UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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 (IRS Employer Identification No.)
incorporation or organization)
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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, par value $.01
NASDAQ National Market
(name of each exchange on which registered)
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]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K [X]
As of March 8, 2002, Registrant had outstanding 11,500,000 shares of common
stock. Of the total shares outstanding, 2,204,700 shares of common stock were
held by non-affiliates of the Registrant, having an
aggregate market value on date of $38,736,579 (based on the closing sales price
on the Nasdaq National Market).
Documents incorporated by reference: None
PART I
ITEM 1. BUSINESS
GENERAL
Newmark Homes Corp. (the "Company"), a Delaware corporation,
is the holding company whose subsidiaries operate in the home building industry
under the names Newmark Home Corporation ("Newmark"), Westbrooke Communities,
Inc. and affiliated entities (collectively, "Westbrooke") and The Adler
Companies, Inc. ("Adler"). The Company also owns a lot development company,
Pacific United Development Corp. We design, build and sell single-family homes,
town homes and patio homes in seven markets in Texas, Florida, Tennessee and
North Carolina. At December 31, 2001, we operated in 67 communities and had 725
homes under construction. We are actively engaged in residential land
acquisition and lot development and at December 31, 2001, owned or had under
option contracts 3,847 lots available for future homebuilding.
The homes we market under our various brand names generally
differ in terms of the locations offered, price, size and degree of
customization. We market homes under the names Fedrick, Harris Estate Homes,
Newmark(R), and Marksman Homes in our markets in Texas, Tennessee and North
Carolina. In Florida, we market homes under the Westbrooke Companies name only.
The homes we market under the Fedrick, Harris Estate Homes name provide the
highest degree of customization and typically range in size from 3,500 square
feet to over 7,000 square feet, with an average sales price of $483,799 for
homes closed during the year ended December 31, 2001. Generally, Newmark(R)
homes range in size from 1,700 square feet to over 4,500 square feet, with an
average sales price of $280,556 for homes closed during the year ended December
31, 2001. Marksman Homes range in size from 1,550 square feet to over 2,450
square feet, with an average sales price of $165,426 for homes closed during the
year ended December 31, 2001. Westbrooke Companies homes range in size from
1,350 square feet to over 3,500 square feet, with an average sales price of
$213,857 for homes closed during the year ended December 31, 2001.
We believe we compete favorably with other homebuilders in our
markets by offering a broad selection of homes with a wide range of amenities
and significant design customization options. We provide homebuyers the ability
to select various design features in accordance with their personal preferences.
Although most design modifications are significant to the homebuyer, they
typically involve relatively minor adjustments that allow us to maintain
construction efficiencies and achieve greater profitability due to increased
sales prices and margins. As a high-volume builder, we believe our homes offer
more value than those offered by local, lower-volume custom builders, primarily
due to our effective purchasing, construction and marketing programs resulting
from economies of scale. We believe that our ability to meet the design tastes
of prospective homebuyers at competitive prices enables us to compete
effectively with many of the other builders in our markets.
Our predecessor company was founded in Houston, Texas in 1983.
In March 1995, we acquired The Adler Companies, Inc., which has operated in
southern Florida since 1990. In January 1998, we acquired Westbrooke, which has
operated in south Florida since 1976. We completed our initial public offering
of common stock in March 1998. On December 15, 1999, Technical Olympic, Inc.
(formerly known as Technical Olympic USA, Inc.) ("Technical Olympic") purchased
9,200,000 shares of our common stock from Pacific Realty Group, Inc. ("Pacific"
or "Pacific USA"), representing 80% of our outstanding common stock. In March
2001, we changed our state of incorporation from Nevada to Delaware.
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We have achieved annual profitability due to both innovative
and disciplined approaches to home construction, land acquisition and
development, as well as lot purchases. The Company believes that the tenure and
experience of its officers and key employees and its disciplined approach to
business have been key factors to the Company's success. There has been
virtually no turnover among officers and key employees at either Newmark and
Westbrooke since their inception.
Our principal executive offices are located at 1200 Soldiers
Field Drive, Sugar Land, Texas 77479, and our phone number is (281) 243-0100.
The Company's divisions in Houston, Austin, Dallas/Ft. Worth, San Antonio,
Nashville, Charlotte and Greensboro/Winston-Salem are managed from the Houston
location. The Company's Florida operations are primarily the responsibility of
Westbrooke management with support from, and oversight of, the Company's
corporate office.
On March 6, 2001, the Company announced it is considering the
possible merger of the Company with Engle Holdings Corp. The Special Committee
of the Company's four independent directors is reviewing and will make a
recommendation on the transaction of the Company's full board. The Special
Committee has engaged legal advisors and investment banks to assist in the
analysis and evaluation of the terms and fairness of the proposed merger. There
are no assurances that the Special Committee will recommend the merger or that
such a merger will be consummated. Any merger would also be subject to the
execution of a definitive agreement and certain regulatory and other approvals
as well as the approval of various lenders of Engle Holdings Corp., the Company
and Technical Olympic. If the merger is consummated, it is contemplated that
shares of Engle Holdings Corp. would be exchanged for shares of the Company.
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 that focuses on the following elements:
Expand in existing and new markets. We have successfully
expanded operations in new and existing markets through internal growth,
start-up operations, and selected acquisitions. Within our existing markets, we
intend to further expand our market share by increasing the number of
residential homes we build, thereby leveraging our management structure and
enhancing profitability by achieving further economies of scale. Over time, we
also intend to further geographically diversify by expanding into new markets
that have favorable characteristics, including significant single-family home
permit activity, substantial job growth, a diversified economy and an
availability of strong management with local market expertise. We believe this
diversification will enable us to minimize our exposure to adverse conditions in
individual local markets.
Selectively acquire and manage lot inventory. We intend to
continue to pursue a lot acquisition and inventory management policy that is
designed to enhance profitability and return on capital while minimizing the
risks associated with investments in lots. We intend to continue to identify and
acquire attractive locations to support our homebuilding operations in our
markets and offer our customers a variety of communities with diverse products
and prices. Wherever possible, we intend to continue to acquire lots to support
our homebuilding operations through options to purchase rather than outright
purchases. We generally also will seek to acquire improved residential lots
ready for construction in order to minimize lot delivery issues and timing
risks. We also expect to continue to acquire tracts of land to support our
homebuilding operations that require site improvements before the start of home
construction when we believe opportunities available outweigh the development
risks and in markets demanding land development due to a shortage of available
completed lots. In addition, we intend to continue to pursue partnership or
joint venture agreements with other major homebuilders and investors, to
purchase and develop well located parcels of land.
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Offer a broad selection of products. We intend to continue to
offer a broad selection of homes appealing to a diverse customer base in order
to attract a large portion of the potential homebuyers in the markets we serve.
Our homes currently range in size from 1,350 square feet to over 7,000 square
feet and have an average price of $263,073 as of December 31, 2001. We intend to
continue targeting "first-time" homebuyers, "move-up" homebuyers, homebuyers who
are being relocated to a new city or state, second home seasonal buyers and
older homebuyers with grown children (so-called "empty-nesters") and, to a
lesser extent, we also intend to continue building and marketing larger, more
expensive residences to the luxury, custom homebuyer segment.
Maintain stringent cost controls. We believe that a policy of
aggressive cost control is a key factor in maintaining and enhancing our
profitability. Among others, we seek to control our costs and minimize our risks
by:
o reducing construction cycle time for our homes;
o obtaining entitlements prior to purchasing land;
o using subcontractors to perform home construction and site
improvement work on a fixed price basis;
o minimizing inventory of unsold homes by closely monitoring
sales rates and changing market conditions;
o using our position as a leading homebuilder to obtain
favorable pricing from subcontractors and volume discounts on
construction materials from suppliers; and
o developing and maintaining information systems that allow us
to monitor land acquisitions, homebuilding production,
scheduling and budgeting on a daily basis.
Provide superior quality and customer service. We intend to
continue to focus on building high quality homes and achieving high customer
satisfaction because we believe they have been, and will continue to be,
critical to our success. We will continue to provide prompt, courteous responses
to homebuyers' needs throughout the homebuying process and after the closing
because we believe it reduces post-closing repair costs, enhances our reputation
for quality and service, and further leads to significant repeat and referral
business.
MARKETS
We build homes in seven markets in Texas, Florida, Tennessee
and North Carolina. We selected these markets based on a number of factors,
including regional economic conditions, projected job growth, land availability,
the local land development process, consumer tastes, competition from other
builders of new homes and secondary home sales activity. We continue to evaluate
new markets for possible entry where we believe there are attractive
opportunities for us.
4
The table below shows, by region, our sales contracts executed (net of
cancellations), the number of home sales we closed, our homebuilding revenue and
our average home sales price, in each case for the year ended December 31, 2001,
and our backlog at December 31, 2001:
MARKET REGION DATA
(dollars in thousands)
Backlog
Net Sales Homebuilding Average ------------
Region Contracts Closings Revenue Sales Price Homes Sales Value
------ ------------ ------------ ------------ ------------ ------------ ------------
Texas 1,189 1,254 $ 361,321 $ 288.1 302 $ 85,697
Florida 879 919 196,535 213.9 413 95,147
Mid-Atlantic(1) 169 157 55,105 351.1 37 11,978
------------ ------------ ------------ ------------ ------------ ------------
Total 2,237 2,330 $ 612,961 $ 263.1 752 $ 192,822
============ ============ ============ ============ ============ ============
(1) This region consists of our operations in North Carolina and
Tennessee.
Our sales backlog at December 31, 2001 was 752 units compared
to 845 units at December 31, 2000. Backlog represents home purchase contracts
that have been executed and for which earnest money deposits have been received,
but for which the sale has not yet closed. Home sales are not recorded as
revenues until the closings occur. Historically, substantially all of the homes
in our backlog at any given point in time have been sold in the following
12-month period. For example, 95% of the homes in our backlog at December 31,
2000 were closed in the year ended December 31, 2001, and 96% and 100% of the
homes in our backlog at December 31, 1999 and 1998, respectively, were closed in
the subsequent calendar year. Although cancellations can disrupt anticipated
home closings, we believe that cancellations have not had a material negative
impact on our operations or liquidity during the last several years. We attempt
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.
The table below shows our homebuilding revenues by region for
the years ended December 31, 2001, 2000 and 1999.
YEAR ENDED DECEMBER 31,
--------------------------------------------
SOURCE 2001 2000 1999
------ ------------ ------------ ------------
(Dollars in Thousands)
Texas $ 361,321 $ 387,188 $ 332,584
Florida 196,535 193,918 108,100
Mid-Atlantic(1) 55,105 53,381 36,422
------------ ------------ ------------
Total(2) $ 612,961 $ 634,487 $ 477,106
============ ============ ============
(1) This region consists of our operations in North Carolina and
Tennessee.
(2) Does not include revenues from land sales of $17.0 million,
$6.0 million, and $14.6 million in 2001, 2000, and 1999,
respectively.
LAND POLICIES AND POSITIONS
To support our homebuilding operations, we acquire (i) lots
that have sewage systems, drainage and other similar infrastructure in place (we
refer to these lots as "developed lots"); and (ii) larger tracts of land that
only have the necessary approvals for the construction of sewage systems,
drainage and other similar infrastructure (we refer to these tracts of land as
"entitled land"). A developed lot is ready to have a house constructed on it.
Before we build a house on entitled land, we must construct sewage systems,
drainage and other infrastructure.
5
We generally acquire multiple developed lots that are located adjacent
to or near each other in a community. This enables us to build and market our
homes more cost efficiently than if the lots were located in many separate
locations. Historically, we have been able to acquire a majority of our
developed lots through options rather than firm purchase contracts due to the
awareness of our brand names among developers and the willingness of developers
in our markets to option available lots. With the continuing strength in the
housing sector, increasingly we have been required to acquire more of our
developed lots under firm purchase contracts.
We also acquire entitled land to develop lots through both options and
firm purchase contracts. Before we enter into these options or contracts, we
conduct extensive due diligence using our local experience and expertise,
including on-site inspection and soil testing, and we confirm that the land has
the required approvals for sewage systems, drainage and other infrastructure
necessary for us to develop the lots and build homes on them. Occasionally, we
sell a portion of the entitled land we purchase and develop to third-party
builders to provide a source of additional revenue and to reduce the risk we
incur by holding these lots in inventory.
Based on the results of market research and analysis performed by and
for the Company, the Company plans to focus its development activity primarily
on the following factors: regional economic conditions, projected job growth,
land availability, the local land development process, consumer tastes,
competition from other builders of new homes and secondary home sales activity.
The table below shows our lot inventory by region for the years ended
December 31, 2001, 2000, 1999.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
SOURCE 2001 2000 1999
------ --------------- -------------- ---------------
Texas 2,204 2,398 1,724
Florida 1,228 1,475 1,864
Mid-Atlantic 415 407 341
--------------- -------------- ---------------
Total(1) 3,847 4,280 3,929
=============== ============== ===============
(1) Includes 2,122, 2,343, and 2,559 lots under option contracts
as of December 31, 2001, 2000, and 1999, respectively.
DESIGN
Our home designs and floor plans are prepared by outside
architects we hire in each of our markets to appeal to the local tastes and
preferences of the community. Using our internal design department and
DesignWizard(R), a proprietary interactive computer program developed to allow
our customers to design a custom home to meet their individual needs, we have
the capability to change our 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 us to maintain
construction efficiencies and result in greater profitability due to increased
margins.
CENTRALIZED PURCHASING
The Company utilizes centralized purchasing to leverage its
purchasing power into volume discounts, a practice that 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 Weyerhaeuser, National Gypsum
Company, General Electric, Rheem Manufacturing, Dupont Corian, Moen, Inc., Owens
Corning, Mohawk Industries, Dow Chemical, Royal Baths, Ingersoll-Rand and
Sherwin-Williams for lumber, sheetrock, appliances, heating and air
conditioning, counter tops, bathroom fixtures, roofing and insulation products,
floor coverings, and other housing
6
components. Other major materials, such as concrete and brick, are also
centrally purchased to obtain volume discounts. There are no minimum purchase
requirements for these arrangements.
CONSTRUCTION
Subcontractors perform substantially all of our construction
work. Our 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 at a fixed price in a
workmanlike manner. In addition, under these contracts the subcontractor
provides us with standard indemnifications and warranties. Typically, we work
with the same subcontractors within each city, which provides us with a stable
and reliable work force and better control over the costs and quality of the
work performed. Although we compete with other homebuilders for qualified
subcontractors, we have established long-standing relationships with many or our
subcontractors.
We typically complete the construction of a home within four
to five months. Construction time for our homes depends on weather, availability
of labor, materials, supplies and other factors. We do not maintain significant
inventories of construction materials, except for materials related to work in
progress for homes under construction. Generally, the construction materials
used in our operations are readily available from numerous sources. We have
favorable price arrangements or contracts with suppliers of certain of our
building materials, but we are not under any specific purchasing requirements.
In recent years, we have not experienced any significant delays in construction
due to shortages of materials.
MARKETING AND SALES
Homebuilding is a local market business, thus, we build and
market different types of homes to meet the needs of different homebuyers and
the needs of different markets. For example, we target "first-time" homebuyers,
"move-up" homebuyers who want to purchase a home that is larger and more
expensive than their current home, homebuyers who are being relocated to a new
city or state, and homebuyers who want to move into a smaller and less expensive
home. We employ a variety of marketing techniques to attract potential
homebuyers through numerous avenues including our Internet web site, extensive
telemarketing and advertising, and other marketing programs. We advertise on
television, in newspapers and other publications, through brochures and
newsletters, on billboards and in brochures and newsletters produced and
distributed by real estate and mortgage brokers. Certain of our suppliers
participate in our advertising and promotional materials, either through
co-branding, cost-sharing or through rebates. We believe that the availability
of DesignWizard(R) is also effective in attracting potential homebuyers because
of the ease with which it allows potential customers to design a home to meet
their individual needs.
We typically conduct home sales from sales offices located in
furnished model homes used in each community. At December 31, 2001, we conducted
our marketing from 119 model homes. Our commissioned sales personnel assist
prospective buyers by providing them with floor plans, price information, tours
of model homes and information on the available options and other custom
features. We provide our sales personnel with extensive training and we keep
them updated as to the availability of financing, construction schedules and
marketing and advertising plans to facilitate their marketing and sales
activities. We supplement our in-house training program with training by outside
sales and marketing consultants. We have also formed sales teams comprised of a
sales person and other employees, who provide sales support and motivation.
In addition to using model homes, we enhance our marketing and
sales activity with a limited number of speculative homes, which we build in
most communities in advance of any specific customer order or contract. We
construct speculative homes to satisfy the requirements of relocated buyers,
"move-up" homebuyers, and other buyers who need completed homes prior to the
completion of the typical four to five month construction period. The number of
speculative homes we build in any given community is
7
influenced by local market factors, such as new employment opportunities,
significant job relocations, housing demand and the length of time we have built
in the market.
We market and sell homes through commissioned sales personnel
and in cooperation with independent real estate brokers. Because a significant
portion of our sales originate from independent real estate brokers, we sponsor
a variety of programs and events, including breakfasts, contests and other
events to ensure that the brokers have the level of familiarity with our
communities, homes and financing options necessary to successfully market our
homes. We also offer other incentives to brokers to actively market our homes.
Sales of our homes generally are made pursuant to a standard
sales contract that is tailored to the requirements of each jurisdiction.
