Exhibit 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Perma-Bilt, A Nevada Corporation
In our opinion, the accompanying balance sheet and the related statements of
income and retained earnings, and cash flows present fairly, in all material
respects, the financial position of Perma-Bilt, A Nevada Corporation (the
"Company"), at December 31, 2001 and 2000, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Irvine, California
January 25, 2002
PERMA-BILT, A NEVADA CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF ZENITH INSURANCE COMPANY)
BALANCE SHEET
DECEMBER 31, 2001 AND 2000
- ------------------------------------------------------------------------------
2001 2000
ASSETS
Cash and cash equivalents $ 2,097,913 $ 2,381,283
Properties under construction (Note 2) 35,267,006 28,163,235
Land held for development (Note 3) 27,975,726 27,266,101
Land held for sale -- 7,201,959
Property and equipment, net (Note 4) 244,321 268,715
Income taxes prepaid to parent 57,681 504,483
Other assets 799,294 639,986
----------- -----------
Total assets $66,441,941 $66,425,762
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accounts payable $ 3,834,782 $ 2,080,709
Accrued liabilities (Note 5) 1,932,312 2,584,819
Accrued interest payable to parent 1,836,250 1,440,670
Deferred income taxes (Note 6) 1,041,525 984,813
Loans from parent company (Note 7) 26,717,000 32,025,000
Construction and other notes payable (Note 8) 16,186,425 15,674,251
----------- -----------
Total liabilities 51,548,294 54,790,262
----------- -----------
Commitments (Note 10)
Stockholder's equity:
Common stock, no par value, authorized 1,000 shares
issued and outstanding 100 shares 250,000 250,000
Retained earnings 14,643,647 11,385,500
----------- -----------
Total stockholder's equity 14,893,647 11,635,500
----------- -----------
Total liabilities and stockholder's equity $66,441,941 $66,425,762
=========== ===========
The accompanying notes are an integral part of these financial statements.
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PERMA-BILT, A NEVADA CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF ZENITH INSURANCE COMPANY)
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
- ------------------------------------------------------------------------------
2001 2000
REVENUES:
Operating revenues $83,545,457 $82,937,924
Gain on land sales 1,277,570 1,579,791
----------- -----------
Total revenues 84,823,027 84,517,715
----------- -----------
COSTS AND EXPENSES:
Cost of sales 72,278,997 72,144,243
General and administration 6,074,626 5,937,814
Sales and marketing 1,456,870 1,474,199
----------- -----------
Total costs and expenses 79,810,493 79,556,256
----------- -----------
Income before provision for taxes 5,012,534 4,961,459
Provision for income taxes (Note 5) 1,754,387 1,736,511
----------- -----------
Net income 3,258,147 3,224,948
Retained earnings at previous year end 11,385,500 8,160,552
----------- -----------
Retained earnings at year end $14,643,647 $11,385,500
=========== ===========
The accompanying notes are an integral part of these financial statements.
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PERMA-BILT, A NEVADA CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF ZENITH INSURANCE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
- ------------------------------------------------------------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from sale of real estate $ 84,823,027 $ 84,517,715
Real estate acquisition and development costs paid (67,621,978) (64,815,024)
Other expenses paid (6,481,899) (6,406,207)
Interest paid (4,872,866) (6,805,632)
Income taxes paid to parent, net (1,250,883) (1,979,556)
------------ ------------
Net cash provided by operating activities 4,595,401 4,511,296
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (91,918) (62,213)
Proceeds from sale of property and equipment 8,973 --
------------ ------------
Net cash used in investment activities (82,945) (62,213)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans from parent company 1,795,375 7,385,000
Repayments to parent company (7,103,375) (7,873,357)
Proceeds from construction and other notes payable 63,315,714 73,987,651
Repayments on construction and other notes payable (62,803,540) (77,530,958)
------------ ------------
Net cash used in financing activities (4,795,826) (4,031,664)
------------ ------------
Net (decrease) increase in cash and cash equivalents (283,370) 417,419
Cash and cash equivalents at beginning of year 2,381,283 1,963,864
------------ ------------
Cash and cash equivalents at end of year $ 2,097,913 $ 2,381,283
============ ============
RECONCILIATION OF NET INCOME TO NET CASH USED IN
OPERATING ACTIVITIES:
Net income $ 3,258,147 $ 3,224,948
Adjustments to reconcile net income used in operating activities:
Depreciation 111,691 122,848
Gain on disposal of property and equipment (4,352) --
(Increase) decrease in properties under construction (7,103,771) 4,697,283
Decrease (increase) in land held for development and sale 6,492,334 (4,621,250)
Increase in other assets (159,308) (27,601)
Decrease (increase) in income taxes prepaid to parent 446,802 (504,483)
Increase in accounts payable and other liabilities 1,101,566 910,559
Increase in parent company interest accrued 395,580 447,554
Decrease in income taxes payable to parent -- (230,412)
Increase in deferred income taxes 56,712 491,850
------------ ------------
Net cash provided by operating activities $ 4,595,401 $ 4,511,296
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Seller-financed real estate acquisitions $ -- $ 130,000
============ ============
The accompanying notes are an integral part of these financial statements.
