SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER: 000-23677
NEWMARK HOMES CORP.
(Exact name of Registrant as specified in its charter)
Delaware 76-0460831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Soldiers Field Drive
Sugar Land, Texas 77479
(Address of principal executive offices) (ZIP code)
(281) 243-0100
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
---- ----
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, par value $0.01 11,500,000 shares as of March 31, 2002
2
NEWMARK HOMES CORP.
INDEX
PAGE
----
PART I. Financial Information........................................................ 4
ITEM 1. Financial Statements......................................................... 4
Consolidated Statements of Financial Condition............................... 4
Consolidated Statements of Income............................................ 5
Consolidated Statements of Cash Flows........................................ 6
Notes to the Consolidated Financial Statements............................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 10
ITEM 3. Changes in Information about Market Risk..................................... 15
PART II. Other Information............................................................ 15
ITEM 1. Legal Proceedings............................................................ 15
ITEM 2. Changes in Securities........................................................ 16
ITEM 3. Defaults Upon Senior Securities.............................................. 16
ITEM 4. Submission of Matters to a Vote of Security Holders.......................... 16
ITEM 5. Other Information............................................................ 16
ITEM 6. Exhibits and Reports on Form 8-K............................................. 17
Exhibits..................................................................... 17
Reports on Form 8-K.......................................................... 17
Signatures................................................................... 18
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Newmark Homes Corp. and Subsidiaries
Consolidated Statements of Financial Condition
(In thousands, except share amounts)
(unaudited)
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
ASSETS
Cash and cash equivalents .......................................... $ 11,878 $ 9,719
Inventory .......................................................... 165,746 162,233
Property, premises and equipment, net of accumulated depreciation
of $6,925 and $6,321 in 2002 and 2001, respectively .............. 5,859 5,220
Other assets ....................................................... 8,599 4,841
Goodwill, net of accumulated amortization of $3,136
in 2002 and 2001 ................................................. 42,914 42,914
Westbrooke assets held for sale .................................... 100,993 117,160
-------- --------
Total assets ....................................................... $335,989 $342,087
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities ........................... $ 16,928 $ 15,831
Customer deposits .................................................. 4,519 3,680
Construction loans payable ......................................... 91,377 87,428
Acquisition notes payable .......................................... 3,685 5,434
Other liabilities .................................................. 1,264 4,003
Westbrooke liabilities associated with assets held for sale ........ 60,640 71,800
-------- --------
Total liabilities .................................................. 178,413 188,176
Minority interest in consolidated subsidiaries ..................... 99 99
Commitments and contingencies ...................................... -- --
Stockholders' equity:
Common stock--$.01 par value; 30,000,000 shares
authorized and 11,500,000 shares issued and outstanding ....... 115 115
Additional paid-in capital ...................................... 106,855 106,855
Retained earnings ............................................... 50,507 46,842
-------- --------
Total stockholders' equity ......................................... 157,477 153,812
-------- --------
Total liabilities and stockholders' equity ......................... $335,989 $342,087
======== ========
See accompanying notes.
4
Newmark Homes Corp. and Subsidiaries
Consolidated Statements of Income
(In thousands, except share amounts)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2002 2001
------------ ------------
Revenues ............................................ $ 84,656 $ 95,900
Cost of sales ....................................... 68,571 75,902
------------ ------------
Gross profit ........................................ 16,085 19,998
Equity in earnings from unconsolidated
subsidiaries ...................................... 268 140
Selling, general and administrative expenses ........ (11,685) (12,466)
Depreciation and amortization ....................... (192) (594)
------------ ------------
Operating income .................................... 4,476 7,078
Other income (expense):
Interest expense ................................. (67) (1,075)
Other, net ....................................... 8 (128)
------------ ------------
Income from continuing operations before income
taxes ............................................. 4,417 5,875
Income taxes ........................................ 1,393 2,001
------------ ------------
Income from continuing operations ................... 3,024 3,874
Discontinued operations:
Income from discontinued operations .............. 1,044 1,910
Income taxes ..................................... 403 731
------------ ------------
Income from discontinued operations, net of tax .. 641 1,179
------------ ------------
Net income .......................................... $ 3,665 $ 5,053
============ ============
Earnings per common share (basic and diluted):
From continuing operations ....................... $ 0.26 $ 0.34
From discontinued operations ..................... 0.06 0.10
------------ ------------
Net income ....................................... $ 0.32 $ 0.44
============ ============
Weighted average number of common shares outstanding:
Basic and diluted ................................ 11,500,000 11,500,000
============ ============
See accompanying notes.
