EXHIBIT 99.3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF TECHNICAL OLYMPIC USA, INC. SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED
NOTES INCLUDED ELSEWHERE IN THIS FORM 8-K.
OVERVIEW
Technical Olympic USA, Inc. (the Company) generates its revenues from its
homebuilding operations ("Homebuilding") and financial services operations
("Financial Services"). In accordance with Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information", the Company has concluded that Homebuilding and Financial
Services comprise the Company's operating segments.
Through its Homebuilding operations, the Company designs, builds and sells
single-family homes, town homes and patio homes in eleven metropolitan markets
located in four major geographic regions: Florida, Texas, the West and the
Mid-Atlantic. Through its Financial Services operations, the Company offers a
variety of financial services products, including mortgage banking and title
insurance agency and closing services.
On June 25, 2002, Engle Holdings Corp. (Engle) merged with and into Newmark
Homes Corp. (Newmark). The combined company was renamed Technical Olympic USA,
Inc. Each issued and outstanding share of Engle common stock was exchanged for
1,724.08294 shares of Newmark common stock (the Merger). At the date of the
Merger, there were 9,500 shares of Engle common stock issued and outstanding,
all of which were held by Technical Olympic, Inc. (TOI). As a result of the
Merger, 16,378,787 of additional shares were issued to TOI. In addition, the
Company assumed approximately $75,000 of debt incurred by TOI. As both Engle and
Newmark were under the control of TOI, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations", the Merger was
accounted for in a manner similar to a pooling of interests, whereby the Company
recognized the acquired assets and liabilities of Engle at their historical
carrying amounts. As both entities came under common control of TOI on November
22, 2000, the financial statements and other operating data of the Company have
been restated to include the operations of Engle from November 22, 2000. The
assumption of the $75,000 of debt incurred by TOI was accounted for as a
distribution as of June 25, 2002. See Note 1 to the consolidated financial
statements included elsewhere in this Form 8-K.
On April 15, 2002, Newmark sold all the stock of Westbrooke Acquisition Corp.,
its Florida operations, to Standard Pacific Corp. for consideration consisting
of $41,000 in cash and the repayment by Standard Pacific of $54,400 of
Westbrooke's debt, including $14,200 of intercompany liabilities owed to
Newmark. The purchase price is subject to adjustment (either upwards or
downwards) within 90 days of the closing, based on Westbrooke's net income from
January 1, 2002 through the closing date. In connection with the Merger, Newmark
sold Westbrooke to eliminate operating redundancies in its South Florida markets
and to strengthen its financial position. In accordance with SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the results of
Westbrooke's operations have been classified as discontinued operations, and
prior periods have been restated. See Note 12 to the consolidated financial
statements included elsewhere in this Form 8-K.
RESULTS OF OPERATIONS
SELECTED FINANCIAL AND OTHER INFORMATION
The following table includes selected statement of income and other data:
2001 2000 1999
----------- ----------- -----------
HOMEBUILDING
Revenues:
Home sales $ 1,374,551 $ 540,323 $ 413,780
Land/lot sales 18,361 6,343 6,968
----------- ----------- -----------
1,392,912 546,666 420,748
Cost of Sales:
Home sales 1,091,626 434,736 339,205
Land/lot sales 16,660 6,203 6,387
----------- ----------- -----------
1,108,286 440,939 345,592
----------- ----------- -----------
Gross profit 284,626 105,727 75,156
Selling, general & administrative expenses 152,063 63,832 47,503
Merger and related expenses 2,643 -- --
Depreciation and amortization 8,849 3,112 2,239
Other (income) expense (3,941) 2,264 867
----------- ----------- -----------
Homebuilding pretax income 125,012 36,519 24,547
FINANCIAL SERVICES
Revenues 32,659 2,562 --
Expenses 17,688 1,635 --
----------- ----------- -----------
Financial Services pretax income 14,971 927 --
----------- ----------- -----------
Income from continuing operations before income taxes 139,983 37,446 24,547
Income tax expense 52,218 13,672 8,721
----------- ----------- -----------
Income from continuing operations $ 87,765 $ 23,774 $ 15,826
=========== =========== ===========
Gross margin on home sales 20.6% 19.5% 18.0%
Ratio of SG&A expenses to revenues from home sales 11.1% 11.8% 11.5%
