EXHIBIT 99.4
TECHNICAL OLYMPIC USA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-------
Report of Independent Certified Public Accountants F-2
Report of Independent Certified Public Accountants F-3
Consolidated Statements of Financial Condition as of December 31, 2001 and 2000 F-4
Consolidated Statements of Income for the years ended December 31, 2001 and
2000, and for the period from December 16, 1999 through December 31, 1999 and
the period from January 1, 1999 through December 15, 1999 F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2001 and 2000, and for the period from December 16, 1999 through December 31,
1999 and the period from January 1, 1999 through December 15, 1999 F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2001 and
2000, and for the period from December 16, 1999 through December 31, 1999 and
the period from January 1, 1999 through December 15, 1999 F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Technical Olympic USA, Inc.
We have audited the accompanying consolidated statement of financial condition
of Technical Olympic USA, Inc. (formerly known as 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. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Technical Olympic
USA, Inc. (formerly known as 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.
/s/ ERNST & YOUNG LLP
Miami, Florida
January 18, 2002, except
for Note 12, as to which
the date is April 15, 2002,
and Note 1 and Note 5 as
to which the date is
June 25, 2002
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Technical Olympic USA, Inc.
We have audited the accompanying consolidated statement of financial condition
of Technical Olympic USA, Inc. (formerly known as Newmark Homes Corp.) and
subsidiaries (the Successor Company), a subsidiary of Technical Olympic, 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 Technical Olympic USA, Inc.
(formerly known as 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. These consolidated financial statements are the responsibility of
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 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 of the financial statements. 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.
As discussed in Note 1 of the financial statements, Technical Olympic, 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.
/s/ BDO SEIDMAN, LLP
Los Angeles, California
January 31, 2001
F-3
TECHNICAL OLYMPIC USA, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
----------------------
2001 2000
-------- --------
ASSETS
HOMEBUILDING:
Cash and cash equivalents:
Unrestricted $ 67,206 $ 21,633
Restricted 7,738 3,841
Inventory 645,986 613,095
Property and equipment, net 10,694 8,783
Other assets 10,897 18,297
Goodwill, net 57,726 59,582
Westbrooke assets held for sale 117,160 118,694
-------- --------
917,407 843,925
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 $999,170 $868,553
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
HOMEBUILDING:
Accounts payable and other liabilities $ 56,295 $ 55,792
Customer deposits 25,674 27,195
Consolidated land bank obligations 30,022 --
Homebuilding borrowings 308,697 337,649
Westbrooke liabilities associated with assets held for sale 71,800 77,752
-------- --------
492,488 498,388
FINANCIAL SERVICES:
Accounts payable and other liabilities 18,828 6,035
Financial services borrowings 38,689 9,071
-------- --------
57,517 15,106
-------- --------
Total liabilities 550,005 513,494
Minority interest 35,795 --
Commitments and contingencies -- --
Stockholders' equity:
Common stock-- $.01 par value; 67,000,000 shares
authorized and 27,878,787 shares issued and outstanding 279 279
Additional paid-in capital 322,400 322,400
Retained earnings 90,691 32,380
-------- --------
Total stockholders' equity 413,370 355,059
-------- --------
Total liabilities and stockholders' equity $999,170 $868,553
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
TECHNICAL OLYMPIC USA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PERIOD FROM PERIOD FROM
DECEMBER 16, JANUARY 1,
YEAR ENDED DECEMBER 31, 1999 TO 1999 TO
--------------------------------- DECEMBER 31, DECEMBER 15,
2001 2000 1999 1999
---------------- ---------------- ---------------- ----------------
(SUCCESSOR) (PREDECESSOR)
HOMEBUILDING:
Revenues:
Homes sales $ 1,374,551 $ 540,323 $ 30,550 $ 383,230
Land/lot sales 18,361 6,343 -- 6,968
------------ ------------ ------------ ------------
1,392,912 546,666 30,550 390,198
Cost of sales:
Home sales 1,091,626 434,736 24,826 314,379
