FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 333-42213
NEWMARK HOMES CORP.
(Exact name of Registrant as specified in its charter)
Nevada 76-0460831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Soldiers Field Drive
Sugar Land, TX 77479
(Address of principal executive offices) (Zip code)
281-243-0100
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock 11,500,000 shares
1
<PAGE>
NEWMARK HOMES CORP.
INDEX
Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statement of Operations 4
Condensed Consolidated Statement of Stockholders' Equity 6
Condensed Consolidated Statement of Cash Flows 7
Notes to the Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 12
ITEM 3. CHANGES IN INFORMATION ABOUT MARKET RISK - None. 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None. 17
ITEM 2. CHANGE IN SECURITIES - None 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 17
SECURITY HOLDERS - None.
ITEM 5. OTHER INFORMATION - None. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
Exhibits
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K
The registrant filed no reports on Form 8-K during the
quarter ended September 30, 1998.
SIGNATURE 17
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS September 30, December 31, 1997
1998
-------------------- --------------------
(unaudited)
<S> <C> <C>
Cash $ 3,136 $ 746
Receivables.......................................................... 7,397 1,729
Inventory............................................................ 187,548 103,010
Investment in unconsolidated subsidiaries ........................... 261 327
Other assets, net ................................................... 8,280 5,854
Goodwill, net of accumulated amortization of $4,818 and $3,773 in
1998 and 1997, respectively .................................... 37,100 27,547
-------------------- --------------------
Total assets......................................................... $ 243,722 $ 139,213
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Construction loans payable .......................................... $ 107,557 $ 66,100
Acquisition notes payable............................................ 15,541 -----
Other payables to affiliates ........................................ 1,065 1,775
Accounts payable and accrued liabilities............................. 21,551 10,963
Other liabilities ................................................... 12,396 4,684
-------------------- --------------------
Total liabilities ................................................... 158,110 83,522
-------------------- --------------------
Stockholders'equity:
Common stock -- $.01 par value; 30,000,000 shares authorized,
9,200,000 at December 31, 1997, and 11,500,000
at September 30, 1998, issued and outstanding .................. 115 92
Additional paid-in capital...................................... 73,768 52,165
Retained earnings............................................... 11,729 3,434
-------------------- --------------------
Total stockholders'equity ........................................... 85,612 55,691
-------------------- --------------------
Total liabilities and stockholders'equity ........................... $ 243,722 $ 139,213
==================== ====================
<FN>
See accompanying notes to the condensed
consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
(unaudited)
Three Months
Ended September 30,
---------------------
1998 1997
---- ----
<S> <C> <C>
Revenues............................................................. $ 112,907 $ 61,507
Cost of sales ...................................................... 93,900 50,256
------ ------
Gross profit......................................................... 19,007 11,251
Equity in earnings from unconsolidated subsidiaries ................ 262 154
Selling, general and administrative expenses......................... (12,055) (6,998)
Depreciation and amortization........................................ (1,163) (402)
------- -----
Operating income ............................................... 6,051 4,005
Other income (expense):
Interest expense .................................................... (419) (701)
Other income, net ................................................... 510 85
--- --
Income before income taxes .......................................... 6,142 3,389
Income taxes ........................................................ 2,301 1,325
----- -----
Net income .......................................................... $ 3,841 $ 2,064
========= =========
Earnings per common share:
Basic ............................................................... $ .33 $ .22
===== =====
Diluted ............................................................. $ .33 $ .22
===== =====
Weighted average number of shares of common
stock equivalents outstanding:
Basic ............................................................... 11,500,000 9,200,000
========== =========
Diluted ............................................................. 11,613,667 9,200,000
========== =========
<FN>
See accompanying notes to the condensed
consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
(unaudited)
Nine Months
Ended September 30,
---------------------
1998 1997
---- ----
<S> <C> <C>
Revenues............................................................. $ 285,160 $ 162,304
Cost of sales ...................................................... 238,022 132,335
------- -------
Gross profit......................................................... 47,138 29,969
Equity in earnings from unconsolidated subsidiaries ................ 602 262
Selling, general and administrative expenses......................... (31,199) (19,121)
Depreciation and amortization........................................ (2,673) (1,224)
------- -------
Operating income ............................................... 13,868 9,886
