EXHIBIT 99.1
ENGLE HOLDINGS 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 Balance Sheets................................................3
Consolidated Statements of Operations......................................4
Consolidated Statements of Shareholder's Equity............................5
Consolidated Statements of Cash Flows......................................6
Notes to Consolidated Financial Statements.................................7
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Stockholder
Engle Holdings Corp.
We have audited the accompanying consolidated balance sheet of Engle Holdings
Corp., and subsidiaries as of December 31, 2001 and the related consolidated
statements of operations, stockholder's equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company`s
management. Our responsibility is to express an opinion on these financial
statements 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Engle Holdings 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.
/s/ ERNST & YOUNG LLP
Miami, Florida
January 18, 2002
1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholder
Engle Holdings Corp.
We have audited the accompanying consolidated balance sheet of Engle Holdings
Corp., and subsidiaries as of December 31, 2000 and the related consolidated
statements of operations, shareholder's equity and cash flows for the periods
from November 22, 2000 to December 31, 2000 and November 1, 2000 to November 21,
2000, and for the fiscal years ended October 31, 2000 and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Engle Holdings Corp.
and subsidiaries at December 31, 2000, and the results of their operations and
their cash flows for the periods from November 22, 2000 to December 31, 2000 and
November 1, 2000 to November 21, 2000, and for the fiscal years ended October
31, 2000 and 1999, in conformity with accounting principles generally accepted
in the United States of America.
/s/ BDO SEIDMAN, LLP
Miami, Florida
February 27, 2001
2
ENGLE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
------------------------------
2001 2000
-------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Homebuilding:
Cash and cash equivalents:
Unrestricted $ 57,487 $ 15,460
Restricted 7,738 3,841
Inventories 456,303 444,070
Property and equipment, net 5,474 5,330
Other assets 27,126 21,549
Goodwill, net of accumulated amortization
of $953 and $105, respectively 14,788 15,128
Deferred tax asset 4,169 9,557
-------- --------
573,085 514,935
Financial Services:
Cash and cash equivalents:
Unrestricted 7,930 2,618
Restricted 19,605 6,364
Mortgage loans held for sale 50,933 14,406
Other assets 3,295 1,240
-------- --------
81,763 24,628
-------- --------
Total assets $654,848 $539,563
======== ========
LIABILITIES
Homebuilding:
Accounts payable and accrued liabilities $ 34,226 $ 27,293
Customer deposits 21,994 21,817
Consolidated land bank obligations 30,022 --
Borrowings 202,938 217,532
Senior notes payable 12,897 38,065
-------- --------
302,077 304,707
-------- --------
Financial Services:
Accounts payable and accrued liabilities 18,828 6,035
Financial service borrowings 38,689 9,071
-------- --------
57,517 15,106
-------- --------
Total liabilities 359,594 319,813
Minority interest 35,696 --
SHAREHOLDER'S EQUITY
Common stock, $.01 par, 50,000 shares authorized
and 9,500 shares issued and outstanding -- --
Additional paid-in capital 215,709 215,709
Retained earnings 43,849 4,041
-------- --------
Total shareholder's equity 259,558 219,750
-------- --------
Total liabilities and shareholder's equity $654,848 $539,563
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
ENGLE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM PERIOD FROM
NOVEMBER 22, NOVEMBER 1,
YEAR ENDED 2000 THROUGH 2000 THROUGH YEAR ENDED OCTOBER 31,
DECEMBER 31, DECEMBER 31, NOVEMBER 21, -------------------------
2001 2000 2000 2000 1999
------------- ----------- ------------- -------------------------
(SUCCESSOR) (SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
Homebuilding:
Revenues:
Sales of homes $958,125 $82,999 $ 25,768 $794,445 $704,563
Sales of land 10,499 1,374 360 24,053 11,236
Rent and other 5,412 351 400 3,383 3,450
-------- ------- --------- -------- --------
974,036 84,724 26,528 821,881 719,249
-------- ------- --------- -------- --------
Costs and expenses:
Cost of sales-homes 763,708 68,189 21,385 664,818 593,046
Cost of sales-land 9,639 1,326 268 21,405 10,659
Selling, general and
administrative 95,947 8,247 4,726 79,158 71,079
Acquisition and
merger related
charges 1,864 -- 20,118 -- --
Depreciation and
amortization 6,457 721 330 6,108 5,604
-------- ------- --------- -------- --------
877,615 78,483 46,827 771,489 680,388
-------- ------- --------- -------- --------
Homebuilding pretax income
(loss) 96,421 6,241 (20,299) 50,392 38,861
-------- ------- --------- -------- --------
Financial Services:
Revenue 32,659 2,562 1,078 22,130 22,691