Land/lot sales 16,660 6,203 -- 6,387
------------ ------------ ------------ ------------
1,108,286 440,939 24,826 320,766
------------ ------------ ------------ ------------
Gross profit 284,626 105,727 5,724 69,432
Selling, general and administrative expenses 152,063 63,832 2,421 45,082
Depreciation and amortization 8,849 3,112 196 2,043
Merger and related expenses 2,643 -- -- --
Other (income) expense (3,941) 2,264 307 560
------------ ------------ ------------ ------------
Homebuilding pretax income 125,012 36,519 2,800 21,747
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 2,800 21,747
Income tax expense 52,218 13,672 979 7,742
------------ ------------ ------------ ------------
Income from continuing operations 87,765 23,774 1,821 14,005
Discontinued operations:
Income from discontinued operations 10,118 10,265 1,347 1,192
Income tax expense 3,846 3,944 520 460
------------ ------------ ------------ ------------
Income from discontinued operations, net of
taxes 6,272 6,321 827 732
------------ ------------ ------------ ------------
Net income $ 94,037 $ 30,095 $ 2,648 $ 14,737
============ ============ ============ ============
EARNINGS PER COMMON SHARE (BASIC AND DILUTED):
From continuing operations $ 3.15 $ 1.79 $ 0.16 $ 1.22
From discontinued operations 0.22 0.48 0.07 0.06
------------ ------------ ------------ ------------
Net income $ 3.37 $ 2.27 $ 0.23 $ 1.28
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic and diluted 27,878,787 13,250,062 11,500,000 11,500,000
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
TECHNICAL OLYMPIC USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL
------------------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------------- --------------- --------------- ---------------- --------------
PREDECESSOR COMPANY:
Balance at December 31, 1998 11,500,000 $ 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 11,500,000 $ 115 $ 73,768 $ 30,966 $ 104,849
========== ========== ========== ========== ==========
SUCCESSOR COMPANY:
Balance at December 15, 1999 11,500,000 $ 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 11,500,000 115 106,855 -- 106,970
Net income for period December 16 to
December 31, 1999 -- -- -- 2,648 2,648
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 11,500,000 115 106,855 2,648 109,618
Combination of stockholder's equity of
Engle Holdings upon consummation of
merger (see Note 1) -- -- 215,709 -- 215,709
Conversion of Engle Holdings shares
exchanged in connection with merger
(see Note 1) 16,378,787 164 (164) -- --
Dividends paid -- -- -- (363) (363)
Net income -- -- -- 30,095 30,095
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 27,878,787 279 322,400 32,380 355,059
Dividends paid -- -- -- (35,726) (35,726)
Net income -- -- -- 94,037 94,037
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 27,878,787 $ 279 $ 322,400 $ 90,691 $ 413,370
========== ========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
TECHNICAL OLYMPIC USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM PERIOD FROM
YEAR ENDED DECEMBER JANUARY 1,
DECEMBER 31, 16, 1999 TO 1999 TO
---------------------------- DECEMBER 31, DECEMBER 15,
2001 2000 1999 1999
------------- -------------- ------------- --------------
(SUCCESSOR) (PREDECESSOR)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 94,037 $ 30,095 $ 2,648 $ 14,737
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Income from discontinued operations (6,272) (6,321) (827) (732)
Depreciation and amortization 8,849 3,112 196 2,043
Deferred income taxes 5,121 2,404 21 (362)
Other adjustments (819) (592) (39) (722)
Changes in operating assets and liabilities:
Restricted cash (17,138) (494) -- --
Inventories (25,691) 14,054 (1,049) (24,042)
Other assets (8,678) (6,490) (35) (814)
Accounts payable and other liabilities 12,728 (19,838) 359 8,258
Customer deposits (953) (7,554) 84 (5,440)
Mortgage loans held for sale (36,527) (6,062) -- --
--------- --------- --------- ---------
Net cash provided by (used in) operating activities 24,657 2,314 1,358 (7,074)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property and equipment (6,713) (1,300) -- (545)
Increase in cash as a result of the merger with Engle Holdings
Corp. -- 35,456 -- --
Additional purchase price paid in connection with Westbrooke --
acquisition -- (1,230) --
Other 331 (796) -- 575
--------- --------- --------- ---------
Net cash (used in) provided by investing activities (6,382) 32,130 -- 30
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments on) revolving credit facilities 12,026 (22,872) 1,475 13,028