Other income (expense):
Interest expense .................................................... (1,558) (1,524)
Other income, net ................................................... 962 421
---- ---
Income before income taxes .......................................... 13,272 8,783
Income taxes ........................................................ 4,977 3,434
----- -----
Net income .......................................................... $ 8,295 $ 5,349
========= ==========
Earnings per common share:
Basic ............................................................... $ .76 $ .58
===== =====
Diluted ............................................................. $ .76 $ .58
===== =====
Weighted average number of shares of common
stock equivalents outstanding:
Basic ............................................................... 10,878,755 9,200,000
========== =========
Diluted ............................................................. 10,954,949 9,200,000
========== =========
<FN>
See accompanying notes to the condensed
consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(unaudited)
Additional
Common paid-in Retained
Stock Capital earnings Total
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 .................. $92 $42,415 $1,422 $43,929
Capital contribution......................... 124 124
Dividends paid ............................ (162) (3,109) (3,271)
Net income................................... 5,349 5,349
----------- ------------ ---------- -----------
Balance, September 30, 1997.................. $92 $42,377 $3,662 $46,131
=========== ============ ========== ===========
Balance, December 31, 1997 .................. $92 $52,165 $3,434 $55,691
Initial public offering of common stock,
net of issuance costs
of $2,554,000, March 13, 1998 ............... 20 18,426 18,446
Issuance of common stock due to the exercise
of underwriters over-allotment option, net of
issuance costs of $271,000, April 3, 1998.... 3 2,876 2,879
Capital contribution......................... 301 301
Net income................................... 8,295 8,295
----------- ------------ ---------- -----------
Balance, September 30, 1998.................. $ 115 $73,768 $11,729 $85,612
=========== ============ ========== ===========
<FN>
See accompanying notes to the condensed
consolidated financial statements.
</FN>
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months
Ended September 30,
-----------------------
1998 1997
-------------- -------------
<S> <C> <C>
Net Income ......................................................... $ 8,295 $ 5,349
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization.................................. 2,673 1,224
Net (gain) loss on sale of property, premises and equipment..... 25 4
Equity in earnings from unconsolidated subsidiaries............ (602) (261)
Changes in operating assets and liabilities, net of effects
from purchase of Westbrooke Communities Inc.:
Inventory and land held for development, net............... (43,778) (11,178)
Receivables................................................ (4,128) (1,184)
Other assets .............................................. 1,666 (796)
Payable to affiliates...................................... (710) 1,034
Accounts payable and accrued liabilities................... 1,547 1,873
Other liabilities.......................................... 7,710 765
-------------- -------------
Net cash used in operating activities .................... (27,302) (3,170)
-------------- -------------
Cash flows from investing activities:
Proceeds from maturing certificate of deposit ................... ----- 1,000
Purchases of property, premises and equipment ................... (1,544) (1,635)
Proceeds from sale of property, premises and equipment .......... ----- 40
Increase in Goodwill ............................................ (444) (42)
Cash acquired in purchase of Westbooke Communities Inc. ......... 3,618 -----
Investment in unconsolidated subsidiaries ....................... ----- (944)
Distributions from unconsolidated subsidiaries .................. 668 1,585
-------------- -------------
Net cash provided by (used in) investing activities ....... 2,298 4
Cash flows from financing activities:
Net proceeds from initial public offering of common stock........ 18,446 -----
Net proceeds from Underwriters over-allotment option ............ 2,879 -----
Capital contributions received .................................. 301 124
Dividends paid .................................................. ----- (3,271)
Proceeds from advances on construction loans payable ............ 207,685 109,979
Principal payments on construction loans payable ................ (188,536) (109,726)
Principal payments on acquisition notes payable.................. (13,381) -----
Proceeds from advances on notes payable to affiliate............. ----- 6,811
Principal payments on notes payable to affiliate ................ ----- (1,365)
-------------- -------------
Net cash provided by financing activities.................. 27,394 2,552
-------------- -------------
Increase (decrease) in cash ........................................ 2,390 (614)
Cash, beginning of period .......................................... 746 642
-------------- -------------
Cash, end of period ................................................ $ 3,136 $ 28
============== =============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest ...................................................... $ 6,876 $ 4,711
============== =============
Income taxes .................................................. $ 6,391 $ 3,028
============== =============
<FN>
See accompanying Note 2 for supplemental disclosure of non-cash
investing and financing activities. See accompanying notes to the
condensed consolidated financial statements.