5
Newmark Homes Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income .......................................................................... $ 3,665 $ 5,053
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Income from discontinued operations ............................................... (641) (1,179)
Depreciation and amortization ..................................................... 192 594
Net (gain) loss on sale of property, premises and equipment ....................... (3) 46
Equity in earnings from unconsolidated subsidiaries ............................... (268) (140)
Changes in operating assets and liabilities:
Inventory and land held for development, net ................................... (3,514) (5,448)
Receivables .................................................................... (80) (3,405)
Other assets ................................................................... (1,045) (530)
Payable to affiliates .......................................................... 961 3,059
Accounts payable and accrued liabilities ....................................... 739 1,683
Other liabilities .............................................................. 707 (263)
------------ ------------
Net cash provided by (used in) operating activities ............................ 713 (530)
Cash flows from investing activities:
Purchases of property, premises and equipment ....................................... (846) (221)
Proceeds from sales of property, premises and equipment ............................. 17 88
Investment in unconsolidated subsidiaries ........................................... (2,286) (100)
Distributions from unconsolidated subsidiaries ...................................... 333 186
------------ ------------
Net cash used in investing activities .......................................... (2,782) (47)
Cash flows from financing activities:
Proceeds from advances on construction loans payable ................................ 29,460 46,835
Principal payments on construction loans payable .................................... (25,509) (34,812)
Principal payments on acquisition notes payable ..................................... (1,749) (1,216)
Dividends ........................................................................... -0- (6,210)
------------ ------------
Net cash provided by financing activities ...................................... 2,202 4,597
------------ ------------
Net cash provided by operations ........................................................ 133 4,020
Net cash provided by discontinued operations ........................................... 2,026 2,187
------------ ------------
Increase in cash ....................................................................... 2,159 6,207
Cash and cash equivalents, beginning of period ......................................... 9,719 6,173
------------ ------------
Cash and cash equivalents, end of period ............................................... $ 11,878 $ 12,830
============ ============
Supplemental disclosures of cash flow information: Cash paid for:
Interest ............................................................................ $ 1,312 $ 2,671
============ ============
Income taxes ........................................................................ $ 85 $ 33
============ ============
See accompanying notes to the condensed consolidated financial statements.
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
ORGANIZATION
Newmark Homes Corp. and subsidiaries (the "Company") is an 80% owned subsidiary
of Technical Olympic, Inc. ("TOI"). On December 15, 1999, TOI acquired 80% of
the Company in a stock purchase transaction. The Company was formed in December
1994 to serve as a real estate holding company.
The Company's primary subsidiaries are as follows:
SUBSIDIARY NATURE OF BUSINESS
---------- ------------------
Newmark Homes Corporation ("Newmark")................ Designs, builds and markets single-family residential homes
in Texas, Tennessee and North Carolina - formed in 1983
Westbrooke Companies, Inc. ("Westbrooke")............ Designs, builds and markets single-family residential homes
and develops residential lots in South Florida - formed in
1976
Pacific United Development Corporation Develops residential lots in Texas and Tennessee - formed in
("PUDC")............................................. 1993
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The accounting and reporting policies of the Company conform
to accounting principles generally accepted in the United States 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 accounting principles
generally accepted in the United States 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
accounting principles generally accepted in the United States 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 included as part of this 10-Q filing should be
read in conjunction with the financial statements and notes thereto included in
the Company's December 31, 2001 Annual Report on Form 10-K. The accompanying
unaudited consolidated financial statements reflect all adjustments, consisting
primarily of normal recurring items that, in the opinion of the management of
the Company, are considered necessary for a fair presentation of the financial
position, results from operations and cash flows for the periods presented.
Results of operations achieved through March 31, 2002 are not necessarily
indicative of those which may be achieved for the year ended December 31, 2002.