Expenses 17,688 1,635 961 15,324 15,907
-------- ------- --------- -------- --------
Financial Services pretax
income 14,971 927 117 6,806 6,784
-------- ------- --------- -------- --------
Income (loss) before
income taxes (benefit) 111,392 7,168 (20,182) 57,198 45,645
Provision (benefit) for
income taxes 42,068 2,764 (5,949) 21,534 17,619
-------- ------- --------- -------- --------
Net income (loss) $ 69,324 $ 4,404 $ (14,233) $ 35,664 $ 28,026
======== ======= ========= ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
ENGLE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
COMMON STOCK ADDITIONAL
----------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- -------- --------- --------- ---------
PREDECESSOR COMPANY
Amounts at October 31, 1998 11,169,000 $ 112 $ 103,134 $ 58,478 $ 161,724
Net income -- -- -- 28,026 28,026
Dividends to shareholders -- -- -- (2,242) (2,242)
Common stock issued in
connection with
employee stock bonus
plan 69,000 -- 882 -- 882
Common stock issued in
connection with
exercise of
stock options 10,000 -- 96 -- 96
Common stock purchased
in connection with
Company's share
repurchase plan (200,000) (2) (2,052) -- (2,054)
----------- ----- --------- --------- ---------
Amounts at October 31, 1999 11,048,000 110 102,060 84,262 186,432
Net income -- -- -- 35,664 35,664
Dividends to
shareholders -- -- -- (2,641) (2,641)
Common stock issued in
connection with
employee stock bonus
plan 127,000 1 1,222 -- 1,223
Common stock issued in
connection with
exercise of stock
options 5,000 1 55 -- 56
Common stock purchased
in connection with
Company's share
repurchase plan (308,000) (3) (3,040) -- (3,043)
----------- ----- --------- --------- ---------
Amounts at October 31, 2000 10,872,000 109 100,297 117,285 217,691
Net loss for the period
November 1, 2000
through November 21, 2000 -- -- -- (14,233) (14,233)
Cancellation of
Company's shares as a
result of merger (10,872,000) (109) (100,297) (103,052) (203,458)
----------- ----- --------- --------- ---------
Amounts at November 21, 2000 -- $ -- $ -- $ -- $ --
=========== ===== ========= ========= =========
SUCCESSOR COMPANY
Conversion of Helios
Acquisition Corporation
stock to Company stock
under merger 9,500 $ -- $ 215,709 $ -- $ 215,709
Net income for the period
November 22, 2000
through December 31, 2000 -- -- -- 4,404 4,404
Net distributions to Parent -- -- -- (363) (363)
----------- ----- --------- --------- ---------
Amounts at December 31, 2000 9,500 -- 215,709 4,041 219,750
Net income -- -- -- 69,324 69,324
Net distributions to
Parent -- -- -- (29,516) (29,516)
----------- ----- --------- --------- ---------
Amounts at December 31, 2001 9,500 $ -- $ 215,709 $ 43,849 $ 259,558
=========== ===== ========= ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
ENGLE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM PERIOD FROM
NOVEMBER 22, NOVEMBER 1,
YEAR ENDED 2000 THROUGH 2000 THROUGH YEAR ENDED OCTOBER 31,
DECEMBER 31, DECEMBER 31, NOVEMBER 21, ------------------------
2001 2000 2000 2000 1999
----------- ------------ ------------- -------- --------
(SUCCESSOR) (SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
OPERATING ACTIVITIES
Net income (loss) $ 69,324 $ 4,404 $(14,233) $ 35,644 $ 28,026
Adjustments to reconcile net income
(loss) to net cash provided
(required) by operating
activities:
Depreciation and amortization 6,457 721 330 6,108 5,604
Impairment loss 530 161 -- 3,979 2,690
Deferred income taxes 5,388 2,764 (5,949) (1,692) (226)
Employee stock compensation -- -- -- 1,223 882
Other (516) -- -- -- --
Changes in operating assets
and liabilities:
Restricted cash (17,138) (494) 4 (1,622) (1,018)
Inventories (12,763) (3,124) (29,314) (26,633) (36,874)
Other assets (9,367) (3,525) (61) (1,688) (2,699)
Mortgages held for sale (36,527) (6,062) 14,027 4,951 (1,553)
Accounts payable and accrued
expenses 19,726 (17,426) 16,513 2,843 5,201
Customer deposits 177 (62) 950 4,650 4,052
-------- --------- -------- -------- --------
Net cash provided (required)
by operating activities 25,291 (22,643) (17,733) 27,783 4,085
-------- --------- -------- -------- --------
INVESTING ACTIVITIES
Acquisition of property and
equipment (4,009) (32) (521) (3,829) (6,176)
-------- --------- -------- -------- --------
Net cash (required) by investing
activities (4,009) (32) (521) (3,829) (6,176)
-------- --------- -------- -------- --------
FINANCING ACTIVITIES
Proceeds from borrowings 27,001 215,000 -- -- 22,000
Repayment of borrowings (66,764) (214,925) (21) (2,249) (72,399)
Proceeds from issuance of senior -- -- -- -- 96,587
debt
Repurchase of common stock -- -- -- (3,043) (2,054)
Distributions to shareholders -- -- -- (2,641) (2,242)
Distributions to parent (29,516) (363) -- -- --
Proceeds from exercise of stock -- -- -- 56 96
options
Decrease (increase) in financial
service borrowings 29,618 5,585 (14,371) (8,919) 1,006
Increase in minority interest 35,696 -- -- -- --
Increase in consolidated land bank