- 4 -
PERMA-BILT, A NEVADA CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF ZENITH INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
ORGANIZATION AND NATURE OF BUSINESS
Perma-Bilt, A Nevada Corporation (the "Company") was formed in the State
of Nevada to engage in the business of acquiring, developing, and selling
real estate, primarily the construction and sale of single-family detached
homes, in Las Vegas, Nevada. Prior to December 11, 2001, the Company was
wholly owned by Zenith National Insurance Corp. On December 11, 2001 the
ownership of the Company was transferred to Zenith Insurance Company
("Zenith"), a wholly owned subsidiary of Zenith National Insurance Corp.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and liquid short-term
investments. Liquid short-term investments are investments which are both
readily convertible to determinable amounts of cash and have maturities of
three months or less when purchased.
PROPERTIES UNDER CONSTRUCTION, LAND HELD FOR DEVELOPMENT AND LAND HELD FOR
SALE
Properties under construction, land held for development and land held for
sale are stated at cost, unless determined to be impaired, in which case
the carrying value is reduced to fair value. Costs include land
acquisition and related costs, direct and indirect construction costs, and
indirect construction-related overhead costs. Interest and property taxes
are capitalized when development activities begin, and capitalization ends
when the property is available for sale.
The Company reviews real estate inventories whenever events or changes in
circumstances indicate the cost basis of such assets may not be
recoverable. If the cost basis of a real estate project is greater than
its projected future undiscounted net cash flows, exclusive of interest,
the real estate project is considered impaired and the carrying value of
the property is reduced to its fair value.
The estimation process in determining the value of land held for
development or sale is inherently uncertain and relies to a considerable
extent on current and future economic and market conditions. Such economic
and market conditions may affect management's development and marketing
plans. Accordingly, the ultimate realization of the Company's real estate
inventories is dependent upon future events and conditions that may cause
realization to differ from amounts previously estimated.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated
useful lives of the assets. Property and equipment are depreciated over
their estimated useful lives of 4-7 years. Maintenance and repairs are
charged to expense as incurred, and significant improvements are
capitalized. Upon sale or disposition, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is
included in income.
REVENUE AND COST RECOGNITION
Revenue from home sales is recognized when a closing occurs, which is when
title, possession and other attributes of ownership have been transferred
to the buyer and the Company is not obligated to perform significant
activities after the sale. Prior to closing, customer deposits are treated
as liabilities. Capitalized costs are charged to cost of sales upon
closing. Selling commissions and escrow closing costs are expensed as
incurred.
Gain on sale of land is recognized when the risks of ownership have been
transferred to the buyer, collectability of the sales price is reasonably
assured and the Company is not obligated to perform significant activities
after the sale.
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PERMA-BILT, A NEVADA CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF ZENITH INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES (CONTINUED)
INCOME TAXES
The provision for income taxes represents the tax payable for the period
and the change during the year in deferred tax assets and liabilities.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and the tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is established
when necessary, to reduce deferred income tax assets to the amount
expected to be realized. The Company is included in the consolidated tax
return of its parent company.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expenses were
$997,304 and $943,910 for the years ended 2001 and 2000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from the estimates made.