7
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations ("SFAS 141"), and No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized.
The Company adopted SFAS 142 on January 1, 2002. The impairment test of goodwill
performed by the Company at January 1, 2002 indicated no impairment. Application
of the provisions of SFAS 142 by the Company resulted in the elimination of
goodwill amortization expense in the first quarter of 2002. Results reported for
the first quarter of 2001 included after tax goodwill amortization expense of
$0.4 million. Elimination of this amortization expense would have resulted in
net income of $5.4 million for the three months ended March 31, 2001 and an
increase of $0.03 in both basic and diluted earnings per share from the amounts
reported to $0.47.
8
RECLASSIFICATION
Certain reclassifications have been made to conform the prior year's amounts to
the current year's presentation.
NOTE 2. INVENTORY
Inventory balances at March 31, 2002 and December 31, 2001 consist of the
following (in thousands):
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
Lots and land held for development ........ $ 41,591 $ 49,223
Residences completed and under construction 113,223 102,542
Models .................................... 10,932 10,468
------------ ------------
Total ........................... $ 165,746 $ 162,233
============ ============
NOTE 3. CAPITALIZED INTEREST
A summary of interest capitalized in inventory is as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
--------- ---------
Interest capitalized, beginning
of period ............................ $ 2,792 $ 2,063
Interest incurred ....................... 1,094 2,286
Less interest included in:
Cost of sales ........................ 801 1,335
Interest expense ..................... 67 1,075
--------- ---------
Interest capitalized, end
of period ............................ $ 3,018 $ 1,939
========= =========
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company is subject to certain pending or threatened litigation and other
claims. Management, after review and consultation with legal counsel, believes
the Company has meritorious defenses to these matters and that any potential
liability from these matters would not materially affect the Company's
consolidated financial statements.
NOTE 5. CONSOLIDATED JOINT VENTURES
The Company acquired a 75% interest in Silver Oak Trails, L.P., a land
development joint venture for a net initial investment of $2.9 million. The
operations of Silver Oak Trails, L.P. are consolidated with the operations of
the Company.
NOTE 6. SUBSEQUENT EVENT
During March 2002, management of the Company committed to a plan to dispose of
Westbrooke. Pursuant to this plan of disposition, the Company would sell 100% of
the common stock of Westbrooke.
9
On April 8, 2002, the Company signed a definitive agreement for the sale of
Westbrooke to Standard Pacific Corp. ("Standard Pacific") for approximately
$41.0 million in cash. This sale was completed on April 15, 2002. An adjustment
(either upwards or downwards) to the purchase price may occur within 90 days of
the closing date of the sale based on Westbrooke's net income from January 1,
2002 through the closing date. In addition, Standard Pacific satisfied
approximately $54.4 million of Westbrooke's debt that includes approximately
$14.2 million of intercompany liabilities owed to the Company. The Company
expects to realize a gain of approximately $4.9 million that will be reflected
in the second quarter, subject to certain adjustments explained above.
Accordingly, as of March 31, 2002, management has determined that in accordance
with SFAS 144, the criteria to classify the Westbrooke assets as held for sale
were met. Results of Westbrooke's operations have been classified as
discontinued operations, and prior periods have been restated. Included in
income from discontinued operations are revenues of $38.7 million and $36.9
million for the three months ended March 31, 2002 and 2001, respectively.
The following major classes of assets and liabilities have been classified as
held for sale in the accompanying statements of financial condition (in
thousands):
MARCH 31, DECEMBER 31,
2002 2001
------------- ------------
Cash ................................................. $ 6,960 $ 15,103
Inventory ............................................ 87,543 90,540
Property, premises and equipment ..................... 2,415 2,765
Other assets ......................................... 4,075 8,752
------------- ------------
Westbrooke assets held for sale ...................... $ 100,993 $ 117,160
============= ============
Accounts payable and accrued liabilities ............. $ 6,857 $ 10,419
Customer deposits .................................... 7,748 7,671
Consolidated land bank obligations ................... 9,882 13,122
Construction and acquisition loans payable ........... 30,211 36,166
Other liabilities .................................... 5,942 4,422
------------- ------------
Westbrooke liabilities associated with assets held for
sale ............................................... $ 60,640 $ 71,800
============= ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, Section
21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995. Such matters involve risks and
uncertainties, including the Company's exposure to certain market risks, changes
in economic conditions, tax and interest rates, increases in raw material and
labor costs, weather conditions, and general competitive factors that may cause
actual results to differ materially.