obligation 30,022 -- -- -- --
-------- --------- -------- -------- --------
Net cash provided (required) by
financing activities 26,057 5,297 (14,392) (16,796) 42,994
-------- --------- -------- -------- --------
Net increase (decrease) in cash 47,339 (17,378) (32,646) 7,158 40,903
Cash and cash equivalents at
beginning of period 18,078 35,456 68,102 60,944 20,041
-------- --------- -------- -------- --------
Cash and cash equivalents at end of
period $ 65,417 $ 18,078 $ 35,456 $ 68,102 $ 60,944
======== ========= ======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
ENGLE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND BUSINESS
Engle Holdings Corp. is a holding company formed on November 22, 2000 to acquire
100% of the issued and outstanding shares of Engle Homes, Inc. and subsidiaries
(Engle Holdings Corp. and subsidiaries are collectively referred to as the
Company). The Company is engaged principally in the construction and sale of
residential homes and land development. The Company operates throughout Florida
with divisions in Broward County; Palm Beach and Martin Counties; Orlando; Fort
Myers; and Naples. The Company also has divisions operating outside Florida
including Dallas, Texas; Denver, Colorado; Virginia; and Phoenix, Arizona.
Ancillary products and services to its residential home building include land
sales to other builders, origination and sale of mortgage loans and title
services. The consolidated financial statements include the accounts of the
Company and all consolidated subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
On November 22, 2000, the Company acquired Engle Homes, Inc. (Engle) which
became a wholly-owned subsidiary of Technical Olympic Inc., formerly known as
Technical Olympic USA., Inc. (Technical Olympic), pursuant to a merger agreement
dated October 12, 2000. Technical Olympic is a wholly-owned subsidiary of
Technical Olympic (UK) PLC that is a wholly-owned subsidiary of Technical
Olympic S.A., a publicly traded Greek corporation. Engle stockholder's received
$19.10 for each share of its common stock at the time of the merger. Following
the merger, the common stock of Engle ceased to be publicly traded.
For accounting purposes, the merger is being accounted for using the purchase
method. Accordingly, the consolidated financial statements for periods after
that date reflect the push-down of the purchase price allocations made by
Technical Olympic to the assets and liabilities of the Company. As a result of
the change in control of Engle, in the accompanying consolidated financial
statements, periods subsequent to November 22, 2000 are labeled as "Successor"
and periods prior to November 22, 2000 are labeled as "Predecessor".
Total consideration for the acquisition approximated $542 million, including
$326 million of assumed liabilities and $216 million in cash paid. The "push
down" basis of accounting resulted in the Company allocating approximately $527
million to inventories and other identifiable assets and $15 million to
goodwill.
As a result of the change in control of Engle, the Company was required by the
indentures governing its Senior Notes to offer to repurchase all of its
outstanding Senior Notes at a price of 101% of the principal plus accrued
interest.
7
Upon termination of the offer in January 2001, the Company repurchased
approximately $237 million of $250 million of its Senior Notes. Approximately
$13 million of the Senior Notes were not tendered and remain outstanding as of
December 31, 2001.
Acquisition related charges amounting to $20.1 million are included in the
results of operations in the period from November 1, 2000 through November 21,
2000.
There is no disclosure of earnings per share since the Company has no registered
trading capital stock.
Due to the Company's normal operating cycle being in excess of one year, the
Company presents an unclassified balance sheet.
PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to conform the prior periods' amounts
to the current year's presentation.
SEGMENT REPORTING
Effective October 31, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION. Under the provisions of SFAS 131, the Company's
operating segments consist of homebuilding and financial services. These two
segments are segregated in the accompanying consolidated financial statements
under "Homebuilding" and "Financial Services", respectively.
ASSET IMPAIRMENTS
The Company periodically reviews the carrying value of certain of its assets in
relation to historical results, current business conditions and trends to
identify potential situations in which the carrying value of assets may not be
recoverable. If such reviews indicate that the carrying value of such assets may
not be recoverable, the Company would estimate the undiscounted sum of the
expected future cash flows of such assets to determine if such sum is less than
the carrying value of such assets to ascertain if a permanent impairment exists.