Proceeds from unsecured borrowings from banks 27,001 215,000 -- --
Principal payments on unsecured borrowings and Senior Notes
(66,764) (214,925) -- --
Proceeds from advances on acquisition notes payable -- -- 3,100 4,500
Principal payments on acquisition notes payable (1,216) (950) -- --
Net proceeds from consolidated land bank obligations 30,022 -- -- --
Net proceeds from financial services borrowings 29,618 5,585 -- --
Minority interest in consolidated subsidiaries 35,795 -- -- --
Dividends paid (35,726) (363) -- --
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 30,756 (18,525) 4,575 17,528
--------- --------- --------- ---------
Net cash provided by operations 49,031 15,919 5,933 10,484
Net cash provided by (used in) discontinued operations 1,854 748 (5,678) (6,827)
--------- --------- --------- ---------
Increase in cash and cash equivalents 50,885 16,667 255 3,657
Cash and cash equivalents at beginning of period 24,251 7,584 7,329 3,672
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 75,136 $ 24,251 $ 7,584 $ 7,329
========= ========= ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
TECHNICAL OLYMPIC USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. BUSINESS AND ORGANIZATION
BUSINESS
Technical Olympic USA, Inc. (the Company), formerly known as Newmark Homes
Corp., is a Delaware Corporation. The Company is a national homebuilder that is
engaged primarily in the construction and sale of residential homes and land
development. The Company operates in eleven metropolitan markets in four
geographic regions: Florida, Texas the West and the Mid-Atlantic. The Company
also provides title and mortgage brokerage services to its homebuyers. The
Company does not retain or service the mortgages that it originates but, rather,
sells the mortgages and related servicing rights to investors.
ORGANIZATION
THE MERGER AND NOTES OFFERING
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 will be accounted for as a
distribution as of June 25, 2002.
As a result of the exchange of equity interests, TOI owns 91.75% of the Company.
TOI 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 that is publicly traded on the Athens Stock Exchange.
Concurrently with the Merger, the Company completed a private placement of
$200,000 9% senior notes and $150,000 10 3/8% senior subordinated notes (the
Notes Offering). The net proceeds of approximately $335,000 from the Notes
Offering were used to repay certain indebtedness of both Newmark and Engle, as
well as approximately $75,000 of debt of TOI that was assumed in connection with
the Merger. Additionally, the Company entered into a revolving credit facility
to fund working capital, which provides for loans up to $220,000.
ENGLE ACQUISITION
On November 22, 2000, Engle became a wholly-owned subsidiary of TOI. Engle's
stockholders received $19.10 for each share of Engle's common stock (the Engle
Acquisition). Following the acquisition, the common stock of Engle ceased to be
publicly traded. The Engle Acquisition was accounted for using the purchase
method. Total consideration for the Engle Acquisition approximated $542,000,
including $216,000 in cash and the assumption of $326,000 of liabilities.
F-8
The "push down" basis of accounting resulted in Engle allocating approximately
$527,000 to inventories and other identifiable assets and $15,000 to goodwill.
As a result of the change in control, Engle 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, Engle repurchased approximately
$237,000 of $250,000 of its senior notes. Approximately $13,000 of the senior
notes were not tendered and remain outstanding as of December 31, 2001. These
notes have been discharged with the proceeds from the Notes Offering.
CHANGE IN CONTROL
On December 15, 1999, TOI purchased 9,200,000 shares of Newmark's common stock
for $86,000 in cash. The shares sold in this transaction represented 80% of
Newmark's then 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.
This acquisition by TOI 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 (goodwill) approximated
$46,000.
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 $4,600 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, Newmark 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 ss.338(h)(10). By electing ss.338(h)(10),
Newmark recognized taxable income of approximately $20,000, and $8,000 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.
As a result, the consolidated amounts 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.