Ratio of Homebuilding pretax income to revenues from home sales 9.1% 6.8% 5.9%
Total active communities at year end 146 161 48
Homes closed 5,304 1,994 1,620
Average sales price per home closed $ 259 $ 271 $ 255
Backlog at end of period in sales value $ 573,405 $ 629,348 $ 137,582
Backlog at end of period in number of homes 2,149 2,486 540
2
SELECTED HOMEBUILDING OPERATING DATA
The following table sets forth home sales and backlog data by region:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2001 2000 1999
---------- ---------- ----------
Revenues from home sales:
Texas $ 433,389 $ 393,873 $ 332,584
Florida 437,784 38,216 --
Mid-Atlantic 213,571 83,671 81,196
West 289,807 24,563 --
---------- ---------- ----------
Total $1,374,551 $ 540,323 $ 413,780
Homes closed:
Texas 1,623 1,441 1,313
Florida 1,931 178 --
Mid-Atlantic 693 280 307
West 1,057 95 --
---------- ---------- ----------
Total 5,304 1,994 1,620
Average sales price per home closed:
Texas $ 267 $ 273 $ 253
Florida $ 227 $ 215 $ --
Mid-Atlantic $ 308 $ 299 $ 264
West $ 274 $ 259 $ --
Total $ 259 $ 271 $ 255
New sales contracts, net of cancellations:
Texas 1,511 1,362 1,346
Florida 1,987 154 --
Mid-Atlantic 524 205 223
West 945 98 --
---------- ---------- ----------
Total 4,967 1,819 1,569
Backlog at end of period in sales value:
Texas $ 105,283 $ 135,517 $ 116,043
Florida 326,026 286,100 --
Mid-Atlantic 59,991 95,831 21,539
West 82,105 111,900 --
---------- ---------- ----------
Total $ 573,405 $ 629,348 $ 137,582
Backlog at end of period in number of homes:
Texas 402 514 449
Florida 1,273 1,217 --
Mid-Atlantic 169 338 91
West 305 417 --
---------- ---------- ----------
Total 2,149 2,486 540
3
FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000
Income from continuing operations increased to $87,765 (or $3.15 per share)
during Fiscal Year 2001 from $23,774 (or $1.79 per share) during Fiscal Year
2000. The increase is primarily a result of the inclusion of a full year of
Engle's results of operations during Fiscal Year 2001 as compared to
approximately 40 days during Fiscal Year 2000. As a result of the Merger which
is being accounted for as a reorganization of entities under common control,
Engle's results of operations are included from November 22, 2000, the earliest
date that both Newmark and Engle were under common control.
The Company's provision for income taxes increased to 37.3% during Fiscal Year
2001 from 36.5% during Fiscal Year 2000. This increase in the Company's
effective rate is primarily a result of an increase in state taxes, due to a
higher proportion of the Company's pretax income being generated from states
which are subject to state income tax.
HOMEBUILDING
As a result of the Merger, Homebuilding revenues increased to $1,392,912 during
Fiscal Year 2001 from $546,666 during Fiscal Year 2000. For Fiscal Year 2001 the
Company had 5,304 closings which generated revenues from home sales of
$1,374,551, as compared to 1,994 closings, which generated revenues from home
sales of $540,323 for Fiscal Year 2000. The average sales price per closed home
for Fiscal Year 2001 decreased to $259 from $271 during Fiscal Year 2000. The
decrease is primarily attributable to the change in the mix of closings between
the Company's regions. During Fiscal Year 2000, 72.2% of the Company's closings
occurred in Texas, which realized an average sales price per closed home of
$273, while only 8.9% of the closings occurred in Florida, which realized an
average sales price per closed home of $215. During Fiscal Year 2001, closings
in Texas, which had an average sales price per closed home of $267, decreased to
30.6%, while closings in Florida, which had an average sales price per closed
home of $227, increased to 36.4%. This was partially offset by the increase in
the Company's closings occurring in the West region. During Fiscal Year 2000,
the Company generated 4.8% of its closings in the West, which realized an
average sales price per closed home of $259. During Fiscal Year 2001, closings
in the West increased to 19.9%, with an average selling price per closed home of
$274.
As a result of the Merger, Homebuilding cost of sales increased to $1,108,286
during Fiscal Year 2001 from $440,939 during Fiscal Year 2000. For Fiscal Year
2001 the cost of home sales was $1,091,626, or 79.4% of revenues from home sales
as compared to $434,736 or 80.5% of revenues from home sales for Fiscal Year
2000. The improvement in the percentage of cost of home sales to revenues from
homes sales is primarily due to the shift in the product mix of homes closed to
higher margin homes.