8
If a permanent impairment exists, the Company would determine the fair value by
using quoted market prices, if available, for such assets, or if quoted market
prices are not available, the Company would discount the expected future cash
flows of such assets and would recognize the impairment through a charge to
operations.
CASH AND CASH EQUIVALENTS
Unrestricted cash includes amounts in transit from title companies for home
closings and highly liquid investments with an initial maturity of three months
or less.
Restricted cash consists of amounts held in escrow as required by purchase
contracts or by law for escrow deposits held by the Company's title company and
compensating balances for various open letters of credit.
INVENTORIES
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.
Interest, real estate taxes and certain development costs are capitalized to
land and construction costs during the development and construction period and
are amortized to costs of sales as closings occur.
PROPERTY AND EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation and amortization are
provided over the assets' estimated useful lives ranging from 18 months to 30
years, primarily on the straight-line method. Loan costs are deferred and
amortized over the term of the outstanding borrowings.
GOODWILL
The Company has classified the excess of cost over the fair value of the net
assets of companies acquired in purchase transactions as goodwill. Goodwill is
being amortized on a straight-line method over 20 years. Amortization charged to
operations amounted to $856,531, $104,992, $20,373, $349,236 and $343,871 for
the year ended December 31, 2001, the period from November 22, 2000 through
December 31, 2000, the period from November 1, 2000 through November 21, 2000,
and the fiscal years ended October 31, 2000, and October 31, 1999, respectively.
REVENUE RECOGNITION
Revenues and profits from sales of commercial and residential real estate and
related activities are recognized at closing when title passes to the buyer and
9
all of the following conditions are met: a sale is consummated, a significant
down payment is received, the earnings process is complete and the collection of
any remaining receivables is reasonably assured.
Fees derived from the Company's financial services segment, including title and
mortgage origination services, are recognized as revenue concurrent with the
closing of the sale.
SELLING AND MARKETING
Selling and marketing costs are expensed as incurred. Selling and marketing
costs included in selling, marketing, and general and administrative expenses in
the accompanying consolidated statement of operations amount to approximately
$63,400,000, $5,700,000, $2,300,000, $53,300,000, and $50,600,000 for the year
ended December 31, 2001, the period from November 22, 2000 through December 31,
2000, the period from November 1, 2000 through November 21, 2000, and the fiscal
years ended October 31, 2000, and October 31, 1999, respectively.
INCOME TAXES
As a result of the merger as described in Note 1, the Company filed consolidated
income tax returns with Technical Olympic beginning November 22, 2000. For the
periods ended December 31, 2001, and 2000, income taxes are allocated to the
Company based upon a "stand alone" computation in the accompanying consolidated
statement of income.
FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to various
market data and other valuation techniques, as appropriate, and unless otherwise
disclosed, the fair values of financial instruments approximate their recorded
values.
STOCK BASED COMPENSATION
The Company recognizes compensation expense for its stock option incentive plans
using the intrinsic value method of accounting. Under the terms of the intrinsic
value method, compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date, or other measurement date, over the amount
an employee must pay to acquire the stock.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) approved Statement
of Financial Accounting Standard 141 (Statement 141), BUSINESS COMBINATIONS, and
Statement of Financial Accounting Standards 142 (Statement 142), GOODWILL AND
OTHER INTANGIBLE ASSETS. Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 142 changes the accounting for goodwill from an amortization method to
an impairment-only approach. Statement 142 will be effective for the Company's
fiscal year 2002 and is immediately effective for goodwill and intangible assets
10
acquired after June 30, 2001. Management is in the process of evaluating the
effect these standards will have on its financial statements.
In September 2000, the FASB issued Statement of Financial Accounting Standards
140 (Statement 140), ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND EXTINGUISHMENTS OF LIABILITIES. Statement 140 amends Statement 125 and
provides revised accounting and financial reporting rules for sales,
securitizations, and servicing of receivables and other financial assets, and
for secured borrowing and collateral transactions. The provisions concerning
servicing assets and liabilities as well as extinguishments of liabilities
remain consistent with Statement 125. Statement 140 is applicable to transfers
occurring after March 31, 2001. The impact of adopting Statement 140 has not
been significant to the Company's financial statements.