Generally, our sales contracts require a down payment of a fixed amount
(typically between $1,000 and $5,000) on our less expensive homes and as a
percentage of the sales price (typically 5% to 10%) on our more expensive
customized homes. The contract includes a financing contingency which permits
the customer to cancel in the event mortgage financing at prevailing interest
rates cannot be obtained within a specified period, typically four to six weeks
from the signing, and may include other contingencies, such as the prior sale of
a buyer's existing home. We estimate that the average period between the
execution of a sales contract for a home and closing is approximately four to
eight months for presold homes.
TITLE AND FINANCIAL SERVICES
We provide title insurance and mortgage origination services
through our financial services businesses. In 1997, we acquired a 49% interest
in Pacific Title, L.C. ("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 us in Texas. We assume no title insurance risk
associated with these title policies. Stewart Title Company owns the balance of
the interests of Pacific Title, and our capital in not at risk in connection
with this partnership beyond our limited partner interest.
In 2001, we acquired a 49% limited partnership interest in
Universal Land Title of South Florida, Ltd., which serves as a title insurance
agent and provides title insurance policies and closing services to purchasers
of homes we build and sell in Florida. We assume no title insurance risk
associated with these title policies. Affiliates of Technical Olympic own the
balance of the partnership, and our capital is not at risk in connection with
this partnership beyond our limited partner interest.
In 2001, we also acquired a 49.99% limited partnership
interest in Technical Mortgage, L.P., a mortgage origination company. TM
Investments LLC and Preferred Home Mortgage Company ("PHMC"), both of which are
affiliates of Technical Olympic, own the balance of the partnership. Our capital
is not at risk in connection with these mortgages beyond our limited partner
interest.
CUSTOMER SERVICE AND QUALITY CONTROL
Our operating divisions are responsible for both pre-closing
quality control inspections and responding to customer's post-closing needs. We
believe that the prompt, courteous response to homebuyers' needs during and
after construction reduces post-closing repair costs, enhances our reputation
for quality and service and ultimately leads to significant repeat and referral
business. We conduct pre-closing inspections with homebuyers immediately before
closing. In conjunction with the inspections, a list of items for home
completion is created and outstanding issues are promptly addressed.
An integral part of our customer service program includes
post-closing interviews. In most markets, a customer service representative is
sent into each home within 45 days of closing to evaluate the homeowners'
satisfaction with their new home, as well as their experience with our sales
personnel, construction department, and title and mortgage services. Typically,
a year after we sell a house we conduct
8
another interview with the homeowner to determine the level of their continued
satisfaction. These interviews provide us with a direct link to the customer's
perception of the entire buying experience as well as valuable feedback on the
quality of the homes we deliver and the services we provide.
SEASONALITY OF OPERATIONS
The homebuilding industry generally is seasonal, as there are
more sales in the spring and summer months when the weather is good, resulting
in more home closings in the fall. We operate primarily in the south, where
weather conditions are more suitable to a year-round construction process than
in other parts of the country. The seasonality of school terms also affects our
operations, but this seasonality is somewhat reduced by the fact that many of
our buyers no longer have children in school.
Our revenues may fluctuate from quarter to quarter as a result
of a number of factors, including, (i) the timing and price mix of home
closings; (ii) our 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 economic conditions
generally; (v) the cyclical nature of the homebuilding industry; (vi) prevailing
interest rates and the availability of mortgage financing; (vii) pricing
policies of our competitors; (viii) the timing of the opening of new residential
projects; (ix) weather; and (x) the cost and availability of materials and
labor. Our historical financial performance is not necessarily a meaningful
indicator of our future results and we expect our financial results to vary from
quarter to quarter.
WARRANTY PROGRAM
We provide a two year limited warranty of workmanship and
materials with each of our homes (in Florida the warranty generally is limited
to one-year, which is the prevailing time period for such a warranty in that
market). We subcontract homebuilding work to subcontractors who provide us with
an indemnity and a certificate of insurance before receiving payments for their
work and, therefore, claims relating to workmanship and materials are the
primary responsibility of our subcontractors. In all markets, except Florida, we
provide an additional eight-year limited homeowners' warranty covering major
structural defects through an agreement with the Residential Warranty
Corporation, an unaffiliated insurance company. An appropriate warranty reserve
is established to cover anticipated warranty expenses not borne by our
subcontractors. Our historical experience is that warranty expenses generally
are within the reserve we have established. We generally have not had any
material litigation or claims regarding warranties or latent defects with
respect to construction of homes. Current claims and litigation are expected to
be substantially covered by our reserve or insurance. After we sell a house, all
warranty requests are processed through our customer service departments located
in each of our markets. In most instances, a customer service manager inspects
the warranty request within 48 hours of receipt. If a warranty repair is
necessary, the construction superintendent who built the particular home manages
and supervises the repair to ensure that the appropriate subcontractor takes
prompt and appropriate corrective action.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
We are subject to extensive and complex laws and regulations
that affect the development and homebuilding process, including laws and
regulations related to zoning, permitted land uses, levels of density, building
design, elevation of properties, water and waste disposal, use of open spaces
and the protection of health and the environment. We must also obtain permits
and approvals from local authorities to complete residential development or home
construction. Our mortgage financing and title insurance operations are subject
to numerous federal, state and local laws and regulations, including applicable
insurance laws and regulations. Failure to comply with these requirements can
lead to administrative enforcement actions, the loss of required licenses and
claims for monetary damages.
9
COMPETITION AND MARKET FORCES
The development and sale of residential properties is a highly
competitive business with many competitors. We compete in each of our markets
with numerous national, regional and local builders. Builders of new homes
compete for homebuyers, as well as for desirable properties, raw materials and
reliable, skilled subcontractors. We also compete with resales of existing
homes, available rental housing and, to a lesser extent, with resales of
condominiums.
We believe we generally compare favorably to other builders in
the markets in which we operate, due primarily to:
o our experience within our geographic markets;
o the ability of our local managers to identify and quickly
respond to local market conditions; and
o our reputation for service and quality.
Our mortgage origination and title operations focus primarily
on providing services to buyers of our homes. Thus, although we compete with
other third-party providers of such financial services with respect to
purchasers of our homes, we generally do not compete with such providers
directly, many of whose sole business involves these operations with respect to
homes we do not build. We believe marketing these services to our homebuilding
clients provides us with a competitive advantage compared to those providers
marketing such services without an established relationship.
EMPLOYEES
At December 31, 2001, we employed 492 persons, of whom 125
were sales and marketing personnel, 221 were executive, administrative and
clerical personnel, and 146 were construction personnel. None of our employees
are covered by collective bargaining agreements. We believe our relations with
our employees are good.
ITEM 2. PROPERTIES
We own a 19,000 square foot facility in Sugar Land, Texas for
our Houston homebuilding operations and a design center, which allows a
prospective homebuyer to view samples of some of the products and features we
offer in our homes. We also own a 16,000 square foot facility in Sugar Land,
Texas that we intend to sell in the near future. We lease an aggregate of
approximately 27,415 square feet in Dallas, Austin, San Antonio, Nashville,
Charlotte/Greensboro and Miami for our homebuilding operations in these markets.
We believe our existing facilities are adequate for our current and planned
levels of operations.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and legal actions arising in
the ordinary course of business. We do not believe that the ultimate resolution
of these matters will have a material adverse effect on our financial condition
or results of operations.
Subsequent to our press release on March 6, 2001 regarding the
possibility of a merger with Engle Holdings Corp., we were notified of the
filing of two class action suits challenging any transaction between us and
Engle Holdings as a violation 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, George 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,
10
Constantinos Stengos, George 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. Our obligation to answer the complaint in the second class action lawsuit
has been deferred until the plaintiff requests in writing that we answer the
complaint pursuant to an agreement with the plaintiffs. Although both of these
class actions are in their early stages, we do not believe the cases have merit,
and we intend to vigorously defend these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 Annual Meeting of Shareholders of the Company was
held on October 1, 2001. Proxies were solicited by the Company pursuant to
Regulation 14 under the Securities Exchange Act of 1934, as amended to elect
directors of the Company for the ensuing year. Proxies and shareholders present
representing 10,942,519 shares of stock eligible to vote at the meeting, or
95.152% of the outstanding shares, were voted in connection with the election of
directors. The following is a separate tabulation with respect to the vote for
each nominee:
Nominee Votes For Votes Withheld
------- --------- --------------
Constantine Stengos 10,752,392 190,127
Andreas Stengos 10,868,200 74,319
George Stengos 10,752,392 190,127
Yannis Delikanakis 10,752,892 189,627
Larry D. Horner 10,878,319 64,200
William A. Hasler 10,878,319 64,200
Michael J. Poulos 10,878,319 64,200
Lonnie M. Fedrick 10,741,314 201,205
James M. Carr 10,741,314 201,205
Michael S. Stevens 10,878,319 64,200
Proxies were solicited by the Company pursuant to Regulation
14 under the Securities Exchange Act of 1934, as amended, to approve the Newmark
Homes Corp. Annual and Long-Term Incentive Plan (the "Plan"), such solicitation
having a deadline of December 21, 2001. Proxies representing 10,377,812 shares
of stock eligible to vote submitted their votes at the closing date. Proxies
representing 9,347,993 shares of stock, or 90.977% of the votes cast, voted to
approve the Plan: 1,029,819 shares of stock, or 9.923% of the votes cast, voted
not to approve the plan.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock commenced trading on the Nasdaq National
Market on March 12, 1998 under the trading symbol "NHCH". The range of high and
low closing sales prices per share by quarter for calendar years 2000 and 2001,
as well as for the first quarter of 2002 through March 8, 2002, as reported by
the Nasdaq National Market, appear in the following table. These prices are what
a securities dealer would pay for a share of our common stock and do not include
any commissions you might have to pay or any retail mark-ups or mark-downs.
RANGE
--------------------------------------------------------------------------------------------
YEAR QUARTER HIGH LOW
--------------------------------------------------------------------------------------------
2000 First $ 6.50 $ 5.50
--------------------------------------------------------------------------------------------
Second 6.50 5.06
--------------------------------------------------------------------------------------------
Third 8.75 6.38
--------------------------------------------------------------------------------------------
Fourth 11.50 8.31
--------------------------------------------------------------------------------------------
2001
--------------------------------------------------------------------------------------------
First 12.38 9.11
--------------------------------------------------------------------------------------------
Second 17.00 10.52
--------------------------------------------------------------------------------------------
Third 13.29 8.75
--------------------------------------------------------------------------------------------
Fourth 14.50 9.60
--------------------------------------------------------------------------------------------
2002 First(1) 17.67 10.12
--------------------------------------------------------------------------------------------
(1) Includes our stock price through March 8, 2002.
As of December 31, 2001, there were 37 shareholders of record.
We believe there are approximately 800 beneficial owners of our common stock.
We did not declare any cash dividends on our common stock in
2000. We declared a dividend on March 6, 2001 of $0.54 per share of common stock
to record holders of March 31, 2001, which was paid May 15, 2001. Our credit
agreements generally contain covenants that limit the amount of dividends or
distributions we can pay on our common stock and the amount of stock we can
repurchase.
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data and statement of financial
condition data presented below have been derived from the historical audited
consolidated financial statements of the Company. 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 Form 10-K and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
12
SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------
2001 2000 1999(1) 1998(2) 1997
------------ ------------ ------------ ------------ ------------
(Dollars in thousands except per share amounts)
STATEMENT OF OPERATIONS DATA
Revenues $ 629,949 $ 640,506 $ 491,714 $ 406,353 $ 215,360
Cost of sales 515,700 529,800 411,011 339,094 175,300
------------ ------------ ------------ ------------ ------------
Gross profit 114,249 110,706 80,703 67,259 40,060
Equity in earnings
from unconsolidated
subsidiaries 1,182 769 725 812 465
Selling, general and
administrative
expenses (69,288) (64,720) (49,565) (43,614) (26,512)
Merger and related
expenses (779)
Depreciation and
amortization (5,349) (4,016) (3,996) (3,287) (1,669)
------------ ------------ ------------ ------------ ------------
Operating income 40,015 42,739 27,867 21,170 12,344
Interest expense (1,116) (3,282) (1,845) (1,939) (1,987)
Other income, net (190) 1,086 1,064 1,201 570
------------ ------------ ------------ ------------ ------------
Income before taxes 38,709 40,543 27,086 20,432 10,927
Income taxes 13,996 14,852 9,701 7,637 4,272
------------ ------------ ------------ ------------ ------------
Net income $ 24,713 $ 25,691 $ 17,385 $ 12,795 $ 6,655
------------ ------------ ------------ ------------ ------------
Net income per
common share $ 2.15 $ 2.23 $ 1.51 $ 1.16 $ 0.72
------------ ------------ ------------ ------------ ------------
Cash dividends declared
per common share $ 0.54 $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Weighted averages
shares outstanding 11,500,000 11,500,000 11,500,000 11,035,000 9,200,000
Operating Data:
Units:
New sales contracts,
net of cancellations 2,237 2,346 2,234 2,036 984
Closings 2,330 2,499 1,989 1,874 972
Backlog at end of
period 752 845 998 753 279
Average sales price
per closing $ 263 $ 254 $ 240 $ 216 $ 219
Sales value of
backlog at end of
period $ 192,822 $ 211,859 $ 230,394 $ 170,402 $ 60,048
Gross profit as a
percentage of
revenues 18.1% 17.3% 16.4% 16.6% 18.6%
Selling, general and
administrative
expenses as a
percentage of
revenues 11.0% 10.1% 10.1% 10.7% 12.3%
13
DECEMBER 31,
------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars in thousands)
STATEMENT OF FINANCIAL
CONDITION DATA
Inventories $252,773 $246,712 $255,576 $185,247 $102,547
Total assets $339,323 $323,991 $328,892 $245,338 $139,213
Total construction debt(3) $121,658 $127,546 $149,380 $106,839 $ 66,100
Stockholders' equity $153,812 $135,309 $109,618 $ 90,112 $ 55,691
----------
(1) Technical Olympic acquired 80% of the Company's outstanding common
shares in December 1999. Consequently, the Company's audited
financial statements for 1999 present the results of operations in
two columns on a predecessor and successor basis. The predecessor
column includes the results of operations from January 1, 1999 to
December 15, 1999 (when Technical Olympic acquired the Company). In
this table the financial and operating data reflects the operations
of the Company on a full-year basis, which represents the total of
the predecessor and successor columns.
(2) Reflects the operating data of Westbrooke subsequent to the
Company's acquisition of the homebuilding assets of Westbrooke
Communities, Inc. on January 1, 1998.
(3) Total construction debt excludes consolidated land bank obligations
which primarily represents liabilities associated with entities that
did not meet the accounting criteria to qualify as unconsolidated
special purpose entities. As a result, the liabilities and the
corresponding assets have been consolidated in the Company's
financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
As a cautionary note, except for the historical information
contained herein, certain matters discussed in Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations and Item 7
"Quantitative and Qualitative Disclosures About Market Risk", are
"forward-looking" statements within the meaning of 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. The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with
the section "Selected Historical Consolidated Financial and Operating Data of
Newmark" and the consolidated financial statements and related notes included
elsewhere in this Form 10-K.
14
OVERVIEW
We design, build and sell single-family homes, town homes and patio
homes in seven markets in Texas, Florida, Tennessee and North Carolina. At
December 31, 2001, the Company operated in 67 communities and had 725 homes
under construction. In addition, as of December 31, 2001, we owned or had under
option contracts 3,847 lots available for future building.
In the year ended December 31, 2001, the Company generated $629.9
million in revenues. We derive our revenue from two sources: (i) sales of homes
and (ii) sales of land. The following tables set forth sources of revenue in
total for the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------
SOURCE 2001 2000 1999
------ ---------- ---------- ----------
(Dollars in thousands)
Sales of homes $ 612,961 $ 634,487 $ 477,106
Sales of land 16,988 6,019 14,608
---------- ---------- ----------
Total $ 629,949 $ 640,506 $ 491,714
========== ========== ==========
The following table sets forth the Company's sales contracts by
region executed (net of cancellations), home sales closed, homebuilding revenue
and average sales price, in each case for the year ended December 31, 2001, and
its backlog at December 31, 2001:
MARKET REGION DATA
(Dollars in thousands)
Backlog
Net Sales Homebuilding Average Sales -------------
Region Contracts Closings Revenue Price Homes Sales Value
------ ------------- ------------- ------------- ------------- ------------- -------------
Texas 1,189 1,254 $ 361,321 $ 288.1 302 $ 85,697
Florida 879 919 196,535 213.9 413 95,147
Mid-Atlantic(1) 169 55,105 157 351.0 37 11,978
------------- ------------- ------------- ------------- ------------- -------------
Total 2,237 2,330 $ 612,961 $ 263.1 752 $ 192,822
============= ============= ============= ============= ============= =============
(1) This region consists of our operations in North Carolina and
Tennessee.
The Company's sales backlog at December 31, 2001 was 752 units
compared to 845 units at December 31, 2000. Backlog represents home purchase
contracts that have been executed and for which deposits have been received, but
which have not yet closed. Home sales are not recorded as revenues until the
closings occur.
The Company's primary expenses are (i) the cost of home construction
and land sales and (ii) selling, general and administrative expenses ("SG&A"),
including administrative costs, advertising expenses, on-site marketing expenses
and commission costs. The following table sets forth the Company's principal
expenses in total for the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------------
EXPENSE 2001 2000 1999
------- ------------ ------------ ------------
(Dollars in thousands)
Cost of sales $ 515,700 $ 529,800 $ 411,011
SG&A 69,288 64,720 49,565
------------ ------------ ------------
Total $ 584,988 $ 594,520 $ 460,576
============ ============ ============
15
The Company's predecessor company was founded in Houston, Texas in
1983. In March 1995, the Company acquired The Adler Companies, Inc., which has
operated in south Florida since 1990. In January 1998, the Company acquired
Westbrooke, which has also operated in south Florida since 1976. The Company
completed its initial public offering of common stock in March 1998. On December
15, 1999, Technical Olympic purchased 9,200,000 shares of the Company's common
stock (80% of its outstanding common stock) from Pacific Realty Group, Inc. The
Company's fiscal year ended December 31, and information with respect to and for
the Company is presented below for the years ended December 31, 2001, 2000 and
1999. In March 2001, we changed our state of incorporation from Nevada to
Delaware.