Selling, general & administrative ("SG&A") expenses increased to $152,063 for
Fiscal Year 2001 from $63,832 for Fiscal Year 2000, primarily as a result of the
Merger. As a percentage of revenues from home sales, SG&A remained relatively
consistent, decreasing to 11.1% for Fiscal Year 2001 from 11.8% for Fiscal Year
2000.
During Fiscal Year 2001, the Company incurred $2,600 in merger and related
expenses. These expenses relate primarily to legal, consulting and related costs
incurred in connection with the Merger.
During Fiscal Year 2001 depreciation and amortization expense was $8,849 as
compared to $3,112 for Fiscal Year 2000. Of these amounts, amortization of
goodwill was $2,398 and $1,633 for Fiscal Years 2001 and 2000, respectively. As
a result of the adoption of SFAS 142 effective January 1, 2002, the Company will
cease amortization of goodwill. The elimination of this amortization expense
would have resulted in an increase in net income per common share for Fiscal
Year 2001 and Fiscal Year 2000 of $0.05 and $0.08, respectively.
4
FINANCIAL SERVICES
Our Financial Services business generally provides mortgage financing, title
insurance and closing services for both our homebuyers and others. During Fiscal
Year 2001, Financial Services generated pretax income of $14,971 as compared to
$927 for Fiscal Year 2000. The increase is primarily attributable to the Merger
since the Company did not have a Financial Services segment prior to the Merger.
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
Income from continuing operations increased to $23,774 (or $1.79 per share)
during Fiscal Year 2000 from $15,826 (or $1.38 per share) during Fiscal Year
1999. The increase is primarily a result of the inclusion of approximately 40
days of Engle's results of operations during Fiscal Year 2000 as a result of the
Merger.
The Company's provision for income taxes increased to 36.5% during Fiscal Year
2000 from 35.5% during Fiscal Year 1999. This increase in the Company's
effective rate is primarily a result of an increase in state taxes, due to a
higher proportion of the Company's pretax income being generated from states
which are subject to state income tax.
HOMEBUILDING
Homebuilding revenues increased to $546,666, or 29.9% during Fiscal Year 2000
from $420,748 during Fiscal Year 1999. This increase is primarily related to the
Merger. For Fiscal Year 2000, the Company had 1,994 closings, which generated
revenues from home sales of $540,323, as compared to 1,620 closings for Fiscal
Year 1999, which generated revenues from home sales of $413,780. The average
sales price per closed home for Fiscal Year 2000 increased to $271 from $255
during Fiscal Year 1999. The increase is primarily attributable to market
conditions and the mix of homes sold.
Homebuilding cost of sales increased to $440,939 during Fiscal Year 2000 from
$345,592 during Fiscal Year 1999. For Fiscal Year 2000, the cost of home sales
was $434,736, or 80.5% of revenues from home sales as compared to $339,205, or
82.0% of revenues from home sales for Fiscal Year 1999. The improvement in the
percentage of cost of home sales to revenues from homes sales is primarily due
to the shift in the product mix of homes closed to higher margin homes.
Selling, general & administrative ("SG&A") expenses increased to $63,832 for
Fiscal Year 2000 from $47,503 for Fiscal Year 1999, primarily as a result of the
Merger. As a percentage of revenues from home sales, SG&A remained relatively
consistent, increasing to 11.8% for Fiscal Year 2000 from 11.5% for Fiscal Year
1999.
During Fiscal Year 2000, depreciation and amortization expense was $3,112 as
compared to $2,239 for Fiscal Year 1999. Of these amounts, amortization of
goodwill was $1,633 and $1,070 for Fiscal Years 2000 and 1999, respectively. As
a result of the adoption of SFAS 142 effective January 1, 2002, the Company will
cease amortization of goodwill. The elimination of this amortization expense
would have resulted in an increase in net income per common share for Fiscal
Year 2000 and Fiscal Year 1999 of $0.08 and $0.06, respectively.
FINANCIAL SERVICES
Prior to the Merger, the Company did not have a Financial Services segment. As
the results of Engle's operations, including its Financial Services segment,
were only included in the Company's consolidated results of operations for
approximately 40 days, the impact of the Financial Services segment was not
significant.
5
DISCONTINUED OPERATIONS
During March 2002, management of the Company committed to a plan to dispose of
Wesbrooke Acquisition Corp. to eliminate operating redundancies in its South
Florida markets and to strengthen its financial position. Pursuant to this plan
of disposition, the Company would sell 100% of the common stock of Westbrooke.