2. INVENTORIES
Inventories consist of (dollars in thousands):
DECEMBER 31,
---------------------
2001 2000
-------- --------
Land and improvements under development $302,630 $301,426
Residential homes under construction 153,673 142,644
-------- --------
$456,303 $444,070
======== ========
Included in inventory is the following (dollars in thousands):
PERIOD FROM PERIOD FROM
NOVEMBER 22, NOVEMBER 1,
YEAR ENDED 2000 THROUGH 2000 THROUGH YEAR ENDED OCTOBER 31,
DECEMBER 31, DECEMBER 31, NOVEMBER 21, -----------------------
2001 2000 2000 2000 1999
------------ ------------ ------------ -------- --------
Interest capitalized, beginning of
period $ 23,019 $ 22,296 $ 21,684 $ 19,205 $ 16,326
Interest incurred and
capitalized 18,294 3,169 1,451 24,185 22,098
Amortized to cost of sales -
homes (27,664) (2,352) (832) (19,746) (18,625)
Amortized to cost of sales -
land (808) (94) (7) (1,960) (594)
Reduction of capitalized
interest - transferred to
land bank (3,407) -- -- -- --
-------- -------- -------- -------- --------
Interest capitalized, end of period $ 9,434 $ 23,019 $ 22,296 $ 21,684 $ 19,205
======== ======== ======== ======== ========
Included in cost of sales - homes during the year ended December 31, 2001, the
period from November 1, 2000 through December 31, 2000, and the fiscal years
ended October 31, 2000, and October 31, 1999, are impairment losses of
approximately $530,000, $161,000, $3,979,000 and $2,690,000, respectively, to
reduce certain projects under development to fair value.
11
During 2001, the Company sold to an investment limited liability company
(Investment Company) certain undeveloped real estate tracts. The Investment
Company is owned by several of the current and former executive officers of the
Company, including without limitation related trusts of management. As of
December 31, 2001, the remaining value of lots that can be acquired by the
Company approximates $43 million. The Company has placed deposits, entered into
a number of agreements, including option contracts and construction contracts
with the Investment Company, 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 these agreements 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.
Although Engle does not have legal title to the assets of the Investment Company
and has not guaranteed the liabilities of the Investment Company, Engle does
exercise certain rights of ownership over the Investment Company assets.
Consequently, the assets and associated liabilities of the Investment Company
have been recorded in the accompanying Consolidated Balance Sheet as of December
31, 2001. Minority interest in consolidated subsidiaries, represents the equity
provided by members of management.
During 2001, the Company entered into option arrangements with independent third
parties to acquire developed lots. Under these option arrangements, the Company
placed deposits, which provide the right to acquire developed lots at market
prices. Additionally, under these arrangements, the Company can cancel these
arrangements to purchase the land by forfeiture of the deposit.
Although the Company does not have legal title to the assets of these
independent third parties and has not guaranteed the liabilities, the Company
does exercise certain rights of ownership over the entity's assets.
Consequently, the assets and associated liabilities of these entities have been
recorded in the accompanying consolidated balance sheet as of December 31, 2001.
As a result of the above transaction, the Company has included on its
consolidated balance sheet inventory and land deposits of approximately $66
million, minority interest of approximately $36 million, which represents the
equity of investors, and consolidated land bank obligation of approximately $30
million. These obligations are at market interest rates and are repaid on lot
closings with a final maturity through 2004.
12
3. FINANCIAL SERVICES
Financial service revenue and expenses consist of the following (dollars in
thousands):
PERIOD FROM PERIOD FROM
NOVEMBER 22, NOVEMBER 1,
YEAR ENDED 2000 THROUGH 2000 THROUGH YEAR ENDED OCTOBER 31,
DECEMBER 31, DECEMBER 31, NOVEMBER 21, -----------------------
2001 2000 2000 2000 1999
----------- ----------- ------------ ------- -------
(SUCCESSOR) (SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
Revenue:
Mortgage services $16,400 $1,265 $ 432 $10,277 $ 9,745
Title services 16,259 1,297 646 11,853 12,946
------- ------ ------ ------- -------
Total financial service revenue 32,659 2,562 1,078 22,130 22,691
------- ------ ------ ------- -------
Expenses:
Mortgage services 6,800 545 378 5,635 5,517
Title services 10,888 1,090 583 9,689 10,390
------- ------ ------ ------- -------
Total financial service expense 17,688 1,635 961 15,324 15,907
------- ------ ------ ------- -------
Total financial service income
before income taxes $14,971 $ 927 $ 117 $ 6,806 $ 6,784
======= ====== ====== ======= =======
- ---------------
Intercompany charges have been eliminated.
In order to fund the origination of residential mortgage loans, the Company
entered into a $40 million revolving warehouse line of credit (including a
purchase agreement) whereby funded mortgage loans are pledged as collateral. The
line of credit bears interest at the Federal Funds rate plus 1.375% (2.895% at
December 31, 2001).
The line of credit includes restrictions including maintenance of certain
financial covenants. The Company is required to fund 2% of all mortgages
originated and to sell all funded mortgages within 90 days. The warehouse line
of credit expires July 5, 2002. As of December 31, 2001, the Company was
committed to selling its entire portfolio of mortgage loans held for sale.