RESULTS OF OPERATIONS
The following table sets forth the homebuilding revenue and number
of home closings by market for the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999(3)
---------- ---------- ----------
(Dollars in thousands)
Texas
Revenues $ 361,321 $ 387,188 $ 332,584
Home Closings 1,254 1,409 1,313
Florida
Revenues $ 196,535 $ 193,918 $ 108,100
Home Closings 919 946 581
Mid-Atlantic(1)
Revenues $ 55,105 $ 53,381 $ 36,422
Home Closings 157 144 95
---------- ---------- ----------
Total Homebuilding Revenues(2) $ 612,961 $ 634,487 $ 477,106
---------- ---------- ----------
Total Home Closings 2,330 2,499 1,989
========== ========== ==========
Average sales price per home closed $ 263 $ 254 $ 240
(1) This region consists of our operations in North Carolina and
Tennessee.
(2) Does not include revenues from land sales of $17.0 million, $6.0
million, and $14.6 million in 2001, 2000, and 1999, respectively.
(3) Reflects the revenue and units closed on a full-year basis. See,
note 2 to "Selected Financial Data."
The following table sets forth, as a percentage of revenues, certain
information in the Company's Statement of Operations for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
---------- ---------- ----------
Cost of sales 81.9% 82.7% 83.6%
Gross profit 18.1% 17.3% 16.4%
SG&A 11.0% 10.1% 10.1%
Income before income taxes 6.1% 6.3% 5.5%
Income taxes(1) 36.2% 36.6% 35.8%
Net Income 3.9% 4.0% 3.5%
(1) As a percentage of income before income taxes.
16
RESULTS OF OPERATIONS
Twelve Months Ended December 31, 2001 Compared to Twelve Months Ended December
31, 2000
Revenues decreased by 1.7% to $629.9 million in 2001 from $640.5
million in 2000. This decrease was principally due to a decrease in the number
of homes closed offset by an increase in the average selling price and an
increase in revenues from land sales. The number of homes the Company closed
declined by 6.8% to 2,330 in 2001 from 2,499 in 2000 due to general market
conditions. The average selling price of homes we closed increased 3.6% to
$263,073 in 2001 from $253,896 in 2000. Revenue from land sales in 2001
increased to $17.0 million from $6.0 million in 2000 principally as a result of
an increase in land sold in South Florida.
Cost of sales decreased by 2.7% to $515.7 million in 2001 from
$529.8 in 2000. As a percentage of revenues, cost of sales for 2001 decreased to
81.9% from 82.7% in 2000. The decrease in cost of sales in both dollar amount
and percentage was due to a shift in the product mix of homes closed to higher
margin homes. Cost of land sales for 2001 increased to $13.3 million from $5.7
million in 2000.
Equity in earnings from unconsolidated subsidiaries increased 53.7%
to $1.2 million in 2001 from $.8 million in 2000 due to increased earnings from
the Company's investment in joint ventures.
SG&A expenses increased by 6.7% to $69.0 million in 2001 from $64.7
million in 2000. As a percentage of revenues, SG&A expense increased to 11.0% in
2001 from 10.1% in 2000. This increase in SG&A resulted primarily from the
expansion of Newmark's operations in some of its Texas markets.
In connection with the proposed merger, the Company has
approximately $.8 million in merger and related expenses which consist primarily
of legal costs.
Interest expense, net of interest capitalized, decreased by 66% to
$1.1 million in 2001 from $3.3 million in 2000. The primary reason for the
decrease is the 36% decrease in the average prime rate and the 80% decrease in
the average 90-day LIBOR rate from 2000 to 2001.
The Company's provision for income taxes remained relatively
consistent as a percentage of earnings before taxes at 36.2% in 2001 compared to
36.6% in 2000.
Net income decreased by 3.8% primarily due to the decrease in home
closings as described above.
Twelve Months Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues increased by 30.3% to $640.5 million in 2000 from $491.7
million in 1999. This increase was primarily due to an increase in the number of
homes closed, which increased by 25.6% to 2,499 homes in 2000 from 1,989 homes
in 1999, and an increase in average selling price. Our average selling price of
homes increased by 5.9% to $254,000 in 2000 from $240,000 in 1999. In addition,
revenue from land sales decreased 58.9% to $6.0 million in 2000 from $14.6
million in 1999. This decrease in revenue from land sales was caused by a
decline on land sales during 2000, principally in the Company's markets in Texas
and Florida.
Cost of sales increased by 28.9% to $529.8 million in 2000 from
$411.0 million in 1999 primarily due the increase in revenues from homes closed
as described above. Cost of land sales for 2000 decreased to $5.7 million from
$12.1 million in 1999. As a percentage of revenues, cost of sales for 2000
decreased slightly to 82.7% from 83.6% in 1999 due to a shift in product mix of
homes closed to higher margin homes.
Equity in earnings from unconsolidated subsidiaries increased
slightly to $.8 million in 2000 from $.7 million in 1999.
17
SG&A expense increased by 30.6% to $64.7 million in 2000 from $49.6
million in 1999. This increase resulted primarily from the expansion into new
markets in Tennessee and North Carolina, as well as the expansion in existing
markets in Texas and Florida. As a percentage of revenues, SG&A expense remained
consistent at 10.1% in 2000 and 1999.
Interest expense, net of interest capitalized, increased by 77.8% to
$3.2 million in 2000 from $1.8 million in 1999. This expense increased due to
the increase in the average number of completed homes held in inventory for the
year ended December 31, 2000 to 179 from 115 during the year ended December 31,
1999.
The Company's provision for income taxes increased as a percentage
of earnings before taxes to 36.6% for the year ended December 31, 2000 compared
to 35.8% for fiscal year 1999. The increase was primarily a result of increased
state taxes resulting from increased earnings in the State of Florida. Federal
income taxes have decreased as a percentage of earnings before taxes to 34.3%
for the year ended December 31, 2000 compared to 35.6% for the year ended
December 31, 1999 primarily as a result of the increase in deductible
amortization of goodwill resulting from our election to treat the acquisition of
Westbrooke as an asset purchase under the Internal Revenue Code Section
338(h)(10). The Company recognized federal income tax expense of $13.9 million
for the year ended December 31, 2000 compared to $9.6 million for the year ended
December 31, 1999.
Net income increased by 47.8% to $25.7 million for the year ended
December 31, 2000 from $17.4 million for the year ended December 31, 1999. The
increase primarily was attributable to the increase in revenues in Newmark's
most profitable markets.
18
The following table presents selected unaudited quarterly operating
data of the Company for each of the eight quarters through the period ended
December 31, 2001. In the opinion of management, all necessary adjustments
(consisting of normal recurring adjustments) have been included to present
fairly the unaudited selected quarterly operating data. This data is not
necessarily indicative of the results of the operations of the Company for any
future period.
QUARTER ENDED,
----------------------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2001 2001 2001 2001 2000 2000 2000 2000
--------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
STATEMENT OF
OPERATIONS DATA:
Revenues ................... $ 178,557 $ 163,011 $ 155,565 $ 132,816 $ 193,382 $ 146,207 $ 164,491 $ 136,426
Gross profit ............... 29,002 30,250 29,145 25,852 32,265 26,580 28,644 23,217
Selling, general and
administrative .......... 17,588 18,705 17,023 15,972 18,032 16,358 16,764 13,566
Operating income ........... 9,451 10,701 11,011 8,852 13,428 9,486 11,100 8,725
MARGIN ANALYSIS:
Gross margin ............... 16.2% 18.6% 18.7% 19.5% 16.7% 18.2% 17.4% 17.0%
Selling, general and
administrative .......... 9.9% 11.5% 10.9% 12.0% 9.3% 11.2% 10.2% 9.9%
Operating income ........... 5.3% 6.6% 7.1% 6.7% 6.9% 6.5% 6.7% 6.4%
OPERATING DATA:
Homes closed (units) ....... 670 623 569 468 764 539 633 563
Average sales price of
homes closed ............ $ 260 $ 260 $ 268 $ 265 $ 250 $ 268 $ 258 $ 240
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.
19
LIQUIDITY AND CAPITAL RESOURCES
Our financing needs have historically varied based primarily on its
operations, sales volume, inventory levels, inventory turnover and land
acquisitions. At December 31, 2001, we had cash and cash equivalents of $24.8
million. Inventories (including finished homes and construction in progress,
developed lots and other land) at December 31, 2001 were $252.8 million, an
increase of $6.1 million from $246.7 million at December 31, 2000. This increase
results from general growth in our business. The growth of the Company's
business has resulted in a decrease in the ratio of debt to total capitalization
to 48.0% at December 31, 2001 from 50.6% at December 31, 2000. Our ratio of
equity to total assets increased to 45.3% at December 31, 2001 from 41.7% at
December 31, 2000 primarily due to increased financing of operations through
earnings. Historically, we have financed our operations primarily through
earnings, borrowings from financial institutions, and, before the Company's
initial public offering on March 12, 1998, capital contributions and borrowings
from Pacific, primarily for land development acquisitions.
During the years ended December 31, 2001 and 2000, cash provided by
operating activities was $16.3 million and $32.4 million, respectively. During
the year ended December 31, 1999, cash used in operating activities was $35.6
million. The decrease in cash provided by operating activities in 2001 versus
2000 is primarily a result of increasing inventory levels generated by the
general growth in our business. The increase in cash provided by operating
activities in 2000 versus 1999 is primarily a result of the 25.6% increase in
home closings in 2000 from 1999. During 1999, the significant cash used in
operating activities was caused by the increasing inventory levels due to
expansion of the Company's business.
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 December 31, 2001 the Company had no material commitments for
capital expenditures.
On June 27, 2000, Newmark entered into a $150 million secured
revolving credit facility with six banks which matures on June 27, 2003, with
annual options for one-year extensions. This credit facility has been used to
finance the acquisition and development of residential communities, the purchase
of developed lots and the construction of homes in Newmark's markets in Texas,
Tennessee and North Carolina. As of December 31, 2001, Newmark had borrowings of
$81.6 million outstanding under this facility.
The Company finances its Westbrooke operations in Florida with cash
from operations and borrowings under construction and lot development credit
facilities. Generally, these credit agreements are with regional and national
financial institutions. Each of the credit agreements relates to specific
communities and provides for financing residential land development costs, lot
acquisition costs and home construction costs. The agreements have covenants
which, among other things, limit speculative homebuilding, require us to
maintain specified minimum of tangible net worth and debt to tangible net worth
ratios, limit our ability to pay dividends. The agreements have various maturity
dates and bear interest at rates based on LIBOR and prime. At December 31, 2001,
Westbrooke had lines of credit commitments for construction loans of
approximately $221.0 million, of which $20.0 million was available to draw down.
To the extent possible, the Company utilizes lot options as a method
of controlling its investments in land. At December 31, 2001, we had 2,122 lots
under option. At December 31, 2001, we had no material capital commitments with
respect to specific performance lot purchase contracts. Increasingly, developers
have been less willing to sell options to purchase developed lots. Therefore,
the Company makes significant capital expenditures in order to maintain adequate
lot inventory in this market.
At December 31, 2001, the Company had approximately $7.4 million
outstanding under promissory notes issued in connection with the acquisition of
Westbrooke. The promissory notes are to be repaid in equal annual installments
from 2001 through 2003.
20
INFLATION
We may be adversely affected during periods of high inflation,
primarily because of higher land and construction costs. In addition inflation
may result in higher mortgage interest rates, which may significantly affect the
affordability of permanent mortgage financing for prospective purchasers.
Inflation also increases our interest costs. We attempt to pass through to our
customers any increases in our costs through increased selling prices and, to
date, inflation has not had a material adverse effect on our results of
operations. However, there is no assurance that inflation will not have a
material adverse impact on our future results of operations.
CRITICAL ACCOUNTING POLICIES
In the preparation of its financial statements, the Company applies
accounting principles generally accepted in the United States. The application
of generally accepted accounting principles may require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying results.
As discussed in Note 3 to the Company's consolidated financial
statements, housing and other real estate sales are recognized when title passes
to the buyer and certain other conditions are met. As a result, the Company's
revenue recognition process does not involve significant judgments or estimates.
However, the Company does rely on certain estimates to determine the related
construction and land costs and resulting gross margins associated with revenues
recognized. The Company's construction and land costs are comprised of direct
and allocated costs, including estimated costs for future warranties and
amenities. Land, land improvements and other common costs are generally
allocated on a relative fair value basis to units within a parcel or
subdivision. Land and land development costs generally include related interest
and property taxes incurred until development is substantially completed.
As disclosed in the consolidated financial statements, the Company
had goodwill in the amount of $43.8 million at December 31, 2001. The Company
periodically evaluates goodwill for impairment by determining whether the
carrying amount can be recovered through future undiscounted cash flows. The
Company's estimates of future cash flows are based on reasonable and supportable
assumptions and represent the Company's best estimates of the cash flows
expected to result from the use of the corresponding assets and their eventual
disposition.
As discussed in Note 10 to the consolidated financial statements,
the Company is involved in litigation incidental to its business, the
disposition of which is expected to have no material effect on the Company's
financial position or results of operations. It is possible, however, that
future results of operations for any particular quarterly or annual period could
be materially affected by changes in the Company's assumptions related to these
proceedings. The Company accrues its best estimate of the probable cost for the
resolution of legal claims. Such estimates are developed in consultation with
outside counsel handling these matters and are based upon a combination of
litigation and settlement strategies. To the extent additional information
arises or the Company's strategies change, it is possible that the Company's
best estimate of its probable liability in these matters may change.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
object of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedge risk or (ii)
the earnings effect of the hedged forecasted
21
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, we have not entered into derivative contracts either to hedge
existing risks or for speculative purposes. Accordingly, we do not expect the
adoption of the new standard on January 1, 2001 to affect our financial
statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
SFAS 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. SFAS 140 replaces SFAS
125 and is effective for transfers and servicing of financial assets and
extinguishments occurring after March 31, 2001. SFAS 140 is effective for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The adoption of SFAS 140 did not materially affect the
Company's earnings or financial position.
In June 2001, the FASB issued SFAS 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 companies to recognize
acquired intangible assets apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS 141 applies to all business combinations completed
on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that
companies 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 tests goodwill for impairment
at least annually. In addition, SFAS 142 requires companies identify reporting
units for 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. SFAS 142 requires companies to complete a transitional
goodwill impairment test six months from the date of adoption. Companies are
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
Our previous business combinations were accounted for using the
purchase method. As of December 31, 2001, the net carrying amount of goodwill is
$43.8 million. Amortization expensed during the year ended December 31, 2001 was
$1.5 million. Currently, the Company is assessing, but has not yet fully
determined, how the adoption of SFAS 141 and SFAS 142 will affect its financial
position and results of operation.
CHANGE IN CONTROL OF OWNERSHIP
Technical Olympic's acquisition of the common stock of the Company
previously held by Pacific represented 80% of the outstanding stock of the
Company. This acquisition was accounted for as a purchase, and the purchase
price was recorded on the Company's books. The excess of purchase price over the
fair value of the assets acquired and the liabilities assumed approximated $46
million of which approximately $2.1 million was directly attributed to the
change in control transaction.
In connection with the acquisition by Technical Olympic of the
Company's common stock previously owned by Pacific, the Company entered into a
Services Agreement with Pacific to continue to provide certain centralized
support services to the Company, including general advisory services, market
expansion research services and administrative support services. This Service
Agreement was terminated December 31, 2000. In addition, the 1998 Tandem Stock
Option/Stock Appreciation Rights Plan and the options granted therein were
terminated. There were no other incentive awards outstanding or exercisable in
fiscal year 1999 or thereafter.
22
Pursuant to the stock purchase agreement entered into in connection
with the acquisition of Westbrooke in January 1998, certain additional
consideration, based on Westbrooke achieving specified income targets over a
five-year period, became due and payable to the prior majority owner and certain
key employees of Westbrooke upon a change of control. Westbrooke entered into an
Amendment to Stock Purchase Agreement ("Amendment") with the prior owner and
certain key employees of Westbrooke regarding the amount and timing of the
additional consideration as well as the acquisition of certain partnership
interests from the key employees. The amount of additional consideration
recorded in the transaction as a result of the change in control to the prior
majority owner was $4.6 million in the form of a promissory note. Additionally,
the Amendment adjusted the level of additional consideration payable to the key
employees from 6% to 7.5% of the net income before income taxes, all as defined
and described in the Amendment. The Company will record such payments as
compensation expense in the periods in which they are earned. During this fiscal
year, The Company, prior owner and certain key employees entered into the Second
Amendment to Stock Purchase Agreement ("Second Amendment") regarding the amount
and timing of certain of the payments to the prior owner and certain key
employees of Westbrooke.
The Pacific USA Tax Allocation Agreement between Pacific USA and the
Company was partially terminated whereby the Company would pay Pacific USA an
amount equal to the federal income taxes that the Company would owe (or refund
that it would receive) had it prepared its federal income tax return on a
stand-alone basis. Certain terms remain in effect with respect to tax periods
ending prior to the change in control.