The following table represents the operating results of the Company on a full
year basis for the year ended December 31, 1999:
F-9
Revenues $ 420,748
Cost of sales 348,617
---------
Gross profit 72,131
Equity in earnings from unconsolidated subsidiaries 725
Selling, general and administrative expenses (44,478)
Depreciation and amortization (2,239)
---------
Operating income 26,139
Other income (expense):
Interest expense (1,837)
Other, net 245
---------
Income from continuing operations before income taxes 24,547
Income taxes 8,721
---------
Income from continuing operations 15,826
Discontinued operations:
Income from discontinued operations (Westbrooke) 2,539
Income taxes 980
---------
Income from discontinued operations, net of taxes 1,559
---------
Net income $ 17,385
=========
Earnings per common share (basic and diluted):
From continuing operations $ 1.38
From discontinued operations 0.13
---------
Net income $ 1.51
=========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States and general practices within
the homebuilding industry. The following summarizes the more significant of
these policies.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in the consolidated financial statements. As a result of the
Merger being accounted for as a reorganization of entities under common control,
the consolidated financial statements have been restated to present the combined
results of the Company as if the Merger had been in effect from November 22,
2000, the date at which both entities became under the control of TOI.
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.
Certain reclassifications have been made to conform the prior periods' amounts
to the current year's presentation.
Due to the Company's normal operating cycle being in excess of one year, the
Company presents an unclassified statement of financial condition.
SEGMENT REPORTING
In accordance with Statement of Financial Accounting Standards No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, the Company
has concluded that its 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.
F-10
HOMEBUILDING
INVENTORY
Inventory is stated at the lower of cost or fair value. Inventory under
development or held for development is 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. Inventory to be
disposed of is 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. 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.
HOMEBUILDING BORROWINGS
Homebuilding borrowings represents financing arrangements utilized to support
the Company's homebuilding activities. These arrangements have been executed by
subsidiaries whereby the Company has an ownership interest.
CONSOLIDATED LAND BANK OBLIGATIONS
Consolidated land bank obligations represents liabilities associated with the
Company's land banking activities, including obligations in special-purpose
entities which have been consolidated by the Company, for which the Company has
no ownership interest.
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 at closing when title passes
to the buyer and 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.
WARRANTY COSTS
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 homebuyer'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 time of
sale. Total warranty expense for the years ended December 31, 2001, 2000 and
1999 were $7,430, $4,136 and $2,700, respectively.
ADVERTISING COSTS
Advertising costs, consisting primarily of newspaper and trade publications,
signage and the cost of maintaining an internet web-site, are expensed as
incurred. Advertising expense included in selling, general and administrative
expenses and income from discontinued operations for the years ended December
31, 2001, 2000 and 1999 amounted to $16,261, $9,036 and $7,600, respectively.
FINANCIAL SERVICES
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are stated at the lower of aggregate cost or fair
value based upon such commitments for loans to be delivered or prevailing market
rates for uncommitted loans. Substantially all of the loans originated by the
F-11
Company are sold to private investors within 30 days of origination. Gains or
losses on mortgages held for sale are realized when the loans are sold.
REVENUE RECOGNITION
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. Financial Service revenue and expenses consist of the
following:
2001 2000
------- -------
Revenue:
Mortgage services $16,400 $ 1,265
Title services 16,259 1,297
------- -------
Total Financial Service revenue 32,659 2,562
Expenses:
Mortgage services 6,800 545
Title services 10,888 1,090
------- -------
Total Financial Service expense 17,688 1,635
------- -------
Total Financial Service pretax income $14,971 $ 927
======= =======
Prior to 2000, the Company did not generate revenue and expenses from financial
service operations.
GENERAL
CASH AND SUPPLEMENTAL CASH FLOW INFORMATION
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.
Supplemental disclosures of cash flow information:
PERIOD FROM PERIOD FROM
YEAR ENDED DECEMBER 16, JANUARY 1,
DECEMBER 31, 1999 TO 1999 TO
---------------------- DECEMBER 31, DECEMBER 15,
2001 2000 1999 1999
------- ------- -------------- --------------
Cash paid for:
Interest (net of amounts capitalized) $ 2,372 $ 8,755 $ -- $ 1,016
======= ======= ========== =======
Income taxes $52,830 $15,802 $ -- $10,723
======= ======= ========== =======
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.
F-12
CONCENTRATION OF CREDIT RISK
The Company conducts business primarily in four geographical regions: Florida,
Texas, the West and the Mid-Atlantic. Accordingly, the market value of the
Company's inventory is susceptible to changes in market conditions that may
occur in these locations. With regards to the mortgage loans held for sale, the
Company will generally only originate loans which have met underwriting criteria
required by purchasers of its loan portfolios. Additionally, the Company
generally sells its mortgage loans held for sale within 30 days which minimizes
the Company's credit risk.