RESULTS OF OPERATIONS
The Company designs, builds and sells single-family homes, town homes and
patio homes in five markets in Texas and Tennessee. At March 31, 2002, the
Company operated in 57 communities in its markets and had 486 homes under
construction. The Company is also engaged in residential land
10
acquisition and lot development and at March 31, 2002, the Company owned, or had
under option contracts, 2,467 lots available for future home building.
The Company's predecessor company was founded in Houston, Texas in 1983.
In March 1995, the Company acquired The Adler Companies, Inc., which operated in
southern Florida from 1990 until 2000. In January 1998, the Company acquired
Westbrooke, which has operated in the Miami, Florida area since 1976. With the
acquisition of Westbrooke, the Company wound down the operation of Adler by the
end of 2000. The Company completed its initial public offering of common stock
in March 1998. On December 15, 1999, TOI purchased 80% of the Company's
outstanding common stock from Pacific Realty Group, Inc.
On April 15, 2002, the Company sold all the stock of Westbrooke, its
operations in Florida, to Standard Pacific for $41.0 million in cash, and the
repayment by Standard Pacific of $54.4 million of Westbrooke's debt, including
$14.2 million of intercompany liabilities owed to the Company. The purchase
price is subject to adjustment (either upwards or downwards) within 90 days of
the closing, based on Westbrooke's net income from January 1, 2002 through the
closing date. The following analysis of financial condition and results of
operations provided herein do not include the results of operations of
Westbrooke which has been classified as held for sale in the accompanying
financial statements.
The Company derives its revenues primarily from two sources: (i) sales of
homes and (ii) sales of land. The following table sets forth the Company's
revenue by source and in total for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2002 2001
---------- ----------
SOURCE
Sales of homes..... $ 83,561 $ 95,225
Sales of land...... 1,095 675
---------- ----------
Total .......... $ 84,656 $ 95,900
========== ==========
The Company's principal expenses are (i) the cost of sales and (ii)
selling, general and administrative expenses, or SG&A. Cost of sales reflects
the cost of home construction and land purchases (including, in each case,
capitalized interest and financing costs). SG&A includes administrative costs,
advertising expenses, on-site marketing expenses and commission costs. The
following table sets forth the Company's principal expenses by category and in
total for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
-------------------------
EXPENSES 2002 2001
-------- ---------- ----------
Cost of sales...... $ 68,571 $ 75,902
SG&A............... 11,685 12,466
---------- ----------
Total........... $ 80,256 $ 88,368
========== ==========
11
The following table sets forth by region and in total for the Company the
number of sales contracts executed (net of cancellations), homes closed,
homebuilding revenue, average sales price and backlog in units and sales value
for the periods indicated:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2002 2001
----------- -----------
(Dollars in thousands)
Region:
Texas
Net sales contracts ......... 351 380
Homes closed ................ 240 300
Homebuilding revenue ........ $ 69,080 $ 85,548
Average sales price
per homes closed ............ $ 288 $ 285
Backlog at end
of period, homes ............ 413 447
Backlog at end of
period, sales value ......... $ 110,780 $ 129,861
Mid-Atlantic(1)
Net sales contracts ......... 62 62
Homes closed ................ 42 29
Homebuilding revenue ........ $ 14,481 $ 9,677
Average sales price
per homes closed ............ $ 345 $ 334
Backlog at end
of period, homes ............ 57 58
Backlog at end of
period, sales value ......... $ 19,068 $ 19,700
Total
Net sales contracts ......... 413 442
Homes closed ................ 282 329
Homebuilding revenues ....... $ 83,561 $ 95,225
Average sales price
per home closed ............. $ 296 $ 289
Backlog at end of period,
homes ....................... 470 505
Backlog at end of period,
sales value ................. $ 129,848 $ 149,561
(1) Consists of the Company's operations in Tennessee and North Carolina.
