the base
lot prices incurred under these agreements were $-0-, $1,737,000 and $2,524,000,
respectively. Prepaid expenses, at December 31, 1996 and 1997, include $309,000
and $325,000, respectively, which had been prepaid under one of these
agreements. Accrued expenses and other liabilities at December 31, 1996 and 1997
include $1,215,000 and $778,000, respectively, for amounts due under one of
these agreements.
Westbrooke has an unsecured letter of credit facility which is used to
issue letters of credit which guarantee Westbrooke's performance of certain
development and construction obligations. At December 31, 1996 and 1997,
F-30
<PAGE> 78
WESTBROOKE COMMUNITIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
letters of credit aggregating $1,484,000 and $1,342,000, respectively, were
outstanding under this facility. No additional amounts are available under this
facility.
The Company is assessing the modification or replacement of its software
that may be necessary for its computer systems to function properly with respect
to the date in the year 2000 and thereafter. The Company does not believe that
the cost of either modification of existing software or conversion to new
software will be significant or that the year 2000 issue will pose significant
operational problems for its computer systems.
Westbrooke is involved from time to time in litigation arising in the
ordinary course of business, none of which, in the opinion of management, is
expected to have a material adverse effect on Westbrooke's financial position or
results of operations.
9. EMPLOYEE BENEFIT PLAN
The Partnership sponsors a 401(k) Profit Sharing Plan (the Plan). Under the
terms of the Plan, the Partnership matches 25% of employee's voluntary
contributions up to a maximum of 6% of each participant's earnings. Additional
employee contributions in the form of profit sharing are made at the discretion
of the Partnership. The Partnership's matching contributions to the Plan were
$12,000, $37,000 and $41,000 for the years ended December 31, 1995, 1996 and
1997, respectively.
10. COMBINED COMMON STOCK
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Westbrooke Communities, Inc., $1 par value, 1,000 shares
authorized, 100 shares issued and outstanding............. $ 100 $ 100
Westbrooke at West Lake, Inc., $1 par value, 7,500 shares
authorized, issued and outstanding........................ 7,500 7,500
Westbrooke at Spring Valley, Inc., $1 par value, 7,500
shares authorized, issued and outstanding................. 7,500 7,500
Westbrooke at Pembroke Pines, Inc., $1 par value, 7,500
shares authorized, issued and outstanding................. 7,500 7,500
Westbrooke at Winston Trails, Inc., $1 par value, 7,500
shares authorized, issued and outstanding................. 7,500 7,500
Westbrooke at Winston Park, Inc., $1 par value, 7,500 shares
authorized, issued and outstanding........................ 7,500 7,500
Westbrooke at Oakridge, Inc., $.01 par value, 10,000 shares
authorized, issued and outstanding........................ 100 100
Westbrooke at Rock Creek, Inc., $1 par value, 7,500 shares
authorized, issued and outstanding........................ 7,500 7,500
------- -------
$45,200 $45,200
======= =======
</TABLE>
11. SUBSEQUENT EVENTS
Effective January 1, 1998, the sole shareholder of Westbrooke sold all of
the outstanding stock of Westbrooke, except for the Inactive Entities, and
substantially all of the partnership interest in the Partnership to Newmark
Homes Corp. (Newmark). The initial sales price was $18.9 million in the form of
promissory notes, $12.3 million of which bear interest at 6.45% payable annually
over five years and $6.6 million of which bear interest at 9.0% and are due on
or before one year from closing. In addition, to the promissory notes, the stock
purchase agreement provides for the payment of up to $7.5 million, contingent
upon Westbrooke achieving specified income targets over the next five years. In
order for the income targets to be met, Westbrooke must
F-31
<PAGE> 79
WESTBROOKE COMMUNITIES, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
achieve net income before income tax (as defined in the stock purchase
agreement), on a cumulative basis, of $3,400,000, $7,040,000, $10,920,000,
$15,040,000 and $19,400,000 for the years ended December 31, 1998, 1999, 2000,
2001 and 2002, respectively.
As part of this transaction, Westbrooke redeemed the partnership interest
of Athena and repaid the subordinated notes payable with the proceeds from a $10
million bank loan, which bears interest at a rate of prime less 0.75% and is
payable September 30, 1998. The bank loan is secured by a letter of credit
issued by a bank for the benefit of Newmark.
F-32
<PAGE> 80
[PHOTOS OF FINISHED HOME (EXTERIOR),
FINISHED HOME (INTERIOR) AND
HOME UNDER CONSTRUCTION]
<PAGE> 81
============================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY. THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................... 3
Risk Factors................................. 7
The Company.................................. 12
Acquisition of Westbrooke.................... 12
Use of Proceeds.............................. 13
Dividend Policy.............................. 13
Dilution..................................... 14
Capitalization............................... 15
Selected Financial and Operating Data........ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 17
Business..................................... 24
Management................................... 35
Certain Transactions......................... 39
Security Ownership........................... 40
Description of Capital Stock................. 41
Shares Eligible for Future Sale.............. 43
Underwriting................................. 44
Legal Matters................................ 45
Experts...................................... 45
Available Information........................ 46
Index to Financial Statements................ F-1
</TABLE>
---------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
============================================================
============================================================
2,000,000 SHARES
NEWMARK LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
Dain Rauscher Incorporated
Laidlaw Global Securities, Inc.
, 1998
============================================================
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The registrant will pay the following estimated expenses in connection with
the issuance and distribution of Common Stock pursuant to this registration
statement, in addition to underwriting discounts:
<TABLE>
<S> <C>
SEC Filing Fee.............................................. $ 7,667
NASD Filing Fee............................................. 3,030
Nasdaq National Market Application Fee...................... 81,625
Accounting Fees and Expenses................................ 250,000
Legal Fees and Expenses..................................... 225,000
Printing and Engraving...................................... 250,000
Transfer Agent and Registrar Fees and Expenses.............. 15,000
Underwriter's Nonaccountable Expense Allowance.............. 150,000
Miscellaneous............................................... 17,678
----------
Total..................................................... $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Nevada Private Corporations Law ("NPCL") provides that a corporation
may indemnify any person who was or is a party or is threatened to be made a
party, by reason of the fact that such person was an officer of director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, to (x) any action or suit by or in the right
of the corporation against expenses, including amounts paid in settlement and
attorneys' fees, actually and reasonably incurred, in connection with the
defense or settlement believed to be in, or not opposed to, the best interests
of the corporation, except that indemnification may not be made for any claim,
issue or matter as to which such person has been adjudged by a court of
competent jurisdiction to be liable to the corporation or for amounts paid in
settlement to the corporation and (y) any other action or suit or proceeding
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement, actually and reasonably incurred, if he or she acted in good
faith and in a manner which he or she reasonably believed to be in, or not
opposed to, reasonable cause to believe his or her conduct was unlawful. To the
extent that a director, officer, employee or agent has been "successful on the
merits or otherwise" the corporation must indemnify such person. The articles of
incorporation or bylaws may provide that the expenses of officers and directors
incurred in defending any such action must be paid as incurred and in advance of
the final disposition of such action. The NPCL also permits the Registrant to
purchase and maintain insurance on behalf of the Registrant's directors and
officers against any liability arising out of their status as such, whether or
not Registrant would have the power to indemnify him against such liability.
These provisions may be sufficiently broad to indemnify such persons for
liabilities arising under the Securities Act.
The Registrant's Restated Articles and Bylaws, as amended to date, provide
that the Registrant shall, to the fullest extent not prohibited by applicable
law, indemnify any director or officer of the Registrant in connection with
certain actions, suits or proceedings, against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred. The Registrant is also required to pay any expenses incurred by a
director or officer in defending such an action, in advance of the final
disposition of such action. The Registrant's Articles and Bylaws further provide
that, by resolution of the Board of Directors, such benefits may be extended to
employees, agents or other representatives of the Registrant.
II-1
<PAGE> 83
The Registrant has authority under the NPCL to indemnify its officers,
directors, employees and agents to the extent provided in such statute. Article
VIII of the Registrant's Bylaws, referenced as Exhibit 3.2 hereto, provide for
indemnification of the Registrant's officers, directors, employees and agents.
The NPCL provides that a corporation's articles of incorporation may
contain a provision which eliminates or limits the personal liability of a
director or officer to the corporation or its stockholders for damages for
breach of fiduciary duty as a director or officer, provided that such a
provision must not eliminate or limit the liability of a director or officer
for: (a) acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law; or (b) the payment of illegal distributions. The
Company's Articles include a provision eliminating the personal liability of
directors for breach of fiduciary duty except that such provision will not
eliminate or limit any liability which may not be so eliminated or limited under
applicable law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The information set forth on the "Index to Exhibits" of this Registration
Statement is incorporated herein by reference.
FINANCIAL STATEMENT SCHEDULES:
Schedule I -- Condensed Financial Information of Registrant; Parent Company
Only Balance Sheets; Parent Company Only Statements of
Operations; Parent Company Only Statements of Cash Flows.
Schedule II -- Valuation and Qualifying Accounts.
Schedule III -- Properties and Accumulated Depreciation.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy, as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the Common
Stock being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
(3) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h)
II-2
<PAGE> 84
under the Securities Act of 1933 shall be deemed to be part of the
registration statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on February 13, 1998.
NEWMARK HOMES CORP.
By: /s/ TERRY C. WHITE
----------------------------------
Terry C. White
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons on
behalf of the registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LONNIE M. FEDRICK* President and Chief Executive February 13, 1998
- ----------------------------------------------------- Officer
Lonnie M. Fedrick
/s/ TERRY C. WHITE Chief Financial Officer and February 13, 1998
- ----------------------------------------------------- Treasurer
Terry C. White
/s/ LARRY D. HORNER Director February 13, 1998
- -----------------------------------------------------
Larry D. Horner
/s/ BILL C. BRADLEY Director February 13, 1998
- -----------------------------------------------------
Bill C. Bradley
/s/ MICHAEL K. MCCRAW Director February 13, 1998
- -----------------------------------------------------
Michael K. McCraw
/s/ TERRY C. WHITE
- -----------------------------------------------------
*Attorney-in-fact
</TABLE>
II-4
<PAGE> 86
SIGNATURES
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael K. McCraw and Terry C. White, and each of
them, his true and lawful attorney-in-fact either one of who may act without the
other, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to sign
any and all additional registration statements relating to the same offering of
securities as this Registration Statement that is filed pursuant to Rule 462(b)
under the Securities Act of 1933 and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES CARR Director February 13, 1998
- -----------------------------------------------------
James Carr
</TABLE>
II-5
<PAGE> 87
SCHEDULE I
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Cash and short-term investments............................. $ 1 $ 11
Investments in and equity in net assets of subsidiaries..... 43,928 55,690
Other assets................................................ 1,347 1,793
------- -------
Total assets...................................... $45,276 $57,494
======= =======
LIABILITIES
Other liabilities........................................... $ 1,347 $ 1,803
------- -------
Total liabilities................................. 1,347 1,803
------- -------
STOCKHOLDERS' EQUITY
Common stock................................................ 92 92
Additional paid in capital.................................. 42,415 52,165
Retained earnings........................................... 1,422 3,434
------- -------
Total Stockholders' Equity........................ 43,929 55,691
------- -------
Total Liabilities and Stockholders' Equity........ $45,276 $57,494
======= =======
</TABLE>
S-1
<PAGE> 88
SCHEDULE 1
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Equity in earnings of subsidiaries.......................... $3,769 $6,332 $6,655
------ ------ ------
Net income.................................................. $3,769 $6,332 $6,655
====== ====== ======
</TABLE>
S-2
<PAGE> 89
SCHEDULE 1
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 3,769 $ 6,332 $ 6,655
Adjustments to reconcile net income to cash from operating
activities:
Change in other assets...................................... (877) (470) (446)
Change in other liabilities................................. 877 470 456
Equity in undistributed earnings of subsidiaries.......... (3,769) (6,332) (6,655)
------- ------- -------
Net cash used by operating activities....................... -- -- 10
------- ------- -------
Cash flows from investing activities:
Dividends from subsidiaries............................... 7,280 9,463 4,810
Capital contributions to subsidiaries..................... (461) (1,247) (181)
------- ------- -------
6,819 8,216 4,629
Cash flows from financing activities:
Capital contributions from parent......................... 461 1,247 181
Dividends paid to parent.................................. (7,280) (9,463) (4,810)
------- ------- -------
6,819 (8,216) (4,629)
Net change in cash and short-term investments............... -- -- 10
Cash at the beginning of the year........................... 1 1 1
------- ------- -------
Cash at the end of the year................................. $ 1 $ 1 $ 11
======= ======= =======
</TABLE>
S-3
<PAGE> 90
SCHEDULE II
NEWMARK HOMES CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
CHARGED CHARGED
BALANCE AT TO COSTS TO OTHER BALANCE AT
BEGINNING OF AND ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ------------ ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Warranty Reserve:
December 31, 1995............. $376 $ 922 $ -- $ (738) $560
December 31, 1996............. 560 1,130 -- (1,121) 569
December 31, 1997............. 569 1,643 -- (1,331) 881
</TABLE>
S-4
<PAGE> 91
SCHEDULE III
NEWMARK HOMES CORP. AND SUBSIDIARIES
PROPERTIES AND ACCUMULATED DEPRECIATION
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COSTS ACQUISITION
----------------------- -----------------------
BUILDINGS
AND CARRYING
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COSTS
----------- ------------ -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
PROPERTIES:
Landmark Retail Tract
Dallas, TX......................... -- $ 325 -- -- --
-------- -------- -------- -------- --------
======== ======== ======== ======== ========
<CAPTION>
TOTAL COSTS
-------------------------------------
BUILDINGS ACCUMULATED DATE OF
AND DEPRECIATION ACQUIS.(A)
DESCRIPTION LAND IMPROVEMENTS TOTAL(1)(2) (2) CONSTR.(C)
----------- -------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
PROPERTIES:
Landmark Retail Tract
Dallas, TX......................... $ 325 138 $463 $ -- 1994(A)
-------- --- ---- -------- --------
138 463 $ --
======== === ==== ======== ========
</TABLE>
NOTES:
(1) The following table reconciles the historical cost of the Company's
properties from January 1, 1994 to December 31, 1996:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of period............................... $ 9,498 $ 5,631 $ 325
Additions during period (acquisition, improvements,
etc.).................................................. 425 1,378 138
Deductions during period (cost of real estate sold,
etc.).................................................. (4,292) (6,684) --
----------- ----------- -----------
Balance, close of period................................... $ 5,631 $ 325 $ 463
=========== =========== ===========
</TABLE>
S-5
<PAGE> 92
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
1.1* -- Form of Underwriting Agreement
3.1* -- Form of Amended and Restated Articles of Incorporation
to be effective prior to the offering
3.2* -- Bylaws
4.1+ -- Specimen of Registrant's Stock Certificate
5.1* -- Legal Opinion by Wolin, Ridley & Miller LLP regarding
the legality of securities being issued.
10.1(a)* -- Construction Loan Agreement dated August 6, 1997 for
$3,675,000 between Pacific United, L.P., as Borrower,
NHC Holdings, Corp., as Guarantor, and Bank of America
Texas, N.A., as Lender
10.1(b)* -- $3,675,000 Promissory Note Secured by Deed of Trust
dated August 6, 1997 payable to Bank of America, N.A.,
as Lender, by Pacific United, L.P.
10.1(c)* -- Deed of Trust, Security Agreement, Financing Statement,
and Assignment of Rental between Pacific United, L.P.,
Grantor to David S. Owens, Trustee, and Bank of America
Texas N.A., Beneficiary dated August 4, 1997
10.1(d)* -- Indemnity Agreement dated August 6, 1997 between Pacific
United, L.P., in favor of Bank of America Texas, N.A.
10.1(e)* -- Payment Guaranty dated August 6, 1997, by NHC Holdings
Corp., as Guarantor, in favor of Bank of America Texas,
N.A., as Lender
10.2* -- $10,000,000 Promissory Note dated April 23, 1997,
between BankTexas, as Lender, and Newmark Home
Corporation, as Borrower
10.3(a)* -- Master Revolving Line of Credit Loan Agreement dated
October 1, 1996 between Newmark Homes, L.P. and Compass
Bank
10.3(b)* -- First Amendment and Modification to Loan Agreement
between Newmark Homes, L.P. and Compass Bank dated March
1, 1997
10.3(c)* -- Second Amendment and Modification to Loan Agreement
between Newmark Homes, L.P. and Compass Bank dated June
1, 1997.
10.3(d)* -- Compass Bank Revolving Line of Credit Promissory Note
dated June 1, 1997
10.4(a)* -- $15,000,000 Loan Agreement between Newmark Homes and
Bank of America Texas, N.A.
10.4(b)* -- Promissory Note dated November 29, 1996 between Newmark
Homes and Bank of America Texas, N.A. for $15,000,000
10.4(c)* -- Deed of Trust, Security Agreement and Assignment of
Rents and Leases dated November 29, 1996, by Newmark
Homes, L.P., as Grantor, to Chris A. Peirson, Trustee,
for the benefit of Bank of America Texas, N.A.
10.5(a)* -- April 30, 1996 Amended & Restated Construction Loan
Agreement for $20,000,000 between Newmark Home
Corporation and Bank One, Texas, N.A. (the "Bank One
Loan Agreement")
</TABLE>
<PAGE> 93
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
10.5(b)* -- Modification Agreement to Amended & Restated
Construction Loan Agreement between Newmark Home
Corporation and Bank One, Texas dated April 30, 1996
10.5(c)* -- Fourth Amendment to Bank One Loan Agreement
10.5(d)* -- Third Amendment to Bank One Loan Agreement
10.5(e)* -- Second Amendment to Bank One Loan Agreement
10.5(f)* -- First Amendment to Bank One Loan Agreement
10.6(a)* -- Form of Tax Allocation Agreement ("Tax Agreement")
between Pacific USA and various affiliates and
subsidiaries, of Pacific USA, including the Registrant,
dated April 28, 1992
10.6(b)* -- Form of Amendment to Tax Agreement.
10.7* -- March 13, 1996 Lot Acquisition Loan Agreement between
The Adler Companies, Inc. and Bank United of Texas
10.8(a)* -- March 13, 1996 Construction Line of Credit Loan
Agreement between The Adler Companies, Inc. and Bank
United of Texas FSB
10.8(b)* -- Amendment to Construction Line of Credit Loan Agreement,
dated December 30, 1996
10.8(c)* -- Amendment to Construction Line of Credit Loan Agreement,
dated January 15, 1997
10.8(d)* -- Mortgage Modification and Spreading Agreement and Notice
of Future Advance, dated January 15, 1997
10.8(e)* -- January 15, 1997 Promissory Note between The Adler
Companies, Inc. and Bank United
10.9* -- April 23, 1997 Construction Loan Agreement between
BankTexas N.A. and Newmark Homes, L.P.
10.10* -- Lot Acquisition Loan Agreement between The Adler
Companies, Inc. and Bank United of Texas FSB dated
January 15, 1997
10.11(a)* -- Master Loan Agreement between Newmark Homes, L.P. and
Guaranty Federal Bank dated August 1997
10.11(b)* -- Revolving Promissory Note for $10,000,000 dated August
1997 between Guaranty Federal Bank and Newmark
10.11(c)* -- Master Form of Deed of Trust with Security Agreement and
Assignment of Rents and Leases between Guaranty Federal
Bank, FSB and Newmark Homes, L.P. re: $10,000,000 Loan
Agreement
10.12(a)* -- $15,000,000 Revolving Line of Credit Loan Agreement
between First American Bank and Newmark Homes, L.P.
dated December 17, 1996
10.12(b)* -- Master Revolving Line of Credit/Promissory Note dated
December 17, 1996 for $15,000,000 between Newmark Homes,
L.P. and First American Bank Texas and Deed of Trust
10.12(c)* -- February 4, 1997 Amendment to $15,000,000 Revolving Line
of Credit Loan Agreement dated December 17, 1996 between
First American Bank and Newmark Homes, L.P.