4. BORROWINGS
Borrowings consist of (dollars in thousands):
DECEMBER 31,
------------------------
2001 2000
-------- --------
Unsecured borrowings from banks $202,000 $215,000
Senior Notes due 2008, at 9.25% 12,897 38,065
Other 938 2,532
-------- --------
$215,835 $255,597
======== ========
13
In connection with the acquisition of the Company by Technical Olympic on
November 22, 2000, the Company entered into a Credit Agreement (the Credit
Agreement) with a bank providing for a $100 million term loan commitment and a
$275 million revolving credit facility (subject to reduction based upon periodic
determinations of a borrowing base). Proceeds from these facilities provide
working capital and financed the required repurchase offer made to holders of
the Company's then outstanding $250 million principal amount of 9 1/4% Senior
Notes due 2008 (Senior Notes). The term loan and revolving credit facility
terminate on November 22, 2002 whereupon all amounts outstanding become due. The
revolving credit facility also provides credit support for the issuance of
letters of credit needed from time to time in the Company's business. The
Company's previous bank revolving credit facility was repaid and cancelled. The
terms of the Credit Agreement contain restrictive covenants which require the
Company, among other things, to maintain a minimum tangible net worth and
maintain certain financial ratios.
As a result of the change in control of the Company, the Company was required by
the indentures governing its Senior Notes to offer to repurchase all of its
outstanding Senior Notes at a price of 101% of the principal plus accrued
interest. Upon termination of the offer in January 2001, the Company repurchased
approximately $237 million of its Senior Notes. Funds to repurchase these Senior
Notes were provided from the issuance of the $100 million term loan under the
Credit Agreement and additional advances under the Company's revolving credit
facility. Approximately $13 million of the Senior Notes were not tendered and
remain outstanding as of December 31, 2001.
Maturities of borrowings are as follows (in thousands):
Year ended December 31,
2002 $202,000
2003 938
2004 --
2005 --
Thereafter 12,897
--------
$215,835
========
The carrying amount of the Company's borrowings approximates fair value as of
December 31, 2001 due to their fluctuating interest rates based on the prime
rate or LIBOR.
5. STOCK BASED COMPENSATION
There are no common stock options outstanding at December 31, 2001 and December
31, 2000. During the year ended October 31, 2000, 4,900 common stock options
were exercised at an average exercise price of $11.50. Additionally, 20,000
common stock options were forfeited. As a result of the change of control in
November 2000 (see Note 1), all of the outstanding common stock options
(965,000) were bought out by the Company.
14
Under the Company's former Performance Bonus Plan (the Bonus Plan) established
in 1997, the Company issued 127,000 and 69,000 shares of common stock valued at
approximately $1,223,000 and $882,000 during the fiscal years ended October 31,
2000, and 1999, respectively. No shares under the Bonus Plan were issued during
2001 and the period from November 1, 2000 through December 31, 2000.
At October 31, 2000, the Company had a fixed stock option plan (the 1991 Stock
Option Plan) which is described below. The Company applies APB Opinion 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for the Plan. Under APB Opinion 25, if the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Under the 1991 Stock Option Plan, as amended, options were authorized to be
granted to purchase 1,000,000 common shares of the Company's stock at not less
than the fair market value at the date of the grant. Options expire ten years
from the date of grant, and typically vest evenly over a five-year period.
SFAS Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
Company to provide pro forma information regarding net income and net income per
share as if compensation cost associated with options granted under the
Company's stock option plan had been determined in accordance with the fair
value based method prescribed in SFAS Statement No. 123. During the year ended
October 31, 1999, the Company granted 10,000 options to purchase shares of the
Company's common stock at $12.75 and 110,000 options at $10.88, the closing
prices on the date of each grant. There were no options granted subsequent to
fiscal year October 31, 1999. The Company's pro forma net income and income per
share under the accounting provisions of SFAS Statement No. 123 did not
materially differ from the reported amounts and are presented below (dollars in
thousands).
YEAR ENDED OCTOBER 31,
-------------------------
2000 1999
-------- --------
Net income, as reported $ 35,664 $ 28,026
Estimated stock compensation costs (497) (512)
-------- --------
Pro forma net income $ 35,167 $ 27,514
======== ========
The Black-Scholes method was used to compute the pro forma amounts presented
above, utilizing the weighted average assumptions summarized below. The weighted
average fair value of options granted was $4.76 for the year ended October 31,
1999.