For tax purposes, the Company elected to treat the change in control
as a deemed taxable sale of assets resulting in a step-up in the tax basis of
assets in accordance with Internal Revenue Code Section 338(h)(10). By electing
Section 338(h)(10), the Company recognized taxable income of approximately $20
million, and $8 million of tax per the original tax sharing agreement, due to
the difference in the financial statement basis and the tax basis of the assets
immediately prior to the change in control. In terms of the purchase and sale
agreement between Pacific USA and Technical Olympic, the tax sharing agreement
was modified to exclude the gain and corresponding tax from this transaction
from the calculation of the tax payments by the Company to Pacific USA.
Accordingly, the Company recognized its income tax expense based on the taxable
income generated from its operations.
As a result of the change of control transaction described above,
certain adjustments were made to the Company's goodwill, acquisition notes
payable and stockholders' equity accounts. As a result, the consolidated amounts
of the Company after December 15, 1999 are presented on a new basis of
accounting different from the financial statements of the Company prior to
December 15, 1999.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, which is the potential loss
arising from adverse changes in market prices and rates. The Company does not
enter into, or intend to enter into, derivative financial instruments for
trading or speculative purposes. The Company's exposure to market risks is
changes to interest rates related to the Company's construction and lot
development loans. The interest rates relative to the Company's construction
loans fluctuate with the prime and LIBOR lending rates, both upwards and
downwards. (See Note 7 - "Construction and Acquisition Loans Payable" of the
Notes to Consolidated Financial Statements.)
Interest Rates. Our operations are interest rate sensitive. Overall
housing demand is adversely affected by increases in interest rates. If mortgage
interest rates increase significantly, this may negatively affect the ability of
homebuyers to secure adequate financing. Higher interest rates will adversely
affect our revenues, gross margins and net income. Higher interest rates also
increase our borrowing costs because, as indicated above, our loans fluctuate
with the prime and LIBOR lending rates, both upwards and downwards.
23
Inflation. We may be adversely affected during periods of high
inflation, primarily because of higher land and construction costs. In addition,
inflation may result in higher mortgage interest rates, which may significantly
affect the affordability of permanent mortgage financing for prospective
purchasers. Inflation also increases our interest costs. We attempt to pass
through to our customers any increases in our costs through increased selling
prices and, to date, inflation has not had a material adverse effect on our
results of operations. However, there is no assurance that inflation will not
have a material adverse impact on our future results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements are set forth in Item 14(a)(1) and (2), and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
See 8-K in exhibits whereby the Company's Board dismissed BDO Seidman,
LLP as its independent accountants and engaged Ernst &Young LLP as its new
independent certified public accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company holding office
as of March 5, 2002 are as follows:
NAME AGE POSITION
---- --- --------
Constantine Stengos 66 Chairman of the Board
Yannis Delikanakis 35 Director
Lonnie M. Fedrick 57 Director, President and Chief
Executive Officer
James Carr 52 Director, Executive Vice President
Andreas Stengos 40 Director
Georgios Stengos 35 Director
Larry D. Horner 67 Director
William A. Hasler 60 Director
Michael J. Poulos 71 Director
Michael S. Stevens 52 Director
Terry White 52 Senior Vice President, Chief
Financial Officer, Treasurer
and Secretary
J. Eric Rome 42 Executive Vice President -
Homebuilding
J. Michael Beckett 42 Executive Vice President -
Purchasing/Product Development
(Newmark)
Constantine Stengos has been our Chairman of the Board since
December 15, 1999. Mr. Stengos has also been a director and the President of
Technical Olympic and a director of Technical Olympic (UK) PLC, since November
1999. Technical Olympic is a wholly owned subsidiary of Technical Olympic (UK)
PLC. Technical Olympic (UK) PLC is a wholly owned subsidiary of Technical
Olympic S.A. Mr. Stengos formed Technical Olympic S.A. in 1965 and serves as a
director, the Chairman of its board of directors and its Managing Director. Mr.
Stengos owns more than 5% of the outstanding equity of Technical Olympic S.A.
Technical Olympic, Technical Olympic (UK) PLC, and Technical Olympic S.A. are
all affiliates of the Company.
Yannis Delikanakis has been one of our directors since 1999 and has
also served as a director and Vice President of Technical Olympic since 1999.
Mr. Delikanakis has been the Real Estate and Housing Director of Technical
Olympic S.A. since 1999. Mr. Delikanakis was a director and the manager of the
Real
24
Estate Development and Project Management Departments of Lambert Smith Hampton
S.A. from 1994 to 1999.
Lonnie M. Fedrick has been one of our directors since 1998 and has been
our President and Chief Executive Officer since 1997. Mr. Fedrick has been
President and Chief Executive Officer of Newmark Home Corporation, our wholly
owned subsidiary, since 1994 and was Executive Vice President of from 1984 to
1994.
Andreas Stengos has been one of our directors since 1999, has served as
a director and Treasurer of Technical Olympic since 1999, and has been a
director and the General Director of Technical Olympic (UK) PLC since 1997. Mr.
Stengos has also been a director of Technical Olympic S.A. since 1989, has
served as its Managing Director from 1989 to 1995 and has been its General
Manager since 1995.
George Stengos has been one of our directors since 1999, has served as
a director of Technical Olympic since November 1999 and has been a director and
the Corporate Secretary of Technical Olympic (UK) PLC since 1997. Mr. Stengos
has been the Executive Vice President (1993-2001) and since 2001 the President
and Chairman of the Board of Mochlos S.A., a publicly listed subsidiary on the
Athens Stock Exchange, of Technical Olympic, S.A.
Larry D. Horner has been one of our directors since 1998. Mr. Horner
served as Chairman of Pacific USA Holdings Corp. from 1994 to 2001 and was
Chairman of the Board 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 until 2001. He is also a director of Phillips
Petroleum Company, Atlantis Plastics Corp., UT Starcom, Inc., Biological and
Popular Cultures, Inc., and New River Pharmaceuticals, Inc. Mr. Horner was
formerly associated with KPMG LLP, a professional services firm, for 35 years,
retiring as Chairman and Chief Executive Officer of both the U.S. and
International firms in 1991. He is a certified public accountant.
William A. Hasler has been one of our directors since 1998 and has
served as Vice Chair Co-Chief of Aphton Corporation since July 1998. Aphton
Corporation is a biotechnology products company. From August 1991 to July 1998,
Mr. Hasler served as Dean of the Haas School of Business at the University of
California at Berkeley. Prior to that, he was both Vice Chairman and a director
of KPMG LLP, a professional services firm. Mr. Hasler also serves on the boards
of Mission West, Walker Interactive, Solectron Corp., DiTech Communications
Schwab Funds and DMC Strategy. Mr. Hasler is a trustee of Pomona College.
Michael J. Poulos has been one of our directors since 2000. Mr.
Poulos has also served as an advisory director of Greystone Capital Partners I,
LP and a trustee of Century Shares Trust. Mr. Poulos had been Chairman,
President, and Chief Executive Officer of Western National Corporation from 1993
until 1998. Mr. Poulos worked for American General Corp., from 1970 to 1993, and
served as its Vice Chairman from 1991 to 1993.
Michael S. Stevens has been one of our directors since 2000. Mr.
Stevens has been the Chairman and owner of Michael Stevens Interests, Inc. since
1981, as well as the owner and director of various affiliated companies. Mr.
Stevens serves on the board of directors of the Greater Houston Partnership, the
Memorial Hermann Foundation, the Houston Convention Center Hotel Corporation,
the Houston 2012 Foundation and the Texas Exile Foundation.
James M. Carr, a director of the Company, became Executive Vice
President and a director of the Company upon the closing of the acquisition of
Westbrooke 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 Emeritus of the Baptist Hospital Foundation. Mr. Carr is a graduate of
the University of Miami. He is also the Chairman Emeritus of the Baptist
Hospital Foundation.
25
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 and was appointed the Chief Operating Officer of
Newmark in early 2000. He was Executive Vice President of 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.
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. Mr. White is a certified public accountant.
J. Mike Beckett became Executive Vice President-Purchasing/Product
Development for Newmark on January 1, 2000. Mr. Beckett was Senior Vice
President- Purchasing for Newmark from January 1, 1998 to December 31, 1999 and
was the Vice President of Purchasing from 1995 to 1998.
FAMILY RELATIONSHIPS
Constantine Stengos is the father of both Andreas Stengos and George
Stengos. Yannis Delikanakis is the son-in-law of Constantine Stengos and the
brother-in-law of Andreas Stengos and George Stengos. We have no other familial
relationships among the executive officers and directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors and persons who own more
than 10% of the Company's stock, as well as certain affiliates of such persons,
to file the initial reports of ownership and changes in ownership with the SEC
and NASDAQ. These parties are required to furnish the Company with copies of
such forms they file. Based solely on a review of the copies of the Section
16(a) forms and amendments thereto received by the Company and on written
representations that no other reports were required, the Company believes that
all reports required pursuant to Section 16(a) for fiscal year 2000 were timely
filed by all persons known by the Company to be required to file such reports
with respect to the Company's securities.
26
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation
for each of the Company's last three fiscal years awarded to or earned by the
Company's Chief Executive Officer and four other most highly paid executive
officers whose salary and bonus earned in Fiscal Year 2001 for services rendered
to the Company exceeded $100,000 ("Named Executive Officers").
ANNUAL COMPENSATION LONG-TERM
COMPENSATION
----------------------------------------------------- ----------------------------
Awards Payouts
----------- -----------
Securities
Underlying
Options /
NAME AND SARs
PRINCIPAL Other Annual (# of LTIP ALL OTHER
POSITION Year Salary Bonus Compensation(1) Shares) Payouts COMPENSATION
-------- ---- ----------- ----------- --------------- ----------- ----------- ------------
Lonnie M. Fedrick, 2001 $ 550,000 $ 1,450,685(2) $ 12,529(3) -- -- $ 563,737(4)
President, Chief 2000 $ 525,000 $ 1,497,702(2) $ 9,137(3) -- -- $ 563,737(4)
Executive Officer 1999 $ 450,000 $ 1,341,644(2) $ 10,420(3) -- -- $ 563,737(4)
and Director
J. Eric Rome, 2001 $ 350,000 $ 479,640(7) $ 6,478(3) -- -- $ 750,990(4)
Executive Vice 2000 $ 300,000 $ 467,390(7) $ 7,993(3) -- -- $ 750,990(4)
President - 1999 $ 275,000 $ 485,827(7) $ 7,212(3) -- -- $ 750,990(4)
Homebuilding
James M. Carr, 2001 $ 518,506 $ 518,506 $ 9,000(3) -- -- $ 500,000(8)
Executive Vice 2000 $ 493,450 $ 493,815 $ 9,000(3) -- -- $ 500,000(8)
President & Director 1999 $ 474,822 -- $ 6,138(3) -- -- $ 500,000(8)
Terry C. White, 2001 $ 205,000 $ 232,371(9) $ 10,670(3) -- -- $ 292,161(4)
Senior Vice 2000 $ 190,000 $ 251,521(9) $ 8,204(3) -- -- $ 292,161(4)
President, Chief 1999 $ 175,000 $ 255,571(9) $ 10,140(3) -- -- $ 292,161(4)
Financial Officer and
Treasurer
J. Michael Beckett, 2001 $ 240,000 $ 270,558(9) $ 4,460(3) -- -- $ 292,161(4)
Executive Vice 2000 $ 210,000 $ 268,346(9) $ 7,776(3) -- -- $ 292,161(4)
President - 1999 $ 170,000 $ 250,458(9) $ 8,526(3) -- -- $ 292,161(4)
Purchasing/Product
Development
(Newmark)(10)
(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 (a) payment from the Company's Capital Accumulation Plan
("CAP Plan"), a former executive bonus plan, earned in 1997 and
prior years, payable in annual installments of $154,394, the last
payments being in January 2000 and 2001 (contributions of $61,345
paid or to be paid by the
27
Pacific Entities to the Company in 2000 and 2001), and (b)
obligations pursuant to a Capital Appreciation Plan of the Pacific
Entities and payable by the Pacific Entities in five annual
installments of $600,000, the first being paid in Fiscal Year 1999.
(3) Includes compensation amounts earned during the fiscal year but
deferred pursuant to Section 401(k) of the Internal Revenue Code
under the Company's 401(k) Savings Plan.
(4) Reflects the three annual payments by the Pacific Entities as a
result of the sale of the Company's common stock by the Pacific
Entities to Technical Olympic and the resulting change of control,
the first payment paid in Fiscal Year 1999, the second payment
earned in Fiscal Year 2000 but paid in 2001, and the third payment
earned in Fiscal Year 2001.
(5) Intentionally omitted.
(6) Intentionally omitted.
(7) Includes payment from the CAP Plan payable in annual installments of
$123,515, the last payment being in January 2001 (contributions of
$49,076 paid or to be paid by the Pacific Entities to the Company in
2000 and 2001).
(8) Includes obligation by the Pacific Entities of the first, second
and/or third of four annual payments but does not include the
acceleration of the earn-out consideration in connection with the
acquisition of Westbrooke. See "Westbrooke Acquisition Amendment"
under the Certain Transactions section of this Form 10-K. Both were
a result of the change of control that occurred from the sale of the
Company's common stock by the Pacific Entities to Technical Olympic
on December 15, 1999.
(9) Includes payment from the CAP Plan payable in annual installments of
$61,758, the last payment being in January 2001 (contributions of
$24,538 paid or to be paid by the Pacific Entities to the Company in
2000 and 2001).
(10) Mr. Beckett became subject to the reporting requirements for
executive officers in 1999. All of Mr. Beckett's compensation for
Fiscal Year 1999 has been included in the table.
EMPLOYMENT AGREEMENTS
Lonnie M. Fedrick, James M. Carr, J. Eric Rome, Terry C. White and
J. Michael Beckett have employment agreements with the Company or a subsidiary
of the Company. Mr. Fedrick's amended agreement commenced on January 1, 1998,
has a five-year term, and provides for a base salary of $400,000 for 1998,
increasing to $575,000 for 2002 and provides for a bonus arrangement. Mr. Carr's
amended agreement commenced on December 15, 1999, has a three-year term,
provides for a base salary of $475,000, subject to adjustment annually beginning
January 1, 2000 and provides for a bonus arrangement. Additionally, as part of
Mr. Carr's agreement, should a change in control occur, Mr. Carr has the option
to terminate his contract within 60 days and, if he elects to terminate, be paid
an amount equal to the annual base salary amount in effect on that date for the
remainder of the term. Mr. Rome's agreement commenced on January 1, 1998, has a
five-year term and provides for a base salary of $250,000 for 1998, increasing
to $400,000 for 2002. Mr. White's agreement commenced on January 1, 1998, has a
five-year term and provides for a base salary of $150,000 for 1998, increasing
to $220,000 for 2002. Mr. Beckett's agreement commenced on January 1, 1998, was
amended effective January 1, 2000, has a six-year term, and provides for a base
salary of $155,000 in 1998, increasing to $300,000 in 2003. 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.
28
COMPENSATION OF DIRECTORS
Independent or non-affiliate directors of the Company receive an
annual fee of $15,000 and $2,000 per board meeting attended and are reimbursed
for reasonable out-of-pocket expenses incurred for attendance at meetings.
COMPENSATION COMMITTEE: The current members of the Compensation
Committee are Messrs. Horner, Hasler, Delikanakis, Andreas Stengos and George
Stengos. The Compensation Committee focuses on executive compensation, the
administration of the Company's stock option plans, if any, and the granting of
discretionary bonuses. During the Company's last fiscal year, the Compensation
Committee held one meeting and took no action by written consent of the members
in lieu of a meeting. Neither management nor employees of the Company serve on
the Compensation Committee.
SPECIAL BENEFITS COMMITTEE: The current members of the Special
Benefits Committee are Messrs. Hasler, Poulos and Stevens. The Special Benefits
Committee was formed on May 12, 2000 and focuses on the compensation and bonus
plan of the Chief Executive Officer of the Company. Only outside directors may
serve on the Special Benefits Committee. During the Company's last fiscal year,
the Special Benefits Committee held one meeting and took no action by written
consent.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hasler, Poulos and Stevens comprised the Special Benefits
Committee. No officer or employee of the Company or any of its subsidiaries
served on the Committee during fiscal year 2001.
Messrs. Hasler, Horner, Delikanakis, George Stengos and Andreas
Stengos comprised the Compensation Committee in 2001. No employee of the Company
or any of its subsidiaries served on the committee during fiscal year 2000.
Messrs. Delikanakis and Andreas Stengos served as officers of certain of the
Company's subsidiaries during fiscal year 2001.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, which is responsible for both the
establishment and administration of the policies that govern both annual
compensation and stock ownership programs for the Company, and the Special
Benefits Committee, which is responsible for both the establishment and
administration of the compensation and bonus arrangement for the Chief Executive
Officer, have furnished the following report of executive compensation.
The Compensation Committee was formed on March 12, 1998, and
therefore did not participate in all components of 1998, 1999, 2000 or 2001
compensation. Specifically, base salaries of certain executive officers and
employees were established pursuant to employment agreements with the executive
officers entered into in November 1996, and amended in January 1998. Mr. Carr's
employment agreement was amended December 15, 1999 to extend the term through
2002 and to address the change of control that resulted from the sale of 80% of
the Company's common stock by the Pacific to Technical Olympic.
The Special Benefits Committee was formed May 12, 2000 to be
responsible for the annual compensation and bonus plan of the Chief Executive
Officer. On May 12, 2000, the Special Benefits Committee amended Mr. Fedrick's
employment agreement to increase his base salary and to address his bonus
arrangement.