10.12(d)* -- April 30, 1997 Amendment to $15,000,000 Revolving Line
of Credit Loan Agreement dated December 17, 1996 between
First American Bank and Newmark Homes, L.P.
</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
10.12(e)* -- Master Deed of Trust and Security Agreement for the
benefit of First American Bank Texas dated December 17,
1996
10.13* -- December 1995 Construction Loan Agreement for $5,000,000
revolving line of credit and $2,473,000 loan between The
Adler Companies, Inc. and Barnett Bank of South Florida,
N.A.
10.14+ -- 1998 Tandem Stock Option/Stock Appreciation Rights Plan
10.15(a)* -- January 10, 1997 Amended and Restated Construction Loan
Agreement for $20,000,000 between Newmark Homes, L.P.
and Mellon Bank
10.15(b)* -- Modification Agreement dated October 1, 1996 between
Newmark Homes Corp., NHC Homes, Inc., Newmark Homes,
L.P. and Mellon Bank
10.15(c)* -- Modification Agreement dated January 10, 1997 between
Newmark Homes, L.P. and Mellon Bank
10.16(a)* -- Loan Agreement between Bank United f/k/a United Savings
Association of Texas and Newmark Home Corp. dated June
28, 1990 with twelve amendments increasing loan amount
to $30,000,000
10.16(b)* -- $30,000,000 Promissory Note between Newmark Home Corp.
and Bank United of Texas dated July 1, 1997
10.16(c)* -- Supplemental Deed of Trust and Security Agreement
between Newmark Homes Corp., as Grantor and Henson as
Trustee, for the benefit of Bank United of Texas
10.17 -- Employment Agreement between Newmark Home Corp. and
Terry White dated January 1, 1998
10.18 -- Employment Agreement between Newmark Home Corp. and Eric
Rome dated January 1, 1998
10.19 -- Employment Agreement between Newmark Home Corp. and
Steve Treece effective dated January 1, 1998
10.20* -- Employment Agreement between Newmark Home Corp. and Ray
Hurlbut effective November 1, 1996
10.21 -- Employment Agreement between Newmark Home Corp. and Mike
Beckett effective dated January 1, 1998
10.22* -- Employment Agreement between Pacific United Development
Corp. and Coleman Bradley effective November 1, 1996
10.23* -- Employment Agreement between Newmark Home Corp. and
Steve J. Von Hofe effective November 1, 1996.
10.24* -- Employment Agreement between Newmark Home Corp. and
Brian K. Shields effective November 1, 1996.
10.25* -- Employment Agreement between Newmark Home Corp. and Mike
M. Moody effective November 1, 1996.
10.26* -- Employment Agreement between Newmark Home Corp. and
James Carr dated January 1, 1998.
</TABLE>
<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made as of January 1, 1998 (the
"Effective Date") by and between NEWMARK HOME CORPORATION, a Nevada corporation
(the "Employer"), and TERRY WHITE, an individual residing in Sugar Land, Texas
(the "Employee").
RECITALS
The Employer, its divisions, subsidiaries, and other affiliated entities are
primarily engaged in the business of constructing single family residences. It
is the intent and purpose of the parties hereto to specify in this Agreement
the terms and conditions of Employee's employment with the Employer.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
"Agreement"--this Employment Agreement, as amended from time to time.
"Base Salary"--as defined in Section 3.1(a).
"Basic Compensation" means Base Salary and Benefits.
"Benefits"--as defined in Section 3.1(b).
"Board of Directors" means the board of directors of the Employer.
"Confidential Information" means any and all intellectual property of
the Employer (or any of its affiliates), including but not limited to:
(a) trade secrets concerning the business and affairs of the
Employer (or any of its affiliates), product specifications,
data, know-how, formulae, compositions, processes, designs,
sketches, photographs, graphs, drawings, samples, inventions
and ideas, past, current, and planned research and
development, current and planned manufacturing or distribution
methods and processes, customer lists, current and anticipated
customer requirements, price lists, market studies, business
plans, computer software and programs (including object code
and source code), computer software and database technologies,
systems, structures, and architectures (and related formulae,
compositions, processes, improvements, devices, know-how,
inventions, discoveries, concepts, ideas, designs, methods and
information), and any other information, however documented,
that is a trade secret under federal, state or other
applicable law; and
<PAGE> 2
(b) information concerning the business and affairs of the
Employer (or any of its affiliates) (which includes historical
financial statements, financial projections and budgets,
historical and projected sales, capital spending budgets and
plans, the names and backgrounds of key personnel, personnel
training and techniques and materials), however documented;
and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Employer (or any of its
affiliates) containing or based, in whole or in part, on any
information included in the foregoing.
"Disability"--as defined in Section 4.2.
"Effective Date" means the date stated in the first paragraph of this
Agreement.
"Employee Invention" means any idea, invention, technique,
modification, process, or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work,
however fixed or encoded, that is suitable to be fixed, embedded or
programmed in a semiconductor product (whether recordable or not), and
any work of authorship (whether or not copyright protection may be
obtained for it) created, conceived, or developed by the Employee,
either solely or in conjunction with others, during the Employment
Period or at any time prior to the Employment Period that Employee was
an employee of Employer, or a period that includes a portion of the
Employment Period, that relates in any way to, or is useful in any
manner in, the business then being conducted or proposed to be
conducted by the Employer, and any such item created by the Employee,
either solely or in conjunction with others, following termination of
the Employee's employment with the Employer, that is based upon or
uses Confidential Information.
"Employment Period" means the term of the Employee's employment under
this Agreement.
"Fiscal Year" means the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.
"For cause"--as defined in Section 4.3.
"Person" means any individual, corporation (including any nonprofit
corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, business trust, association,
organization, or governmental body.
"Post-Employment Period"-- as defined in Section 5.2.
2. EMPLOYMENT TERMS AND DUTIES
2.1 EMPLOYMENT
The Employer hereby employs the Employee, and the Employee hereby
accepts employment by the Employer, upon the terms and conditions set
forth in this Agreement.
2
<PAGE> 3
2.2 TERM
The term of the Employee's employment under this Agreement shall
commence on the Effective Date and end on December 31, 2002, unless
terminated earlier in accordance with the provisions of Section 4
herein. Employer and Employee may extend the term of this Agreement by
execution of a written amendment hereto, setting forth the terms of
such extension. If the parties fail to execute such written amendment,
but the employment relationship has continued by mutual consent, then
the terms of such employment shall be deemed to be on a month-to-month
basis.
2.3 DUTIES
The Employee will serve as Senior Vice President, Chief Financial
Officer and Treasurer of the Employer for the term of this Agreement
and will have such duties as are assigned or delegated to the Employee
by the Chief Executive Officer of Employer, the Chief Executive
Officer's designee, or Employee's immediate supervisor. The Employee
will devote his full business time, attention, skill, and energy
exclusively to the business of the Employer, will use his best efforts
to promote the success of the Employer's business, and will cooperate
fully with the management and Board of Directors of Employer in the
advancement of the best interests of the Employer. Nothing in this
Section 2.3, however, will prevent the Employee from engaging in
additional activities in connection with personal investments and
community affairs that are not inconsistent with the Employee's duties
under this Agreement. If the Employee is elected an officer of any of
Employer's affiliates, the Employee will fulfill his duties as such
officer without additional compensation.
3. COMPENSATION
The compensation and other benefits payable to the Employee under this
Agreement shall constitute the full consideration to be paid to the
Employee for all services to be rendered by the Employee for the
Employer, its divisions, subsidiaries and other affiliated entities.
3.1 BASIC COMPENSATION
(a) The Employee will be paid an annual salary as set forth below
("Base Salary"), which will be payable in equal periodic
installments according to the Employer's customary payroll
practices, but no less frequently than monthly.
<TABLE>
<CAPTION>
Calendar Year Base Salary
------------- -----------
<S> <C>
1998 $150,000.00
1999 $175,000.00
2000 $190,000.00
2001 $205,000.00
2002 $220,000.00
</TABLE>
3
<PAGE> 4
(b) The Employee will, during the Employment Period, be permitted
to participate in such pension, profit sharing, life
insurance, hospitalization, major medical and other employee
benefit plans of the Employer that may be in effect from time
to time, to the extent Employee is eligible under the terms of
those plans (collectively, the "Benefits").
(c) Employee will be eligible to participate in an annual bonus
plan, which will be consistent with previous bonus plans,
except as agreed to between Employee and Employer at the
beginning of each calendar year (the "Bonus Plan").
4. TERMINATION
4.1 EVENTS OF TERMINATION
The Employment Period, the Employee's Basic Compensation, and any and
all other rights of the Employee under this Agreement or otherwise as
an employee of the Employer will terminate (except as otherwise
provided in this Section 4):
(a) upon the death of the Employee;
(b) upon the disability of the Employee (as defined in Section
4.2) immediately upon notice from either party to the other;
(c) for cause (as defined in Section 4.3), immediately upon notice
from the Employer to the Employee, or at such later time as
such notice may specify; or
(d) on December 31, 2002.
4.2 DEFINITION OF DISABILITY
For purposes of Section 4.1, the Employee will be deemed to have a
"disability" if, for physical or mental reasons, the Employee is
unable to perform the essential functions of the Employee's duties
under this Agreement for 120 consecutive days, or 180 days during any
twelve (12) month period, as determined in accordance with this
Section 4.2. The disability of the Employee will be determined by a
medical doctor selected by written agreement of the Employer and the
Employee upon the request of either party by notice to the other. If
the Employer and the Employee cannot agree on the selection of a
medical doctor, each of them will select a medical doctor and the two
(2) medical doctors will select a third medical doctor who will
determine whether the Employee has a disability. The determination of
the medical doctor selected under this Section 4.2 will be binding on
both parties. The Employee must submit to a reasonable number of
examinations by the medical doctor making the determination of
disability under this Section 4.2, and the Employee hereby authorizes
the disclosure and release to the Employer of such determination and
all supporting medical records. If the Employee is not legally
competent, the Employee's legal guardian or duly authorized
attorney-in-fact will act in the Employee's stead, under this Section
4.2, for the
4
<PAGE> 5
purposes of submitting the Employee to the examinations, and providing
the authorization of disclosure, required under this Section 4.2.
4.3 DEFINITION OF "FOR CAUSE"
For purposes of Section 4.1, the phrase "for cause" means: (a) the
commission of fraud, theft, embezzlement, or similar malfeasance
involving moral turpitude or the conviction of, or plea of nolo
contendere to, any felony; (b) gross negligence, nonfeasance,
dishonesty, willful misconduct or substantial failure to perform
employment duties in a manner consistent with normal standards of job
performance after prior evaluation and warning related to such
standards of job performance; or (c) the appropriation (or attempted
appropriation) of a material business opportunity of the Employer.
4.4 TERMINATION PAY
Effective upon the termination of this Agreement, the Employer will be
obligated to pay the Employee (or, in the event of his death, his
designated beneficiary as defined below) only such compensation as is
provided in this Section 4.4, and in lieu of all other amounts and in
settlement and complete release of all claims the Employee may have
against the Employer. For purposes of this Section 4.4, the Employee's
designated beneficiary will be such individual beneficiary or trust,
located at such address, as the Employee may designate by notice to
the Employer from time to time or, if the Employee fails to give
notice to the Employer of such a beneficiary, the Employee's estate.
(a) Termination by the Employer for Cause. If the Employer
terminates this Agreement for cause, the Employee will be
entitled to receive his accrued, but unpaid, Base Salary only
through the date such termination is effective. If the
Employer terminates this Agreement for cause, as defined in
Section 4.3(a) or 4.3(c), Employee shall forfeit his rights to
any payment under any Bonus Plan in which Employee
participated at the time of termination, whether or not
payments under such Bonus Plan have been accrued by Employer.
If the Employer terminates this Agreement for cause, as
defined in Section 4.3(b), Employee shall be entitled to
receive a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
Employee shall not be released from the covenants contained in
Section 5 hereof.
(b) Termination upon Disability. If this Agreement is
terminated by either party as a result of the Employee's
disability, as determined under Section 4.2, the Employer will
pay the Employee (i) his Base Salary through the remainder of
the calendar month during which such termination is effective
and (ii) a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
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<PAGE> 6
(c) Termination upon Death. If this Agreement is terminated
because of the Employee's death, the Employee's estate will be
entitled to receive (i) his Base Salary through the end of the
calendar month in which his death occurs and (ii) a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual
days worked by the Employee during the fiscal year on which
the Bonus Plan is based.
(d) Termination on December 31, 2002. If on December 31,
2002, this Agreement terminates because the parties have not
extended the Term (as provide in Section 2.2 hereof), the
Employee shall be entitled to receive (i) any unpaid Base
Salary accrued through December 31, 2002, and (ii) a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual
months worked by the Employee during the fiscal year on which
the Bonus Plan is based. Employee shall not be released from
the covenants contained in Section 5 hereof, provided
however, that Employer shall pay Employee an amount equal to
one years Base Salary. Such amount shall be payable in twelve
(12) equal monthly installments, determined by dividing
Employee's Base Salary, on the last day of Employee's
employment with Employer, by 12, with the first such
installment being due and payable on the last day of
Employee's employment with Employer, and the remaining
installments being due and payable on the same date in each
succeeding month. Employer shall have the right, at any time,
to release Employee from the covenants contained in Section 5
hereof, at which time Employee's right to receive and
Employer's obligation to make any installment payment shall
terminate.
(e) Termination after December 31, 2002. In the event Employer
and Employee agree to continue Employee's employment with
Employer after December 31, 2002, pursuant to the terms of
Section 2.2 hereof, such employment shall be continued, unless
otherwise agreed in writing, on a month to month basis and on
the same terms and conditions as set forth herein, and may be
terminated by Employer (i) at any time upon thirty (30) days
notice, or (ii) immediately, provided that Employer shall pay
Employee in a lump sum, an amount equal to one (1) months Base
Salary. Employee shall be entitled to receive a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual
months worked by the Employee during the fiscal year on which
the Bonus Plan is based. Employee shall not be released from
the covenants contained in Section 5 hereof, provided however,
that Employer shall pay Employee an amount equal to one years
Base Salary. Such amount shall be payable in twelve (12) equal
monthly installments, determined by dividing Employee's Base
Salary, on the last day of Employee's employment with
Employer, by 12, with the first such installment being due and
payable on the last day of Employee's employment with
Employer, and the remaining installments being due and payable
on the same date in each succeeding month. Employer shall have
the right, at any time, to release Employee from the covenants
contained in Section 5 hereof, at which time Employee's right
to receive and Employer's obligation to make any installment
payment shall terminate.
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<PAGE> 7
In the event that Employer terminates Employee for cause, as
defined in Section 4.3, then the provisions of this Section
4.4(e)(i) and (ii) shall not apply, and Employee will be
entitled to receive only his accrued, but unpaid, Base Salary
through the date such termination is effective and Employee
shall not be released from the covenants contained in Section
5 hereof. If the Employer terminates this Agreement for cause,
as defined in Section 4.3(a) or 4.3(c), Employee shall forfeit
his rights to any payment under any Bonus Plan in which
Employee participated at the time of termination, whether or
not payments under such Bonus Plan have been accrued by
Employer. If the Employer terminates this Agreement for cause,
as defined in Section 4.3(b), Employee shall be entitled to
receive a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
(f) Benefits. The Employee's accrual of, or participation in plans
providing for, Benefits, will cease at the effective date of
the termination of this Agreement, except as otherwise
specifically provided in writing in the documentation for any
such Benefit. The Employee will not receive, as part of his
termination pay pursuant to this Section 4, any payment or
other compensation for any vacation, holiday, sick leave, or
other leave unused on the date the notice of termination is
given under this Agreement, unless Employer's written
personnel policies provide otherwise.
5. NON-COMPETITION AND NON-INTERFERENCE
5.1 ACKNOWLEDGMENTS BY THE EMPLOYEE
The Employee acknowledges that: (a) the services to be performed by
him under this Agreement are of a special, unique, unusual,
extraordinary, and intellectual character, and (b) the provisions of
this Section 5 are reasonable and necessary to protect the goodwill
and other business interests of Employer.
5.2 COVENANTS OF THE EMPLOYEE
In consideration of the acknowledgments by the Employee, and in
consideration of the compensation and benefits to be paid or provided
to the Employee by the Employer, the Employee covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period
(as defined below), without the express prior written consent
of Employer (as authorized by its board of directors), as
owner, officer, director, employee, stockholder, principal,
consultant, agent, lender, guarantor, cosigner, investor or
trustee of any corporation, partnership, proprietorship, joint
venture, association or any other entity of any nature,
engage, directly or indirectly, in any business of siting,
permitting, developing, constructing, or selling single-family
homes in (i) the following counties in the State of Texas:
(1) Harris County and all contiguous counties, (2) Travis
County and all contiguous counties, (3) Bexar County, and all
contiguous counties, (4) Dallas County and all
7
<PAGE> 8
contiguous counties, and (5) any county in which Employer has
homebuilding activity during the Employment Period, and (ii)
the following counties in the State of Tennessee: (1)
Williamson County and all contiguous counties, and (2) any
county in which Employer engages in business during the
Employment Period, provided, however, that the Employee may
purchase or otherwise acquire up to (but not more than) one
percent (1%) of any class of securities of any enterprise (but
without otherwise participating in the activities of such
enterprise) if such securities are listed on any national or
regional securities exchange or have been registered under
Section 12(g) of the Securities Exchange Act of 1934;
(b) whether for the Employee's own account or for the account of
any other person, at any time during the Employment Period
(except for the account of Employer and its affiliates) and
the Post-Employment Period, solicit business of the same or
similar type being carried on by the Employer, from any person
known by the Employee to be a customer of the Employer,
whether or not the Employee had personal contact with such
person during and by reason of the Employee's employment with
the Employer;
(c) whether for the Employee's own account or the account of any
other person (i) at any time during the Employment Period and
the Post-Employment Period, solicit, employ, or otherwise
engage as an employee, independent contractor, or otherwise,
any person who is an employee of the Employer, or in any
manner induce, or attempt to induce, any employee of the
Employer to terminate his employment with the Employer; or
(ii) at any time during the Employment Period and Post
Employment Period, interfere with the Employer's relationship
with any person, including any person, who at any time during
the Employment Period, was an employee, contractor, supplier,
or customer of the Employer; provided, however, that nothing
in this Section 5.2(c)(ii) shall preclude Employee from
soliciting or employing any person, who was employed by
Employer, after six (6) months have lapsed from the last date
of the former employee's employment with Employer; or
(d) at any time during or after the Employment Period, disparage
the Employer or any of its shareholders, parents, affiliates,
directors, officers, employees, or agents.
The term "Post-Employment Period" means the one (1) year period
beginning on the date of termination of the Employee's employment with
the Employer.
If any covenant in this Section 5.2 is held to be unreasonable,
arbitrary, or against public policy, such covenant will be considered
to be divisible with respect to scope, time, and geographic area, and
such lesser scope, time, or geographic area, or all of them, as a
court of competent jurisdiction may determine to be reasonable, not
arbitrary, and not against public policy, will be effective, binding,
and enforceable against the Employee. Employee hereby agrees that this
covenant is a material and substantial part of this Agreement and that
(i) the geographic limitations are reasonable; (ii) the one (1) year
term of the covenant is reasonable; and (iii) the covenant is not made
for the purpose of limiting competition per se and is reasonably
related to a protectable business interest of the Employer.
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<PAGE> 9
The period of time applicable to any covenant in this Section 5.2 will
be extended by the duration of any violation by the Employee of such
covenant.
The Employee will, while the covenant under this Section 5.2 is in
effect, give notice to the Employer, within ten (10) days after
accepting any other employment, of the identity of the Employee's
employer. The Employer may notify such employer that the Employee is
bound by this Agreement and, at the Employer's election, furnish such
employer with a copy of this Agreement or relevant portions thereof.
6. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS
6.1 ACKNOWLEDGMENTS BY THE EMPLOYEE
The Employee acknowledges that (a) during the Employment Period and as
a part of his employment, the Employee will be afforded access to
Confidential Information; (b) public disclosure of such Confidential
Information could have an adverse effect on the Employer and its
business; (c) because the Employee possesses substantial technical
expertise and skill with respect to the Employer's business, the
Employer desires to obtain exclusive ownership of each Employee
Invention, and the Employer will be at a substantial competitive
disadvantage if it fails to acquire exclusive ownership of each
Employee Invention; and (d) the provisions of this Section 6 are
reasonable and necessary to prevent the improper use or disclosure of
Confidential Information and to provide the Employer with exclusive
ownership of all Employee Inventions.
6.2 AGREEMENTS OF THE EMPLOYEE
In consideration of the compensation and benefits to be paid or
provided to the Employee by the Employer under this Agreement, the
Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the
Employee will hold in confidence the Confidential
Information and will not disclose it to any person
other than in connection with the performance of his
duties and obligations hereunder, except with the
specific prior written consent of the Employer or
except as otherwise expressly permitted by the terms
of this Agreement.
(ii) Any trade secrets of the Employer will be entitled to
all of the protections and benefits under the federal
and state trade secret and intellectual property laws
and any other applicable law. If any information that
the Employer deems to be a trade secret is found by a
court of competent jurisdiction not to be a trade
secret for purposes of this Agreement, such
information will, nevertheless, be considered
Confidential Information for purposes of this
Agreement. The Employee hereby waives any requirement
that the Employer submit proof of the economic value
of any trade secret or post a bond or other security.
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<PAGE> 10
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information
that the Employee demonstrates was or became
generally available to the public other than as a
result of a disclosure by the Employee.
(iv) The Employee will not remove from the Employer's
premises (except to the extent such removal is for
purposes of the performance of the Employee's duties
at home or while traveling, or except as otherwise
specifically authorized by the Employer) any
document, record, notebook, plan, model, component,
device, or computer software or code, whether
embodied in a disk or in any other form belonging to
the Employer or used in Employer's business
(collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Employer and the
Employee, all of the Proprietary Items, whether or
not developed by the Employee, are the exclusive
property of the Employer. Upon termination of this
Agreement, or upon the request of the Employer during
the Employment Period, the Employee will return to
the Employer all of the Proprietary Items in the
Employee's possession or subject to the Employee's
control, and the Employee shall not retain any
copies, abstracts, sketches, or other physical
embodiment of any of the Proprietary Items.
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Employer. The Employee acknowledges that
all of the Employee's writing, works of authorship and other
Employee Inventions are works made for hire and the property
of the Employer, including any copyrights, patents, or other
intellectual property rights pertaining thereto. If it is
determined that any such works are not works made for hire,
the Employee hereby assigns to the Employer all of the
Employee's right, title, and interest, including all rights of
copyright, patent, and other intellectual property rights, to
or in such Employee Inventions. The Employee covenants that he
will promptly:
(i) disclose to the Employer in writing any Employee
Invention;
(ii) assign to the Employer or to a party designated by
the Employer, at the Employer's request and without
additional compensation, all of the Employee's right
to the Employee Invention for the United States and
all foreign jurisdictions;
(iii) execute and deliver to the Employer such
applications, assignments, and other documents as the
Employer may request in order to apply for and obtain
patents or other registrations with respect to any
Employee Invention in the United States and any
foreign jurisdictions;
(iv) sign all other papers necessary to carry out the
above obligations; and
(v) give testimony and render any other assistance but
without expense to the Employee in support of the
Employer's rights to any Employee Invention.
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<PAGE> 11
6.3 DISPUTES OR CONTROVERSIES
The Employee recognizes that should a dispute or controversy arising
from or relating to this Agreement be submitted for adjudication to
any court, arbitration panel, or other third party, the preservation
of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such
adjudication will be maintained in secrecy and will be available for
inspection by the Employer, the Employee, and their respective
attorneys and experts, who will agree, in advance and in writing, to
receive and maintain all such information in secrecy, except as may be
limited by them in writing.
7. GENERAL PROVISIONS
7.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY
The Employee acknowledges that the injury that would be suffered by
the Employer as a result of a breach of the provisions of this
Agreement (including any provision of Sections 5 and 6) would be
irreparable and that an award of monetary damages to the Employer for
such a breach would be an inadequate remedy. Consequently, the
Employer will have the right, in addition to any other rights it may
have, to obtain injunctive relief to restrain any breach or threatened
breach or otherwise to specifically enforce any provision of this
Agreement. Without limiting the Employer's rights under this Section
7 or any other remedies of the Employer, if the Employee breaches any
of the provisions of Sections 5 and 6 and such breach is proven in a
court of competent jurisdiction, the Employer will have the right to
cease making any payments otherwise due to the Employee under this
Agreement.
7.2 COVENANTS OF SECTIONS 5 AND 6 ARE ESSENTIAL AND INDEPENDENT COVENANTS
The covenants by the Employee in Sections 5 and 6 are essential
elements of this Agreement, and without the Employee's agreement to
comply with such covenants, the Employer would not have entered into
this Agreement or continued the employment of the Employee. The
Employer and the Employee have independently consulted their
respective counsel and have been advised in all respects concerning
the reasonableness and propriety of such covenants, with specific
regard to the nature of the business conducted by the Employer.
The Employee's covenants in Section 5 and 6 are independent covenants
and the existence of any claim by the Employee against the Employer
under this Agreement or otherwise will not excuse the Employee's
breach of any covenant in Sections 5 or 6. If the Employee's
employment hereunder expires or is terminated, this Agreement will
continue in full force and effect as is necessary or appropriate to
enforce the covenants and agreements of the Employee in Sections 5 and
6.
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<PAGE> 12
7.3 LEGAL RECOURSE
Employee further agrees that these covenants are made to protect the
legitimate business interests of the Employer. Employee understands
as a part of these covenants that the Employer intends to exercise
whatever legal recourse against him for any breach of this Agreement
and in particular, for any breach of these covenants.
8. GENERAL PROVISIONS
8.1 WAIVER
The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by
either party in exercising any right, power, or privilege under this
Agreement will operate as a waiver of such right, power, or privilege,
and no single or partial exercise of any such right, power, or
privilege will preclude any other or further exercise of such right,
power, or privilege or the exercise of any other right, power, or
privilege. To the maximum extent permitted by applicable law, (a) no
claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim
or right unless in writing signed by the other party; (b) no waiver
that may be given by a party will be applicable except in the specific
instance for which it is given; and (c) no notice to or demand on one
party will be deemed to be a waiver of any obligation of such party or
of the right of the party giving such notice or demand to take further
action without notice or demand as provided in this Agreement.
8.2 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED
This Agreement shall inure to the benefit of, and shall be binding
upon, the parties hereto and their respective successors, assigns,
heirs, and legal representatives, including any entity with which the
Employer may merge or consolidate or to which all or substantially all
of its assets may be transferred. The duties and covenants of the
Employee under this Agreement, being personal, may not be delegated.
8.3 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by facsimile (with written confirmation of
receipt), provided that a copy is mailed by certified mail, return
receipt requested, or (c) when received by the addressee, if sent by a
nationally recognized overnight delivery service, in each case to the
appropriate addresses and facsimile numbers set forth below (or to
such other addresses and facsimile numbers as a party may designate by
notice to the other parties):
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If to Employer:
Newmark Home Corporation
1200 Soldiers Field Drive
Sugar Land, TX 77479
Facsimile No.: 281/243-0132
With a copy to:
Cathryn L. Porter
Pacific USA Holdings Corp.
3200 Southwest Freeway, Suite 1220
Houston, TX 77027
Facsimile No.: 713/871-0155
If to the Employee:
Terry White
225 Fluor Daniel Dr., Apt. 12301
Sugar Land, Texas 77479
8.4 ENTIRE AGREEMENT; AMENDMENTS
Employee and Employer have entered into a Mutual Agreement to
Arbitrate Claims (the "Arbitration Agreement") incorporated herein for
all purposes as if set forth in full. This Agreement, together with
the Arbitration Agreement, contains the entire agreement between the
parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral or written, between the
parties hereto with respect to the subject matter hereof, including,
but not limited to, the Employment Agreement dated November 1, 1996
between Employer and Employee. This Agreement may not be amended
orally, but only by an agreement in writing signed by the parties
hereto.
8.5 GOVERNING LAW
This Agreement will be governed by the laws of the State of Texas
without regard to conflicts of laws principles.
8.6 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this
Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or
unenforceable.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
"EMPLOYER"
NEWMARK HOME CORPORATION
By: /s/ LONNIE M. FEDRICK
-------------------------------
Name: Lonnie M. Fedrick
Title: President & CEO
"EMPLOYEE"
/s/ TERRY WHITE
-----------------------------------
TERRY WHITE
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<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made as of January 1, 1998 (the
"Effective Date") by and between NEWMARK HOME CORPORATION, a Nevada corporation
(the "Employer"), and ERIC ROME, an individual residing in Austin, Texas (the
"Employee").
RECITALS
The Employer, its divisions, subsidiaries, and other affiliated entities are
primarily engaged in the business of constructing single family residences. It
is the intent and purpose of the parties hereto to specify in this Agreement
the terms and conditions of Employee's employment with the Employer.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
"Agreement"--this Employment Agreement, as amended from time to time.
"Base Salary"--as defined in Section 3.1(a).
"Basic Compensation" means Base Salary and Benefits.
"Benefits"--as defined in Section 3.1(b).
"Board of Directors" means the board of directors of the Employer.
"Confidential Information" means any and all intellectual property of
the Employer (or any of its affiliates), including but not limited to:
(a) trade secrets concerning the business and affairs of the
Employer (or any of its affiliates), product specifications,
data, know-how, formulae, compositions, processes, designs,
sketches, photographs, graphs, drawings, samples, inventions
and ideas, past, current, and planned research and
development, current and planned manufacturing or distribution
methods and processes, customer lists, current and anticipated
customer requirements, price lists, market studies, business
plans, computer software and programs (including object code
and source code), computer software and database technologies,
systems, structures, and architectures (and related formulae,
compositions, processes, improvements, devices, know-how,
inventions, discoveries, concepts, ideas, designs, methods and
information), and any other information, however documented,
that is a trade secret under federal, state or other
applicable law; and
<PAGE> 2
(b) information concerning the business and affairs of the
Employer (or any of its affiliates) (which includes historical
financial statements, financial projections and budgets,
historical and projected sales, capital spending budgets and
plans, the names and backgrounds of key personnel, personnel
training and techniques and materials), however documented;
and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Employer (or any of its
affiliates) containing or based, in whole or in part, on any
information included in the foregoing.
"Disability"--as defined in Section 4.2.
"Effective Date" means the date stated in the first paragraph of this
Agreement.
"Employee Invention" means any idea, invention, technique,
modification, process, or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work,
however fixed or encoded, that is suitable to be fixed, embedded or
programmed in a semiconductor product (whether recordable or not), and
any work of authorship (whether or not copyright protection may be
obtained for it) created, conceived, or developed by the Employee,
either solely or in conjunction with others, during the Employment
Period or at any time prior to the Employment Period that Employee was
an employee of Employer, or a period that includes a portion of the
Employment Period, that relates in any way to, or is useful in any
manner in, the business then being conducted or proposed to be
conducted by the Employer, and any such item created by the Employee,
either solely or in conjunction with others, following termination of
the Employee's employment with the Employer, that is based upon or
uses Confidential Information.
"Employment Period" means the term of the Employee's employment under
this Agreement.
"Fiscal Year" means the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.
"For cause"--as defined in Section 4.3.
"Person" means any individual, corporation (including any nonprofit
corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, business trust, association,
organization, or governmental body.
"Post-Employment Period"-- as defined in Section 5.2.
2. EMPLOYMENT TERMS AND DUTIES
2.1 EMPLOYMENT
The Employer hereby employs the Employee, and the Employee hereby
accepts employment by the Employer, upon the terms and conditions set
forth in this Agreement.
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2.2 TERM
The term of the Employee's employment under this Agreement shall
commence on the Effective Date and end on December 31, 2002, unless
terminated earlier in accordance with the provisions of Section 4
herein. Employer and Employee may extend the term of this Agreement by
execution of a written amendment hereto, setting forth the terms of
such extension. If the parties fail to execute such written amendment,
but the employment relationship has continued by mutual consent, then
the terms of such employment shall be deemed to be on a month-to-month
basis.
2.3 DUTIES
The Employee will serve as President - Texas Division of the Employer
for the term of this Agreement and will have such duties as are
assigned or delegated to the Employee by the Chief Executive Officer
of Employer, the Chief Executive Officer's designee, or Employee's
immediate supervisor. The Employee will devote his full business time,
attention, skill, and energy exclusively to the business of the
Employer, will use his best efforts to promote the success of the
Employer's business, and will cooperate fully with the management and
Board of Directors of Employer in the advancement of the best
interests of the Employer. Nothing in this Section 2.3, however, will
prevent the Employee from engaging in additional activities in
connection with personal investments and community affairs that are
not inconsistent with the Employee's duties under this Agreement. If
the Employee is elected an officer of any of Employer's affiliates,
the Employee will fulfill his duties as such officer without
additional compensation.
3. COMPENSATION
The compensation and other benefits payable to the Employee under this
Agreement shall constitute the full consideration to be paid to the
Employee for all services to be rendered by the Employee for the
Employer, its divisions, subsidiaries and other affiliated entities.
3.1 BASIC COMPENSATION
(a) The Employee will be paid an annual salary as set forth below
("Base Salary"), which will be payable in equal periodic
installments according to the Employer's customary payroll
practices, but no less frequently than monthly.
<TABLE>
<S> <C>
Calendar Year Base Salary
------------- -----------
1998 $250,000.00
1999 $275,000.00
2000 $300,000.00
2001 $350,000.00
2002 $400,000.00
</TABLE>
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(b) The Employee will, during the Employment Period, be permitted
to participate in such pension, profit sharing, life
insurance, hospitalization, major medical and other employee
benefit plans of the Employer that may be in effect from time
to time, to the extent Employee is eligible under the terms of
those plans (collectively, the "Benefits").
(c) Employee will be eligible to participate in an annual bonus
plan, which will be consistent with previous bonus plans,
except as agreed to between Employee and Employer at the
beginning of each calendar year (the "Bonus Plan").
4. TERMINATION
4.1 EVENTS OF TERMINATION
The Employment Period, the Employee's Basic Compensation, and any and
all other rights of the Employee under this Agreement or otherwise as
an employee of the Employer will terminate (except as otherwise
provided in this Section 4):
(a) upon the death of the Employee;
(b) upon the disability of the Employee (as defined in Section
4.2) immediately upon notice from either party to the other;
(c) for cause (as defined in Section 4.3), immediately upon notice
from the Employer to the Employee, or at such later time as
such notice may specify; or
(d) on December 31, 2002.
4.2 DEFINITION OF DISABILITY
For purposes of Section 4.1, the Employee will be deemed to have a
"disability" if, for physical or mental reasons, the Employee is
unable to perform the essential functions of the Employee's duties
under this Agreement for 120 consecutive days, or 180 days during any
twelve (12) month period, as determined in accordance with this
Section 4.2. The disability of the Employee will be determined by a
medical doctor selected by written agreement of the Employer and the
Employee upon the request of either party by notice to the other. If
the Employer and the Employee cannot agree on the selection of a
medical doctor, each of them will select a medical doctor and the two
(2) medical doctors will select a third medical doctor who will
determine whether the Employee has a disability. The determination of
the medical doctor selected under this Section 4.2 will be binding on
both parties. The Employee must submit to a reasonable number of
examinations by the medical doctor making the determination of
disability under this Section 4.2, and the Employee hereby authorizes
the disclosure and release to the Employer of such determination and
all supporting medical records. If the Employee is not legally
competent, the Employee's legal guardian or duly authorized
attorney-in-fact will act in the Employee's stead, under this Section
4.2, for the
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purposes of submitting the Employee to the examinations, and providing
the authorization of disclosure, required under this Section 4.2.
4.3 DEFINITION OF "FOR CAUSE"
For purposes of Section 4.1, the phrase "for cause" means: (a) the
commission of fraud, theft, embezzlement, or similar malfeasance
involving moral turpitude or the conviction of, or plea of nolo
contendere to, any felony; (b) gross negligence, nonfeasance,
dishonesty, willful misconduct or substantial failure to perform
employment duties in a manner consistent with normal standards of job
performance after prior evaluation and warning related to such
standards of job performance; or (c) the appropriation (or attempted
appropriation) of a material business opportunity of the Employer.
4.4 TERMINATION PAY
Effective upon the termination of this Agreement, the Employer will be
obligated to pay the Employee (or, in the event of his death, his
designated beneficiary as defined below) only such compensation as is
provided in this Section 4.4, and in lieu of all other amounts and in
settlement and complete release of all claims the Employee may have
against the Employer. For purposes of this Section 4.4, the Employee's
designated beneficiary will be such individual beneficiary or trust,
located at such address, as the Employee may designate by notice to
the Employer from time to time or, if the Employee fails to give
notice to the Employer of such a beneficiary, the Employee's estate.
(a) Termination by the Employer for Cause. If the Employer
terminates this Agreement for cause, the Employee will be
entitled to receive his accrued, but unpaid, Base Salary only
through the date such termination is effective. If the
Employer terminates this Agreement for cause, as defined in
Section 4.3(a) or 4.3(c), Employee shall forfeit his rights to
any payment under any Bonus Plan in which Employee
participated at the time of termination, whether or not
payments under such Bonus Plan have been accrued by Employer.
If the Employer terminates this Agreement for cause, as
defined in Section 4.3(b), Employee shall be entitled to
receive a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
Employee shall not be released from the covenants contained in
Section 5 hereof.
(b) Termination upon Disability. If this Agreement is
terminated by either party as a result of the Employee's
disability, as determined under Section 4.2, the Employer will
pay the Employee (i) his Base Salary through the remainder of
the calendar month during which such termination is effective
and (ii) a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
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<PAGE> 6
(c) Termination upon Death. If this Agreement is terminated
because of the Employee's death, the Employee's estate will be
entitled to receive (i) his Base Salary through the end of the
calendar month in which his death occurs and (ii) a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual
days worked by the Employee during the fiscal year on which
the Bonus Plan is based.
(d) Termination on December 31, 2002. If on December 31,
2002, this Agreement terminates because the parties have not
extended the Term (as provide in Section 2.2 hereof), the
Employee shall be entitled to receive (i) any unpaid Base
Salary accrued through December 31, 2002, and (ii) a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual
months worked by the Employee during the fiscal year on which
the Bonus Plan is based. Employee shall not be released from
the covenants contained in Section 5 hereof, provided
however, that Employer shall pay Employee an amount equal to
one years Base Salary. Such amount shall be payable in twelve
(12) equal monthly installments, determined by dividing
Employee's Base Salary, on the last day of Employee's
employment with Employer, by 12, with the first such
installment being due and payable on the last day of
Employee's employment with Employer, and the remaining
installments being due and payable on the same date in each
succeeding month. Employer shall have the right, at any time,
to release Employee from the covenants contained in Section 5
hereof, at which time Employee's right to receive and
Employer's obligation to make any installment payment shall
terminate.
(e) Termination after December 31, 2002. In the event Employer
and Employee agree to continue Employee's employment with
Employer after December 31, 2002, pursuant to the terms of
Section 2.2 hereof, such employment shall be continued, unless
otherwise agreed in writing, on a month to month basis and on
the same terms and conditions as set forth herein, and may be
terminated by Employer (i) at any time upon thirty (30) days
notice, or (ii) immediately, provided that Employer shall pay
Employee in a lump sum, an amount equal to one (1) months Base
Salary. Employee shall be entitled to receive a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual
months worked by the Employee during the fiscal year on which
the Bonus Plan is based. Employee shall not be released from
the covenants contained in Section 5 hereof, provided however,
that Employer shall pay Employee an amount equal to one years
Base Salary. Such amount shall be payable in twelve (12) equal
monthly installments, determined by dividing Employee's Base
Salary, on the last day of Employee's employment with
Employer, by 12, with the first such installment being due and
payable on the last day of Employee's employment with
Employer, and the remaining installments being due and payable
on the same date in each succeeding month. Employer shall have
the right, at any time, to release Employee from the covenants
contained in Section 5 hereof, at which time Employee's right
to receive and Employer's obligation to make any installment
payment shall terminate.