On April 8, 2002, the Company signed a definitive agreement for the sale of
Westbrooke to Standard Pacific Corp. (Standard Pacific) for approximately
$41,000 in cash. This sale was completed on April 15, 2002. An adjustment
(either upwards or downwards) to the purchase price may occur within 90 days of
the closing date of the sale based on Westbrooke's net income from January 1,
2002 through the closing date. In addition, Standard Pacific satisfied
approximately $54,400 of Westbrooke's debt that includes approximately $14,200
of intercompany liabilities owed to the Company. Upon completion of this sale,
the Company expects to realize a gain of $4,900. Management has determined that
in accordance with SFAS 144, as of March 31, 2002, the criteria to classify the
Westbrooke assets as held for sale were met.
Results of Westbrooke's operations have been classified as discontinued
operations, and prior periods have been restated. Selected financial data of the
Company's discontinued operations are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
-------- -------- --------
Revenues $205,661 $178,213 $ 70,966
Income from discontinued operations, net of taxes $ 6,272 $ 6,321 $ 1,559
Net income per common share from discontinued operations $ 0.22 $ 0.48 $ 0.13
6
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
STATEMENT OF FINANCIAL CONDITION AND CASH FLOW DATA
The following table includes selected statement of financial condition and other
information:
2001 2000 1999
--------- --------- ---------
Cash-unrestricted $ 75,136 $ 24,251 $ 7,586
Inventory $ 645,986 $ 613,095 $ 166,676
Total assets $ 999,170 $ 868,553 $ 328,892
Homebuilding borrowings $ 308,697 $ 337,649 $ 97,587
Homebuilding debt (2) $ 338,719 $ 337,649 $ 105,876
Stockholders' equity $ 413,370 $ 355,059 $ 109,618
Cash flow from operating activities $ 24,657 $ 2,314 $ (5,716)
Cash flow from investing activities $ (6,382) $ 32,130 $ 30
Cash flow from financing activities $ 30,756 $ (18,525) $ 22,103
EBITDA (1) $ 184,160 $ 53,551 $ 35,142
Ratio of Homebuilding debt to total assets 33.9% 38.9% 32.2%
Ratio of Homebuilding debt to capital (3) 45.0% 48.7% 49.1%
- ----------------
(1) EBITDA represents earnings from continuing operations before interest,
taxes, depreciation, and amortization and consists of the sum of income
from continuing operations before: (a) income taxes, (b) amortization of
capitalized interest in cost of sales, (c) homebuilding interest expense
and (d) depreciation and amortization. We have included information
concerning EBITDA because it is used by some investors as a measure of a
company's ability to service and incur debt. EBITDA is not required by
generally accepted accounting principles, or GAAP, and other companies may
calculate EBITDA differently. EBITDA should not be considered as an
alternative to operating income or to cash flows from operating activities
(as determined in accordance with GAAP) and should not be construed as an
indication of our operating performance or a measure of our liquidity.
(2) Homebuilding debt includes homebuilding borrowings and consolidated land
bank obligations.
(3) Capital includes homebuilding debt and stockholders' equity. Capital
excludes financial services borrowings.
At December 31, 2001, the Company had unrestricted cash and cash equivalents of
$75,136, as compared to $24,251 at December 31, 2000. The increase in
unrestricted cash was primarily attributable to income from continuing
operations of $87,765 generated from the Company's Homebuilding and Financial
Services segments. Cash flows provided by operating activities of $24,657 during
Fiscal Year 2001 were reduced by an increase in mortgage loans held for sale of
$36,527. The Company sells the mortgage loans that are originated, generally
within thirty days of the closing of the loan. The cash related to these loans
was primarily received during January 2002 and was used to pay down the mortgage
company's warehouse line of credit. Additionally, cash was reduced by increases
in inventories of $25,691, which relates primarily to the Company's acquisition
of additional lots and land held for development as the Company continues to
expand in its existing markets.
Cash used in investing activities was $6,382 during Fiscal Year 2001 as compared
to cash provided by investing activities of $32,130 during Fiscal Year 2000. The
change relates primarily to Engle cash on hand of $35,456 which was acquired at
the time of the Merger. During Fiscal Year 2001, cash used in investing
activities relates primarily to net additions to property and equipment of
$6,713.
The Company's Homebuilding operations primary uses of cash have been for land
acquisitions, construction and development expenditures, and SG&A expenditures.
The Company's sources of cash to finance these requirements have been primarily
with cash generated from operations and cash borrowed under existing credit
facilities. The Company's Financial Services segment relies primarily on
internally generated funds, which include the proceeds generated from the sale
of mortgages and from the mortgage company's warehouse line of credit, to fund
its operations.