</FN>
</TABLE>
7
<PAGE>
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization
Newmark Homes Corp. and subsidiaries (the Company) is a majority-owned
subsidiary of Pacific Realty Group and ultimately a subsidiary of Pacific USA
Holdings Corp. (PUSA). The Company was formed in December 1994 to serve as a
real estate holding company.
The Company's primary subsidiaries are as follows:
<TABLE>
<CAPTION>
Subsidiary Nature of Business
<S> <C>
Newmark Home Corporation (Newmark) ......... Single-family residential homebuilding in Texas,
Tennessee and North Carolina - formed in 1983.
Westbrooke Communities, Inc. (Westbrooke) Single-family residential homebuilding in Florida
-formed in 1976.
The Adler Companies, Inc. (Adler) .......... Single-family residential homebuilding in Florida
-formed in 1990.
Pacific United Development Corporation Residential lot development in Texas and Tennessee
(PUDC)...................................... -formed in 1993.
</TABLE>
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The accounting and reporting policies of the Company conform
to generally accepted accounting principles and general practices within the
homebuilding industry. All significant intercompany balances and transactions
have been eliminated in the consolidated financial statements.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Interim presentation
The accompanying condensed consolidated financial statements have been prepared
by the Company and are unaudited. Certain information and footnote disclosures
normally included in financial statements presented in accordance with generally
accepted accounting principles have been omitted from the accompanying
statements. The Company's management believes the disclosures made are adequate
to make the information presented not misleading. However, the financial
statements should be read in conjunction with the financial statements and notes
thereto of the Company for the year ended December 31, 1997 which were a part of
the Company's Registration Statement on Form S-1 (Commission File No. 333-42213)
that was declared effective March 12, 1998.
8
<PAGE>
Earnings per share
In March 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
This Statement establishes new standards for computing and presenting earnings
per share (EPS). SFAS No. 128 replaces the presentation of primary EPS
previously prescribed by Accounting Principles Board Opinion No. 15 (APB No. 15)
with a presentation of basic EPS which is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period.
SFAS No. 128 also requires dual presentation of basic and diluted EPS. Diluted
EPS is computed similarly to fully diluted EPS pursuant to APB No. 15.
The following tables reconcile the computation of basic and diluted EPS for the
three months ended September 30, 1998 and 1997 and for the nine months ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998 Three Months Ended September 30, 1997
--------------------------------------------- ----------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to
common shareholders $3,841,000 11,500,000 $.33 $2,064,000 9,200,000 $.22
============== ===============
Effect of Dilutive Securities
1998 Tandem Stock
Option Plan ----- 113,667 ----- -----
--------------------------------- ----------------- -----------------
Diluted EPS:
Income available to
common shareholders +
assumed conversions $3,841,000 11,613,667 $.33 $2,064,000 9,200,000 $.22
============== ===============
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998 Nine Months Ended September 30, 1997
-------------------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------------------------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to
Common shareholders $8,295,000 10,878,755 $.76 $5,349,000 9,200,000 $.58
============== =============
Effect of Dilutive Securities
1998 Tandem Stock
Option Plan ----- 76,194 ----- -----
--------------------------------- ------------------ -----------------
Diluted EPS:
Income available to
common shareholders +
assumed conversions $8,295,000 10,954,949 $.76 $5,349,000 9,200,000 $.58
============== =============
</TABLE>
9
<PAGE>
Note 2. Acquisitions
Effective January 1, 1998, the Company acquired all of the outstanding stock of
Westbrooke and its affiliated entities, a single-family home builder in South
Florida. The initial purchase price for Westbrooke was $18.9 million in the form
of promissory notes. ($12.3 million of notes payable bearing interest at 6.45%
payable annually over five years and a $6.6 million note payable bearing
interest at 9.0% due on or before one year from closing.) In addition to the
promissory notes, the purchase agreement requires the Company to pay additional
consideration of up to $7.5 million contingent upon Westbrooke achieving
specified income targets over the next five years.