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In the event that Employer terminates Employee for cause, as
defined in Section 4.3, then the provisions of this Section
4.4(e)(i) and (ii) shall not apply, and Employee will be
entitled to receive only his accrued, but unpaid, Base Salary
through the date such termination is effective and Employee
shall not be released from the covenants contained in Section
5 hereof. If the Employer terminates this Agreement for cause,
as defined in Section 4.3(a) or 4.3(c), Employee shall forfeit
his rights to any payment under any Bonus Plan in which
Employee participated at the time of termination, whether or
not payments under such Bonus Plan have been accrued by
Employer. If the Employer terminates this Agreement for cause,
as defined in Section 4.3(b), Employee shall be entitled to
receive a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
(f) Benefits. The Employee's accrual of, or participation in plans
providing for, Benefits, will cease at the effective date of
the termination of this Agreement, except as otherwise
specifically provided in writing in the documentation for any
such Benefit. The Employee will not receive, as part of his
termination pay pursuant to this Section 4, any payment or
other compensation for any vacation, holiday, sick leave, or
other leave unused on the date the notice of termination is
given under this Agreement, unless Employer's written
personnel policies provide otherwise.
5. NON-COMPETITION AND NON-INTERFERENCE
5.1 ACKNOWLEDGMENTS BY THE EMPLOYEE
The Employee acknowledges that: (a) the services to be performed by
him under this Agreement are of a special, unique, unusual,
extraordinary, and intellectual character, and (b) the provisions of
this Section 5 are reasonable and necessary to protect the goodwill
and other business interests of Employer.
5.2 COVENANTS OF THE EMPLOYEE
In consideration of the acknowledgments by the Employee, and in
consideration of the compensation and benefits to be paid or provided
to the Employee by the Employer, the Employee covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post- Employment Period
(as defined below), without the express prior written consent
of Employer (as authorized by its board of directors), as
owner, officer, director, employee, stockholder, principal,
consultant, agent, lender, guarantor, cosigner, investor or
trustee of any corporation, partnership, proprietorship, joint
venture, association or any other entity of any nature,
engage, directly or indirectly, in any business of siting,
permitting, developing, constructing, or selling single-family
homes in (i) the following counties in the State of Texas:
(1) Harris County and all contiguous counties, (2) Travis
County and all contiguous counties, (3) Bexar County, and all
contiguous counties, (4) Dallas County and all
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contiguous counties, and (5) any county in which Employer has
homebuilding activity during the Employment Period, and (ii)
the following counties in the State of Tennessee: (1)
Williamson County and all contiguous counties, and (2) any
county in which Employer engages in business during the
Employment Period, provided, however, that the Employee may
purchase or otherwise acquire up to (but not more than) one
percent (1%) of any class of securities of any enterprise (but
without otherwise participating in the activities of such
enterprise) if such securities are listed on any national or
regional securities exchange or have been registered under
Section 12(g) of the Securities Exchange Act of 1934;
(b) whether for the Employee's own account or for the account of
any other person, at any time during the Employment Period
(except for the account of Employer and its affiliates) and
the Post-Employment Period, solicit business of the same or
similar type being carried on by the Employer, from any person
known by the Employee to be a customer of the Employer,
whether or not the Employee had personal contact with such
person during and by reason of the Employee's employment with
the Employer;
(c) whether for the Employee's own account or the account of any
other person (i) at any time during the Employment Period and
the Post-Employment Period, solicit, employ, or otherwise
engage as an employee, independent contractor, or otherwise,
any person who is an employee of the Employer, or in any
manner induce, or attempt to induce, any employee of the
Employer to terminate his employment with the Employer; or
(ii) at any time during the Employment Period and Post
Employment Period, interfere with the Employer's relationship
with any person, including any person, who at any time during
the Employment Period, was an employee, contractor, supplier,
or customer of the Employer; provided, however, that nothing
in this Section 5.2(c)(ii) shall preclude Employee from
soliciting or employing any person, who was employed by
Employer, after six (6) months have lapsed from the last date
of the former employee's employment with Employer; or
(d) at any time during or after the Employment Period, disparage
the Employer or any of its shareholders, parents, affiliates,
directors, officers, employees, or agents.
The term "Post-Employment Period" means the one (1) year period
beginning on the date of termination of the Employee's employment with
the Employer.
If any covenant in this Section 5.2 is held to be unreasonable,
arbitrary, or against public policy, such covenant will be considered
to be divisible with respect to scope, time, and geographic area, and
such lesser scope, time, or geographic area, or all of them, as a
court of competent jurisdiction may determine to be reasonable, not
arbitrary, and not against public policy, will be effective, binding,
and enforceable against the Employee. Employee hereby agrees that this
covenant is a material and substantial part of this Agreement and that
(i) the geographic limitations are reasonable; (ii) the one (1) year
term of the covenant is reasonable; and (iii) the covenant is not made
for the purpose of limiting competition per se and is reasonably
related to a protectable business interest of the Employer.
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The period of time applicable to any covenant in this Section 5.2 will
be extended by the duration of any violation by the Employee of such
covenant.
The Employee will, while the covenant under this Section 5.2 is in
effect, give notice to the Employer, within ten (10) days after
accepting any other employment, of the identity of the Employee's
employer. The Employer may notify such employer that the Employee is
bound by this Agreement and, at the Employer's election, furnish such
employer with a copy of this Agreement or relevant portions thereof.
6. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS
6.1 ACKNOWLEDGMENTS BY THE EMPLOYEE
The Employee acknowledges that (a) during the Employment Period and as
a part of his employment, the Employee will be afforded access to
Confidential Information; (b) public disclosure of such Confidential
Information could have an adverse effect on the Employer and its
business; (c) because the Employee possesses substantial technical
expertise and skill with respect to the Employer's business, the
Employer desires to obtain exclusive ownership of each Employee
Invention, and the Employer will be at a substantial competitive
disadvantage if it fails to acquire exclusive ownership of each
Employee Invention; and (d) the provisions of this Section 6 are
reasonable and necessary to prevent the improper use or disclosure of
Confidential Information and to provide the Employer with exclusive
ownership of all Employee Inventions.
6.2 AGREEMENTS OF THE EMPLOYEE
In consideration of the compensation and benefits to be paid or
provided to the Employee by the Employer under this Agreement, the
Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the
Employee will hold in confidence the Confidential
Information and will not disclose it to any person
other than in connection with the performance of his
duties and obligations hereunder, except with the
specific prior written consent of the Employer or
except as otherwise expressly permitted by the terms
of this Agreement.
(ii) Any trade secrets of the Employer will be entitled to
all of the protections and benefits under the federal
and state trade secret and intellectual property laws
and any other applicable law. If any information
that the Employer deems to be a trade secret is found
by a court of competent jurisdiction not to be a
trade secret for purposes of this Agreement, such
information will, nevertheless, be considered
Confidential Information for purposes of this
Agreement. The Employee hereby waives any requirement
that the Employer submit proof of the economic value
of any trade secret or post a bond or other security.
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(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information
that the Employee demonstrates was or became
generally available to the public other than as a
result of a disclosure by the Employee.
(iv) The Employee will not remove from the Employer's
premises (except to the extent such removal is for
purposes of the performance of the Employee's duties
at home or while traveling, or except as otherwise
specifically authorized by the Employer) any
document, record, notebook, plan, model, component,
device, or computer software or code, whether
embodied in a disk or in any other form belonging to
the Employer or used in Employer's business
(collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Employer and the
Employee, all of the Proprietary Items, whether or
not developed by the Employee, are the exclusive
property of the Employer. Upon termination of this
Agreement, or upon the request of the Employer during
the Employment Period, the Employee will return to
the Employer all of the Proprietary Items in the
Employee's possession or subject to the Employee's
control, and the Employee shall not retain any
copies, abstracts, sketches, or other physical
embodiment of any of the Proprietary Items.
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Employer. The Employee acknowledges that
all of the Employee's writing, works of authorship and other
Employee Inventions are works made for hire and the property
of the Employer, including any copyrights, patents, or other
intellectual property rights pertaining thereto. If it is
determined that any such works are not works made for hire,
the Employee hereby assigns to the Employer all of the
Employee's right, title, and interest, including all rights of
copyright, patent, and other intellectual property rights, to
or in such Employee Inventions. The Employee covenants that he
will promptly:
(i) disclose to the Employer in writing any Employee
Invention;
(ii) assign to the Employer or to a party designated by
the Employer, at the Employer's request and without
additional compensation, all of the Employee's right
to the Employee Invention for the United States and
all foreign jurisdictions;
(iii) execute and deliver to the Employer such
applications, assignments, and other documents as the
Employer may request in order to apply for and obtain
patents or other registrations with respect to any
Employee Invention in the United States and any
foreign jurisdictions;
(iv) sign all other papers necessary to carry out the
above obligations; and
(v) give testimony and render any other assistance but
without expense to the Employee in support of the
Employer's rights to any Employee Invention.
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6.3 DISPUTES OR CONTROVERSIES
The Employee recognizes that should a dispute or controversy arising
from or relating to this Agreement be submitted for adjudication to
any court, arbitration panel, or other third party, the preservation
of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such
adjudication will be maintained in secrecy and will be available for
inspection by the Employer, the Employee, and their respective
attorneys and experts, who will agree, in advance and in writing, to
receive and maintain all such information in secrecy, except as may be
limited by them in writing.
7. GENERAL PROVISIONS
7.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY
The Employee acknowledges that the injury that would be suffered by
the Employer as a result of a breach of the provisions of this
Agreement (including any provision of Sections 5 and 6) would be
irreparable and that an award of monetary damages to the Employer for
such a breach would be an inadequate remedy. Consequently, the
Employer will have the right, in addition to any other rights it may
have, to obtain injunctive relief to restrain any breach or threatened
breach or otherwise to specifically enforce any provision of this
Agreement. Without limiting the Employer's rights under this Section
7 or any other remedies of the Employer, if the Employee breaches any
of the provisions of Sections 5 and 6 and such breach is proven in a
court of competent jurisdiction, the Employer will have the right to
cease making any payments otherwise due to the Employee under this
Agreement.
7.2 COVENANTS OF SECTIONS 5 AND 6 ARE ESSENTIAL AND INDEPENDENT COVENANTS
The covenants by the Employee in Sections 5 and 6 are essential
elements of this Agreement, and without the Employee's agreement to
comply with such covenants, the Employer would not have entered into
this Agreement or continued the employment of the Employee. The
Employer and the Employee have independently consulted their
respective counsel and have been advised in all respects concerning
the reasonableness and propriety of such covenants, with specific
regard to the nature of the business conducted by the Employer.
The Employee's covenants in Section 5 and 6 are independent covenants
and the existence of any claim by the Employee against the Employer
under this Agreement or otherwise will not excuse the Employee's
breach of any covenant in Sections 5 or 6. If the Employee's
employment hereunder expires or is terminated, this Agreement will
continue in full force and effect as is necessary or appropriate to
enforce the covenants and agreements of the Employee in Sections 5 and
6.
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7.3 LEGAL RECOURSE
Employee further agrees that these covenants are made to protect the
legitimate business interests of the Employer. Employee understands
as a part of these covenants that the Employer intends to exercise
whatever legal recourse against him for any breach of this Agreement
and in particular, for any breach of these covenants.
8. GENERAL PROVISIONS
8.1 WAIVER
The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by
either party in exercising any right, power, or privilege under this
Agreement will operate as a waiver of such right, power, or privilege,
and no single or partial exercise of any such right, power, or
privilege will preclude any other or further exercise of such right,
power, or privilege or the exercise of any other right, power, or
privilege. To the maximum extent permitted by applicable law, (a) no
claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim
or right unless in writing signed by the other party; (b) no waiver
that may be given by a party will be applicable except in the specific
instance for which it is given; and (c) no notice to or demand on one
party will be deemed to be a waiver of any obligation of such party or
of the right of the party giving such notice or demand to take further
action without notice or demand as provided in this Agreement.
8.2 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED
This Agreement shall inure to the benefit of, and shall be binding
upon, the parties hereto and their respective successors, assigns,
heirs, and legal representatives, including any entity with which the
Employer may merge or consolidate or to which all or substantially all
of its assets may be transferred. The duties and covenants of the
Employee under this Agreement, being personal, may not be delegated.
8.3 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by facsimile (with written confirmation of
receipt), provided that a copy is mailed by certified mail, return
receipt requested, or (c) when received by the addressee, if sent by a
nationally recognized overnight delivery service, in each case to the
appropriate addresses and facsimile numbers set forth below (or to
such other addresses and facsimile numbers as a party may designate by
notice to the other parties):
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If to Employer:
Newmark Home Corporation
1200 Soldiers Field Drive
Sugar Land, TX 77479
Facsimile No.: 281/243-0132
With a copy to:
Cathryn L. Porter
Pacific USA Holdings Corp.
3200 Southwest Freeway, Suite 1220
Houston, TX 77027
Facsimile No.: 713/871-0155
If to the Employee:
Eric Rome
2909 Montebello Ct.
Austin, Texas 78746
8.4 ENTIRE AGREEMENT; AMENDMENTS
Employee and Employer have entered into a Mutual Agreement to
Arbitrate Claims (the "Arbitration Agreement") incorporated herein for
all purposes as if set forth in full. This Agreement, together with
the Arbitration Agreement, contains the entire agreement between the
parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral or written, between the
parties hereto with respect to the subject matter hereof, including,
but not limited to, the Employment Agreement dated November 1, 1996
between Employer and Employee. This Agreement may not be amended
orally, but only by an agreement in writing signed by the parties
hereto.
8.5 GOVERNING LAW
This Agreement will be governed by the laws of the State of Texas
without regard to conflicts of laws principles.
8.6 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this
Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or
unenforceable.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
"EMPLOYER"
NEWMARK HOME CORPORATION
By: /s/ LONNIE M. FEDRICK
-----------------------------
Name: Lonnie M. Fedrick
Title: President & CEO
"EMPLOYEE"
/s/ ERIC ROME 2/12/98
---------------------------------
ERIC ROME
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Exhibit 10.19
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made as of January 1, 1998 (the
"Effective Date") by and between NEWMARK HOME CORPORATION, a Nevada corporation
(the "Employer"), and STEVE TREECE, an individual residing in Plano, Texas (the
"Employee").
RECITALS
The Employer, its divisions, subsidiaries, and other affiliated entities are
primarily engaged in the business of constructing single family residences. It
is the intent and purpose of the parties hereto to specify in this Agreement
the terms and conditions of Employee's employment with the Employer.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
"Agreement"--this Employment Agreement, as amended from time to time.
"Base Salary"--as defined in Section 3.1(a).
"Basic Compensation" means Base Salary and Benefits.
"Benefits"--as defined in Section 3.1(b).
"Board of Directors" means the board of directors of the Employer.
"Confidential Information" means any and all intellectual property of
the Employer (or any of its affiliates), including but not limited to:
(a) trade secrets concerning the business and affairs of the
Employer (or any of its affiliates), product specifications,
data, know-how, formulae, compositions, processes, designs,
sketches, photographs, graphs, drawings, samples, inventions
and ideas, past, current, and planned research and
development, current and planned manufacturing or distribution
methods and processes, customer lists, current and anticipated
customer requirements, price lists, market studies, business
plans, computer software and programs (including object code
and source code), computer software and database technologies,
systems, structures, and architectures (and related formulae,
compositions, processes, improvements, devices, know-how,
inventions, discoveries, concepts, ideas, designs, methods and
information), and any other information, however documented,
that is a trade secret under federal, state or other
applicable law; and
<PAGE> 2
(b) information concerning the business and affairs of the
Employer (or any of its affiliates) (which includes historical
financial statements, financial projections and budgets,
historical and projected sales, capital spending budgets and
plans, the names and backgrounds of key personnel, personnel
training and techniques and materials), however documented;
and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Employer (or any of its
affiliates) containing or based, in whole or in part, on any
information included in the foregoing.
"Disability"--as defined in Section 4.2.
"Effective Date" means the date stated in the first paragraph of this
Agreement.
"Employee Invention" means any idea, invention, technique,
modification, process, or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work,
however fixed or encoded, that is suitable to be fixed, embedded or
programmed in a semiconductor product (whether recordable or not), and
any work of authorship (whether or not copyright protection may be
obtained for it) created, conceived, or developed by the Employee,
either solely or in conjunction with others, during the Employment
Period or at any time prior to the Employment Period that Employee was
an employee of Employer, or a period that includes a portion of the
Employment Period, that relates in any way to, or is useful in any
manner in, the business then being conducted or proposed to be
conducted by the Employer, and any such item created by the Employee,
either solely or in conjunction with others, following termination of
the Employee's employment with the Employer, that is based upon or
uses Confidential Information.
"Employment Period" means the term of the Employee's employment under
this Agreement.
"Fiscal Year" means the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.
"For cause"--as defined in Section 4.3.
"Person" means any individual, corporation (including any nonprofit
corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, business trust, association,
organization, or governmental body.
"Post-Employment Period"-- as defined in Section 5.2.
2. EMPLOYMENT TERMS AND DUTIES
2.1 EMPLOYMENT
The Employer hereby employs the Employee, and the Employee hereby
accepts employment by the Employer, upon the terms and conditions set
forth in this Agreement.
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<PAGE> 3
2.2 TERM
The term of the Employee's employment under this Agreement shall
commence on the Effective Date and end on December 31, 2000, unless
terminated earlier in accordance with the provisions of Section 4
herein. Employer and Employee may extend the term of this Agreement by
execution of a written amendment hereto, setting forth the terms of
such extension. If the parties fail to execute such written amendment,
but the employment relationship has continued by mutual consent, then
the terms of such employment shall be deemed to be on a month-to-month
basis.
2.3 DUTIES
The Employee will serve as Executive Vice President - North Texas
Division of the Employer for the term of this Agreement and will have
such duties as are assigned or delegated to the Employee by the Chief
Executive Officer of Employer, the Chief Executive Officer's designee,
or Employee's immediate supervisor. The Employee will devote his full
business time, attention, skill, and energy exclusively to the
business of the Employer, will use his best efforts to promote the
success of the Employer's business, and will cooperate fully with the
management and Board of Directors of Employer in the advancement of
the best interests of the Employer. Nothing in this Section 2.3,
however, will prevent the Employee from engaging in additional
activities in connection with personal investments and community
affairs that are not inconsistent with the Employee's duties under
this Agreement. If the Employee is elected an officer of any of
Employer's affiliates, the Employee will fulfill his duties as such
officer without additional compensation.
3. COMPENSATION
The compensation and other benefits payable to the Employee under this
Agreement shall constitute the full consideration to be paid to the
Employee for all services to be rendered by the Employee for the
Employer, its divisions, subsidiaries and other affiliated entities.
3.1 BASIC COMPENSATION
(a) The Employee will be paid an annual salary as set forth below
("Base Salary"), which will be payable in equal periodic
installments according to the Employer's customary payroll
practices, but no less frequently than monthly.
<TABLE>
<CAPTION>
Calendar Year Base Salary
------------- -----------
<S> <C>
1998 $155,000.00
1999 $170,000.00
2000 $185,000.00
</TABLE>
3
<PAGE> 4
(b) The Employee will, during the Employment Period, be permitted
to participate in such pension, profit sharing, life
insurance, hospitalization, major medical and other employee
benefit plans of the Employer that may be in effect from time
to time, to the extent Employee is eligible under the terms of
those plans (collectively, the "Benefits").
(c) Employee will be eligible to participate in an annual bonus
plan, which will be consistent with previous bonus plans,
except as agreed to between Employee and Employer at the
beginning of each calendar year (the "Bonus Plan").