7
At December 31, 2001, the Company had homebuilding borrowings of $308,697
outstanding and an aggregate of $60,900 in letters of credit and performance
bonds outstanding. Outstanding borrowings consisted primarily of $202,000
aggregate principal amount of unsecured borrowings from financial institutions
("Unsecured Borrowings"), $86,873 aggregate principal amount of the Company's
secured revolving credit facility ("Secured Credit Facilities") and $12,897 of
the Engle 9 1/4% Senior Notes due 2008 ("Engle Senior Notes"). The letters of
credit and performance bonds are required for certain development activities,
such as deposits on land and lot purchase contracts. The Company also has a
$40,000 warehouse line of credit to be used to fund the mortgage company's
origination of residential mortgage loans. At December 31, 2001, the outstanding
balance was $38,689 with an amount available under the warehouse line of credit
of $1,311.
The Company's ratio of Homebuilding debt to total assets was 33.9% at December
31, 2001, as compared to 38.9% and 32.2% at December 31, 2000 and 1999,
respectively. The Company's ratio of Homebuilding debt to capital was 45.0% at
December 31, 2001, as compared to 48.7% and 49.1% at December 31, 2000 and 1999,
respectively. The decrease in these ratios at December 31, 2001 relates
primarily to the Company's use of funds generated from operating activities to
reduce its borrowings.
Maturities on homebuilding borrowings at December 31, 2001 are as follows (in
thousands):
2002 $ 294,381
2003 1,018
2004 87
2005 94
2006 101
Thereafter 13,016
---------
$ 308,697
=========
On June 25, 2002, concurrent with the closing of the Merger, the Company
completed a private placement (the Notes Offering) of $200,000 9% Senior Notes
due 2010 and $150,000 10 3/8% Senior Subordinated Notes due 2012 (collectively,
the "Notes"). The proceeds, net of transaction costs, of approximately $335,000
and cash on hand were used to repay the Unsecured Borrowings, the Secured Credit
Facilities, the Engle Senior Notes, other obligations and approximately $75,000
in mezzanine debt assumed from TOI in the Merger. As a result, upon completion
of the Notes Offering and repayment of existing borrowings, the Company's cash
on hand decreased by approximately $19,800. The interest rates on the Notes are
higher than the collective interest rates obligations which were repaid. As a
result of the higher interest rates and the assumption of the TOI debt, the
Company anticipates that interest incurred will exceed the amounts which would
have been incurred under the existing borrowings. Therefore, the increased
interest incurred will have an effect on gross margins in future periods.
Additionally, the Company entered into a revolving credit facility to fund
working capital, which provides for loans up to $220,000.
Management believes that as a result of the Merger and the Notes Offering, the
Company will have adequate financial resources, including cash from operations
and availability under the new credit facility and the warehouse line of credit,
to meet the Company's current working capital and land acquisition and
development needs based on current market conditions into the foreseeable
future. However, there can be no assurance that the amounts available from such
sources will be sufficient. If we identify new acquisition opportunities, or if
our operations do not generate sufficient cash from operations at levels
currently anticipated, we may need to seek additional debt or equity financing
to operate and expand our business.
DIVIDENDS
Newmark paid a dividend of $0.54 per share (on a pre-restatement basis) of
common stock in Fiscal Year 2001. Newmark did not pay any cash dividends on its
common stock in Fiscal Year 2000. Engle made net distributions of $29,516 in
Fiscal Year 2001 and $363 in Fiscal Year 2000.
8
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.
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
indemnities. 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.
The Company had goodwill in the amount of $57,726 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.
The Company enters into option contracts with third parties to acquire developed
lots. From time to time to leverage its ability to acquire and finance the
development of these lots, the Company transfers its option right to a special
purpose entity owned by third parties, including current and former officers or
trusts related to them. These special purpose entities incur debt to finance the
acquisition and development of the lots and grant the Company an option to
acquire these assets. In consideration for these options, the Company makes a
non-refundable deposit, typically less than 20% of the option price. The Company
does not have legal title to the special purpose entities or their assets and
has not guaranteed their liabilities. However, because the Company has the right
to exercise the options, it may be deemed to have certain rights of ownership
over these entities' assets. As a result, the Company is required to include the
assets of these entities and their corresponding liabilities in the financial
statements under the caption "Consolidated Land Bank Obligations." Accordingly,
at December 31, 2001, the Company included in its statement of financial
condition inventory of $65,718, minority interests of $35,696, representing the
equity of investors, and consolidated land bank obligations of $30,022,
representing the liabilities of these entities.