The following unaudited pro forma financial information for the three months and
nine months ended September 30, 1997 is presented as if the Westbrooke
acquisition had occurred on January 1, 1997 (dollars in thousands). This pro
forma financial information does not necessarily reflect the results of
operations as if they had occurred or the results that may occur in the future.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------ --------------------
<S> <C> <C>
Revenues............................................................. $88,975 $227,486
Cost of sales ...................................................... 74,805 189,797
------ -------
Gross profit......................................................... 14,170 37,689
------ ------
$ 2,594 $ 6,380
Net income ................................................ ======= =====
Earnings per common share:
Basic .......................................................... $ .28 $ .69
==== ====
Weighted average number of shares of common
stock equivalents outstanding:
Basic .......................................................... 9,200,000 9,200,000
========= =========
</TABLE>
Note 3. Inventory
The inventory as of September 30, 1998 and December 31, 1997 consists of the
following:
<TABLE>
<CAPTION>
Carrying value
Number of homes (in thousands)
-------------------------------------- -------------------------------------
September 30, December 31, September 30, December 31,
1998 1997 1998 1997
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Completed .................................. 130 90 $25,078 $18,564
Under construction ......................... 973 444 101,819 48,352
Models ..................................... 87 40 16,275 8,490
Residential lots............................. ----- ----- 43,904 27,141
Land held for development.................... ----- ----- 472 463
----------------- ----------------- ---------------- ----------------
Total 1,190 574 $187,548 $103,010
================= ================= ================ ================
</TABLE>
10
<PAGE>
Note 4. Capitalized Interest
A summary of interest capitalized in inventory is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -- -------------------------
1998 1997 1998 1997
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Interest capitalized, beginning of period .... $5,542 $2,067 $2,572 $1,494
Capitalized interest acquired in the
purchase of Westbrooke ....................... ----- ----- 2,597 -----
Interest incurred ............................ 2,690 1,846 7,859 4,861
Less interest included in:
Cost of sales .......................... 2,412 965 6,069 2,584
Other (income) expense ................. 419 701 1,558 1,524
----------- ----------- --------- ----------
Interest capitalized, end of period .......... $5,401 $2,247 $5,401 $2,247
============ =========== ========== ==========
</TABLE>
Note 5. Commitments and Contingencies
The Company is subject to certain pending or threatened litigation and other
claims. Management, after review and consultation with legal counsel, believes
the Company has meritorious defenses to these matters and that any potential
liability from these matters would not materially affect the Company's
consolidated financial statements.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
This Quarterly Report on Form 10-Q may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth below.
Results of Operations
The following tables set forth certain operating and financial data for the
Company:
<TABLE>
<CAPTION>
New sales contracts,
net of cancellations Home closings
------------------------
-------------------------
Three Months Three Months
Ended September 30, Ended September 30,
------------------------ -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Houston 124 90 148 117
Austin 119 75 110 74
Dallas 47 43 42 33
Nashville 20 0 8 0
South Florida 180 35 200 43
---- ---- ---- ----
Total 490 243 508 267
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
New sales contracts, Homes in
net of cancellations Home closings sales backlog
------------------------ ------------------------- ------------------------
Nine Months Nine Months As of
Ended September 30, Ended September 30, September 30,
------------------------ ------------------------- ------------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Houston 456 301 349 283 204 88
Austin 385 253 297 234 173 91
Dallas 143 117 116 97 69 48
Nashville 40 0 14 0 26 0
South Florida 618 86 546 117 439 66
--- -- --- --- --- --
Total 1,642 757 1,322 731 911 293
===== === ===== === === ===
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
As a Percentage of Revenue As a Percentage of Revenue
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------------- ----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of sales 83.2% 81.7% 83.5% 81.5%
Gross profit 16.8% 18.3% 16.5% 18.5%
Selling, general and administrative expenses 10.7% 11.4% 10.9% 11.8%
Income before income taxes 5.4% 5.5% 4.7% 5.4%
Income taxes (1) 37.5% 39.1% 37.5% 39.1%
Net income 3.4% 3.4% 2.9% 3.3%
<FN>
(1) As a percent of income before income taxes.
</FN>
</TABLE>
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997.
Revenues for the three months ended September 30, 1998, increased by 83.6%, to
$112.9 million, from $61.5 million for the comparable period of 1997. The number
of homes closed by the Company increased by 90.3% to 508 homes in the three
months ended September 30, 1998 from 267 homes in the same period of 1997. A
slowdown in construction in southern Florida caused by the threat of Hurricane
Georges affected third quarter revenue and earnings, delaying the closings of
approximately 20 homes. The increases in both revenues and homes closed were due
in part to the acquisition of Westbrooke in January 1998. In the three months
ended September 30, 1998, Westbrooke closed 160 homes, with revenues totaling
$27.9 million. Westbrooke comprised 31.5% of the homes closed in the period, and
24.7% of the revenues generated. Excluding Westbrooke, revenues increased by
38.2%, to $85 million in the three months ended September 30, 1998.