4. TERMINATION
4.1 EVENTS OF TERMINATION
The Employment Period, the Employee's Basic Compensation, and any and
all other rights of the Employee under this Agreement or otherwise as
an employee of the Employer will terminate (except as otherwise
provided in this Section 4):
(a) upon the death of the Employee;
(b) upon the disability of the Employee (as defined in Section
4.2) immediately upon notice from either party to the other;
(c) for cause (as defined in Section 4.3), immediately upon notice
from the Employer to the Employee, or at such later time as
such notice may specify; or
(d) on December 31, 2000.
4.2 DEFINITION OF DISABILITY
For purposes of Section 4.1, the Employee will be deemed to have a
"disability" if, for physical or mental reasons, the Employee is
unable to perform the essential functions of the Employee's duties
under this Agreement for 120 consecutive days, or 180 days during any
twelve (12) month period, as determined in accordance with this
Section 4.2. The disability of the Employee will be determined by a
medical doctor selected by written agreement of the Employer and the
Employee upon the request of either party by notice to the other. If
the Employer and the Employee cannot agree on the selection of a
medical doctor, each of them will select a medical doctor and the two
(2) medical doctors will select a third medical doctor who will
determine whether the Employee has a disability. The determination of
the medical doctor selected under this Section 4.2 will be binding on
both parties. The Employee must submit to a reasonable number of
examinations by the medical doctor making the determination of
disability under this Section 4.2, and the Employee hereby authorizes
the disclosure and release to the Employer of such determination and
all supporting medical records. If the Employee is not legally
competent, the Employee's legal guardian or duly authorized
attorney-in-fact will act in the Employee's stead, under this Section
4.2, for the
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<PAGE> 5
purposes of submitting the Employee to the examinations, and providing
the authorization of disclosure, required under this Section 4.2.
4.3 DEFINITION OF "FOR CAUSE"
For purposes of Section 4.1, the phrase "for cause" means: (a) the
commission of fraud, theft, embezzlement, or similar malfeasance
involving moral turpitude or the conviction of, or plea of nolo
contendere to, any felony; (b) gross negligence, nonfeasance,
dishonesty, willful misconduct or substantial failure to perform
employment duties in a manner consistent with normal standards of job
performance after prior evaluation and warning related to such
standards of job performance; or (c) the appropriation (or attempted
appropriation) of a material business opportunity of the Employer.
4.4 TERMINATION PAY
Effective upon the termination of this Agreement, the Employer will be
obligated to pay the Employee (or, in the event of his death, his
designated beneficiary as defined below) only such compensation as is
provided in this Section 4.4, and in lieu of all other amounts and in
settlement and complete release of all claims the Employee may have
against the Employer. For purposes of this Section 4.4, the Employee's
designated beneficiary will be such individual beneficiary or trust,
located at such address, as the Employee may designate by notice to
the Employer from time to time or, if the Employee fails to give
notice to the Employer of such a beneficiary, the Employee's estate.
(a) Termination by the Employer for Cause. If the Employer
terminates this Agreement for cause, the Employee will be
entitled to receive his accrued, but unpaid, Base Salary only
through the date such termination is effective. If the
Employer terminates this Agreement for cause, as defined in
Section 4.3(a) or 4.3(c), Employee shall forfeit his rights to
any payment under any Bonus Plan in which Employee
participated at the time of termination, whether or not
payments under such Bonus Plan have been accrued by Employer.
If the Employer terminates this Agreement for cause, as
defined in Section 4.3(b), Employee shall be entitled to
receive a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
Employee shall not be released from the covenants contained in
Section 5 hereof.
(b) Termination upon Disability. If this Agreement is
terminated by either party as a result of the Employee's
disability, as determined under Section 4.2, the Employer will
pay the Employee (i) his Base Salary through the remainder of
the calendar month during which such termination is effective
and (ii) a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
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<PAGE> 6
(c) Termination upon Death. If this Agreement is terminated
because of the Employee's death, the Employee's estate will be
entitled to receive (i) his Base Salary through the end of the
calendar month in which his death occurs and (ii) a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual
days worked by the Employee during the fiscal year on which
the Bonus Plan is based.
(d) Termination on December 31, 2000. If on December 31, 2000,
this Agreement terminates because the parties have not
extended the Term (as provide in Section 2.2 hereof), the
Employee shall be entitled to receive (i) any unpaid Base
Salary accrued through December 31, 2000, and (ii) a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual
months worked by the Employee during the fiscal year on which
the Bonus Plan is based. Employee shall not be released from
the covenants contained in Section 5 hereof, provided
however, that Employer shall pay Employee an amount equal to
one years Base Salary. Such amount shall be payable in twelve
(12) equal monthly installments, determined by dividing
Employee's Base Salary, on the last day of Employee's
employment with Employer, by 12, with the first such
installment being due and payable on the last day of
Employee's employment with Employer, and the remaining
installments being due and payable on the same date in each
succeeding month. Employer shall have the right, at any time,
to release Employee from the covenants contained in Section 5
hereof, at which time Employee's right to receive and
Employer's obligation to make any installment payment shall
terminate.
(e) Termination after December 31, 2000. In the event Employer
and Employee agree to continue Employee's employment with
Employer after December 31, 2000, pursuant to the terms of
Section 2.2 hereof, such employment shall be continued, unless
otherwise agreed in writing, on a month to month basis and on
the same terms and conditions as set forth herein, and may be
terminated by Employer (i) at any time upon thirty (30) days
notice, or (ii) immediately, provided that Employer shall pay
Employee in a lump sum, an amount equal to one (1) months Base
Salary. Employee shall be entitled to receive a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual
months worked by the Employee during the fiscal year on which
the Bonus Plan is based. Employee shall not be released from
the covenants contained in Section 5 hereof, provided however,
that Employer shall pay Employee an amount equal to one years
Base Salary. Such amount shall be payable in twelve (12) equal
monthly installments, determined by dividing Employee's Base
Salary, on the last day of Employee's employment with
Employer, by 12, with the first such installment being due and
payable on the last day of Employee's employment with
Employer, and the remaining installments being due and payable
on the same date in each succeeding month. Employer shall have
the right, at any time, to release Employee from the covenants
contained in Section 5 hereof, at which time Employee's right
to receive and Employer's obligation to make any installment
payment shall terminate.
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<PAGE> 7
In the event that Employer terminates Employee for cause, as
defined in Section 4.3, then the provisions of this Section
4.4(e)(i) and (ii) shall not apply, and Employee will be
entitled to receive only his accrued, but unpaid, Base Salary
through the date such termination is effective and Employee
shall not be released from the covenants contained in Section
5 hereof. If the Employer terminates this Agreement for cause,
as defined in Section 4.3(a) or 4.3(c), Employee shall forfeit
his rights to any payment under any Bonus Plan in which
Employee participated at the time of termination, whether or
not payments under such Bonus Plan have been accrued by
Employer. If the Employer terminates this Agreement for cause,
as defined in Section 4.3(b), Employee shall be entitled to
receive a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
(f) Benefits. The Employee's accrual of, or participation in plans
providing for, Benefits, will cease at the effective date of
the termination of this Agreement, except as otherwise
specifically provided in writing in the documentation for any
such Benefit. The Employee will not receive, as part of his
termination pay pursuant to this Section 4, any payment or
other compensation for any vacation, holiday, sick leave, or
other leave unused on the date the notice of termination is
given under this Agreement, unless Employer's written
personnel policies provide otherwise.
5. NON-COMPETITION AND NON-INTERFERENCE
5.1 ACKNOWLEDGMENTS BY THE EMPLOYEE
The Employee acknowledges that: (a) the services to be performed by
him under this Agreement are of a special, unique, unusual,
extraordinary, and intellectual character, and (b) the provisions of
this Section 5 are reasonable and necessary to protect the goodwill
and other business interests of Employer.
5.2 COVENANTS OF THE EMPLOYEE
In consideration of the acknowledgments by the Employee, and in
consideration of the compensation and benefits to be paid or provided
to the Employee by the Employer, the Employee covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post- Employment Period
(as defined below), without the express prior written consent
of Employer (as authorized by its board of directors), as
owner, officer, director, employee, stockholder, principal,
consultant, agent, lender, guarantor, cosigner, investor or
trustee of any corporation, partnership, proprietorship, joint
venture, association or any other entity of any nature,
engage, directly or indirectly, in any business of siting,
permitting, developing, constructing, or selling single-family
homes in (i) the following counties in the State of Texas:
(1) Harris County and all contiguous counties, (2) Travis
County and all contiguous counties, (3) Bexar County, and all
contiguous counties, (4) Dallas County and all
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<PAGE> 8
contiguous counties, and (5) any county in which Employer has
homebuilding activity during the Employment Period, and (ii)
the following counties in the State of Tennessee: (1)
Williamson County and all contiguous counties, and (2) any
county in which Employer engages in business during the
Employment Period, provided, however, that the Employee may
purchase or otherwise acquire up to (but not more than) one
percent (1%) of any class of securities of any enterprise (but
without otherwise participating in the activities of such
enterprise) if such securities are listed on any national or
regional securities exchange or have been registered under
Section 12(g) of the Securities Exchange Act of 1934;
(b) whether for the Employee's own account or for the account of
any other person, at any time during the Employment Period
(except for the account of Employer and its affiliates) and
the Post-Employment Period, solicit business of the same or
similar type being carried on by the Employer, from any person
known by the Employee to be a customer of the Employer,
whether or not the Employee had personal contact with such
person during and by reason of the Employee's employment with
the Employer;
(c) whether for the Employee's own account or the account of any
other person (i) at any time during the Employment Period and
the Post-Employment Period, solicit, employ, or otherwise
engage as an employee, independent contractor, or otherwise,
any person who is an employee of the Employer, or in any
manner induce, or attempt to induce, any employee of the
Employer to terminate his employment with the Employer; or
(ii) at any time during the Employment Period and Post
Employment Period, interfere with the Employer's relationship
with any person, including any person, who at any time during
the Employment Period, was an employee, contractor, supplier,
or customer of the Employer; provided, however, that nothing
in this Section 5.2(c)(ii) shall preclude Employee from
soliciting or employing any person, who was employed by
Employer, after six (6) months have lapsed from the last date
of the former employee's employment with Employer; or
(d) at any time during or after the Employment Period, disparage
the Employer or any of its shareholders, parents, affiliates,
directors, officers, employees, or agents.
The term "Post-Employment Period" means the one (1) year period
beginning on the date of termination of the Employee's employment with
the Employer.
If any covenant in this Section 5.2 is held to be unreasonable,
arbitrary, or against public policy, such covenant will be considered
to be divisible with respect to scope, time, and geographic area, and
such lesser scope, time, or geographic area, or all of them, as a
court of competent jurisdiction may determine to be reasonable, not
arbitrary, and not against public policy, will be effective, binding,
and enforceable against the Employee. Employee hereby agrees that this
covenant is a material and substantial part of this Agreement and that
(i) the geographic limitations are reasonable; (ii) the one (1) year
term of the covenant is reasonable; and (iii) the covenant is not made
for the purpose of limiting competition per se and is reasonably
related to a protectable business interest of the Employer.
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<PAGE> 9
The period of time applicable to any covenant in this Section 5.2 will
be extended by the duration of any violation by the Employee of such
covenant.
The Employee will, while the covenant under this Section 5.2 is in
effect, give notice to the Employer, within ten (10) days after
accepting any other employment, of the identity of the Employee's
employer. The Employer may notify such employer that the Employee is
bound by this Agreement and, at the Employer's election, furnish such
employer with a copy of this Agreement or relevant portions thereof.
6. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS
6.1 ACKNOWLEDGMENTS BY THE EMPLOYEE
The Employee acknowledges that (a) during the Employment Period and as
a part of his employment, the Employee will be afforded access to
Confidential Information; (b) public disclosure of such Confidential
Information could have an adverse effect on the Employer and its
business; (c) because the Employee possesses substantial technical
expertise and skill with respect to the Employer's business, the
Employer desires to obtain exclusive ownership of each Employee
Invention, and the Employer will be at a substantial competitive
disadvantage if it fails to acquire exclusive ownership of each
Employee Invention; and (d) the provisions of this Section 6 are
reasonable and necessary to prevent the improper use or disclosure of
Confidential Information and to provide the Employer with exclusive
ownership of all Employee Inventions.
6.2 AGREEMENTS OF THE EMPLOYEE
In consideration of the compensation and benefits to be paid or
provided to the Employee by the Employer under this Agreement, the
Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the
Employee will hold in confidence the Confidential
Information and will not disclose it to any person
other than in connection with the performance of his
duties and obligations hereunder, except with the
specific prior written consent of the Employer or
except as otherwise expressly permitted by the terms
of this Agreement.
(ii) Any trade secrets of the Employer will be entitled to
all of the protections and benefits under the federal
and state trade secret and intellectual property laws
and any other applicable law. If any information
that the Employer deems to be a trade secret is found
by a court of competent jurisdiction not to be a
trade secret for purposes of this Agreement, such
information will, nevertheless, be considered
Confidential Information for purposes of this
Agreement. The Employee hereby waives any requirement
that the Employer submit proof of the economic value
of any trade secret or post a bond or other security.
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<PAGE> 10
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information
that the Employee demonstrates was or became
generally available to the public other than as a
result of a disclosure by the Employee.
(iv) The Employee will not remove from the Employer's
premises (except to the extent such removal is for
purposes of the performance of the Employee's duties
at home or while traveling, or except as otherwise
specifically authorized by the Employer) any
document, record, notebook, plan, model, component,
device, or computer software or code, whether
embodied in a disk or in any other form belonging to
the Employer or used in Employer's business
(collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Employer and the
Employee, all of the Proprietary Items, whether or
not developed by the Employee, are the exclusive
property of the Employer. Upon termination of this
Agreement, or upon the request of the Employer during
the Employment Period, the Employee will return to
the Employer all of the Proprietary Items in the
Employee's possession or subject to the Employee's
control, and the Employee shall not retain any
copies, abstracts, sketches, or other physical
embodiment of any of the Proprietary Items.
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Employer. The Employee acknowledges that
all of the Employee's writing, works of authorship and other
Employee Inventions are works made for hire and the property
of the Employer, including any copyrights, patents, or other
intellectual property rights pertaining thereto. If it is
determined that any such works are not works made for hire,
the Employee hereby assigns to the Employer all of the
Employee's right, title, and interest, including all rights of
copyright, patent, and other intellectual property rights, to
or in such Employee Inventions. The Employee covenants that he
will promptly:
(i) disclose to the Employer in writing any Employee
Invention;
(ii) assign to the Employer or to a party designated by
the Employer, at the Employer's request and without
additional compensation, all of the Employee's right
to the Employee Invention for the United States and
all foreign jurisdictions;
(iii) execute and deliver to the Employer such
applications, assignments, and other documents as the
Employer may request in order to apply for and obtain
patents or other registrations with respect to any
Employee Invention in the United States and any
foreign jurisdictions;
(iv) sign all other papers necessary to carry out the
above obligations; and
(v) give testimony and render any other assistance but
without expense to the Employee in support of the
Employer's rights to any Employee Invention.
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<PAGE> 11
6.3 DISPUTES OR CONTROVERSIES
The Employee recognizes that should a dispute or controversy arising
from or relating to this Agreement be submitted for adjudication to
any court, arbitration panel, or other third party, the preservation
of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such
adjudication will be maintained in secrecy and will be available for
inspection by the Employer, the Employee, and their respective
attorneys and experts, who will agree, in advance and in writing, to
receive and maintain all such information in secrecy, except as may be
limited by them in writing.
7. GENERAL PROVISIONS
7.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY
The Employee acknowledges that the injury that would be suffered by
the Employer as a result of a breach of the provisions of this
Agreement (including any provision of Sections 5 and 6) would be
irreparable and that an award of monetary damages to the Employer for
such a breach would be an inadequate remedy. Consequently, the
Employer will have the right, in addition to any other rights it may
have, to obtain injunctive relief to restrain any breach or threatened
breach or otherwise to specifically enforce any provision of this
Agreement. Without limiting the Employer's rights under this Section
7 or any other remedies of the Employer, if the Employee breaches any
of the provisions of Sections 5 and 6 and such breach is proven in a
court of competent jurisdiction, the Employer will have the right to
cease making any payments otherwise due to the Employee under this
Agreement.
7.2 COVENANTS OF SECTIONS 5 AND 6 ARE ESSENTIAL AND INDEPENDENT COVENANTS
The covenants by the Employee in Sections 5 and 6 are essential
elements of this Agreement, and without the Employee's agreement to
comply with such covenants, the Employer would not have entered into
this Agreement or continued the employment of the Employee. The
Employer and the Employee have independently consulted their
respective counsel and have been advised in all respects concerning
the reasonableness and propriety of such covenants, with specific
regard to the nature of the business conducted by the Employer.
The Employee's covenants in Section 5 and 6 are independent covenants
and the existence of any claim by the Employee against the Employer
under this Agreement or otherwise will not excuse the Employee's
breach of any covenant in Sections 5 or 6. If the Employee's
employment hereunder expires or is terminated, this Agreement will
continue in full force and effect as is necessary or appropriate to
enforce the covenants and agreements of the Employee in Sections 5 and
6.
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<PAGE> 12
7.3 LEGAL RECOURSE
Employee further agrees that these covenants are made to protect the
legitimate business interests of the Employer. Employee understands
as a part of these covenants that the Employer intends to exercise
whatever legal recourse against him for any breach of this Agreement
and in particular, for any breach of these covenants.
8. GENERAL PROVISIONS
8.1 WAIVER
The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by
either party in exercising any right, power, or privilege under this
Agreement will operate as a waiver of such right, power, or privilege,
and no single or partial exercise of any such right, power, or
privilege will preclude any other or further exercise of such right,
power, or privilege or the exercise of any other right, power, or
privilege. To the maximum extent permitted by applicable law, (a) no
claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim
or right unless in writing signed by the other party; (b) no waiver
that may be given by a party will be applicable except in the specific
instance for which it is given; and (c) no notice to or demand on one
party will be deemed to be a waiver of any obligation of such party or
of the right of the party giving such notice or demand to take further
action without notice or demand as provided in this Agreement.
8.2 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED
This Agreement shall inure to the benefit of, and shall be binding
upon, the parties hereto and their respective successors, assigns,
heirs, and legal representatives, including any entity with which the
Employer may merge or consolidate or to which all or substantially all
of its assets may be transferred. The duties and covenants of the
Employee under this Agreement, being personal, may not be delegated.
8.3 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by facsimile (with written confirmation of
receipt), provided that a copy is mailed by certified mail, return
receipt requested, or (c) when received by the addressee, if sent by a
nationally recognized overnight delivery service, in each case to the
appropriate addresses and facsimile numbers set forth below (or to
such other addresses and facsimile numbers as a party may designate by
notice to the other parties):
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<PAGE> 13
If to Employer:
Newmark Home Corporation
1200 Soldiers Field Drive
Sugar Land, TX 77479
Facsimile No.: 281/243-0132
With a copy to:
Cathryn L. Porter
Pacific USA Holdings Corp.
3200 Southwest Freeway, Suite 1220
Houston, TX 77027
Facsimile No.: 713/871-0155
If to the Employee:
Steve Treece
6724 Myrtle Beach
Plano, Texas 75893
8.4 ENTIRE AGREEMENT; AMENDMENTS
Employee and Employer have entered into a Mutual Agreement to
Arbitrate Claims (the "Arbitration Agreement") incorporated herein for
all purposes as if set forth in full. This Agreement, together with
the Arbitration Agreement, contains the entire agreement between the
parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral or written, between the
parties hereto with respect to the subject matter hereof, including,
but not limited to, the Employment Agreement dated November 1, 1996
between Employer and Employee. This Agreement may not be amended
orally, but only by an agreement in writing signed by the parties
hereto.
8.5 GOVERNING LAW
This Agreement will be governed by the laws of the State of Texas
without regard to conflicts of laws principles.