During March 2002, the Company's management committed to a plan to dispose of
Westbrooke. Pursuant to this plan of disposition, the Company would sell 100% of
the common stock of Westbrooke. On April 15, 2002, the Company completed the
sale of Westbrooke to Standard Pacific. Accordingly, as of March 31, 2002,
management has determined that in accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," the criteria to classify the
Westbrooke assets as held for sale were met. Results of Westbrooke's operations
have been classified as discontinued operations and prior periods have been
restated.
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 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.
9
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board, or the FASB, issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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 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, the Company has not entered
into derivative contracts either to hedge existing risks or for speculative
purposes. Accordingly, the adoption of the new standard on January 1, 2001 did
not affect the Company's consolidated 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 ended after December
15, 2000. The adoption of SFAS 140 did not materially affect the Company's
results of operations or financial position.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and No.
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 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. The
adoption of SFAS No. 141 did not have a material impact on the consolidated
financial statements of the Company.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead review goodwill for impairment at least annually. SFAS No.
142 prescribes a two-phase process for impairment testing of goodwill. The first
phase, required to be completed by June 30, 2002, screens for impairment. The
second phase (if necessary), required to be completed by December 31, 2002,
measures the impairment. The impairment loss is the amount, if any, by which the
implied fair value of goodwill is less than the book carrying value. In
addition, SFAS 142 requires companies to 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. Companies are also required to reassess the useful lives of other
intangible assets within the first interim quarter after adoption of SFAS 142.
The Company adopted SFAS 142 as of January 1, 2002 and has accounted for
previous business combinations using the purchase method. As of December 31,
2001, the net carrying amount of goodwill is $57,726. The Company completed the
first phase impairment analysis during the second quarter of 2002 and found no
instances of impairment on its recorded goodwill. Accordingly, the second
testing phase, absent future indicators of impairment, is not necessary during
2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement supersedes the rules on asset
impairment under SFAS No. 121, "Accounting for Long Lived Assets and for Long
Lived Assets to Be Disposed Of," but retains many of its fundamental provisions.
Additionally this Statement expands the scope of discontinued operations to
include more disposal transactions. SFAS 144 provides a single accounting model
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for long-lived assets to be disposed of and significantly changes the criteria
that would have to be met to classify an asset as held-for-sale. Classification
as held-for-sale is an important distinction since such assets are not
depreciated and are stated at the lower of fair value or carrying amount. SFAS
144 also requires expected future operating losses from discontinued operations
to be displayed in the periods in which the losses are incurred, rather than as
of the measurement date as previously required. The provisions of this Statement
are effective for financial statements issued beginning after December 15, 2001.
As a result of the adoption of SFAS 144 on January 1, 2002, the Company has
classified the operations of Westbrooke as discontinued in the consolidated
financial statements. See Note 12 to the consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44 and
64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS 145
prevents gains or losses on extinguishment of debt not meeting the criteria of
APB 30 to be treated as extraordinary. SFAS 145 amends SFAS No. 13, "Accounting
for Leases," to eliminate inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. In addition, SFAS 145 rescinds SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers" and amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. SFAS 145 is effective for
fiscal years beginning after May 15, 2002. The adoption of SFAS 145 does not
have a material impact on previously issued financial statements of the Company.
However, the adoption of SFAS 145 could impact the financial statements of
subsequent periods, although it is not expected to be material.
SEASONALITY OF OPERATIONS
The homebuilding industry tends to be seasonal, as generally there are more
homes sold in the spring and summer months when the weather is milder, although
the rate of sales contracts for new homes is highly dependent on the number of
active communities and the timing of new community openings. We operate
primarily in the southwest and southeast, where weather conditions are more
suitable to a year-round construction process than in other parts of the
country. Because new home closings trail new home sales by several months, we
typically have a greater percentage of home closings in the fall.
INFLATION
The Company and the homebuilding industry in general, may be adversely affected
during periods of high inflation, primarily because of higher land and
construction costs. Inflation also increases the Company's financing, labor and
material costs, which may reduce gross margins. In addition, higher mortgage
rates significantly affect the affordability of permanent mortgage financing to
prospective homebuyers. The Company attempts to pass through to its customers
any increases in its costs through increased sales prices. To date, inflation
has not had a material adverse effect on the Company's results of operations.
However, there is no assurance that it will not have a material adverse impact
on the Company's future results of operations.
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