The average selling price of homes closed in the three months ended September
30, 1998 was $221,797, a decrease of 3.4% from $229,557 selling price in the
comparable period of 1997. Westbrooke's average selling price was $174,262.
Excluding Westbrooke, the average selling price for homes closed in the three
months ending September 30, 1998 was $243,652, an increase of 6.1%.
New net sales contracts increased 101.6%, to 490 homes for the three months
ended September 30, 1998, from 243 homes for the three months ended September
30, 1997. The dollar amount of new net sales contracts increased 106%, to $108.2
million. Westbrooke had 112 home sales contracts during the current period.
Excluding Westbrooke, sales contracts were 378 homes in the current three-month
period, a 55.6% increase over 1997.
The Company was operating in 60 subdivisions at September 30, 1998, compared to
46 subdivisions at September 30, 1997. At September 30, 1998, the Company's
backlog of sales contracts was 911 homes, a 210.9% increase over comparable
figures at September 30, 1997. At September 30, 1998, Westbrooke had 289 homes
in sales backlog. Excluding Westbrooke, the sales backlog at September 30, 1998,
was 622 homes, a 112.3% increase over 1997.
Cost of sales increased by 86.8%, to $93.9 million in the three months ended
September 30, 1998, from $50.3 million in the comparable period of 1997. The
increase was attributable to the increase in revenues. As a percentage of
revenues, cost of sales for the quarter increased to 83.2% in 1998 from 81.7% in
1997. The increase in cost of sales as a percentage of revenues is due primarily
to the acquisition of Westbrooke. Generally, the margins on the homes sold in
South Florida will carry lower margins due to the impact of higher land cost
relative to sales price. Excluding Westbrooke, as a percentage of revenues, cost
of sales decreased slightly to 81.1% in 1998 from 81.7% in 1997.
13
<PAGE>
Selling, general and administrative (SG&A) expense increased by 72.3%, to $12.1
million in the three months ended September 30, 1998, from $7 million in the
comparable period of 1997. As a percentage of revenues, SG&A expense decreased
slightly to 10.7% in 1998, from 11.4% in 1997. Excluding Westbrooke, SG&A
expense increased by 52.9% to $10.7 million. This increase was caused by the
expansion into Nashville, Tennessee as well as the growth in the Company's Texas
markets as reflected in the 38.2% increase in revenues for the third quarter
1998 and the 112.3% increase in the backlog at the end of September 1998 versus
September 1997. Both numbers exclude Westbrooke's results.
Interest expense amounted to $419,000 in the three months ended September 30,
1998, compared to $701,000 in the comparable period of 1997. The Company follows
a policy of capitalizing interest only on inventory under construction or
development. During the three months ended September 30, 1998 and 1997, the
Company expensed a portion of incurred interest and other financing costs on
those completed homes held in inventory. This expense decreased due to the
decrease in the average number of completed homes held in inventory for the
quarter ending September 30, 1998 compared to the quarter ending September 30,
1997. Capitalized interest and other financing costs are included in cost of
sales at the time of home closings.
The Company's provision for income taxes decreased as a percentage of earnings
before taxes to 37.5% for the three months ended September 30, 1998, compared to
39.1% for the three months ended September 30, 1997. Under a tax allocation
agreement with Pacific USA, the Company is required to calculate its federal
corporate income tax liability as if it filed a separate federal income tax
return for each period and to pay Pacific USA the sum which would result from
such calculation if the Company were subject to federal corporate income tax and
filed a separate tax return. The Company recognized federal income tax expense
under the tax allocation agreement amounting to $2.2 million for the three
months ended September 30, 1998 compared to $1.3 million for the three months
ended September 30, 1997.
Net income increased by 86.1% to $3.8 million for the three months ending
September 30, 1998 from $2.1 million for the corresponding period in 1997.
Westbrooke comprised 15.9% of the net income for the three months ending
September 30, 1998.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997.
Revenues for the nine months ended September 30, 1998, increased by 75.7%, to
$285.2 million, from $162.3 million for the comparable period of 1997. The
number of homes closed by the Company increased by 80.8% to 1322 homes in the
nine months ended September 30, 1998 from 731 homes in the same period of 1997.