8.6 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this
Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or
unenforceable.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
"EMPLOYER"
NEWMARK HOME CORPORATION
By: /s/ LONNIE M. FEDRICK
-----------------------------------
Name: Lonnie M. Fedrick
Title: President & CEO
"EMPLOYEE"
/s/ STEVE TREECE
--------------------------------------
STEVE TREECE
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<PAGE> 1
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made as of January 1, 1998 (the
"Effective Date") by and between NEWMARK HOME CORPORATION, a Nevada corporation
(the "Employer"), and MIKE BECKETT, an individual residing in Missouri City,
Texas (the "Employee").
RECITALS
The Employer, its divisions, subsidiaries, and other affiliated entities are
primarily engaged in the business of constructing single family residences. It
is the intent and purpose of the parties hereto to specify in this Agreement
the terms and conditions of Employee's employment with the Employer.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
"Agreement"--this Employment Agreement, as amended from time to time.
"Base Salary"--as defined in Section 3.1(a).
"Basic Compensation" means Base Salary and Benefits.
"Benefits"--as defined in Section 3.1(b).
"Board of Directors" means the board of directors of the Employer.
"Confidential Information" means any and all intellectual property of
the Employer (or any of its affiliates), including but not limited to:
(a) trade secrets concerning the business and affairs of the
Employer (or any of its affiliates), product specifications,
data, know-how, formulae, compositions, processes, designs,
sketches, photographs, graphs, drawings, samples, inventions
and ideas, past, current, and planned research and
development, current and planned manufacturing or distribution
methods and processes, customer lists, current and anticipated
customer requirements, price lists, market studies, business
plans, computer software and programs (including object code
and source code), computer software and database technologies,
systems, structures, and architectures (and related formulae,
compositions, processes, improvements, devices, know-how,
inventions, discoveries, concepts, ideas, designs, methods and
information), and any other information, however documented,
that is a trade secret under federal, state or other
applicable law; and
<PAGE> 2
(b) information concerning the business and affairs of the
Employer (or any of its affiliates) (which includes historical
financial statements, financial projections and budgets,
historical and projected sales, capital spending budgets and
plans, the names and backgrounds of key personnel, personnel
training and techniques and materials), however documented;
and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Employer (or any of its
affiliates) containing or based, in whole or in part, on any
information included in the foregoing.
"Disability"--as defined in Section 4.2.
"Effective Date" means the date stated in the first paragraph of this
Agreement.
"Employee Invention" means any idea, invention, technique,
modification, process, or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work,
however fixed or encoded, that is suitable to be fixed, embedded or
programmed in a semiconductor product (whether recordable or not), and
any work of authorship (whether or not copyright protection may be
obtained for it) created, conceived, or developed by the Employee,
either solely or in conjunction with others, during the Employment
Period or at any time prior to the Employment Period that Employee was
an employee of Employer, or a period that includes a portion of the
Employment Period, that relates in any way to, or is useful in any
manner in, the business then being conducted or proposed to be
conducted by the Employer, and any such item created by the Employee,
either solely or in conjunction with others, following termination of
the Employee's employment with the Employer, that is based upon or
uses Confidential Information.
"Employment Period" means the term of the Employee's employment under
this Agreement.
"Fiscal Year" means the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.
"For cause"--as defined in Section 4.3.
"Person" means any individual, corporation (including any nonprofit
corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, business trust, association,
organization, or governmental body.
"Post-Employment Period"-- as defined in Section 5.2.
2. EMPLOYMENT TERMS AND DUTIES
2.1 EMPLOYMENT
The Employer hereby employs the Employee, and the Employee hereby
accepts employment by the Employer, upon the terms and conditions set
forth in this Agreement.
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<PAGE> 3
2.2 TERM
The term of the Employee's employment under this Agreement shall
commence on the Effective Date and end on December 31, 2002, unless
terminated earlier in accordance with the provisions of Section 4
herein. Employer and Employee may extend the term of this Agreement by
execution of a written amendment hereto, setting forth the terms of
such extension. If the parties fail to execute such written amendment,
but the employment relationship has continued by mutual consent, then
the terms of such employment shall be deemed to be on a month-to-month
basis.
2.3 DUTIES
The Employee will serve as Senior Vice President - Purchasing of the
Employer for the term of this Agreement and will have such duties as
are assigned or delegated to the Employee by the Chief Executive
Officer of Employer, the Chief Executive Officer's designee, or
Employee's immediate supervisor. The Employee will devote his full
business time, attention, skill, and energy exclusively to the
business of the Employer, will use his best efforts to promote the
success of the Employer's business, and will cooperate fully with the
management and Board of Directors of Employer in the advancement of
the best interests of the Employer. Nothing in this Section 2.3,
however, will prevent the Employee from engaging in additional
activities in connection with personal investments and community
affairs that are not inconsistent with the Employee's duties under
this Agreement. If the Employee is elected an officer of any of
Employer's affiliates, the Employee will fulfill his duties as such
officer without additional compensation.
3. COMPENSATION
The compensation and other benefits payable to the Employee under this
Agreement shall constitute the full consideration to be paid to the
Employee for all services to be rendered by the Employee for the
Employer, its divisions, subsidiaries and other affiliated entities.
3.1 BASIC COMPENSATION
(a) The Employee will be paid an annual salary as set forth below
("Base Salary"), which will be payable in equal periodic
installments according to the Employer's customary payroll
practices, but no less frequently than monthly.
<TABLE>
<CAPTION>
Calendar Year Base Salary
------------- -----------
<S> <C>
1998 $155,000.00
1999 $170,000.00
2000 $185,000.00
2001 $200,000.00
2002 $215,000.00
</TABLE>
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<PAGE> 4
(b) The Employee will, during the Employment Period, be permitted
to participate in such pension, profit sharing, life
insurance, hospitalization, major medical and other employee
benefit plans of the Employer that may be in effect from time
to time, to the extent Employee is eligible under the terms of
those plans (collectively, the "Benefits").
(c) Employee will be eligible to participate in an annual bonus
plan, which will be consistent with previous bonus plans,
except as agreed to between Employee and Employer at the
beginning of each calendar year (the "Bonus Plan").
4. TERMINATION
4.1 EVENTS OF TERMINATION
The Employment Period, the Employee's Basic Compensation, and any and
all other rights of the Employee under this Agreement or otherwise as
an employee of the Employer will terminate (except as otherwise
provided in this Section 4):
(a) upon the death of the Employee;
(b) upon the disability of the Employee (as defined in Section
4.2) immediately upon notice from either party to the other;
(c) for cause (as defined in Section 4.3), immediately upon notice
from the Employer to the Employee, or at such later time as
such notice may specify; or
(d) on December 31, 2002.
4.2 DEFINITION OF DISABILITY
For purposes of Section 4.1, the Employee will be deemed to have a
"disability" if, for physical or mental reasons, the Employee is
unable to perform the essential functions of the Employee's duties
under this Agreement for 120 consecutive days, or 180 days during any
twelve (12) month period, as determined in accordance with this
Section 4.2. The disability of the Employee will be determined by a
medical doctor selected by written agreement of the Employer and the
Employee upon the request of either party by notice to the other. If
the Employer and the Employee cannot agree on the selection of a
medical doctor, each of them will select a medical doctor and the two
(2) medical doctors will select a third medical doctor who will
determine whether the Employee has a disability. The determination of
the medical doctor selected under this Section 4.2 will be binding on
both parties. The Employee must submit to a reasonable number of
examinations by the medical doctor making the determination of
disability under this Section 4.2, and the Employee hereby authorizes
the disclosure and release to the Employer of such determination and
all supporting medical records. If the Employee is not legally
competent, the Employee's legal guardian or duly authorized
attorney-in-fact will act in the Employee's stead, under this Section
4.2, for the purposes of submitting the Employee to the examinations,
and providing the authorization of disclosure, required under this
Section 4.2.
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<PAGE> 5
4.3 DEFINITION OF "FOR CAUSE"
For purposes of Section 4.1, the phrase "for cause" means: (a) the
commission of fraud, theft, embezzlement, or similar malfeasance
involving moral turpitude or the conviction of, or plea of nolo
contendere to, any felony; (b) gross negligence, nonfeasance,
dishonesty, willful misconduct or substantial failure to perform
employment duties in a manner consistent with normal standards of job
performance after prior evaluation and warning related to such
standards of job performance; or (c) the appropriation (or attempted
appropriation) of a material business opportunity of the Employer.
4.4 TERMINATION PAY
Effective upon the termination of this Agreement, the Employer will be
obligated to pay the Employee (or, in the event of his death, his
designated beneficiary as defined below) only such compensation as is
provided in this Section 4.4, and in lieu of all other amounts and in
settlement and complete release of all claims the Employee may have
against the Employer. For purposes of this Section 4.4, the Employee's
designated beneficiary will be such individual beneficiary or trust,
located at such address, as the Employee may designate by notice to
the Employer from time to time or, if the Employee fails to give
notice to the Employer of such a beneficiary, the Employee's estate.
(a) Termination by the Employer for Cause. If the Employer
terminates this Agreement for cause, the Employee will be
entitled to receive his accrued, but unpaid, Base Salary only
through the date such termination is effective. If the
Employer terminates this Agreement for cause, as defined in
Section 4.3(a) or 4.3(c), Employee shall forfeit his rights to
any payment under any Bonus Plan in which Employee
participated at the time of termination, whether or not
payments under such Bonus Plan have been accrued by Employer.
If the Employer terminates this Agreement for cause, as
defined in Section 4.3(b), Employee shall be entitled to
receive a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
Employee shall not be released from the covenants contained in
Section 5 hereof.
(b) Termination upon Disability. If this Agreement is
terminated by either party as a result of the Employee's
disability, as determined under Section 4.2, the Employer will
pay the Employee (i) his Base Salary through the remainder of
the calendar month during which such termination is effective
and (ii) a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
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<PAGE> 6
(c) Termination upon Death. If this Agreement is terminated
because of the Employee's death, the Employee's estate will be
entitled to receive (i) his Base Salary through the end of the
calendar month in which his death occurs and (ii) a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual
days worked by the Employee during the fiscal year on which
the Bonus Plan is based.
(d) Termination on December 31, 2002. If on December 31,
2002, this Agreement terminates because the parties have not
extended the Term (as provide in Section 2.2 hereof), the
Employee shall be entitled to receive (i) any unpaid Base
Salary accrued through December 31, 2002, and (ii) a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual
months worked by the Employee during the fiscal year on which
the Bonus Plan is based. Employee shall not be released from
the covenants contained in Section 5 hereof, provided however,
that Employer shall pay Employee an amount equal to one years
Base Salary. Such amount shall be payable in twelve (12) equal
monthly installments, determined by dividing Employee's Base
Salary, on the last day of Employee's employment with
Employer, by 12, with the first such installment being due and
payable on the last day of Employee's employment with
Employer, and the remaining installments being due and payable
on the same date in each succeeding month. Employer shall have
the right, at any time, to release Employee from the covenants
contained in Section 5 hereof, at which time Employee's right
to receive and Employer's obligation to make any installment
payment shall terminate.
(e) Termination after December 31, 2002. In the event Employer and
Employee agree to continue Employee's employment with Employer
after December 31, 2002, pursuant to the terms of Section 2.2
hereof, such employment shall be continued, unless otherwise
agreed in writing, on a month to month basis and on the same
terms and conditions as set forth herein, and may be
terminated by Employer (i) at any time upon thirty (30) days
notice, or (ii) immediately, provided that Employer shall pay
Employee in a lump sum, an amount equal to one (1) months Base
Salary. Employee shall be entitled to receive a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual
months worked by the Employee during the fiscal year on which
the Bonus Plan is based. Employee shall not be released from
the covenants contained in Section 5 hereof, provided however,
that Employer shall pay Employee an amount equal to one years
Base Salary. Such amount shall be payable in twelve (12) equal
monthly installments, determined by dividing Employee's Base
Salary, on the last day of Employee's employment with
Employer, by 12, with the first such installment being due and
payable on the last day of Employee's employment with
Employer, and the remaining installments being due and payable
on the same date in each succeeding month. Employer shall have
the right, at any time, to release Employee from the covenants
contained in Section 5 hereof, at which time Employee's right
to receive and Employer's obligation to make any installment
payment shall terminate.
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<PAGE> 7
In the event that Employer terminates Employee for cause, as
defined in Section 4.3, then the provisions of this Section
4.4(e)(i) and (ii) shall not apply, and Employee will be
entitled to receive only his accrued, but unpaid, Base Salary
through the date such termination is effective and Employee
shall not be released from the covenants contained in Section
5 hereof. If the Employer terminates this Agreement for cause,
as defined in Section 4.3(a) or 4.3(c), Employee shall forfeit
his rights to any payment under any Bonus Plan in which
Employee participated at the time of termination, whether or
not payments under such Bonus Plan have been accrued by
Employer. If the Employer terminates this Agreement for cause,
as defined in Section 4.3(b), Employee shall be entitled to
receive a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
(f) Benefits. The Employee's accrual of, or participation in plans
providing for, Benefits, will cease at the effective date of
the termination of this Agreement, except as otherwise
specifically provided in writing in the documentation for any
such Benefit. The Employee will not receive, as part of his
termination pay pursuant to this Section 4, any payment or
other compensation for any vacation, holiday, sick leave, or
other leave unused on the date the notice of termination is
given under this Agreement, unless Employer's written
personnel policies provide otherwise.
5. NON-COMPETITION AND NON-INTERFERENCE
5.1 ACKNOWLEDGMENTS BY THE EMPLOYEE
The Employee acknowledges that: (a) the services to be performed by
him under this Agreement are of a special, unique, unusual,
extraordinary, and intellectual character, and (b) the provisions of
this Section 5 are reasonable and necessary to protect the goodwill
and other business interests of Employer.
5.2 COVENANTS OF THE EMPLOYEE
In consideration of the acknowledgments by the Employee, and in
consideration of the compensation and benefits to be paid or provided
to the Employee by the Employer, the Employee covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post- Employment Period
(as defined below), without the express prior written consent
of Employer (as authorized by its board of directors), as
owner, officer, director, employee, stockholder, principal,
consultant, agent, lender, guarantor, cosigner, investor or
trustee of any corporation, partnership, proprietorship, joint
venture, association or any other entity of any nature,
engage, directly or indirectly, in any business of siting,
permitting, developing, constructing, or selling single-family
homes in (i) the following counties in the State of Texas: (1)
Harris County and all contiguous counties, (2) Travis County
and all contiguous counties, (3) Bexar County, and all
contiguous counties, (4) Dallas County and all contiguous
counties, and (5) any county in which Employer has
homebuilding
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<PAGE> 8
activity during the Employment Period, and (ii) the following
counties in the State of Tennessee: (1) Williamson County and
all contiguous counties, and (2) any county in which Employer
engages in business during the Employment Period, provided,
however, that the Employee may purchase or otherwise acquire
up to (but not more than) one percent (1%) of any class of
securities of any enterprise (but without otherwise
participating in the activities of such enterprise) if such
securities are listed on any national or regional securities
exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934;
(b) whether for the Employee's own account or for the account of
any other person, at any time during the Employment Period
(except for the account of Employer and its affiliates) and
the Post-Employment Period, solicit business of the same or
similar type being carried on by the Employer, from any person
known by the Employee to be a customer of the Employer,
whether or not the Employee had personal contact with such
person during and by reason of the Employee's employment with
the Employer;
(c) whether for the Employee's own account or the account of any
other person (i) at any time during the Employment Period and
the Post-Employment Period, solicit, employ, or otherwise
engage as an employee, independent contractor, or otherwise,
any person who is an employee of the Employer, or in any
manner induce, or attempt to induce, any employee of the
Employer to terminate his employment with the Employer; or
(ii) at any time during the Employment Period and Post
Employment Period, interfere with the Employer's relationship
with any person, including any person, who at any time during
the Employment Period, was an employee, contractor, supplier,
or customer of the Employer; provided, however, that nothing
in this Section 5.2(c)(ii) shall preclude Employee from
soliciting or employing any person, who was employed by
Employer, after six (6) months have lapsed from the last date
of the former employee's employment with Employer; or
(d) at any time during or after the Employment Period, disparage
the Employer or any of its shareholders, parents, affiliates,
directors, officers, employees, or agents.
The term "Post-Employment Period" means the one (1) year period
beginning on the date of termination of the Employee's employment with
the Employer.
If any covenant in this Section 5.2 is held to be unreasonable,
arbitrary, or against public policy, such covenant will be considered
to be divisible with respect to scope, time, and geographic area, and
such lesser scope, time, or geographic area, or all of them, as a
court of competent jurisdiction may determine to be reasonable, not
arbitrary, and not against public policy, will be effective, binding,
and enforceable against the Employee. Employee hereby agrees that this
covenant is a material and substantial part of this Agreement and that
(i) the geographic limitations are reasonable; (ii) the one (1) year
term of the covenant is reasonable; and (iii) the covenant is not made
for the purpose of limiting competition per se and is reasonably
related to a protectable business interest of the Employer.
The period of time applicable to any covenant in this Section 5.2 will
be extended by the duration of any violation by the Employee of such
covenant.
8
<PAGE> 9
The Employee will, while the covenant under this Section 5.2 is in
effect, give notice to the Employer, within ten (10) days after
accepting any other employment, of the identity of the Employee's
employer. The Employer may notify such employer that the Employee is
bound by this Agreement and, at the Employer's election, furnish such
employer with a copy of this Agreement or relevant portions thereof.
6. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS
6.1 ACKNOWLEDGMENTS BY THE EMPLOYEE
The Employee acknowledges that (a) during the Employment Period and as
a part of his employment, the Employee will be afforded access to
Confidential Information; (b) public disclosure of such Confidential
Information could have an adverse effect on the Employer and its
business; (c) because the Employee possesses substantial technical
expertise and skill with respect to the Employer's business, the
Employer desires to obtain exclusive ownership of each Employee
Invention, and the Employer will be at a substantial competitive
disadvantage if it fails to acquire exclusive ownership of each
Employee Invention; and (d) the provisions of this Section 6 are
reasonable and necessary to prevent the improper use or disclosure of
Confidential Information and to provide the Employer with exclusive
ownership of all Employee Inventions.
6.2 AGREEMENTS OF THE EMPLOYEE
In consideration of the compensation and benefits to be paid or
provided to the Employee by the Employer under this Agreement, the
Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the
Employee will hold in confidence the Confidential
Information and will not disclose it to any person
other than in connection with the performance of his
duties and obligations hereunder, except with the
specific prior written consent of the Employer or
except as otherwise expressly permitted by the terms
of this Agreement.
(ii) Any trade secrets of the Employer will be entitled to
all of the protections and benefits under the federal
and state trade secret and intellectual property laws
and any other applicable law. If any information
that the Employer deems to be a trade secret is found
by a court of competent jurisdiction not to be a
trade secret for purposes of this Agreement, such
information will, nevertheless, be considered
Confidential Information for purposes of this
Agreement. The Employee hereby waives any requirement
that the Employer submit proof of the economic value
of any trade secret or post a bond or other security.
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information
that the Employee demonstrates was or became
generally available to the public other than as a
result of a disclosure by the Employee.
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<PAGE> 10
(iv) The Employee will not remove from the Employer's
premises (except to the extent such removal is for
purposes of the performance of the Employee's duties
at home or while traveling, or except as otherwise
specifically authorized by the Employer) any
document, record, notebook, plan, model, component,
device, or computer software or code, whether
embodied in a disk or in any other form belonging to
the Employer or used in Employer's business
(collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Employer and the
Employee, all of the Proprietary Items, whether or
not developed by the Employee, are the exclusive
property of the Employer. Upon termination of this
Agreement, or upon the request of the Employer during
the Employment Period, the Employee will return to
the Employer all of the Proprietary Items in the
Employee's possession or subject to the Employee's
control, and the Employee shall not retain any
copies, abstracts, sketches, or other physical
embodiment of any of the Proprietary Items.