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The Company has investments in unconsolidated entities, which approximate $2,800
and $2,200 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.
PROPERTY AND EQUIPMENT
Property 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 18 months to 30 years. At
December 31, 2001 and 2000, accumulated depreciation approximated $7,180 and
$7,190, respectively.
GOODWILL
Goodwill represents the excess of the purchase price of the Company's
acquisitions over the fair value of the net assets acquired. Goodwill is
amortized on a straight-line basis over a period ranging from 20 to 30 years.
For the years ended December 31, 2001, 2000 and 1999, amortization expense
amounted to $2,398, $1,633 and $1,070, respectively.
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.
INCOME TAXES
The Company was included in the consolidated federal income tax return of PUSA
through December 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.
F-13
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.
EARNINGS PER SHARE
The Company presents earnings per share data in accordance with the provisions
of SFAS 128, 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.
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 and mortgage loans held for sale, approximate their fair values due to
their short-term nature. The carrying value of homebuilding and financial
service borrowings and consolidated land bank obligations approximate their fair
value as substantially all of the debt has a fluctuating interest rate based
upon a current market index.
RECENT ACCOUNTING PRONOUNCEMENTS
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 consolidated financial statements.
In June 2001, the Financial Accounting Standards Board finalized SFAS 141,
BUSINESS COMBINATIONS, 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.
F-14
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
$57,726. The Company adopted SFAS 142 on January 1, 2002. The impairment test of
goodwill performed by the Company at January 1, 2002 indicated no impairment.
The following table sets forth reported net income and earnings per share, as
adjusted to exclude goodwill amortization expense:
PERIOD FROM PERIOD FROM
YEAR ENDED DECEMBER 16, JANUARY 1,
DECEMBER 31, 1999 TO 1999 TO
---------------------- DECEMBER 31, DECEMBER 15,
2001 2000 1999 1999
------- ------- ------------- --------------
Income from continuing operations, as reported $87,765 $23,774 $ 1,821 $ 14,005
Add back of amortization expense, net of taxes 1,504 1,037 28 661
------- ------- ------- ----------
$89,269 $24,811 $ 1,849 $ 14,666
======= ======= ======= ==========
Earnings per common share (basic and diluted), as
reported $ 3.15 $ 1.79 $ 0.16 $ 1.22
======= ======= ======= ==========
Earnings per common share (basic and diluted), as
adjusted $ 3.20 $ 1.87 $ 0.16 $ 1.28
======= ======= ======= ==========
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. See note 12.
F-15
3. INVENTORY
Inventory consists of the following as of December 31:
2001 2000
-------- --------
Land and lots under development $264,893 $259,531
Residences completed and under construction 381,093 353,564
-------- --------
$645,986 $613,095
======== ========
A summary of homebuilding interest capitalized in inventory is as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
------- ------- -------
Interest capitalized, beginning of period $25,487 $ 3,003 $ 3,571
Interest incurred 22,067 35,477 9,339
Less interest included in:
Cost of sales 34,241 9,711 8,070
Interest expense 1,087 3,282 1,837
------- ------- -------
Interest capitalized, end of period $12,226 $25,487 $ 3,003
======= ======= =======
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 $22,451 and $14,721,
respectively, included in other assets in the accompanying consolidated
statements of financial condition. The Company's liability for nonperformance
under such contracts is limited to forfeiture of the related deposits.
During 2001, through Westbrooke, the Company entered into an option arrangement
with Durham-Florida Properties, LLC (Durham) to acquire developed lots with a
total estimated contract price of $16,400. Under this option arrangement, the
Company has placed a $3,700 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, which have been classified as Westbrooke assets held for sale with a
corresponding liability in consolidated land bank obligations, which has been
classified as Westbrooke liabilities associated with assets held for sale. See
Note 12.
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 $4,300. 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.
These amounts have been included in Wesbrooke assets held for sale and
Westbrooke liabilities associated with assets held for sale in the accompanying
statement of financial condition. See Note 12.