A slowdown in construction in southern Florida caused by the threat of Hurricane
Georges affected third quarter revenue and earnings, delaying the closings of
approximately 20 homes. The increases in both revenues and homes closed were due
in part to the acquisition of Westbrooke in January 1998. In the nine months
ended September 30, 1998, Westbrooke closed 457 homes, with revenues totaling
$79.1 million. Westbrooke comprised 34.6% of the homes closed in the period, and
27.7% of the revenues generated. Excluding Westbrooke, revenues increased by
27%, to $206 million in the nine months ended September 30, 1998.
The average selling price of homes closed in the nine months ended September 30,
1998 was $214,466, a decrease of 2.5% from $219,855 selling price in the
comparable period of 1997. Westbrooke's average selling price was $173,123.
Excluding Westbrooke, the average selling price for homes closed in the nine
months ending September 30, 1998 was $236,309, an increase of 7.5%.
New net sales contracts increased 116.9%, to 1642 homes for the nine months
ended September 30, 1998, from 757 homes for the nine months ended September 30,
1997. The dollar amount of new net sales contracts increased 122.5%, to $354.3
million. Westbrooke had 434 home sales contracts during the current period.
Excluding Westbrooke, sales contracts were 1208 homes in the current nine-month
period, a 59.6% increase over 1997.
14
<PAGE>
Cost of sales increased by 79.9%, to $238 million in the nine months ended
September 30, 1998, from $132.3 million in the comparable period of 1997. The
increase was attributable to the increase in revenues. As a percentage of
revenues, cost of sales for the nine-month period increased to 83.5% in 1998
from 81.5% in 1997. The increase in cost of sales as a percentage of revenues is
due primarily to the acquisition of Westbrooke. Generally, the margins on the
homes sold in South Florida will carry lower margins due to the impact of higher
land cost relative to sales price. Excluding Westbrooke, as a percentage of
revenues, cost of sales increased slightly to 81.6% in 1998 from 81.5% in 1997.
SG&A expense increased by 63.2%, to $31.2 million in the nine months ended
September 30, 1998, from $19.1 million in the comparable period of 1997. As a
percentage of revenues, SG&A expense decreased slightly to 10.9% in 1998, from
11.8% in 1997. Excluding Westbrooke, SG&A expense increased by 38.8% to $26.5
million. This increase was caused by the expansion into Nashville, Tennessee as
well as the growth in the Company's Texas markets as reflected in the 27%
increase in revenues and the 112.3% increase in the backlog, excluding
Westbrooke, at the end of September 1998 versus September 1997.
Interest expense amounted to $1.6 million in the nine months ended September 30,
1998, compared to $1.5 million in the comparable period of 1997. The Company
follows a policy of capitalizing interest only on inventory under construction
or development. During the nine months ended September 30, 1998 and 1997, the
Company expensed a portion of incurred interest and other financing costs of
finished homes. Capitalized interest and other financing costs are included in
cost of sales at the time of home closings.
The Company's provision for income taxes decreased as a percentage of earnings
before taxes to 37.5% for the nine months ended September 30, 1998, compared to
39.1% for the nine months ended September 30, 1997. Under a tax allocation
agreement with Pacific USA, the Company is required to calculate its federal
corporate income tax liability as if it filed a separate federal income tax
return for each period and to pay Pacific USA the sum which would result from
such calculation if the Company were subject to federal corporate income tax and
filed a separate tax return. The Company recognized federal income tax expense
under the tax allocation agreement amounting to $4.7 million for the nine months
ended September 30, 1998 compared to $3.4 million for the nine months ended
September 30, 1997.
Net income increased by 55% to $8.3 million for the nine months ending September
30, 1998 from $5.3 million for the corresponding period in 1997. Westbrooke
comprised 25.6% of the net income for the nine months ending September 30, 1998.
Financial Condition, Liquidity and Capital Resources
At September 30, 1998, the Company had available cash and cash equivalents of
$3.1 million. Inventories (including finished homes and construction in
progress, developed residential lots and other land) at September 30, 1998,
increased by $84.5 million from December 31, 1997, due to a general increase in
business activity; the acquisition of Westbrooke and the expansion of operations
in the newer market areas. Because a portion of the net proceeds from the
initial public offering was used to repay a portion of the outstanding balances
under the Company's construction credit facilities, the Company's ratio of
construction loans payable to total capital assets decreased to 55.8% at
September 30, 1998, from 62.5% at December 31, 1997. The equity to total assets
ratio decreased during the nine months, to 35.1% at September 30, 1998, from 40%
at December 31, 1997 due to the acquisition of Westbrooke (see Note 2).