12
The following table sets forth certain historical operating data for the
Company as a percentage of revenues:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2002 2001
---------- ----------
Cost of sales ...................... 81.0% 79.1%
Gross profit ....................... 19.0% 20.9%
SG&A ............................... 13.8% 13.0%
Income from continuing operations
before income taxes .............. 5.2% 6.1%
Income taxes(1) .................... 31.5% 34.1%
Net income ......................... 4.3% 5.3%
(1) As a percentage of income from continuing operations before income taxes.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Revenues decreased by $11.2 million, or 11.7%, to $84.7 million in the three
months ended March 31, 2002 from $95.9 million in the three months ended March
31, 2001. This decrease was primarily due to a decrease in the number of homes
closed offset in part by an increase in the average selling price of homes
closed and an increase in revenues from land sales. The number of homes closed
declined by 47 homes, or 14.3%, to 282 in the three months ended March 31, 2002
from 329 in the three months ended March 31, 2001 due to general market
conditions. The average selling price of homes closed increased by $7,000, or
2.4%, to $296,000 in the three months ended March 31, 2002 from $289,000 in the
three months ended March 31, 2001. Revenue from home sales decreased by $11.6
million or 12.2%, to $83.6 million in the three months ended March 31, 2002 from
$95.2 million in the three months ended March 31, 2001, primarily as a result of
a decline in homes closed in Texas. Revenue from land sales increased by $0.4
million, or 62.2%, to $1.1 million in the three months ended March 31, 2002 from
$0.7 million in the three months ended March 31, 2001, primarily as a result of
an increase in land sold in Texas.
New net sales contracts decreased by 29 homes, or 6.6%, to 413 homes for the
three months ended March 31, 2002 from 442 homes for the three months ended
March 31, 2001 due to the general economic conditions in the Company's markets.
The dollar amount of new net sales contracts decreased by $12.6 million, or
9.8%, to $115.7 million in the three months ended March 31, 2002 from $128.3
million in the three months ended March 31, 2001.
The Company operated in 57 communities at March 31, 2002 compared to 51
communities at March 31, 2001. As of March 31, 2002, the Company's backlog of
sales contracts was 470 homes, a 6.9% decrease from 505 homes at March 31, 2001.
Cost of sales decreased by $7.3 million, or 9.7%, to $68.6 million, in the three
months ended March 31, 2002 from $75.9 million in the three months ended March
31, 2001, primarily due to a decrease in the number of homes closed. As a
percentage of revenues, cost of sales for the three months ended March 31, 2002
increased to 81.0% from 79.1% in the three months ended March 31, 2001. This
increase in cost of sales as a percentage of revenues was due to a shift in the
product mix of homes closed to lower margin homes. Cost of home sales decreased
by $7.7 million, or 10.2%, to $67.6 million in the three months ended March 31,
2002 from $75.3 million in the three months ended March 31, 2001, primarily due
to a decline in homes closed in Texas. Cost of land sales increased by $0.4
million, or 66.7%, to $1.0 million in the three months ended March 31, 2002 from
$0.6 million in the three months ended March 31, 2001, primarily due to an
increase in land sales in Texas.
13
Equity in earnings from unconsolidated subsidiaries, which are primarily
earnings from certain mortgage origination and title operations in which Newmark
has an ownership interest of less than 50%, increased by $0.2 million, or
approximately 100%, to $0.3 million in the three months ended March 31, 2002
from $0.1 million in the three months ended March 31, 2001 due to increased
earnings from certain financial service operations and land development joint
ventures.
SG&A decreased by $0.8 million, or 6.3%, to $11.7 million in the three months
ended March 31, 2002 from $12.5 million in the three months ended March 31,
2001. As a percentage of revenues, SG&A remained relatively constant, increasing
to 13.8% in the three months ended March 31, 2002 from 13.0% in the three months
ended March 31, 2001.
Income from continuing operations before income taxes decreased by $1.5 million,
or 24.8%, to $4.4 million in the three months ended March 31, 2002 from $5.9
million in the three months ended March 31, 2001, primarily due to a decline in
homes closed in Texas.