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Employer. The Employee acknowledges that
all of the Employee's writing, works of authorship and other
Employee Inventions are works made for hire and the property
of the Employer, including any copyrights, patents, or other
intellectual property rights pertaining thereto. If it is
determined that any such works are not works made for hire,
the Employee hereby assigns to the Employer all of the
Employee's right, title, and interest, including all rights of
copyright, patent, and other intellectual property rights, to
or in such Employee Inventions. The Employee covenants that he
will promptly:
(i) disclose to the Employer in writing any Employee
Invention;
(ii) assign to the Employer or to a party designated by
the Employer, at the Employer's request and without
additional compensation, all of the Employee's right
to the Employee Invention for the United States and
all foreign jurisdictions;
(iii) execute and deliver to the Employer such
applications, assignments, and other documents as the
Employer may request in order to apply for and obtain
patents or other registrations with respect to any
Employee Invention in the United States and any
foreign jurisdictions;
(iv) sign all other papers necessary to carry out the
above obligations; and
(v) give testimony and render any other assistance but
without expense to the Employee in support of the
Employer's rights to any Employee Invention.
6.3 DISPUTES OR CONTROVERSIES
The Employee recognizes that should a dispute or controversy arising
from or relating to this Agreement be submitted for adjudication to
any court, arbitration panel, or other third party, the preservation
of the secrecy of Confidential Information may be jeopardized. All
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<PAGE> 11
pleadings, documents, testimony, and records relating to any such
adjudication will be maintained in secrecy and will be available for
inspection by the Employer, the Employee, and their respective
attorneys and experts, who will agree, in advance and in writing, to
receive and maintain all such information in secrecy, except as may be
limited by them in writing.
7. GENERAL PROVISIONS
7.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY
The Employee acknowledges that the injury that would be suffered by
the Employer as a result of a breach of the provisions of this
Agreement (including any provision of Sections 5 and 6) would be
irreparable and that an award of monetary damages to the Employer for
such a breach would be an inadequate remedy. Consequently, the
Employer will have the right, in addition to any other rights it may
have, to obtain injunctive relief to restrain any breach or threatened
breach or otherwise to specifically enforce any provision of this
Agreement. Without limiting the Employer's rights under this Section
7 or any other remedies of the Employer, if the Employee breaches any
of the provisions of Sections 5 and 6 and such breach is proven in a
court of competent jurisdiction, the Employer will have the right to
cease making any payments otherwise due to the Employee under this
Agreement.
7.2 COVENANTS OF SECTIONS 5 AND 6 ARE ESSENTIAL AND INDEPENDENT COVENANTS
The covenants by the Employee in Sections 5 and 6 are essential
elements of this Agreement, and without the Employee's agreement to
comply with such covenants, the Employer would not have entered into
this Agreement or continued the employment of the Employee. The
Employer and the Employee have independently consulted their
respective counsel and have been advised in all respects concerning
the reasonableness and propriety of such covenants, with specific
regard to the nature of the business conducted by the Employer.
The Employee's covenants in Section 5 and 6 are independent covenants
and the existence of any claim by the Employee against the Employer
under this Agreement or otherwise will not excuse the Employee's
breach of any covenant in Sections 5 or 6. If the Employee's
employment hereunder expires or is terminated, this Agreement will
continue in full force and effect as is necessary or appropriate to
enforce the covenants and agreements of the Employee in Sections 5 and
6.
7.3 LEGAL RECOURSE
Employee further agrees that these covenants are made to protect the
legitimate business interests of the Employer. Employee understands as
a part of these covenants that the Employer intends to exercise
whatever legal recourse against him for any breach of this Agreement
and in particular, for any breach of these covenants.
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<PAGE> 12
8. GENERAL PROVISIONS
8.1 WAIVER
The rights and remedies of the parties to this Agreement are
cumulative and not alternative. Neither the failure nor any delay by
either party in exercising any right, power, or privilege under this
Agreement will operate as a waiver of such right, power, or privilege,
and no single or partial exercise of any such right, power, or
privilege will preclude any other or further exercise of such right,
power, or privilege or the exercise of any other right, power, or
privilege. To the maximum extent permitted by applicable law, (a) no
claim or right arising out of this Agreement can be discharged by one
party, in whole or in part, by a waiver or renunciation of the claim
or right unless in writing signed by the other party; (b) no waiver
that may be given by a party will be applicable except in the specific
instance for which it is given; and (c) no notice to or demand on one
party will be deemed to be a waiver of any obligation of such party or
of the right of the party giving such notice or demand to take further
action without notice or demand as provided in this Agreement.
8.2 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED
This Agreement shall inure to the benefit of, and shall be binding
upon, the parties hereto and their respective successors, assigns,
heirs, and legal representatives, including any entity with which the
Employer may merge or consolidate or to which all or substantially all
of its assets may be transferred. The duties and covenants of the
Employee under this Agreement, being personal, may not be delegated.
8.3 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by facsimile (with written confirmation of
receipt), provided that a copy is mailed by certified mail, return
receipt requested, or (c) when received by the addressee, if sent by a
nationally recognized overnight delivery service, in each case to the
appropriate addresses and facsimile numbers set forth below (or to
such other addresses and facsimile numbers as a party may designate by
notice to the other parties):
If to Employer:
Newmark Home Corporation
1200 Soldiers Field Drive
Sugar Land, TX 77479
Facsimile No.: 281/243-0132
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With a copy to:
Cathryn L. Porter
Pacific USA Holdings Corp.
3200 Southwest Freeway, Suite 1220
Houston, TX 77027
Facsimile No.: 713/871-0155
If to the Employee:
Mike Beckett
4731 Diamond Spring
Missouri City, Texas 77459
8.4 ENTIRE AGREEMENT; AMENDMENTS
Employee and Employer have entered into a Mutual Agreement to
Arbitrate Claims (the "Arbitration Agreement") incorporated herein for
all purposes as if set forth in full. This Agreement, together with
the Arbitration Agreement, contains the entire agreement between the
parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral or written, between the
parties hereto with respect to the subject matter hereof, including,
but not limited to, the Employment Agreement dated November 1, 1996
between Employer and Employee. This Agreement may not be amended
orally, but only by an agreement in writing signed by the parties
hereto.
8.5 GOVERNING LAW
This Agreement will be governed by the laws of the State of Texas
without regard to conflicts of laws principles.
8.6 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this
Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or
unenforceable.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
"EMPLOYER"
NEWMARK HOME CORPORATION
By: /s/ LONNIE M. FEDRICK
----------------------------
Name: Lonnie M. Fedrick
Title: President & CEO
"EMPLOYEE"
/s/ MIKE BECKETT
-------------------------------
MIKE BECKETT
13
<PAGE> 1
EXHIBIT 10.27(b)
ADDENDUM TO STOCK PURCHASE AGREEMENT
This Addendum to Stock Purchase Agreement ("Agreement") is made as of
January 15, 1998 ("Effective Date"), by and among JAMES CARR, an individual
("Seller"), WESTBROOKE COMMUNITIES, INC., a Florida corporation, WESTBROOKE AT
WEST LAKE, INC., a Florida corporation, WESTBROOKE AT WINSTON TRAILS, INC., a
Florida Corporation, WESTBROOKE AT PEMBROKE PINES, INC., a Florida corporation,
and WESTBROOKE AT OAK RIDGE, INC., a Florida corporation (each of such
companies individually referred to as an "Acquired Company" and collectively
referred to as the "Acquired Companies"), HAROLD L. EISENACHER, LEONARD R.
CHERNYS and DIANA IBARRIA (each of such three individuals individually referred
to as a "Key Employee" and collectively referred to as the "Key Employees"),
THE WESTBROOKE PARTNERSHIP, a Florida general partnership (the "Partnership"),
PACIFIC USA HOLDINGS CORP., a Texas corporation ("Pacific USA"), NEWMARK HOMES
CORP., a Nevada corporation ("Newmark") and WESTBROOKE ACQUISITION CORP., a
Florida corporation ("Buyer").
1. This Addendum is attached to and forms a part of that certain Stock
Purchase Agreement (the "Agreement") between Seller, the Acquired Companies, the
Key Employees, the Partnership, Pacific USA, Newmark and Buyer as of even date
herewith. To the extent anything contained herein conflicts with or otherwise is
different from the provisions of the Agreement, the terms hereof shall control.
2. The following corrections are hereby made to conform the Agreement
to the Parties' mutual agreement and understanding:
A. The last paragraph of Section 10.1 of the Agreement is
deleted in its entirety.
B. Section 10.3(c) of the Agreement is deleted in its entirety
and the following is substituted in its place:
(c) It is understood and agreed that each payment pursuant
to the provisions of this Section 10 is contingent:
(i) since it is based on future operations of the
Subject Entities; and
(ii) solely with respect to each payment pursuant to
Sections 10.2(a)(i) and 10.2(b)(i), since it
shall not be payable for any Calculation Year
during which the respective Key Employee's
employment under the applicable KE Employment
Agreement is terminated
(A) by the employer therein for "cause" or by
that Key Employee otherwise than for "cause"
as each such
<PAGE> 2
term is defined in the applicable KE
Employment Agreement, or
(B) because of the disability or death of
that Key Employee, as those terms are
contemplated by the KE Employment Agreements,
except that any amount that otherwise would
be payable in respect of the Calculation Year
during which that Key Employee's employment
is terminated for a reason stated in this
Section 10.3(c)(ii)(B) shall be payable to
the extent of the product of that amount
multiplied by a fraction of which the
numerator is the number of days in that
Calculation Year expired as of the date of
termination of employment for that reason and
the denominator is 365.
3. Facsimile execution and delivery of this Addendum shall be deemed
effective and the parties agree to execute original counterparts of this
Addendum promptly after such facsimile execution and delivery.
IN WITNESS WHEREOF, the parties have executed and delivered this Addendum
as of the date first written above:
SELLER:
/s/ JAMES M. CARR
- -------------------------------
JAMES M. CARR
WESTBROOKE COMMUNITIES, INC.,
a Florida corporation
By: /s/ JAMES M. CARR
---------------------------
Its: President
---------------------------
WESTBROOKE AT WEST LAKE, INC.
a Florida corporation
By: /s/ JAMES M. CARR
---------------------------
Its: President
---------------------------
<PAGE> 3
WESTBROOKE AT WINSTON TRAILS, INC.
a Florida corporation
By: /s/ JAMES M. CARR
---------------------------
Its: President
---------------------------
WESTBROOKE AT PEMBROKE PINES, INC.
a Florida corporation
By: /s/ JAMES M. CARR
---------------------------
Its: President
---------------------------
WESTBROOKE AT OAK RIDGE, INC.
a Florida corporation
By: /s/ JAMES M. CARR
---------------------------
Its: President
---------------------------
/s/ HAROLD L. EISENACHER
- -------------------------------
HAROLD L. EISENACHER
/s/ LEONARD R. CHERNYS
- -------------------------------
LEONARD R. CHERNYS
/s/ DIANA IBARRIA
- -------------------------------
DIANA IBARRIA
THE WESTBROOKE PARTNERSHIP
a Florida corporation
By: Westbrooke Communities, Inc.
a Florida corporation, as
Managing General Partner
By: /s/ JAMES M. CARR
---------------------------
Its: President
---------------------------
Buyer:
<PAGE> 4
WESTBROOKE ACQUISITION CORP.
a Florida Corporation
By: /s/ MICHAEL M. McCRAW
------------------------------
Michael M. McCraw, President
PACIFIC USA HOLDINGS CORP.,
a Texas Corporation
By: /s/ MICHAEL M. McCRAW
------------------------------
Michael M. McCraw, CFO
NEWMARK HOMES CORP.
a Nevada Corporation
By: /s/ MICHAEL M. McCRAW
------------------------------
Michael M. McCraw,
Chairman of the Board
<PAGE> 1
EXHIBIT 10.28
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made as of January 1, 1998 (the
"Effective Date") by and between NEWMARK HOME CORPORATION, a Nevada corporation
(the "Employer"), and LONNIE M. FEDRICK, an individual residing in Houston,
Texas (the "Employee").
RECITALS
The Employer, its divisions, subsidiaries, and other affiliated entities are
primarily engaged in the business of constructing single family residences. It
is the intent and purpose of the parties hereto to specify in this Agreement the
terms and conditions of Employee's employment with the Employer.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1.
"Agreement"--this Employment Agreement, as amended from time to time.
"Base Salary"--as defined in Section 3.1(a).
"Basic Compensation" means Base Salary and Benefits.
"Benefits"--as defined in Section 3.1(b).
"Board of Directors" means the board of directors of the Employer.
"Confidential Information" means any and all intellectual property of
the Employer (or any of its affiliates), including but not limited to:
(a) trade secrets concerning the business and affairs of the Employer
(or any of its affiliates), product specifications, data,
know-how, formulae, compositions, processes, designs, sketches,
photographs, graphs, drawings, samples, inventions and ideas,
past, current, and planned research and development, current and
planned manufacturing or distribution methods and processes,
customer lists, current and anticipated customer requirements,
price lists, market studies, business plans, computer software
and programs (including object code and source code), computer
software and database technologies, systems, structures, and
architectures (and related formulae, compositions, processes,
improvements, devices, know-how, inventions, discoveries,
concepts, ideas, designs, methods and information), and any other
information, however documented, that is a trade secret under
federal, state or other applicable law; and
<PAGE> 2
(b) information concerning the business and affairs of the Employer
(or any of its affiliates) (which includes historical financial
statements, financial projections and budgets, historical and
projected sales, capital spending budgets and plans, the names
and backgrounds of key personnel, personnel training and
techniques and materials), however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Employer (or any of its
affiliates) containing or based, in whole or in part, on any
information included in the foregoing.
"Disability"--as defined in Section 4.2.
"Effective Date" means the date stated in the first paragraph of this
Agreement.
"Employee Invention" means any idea, invention, technique,
modification, process, or improvement (whether patentable or not), any
industrial design (whether registerable or not), any mask work, however
fixed or encoded, that is suitable to be fixed, embedded or programmed
in a semiconductor product (whether recordable or not), and any work of
authorship (whether or not copyright protection may be obtained for it)
created, conceived, or developed by the Employee, either solely or in
conjunction with others, during the Employment Period or at any time
prior to the Employment Period that Employee was an employee of
Employer, or a period that includes a portion of the Employment Period,
that relates in any way to, or is useful in any manner in, the business
then being conducted or proposed to be conducted by the Employer, and
any such item created by the Employee, either solely or in conjunction
with others, following termination of the Employee's employment with
the Employer, that is based upon or uses Confidential Information.
"Employment Period" means the term of the Employee's employment under
this Agreement.
"Fiscal Year" means the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.
"For cause"--as defined in Section 4.3.
"Person" means any individual, corporation (including any nonprofit
corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, business trust, association,
organization, or governmental body.
"Post-Employment Period"-- as defined in Section 5.2.
2. EMPLOYMENT TERMS AND DUTIES
2.1 EMPLOYMENT
The Employer hereby employs the Employee, and the Employee hereby
accepts employment by the Employer, upon the terms and conditions set
forth in this Agreement.
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<PAGE> 3
2.2 TERM
The term of the Employee's employment under this Agreement shall
commence on the Effective Date and end on December 31, 2002, unless
terminated earlier in accordance with the provisions of Section 4
herein. Employer and Employee may extend the term of this Agreement by
execution of a written amendment hereto, setting forth the terms of
such extension. If the parties fail to execute such written amendment,
but the employment relationship has continued by mutual consent, then
the terms of such employment shall be deemed to be on a month-to-month
basis.
2.3 DUTIES
The Employee will serve as President and Chief Executive Officer of the
Employer for the term of this Agreement and will have such duties as
are assigned or delegated to the Employee by the Board of Directors.
The Employee will devote his full business time, attention, skill, and
energy exclusively to the business of the Employer, will use his best
efforts to promote the success of the Employer's business, and will
cooperate fully with the Board of Directors of Employer in the
advancement of the best interests of the Employer. Nothing in this
Section 2.3, however, will prevent the Employee from engaging in
additional activities in connection with personal investments and
community affairs that are not inconsistent with the Employee's duties
under this Agreement. If the Employee is elected an officer of any of
Employer's affiliates, the Employee will fulfill his duties as such
officer without additional compensation.
3. COMPENSATION
The compensation and other benefits payable to the Employee under this
Agreement shall constitute the full consideration to be paid to the
Employee for all services to be rendered by the Employee for the
Employer, its divisions, subsidiaries and other affiliated entities.
3.1 BASIC COMPENSATION
(a) The Employee will be paid an annual salary as set forth below
("Base Salary"), which will be payable in equal periodic
installments according to the Employer's customary payroll
practices, but no less frequently than monthly.
<TABLE>
<CAPTION>
Calendar Year Base Salary
------------- -----------
<S> <C>
1998 $400,000.00
1999 $450,000.00
2000 $500,000.00
2001 $500,000.00
2002 $500,000.00
</TABLE>
3
<PAGE> 4
(b) The Employee will, during the Employment Period, be permitted
to participate in such pension, profit sharing, life
insurance, hospitalization, major medical and other employee
benefit plans of the Employer that may be in effect from time
to time, to the extent Employee is eligible under the terms of
those plans (collectively, the "Benefits").
(c) Employee will be eligible to participate in an annual bonus
plan, which will be consistent with previous bonus plans,
except as agreed to between Employee and Employer at the
beginning of each calendar year (the "Bonus Plan").
4. TERMINATION
4.1 EVENTS OF TERMINATION
The Employment Period, the Employee's Basic Compensation, and any and
all other rights of the Employee under this Agreement or otherwise as
an employee of the Employer will terminate (except as otherwise
provided in this Section 4):
(a) upon the death of the Employee;
(b) upon the disability of the Employee (as defined in Section
4.2) immediately upon notice from either party to the other;
(c) for cause (as defined in Section 4.3), immediately upon notice
from the Employer to the Employee, or at such later time as
such notice may specify; or
(d) on December 31, 2002.
4.2 DEFINITION OF DISABILITY
For purposes of Section 4.1, the Employee will be deemed to have a
"disability" if, for physical or mental reasons, the Employee is unable
to perform the essential functions of the Employee's duties under this
Agreement for 120 consecutive days, or 180 days during any twelve (12)
month period, as determined in accordance with this Section 4.2. The
disability of the Employee will be determined by a medical doctor
selected by written agreement of the Employer and the Employee upon the
request of either party by notice to the other. If the Employer and the
Employee cannot agree on the selection of a medical doctor, each of
them will select a medical doctor and the two (2) medical doctors will
select a third medical doctor who will determine whether the Employee
has a disability. The determination of the medical doctor selected
under this Section 4.2 will be binding on both parties. The Employee
must submit to a reasonable number of examinations by the medical
doctor making the determination of disability under this Section 4.2,
and the Employee hereby authorizes the disclosure and release to the
Employer of such determination and all supporting medical records. If
the Employee is not legally competent, the Employee's legal guardian or
duly authorized attorney-in-fact will act in the Employee's stead,
under this Section 4.2, for the
4
<PAGE> 5
purposes of submitting the Employee to the examinations, and providing
the authorization of disclosure, required under this Section 4.2.
4.3 DEFINITION OF "FOR CAUSE"
For purposes of Section 4.1, the phrase "for cause" means: (a) the
commission of fraud, theft, embezzlement, or similar malfeasance
involving moral turpitude or the conviction of, or plea of nolo
contendere to, any felony; (b) gross negligence, nonfeasance,
dishonesty, willful misconduct or substantial failure to perform
employment duties in a manner consistent with normal standards of job
performance after prior evaluation and warning related to such
standards of job performance; or (c) the appropriation (or attempted
appropriation) of a material business opportunity of the Employer.
4.4 TERMINATION PAY
Effective upon the termination of this Agreement, the Employer will be
obligated to pay the Employee (or, in the event of his death, his
designated beneficiary as defined below) only such compensation as is
provided in this Section 4.4, and in lieu of all other amounts and in
settlement and complete release of all claims the Employee may have
against the Employer. For purposes of this Section 4.4, the Employee's
designated beneficiary will be such individual beneficiary or trust,
located at such address, as the Employee may designate by notice to the
Employer from time to time or, if the Employee fails to give notice to
the Employer of such a beneficiary, the Employee's estate.