2. PROPERTIES UNDER CONSTRUCTION
Properties under construction at December 31, 2001 and 2000 consist of the
following:
2001
---------------------------------------------
DEVELOPMENT
LAND COSTS TOTAL
---------------------------------------------
Southern Terrace Project $10,160,984 $15,177,139 $25,338,123
Cheyenne Project 1,072,162 8,734,155 9,806,317
Naples Project 18,382 104,184 122,566
Modena Project -- -- --
----------- ----------- -----------
Total $11,251,528 $24,015,478 $35,267,006
=========== =========== ===========
2000
---------------------------------------------
DEVELOPMENT
LAND COSTS TOTAL
---------------------------------------------
Southern Terrace Project $ -- $ -- $ --
Cheyenne Project 4,953,949 15,904,906 20,858,855
Naples Project 855,141 2,270,295 3,125,436
Modena Project 850,800 3,328,144 4,178,944
----------- ----------- -----------
Total $ 6,659,890 $21,503,345 $28,163,235
=========== =========== ===========
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PERMA-BILT, A NEVADA CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF ZENITH INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
3. LAND HELD FOR DEVELOPMENT
Land held for development at December 31, 2001 and 2000 consists of the
following:
2001
---------------------------------------------
DEVELOPMENT
LAND COSTS TOTAL
---------------------------------------------
Elkhorn Project $ 4,819,126 $ 276,377 $ 5,095,503
Blue Diamond Project 3,588,674 536,565 4,125,239
Southern Terrace Project 10,428,720 8,326,264 18,754,984
Cheyenne Project -- -- --
----------- ----------- -----------
Total $18,836,520 $ 9,139,206 $27,975,726
=========== =========== ===========
2000
---------------------------------------------
DEVELOPMENT
LAND COSTS TOTAL
---------------------------------------------
Elkhorn Project $ -- $ -- $ --
Blue Diamond Project 1,306,244 2,971 1,309,215
Southern Terrace Project 16,616,198 3,956,473 20,572,671
Cheyenne Project 1,018,255 4,365,960 5,384,215
----------- ----------- -----------
Total $18,940,697 $ 8,325,404 $27,266,101
=========== =========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 and 2000 consist of the
following:
2001 2000
--------- ---------
Furniture and fixtures $ 279,747 $ 251,040
Computer equipment and software 167,516 167,515
Vehicles 197,589 166,505
Construction equipment 13,801 13,801
Leasehold improvements 114,777 114,777
--------- ---------
773,430 713,638
Less accumulated depreciation (529,109) (444,923)
--------- ---------
$ 244,321 $ 268,715
========= =========
Depreciation expense amounted to $111,691 and $122,848 for the years ended
December 31, 2001 and 2000, respectively.
-7-
PERMA-BILT, A NEVADA CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF ZENITH INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 2001 and 2000 consists of the
following:
2001 2000
---------- ----------
Option deposits $ 354,833 $ 905,774
Accrued bonuses 1,247,918 1,416,003
Other accrued liabilities 329,561 263,042
---------- ----------
$1,932,312 $2,584,819
========== ==========
6. INCOME TAXES
The Company files a consolidated tax return with its parent company. The
method of allocation between companies is subject to written agreement.
Allocation is based upon separate tax return calculations using the
corporate tax rate of 35%. Income tax expense consists of the following at
December 31, 2001 and 2000:
2001 2000
---------- ----------
Current $1,697,675 $1,238,132
Deferred 56,712 498,379
---------- ----------
Income tax expense $1,754,387 $1,736,511
========== ==========
In accordance with Nevada tax statute, no state income tax is payable by
the Company.
Deferred income tax assets and liabilities have been netted to reflect the
tax impact of temporary differences. The components of the net deferred
income tax liability as of December 31, 2001 and 2000 are as follows:
2001 2000
----------- -----------
LIABILITY
Capitalized interest and taxes $ 1,075,529 $ 1,005,529
Depreciation 1,201 1,201
Warranty reserve (35,205) (21,917)
----------- -----------
$ 1,041,525 $ 984,813
=========== ===========
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PERMA-BILT, A NEVADA CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF ZENITH INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
7. LOANS FROM PARENT COMPANY
Loans from parent company at December 31, 2001 and 2000 consist of the
following:
2001 2000
------------ ------------
Revolving credit promissory note from Zenith
National Insurance Corp., the parent company
of Zenith, uncollateralized, quarterly interest
only payments, with the unpaid principal
maturing on December 31, 2002 $ 26,717,000 $ 32,025,000
============ ============
The Company is charged interest on all borrowed or advanced monies from
Zenith, including a portion of its equity balance (which could otherwise
be converted to intercompany indebtedness). Such interest is charged at
the rate of prime plus 2% (6.75% at December 31, 2001 and 11.5% at
December 31, 2000). For the year ended December 31, 2001 and 2000, the
Company incurred and capitalized $3,689,061 and $4,997,457 of such
interest, respectively, for properties under construction and land held
for development.
Of the Company's indebtedness above, $1,702,000 has been subordinated in
favor of all the construction notes payable to a financial institution.