The Company's provision for income taxes decreased as a percentage of income
from continuing operations before taxes to 31.5% in the three months ended March
31, 2002 compared to 34.1% in the three months ended March 31, 2001. The
decrease was primarily a result of the timing difference associated with the
deductibility of the amortization of goodwill for tax purposes and the result of
no amortization of goodwill for the three months ended March 31, 2002 in
accordance with Statement of Financial Accounting Standards No. 142.
Net income decreased by $1.4 million, or 27.5%, to $3.7 million, in the three
months ended March 31, 2002 from $5.1 million for the three months ended March
31, 2001 primarily due to the decrease in home closings as described above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's financing needs historically have varied based primarily on its
operations, sales volume, inventory levels, inventory turnover and land
acquisitions. The Company's cash needs historically have been provided by cash
flows from operations, and secured borrowings from financial institutions. At
March 31, 2002, the Company had cash and cash equivalents of $11.9 million.
Inventories (including finished homes and construction in progress, developed
lots and other land) at March 31, 2002 were $165.7 million, an increase of $3.5
million from $162.2 million at December 31, 2001. This increase results from
general growth in the Company's business. The Company's ratio of construction
loans payable to total assets was 26.5% and 25.6% at March 31, 2002 and at
December 31, 2001, respectively. The ratio of stockholders' equity to total
assets increased during the three months to 46.9% at March 31, 2002 from 45.0%
at December 31, 2001, primarily due to an increase in equity from earnings.
At March 31, 2002, the Company had lines of credit commitments for construction
loans totaling approximately $150.0 million, of which $15.1 million was
available to draw down.
The Company's growth requires significant amounts of cash. It is anticipated
that future home construction, lot and land purchases and acquisitions will be
funded through internally generated funds and new and existing borrowing
relationships. The Company continuously evaluates its capital structure and, in
the future, may seek to further increase secured debt and obtain additional
equity to fund ongoing operations as well as to pursue additional growth
opportunities.
Except for ordinary expenditures for the construction of homes and, to a limited
extent, the acquisition of land and lots for development and sale of homes, at
March 31, 2002, the Company had no material commitments for capital
expenditures.
14
SEASONALITY AND QUARTER RESULTS
The homebuilding industry tends to be seasonal, as generally there are more
homes sold in the spring and summer months when the weather is milder, 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 parts of the country.
The Company also believes its geographic diversity 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
markets. The school term has an impact on the Company's operations because, in
general, homebuyers do not move during the school term. The impact of the school
term on the Company's operations is somewhat mitigated by the fact that many of
the Company's buyers at the higher end of the Company's price range 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.
ITEM 3. CHANGES IN INFORMATION ABOUT MARKET RISK
The Company is exposed to market risk primarily related to potential adverse
changes in interest rates on its construction loans. The interest rates relative
to the Company's construction loans fluctuate with the prime and LIBOR lending
rates, both upwards and downwards. The Company does not enter into, or intend to
enter into, derivative financial instruments for trading or speculative
purposes.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The Company does not believe that the ultimate
resolution of these matters will have a material adverse effect on the financial
condition or results of operations of the Company.
Subsequent to the Company's press release on March 6, 2001 regarding the
possibility of a merger with Engle Holdings Corp ("Engle"), the Company was
notified of the filing of two class action suits challenging any transaction
between Newmark and Engle as a breach of fiduciary duty. The first case was
filed in the District Court, Clark County, Nevada and is entitled: Cause No.
A431555; Barry Feldman v. Michael J. Poulos, Yannis Delikanakis, Michael S.
Stevens, Constantinos Stengos, Georgios Stengos, Andreas Stengos, James M. Carr,
William A. Hasler, Larry D. Horner, Lonnie M. Fedrick, Engle Holdings Corp. and
Newmark Homes Corp. The second case was filed in the 80th Judicial District
Court of Harris County, Texas and is entitled: Cause No. 2001-14194; and Michael
Gormley v. Michael J. Poulos, Yannis Delikanakis, Michael S. Stevens,
Constantinos Stengos, Georgios Stengos, Andreas Stengos, James M. Carr, William
A. Hasler, Larry D. Horner, Lonnie M. Fedrick, Engle Holdings Corp. and Newmark
Homes Corp.