As a result of the above transactions, the Company has included in Westbrooke
assets held for sale in the consolidated statement of financial condition
inventory of approximately $13,000 and in Westbrooke liabilities associated with
assets held for sale consolidated land bank obligations of approximately
$13,000. These obligations are at market interest rates and are repaid based on
lot closings with a final maturity through January 31, 2004.
During 2001, Engle sold to an investment limited liability company ("Investment
F-16
Company") certain undeveloped real estate tracts. The Investment Company is
owned by several of the current and former executive officers of Engle,
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 $43,000.
Engle 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, Engle can
cancel these agreements to purchase the land by forfeiture of its deposit. Engle
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 statement of financial
condition as of December 31, 2001. Minority interest in consolidated
subsidiaries, represents the equity provided by members of management.
During 2001, Engle entered into option arrangements with independent third
parties to acquire developed lots. Under these option arrangements, Engle placed
deposits, which provide the right to acquire developed lots at market prices.
Additionally, under these arrangements, Engle can cancel these arrangements to
purchase the land by forfeiture of the deposit.
Although Engle does not have legal title to the assets of these independent
third parties and have not guaranteed the liabilities, Engle 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 statement of financial condition as of December 31,
2001.
As a result of the above transactions, the Company has included on its
consolidated statement of financial condition inventory and land deposits of
approximately $66,000, minority interest of approximately $36,000, which
represents the equity of investors, and consolidated land bank obligations of
approximately $30,000. These obligations are at market interest rates and are
repaid on lot closings with a final maturity through 2004.
4. CONSOLIDATED JOINT VENTURES
The Company acquired a 75% interest in Silver Oak Trails, L.P., a land
development joint venture for a net initial investment of $2,900. The operations
of Silver Oak Trails, L.P. are consolidated with the operations of the Company.
Silver Oak Trails, L.P. earned $400 of which $100 is classified as minority
interest in the accompanying consolidated statement of income for the year
ending December 31, 2001.
F-17
5. HOMEBUILDING AND FINANCIAL SERVICES BORROWINGS
HOMEBUILDING BORROWINGS
Homebuilding borrowings, excluding the construction loans payable of Westbrooke
which are included in Westbrooke liabilities associated with assets held for
sale, consist of the following at December 31:
2001 2000
-------- --------
Unsecured borrowings from banks (a) $202,000 $215,000
Senior Notes due 2008, at 9.25% (b) 12,897 38,065
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 (c) 81,643 74,590
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) 5,230 182
Acquisition notes payable (d) 5,434 6,650
Other 1,493 3,162
-------- --------
$308,697 $337,649
======== ========
Maturities on homebuilding borrowings at December 31, 2001 are as follows:
2002 $ 294,381
2003 1,018
2004 87
2005 94
2006 101
Thereafter 13,016
---------
$ 308,697
=========
(a) In connection with the acquisition of Engle by Technical Olympic on
November 22, 2000, Engle entered into a Credit Agreement (the "Credit
Agreement") with a bank providing for a $100,000 term loan commitment and a
$275,000 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 Engle's then outstanding $250,000 principal amount
of 9 1/4% Senior Notes due 2008 ("Engle 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 Engle's business. Engle's previous bank revolving credit facility
was repaid and cancelled. The terms of the Credit Agreement contain
restrictive covenants which require Engle, among other things, to maintain
a minimum tangible net worth and maintain certain financial ratios.
(b) As a result of the change in control of Engle, Engle was required by the
indentures governing the Engle 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, Engle
repurchased approximately $237,000 of the Engle Senior Notes. Funds to
repurchase the Engle Senior Notes were provided from the issuance of the
$100,000 term loan under the Credit Agreement and additional advances under
Engle's revolving credit facility. Approximately $13,000 of the Engle
Senior Notes were not tendered and remain outstanding as of December 31,
2001.
F-18
(c) On June 27, 2000, the Company entered into a syndicated $150,000 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
subdivisions, the purchase of developed lots and the construction of homes
in the Texas, Tennessee and North Carolina markets.
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 $140,000, of which $14,900 was
available to draw down.
(d) In connection with the Company's acquisition of Westbrooke, the Company has
remaining notes which are payable in annual installments of $2,400
beginning in January 1999. The Company made its first installment of $2,400
in 1999. The remaining notes totaling $9,900 bear interest at 6.45% payable
annually. As indicated in Note 1, additional consideration paid as a result
of the change of control resulted in an additional $4,600 promissory note.