8. CONSTRUCTION AND OTHER NOTES PAYABLE
Construction and other notes payable at December 31, 2001 and 2000 consist
of the following:
2001 2000
----------- ----------
Revolving line of credit from a financial institution
up to a maximum of $50,000,000 with interest at prime
plus 0.50% per annum (5.25% at December 31, 2001),
collateralized by one or more deed(s) of trust on
various projects, interest only payable monthly, and
principal is payable based on a minimum price per
unit closed, as set forth in the agreement, which
matures on April 18, 2002. $16,186,425 $ -
Development note payable to a financial institution,
with interest at prime plus 1% per annum (10.50% at
December 31, 2000), collateralized by first trust
deed on certain properties under development (the
Naples Project), interest only payable monthly, and
the principal was payable at the start of housing
construction and was paid by a draw on the related
revolving line of credit, as set forth in the
agreement, with the final principal balance paid
April, 2001. - 280,303
- 9 -
PERMA-BILT, A NEVADA CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF ZENITH INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. CONSTRUCTION AND OTHER NOTES PAYABLE (CONTINUED)
2001 2000
----------- -----------
Development note payable to a financial institution,
with interest at prime plus 0.75% per annum (10.25%
at December 31, 2000), collateralized by first trust
deed on certain properties under development (the
Naples Project), interest only payable monthly, and
principal was payable at the start of housing
construction and was paid by a draw on the related
revolving line of credit, as set forth in the
agreement, with the final principal balance paid
February, 2001. - 2,184
Other notes payable, collateralized by deeds of trust
payable on certain land parcels, principal due under
varying terms from annual installments to balloon
payments. The interest rate varies between 8% and 12%
and was payable quarterly, monthly or annually with
the final principal balance paid May, 2001. - 1,360,848
Notes payable to a financial institution, with
interest rates ranging from prime plus 0.75% to 1.0%
per annum (10.25% and 10.50%, respectively, as of
December 31, 2000), collateralized by one or more
deed(s) of trust on various projects. The principal
balance of these notes were consolidated and
refinanced on April 18, 2001. - 14,030,916
----------- -----------
$16,186,425 $15,674,251
=========== ===========
In April 2001, the Company entered into a Master Revolving Line of Credit
Construction Loan Agreement (the "Agreement") with a financial
institution. The institution agreed to make a revolving line of credit
available to the Company with a maximum availability of $50 million. The
proceeds of the credit Agreement are to be used by the Company to finance
the development of single-family home projects. In addition, the Agreement
restricts the maximum credit that can be drawn in connection with each
individual project for zoned land allocation, recreation facility
allocation, and acquisition and development allocations.
The Agreement contains covenants which include, among other things, (a)
maintaining minimum loan-to-value ratios, (b) maintenance of specific
leverage ratios and adjusted working capital balances, (c) and Zenith must
maintain a minimum percentage ownership of the Company's outstanding
capital stock. At December 31, 2001, management believes the Company is in
compliance with the covenants.
For the years ended December 31, 2001 and 2000, the Company capitalized
$1,540,507 and $2,255,729 of interest, respectively, from construction and
other notes payable.
- 10 -
PERMA-BILT, A NEVADA CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF ZENITH INSURANCE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Capitalized interest on the loans from parent company and construction and
other notes payable included in cost of sales for the years ended December
31, 2001 and 2000 amounted to $6,479,887 and $5,274,806, respectively.
9. COMMITMENTS
LAND PURCHASES
Included in other assets as of December 31, 2001, are deposits on
in-progress land purchases of $30,000. These deposits represent
in-progress land purchases in the amount of $594,000.
CONTRACTS
The Company has entered into various contracts with its suppliers and
subcontracts in the ordinary course of its business activities. It is the
opinion of management that its contracts will not have an adverse material
effect on the Company's financial position.
LEASE
The Company leases office space and vehicles under operating leases
expiring in various years through 2004.
The future minimum rental payments under noncancellable operating leases
having remaining terms in excess of one year at December 31, 2001 are as
follows:
YEAR ENDING
DECEMBER 31,
2002 $ 77,913
2003 12,468
2004 2,568
2005 and thereafter -
--------
Total minimum future rental payments $ 92,949
========
For the years ended December 31, 2001 and 2000, rental expense amounted to
$158,334 and $208,821, respectively.
EMPLOYMENT CONTRACT
The Company has an employment contract with an officer and director of the
Company which guarantees the employee either a minimum salary or 40% of
the Company's adjusted net income, as defined, whichever amount is higher.
10. EMPLOYEE 401(K) PLAN
The Company participated in the 401(k) plan offered by Zenith Insurance
Company (the "Plan"). The Plan allows employees of the Company to defer up
to the lesser of the Internal Revenue Code prescribed maximum amount
($10,500 for 2001 and 2000) or 15% of their earnings on a pre-tax basis
through contributions to the Plan (increased from 12% in the previous
years). The Company matches 50% of eligible employees' contributions up to
a maximum of 6% of their individual earnings in 2001 (this was increased
from 331/3 of the eligible employees' contributions in the previous
years). The Company recorded charges for matching contributions of $82,226
and $38,475 for the years ended December 31, 2001 and 2000, respectively.
- 11 -