1999
-------
Risk-free interest rate 5.15%
Volatility % 45.83%
Expected life (in years) 7 years
Dividend yield rate 2.00%
15
A summary of the status of the Plan and changes are presented below:
PERIOD FROM
NOVEMBER 1, 2000 THROUGH YEAR ENDED YEAR ENDED
NOVEMBER 21, 2000 OCTOBER 31, 2000 OCTOBER 31, 1999
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding at beginning of
year 965,100 $ 11.70 990,000 $ 11.74 895,200 $ 11.81
Granted -- -- -- -- 120,000 11.04
Exercised -- -- (4,900) 11.50 (10,200) 9.49
Repurchased (965,100) 11.70 -- -- -- --
Forfeited -- -- (20,000) 13.75 (15,000) 11.68
-------- -------- -------- -------- -------- --------
Outstanding at end of year -- $ -- 965,100 $ 11.70 990,000 $ 11.74
======== ======== ======== ======== ======== ========
Options exercisable at
year-end -- $ -- 709,100 $ 11.31 610,400 $ 11.24
======== ======== ======== ======== ======== ========
Weighted average fair value
of options granted during
the year $ 4.76
========
6. INCOME TAXES
The income tax provision in the consolidated statements of operations consists
of the following components (dollars in thousands):
PERIOD FROM PERIOD FROM
NOVEMBER 22, NOVEMBER 1,
YEAR ENDED 2000 THROUGH 2000 THROUGH YEAR ENDED OCTOBER 31,
DECEMBER 31, DECEMBER 31, NOVEMBER 21, ------------------------------
2001 2000 2000 2000 1999
------------- ------------ ------------- -------- --------
Current:
Federal $37,030 $ -- $ -- $ 21,252 $ 15,287
State 3,951 -- -- 1,974 2,558
------- ------- -------- -------- --------
40,981 -- -- 23,226 17,845
Deferred:
Federal 877 2,449 (5,389) (1,994) (194)
State 210 315 (560) 302 (32)
------- ------- -------- -------- --------
1,087 2,764 (5,949) (1,692) (226)
------- ------- -------- -------- --------
Total $42,068 $ 2,764 $ (5,949) $ 21,534 $ 17,619
======= ======= ======== ======== ========
16
The provision for income taxes was different from the amount computed by
applying the statutory rate due to the effect of state income taxes, except for
the period from November 1, 2000 through November 21, 2000, which included
merger related expenses not deductible for tax purposes.
Temporary differences which gave rise to deferred income tax assets and
liabilities at December 31, 2001 and December 31, 2000 are as follows (dollars
in thousands):
YEAR ENDED DECEMBER 31
-------------------------
2001 2000
------- --------
Deferred tax liabilities:
Differences in reporting selling and marketing costs for
tax purposes $ (744) $ (1,096)
Other (120) (572)
------- --------
Gross deferred tax liabilities (864) (1,668)
------- --------
Deferred tax assets:
Inventory 4,745 5,771
Property and equipment 250 468
Income recognized for tax purposes and deferred for 38 107
financial reporting purposes
Net operating loss for tax purposes -- 4,879
------- --------
Gross deferred tax assets 5,033 11,225
------- --------
Net deferred tax asset $ 4,169 $ 9,557
======= ========
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to the normal obligations associated with entering into
contracts for the purchase, development and sale of real estate in the routine
conduct of its business. The Company is committed under various letters of
credit and performance bonds which are required for certain development
activities, deposits on land and lot purchase contract deposits. Deposits for
future purchases of land totaled approximately $25.6 million at December 31,
2001. Outstanding letters of credit and performance bonds under these
arrangements totaled approximately $57.1 million at December 31, 2001.
The Company and its subsidiaries occupy certain facilities, including the
Company's headquarters in Boca Raton, Florida, under lease arrangements. Rent
expense, net of sublease income, amounted to approximately $2,200,000, $269,000,
$127,000, $2,000,000, and $1,900,000, for the year ended December 31, 2001, the
period from November 22, 2000 through December 31, 2000, the period from
November 1, 2000 through November 21, 2000, and the fiscal years ended October
31, 2000, and 1999, respectively. Sublease income is derived primarily from
tenants occupying space under month-to-month and annual leases.
17
Future minimum rental commitments for operating leases with non-cancelable terms
in excess of one year are as follows:
2002 $2,410,000
2003 2,000,000
2004 1,674,000
2005 1,246,000
2006 906,000
2007 253,000
2008 242,000
2009 242,000
The Company has a defined contribution plan established pursuant to Section
401(k) of the Internal Revenue Code. Employees contribute to the plan a
percentage of their salaries, subject to certain dollar limitations, and the
Company matches a portion of the employees' contributions. The Company's
contribution to the plan for the year ended December 31, 2001, the period from
November 22, 2000 through December 31, 2000, the period from November 1, 2000
through November 21, 2000, and the fiscal years ended October 31, 2000, and
1999, amounted to $615,000, $65,000, $24,000, $429,000, and $181,000,
respectively. Concurrently with the signing of the merger agreement with
Technical Olympic, the Company entered into employment contracts with certain
executive officers. The agreements provide for an initial employment term
beginning on the closing of the tender offer and ending December 31, 2003.
Pursuant to the employee agreements, executive officers received annual base
salaries aggregating approximately $2,474,000 for the calendar year, with
scheduled annual increases beginning January 1, 2001 thereafter. In addition,
the employee agreements establish incentive bonus formulas comparable to the
criteria previously used by the Company in determining annual discretionary
incentive bonuses. Total compensation under the employee agreement with the
Company's former Chairman of the Board, President, and Chief Executive Officer
amounted to $2,355,770 for the year ended December 31, 2001.