DETERMINATION OF EXECUTIVE OFFICER COMPENSATION. The compensation
policies of the Company are intended to: (i) reward executives for long-term
strategic management which results in the enhancement of shareholder values;
(ii) support a performance-oriented environment which rewards achievement of
both internal Company goals and enhanced Company performance compared to
performance levels of
29
comparable companies in the industry; and (iii) attract and retain executives
whose abilities are critical to the long-term success and competitiveness of the
Company.
COMPONENTS OF EXECUTIVE OFFICER COMPENSATION. For 2001, the
executive compensation program also consisted of two key components: (i) a base
salary and (ii) incentive compensation (bonus).
Base salaries paid to executive officers were paid pursuant to
agreements described in "Employment Agreements" above. Each executive officer's
base salary was established based primarily on the individual officer's level of
responsibility and comparisons to similar positions within the Company as well
as with other companies in the industry. In 2001, the two primary criteria in
establishing the bonus program were the level of profitability and expense
control. Each bonus was also to be a percentage of the officer's base salary
based on job position and experience with the Company. In the budgeting process
for the Company, a profit goal or regional contribution target and an expense
target were set for each city and region. The amount of bonus earned by the
employee is determined with each factor and actual performance of such factor
evaluated. Minimum threshold performance criteria must be reached before any
bonus awards are granted. In addition, the individual performance of executive
officers may be taken into consideration in making any awards.
DETERMINATION OF THE CHIEF EXECUTIVE OFFICER'S COMPENSATION. As
Chief Executive Officer, Mr. Fedrick is compensated pursuant to an employment
agreement described under "Employment Agreements" above. Mr. Fedrick was paid a
base salary and an annual bonus in 2001. Mr. Fedrick's compensation is
substantially related to the Company's performance because he receives an annual
bonus, determined pursuant to a specific formula, which is based on the
achievement of defined net income and expense control levels by Newmark Home
Corporation and its subsidiaries. The actual achievement of a level of
profitability for the combined cities and expense control are components of Mr.
Fedrick's bonus. If the Company achieves the goals, Mr. Fedrick is entitled to
receive a percentage of his base compensation. Mr. Fedrick's annual bonus plan
was approved at the 2000 Annual Shareholders Meeting held July 17, 2000.
COMPLIANCE WITH SECTION 162(m): Section 162(m) of the Internal
Revenue Code (the "Code") generally disallows a tax deduction to public
companies for annual compensation over $1 million paid to their chief executive
officer and certain other highly compensated executive officers. The Code
generally excludes from the calculation of the $1 million cap compensation that
is based on the attainment of pre-established, objective performance goals.
Where practicable, it is the policy of the Special Benefits Committee and the
Compensation Committee to establish compensation practices that are both
cost-efficient from a tax standpoint and effective as a compensation program.
The committees consider it important to be able to utilize the full range of
incentive compensations, even though some compensation may not be fully
deductible.
The foregoing report has been furnished by the current members of
the Compensation Committee and the Special Benefits Committee:
Compensation Committee: Special Benefits Committee:
William A. Hasler William A. Hasler
Larry D. Horner Michael J. Poulos
Andreas Stengos Michael S. Stevens
George Stengos
Yannis Delikanakis
30
COMPARATIVE STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total shareholder return on the
Company's common stock with the cumulative total return of the Standard and
Poor's 500 Stock Index and the Standard and Poor's Small Cap 600 Homebuilding
Index for the period beginning March 12, 1998 (the date on which the Company's
common stock commenced trading on the NASDAQ) through December 31, 2001. The
total shareholder return assumes $100 invested at the beginning of the period in
the Company's common stock, the S&P 500, and the S&P Small Cap 600 Homebuilding
Index. It also assumes reinvestment of all dividends.
[GRAPH]
COMPARISON OF CUMULATIVE TOTAL RETURN FOR THE PERIOD BEGINNING MARCH 12, 1998
AND ENDING DECEMBER 31, 2001.
3/12/98 12/31/98 12/31/99 12/31/00 12/31/01
------------ ------------ ------------ ------------ ------------
Newmark Homes Corp. $ 100.00 $ 66.67 $ 57.14 $ 97.62 $ 144.40
S&P Small Cap 600
Homebuilding $ 100.00 $ 94.80 $ 60.97 $ 100.14 $ 144.10
S&P 500 Composite $ 100.00 $ 116.19 $ 140.64 $ 127.84 $ 112.64
31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 5,
2002, respecting the holding of: (i) each person who was known to the Company to
be the beneficial owner of more than 5% of the Company's common stock; (ii) each
director and nominee of the Company and each executive officer named in the
Summary Compensation Table under "Executive Compensation" and (iii) all
directors and executive officers of the Company as a group. The Company's common
stock is the only class of stock of the Company that is outstanding. Each of the
persons named in the table below as beneficially owning the shares set fort
therein has sole voting power and sole investment power with respect to such
shares, unless otherwise indicated.
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
------------------------------------------------------------------------------
PERCENT OF
COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER STOCK
------------------------------------------------------------------------------
Technical Olympic, Inc.(1) 9,200,000 80%
4000 Hollywood Blvd., Suite 500-N
Hollywood, FL 33021
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Constantine Stengos 25,000 *
Technical Olympic S.A.
20 Solomou Street
Athens 17456 Greece
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Lonnie M. Fedrick 42,900 *
Newmark Homes Corp.
1200 Soldiers Field Drive
Sugar Land, Texas 77479
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J. Eric Rome 9,000 *
Newmark Home Corporation
5910 Courtyard Drive, Suite 230
Austin, Texas 78731
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Terry C. White 7,500 *
Newmark Homes Corp.
1200 Soldiers Field Drive
Sugar Land, Texas 77479
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J. Michael Beckett (2) 10,900 *
Newmark Homes Corp.
1200 Soldiers Field Drive
Sugar Land, Texas 77479
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All directors and executive officers as a 95,300 *
group (13 persons)
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* Less than one percent
(1) Technical Olympic, Inc. ("Technical Olympic") is a subsidiary of
Technical Olympic (UK) PLC which is a subsidiary of Technical
Olympic S.A. Mr. Constantine Stengos owns greater than 5% of the
outstanding stock of Technical Olympic S.A.
(2) Includes 6,700 shares of common stock held by the wife of Mr.
Beckett as to which he disclaims beneficial ownership.
The Company has been advised that Technical Olympic pledged its
shares of common stock in the Company in support of a commercial loan. Technical
Olympic, which is the wholly owned subsidiary of
32
Technical Olympic (UK) PLC, a company incorporated under the laws of Great
Britain, which is the wholly owned subsidiary of Technical Olympic S.A., a
company incorporated under the laws of Greece, beneficially owns 9,200,000
shares of common stock of the Company, which represent 80% of the issued and
outstanding common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TAX ALLOCATION AGREEMENT - TECHNICAL OLYMPIC
Pursuant to a Tax Allocation Agreement between Technical Olympic and
the Company dated March 15, 2000 and effective as of December 16, 1999, the
Company's earnings may be included in the consolidated federal income tax
returns filed by Technical Olympic. The amount of the Company's liability to (or
entitlement to payment from ) Technical Olympic will equal the amount of taxes
that the Company would owe (or refund that it would receive) had it prepared its
federal tax returns on a stand-alone basis. 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-Technical Olympic, Technical Olympic has agreed to indemnify the
Company for payments which Technical Olympic has already received from the
Company or with respect to any tax liabilities of Technical Olympic or its
affiliated entities other than the Company. The Company has made payments
totaling $12.8 million during and for the year ending December 31, 2001 related
to this agreement.
WESTBROOKE ACQUISITION AMENDMENT
Pursuant to the Stock Purchase Agreement dated January 15, 1998
entered into in connection with the acquisition of Westbrooke, certain
additional consideration or "earn-out payments" based on Westbrooke achieving
specified income targets over a five year period became due and payable to James
Carr, the prior majority owner of Westbrooke, and certain key employees of
Westbrooke upon a change of control. Westbrooke and the Company entered into an
Amendment to Stock Purchase Agreement dated December 15, 1999 with Mr. Carr and
the key employees regarding the amount and timing of the additional
consideration as well as the acquisition of certain partnership interests from
the key employees. The additional consideration for the acquisition of
Westbrooke paid to Mr. Carr was in the form of a $4.6 million promissory note
with extended payment terms. On January 15, 2001, the Company, Mr. Carr and the
key employees entered into the Second Amendment to Stock Purchase Agreement
regarding the amount and timing of certain of the payments to Mr. Carr and the
key employees. Mr. Carr is a director and an Executive Vice President of the
Company.
ADMINISTRATIVE SERVICES
Pacific USA provided certain administrative services to and for the
Company prior to the change of control on December 15, 1999. Functions that were
performed by Pacific USA included 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 have differed from those available to the Company if it were to have
negotiated these contracts on its own. The Company entered into a Services
Agreement with Pacific USA on December 15, 1999 to continue to provide payroll
and employee benefits administration, as well as certain other functions. The
Company made payments totaling $414,000 during and for the year ending December
31, 2000 related to this agreement. This Services Agreement was terminated
December 31, 2000. Mr. Horner was the former chairman of Pacific USA.
33
CAPITAL ACCUMULATION PLAN
The Company and Pacific USA entered into a Schedule of Continuing
Payments Related to the Capital Accumulation Plan (the "Schedule"), such
Schedule dated November 1, 1999. Benefits from the CAP Plan, a former executive
bonus plan earned in 1997 and prior years, were and are payable to Mr. Fedrick,
Mr. Rome, Mr. White, Mr. Beckett and certain other officers of Newmark Home
Corporation. Pursuant to the Schedule, Pacific USA agreed to contribute $200,394
for the annual payments by the Company in both January 2000 and 2001. See the
"Summary Compensation Table" and the footnotes thereto.
MANAGEMENT SERVICES AGREEMENT
Technical Olympic, through its subsidiary Techolym, L.P., provided
certain corporate and staff support and management services to and for the
Company in fiscal year 2001. Functions that were performed by Technical Olympic
included consultation with and assistance to the Board of Directors and
management of the Company in connection with issues involving any and all
matters of the business affairs of the Company. Functions as of January 1, 2001
include plan administration of a self-funded group medical and dental plan for
the Company and its subsidiaries. The Company made payments totaling $1.9 and
$1.5 million during and for the years ending December 31, 2001 and 2000,
respectively, related to this agreement.
MORTGAGE COMPANY BUSINESS
On March 9, 2001, the Company acquired for nominal consideration a
49.99% limited partnership interest in Technical Mortgage, L.P., a Texas limited
partnership, that is a mortgage origination company owned jointly with Preferred
Home Mortgage Company, a Florida corporation that is an affiliate of Technical
Olympic. Preferred Home Mortgage Company underwrites, originates and sells
mortgages for homes the Company builds and for other homebuilders. The Company's
capital is not at risk in connection with these mortgages beyond its limited
partnership interest.
TITLE COMPANY BUSINESS
On April 1, 2001, the Company acquired for $10,000 a 49.0% limited
partnership interest in Universal Land Title of South Florida, Ltd., a Florida
limited partnership, that is a title insurance business owned jointly with
Universal Land Title Investment #1, L.L.C., a Florida limited liability company,
an affiliate of Technical Olympic. The Company's capital is not at risk beyond
its limited partnership interest and the Company assumes no title insurance risk
associated with the title policies.
PARK/WALNUT CREEK TRANSACTION
During 2001, the Company sold to Park/Walnut Creek Investors, LLC
("Walnut Creek") certain undeveloped real estate tracts. Walnut Creek is owned
by several of the executive officers of the Company. The Company has placed
deposits, entered into a number of agreements, including an option contract and
construction contract, with Walnut Creek to develop and buy back fully developed
lots from time to time subject to the terms and conditions of such agreements.
Additionally, under these agreements, the Company can cancel the agreement to
purchase the land by forfeiture of the Company's deposit. The Company believes
that the terms of the purchase contract and the terms of the related option and
development contracts were comparable to those available from unaffiliated
parties. As of December 31, 2001, the remaining value of lots that can be
acquired by the Company approximates $4.3 million. Although the Company does not
have legal title to the assets of Walnut Creek, the Company does exercise
certain rights of ownership, and as a result, has included these assets in
inventory with a corresponding liability in consolidated land bank obligations
in the accompanying consolidated statement of financial condition.
34
CONTRACTOR AGREEMENT
On November 6, 2000, the Company entered into a Contractor Agreement
with Technical Olympic S.A. ("TOSA"), an affiliate of Technical Olympic. TOSA
agreed to provide certain construction services and to purchase such materials,
supplies and labor on behalf of the Company pursuant to certain third-party
contracts assigned to TOSA by the Company or its subsidiaries, all in an effort
to consolidate the purchasing function. The Company maintained the right to
contract directly for any construction services and purchase any goods and
services from any vendors in its own free unlimited discretion. (Although TOSA
would incur certain franchise tax expense, the Company and its subsidiaries are
not liable for such additional purchasing liability.) The Company paid on behalf
of TOSA, for goods and services pursuant to this Agreement, $137 million and
$51.0 million during the fiscal years ending December 31, 2001 and 2000,
respectively.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
1. Financial Statements:
Reports of independent certified public accountants.
Consolidated Statements of Financial Condition as of December 31, 2001
and 2000.
Consolidated Statements of Income for the years ended December 31,
2001 and 2000; for the Period from December 16, 1999 to
December 31, 1999; and for the Period from January 1, 1999 to
December 15, 1999.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001 and 2000; for the Period from December 16,
1999 to December 31, 1999; and for the Period from January 1,
1999 to December 15, 1999.
Consolidated Statements of Cash Flows for the years ended December 31,
2001 and 2000; for the Period from December 16, 1999 to
December 31, 1999; and for the Period from January 1, 1999 to
December 15, 1999.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
Schedule I - Condensed Financial Information of Registrant Parent
Company Only - Statements of Financial Condition as
of December 31, 2001 and 2000.
Condensed Financial Information of Registrant Parent
Company Only - Statements of Income for the years
ended December 31, 2001 and 2000; for the Period
from December 16, 1999 to December 31, 1999; and
for the Period from January 1, 1999 to December 15,
1999.
Condensed Financial Information of Registrant Parent
Company Only - Statements of Cash Flows for the
years ended December 31, 2001 and 2000; for the
Period from December 16, 1999 to December 31, 1999;
and for the Period from January 1, 1999 to December
15, 1999.
35
3. Exhibits required to be filed by Item 601 of Regulation S-K:
EXHIBIT
NUMBER REF EXHIBIT
------- --- -------
2.1 (1) Stock Purchase Agreement dated January 15, 1998 among
James Carr, Westbrooke Communities, Inc., Westbrooke at
West Lake, Inc., Westbrooke at Winston Trails, Inc.,
Westbrooke at Pembroke Pines, Inc., Westbrooke at Oak
Ridge Inc., Harold L. Eisenacher, Leonard R. Chernys,
Diana Ibarria, The Westbrooke Partnership, Pacific USA
Holdings Corp., Newmark Homes Corp., and Westbrooke
Acquisition Corp.
2.1(b) (4) Amendment to Stock Purchase Agreement dated December 15,
1999 among James Carr, Westbrooke Communities, Inc.,
Westbrooke at West Lake, Inc., Westbrooke at Winston
Trails, Inc., Westbrooke at Pembroke Pines, Inc.,
Westbrooke at Oak Ridge, Inc., Harold L. Eisenacher,
Leonard R. Chernys and Diana Ibarria, The Westbrooke
Partnership, Pacific USA Holdings Corp., Newmark Homes
Corp. and Westbrooke Acquisition Corp.
2.1(c) (5) Second Amendment to Stock Purchase Agreement dated January
15, 2001 among James Carr, Westbrooke Communities, Inc.,
Westbrooke at West Lake, Inc., Westbrooke at Winston
Trails, Inc., Westbrooke at Pembroke Pines, Inc.,
Westbrooke at Oak Ridge, Inc., Harold L. Eisenacher,
Leonard R. Chernys and Dianna Ibarria, The Westbrooke
Partnership, Newmark Homes Corp. and Westbrooke
Acquisition Corp.
2.3 (2) Stock Purchase Agreement dated November 24, 1999 between
Pacific Realty Group, Inc., Pacific USA Holdings Corp.,
and Technical Olympic USA, Inc.
2.4 (6) Agreement and Plan of Merger dated February 12, 2001 among
Newmark Homes Corp., a Delaware corporation, and Newmark
Homes Corp., a Nevada corporation.
3.1 (6) Articles of Incorporation.
3.2 (6) Bylaws.
10.1 (1) Form of Tax Allocation Agreement between Pacific USA and
various affiliates and subsidiaries, of Pacific USA,
including the Registrant, dated April 28, 1992.
10.2 (1) Form of Amendment to Tax Agreement.
10.3 (4) Tax Indemnity and Allocation Agreement dated December 15,
1999 among Pacific USA Holdings Corp., Pacific Realty
Group, Inc., Newmark Homes Corp. and Technical Olympic
USA, Inc.
10.4 (1) Employment Agreement between Newmark Homes Corp. and Terry
White dated January 1, 1998.
10.5 (1) Employment Agreement Between Newmark Homes Corp. and J.
Eric Rome dated January 1, 1998.
10.6(a) (4) Second Amended and Restated Employment Agreement Between
Westbrooke Communities, Inc. and James Carr dated December
15, 1999.
10.6(b) (4) Amended and Restated Non-Competition Agreement dated
December 15, 1999 among Westbrooke Communities, Inc.,
Westbrooke at West Lake, Inc., Westbrooke at Winston
Trails, Inc., Westbrooke at Pembrook Pines, Inc.,
Westbrooke at Oak Ridge, Inc., The Westbrooke Partnership,
Westbrooke Acquisition Corp. and James Carr.