During 2000, the Company made further payments on acquisition loans of
$3,400. At December 31, 2001 and 2000, the total acquisition notes payable
to Westbrooke's prior majority owner was approximately $7,400 and $11,100,
respectively. The majority of these outstanding amounts are included in
Westbrooke liabilities associated with assets held for sale. See Note 12.
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 the Company's subsidiaries restrict the
subsidiaries' ability to pay dividends or advance funds to the Company to the
extent that the payment would put the subsidiary in violation of debt covenants.
FINANCIAL SERVICES BORROWINGS
In order to fund the origination of residential mortgage loans, the Company
entered into a $40,000 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. As of December 31,
2001, the Company was committed to selling its entire portfolio of mortgage
loans held for sale. The warehouse line of credit was to expire on July 5, 2002.
On June 25, 2002, the warehouse line of credit was amended to extend the
expiration to June 24, 2003.
6. MERGER AND RELATED EXPENSES
During 2001, in connection with the Merger, the Company incurred approximately
$2,643 in legal, consulting, and related costs. These costs are included in
merger and related expenses in the accompanying statement of income.
7. RELATED PARTY TRANSACTIONS
While a subsidiary of PUSA, the Company purchased insurance policies from an
affiliated insurance broker. The affiliated entity earned commissions of $155 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 in
1999.
F-19
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, the
Company and its subsidiaries would not be required to pay such additional
purchasing liability. Technical Olympic S.A. purchased $137,000 and $51,000 of
materials and supplies on behalf of the Company 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 $1,900 and
$1,500, respectively. These expenses are included in selling, general and
administrative expenses in the accompanying statements of income.
During 2001, through Westbrooke, the Company sold to Park/Walnut Creek
Investors, LLC certain undeveloped real estate tracts. Walnut Creek is owned by
several of the executive officers of Westbrooke. Additionally, during 2001,
Engle entered into certain transactions to acquire developed lots from an entity
owned by several of the current and former executive officers of Engle. See Note
3.
8. INCOME TAXES
Components of income tax expense from continuing operations consist of the
following:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
-------- -------- --------
Current:
Federal $ 47,055 $ 10,865 $ 9,144
State 4,343 403 (83)
-------- -------- --------
51,398 11,268 9,061
Deferred:
Federal 667 2,089 (340)
State 153 315 --
-------- -------- --------
820 2,404 (340)
-------- -------- --------
$ 52,218 $ 13,672 $ 8,721
======== ======== ========
The difference between total reported income taxes and expected income tax
expense computed by applying the federal statutory income tax rate of 35% for
2001, 2000 and 1999 to income from continuing operations is reconciled as
follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
------- ------- -------
Computed income tax expense at
statutory rate $48,994 $13,106 $ 8,591
State income taxes 2,922 467 (54)
Other, net 302 99 184
------- ------- -------
Income taxes $52,218 $13,672 $ 8,721
======= ======= =======
F-20
Significant temporary differences that give rise to the deferred tax assets and
liabilities from continuing operations are as follows:
DECEMBER 31,
-------------------------
2001 2000
-------- --------
Deferred tax assets:
Warranty reserve $ 725 $ 173
Property and equipment, principally due to differences in 325 496
depreciation
Inventory 4,939 6,121
Net operating loss carryforward -- 4,879
Other 154 266
-------- --------
Total deferred tax assets 6,143 11,935
Deferred tax liabilities:
Amortizable intangibles (3,874) (3,741)
Differences in reporting selling & marketing (744) (1,096)
Other (120) (572)
-------- --------
Total deferred tax liabilities (4,738) (5,409)
-------- --------
Net deferred tax asset $ 1,405 $ 6,526
======== ========
The net deferred tax asset included in other assets in the accompanying
consolidated statement of financial condition at December 31, 2001 and 2000 was
$1,405 and $6,526, 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 $300 and $600 payable to TOI at December
31, 2001 and 2000, respectively, under the terms of the tax sharing agreements.
Payments of $47,200 and $15,300 were made to TOI for federal income taxes during
2001 and 2000, respectively, and $10,700 to PUSA for federal income taxes during
1999.