The first class action lawsuit filed in Nevada has been stayed indefinitely
pending the resolution of the second class action lawsuit filed in Texas. The
Company's obligation to answer the complaint in the second class action lawsuit
was deferred until the plaintiffs request in writing that the Company answer the
complaint pursuant to an agreement with the plaintiffs.
Subsequent to the filing of the class action lawsuit in Texas, two intervenors
filed interventions in the Texas class action: Intervention by Plaintiff Barry
Feldman; Cause No. 2001-14194; Michael Gormley, on behalf of himself and all
others similarly situated v. Michael J. Poulos, et al; in the 80th Judicial
District Court Harris County, Texas, filed March 23, 2001; and Intervention by
Plaintiff William F. Ring; Cause
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No. 2001-14194; Michael Gormley, on behalf of himself and all others similarly
situated v. Michael J. Poulos, et al; in the 80th Judicial District Court Harris
County, Texas, filed March 29, 2001.
In March 2002, the Company and Engle reached an agreement in principle with
representatives for the plaintiffs for the proposed settlement of the class
actions, as well as the interventions. Under the terms of the settlement, the
Company has agreed to pay the plaintiffs' attorneys' fees and expenses in an
amount not to exceed $350,000 in the aggregate. The settlement is subject to a
number of conditions, including the closing of the Merger, providing notice to
the class, conducting confirmatory discovery, executing a definitive settlement
agreement and obtaining final approval by the court. We believe the settlement
will be approved and implemented, but there can be no assurance that will be the
case.
ITEM 2. CHANGES IN SECURITIES
None. No disclosure required.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None. No disclosure required
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None. No disclosure required
ITEM 5. OTHER INFORMATION
RECENT DEVELOPMENTS
On April 8, 2002, the Company announced that it had entered into a definitive
merger agreement with Engle and TOI, the sole stockholder of Engle. Under
the terms of the merger agreement, Engle will be merged with and into the
Company, which will be the surviving entity following the merger and will change
its name to "Technical Olympic USA, Inc." In the merger, each outstanding share
of Engle's common stock will be converted into 1,724.08294 shares of the
Company's common stock.
The merger is contingent upon certain closing conditions, including the closing
of the proposed refinancing of the Company's outstanding debt and Engle's
outstanding debt, as well as the assumption of a $71 million obligation of
TOI incurred in connection with its acquisition of Engle Homes, Inc. in
November 2000. Pursuant to the proposed refinancing, the Company expects
to (1) enter into a $175 million credit facility, (2) issue $350 million
aggregate principal amount of one or more series of senior and senior
subordinated notes in a private placement, (3) repay approximately $47.1 million
of the Company's outstanding debt, (4) repay approximately $215.8 million of
Engle's outstanding debt, and (5) repay the $71 million obligation of TOI.
On April 9, 2002, the Company filed an information statement with the SEC
related to the merger of the Company and Engle. In connection with the merger,
the Company proposes to (i) amend its certificate of incorporation to increase
the number of authorized shares of common stock from 30,000,000 to 67,000,000;
(ii) increase the maximum number of authorized directors on its board from 10 to
15 directors; and, (iii) change the corporate name to "Technical Olympic USA,
Inc.". The Company expects the merger to be completed in the second quarter of
2002, but there can be no assurance that the proposed merger will be
consummated.
On April 15, 2002, the Company sold all the stock of Westbrooke, its operations
in Florida, to Standard Pacific for $41.0 million in cash and the repayment by
Standard Pacific of $54.4 million of Westbrooke's debt, including $14.2 million
of intercompany liabilities owed to the Company. The purchase price is subject
to adjustment (either upwards or downwards) within 90 days of the closing, based
on Westbrooke's net income from January 1, 2002 through the closing date. In
connection with the merger, the Company sold Westbrooke to eliminate operating
redundancies in its South Florida markets and to strengthen its financial
position.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit Number Exhibit
-------------- -------
None
(b) Reports on Form 8-K.
None - No disclosure required.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWMARK HOMES CORP.
May 14, 2002 By: /s/ Terry C. White
--------------------------------------
Terry C. White, Senior Vice President,
Chief Financial Officer, Treasurer
and Secretary
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