10.7 (4) Amended and Restated Employment Agreement between Newmark
Home Corporation and J. Michael Beckett dated March 1,
2000.
10.8 (4) Form of Tax Allocation Agreement between Technical Olympic
USA, Inc. and various affiliates and subsidiaries,
including Newmark Homes Corp. and its subsidiaries.
10.9 (3) Credit Agreement among Newmark Homes, L.P. and Bank of
America, N.A. as Administrative Agent, Swing Line Lender
and Letter of Credit Issuing Lender and Other Financial
Institutions Party Hereto dated June 27, 2000.
36
EXHIBIT
NUMBER REF EXHIBIT
------- --- -------
10.9(a) (7) First Amendment to the Credit Agreement among Newmark
Homes, L.P. and Bank of America, N.A. as Administrative
Agent, Swing Line Lender and Letter of Credit Issuing
Lender and Other Financial Institutions Party Hereto dated
January 1, 2001
10.9(b) (8) Second Amendment to the Credit Agreement among Newmark
Homes, L.P. and Bank of America, N.A. as Administrative
Agent for Itself and Other Entities dated December 1, 2001
10.10 (3) Guaranty Agreement among Newmark Homes Corp. and Newmark
Homes Corporation in favor of Bank of America, N.A. and
the Lenders under the Credit Agreement dated June 27,
2000.
10.11 (3) Management Services Agreement between Newmark Homes Corp.
and Techolym, L.P. dated June 1, 2000.
10.12 (3) Amended and Restated Employment Agreement between Newmark
Homes Corporation and Lonnie M. Fedrick dated May 12, 2000
effective January 1, 2000.
10.13 (9) Form of Indemnification Agreement effective March 1, 2001.
11.1 (5) Statement relating to computation of per share earnings.
21.1 (5) List of subsidiaries.
(1) Filed as part of the Registrant's Registration Statement on Form S-1,
Amendment Number 1, filed with the Securities and Exchange Commission
on March 5, 1998, File No. 333-42213 and incorporated herein by
reference.
(2) Filed as Exhibit 2.1 of registrant's Current Report on Form 8K dated
December 22, 1999 and incorporated herein by reference.
(3) Filed as part of the Registrant's Quarterly Report on Form 10-Q, filed
with the Securities and Exchange Commission on August 10, 2000 and
incorporated herein by reference.
(4) Filed as part of the Registrant's Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on March 27, 2000, File
no. 000-23677 and incorporated herein by reference.
(5) Filed as part of Registrant's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on March 29, 2001, File No.
000-23677 and incorporated herein by reference.
(6) Filed as part of the Registrant's Current Report on Form 8-K dated
March 23, 2001 and incorporated herein by reference.
(7) Filed as part of the Registrant's Quarterly Report on Form 10-Q, filed
with the Securities and Exchange Commission on May 15, 2001 and
incorporated herein by reference.
(8) Filed herewith.
(9) Filed as part of the Registrant's Quarterly Report on Form 10-Q, filed
with the Securities and Exchange Commission on November 14, 2001 and
incorporated herein by reference.
(a) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K during the fourth
quarter of 2001, reporting a change in Registrant's certifying accountant.
On October 5, 2001, the Company filed a Form 8-K disclosing that on
October 1, 2001 its Board dismissed BDO Seidman, LLP as its independent
accountants and engaged Ernst & Young LLP as its new independent certified
public accountants. The date of the report is October 1, 2001, and as of that
date the Company had not consulted Ernst & Young LLP on any accounting issues.
The reports of BDO Seidman, LLP on the Company's financial
statements for the past two fiscal years (2000 and 1999) contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle. In connection with its audits
for the two most recent years and through October 1, 2001, there have been no
disagreements with BDO Seidman, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
37
procedure, which disagreements if not resolved to the satisfaction of BDO
Seidman, LLP would have caused them to make reference thereto in their report on
the financial statements for such years. During the last two years and for the
interim period through October 1, 2001, there were no reportable events of the
type described in Item 304(a)(1)(v) of Regulation S-K. BDO Seidman, LLP provided
a letter dated October 3, 2001 agreeing with the statements made above. Newmark
Homes Corp.'s Form 8-K disclosure filed October 5, 2001 is an exhibit to this
10-K and is incorporated by reference.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 22, 2002 By: /s/ Lonnie M. Fedrick
Date ------------------------------------
Name: Lonnie M. Fedrick
Title: Chief Executive Officer
(Principal Executive Officer)
March 22, 2002 By: /s/ Terry C. White
Date -----------------------------------
Name: Terry C. White
Title: Senior Vice President, Chief
Financial Officer, Treasurer
and Secretary (Principal
Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
March 22, 2002 By: /s/ Constantine Stengos
Date -----------------------------------
Name: Constantine Stengos
Title: Chairman of the Board of
Directors and Director
March 22, 2002 By: /s/ Andreas Stengos
Date -----------------------------------
Name: Andreas Stengos
Title: Director
March 22, 2002 By: /s/ George Stengos
Date -----------------------------------
Name: George Stengos
Title: Director
March 22, 2002 By: /s/ Yannis Delikanakis
Date -----------------------------------
Name: Yannis Delikanakis
Title: Director
March 22, 2002 By: /s/ William A. Hasler
Date -----------------------------------
Name: William A. Hasler
Title: Director
March 22, 2002 By: /s/ Larry D. Horner
Date -----------------------------------
Name: Larry D. Horner
Title: Director
March 22, 2002 By: /s/ Lonnie M. Fedrick
Date -----------------------------------
Name: Lonnie M. Fedrick
Title: Director
39
March 22, 2002 By: /s/ James M. Carr
Date -----------------------------------
Name: James M. Carr
Title: Director
March 22, 2002 By: /s/ Michael Stevens
Date -----------------------------------
Name: Michael Stevens
Title: Director
March 22, 2002 By: /s/ Michael J. Poulos
Date -----------------------------------
Name: Michael J. Poulos
Title: Director
40
NEWMARK HOMES CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
CONTENTS
Reports of Independent Certified Public Accountants 1
Consolidated Financial Statements:
Consolidated Statements of Financial Condition 4
Consolidated Statements of Income 5
Consolidated Statement of Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 9
Report of Independent Certified Public Accountants
The Board of Directors
Newmark Homes Corp.
We have audited the accompanying consolidated statement of financial condition
of Newmark Homes Corp. and subsidiaries as of December 31, 2001 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. Our audit also included the financial statement schedule listed
in the index at Item 14. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Newmark Homes
Corp. and subsidiaries at December 31, 2001, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Ernst & Young LLP
Miami, Florida
January 18, 2002
1
Report of Independent Certified Public Accountants
The Board of Directors
Newmark Homes Corp.:
We have audited the accompanying consolidated statement of financial condition
of Newmark Homes Corp. and subsidiaries (the Successor Company), a subsidiary of
Technical Olympic USA, Inc. as of December 31, 2000 and the related consolidated
statements of income, stockholders' equity, and cash flows for the year ended
December 31, 2000 and for the period from commencement of its operations on
December 16, 1999 through December 31, 1999. We have also audited the
accompanying consolidated statements of income, stockholders' equity, and cash
flows of Newmark Homes Corp. and subsidiaries (the Predecessor Company) as
described in Note 2 of the financial statements), a subsidiary of Pacific USA
Holdings Corp., for the period from January 1, 1999 to December 15, 1999. We
have also audited the schedule listed in the accompanying index for the years
2000 and 1999. These consolidated financial statements and schedule are the
responsibility of management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
schedule are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation of the financial
statements and schedule. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the Successor Company's consolidated financial statements
referred to above, present fairly, in all material respects, the financial
position of the Company as of December 31, 2000, and the results of its
operations and cash flows for the year ended December 31, 2000 and the period
from commencement of its operations on December 16, 1999 to December 31, 1999,
in conformity with accounting principles generally accepted in the United
States. Further in our opinion, based on our audit, the Predecessor Company's
consolidated financial statements, referred to above, present fairly, in all
material respects, the results of operations and cash flows of the Predecessor
Company for the period from January 1, 1999 to December 15, 1999, in conformity
with accounting principles generally accepted in the United States.
2
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
As discussed in Note 2 of the financial statements, Technical Olympic USA, Inc.
acquired an 80% interest in the Predecessor Company on December 15, 1999, in a
business combination accounted for as a purchase. As a result, the consolidated
financial statements of the Successor Company are presented on a new basis of
accounting different from the financial statements of the Predecessor Company
and, therefore, are not comparable.
BDO Seidman, LLP
Los Angeles, California
January 31, 2001
3
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
2001 2000
---------- ----------
ASSETS
Cash and cash equivalents $ 24,822 $ 15,261
Receivables 2,289 4,291
Inventory 252,773 246,712
Property, premises and equipment, net of accumulated depreciation
of $6,321 and $4,728 in 2001 and 2000, respectively 7,985 5,884
Other assets 7,640 6,489
Goodwill, net of accumulated amortization of $3,136 and $1,594 in 2001 and
2000, respectively 43,814 45,354
---------- ----------
Total assets $ 339,323 $ 323,991
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 26,250 $ 33,684
Customer Deposits 11,351 11,607
Consolidated land bank obligations 13,122 --
Construction loans payable 121,658 127,546
Acquisition notes payable 7,370 11,055
Other Liabilities 5,661 4,790
---------- ----------
Total liabilities 185,412 188,682
Minority interest in consolidated subsidiaries 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 46,842 28,339
---------- ----------
Total stockholders' equity 153,812 135,309
---------- ----------
Total liabilities and stockholders' equity $ 339,323 $ 323,991
========== ==========
See accompanying notes.
4
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PERIOD FROM PERIOD FROM
DECEMBER 16, JANUARY 1,
1999 TO 1999 TO
YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 15,
2001 2000 1999 1999
------------ ------------ ------------ ------------
(Successor) (Predecessor)
Revenues $ 629,949 $ 640,506 $ 44,252 $ 447,462
Cost of sales 515,700 529,800 37,047 373,964
------------ ------------ ------------ ------------
Gross profit 114,249 110,706 7,205 73,498
Equity in earnings from unconsolidated
subsidiaries 1,182 769 39 686
Selling, general and administrative expenses
(69,288) (64,720) (2,721) (46,844)
Merger and related expenses (779) -- -- --
Depreciation and amortization (5,349) (4,016) (277) (3,719)
------------ ------------ ------------ ------------
Operating income 40,015 42,739 4,246 23,621
Other income (expense):
Interest expense (1,116) (3,282) (124) (1,721)
Other income, net (190) 1,086 25 1,039
------------ ------------ ------------ ------------
Income before income taxes 38,709 40,543 4,147 22,939
Income taxes 13,996 14,852 1,499 8,202
------------ ------------ ------------ ------------
Net income $ 24,713 $ 25,691 $ 2,648 $ 14,737
============ ============ ============ ============
Earnings per common share:
Basic and diluted $ 2.15 $ 2.23 $ .23 $ 1.28
============ ============ ============ ============
Weighted average number of shares
of common stock equivalents
outstanding:
Basic and diluted 11,500,000 11,500,000 11,500,000 11,500,000
============ ============ ============ ============
See accompanying notes.
5
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
---------- ---------- ---------- ----------
PREDECESSOR COMPANY:
Balance at December 31, 1998 $ 115 $ 73,768 $ 16,229 $ 90,112
Net income for period January 1 to
December 15, 1999 -- -- 14,737 14,737
---------- ---------- ---------- ----------
Balance at December 15, 1999 $ 115 $ 73,768 $ 30,966 $ 104,849
========== ========== ========== ==========
SUCCESSOR COMPANY:
Balance at December 15, 1999 $ 115 $ 73,768 $ 30,966 $ 104,849
Adjustment to reflect purchase by
Technical Olympic, Inc. on the
Company's books -- 33,087 (30,966) 2,121
---------- ---------- ---------- ----------
Opening balance, December 16, 1999 115 106,855 -- 106,970
Net income for period December 16 to
December 31, 1999 -- -- 2,648 2,648
---------- ---------- ---------- ----------
Balance at December 31, 1999 115 106,855 2,648 109,618
Net income -- -- 25,691 25,691
---------- ---------- ---------- ----------
Balance at December 31, 2000 115 106,855 28,339 135,309
Net income -- -- 24,713 24,713
Dividends paid -- -- (6,210) (6,210)
---------- ---------- ---------- ----------
Balance at December 31, 2001 $ 115 $ 106,855 $ 46,842 $ 153,812
========== ========== ========== ==========
See accompanying notes.
6
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM PERIOD FROM
DECEMBER 16, JANUARY 1,
1999 TO 1999 TO
YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 15,
2001 2000 1999 1999
---------- ---------- ------------ ------------
(Successor) (Predecessor)
OPERATING ACTIVITIES
Net income $ 24,713 $ 25,691 $ 2,648 $ 14,737
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 5,349 4,016 277 3,719
Net loss (gain) on sale of property,
premises and equipment 85 (24) -- (36)
Equity in earnings from unconsolidated
subsidiaries (1,182) (769) (39) (686)
Deferred income taxes 253 (360) 22 (362)
Changes in operating assets and
liabilities:
Inventories (5,908) 8,711 (2,908) (66,901)
Receivables 2,002 1,005 (143) (3,289)
Other assets (2,067) (715) (84) (1,920)
Accounts payable and accrued
liabilities (7,587) (2,802) 571 13,134
Other liabilities 615 (2,385) 1,647 4,022
---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities 16,273 32,368 1,991 (37,582)
INVESTING ACTIVITIES
Purchases of property, premises and
equipment (5,039) (2,070) -- (2,286)
Proceeds from sales of property, premises
and equipment 294 252 -- 139
Additional purchase price paid in
connection with Westbrooke acquisition -- (1,230) -- --
Investment in unconsolidated subsidiaries (513) (1,249) -- (345)
Distributions from unconsolidated
subsidiaries 1,108 453 -- 920
---------- ---------- ---------- ----------
Net cash used in investing activities (4,150) (3,844) -- (1,572)
Continued on next page.
7
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
PERIOD FROM PERIOD FROM
DECEMBER 16, JANUARY 1,
1999 TO 1999 TO
YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 15,
2001 2000 1999 1999
------------ ------------ ------------ -------------
(Successor) (Predecessor)
FINANCING ACTIVITIES
Proceeds from advances on construction
loans payable $ 272,924 $ 307,718 $ 12,860 $ 337,506
Principal payments on construction loans
payables (265,690) (329,552) (12,902) (296,737)
Principal payments on acquisition notes
payable (3,685) (3,418) -- (2,468)
Minority interest in consolidated
subsidiaries 99 -- -- --
Dividends paid (6,210) -- -- --
------------ ------------ ------------ ------------
Net cash (used in) provided by financing
activities (2,562) (25,252) (42) 38,301
------------ ------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents 9,561 3,272 1,949 (853)
Cash and cash equivalents at beginning of
period 15,261 11,989 10,040 10,893
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 24,822 $ 15,261 $ 11,989 $ 10,040
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for:
Interest (net of amounts capitalized) $ 483 $ 3,144 $ -- $ 1,016
============ ============ ============ ============
Income taxes $ 14,078 $ 15,802 $ -- $ 10,723
============ ============ ============ ============
See accompanying notes.
8
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. ORGANIZATION Newmark Homes Corp., a Delaware Corporation, and
subsidiaries (NHC or the Company) is an 80% owned
subsidiary of Technical Olympic, Inc. (TOI),
formerly known as Technical Olympic USA, Inc. On
December 15, 1999, TOI acquired 80% of the Company
in a stock purchase transaction. NHC was formed in
December 1994 to serve as a real estate holding
company.
NHC's primary subsidiaries are as follows:
SUBSIDIARY NATURE OF BUSINESS
-----------------------------------------------------------------------------------------------------
Newmark Home Corporation (Newmark) Single-family residential homebuilding in Texas,
Tennessee and North Carolina; formed in 1983.
Westbrooke Communities, Inc.
(Westbrooke) Single-family residential homebuilding and residential lot
developer in Florida; formed in 1976.
Pacific United Development Corporation Residential lot developer in Texas and Tennessee; (PUDC)
(PUDC) formed in 1993.
2. CHANGE IN CONTROL On December 15, 1999, TOI purchased 9,200,000
shares of the Company's common stock for $86
million in cash. The shares sold in this
transaction represent 80% of the Company's
outstanding common stock. TOI purchased the shares
from Pacific Realty Group, Inc. (PRG), a Nevada
corporation, which is a wholly-owned subsidiary of
Pacific USA Holdings Corp. (PUSA), a Texas
corporation and an indirect subsidiary of Pacific
Electric Wire & Cable, Ltd.
TOI, a Delaware corporation, is a wholly owned
subsidiary of Technical Olympic (UK) PLC, an
English company, which is a wholly owned
subsidiary of Technical Olympic S.A., a Greek
company.
This acquisition by TOI is accounted for as a
purchase, and the purchase price is recorded on
the Company's books. The excess of purchase price
over the fair value of the assets acquired and the
liabilities assumed (goodwill) approximates $46
million.
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CHANGE IN CONTROL In connection with the acquisition by TOI, the
(CONTINUED) 1998 Tandem Stock Option/Stock Appreciation Rights
Plan was terminated, as follows: the Company
exercised its right to terminate the options upon
a change of control and to pay the spread between
the exercise price and the closing price of the
Common Stock on the date of the change of control,
December 15, 1999. There was no spread, and the
options expired and terminated on December 15,
1999. There were no other incentive awards
outstanding or exercisable in fiscal year 1999.