9. COMMITMENTS AND CONTINGENCIES
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.
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. At December 31,
2001, outstanding letters of credit and performance bonds under these
arrangements totaled approximately $60,900.
The Company has entered into an agreement with an insurance company to
underwrite Private Mortgage Insurance on certain loans originated by the
Company's mortgage services subsidiary. 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, which is further limited to the amounts held in
trust of approximately $511. 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.
F-21
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.
10. STOCK OPTION PLAN
During 2001, the Company adopted the Newmark Homes 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.
In connection with the acquisition by TOI, the 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.
11. EMPLOYEE BENEFIT PLAN
The Company has two defined contribution plans 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
contributions to the plans for the years ended December 31, 2001, 2000, and
1999, amounted to $1,149, $584, and $234, respectively. Concurrently with the
signing of the merger agreement between Engle and TOI, Engle 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 for the
calendar year, with scheduled annual increases beginning January 1, 2001 and
thereafter. In addition, the employee agreements establish incentive bonus
formulas comparable to the criteria previously used by Engle in determining
annual discretionary incentive bonuses. Total compensation under the employee
agreement with Engle's former Chairman of the Board, President, and Chief
Executive Officer amounted to $2,356 for the year ended December 31, 2001.
12. SUBSEQUENT EVENT
During March 2002, management of the Company committed to a plan to dispose of
Westbrooke. Pursuant to this plan of disposition, the Company would sell 100% of
the common stock of Westbrooke. 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 $54,000 of Westbrooke's debt
that includes approximately $14,000 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.
F-22
Results of Westbrooke's operations have been classified as discontinued
operations, and prior periods have been restated. Discontinued operations
include Westbrooke revenues, which totaled the following:
PERIOD FROM PERIOD FROM
DECEMBER 16, JANUARY 1,
YEAR ENDED DECEMBER 31, 1999 TO 1999 TO
---------------------------- DECEMBER 31, DECEMBER 15,
2001 2000 1999 1999
---------- ---------- -------------- --------------
Revenues $ 205,661 $ 178,213 $ 13,702 $57,264
========== ========== ========== =======
The following major classes of assets and liabilities have been classified as
held for sale in the accompanying statements of financial condition:
DECEMBER 31,
------------------------
2001 2000
-------- --------
Cash $ 15,103 $ 9,088
Inventory 90,540 97,407
Property and equipment 2,765 2,431
Other assets 8,752 9,768
-------- --------
Westbrooke assets held for sale $117,160 $118,694
======== ========
Accounts payable and accrued liabilities $ 10,419 $ 10,855
Customer deposits 7,671 6,229
Consolidated land bank obligations 13,122 --
Construction and acquisition loans payable 36,166 56,549
Other liabilities 4,422 4,119
-------- --------
Westbrooke liabilities associated with assets held for sale $ 71,800 $ 77,752
======== ========
F-23
13. QUARTERLY RESULTS (UNAUDITED)
Quarterly results for the years ended December 31, 2001 and 2000, which have
been restated for the Merger, are reflected below:
FOURTH THIRD SECOND FIRST
-------------- -------------- --------------- --------------
2001
Revenue $372,583 $369,409 $367,016 $316,564
Homebuilding gross profit 76,734 81,243 77,529 64,091
Income from continuing operations 21,922 24,958 23,068 18,027
Discontinued operations (a) 3,199 1,297 597 1,179
Net income 24,911 26,255 23,665 19,206
Basic and diluted earnings per share:
Income from continuing operations 0.79 0.90 0.83 0.65
Net income 0.89 0.94 0.85 0.69
2000
Revenue 206,644 113,602 127,145 101,837
Homebuilding gross profit 38,976 23,337 25,285 24,091
Income from continuing operations 8,895 4,999 5,894 3,986
Discontinued operations (a) 3,641 656 686 1,338
Net income 12,536 5,655 6,580 5,324
Basic and diluted earnings per share:
Income from continuing operations 0.67 0.43 0.51 0.35
Net income 0.95 0.49 0.57 0.46
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.
- ----------
(a) Discontinued operations include the after-tax operations of Westbrooke. See
Note 12.
F-24