The Company's financing needs depend upon the results of its operations, sales
volume, inventory levels, inventory turnover, and acquisitions. The Company has
financed its operations through borrowings from financial institutions, through
funds from earnings, and, in 1998, from the sale of common stock.
At September 30, 1998, the Company had unused lines of credit for construction
loans totaling approximately $163.6 million of which $19.9 million is available
to draw down.
15
<PAGE>
The Company's rapid growth requires significant amounts of cash. It is
anticipated that future home construction, lot and land purchases and
acquisitions will be funded through internally generated funds and new and
existing borrowing relationships. The Company continuously evaluates its capital
structure and, in the future, may seek to further increase secured debt and
obtain additional equity to fund ongoing operations as well as to pursue
additional growth opportunities.
Except for ordinary expenditures for the construction of homes and, to a limited
extent, the acquisition of land and lots for development and sale of homes, at
September 30, 1998, the Company had no material commitments for capital
expenditures.
Seasonality and Quarterly Results
The homebuilding industry is seasonal, as generally there are more sales in the
spring and summer months, resulting in more home closings in the fall. The
Company operates in the Southwestern and Southeastern markets of the United
States, where weather conditions are more suitable to a year-round construction
process than other areas. The Company also believes its geographic dispersion to
be somewhat counter-cyclical, with adverse economic conditions associated with
certain of its markets often being offset by more favorable economic conditions
in other areas. The seasonality of school terms has an impact on the Company
operations, but it is somewhat mitigated by the fact that many of the Company's
buyers at the higher end of the Company's price range, including Fedrick, Harris
custom homes, no longer have children in school. As a result of these factors,
among others, the Company generally experiences more sales in the spring and
summer months, and more closings in the summer and fall months. Likewise,
Westbrooke has experienced seasonality in its revenues, generally completing
more sales in the spring and summer months and more closings in the fourth
quarter.
The Company historically has experienced, and in the future expects to continue
to experience, variability in revenues on a quarterly basis. Factors expected to
contribute to the variability include, among others: (i) the timing of home
closings; (ii) the Company's ability to continue to acquire land and options on
acceptable terms; (iii) the timing of receipt of regulatory approvals for the
construction of homes; (iv) the condition of the real estate market and general
economic conditions; (v) the cyclical nature of the homebuilding industry; (vi)
prevailing interest rates and the availability of mortgage financing; (vii)
pricing policies of the Company's competitors; (viii) the timing of the opening
of new residential projects; (ix) weather; and (x) the cost and availability of
materials and labor. The Company's historical financial performance is not
necessarily a meaningful indicator of future results and the Company expects its
financial results to vary from project to project from quarter to quarter.
Management Information Systems
The Company utilizes a number of computer information systems in conjunction
with its homebuilding and residential lot development operations. The Company
has converted the majority of its computer information systems to be Year 2000
compliant and expects to be totally complete by the middle of 1999. The Company
is in the process of surveying its significant vendors and suppliers to assess
their state of readiness for the Year 2000. The Company cannot currently
determine to what extent the Year 2000 issue will affect these parties and
consequently, the Company. The financial impact of becoming Year 2000 compliant
has not been and is not expected to be material to the Company's financial
position or results of operations.
Item 3. Changes in Information about Market Risk
No disclosure required.
16
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
No disclosure required.
Item 2. Changes in Securities
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
1. Exhibit 27 - Financial Data Schedule.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEWMARK HOMES CORP.
November 3, 1998 By: /s/ Terry C. White
Date _______________________________________
Terry C. White, Senior Vice President,
Chief Financial Officer,
Treasurer and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE REGISTRANT FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE REGISTRANT'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 3,136
<SECURITIES> 0
<RECEIVABLES> 7,397
<ALLOWANCES> 0
<INVENTORY> 187,548
<CURRENT-ASSETS> 198,081
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 243,722
<CURRENT-LIABILITIES> 21,551
<BONDS> 123,098
0
0
<COMMON> 115
<OTHER-SE> 85,497
<TOTAL-LIABILITY-AND-EQUITY> 243,722
<SALES> 285,160
<TOTAL-REVENUES> 285,160
<CGS> 238,022
<TOTAL-COSTS> 238,022
<OTHER-EXPENSES> 33,872
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,558
<INCOME-PRETAX> 13,272
<INCOME-TAX> 4,977
<INCOME-CONTINUING> 8,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,295
<EPS-PRIMARY> .76
<EPS-DILUTED> .76
</TABLE>