Pursuant to the stock purchase agreement entered
into in connection with the acquisition of
Westbrooke in 1998, certain additional
consideration dependent upon Westbrooke achieving
specified income targets over a five-year period
became due and payable to the prior majority owner
of Westbrooke upon a change of control. At the
time of the acquisition of the Company by TOI,
Westbrooke entered into an Amendment to Stock
Purchase Agreement (the Amendment) with the prior
owner and key employees of Westbrooke regarding
the amount and timing of the additional
consideration as well as the acquisition of
certain partnership interests from the key
employees. The amount of additional consideration
recorded in the transaction as a result of the
change in control to the prior majority owner was
$4.6 million in the form of a promissory note.
Additionally, the Amendment adjusted the level of
additional consideration payable to the key
employees from 6% to 7.5% of the net income before
income taxes, all as defined in the Amendment.
For tax purposes, the Company elected to treat the
change in control as a deemed taxable sale of
assets resulting in a step-up in the tax basis of
assets in accordance with Internal Revenue Code
Section 338(h)(10). By electing Section
338(h)(10), the Company recognized taxable income
of approximately $20 million, and $8 million of
tax per the original tax sharing agreement, due to
the difference in the financial statement basis
and the tax basis of the assets immediately prior
to the change in control. In terms of the purchase
and sale agreement between PUSA and TOI, the
former tax allocation agreement between PUSA and
the Company (the Former Tax Sharing Agreement) was
modified to exclude the gain and corresponding tax
from this transaction from the calculation of the
tax payments by the Company to PUSA. Accordingly,
the Company recognized its income tax expense
based on the taxable income generated from its
operations.
10
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CHANGE IN CONTROL As a result, the consolidated amounts of the
(CONTINUED) Successor Company are presented on a new basis of
accounting different from the financial statements
of the Predecessor Company and, therefore, are not
comparable.
The following table represents the operating
results of the Company on a full year basis for
the year ended December 31, 1999 (in thousands,
except per share data).
Revenues $ 491,714
Cost of sales 411,011
------------
Gross profit 80,703
Equity in earnings from unconsolidated subsidiaries 725
Selling, general and administrative expenses (49,565)
Depreciation and amortization (3,996)
------------
Operating income 27,867
Other income (expense):
Interest expense (1,845)
Other income, net 1,064
------------
Income before income taxes 27,086
Income taxes 9,701
------------
Net income $ 17,385
============
Net income per common share $ 1.51
============
3. SUMMARY OF The accounting and reporting policies of the
SIGNIFICANT Company conform to accounting principles generally
ACCOUNTING accepted in the United States and general
POLICIES practices within the homebuilding industry. The
following summarizes the more significant of these
policies.
11
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION
SIGNIFICANT
ACCOUNTING The consolidated financial statements include the
POLICIES accounts of NHC and its subsidiaries. All
(CONTINUED) significant intercompany balances and transactions
have been eliminated in the consolidated financial
statements.
CASH AND CASH EQUIVALENTS
Cash includes amounts in transit from title
companies for home closings and highly liquid
investments with an initial maturity of three
months or less.
USE OF ESTIMATES
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.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with 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, the Company
carries long-lived assets, including certain
identifiable intangibles and goodwill, at the
lower of the carrying amount or fair value.
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 estimated future cash flows, discounted
at a market rate of interest.
CONCENTRATION OF CREDIT RISK
The Company conducts business primarily in Texas,
Florida, Tennessee, and North Carolina.
Accordingly, the market value of the Company's
inventory is susceptible to changes in market
conditions that may occur in these locations.
12
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF The Company has accounts with various financial
SIGNIFICANT institutions, which are insured by the FDIC.
ACCOUNTING Amounts exceeding the FDIC insured amounts are $13
POLICIES million at December 31, 2001.
(CONTINUED)
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The Company has investments in unconsolidated
entities, which approximate $2.8 million and $2.2
million as of December 31, 2001 and 2000,
respectively, and are included in other assets in
the accompanying consolidated statements of
financial condition. The Company does not have
control of these entities and has, therefore,
accounted for its interests using the equity
method of accounting.
INVENTORY
Inventories are stated at the lower of cost or
fair value. Inventories under development or held
for development are stated at an accumulated cost
unless such cost would not be recovered from the
cash flows generated by future disposition. In
this instance, such inventories are recorded at
fair value. Inventories to be disposed of are
carried at the lower of cost or fair value less
cost to sell. The Company utilizes the specific
identification method of charging construction
costs to cost of sales as units are sold. Common
construction project costs are allocated to each
individual home in the various subdivisions based
upon the total number of homes to be constructed
in each subdivision community.
PROPERTY, PREMISES AND EQUIPMENT
Property, premises and equipment, consisting
primarily of office premises, transportation
equipment, office furniture and fixtures, and
model home furniture, are stated at cost net of
accumulated depreciation. Repairs and maintenance
are expensed as incurred. Depreciation generally
is provided using the straight-line method over
the estimated useful life of the asset, which
ranges from 3-30 years.
13
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF GOODWILL
SIGNIFICANT
ACCOUNTING Goodwill represents the excess of the purchase
POLICIES price of the Company's acquisitions over the fair
(CONTINUED) value of the net assets acquired. Goodwill is
amortized on a straight-line basis over thirty
years. For the year ended December 31, 2000,
goodwill increased by approximately $1.2 related
to a payment made under an earn-out provision in
the Westbrooke stock purchase agreement.
Periodically, the Company evaluates goodwill for
impairment by determining whether the amortization
of the balance over its remaining life can be
recovered through future undiscounted cash flows
of the Company.
REVENUE RECOGNITION
The Company's primary source of revenue is the
sale of homes to homebuyers. To a lesser degree,
the Company engages in the sale of land to other
homebuilders. Revenue is recognized on home sales
and land sales when the requirements under SFAS
66, Accounting for Sales of Real Estate, are met,
usually at closing upon the transfer of title.
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, 2001, 2000 and
1999 was approximately $8.8 million, $8.3 million
and $7.6 million, respectively.
REPORTING ON THE COSTS OF START-UP ACTIVITIES
Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities (SOP 98-5), issued by the
American Institute of Certified Accountants, is
effective for years after December 15, 1998. SOP
98-5 requires that costs of start-up activities be
expensed as incurred. The Company adopted SOP 98-5
on January 1, 1999 and $259,000 of start-up costs
was expensed during the period from January 1 to
December 15, 1999.
14
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF INCOME TAXES
SIGNIFICANT
ACCOUNTING The Company was included in the consolidated
POLICIES federal income tax return of PUSA through December
(CONTINUED) 15, 1999. Under the Former Tax Sharing Agreement
with PUSA, the Company was required to calculate
its federal income tax on a separate company basis
and pay to PUSA the amount of the liability. When
applicable, the Company was entitled to receive
payments from PUSA. Such payment was only
applicable to the extent the benefits calculated
could be utilized to offset prior separate company
income through carryback or, if carried forward,
at the time such benefits were utilized to offset
separate company income. The Former Tax Sharing
Agreement between PUSA and the Company was
partially terminated whereby the Company would pay
PUSA an amount equal to the federal income taxes
that the Company would owe (or refund that it
would receive) had it prepared its federal income
tax return on a stand-alone basis.
Effective December 16, 1999, the Company is
included in the consolidated federal income tax
return with TOI pursuant to a revised Tax
Allocation Agreement between the Company and TOI.
As a result of this revised Tax Allocation
Agreement, 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.
15
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF EARNINGS PER SHARE
SIGNIFICANT
ACCOUNTING The Company presents earnings per share data in
POLICIES accordance with the provisions of SFAS 128,
(CONTINUED) Earnings Per Share. Basic earnings per share is
computed by dividing income available to common
stockholders by the weighted-average number of
common shares outstanding for the period.
Diluted earnings per share is computed based on
the weighted average number of shares of common
stock and dilutive securities outstanding during
the period. Dilutive securities are options that
are freely exercisable into common stock at less
than market exercise prices. Dilutive securities
are not included in the weighted average number of
shares when inclusion would increase the earnings
per share or decrease the loss per share. For the
years ended December 31, 2001, 2000 and 1999, the
Company had no dilutive securities outstanding.
STOCK-BASED COMPENSATION
The Company accounts for its stock option plan in
accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related
interpretations. As such, compensation expense
would be recorded on the date of grant only if the
current market price of the underlying stock
exceeded the exercise price.
Effective December 15, 1999, as part of the change
in control, all Tandem Stock Option/Stock
Appreciation Rights were terminated.
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 and notes
payable approximates its fair value as
substantially all of the debt has a fluctuating
interest rate based upon a current market index.
The carrying amount of the acquisition notes
payable approximate their fair value.
16
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS
SIGNIFICANT
ACCOUNTING In June 2001, the Financial Accounting Standards
POLICIES Board finalized SFAS 141, Business Combinations,
(CONTINUED) and SFAS 142, Goodwill and Other Intangible
Assets. 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's previous business combinations were
accounted for using the purchase method. As of
December 31, 2001, the net carrying amount of
goodwill is $43.8 million. Amortization expenses
during the year ended December 31, 2001 was $1.5
million. Currently, the Company is assessing but
has not yet determined how the adoption of SFAS
141 and SFAS 142 will impact its consolidated
financial position and consolidated results of
operation.
In October 2001, the FASB issued SFAS 144,
Accounting for the Impairment or Disposal of
Long-Lived Assets. The Statement supersedes SFAS
121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed
Of, however, it retains the fundamental provisions
of that statement related to the recognition and
measurement of the impairment of long-lived assets
to be "held and used." In addition, the Statement
provides more guidance on estimating cash flows
when performing a recoverability test, requires
that a long-lived asset to be disposed of other
than by sale (e.g., abandoned) be classified as
"held and used" until it is disposed of, and
establishes more restrictive criteria to classify
an asset as "held for sale." The Statement is
effective for year-ends beginning after December
15, 2001.
17
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF RECLASSIFICATION
SIGNIFICANT
ACCOUNTING Certain reclassifications have been made to
POLICIES conform the prior year's amounts to the current
(CONTINUED) year's presentation.
4. PENDING MERGER On March 6, 2001, the Company announced it is
WITH ENGLE considering the possible merger of NHC with Engle
HOMES Holdings Corp. (Engle). Engle is a wholly owned
subsidiary of TOI. Engle, through its wholly owned
operating subsidiary, Engle Homes, is primarily
engaged in the sale of single-family residences in
Florida, Texas, Colorado, Arizona and Virginia.
The Special Committee of the Company's independent
directors is reviewing the transaction and will
make a recommendation to the Company's full board.
There are no assurances that the Special Committee
will either recommend the merger or that such a
merger will be consummated. Any merger would also
be subject to execution of a definitive agreement,
certain regulatory and other approvals as well as
the approval of various lenders of Engle, NHC and
TOI. If the merger is consummated, it is
contemplated that shares of Engle Holdings would
be exchanged for shares of NHC. During 2001, in
connection with the proposed merger, the Company
incurred approximately $779,000 in legal and
related costs. These costs are included in merger
and related expenses in the accompanying statement
of income.
The Company was notified of the filing of two
lawsuits against certain officers, directors and
subsidiaries of the Company, challenging any
transaction between the Company and Engle Holdings
as a violation of fiduciary duty. Given the fact
that there is no transaction agreed to between the
Company and Engle, the Company believes the
lawsuits are without merit, and the Company
intends to vigorously defend itself and its
directors.
18
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVENTORY Inventory consists of the following as of December
31, (in thousands):
2001 2000
------------ ------------
Lots and land held for development $ 86,008 $ 77,414
Residences completed and under construction 147,300 150,583
Models 19,465 18,715
------------ ------------
$ 252,773 $ 246,712
============ ============
A summary of interest capitalized in inventory is
as follows (in thousands):
YEARS ENDED DECEMBER 31,
2001 2000 1999
----------- ----------- -----------
Interest capitalized, beginning of period $ 7,323 $ 6,672 $ 5,516
Interest incurred 12,090 15,730 13,265
Less interest included in:
Cost of sales 11,814 11,797 10,264
Interest expense 1,116 3,282 1,845
----------- ----------- -----------
Interest capitalized, end of period $ 6,483 $ 7,323 $ 6,672
=========== =========== ===========
In the ordinary course of business, the Company
enters into contracts to purchase lots and land
held for lot development. At December 31, 2001 and
2000, the Company had nonrefundable deposits
aggregating $2.0 million and $1.8 million,
respectively, included in other assets in the
accompanying consolidated statements of financial
condition, for lots and land with a related
purchase price of approximately $64.1 million and
$98.2 million, respectively. The Company's
liability for nonperformance under such contracts
is limited to forfeiture of the related deposits.
19
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVENTORY During 2001, through Westbrooke, the Company
(CONTINUED) entered into an option arrangement with
Durham-Florida Properties, LLC (Durham) to acquire
developed lots with a total estimated contract
price of $16.4 million. Under this option
arrangement, the Company has placed a $3.7 million
financial guarantee bond with Durham, which is
reduced on a pro rata basis as lots are purchased
by Westbrooke. This bond is guaranteed by the
Company Under this arrangement, Westbrooke can
cancel this agreement to purchase the land by
forfeiture of Westbrooke's bond. Although
Westbrooke does not have legal title to the assets
of Durham and has not guaranteed the liabilities,
Westbrooke does exercise certain rights of
ownership over Durham's assets, and as a result,
the Company has included these assets in inventory
with a corresponding liability in consolidated
land bank obligations in the accompanying
statement of financial condition.
During 2001, through Westbrooke, the Company sold
to Park/Walnut Creek Investors, LLC (Walnut Creek)
certain undeveloped real estate tracts. Walnut
Creek is owned by several of the executive
officers of Westbrooke. The Company has placed
deposits, entered into a number of agreements,
including an option contract and construction
contract with Walnut Creek, to develop and buy
back fully developed lots from time to time
subject to the terms and conditions of such
agreements. Additionally, under these agreements,
the Company can cancel the agreement to purchase
the land by forfeiture of the Company's deposits.
The Company believes that the terms of the
purchase contract and the terms of the related
option and development contracts were comparable
to those available from unaffiliated parties. As
of December 31, 2001, the remaining value of lots
that can be acquired by the Company approximates
$4.3 million. Although Westbrooke does not have
legal title to the assets of Walnut Creek,
Westbrooke does exercise certain rights of
ownership, and as a result, the Company has
included these assets in inventory with a
corresponding liability in consolidated land bank
obligations in the accompanying consolidated
statement of financial condition.
As a result of the above transactions, the Company
has included in its consolidated statement of
financial condition inventory of approximately $13
million and consolidated land bank obligations of
approximately $13 million. These obligations are
at market interest rates and are repaid based on
lot closings with a final maturity through January
31, 2004.
6. CONSOLIDATED The Company acquired a 75% interest in Silver Oak
JOINT VENTURES 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
20
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
consolidated with the operations of the Company.
Silver Oak Trails, L.P. earned $0.4 million of
which $0.1 million is classified as minority
interest in the accompanying consolidated
statement of income for the year ending December
31, 2001.
21
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CONSTRUCTION On June 27, 2000, the Company entered into a
AND ACQUISITION syndicated $150 million secured revolving credit
LOANS PAYABLE facility with six banks, which matures on June 27,
2003, with annual options for one-year extensions.
This credit facility has been used to finance the
acquisition and development of residential
subdivisions, the purchase of developed lots and
the construction of homes in the Texas, Tennessee
and North Carolina markets.
Construction loans payable consist of the
following at December 31, (in thousands):
2001 2000
------------ ------------
Construction and lot loans with financial institutions, collateralized
by lots and single family residences completed or under
construction, bearing interest at LIBOR plus 175 basis points to
prime rate (4.20% to 4.75% at December 31, 2001), maturing upon
completion and closing of the homes $ 102,694 $ 97,132
Development and land acquisition loans with financial institutions,
collateralized by deeds of trust on property, with maturing dates
ranging from June, 2003 through December, 2004, bearing interest at
LIBOR plus 175 basis points to prime rate plus 1% (4.20% to 5.75% at
December 31, 2001) 17,819 29,784
Other 1,145 630
------------ ------------
$ 121,658 $ 127,546
============ ============
22
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CONSTRUCTION Maturities on construction loans payable at
AND ACQUISITION December 31, 2001 are as follows (in thousands):
LOANS PAYABLE
(CONTINUED)
December 31,
------------
2002 $ 120,607
2003 100
2004 107
2005 114
2006 121
Thereafter 609
-------------
$ 121,658
=============
Construction and lot loans are generally repaid as
sales of individual homes are closed and,
therefore, are considered current at December 31,
2001. At December 31, 2001, the Company had lines
of credit commitments for construction loans
totaling approximately $221 million, of which $20
million was 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, 2001, the Company
was in compliance with such requirements. 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.
In connection with NHC's acquisition of
Westbrooke, the Company has remaining notes which
are payable in annual installments of $2.4 million
beginning in January 1999. The Company made its
first installment of $2.4 million in 1999. The
remaining notes totaling $9.9 million bear
interest at 6.45% payable annually. As indicated
in Note 2, additional consideration paid as a
result of the change of control resulted in an
additional $4.6 million promissory note. During
2000, the Company made further payments on
acquisition loans of $3.4 million. At December 31,
2001 and 2000, the total acquisition notes payable
to Westbrooke's prior majority owner was
approximately $7.4 million and $11.1 million,
respectively.
23
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY While a subsidiary of PUSA, the Company purchased
TRANSACTIONS insurance policies from an affiliated insurance
broker. The affiliated entity earned commissions
of $155,000 in 1999 with respect to such policies.