The Company has entered into an agreement with an insurance company to
underwrite Private Mortgage Insurance on certain loans originated by PHMC. Under
the terms of the agreement, the Company shares in premiums generated on the
loans and is exposed to losses in the event of loan default. At December 31,
2001, the Company's maximum exposure to losses relating to loans insured is
approximately $1,387,000, which is further limited to the amounts held in trust
of approximately $511,000. The Company minimizes the credit risk associated with
such loans through credit investigations of customers as part of the loan
origination process and by monitoring the status of the loans and related
collateral on a continuous basis.
The Company is involved, from time to time, in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company's consolidated financial position or results of
operations.
18
8. ACQUISITION AND MERGER RELATED CHARGES
On March 6, 2001, Newmark Homes Corp. (Newmark) announced it is considering the
possible merger of Newmark with the Company. The Special Committee of Newmark's
independent directors is reviewing the transaction and will make a
recommendation to Newmark'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 the Company, Newmark, and Technical Olympic Inc. If the
merger is consummated, it is contemplated that shares of the Company would be
exchanged for shares of Newmark. During 2001, in connection with the proposed
merger, the Company incurred approximately $2 million in legal, consulting, and
related costs. These costs are included in acquisition and merger related
charges in the accompanying statement of operations.
9. RELATED PARTY TRANSACTIONS
During 2001, the Company entered into purchasing agreements with Technical
Olympic S.A. The agreements provide that Technical Olympic S.A. would purchase
certain of the materials and supplies necessary for operations and sell them to
the Company, all in an effort to consolidate the purchasing function. Although
Technical Olympic S.A. would incur certain franchise tax expense, the
subsidiaries would not be required to pay such additional liability.
During 2001, the Company entered into certain transactions to acquire developed
lots from an entity owned by several of the current and former executive
officers of the Company. See Note 2.
10. QUARTERLY RESULTS FOR 2001 AND 2000 (UNAUDITED)
Quarterly results for the twelve months ended December 31, 2001 and October 31,
2000 follow (dollars in thousands):
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2001
Revenues $222,581 $254,576 $260,032 $269,506
Income before income taxes 22,555 26,139 31,150 31,548
Net income 14,153 16,402 19,547 19,222
2000
Revenues 167,174 212,112 224,308 240,417
Income before income taxes 8,660 14,572 16,620 17,346
Net income 5,490 9,239 10,537 10,398
19
11. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM PERIOD FROM
NOVEMBER 22, 2000 NOVEMBER 1, 2000 THREE
THROUGH THROUGH MONTHS ENDED
DECEMBER 31, 2000 NOVEMBER 21, 2000 JANUARY 31, 2000
----------------- ----------------- ----------------
(IN THOUSANDS)
Revenues $ 87,286 $ 27,606 $167,174
Costs and expenses 80,118 47,788 158,514
-------- -------- --------
Income (loss) before income tax (benefit)
7,168 (20,182) 8,660
Provision (benefit) for income taxes 2,764 (5,949) 3,170
-------- -------- --------
Net Income (Loss) $ 4,404 $(14,233) $ 5,490
======== ======== ========
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM PERIOD FROM
NOVEMBER 22, 2000 NOVEMBER 1, 2000 THREE
THROUGH THROUGH MONTHS ENDED
DECEMBER 31, 2000 NOVEMBER 21, 2000 JANUARY 31, 2000
----------------- ----------------- ----------------
(IN THOUSANDS)
Net cash (provided) required by operating
activities $(22,643) $(17,733) $(24,300)
-------- -------- --------
Net cash (required) by investing activities (32) (521) (1,012)
-------- -------- --------
Net cash provided (required) by financing
activities 5,297 (14,392) (1,784)
-------- -------- --------
Net increase (decrease) in cash (17,378) (32,646) (27,096)
Cash and cash equivalents at
beginning of period 35,456 68,102 60,944
-------- -------- --------
Cash and cash equivalents at end
of period $ 18,078 $ 35,456 $ 33,848
======== ======== ========
20
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
PERIOD FROM PERIOD FROM
NOVEMBER 22, NOVEMBER 1,
YEAR ENDED 2000 THROUGH 2000 THROUGH YEAR ENDED OCTOBER 31,
DECEMBER 31, DECEMBER 31, NOVEMBER 21, ------------------------
2001 2000 2000 2000 1999
------------ ------------ ------------ ------- -------
(IN THOUSANDS)
Interest paid (net of interest
capitalized) $ 1,889 $ 5,611 $ -- $ 374 $ --
======= ========== ========== ======= =======
Income taxes paid $38,752 $ -- $ 1,000 $23,612 $16,418
======= ========== ========== ======= =======
21