(a) Termination by the Employer for Cause. If the Employer terminates
this Agreement for cause, the Employee will be entitled to
receive his accrued, but unpaid, Base Salary only through the
date such termination is effective. If the Employer terminates
this Agreement for cause, as defined in Section 4.3(a) or 4.3(c),
Employee shall forfeit his rights to any payment under any Bonus
Plan in which Employee participated at the time of termination,
whether or not payments under such Bonus Plan have been accrued
by Employer. If the Employer terminates this Agreement for cause,
as defined in Section 4.3(b), Employee shall be entitled to
receive a pro-rated portion of any payment under any Bonus Plan
in which Employee participated at the time of termination, based
on the actual days worked by the Employee during the fiscal year
on which the Bonus Plan is based. Employee shall not be released
from the covenants contained in Section 5 hereof.
(b) Termination upon Disability. If this Agreement is terminated by
either party as a result of the Employee's disability, as
determined under Section 4.2, the Employer will pay the Employee
(i) his Base Salary through the remainder of the calendar month
during which such termination is effective and (ii) a pro-rated
portion of any payment under any Bonus Plan in which Employee
participated at the time of termination, based on the actual days
worked by the Employee during the fiscal year on which the Bonus
Plan is based.
5
<PAGE> 6
(c) Termination upon Death. If this Agreement is terminated because
of the Employee's death, the Employee's estate will be entitled
to receive (i) his Base Salary through the end of the calendar
month in which his death occurs and (ii) a pro-rated portion of
any payment under any Bonus Plan in which Employee participated
at the time of termination, based on the actual days worked by
the Employee during the fiscal year on which the Bonus Plan is
based.
(d) Termination on December 31, 2002. If on December 31, 2002, this
Agreement terminates because the parties have not extended the
Term (as provide in Section 2.2 hereof), the Employee shall be
entitled to receive (i) any unpaid Base Salary accrued through
December 31, 2002, and (ii) a pro-rated portion of any payment
under any Bonus Plan in which Employee participated at the time
of termination, based on the actual months worked by the Employee
during the fiscal year on which the Bonus Plan is based. Employee
shall not be released from the covenants contained in Section 5
hereof, provided however, that Employer shall pay Employee an
amount equal to one years Base Salary. Such amount shall be
payable in twelve (12) equal monthly installments, determined by
dividing Employee's Base Salary, on the last day of Employee's
employment with Employer, by 12, with the first such installment
being due and payable on the last day of Employee's employment
with Employer, and the remaining installments being due and
payable on the same date in each succeeding month. Employer shall
have the right, at any time, to release Employee from the
covenants contained in Section 5 hereof, at which time Employee's
right to receive and Employer's obligation to make any
installment payment shall terminate.
(e) Termination after December 31, 2002. In the event Employer and
Employee agree to continue Employee's employment with Employer
after December 31, 2002, pursuant to the terms of Section 2.2
hereof, such employment shall be continued, unless otherwise
agreed in writing, on a month to month basis and on the same
terms and conditions as set forth herein, and may be terminated
by Employer (i) at any time upon thirty (30) days notice, or (ii)
immediately, provided that Employer shall pay Employee in a lump
sum, an amount equal to one (1) months Base Salary. Employee
shall be entitled to receive a pro-rated portion of any payment
under any Bonus Plan in which Employee participated at the time
of termination, based on the actual months worked by the Employee
during the fiscal year on which the Bonus Plan is based. Employee
shall not be released from the covenants contained in Section 5
hereof, provided however, that Employer shall pay Employee an
amount equal to one years Base Salary. Such amount shall be
payable in twelve (12) equal monthly installments, determined by
dividing Employee's Base Salary, on the last day of Employee's
employment with Employer, by 12, with the first such installment
being due and payable on the last day of Employee's employment
with Employer, and the remaining installments being due and
payable on the same date in each succeeding month. Employer shall
have the right, at any time, to release Employee from the
covenants contained in Section 5 hereof, at which time Employee's
right to receive and Employer's obligation to make any
installment payment shall terminate.
6
<PAGE> 7
In the event that Employer terminates Employee for cause, as
defined in Section 4.3, then the provisions of this Section
4.4(e)(i) and (ii) shall not apply, and Employee will be
entitled to receive only his accrued, but unpaid, Base Salary
through the date such termination is effective and Employee
shall not be released from the covenants contained in Section
5 hereof. If the Employer terminates this Agreement for cause,
as defined in Section 4.3(a) or 4.3(c), Employee shall forfeit
his rights to any payment under any Bonus Plan in which
Employee participated at the time of termination, whether or
not payments under such Bonus Plan have been accrued by
Employer. If the Employer terminates this Agreement for cause,
as defined in Section 4.3(b), Employee shall be entitled to
receive a pro-rated portion of any payment under any Bonus
Plan in which Employee participated at the time of
termination, based on the actual days worked by the Employee
during the fiscal year on which the Bonus Plan is based.
(f) Benefits. The Employee's accrual of, or participation in plans
providing for, Benefits, will cease at the effective date of
the termination of this Agreement, except as otherwise
specifically provided in writing in the documentation for any
such Benefit. The Employee will not receive, as part of his
termination pay pursuant to this Section 4, any payment or
other compensation for any vacation, holiday, sick leave, or
other leave unused on the date the notice of termination is
given under this Agreement, unless Employer's written
personnel policies provide otherwise.
5. NON-COMPETITION AND NON-INTERFERENCE
5.1 ACKNOWLEDGMENTS BY THE EMPLOYEE
The Employee acknowledges that: (a) the services to be performed by him
under this Agreement are of a special, unique, unusual, extraordinary,
and intellectual character, and (b) the provisions of this Section 5
are reasonable and necessary to protect the goodwill and other business
interests of Employer.
5.2 COVENANTS OF THE EMPLOYEE
In consideration of the acknowledgments by the Employee, and in
consideration of the compensation and benefits to be paid or provided
to the Employee by the Employer, the Employee covenants that he will
not, directly or indirectly:
(a) during the Employment Period, except in the course of his
employment hereunder, and during the Post-Employment Period (as
defined below), without the express prior written consent of
Employer (as authorized by its board of directors), as owner,
officer, director, employee, stockholder, principal, consultant,
agent, lender, guarantor, cosigner, investor or trustee of any
corporation, partnership, proprietorship, joint venture,
association or any other entity of any nature, engage, directly
or indirectly, in any business of siting, permitting, developing,
constructing, or selling single-family homes in (i) the following
counties in the State of Texas: (1) Harris County and all
contiguous counties, (2) Travis County and all contiguous
counties, (3) Bexar County, and all contiguous counties, (4)
Dallas County and all
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<PAGE> 8
contiguous counties, and (5) any county in which Employer has
homebuilding activity during the Employment Period, and (ii) the
following counties in the State of Tennessee: (1) Williamson
County and all contiguous counties, and (2) any county in which
Employer engages in business during the Employment Period,
provided, however, that the Employee may purchase or otherwise
acquire up to (but not more than) one percent (1%) of any class
of securities of any enterprise (but without otherwise
participating in the activities of such enterprise) if such
securities are listed on any national or regional securities
exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934;
(b) whether for the Employee's own account or for the account of any
other person, at any time during the Employment Period (except
for the account of Employer and its affiliates) and the
Post-Employment Period, solicit business of the same or similar
type being carried on by the Employer, from any person known by
the Employee to be a customer of the Employer, whether or not the
Employee had personal contact with such person during and by
reason of the Employee's employment with the Employer;
(c) whether for the Employee's own account or the account of any
other person (i) at any time during the Employment Period and the
Post-Employment Period, solicit, employ, or otherwise engage as
an employee, independent contractor, or otherwise, any person who
is an employee of the Employer, or in any manner induce, or
attempt to induce, any employee of the Employer to terminate his
employment with the Employer; or (ii) at any time during the
Employment Period and Post Employment Period, interfere with the
Employer's relationship with any person, including any person,
who at any time during the Employment Period, was an employee,
contractor, supplier, or customer of the Employer; provided,
however, that nothing in this Section 5.2(c)(ii) shall preclude
Employee from soliciting or employing any person, who was
employed by Employer, after six (6) months have lapsed from the
last date of the former employee's employment with Employer; or
(d) at any time during or after the Employment Period, disparage the
Employer or any of its shareholders, parents, affiliates,
directors, officers, employees, or agents.
The term "Post-Employment Period" means the one (1) year period
beginning on the date of termination of the Employee's employment with
the Employer.
If any covenant in this Section 5.2 is held to be unreasonable,
arbitrary, or against public policy, such covenant will be considered
to be divisible with respect to scope, time, and geographic area, and
such lesser scope, time, or geographic area, or all of them, as a court
of competent jurisdiction may determine to be reasonable, not
arbitrary, and not against public policy, will be effective, binding,
and enforceable against the Employee. Employee hereby agrees that this
covenant is a material and substantial part of this Agreement and that
(i) the geographic limitations are reasonable; (ii) the one (1) year
term of the covenant is reasonable; and (iii) the covenant is not made
for the purpose of limiting competition per se and is reasonably
related to a protectable business interest of the Employer.
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<PAGE> 9
The period of time applicable to any covenant in this Section 5.2 will
be extended by the duration of any violation by the Employee of such
covenant.
The Employee will, while the covenant under this Section 5.2 is in
effect, give notice to the Employer, within ten (10) days after
accepting any other employment, of the identity of the Employee's
employer. The Employer may notify such employer that the Employee is
bound by this Agreement and, at the Employer's election, furnish such
employer with a copy of this Agreement or relevant portions thereof.
6. NON-DISCLOSURE COVENANT; EMPLOYEE INVENTIONS
6.1 ACKNOWLEDGMENTS BY THE EMPLOYEE
The Employee acknowledges that (a) during the Employment Period and as
a part of his employment, the Employee will be afforded access to
Confidential Information; (b) public disclosure of such Confidential
Information could have an adverse effect on the Employer and its
business; (c) because the Employee possesses substantial technical
expertise and skill with respect to the Employer's business, the
Employer desires to obtain exclusive ownership of each Employee
Invention, and the Employer will be at a substantial competitive
disadvantage if it fails to acquire exclusive ownership of each
Employee Invention; and (d) the provisions of this Section 6 are
reasonable and necessary to prevent the improper use or disclosure of
Confidential Information and to provide the Employer with exclusive
ownership of all Employee Inventions.
6.2 AGREEMENTS OF THE EMPLOYEE
In consideration of the compensation and benefits to be paid or
provided to the Employee by the Employer under this Agreement, the
Employee covenants as follows:
(a) Confidentiality.
(i) During and following the Employment Period, the
Employee will hold in confidence the Confidential
Information and will not disclose it to any person
other than in connection with the performance of his
duties and obligations hereunder, except with the
specific prior written consent of the Employer or
except as otherwise expressly permitted by the terms
of this Agreement.
(ii) Any trade secrets of the Employer will be entitled to
all of the protections and benefits under the federal
and state trade secret and intellectual property laws
and any other applicable law. If any information that
the Employer deems to be a trade secret is found by a
court of competent jurisdiction not to be a trade
secret for purposes of this Agreement, such
information will, nevertheless, be considered
Confidential Information for purposes of this
Agreement. The Employee hereby waives any requirement
that the Employer submit proof of the economic value
of any trade secret or post a bond or other security.
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<PAGE> 10
(iii) None of the foregoing obligations and restrictions
applies to any part of the Confidential Information
that the Employee demonstrates was or became
generally available to the public other than as a
result of a disclosure by the Employee.
(iv) The Employee will not remove from the Employer's
premises (except to the extent such removal is for
purposes of the performance of the Employee's duties
at home or while traveling, or except as otherwise
specifically authorized by the Employer) any
document, record, notebook, plan, model, component,
device, or computer software or code, whether
embodied in a disk or in any other form belonging to
the Employer or used in Employer's business
(collectively, the "Proprietary Items"). The Employee
recognizes that, as between the Employer and the
Employee, all of the Proprietary Items, whether or
not developed by the Employee, are the exclusive
property of the Employer. Upon termination of this
Agreement, or upon the request of the Employer
during the Employment Period, the Employee will
return to the Employer all of the Proprietary Items
in the Employee's possession or subject to the
Employee's control, and the Employee shall not retain
any copies, abstracts, sketches, or other physical
embodiment of any of the Proprietary Items.
(b) Employee Inventions. Each Employee Invention will belong
exclusively to the Employer. The Employee acknowledges that all
of the Employee's writing, works of authorship and other Employee
Inventions are works made for hire and the property of the
Employer, including any copyrights, patents, or other
intellectual property rights pertaining thereto. If it is
determined that any such works are not works made for hire, the
Employee hereby assigns to the Employer all of the Employee's
right, title, and interest, including all rights of copyright,
patent, and other intellectual property rights, to or in such
Employee Inventions. The Employee covenants that he will
promptly:
(i) disclose to the Employer in writing any Employee
Invention;
(ii) assign to the Employer or to a party designated by the
Employer, at the Employer's request and without additional
compensation, all of the Employee's right to the Employee
Invention for the United States and all foreign
jurisdictions;
(iii) execute and deliver to the Employer such applications,
assignments, and other documents as the Employer may
request in order to apply for and obtain patents or other
registrations with respect to any Employee Invention in
the United States and any foreign jurisdictions;
(iv) sign all other papers necessary to carry out the above
obligations; and
(v) give testimony and render any other assistance but without
expense to the Employee in support of the Employer's
rights to any Employee Invention.
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6.3 DISPUTES OR CONTROVERSIES
The Employee recognizes that should a dispute or controversy arising
from or relating to this Agreement be submitted for adjudication to any
court, arbitration panel, or other third party, the preservation of the
secrecy of Confidential Information may be jeopardized. All pleadings,
documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by
the Employer, the Employee, and their respective attorneys and experts,
who will agree, in advance and in writing, to receive and maintain all
such information in secrecy, except as may be limited by them in
writing.
7. GENERAL PROVISIONS
7.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY
The Employee acknowledges that the injury that would be suffered by the
Employer as a result of a breach of the provisions of this Agreement
(including any provision of Sections 5 and 6) would be irreparable and
that an award of monetary damages to the Employer for such a breach
would be an inadequate remedy. Consequently, the Employer will have the
right, in addition to any other rights it may have, to obtain
injunctive relief to restrain any breach or threatened breach or
otherwise to specifically enforce any provision of this Agreement.
Without limiting the Employer's rights under this Section 7 or any
other remedies of the Employer, if the Employee breaches any of the
provisions of Sections 5 and 6 and such breach is proven in a court of
competent jurisdiction, the Employer will have the right to cease
making any payments otherwise due to the Employee under this Agreement.
7.2 COVENANTS OF SECTIONS 5 AND 6 ARE ESSENTIAL AND INDEPENDENT
COVENANTS
The covenants by the Employee in Sections 5 and 6 are essential
elements of this Agreement, and without the Employee's agreement to
comply with such covenants, the Employer would not have entered into
this Agreement or continued the employment of the Employee. The
Employer and the Employee have independently consulted their respective
counsel and have been advised in all respects concerning the
reasonableness and propriety of such covenants, with specific regard to
the nature of the business conducted by the Employer.
The Employee's covenants in Section 5 and 6 are independent covenants
and the existence of any claim by the Employee against the Employer
under this Agreement or otherwise will not excuse the Employee's breach
of any covenant in Sections 5 or 6. If the Employee's employment
hereunder expires or is terminated, this Agreement will continue in
full force and effect as is necessary or appropriate to enforce the
covenants and agreements of the Employee in Sections 5 and 6.
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7.3 LEGAL RECOURSE
Employee further agrees that these covenants are made to protect the
legitimate business interests of the Employer. Employee understands as
a part of these covenants that the Employer intends to exercise
whatever legal recourse against him for any breach of this Agreement
and in particular, for any breach of these covenants.
8. GENERAL PROVISIONS
8.1 WAIVER
The rights and remedies of the parties to this Agreement are cumulative
and not alternative. Neither the failure nor any delay by either party
in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single
or partial exercise of any such right, power, or privilege will
preclude any other or further exercise of such right, power, or
privilege or the exercise of any other right, power, or privilege. To
the maximum extent permitted by applicable law, (a) no claim or right
arising out of this Agreement can be discharged by one party, in whole
or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; (b) no waiver that may be given by a
party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one party will be deemed to
be a waiver of any obligation of such party or of the right of the
party giving such notice or demand to take further action without
notice or demand as provided in this Agreement.
8.2 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED
This Agreement shall inure to the benefit of, and shall be binding
upon, the parties hereto and their respective successors, assigns,
heirs, and legal representatives, including any entity with which the
Employer may merge or consolidate or to which all or substantially all
of its assets may be transferred. The duties and covenants of the
Employee under this Agreement, being personal, may not be delegated.
8.3 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given
when (a) delivered by hand (with written confirmation of receipt), (b)
sent by facsimile (with written confirmation of receipt), provided that
a copy is mailed by certified mail, return receipt requested, or (c)
when received by the addressee, if sent by a nationally recognized
overnight delivery service, in each case to the appropriate addresses
and facsimile numbers set forth below (or to such other addresses and
facsimile numbers as a party may designate by notice to the other
parties):
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If to Employer:
Newmark Home Corporation
1200 Soldiers Field Drive
Sugar Land, TX 77479
Facsimile No.: 281/243-0132
With a copy to:
Cathryn L. Porter
Pacific USA Holdings Corp.
3200 Southwest Freeway, Suite 1220
Houston, TX 77027
Facsimile No.: 713/871-0155
If to the Employee:
Lonnie M. Fedrick
14 Greenway Plaza, PH 28G
Houston, Texas 77046
8.4 ENTIRE AGREEMENT; AMENDMENTS
Employee and Employer have entered into a Mutual Agreement to Arbitrate
Claims (the "Arbitration Agreement") incorporated herein for all
purposes as if set forth in full. The Arbitration Agreement is hereby
amended to provide that the Arbitration, as defined in the Arbitration
Agreement, shall be non-binding. This Agreement, together with the
Arbitration Agreement, contains the entire agreement between the
parties with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral or written, between the
parties hereto with respect to the subject matter hereof. This
Agreement may not be amended orally, but only by an agreement in
writing signed by the parties hereto.
8.5 GOVERNING LAW
This Agreement will be governed by the laws of the State of Texas
without regard to conflicts of laws principles.
8.6 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this
Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or
unenforceable.
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<PAGE> 14
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
"EMPLOYER"
NEWMARK HOME CORPORATION
By: /s/ LONNIE M. FEDRICK
--------------------------------
Name: Lonnie M. Fedrick
Title: President & CEO
"EMPLOYEE"
/s/ LONNIE M. FEDRICK
-----------------------------------
LONNIE M. FEDRICK 2/13/98
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<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
AND REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Newmark Homes Corp.:
The audits referred to in our report dated January 23, 1998, included the
related financial statement schedules as of December 31, 1996 and 1997, and for
each of the years in the three-year period ended December 31, 1997, included in
the registration statement. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" and "Selected Financial and Operating
Data" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Dallas, Texas
February 12, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 27, 1998 with respect to the combined
financial statements of Westbrooke Communities, Inc. and Affiliates included in
Amendment No. 2 to the Registration Statement (Form S-1 No. 333-42213) and
related Prospectus of Newmark Homes Corp. for the registration of 2,000,000
shares of its common stock.
/s/ ERNST & YOUNG LLP
Miami, Florida
February 12, 1998
<PAGE> 1
EXHIBIT 99.1
CONSENT OF DIRECTOR DESIGNATE
I consent to my election as a director of Newmark Homes Corporation
immediately following the completion of its initial public offering of Common
Stock and the reference to my name under the caption "Management -- Directors
and Officers" in the prospectus.
Date: January 28, 1998
--------------------
/s/ JON P. NEWTON
-------------------------------
Jon P. Newton
<PAGE> 1
Exhibit 99.2
CONSENT OF DIRECTOR DESIGNATE
I consent to my election as a director of Newmark Homes Corporation
immediately following the completion of its initial public offering of Common
Stock and to the reference to my name under the caption "Management -- Directors
and Officers" in the prospectus.
Dated: February 3, 1998
--------------------
/s/ WILLIAM A. HASLER
---------------------------
William A. Hasler