From January 1, 2000 to December 15, 2000 the
Company continued to utilize the services of the
PUSA affiliate. As of December 15, 2000, the
Company purchased insurance under the TOI umbrella
policy. As a result, the Company currently makes
payments directly to an unaffiliated broker. Also,
while a subsidiary of PUSA, the Company purchased
demographic and economic research information
through an affiliate for $57,000 in 1999.
In 2000, the Company entered into a purchasing
agreement with its parent, Technical Olympic S.A.
The agreement provided that Technical Olympic S.A.
would purchase certain of the materials and
supplies necessary for operations and sell them to
the Newmark entities, all in an effort to
consolidate the purchasing function. Although
Technical Olympic S.A. would incur certain
franchise tax expense, Newmark and its
subsidiaries would not be required to pay such
additional purchasing liability. Technical Olympic
S.A. purchased $137 million and $51 million of
materials and supplies on behalf of Newmark and
its subsidiaries during the years ended December
31, 2001 and 2000, respectively. This agreement
was terminated effective June 30, 2001.
In 2000, the Company entered into a management
services agreement with TOI, whereby TOI will
provide certain advisory, administrative and other
services. For the years ended December 31, 2001
and 2000, the Company paid $1.9 million and $1.5
million, respectively. These expenses are included
in selling, general and administrative expenses in
the accompanying statements of income.
24
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES Components of income tax expense consist of the
following (in thousands):
YEAR ENDED DECEMBER 31, 2001 2000 1999
---------- ---------- ----------
Current:
Federal $ 12,863 $ 14,247 $ 9,984
State 880 965 57
---------- ---------- ----------
13,743 15,212 10,041
---------- ---------- ----------
Deferred:
Federal 237 (360) (340)
State 16 -- --
---------- ---------- ----------
253 (360) (340)
---------- ---------- ----------
$ 13,996 $ 14,852 $ 9,701
========== ========== ==========
The difference between total reported income taxes
and expected income tax expense computed using the
federal statutory income tax rate of 35% for 2001,
2000 and 1999 is reconciled as follows (in
thousands):
YEAR ENDED DECEMBER 31, 2001 2000 1999
------------ ------------ ------------
Computed income tax expense at statutory
rate $ 13,591 $ 14,190 $ 9,481
Non-deductible goodwill amortization
-- -- 208
State taxes, net of federal benefit 579 627 38
Other (174) 35 (26)
------------ ------------ ------------
Income taxes $ 13,996 $ 14,852 $ 9,701
============ ============ ============
25
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES Significant temporary differences that give rise to the
(CONTINUED) deferred tax assets and liabilities are as follows (in
thousands):
DECEMBER 31, 2001 2000
------------ ------------
Deferred tax assets:
Warranty reserve $ 874 $ 366
Property, premises and equipment, principally due to
differences in depreciation 75 28
Inventory 194 350
Other 129 160
------------ ------------
Total deferred tax assets 1,272 904
------------ ------------
Deferred tax liabilities:
Amortizable intangibles (997) (381)
Other (13) (8)
------------ ------------
Total deferred tax liabilities (1,010) (389)
------------ ------------
Net deferred tax asset $ 262 $ 515
============ ============
The net deferred tax assets included in other assets in the
accompanying consolidated statement of financial condition
at December 31, 2001 and 2000 was $262,000 and $515,000,
respectively. 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, 2001 and 2000.
Included in other liabilities in the accompanying
consolidated statements of financial condition is
approximately $1.7 million and $.6 million payable to TOI at
December 31, 2001 and 2000, respectively under the terms of
the tax sharing agreements. Payments of $12.7 million and
$15.3 million were made to TOI for federal income taxes
during 2001 and 2000, respectively, and $10.7 million to
PUSA for federal income taxes during 1999.
26
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES The Internal Revenue Code Section 338(h)(10)
(CONTINUED) election discussed in Note 2 resulted in the
creation of amortizable goodwill for tax purposes
in excess of amortizable goodwill for financial
statement purposes. Accordingly, the Company
recognized a new deferred tax asset of
approximately $.2 million at December 16, 1999.
From December 16, 1999, the goodwill reflected in
the financial statements of approximately $46
million will be amortized on a straight-line basis
over a period of thirty years; whereas, the
goodwill for tax purposes of approximately $46.5
million will be amortized on a straight-line basis
over a period of fifteen years.
10. COMMITMENTS AND The Company leases office premises and equipment
CONTINGENCIES under noncancellable operating leases. Future
minimum payments under these noncancellable
operating leases for the fiscal years ending on
December 31 are as follows (in thousands):
December 31,
------------
2002 $ 620
2003 548
2004 368
2005 213
2006 217
--------
$ 1,966
========
Rental expense for the years ended December 31,
2001, 2000 and 1999 aggregated, $745,000, $662,000
and $425,000, 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 limited
warranty of workmanship and materials from the
date of sale for up to two years. 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 with a
third party. This warranty generally covers major
structural defects. Estimated warranty costs are
recorded at the
27
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND time of sale. Total warranty expense for the year
CONTINGENCIES ended December 31, 2001, 2000 and 1999 was $3.6
(CONTINUED) million, $4.2 million and $3.2 million,
respectively. As of December 31, 2001 and 2000,
the liability accrued by the Company for warranty
costs was $2.5 million and $2.5 million,
respectively, and was included in other
liabilities.
The Company has secured letter of credit
facilities, which are used to issue letters of
credit, which guarantee Westbrooke's performance
of certain development and construction
obligations. At December 31, 2001 and 2000,
letters of credit aggregating $3.8 and $2.9
million, respectively, were outstanding under
these facilities. No additional amounts are
available under this facility.
11. STOCK OPTION During 2001, the Company adopted the Newmark Homes
PLAN Corp. Annual and Long-Term Incentive Plan (the
Plan) pursuant to which employees, consultants and
directors of the Company, its subsidiaries and
affiliated entities are eligible to receive
options to purchase shares of common stock. Under
the plan, subject to adjustment as defined, the
maximum number of shares with respect to which
awards may be granted under the Plan shall be
4,000,000. Pursuant to the Plan, no shares can be
granted prior to consummation of the
aforementioned merger between the Company and
Engle. As a result, as of December 31, 2001, no
options have been granted.
12. EMPLOYEE The Company has a 401 (k) Profit Sharing Plan (the
BENEFIT PLAN Plan). Under the terms of the Plan, the Company
matches 50% of employee's voluntary contributions
up to a maximum of 6% of each participant's
earnings. The Company's matching contributions to
the Plan for the year ended December 31, 2001,
2000 and 1999 were $721,000, $681,000 and
$299,000, respectively. Effective December 16,
1999, this plan is being sponsored by TOI.
28
NEWMARK HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. QUARTERLY RESULTS Quarterly results for the years ended December 31,
(UNAUDITED) 2001 and 2000 are reflected below (in thousands,
except per share amounts):
FOURTH THIRD SECOND FIRST
----------- ----------- ----------- -----------
2001
----
Revenue $ 178,557 $ 163,011 $ 155,565 $ 132,816
Operating income 9,451 10,701 11,011 8,852
Net income 5,689 6,708 7,263 5,053
Basic and diluted earnings per share .49 .58 .63 .44
2000
----
Revenue 193,382 146,207 164,491 136,426
Operating income 13,428 9,486 11,100 8,725
Net income 8,132 5,655 6,580 5,324
Basic and diluted earnings per share .71 .49 .57 .46
Quarterly and year-to-date computations of per
share amounts are made independently. Therefore,
the sum of per share amounts for the quarters may
not agree with the per share amounts for the year.
29
SCHEDULE I
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)
2001 2000
--------- ---------
ASSETS
Cash and cash equivalents ................................................. $ 587 $ 120
Investments in and equity in net assets of subsidiaries ................... 113,747 96,258
Goodwill .................................................................. 43,814 45,354
Other assets .............................................................. 482 629
--------- ---------
Total assets .................................................... $ 158,630 $ 142,361
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Acquisition notes payable ................................................. $ 5,433 $ 6,650
Other liabilities ......................................................... (615) 402
--------- ---------
Total liabilities ............................................... 4,818 7,052
--------- ---------
Stockholders' Equity:
Common stock ....................................................... 115 115
Additional paid in capital ......................................... 106,855 106,855
Retained earnings .................................................. 46,842 28,339
--------- ---------
Total Stockholders' Equity ...................................... 153,812 135,309
--------- ---------
Total Liabilities and Stockholders' Equity ...................... $ 158,630 $ 142,361
========= =========
PARENT COMPANY ONLY STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
PERIOD FROM PERIOD FROM
DECEMBER 16, JANUARY 1,
YEAR ENDED YEAR ENDED 1999 TO 1999 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 15,
2001 2000 1999 1999
------------- ------------- ------------- -------------
Equity in earnings of subsidiaries
(net of taxes) ......................................... $ 29,744 $ 28,846 $ 2,730 $ 15,183
Other expenses ............................................. 5,031 3,155 82 446
------------- ------------- ------------- -------------
Net income ................................................. $ 24,713 $ 25,691 $ 2,648 $ 14,737
============= ============= ============= =============
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, 1999
(DOLLARS IN THOUSANDS)
PERIOD FROM PERIOD FROM
DECEMBER JANUARY 1,
1999 1999
YEAR ENDED YEAR ENDED TO TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 15,
2001 2000 1999 1999
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 24,713 $ 25,691 $ 2,648 $ 14,737
Adjustments to reconcile net income to cash from operating
activities:
Change in other assets ................................... 1,687 (180) (138) (132)
Change in other liabilities .............................. (1,017) (707) 16 363
Equity in undistributed earnings of subsidiaries ......... (29,744) (28,846) (2,730) (15,183)
------------ ------------ ------------ ------------
Net cash used in operating activities ........................... (4,361) (4,042) 72 (215)
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends from subsidiaries .................................. 12,255 8,583 -- 2,880
Capital contributions to subsidiaries ........................ -- (4,567) -- (2,000)
------------ ------------ ------------ ------------
Net cash provided by investing activities ....................... 12,255 4,016 -- 880
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on acquisition loan ....................... (1,217) (950) -- --
Dividends paid ............................................... (6,210) -- -- --
------------ ------------ ------------ ------------
Net cash used in financing activities ........................... (7,427) (950) -- --
Net change in cash and cash equivalents ......................... 467 (976) 72 665
Cash and cash equivalents at the beginning of the period ........ 120 1,096 1,024 359
------------ ------------ ------------ ------------
Cash and cash equivalents at the end of the period .............. $ 587 $ 120 $ 1,096 $ 1,024
============ ============ ============ ============
NEWMARK HOMES CORP. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the parent-company-only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since date of acquisition or formation. The Company's share of net
income or loss of its unconsolidated subsidiaries is included in consolidated
income using the equity method. Parent-company-only financial statements should
be read in conjunction with the Company's consolidated financial statements.
2. ACQUISITION LOANS PAYABLE
In connection with the Company's acquisition of Westbrooke Communities, Inc.
(Westbrooke), the Company has remaining acquisition loans payable to
Westbrooke's prior majority owner. These notes bear interest at 6.45% and are
payable in annual installments. At December 31, 2001 and 2000, the remaining
unpaid balance of these loans was approximately $5.4 million and $6.6 million,
respectively.
3. DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to Newmark Homes Corp. from the Company's consolidated
subsidiaries for the years ended December 31, 2001 and 2000, and for the period
from January 1, 1999 to December 15, 1999 were $12,255,000, $8,583,000 and
$2,880,000, respectively.
INDEX TO EXHIBITS
EXHIBIT
NUMBER REF EXHIBIT
------- --- -------
2.1 (1) Stock Purchase Agreement dated January 15, 1998 among
James Carr, Westbrooke Communities, Inc., Westbrooke at
West Lake, Inc., Westbrooke at Winston Trails, Inc.,
Westbrooke at Pembroke Pines, Inc., Westbrooke at Oak
Ridge Inc., Harold L. Eisenacher, Leonard R. Chernys,
Diana Ibarria, The Westbrooke Partnership, Pacific USA
Holdings Corp., Newmark Homes Corp., and Westbrooke
Acquisition Corp.
2.1(b) (4) Amendment to Stock Purchase Agreement dated December 15,
1999 among James Carr, Westbrooke Communities, Inc.,
Westbrooke at West Lake, Inc., Westbrooke at Winston
Trails, Inc., Westbrooke at Pembroke Pines, Inc.,
Westbrooke at Oak Ridge, Inc., Harold L. Eisenacher,
Leonard R. Chernys and Diana Ibarria, The Westbrooke
Partnership, Pacific USA Holdings Corp., Newmark Homes
Corp. and Westbrooke Acquisition Corp.
2.1(c) (5) Second Amendment to Stock Purchase Agreement dated January
15, 2001 among James Carr, Westbrooke Communities, Inc.,
Westbrooke at West Lake, Inc., Westbrooke at Winston
Trails, Inc., Westbrooke at Pembroke Pines, Inc.,
Westbrooke at Oak Ridge, Inc., Harold L. Eisenacher,
Leonard R. Chernys and Dianna Ibarria, The Westbrooke
Partnership, Newmark Homes Corp. and Westbrooke
Acquisition Corp.
2.3 (2) Stock Purchase Agreement dated November 24, 1999 between
Pacific Realty Group, Inc., Pacific USA Holdings Corp.,
and Technical Olympic USA, Inc.
2.4 (6) Agreement and Plan of Merger dated February 12, 2001 among
Newmark Homes Corp., a Delaware corporation, and Newmark
Homes Corp., a Nevada corporation.
3.1 (6) Articles of Incorporation.
3.2 (6) Bylaws.
10.1 (1) Form of Tax Allocation Agreement between Pacific USA and
various affiliates and subsidiaries, of Pacific USA,
including the Registrant, dated April 28, 1992.
10.2 (1) Form of Amendment to Tax Agreement.
10.3 (4) Tax Indemnity and Allocation Agreement dated December 15,
1999 among Pacific USA Holdings Corp., Pacific Realty
Group, Inc., Newmark Homes Corp. and Technical Olympic
USA, Inc.
10.4 (1) Employment Agreement between Newmark Homes Corp. and Terry
White dated January 1, 1998.
10.5 (1) Employment Agreement Between Newmark Homes Corp. and J.
Eric Rome dated January 1, 1998.
10.6(a) (4) Second Amended and Restated Employment Agreement Between
Westbrooke Communities, Inc. and James Carr dated December
15, 1999.
10.6(b) (4) Amended and Restated Non-Competition Agreement dated
December 15, 1999 among Westbrooke Communities, Inc.,
Westbrooke at West Lake, Inc., Westbrooke at Winston
Trails, Inc., Westbrooke at Pembrook Pines, Inc.,
Westbrooke at Oak Ridge, Inc., The Westbrooke Partnership,
Westbrooke Acquisition Corp. and James Carr.
10.7 (4) Amended and Restated Employment Agreement between Newmark
Home Corporation and J. Michael Beckett dated March 1,
2000.
10.8 (4) Form of Tax Allocation Agreement between Technical Olympic
USA, Inc. and various affiliates and subsidiaries,
including Newmark Homes Corp. and its subsidiaries.
10.9 (3) Credit Agreement among Newmark Homes, L.P. and Bank of
America, N.A. as Administrative Agent, Swing Line Lender
and Letter of Credit Issuing Lender and Other Financial
Institutions Party Hereto dated June 27, 2000.
EXHIBIT
NUMBER REF EXHIBIT
------- --- -------
10.9(a) (7) First Amendment to the Credit Agreement among Newmark
Homes, L.P. and Bank of America, N.A. as Administrative
Agent, Swing Line Lender and Letter of Credit Issuing
Lender and Other Financial Institutions Party Hereto dated
January 1, 2001
10.9(b) (8) Second Amendment to the Credit Agreement among Newmark
Homes, L.P. and Bank of America, N.A. as Administrative
Agent for Itself and Other Entities dated December 1, 2001
10.10 (3) Guaranty Agreement among Newmark Homes Corp. and Newmark
Homes Corporation in favor of Bank of America, N.A. and
the Lenders under the Credit Agreement dated June 27,
2000.
10.11 (3) Management Services Agreement between Newmark Homes Corp.
and Techolym, L.P. dated June 1, 2000.
10.12 (3) Amended and Restated Employment Agreement between Newmark
Homes Corporation and Lonnie M. Fedrick dated May 12, 2000
effective January 1, 2000.
10.13 (9) Form of Indemnification Agreement effective March 1, 2001.
11.1 (5) Statement relating to computation of per share earnings.
21.1 (5) List of subsidiaries.
(1) Filed as part of the Registrant's Registration Statement on Form S-1,
Amendment Number 1, filed with the Securities and Exchange Commission
on March 5, 1998, File No. 333-42213 and incorporated herein by
reference.
(2) Filed as Exhibit 2.1 of registrant's Current Report on Form 8K dated
December 22, 1999 and incorporated herein by reference.
(3) Filed as part of the Registrant's Quarterly Report on Form 10-Q, filed
with the Securities and Exchange Commission on August 10, 2000 and
incorporated herein by reference.
(4) Filed as part of the Registrant's Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on March 27, 2000, File
no. 000-23677 and incorporated herein by reference.
(5) Filed as part of Registrant's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on March 29, 2001, File No.
000-23677 and incorporated herein by reference.
(6) Filed as part of the Registrant's Current Report on Form 8-K dated
March 23, 2001 and incorporated herein by reference.
(7) Filed as part of the Registrant's Quarterly Report on Form 10-Q, filed
with the Securities and Exchange Commission on May 15, 2001 and
incorporated herein by reference.
(8) Filed herewith.
(9) Filed as part of the Registrant's Quarterly Report on Form 10-Q, filed
with the Securities and Exchange Commission on November 14, 2001 and
incorporated herein by reference.