SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER: 000-23677
TECHNICAL OLYMPIC USA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0460831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Hollywood Blvd, Suite 500 N
Hollywood, Florida 33021
(Address of principal executive offices) (ZIP code)
(954) 364-4000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ ------
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The Company had 27,878,787 shares of $0.01 par value common stock outstanding as
of September 30, 2002.
TECHNICAL OLYMPIC USA, INC.
INDEX
PAGE
Explanatory Note..........................................................................................3
PART I. Financial Information...................................................................4
ITEM 1. Financial Statements (Unaudited)........................................................4
Consolidated Statements of Financial Condition..........................................4
Consolidated Statements of Income.......................................................5
Consolidated Statements of Cash Flows...................................................6
Notes to the Consolidated Financial Statements..........................................7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk..............................17
ITEM 4. Controls and Procedures.................................................................18
PART II. Other Information.......................................................................18
ITEM 1. Legal Proceedings.......................................................................18
ITEM 2. Changes in Securities and Use of Proceeds...............................................19
ITEM 3. Defaults upon Senior Securities.........................................................19
ITEM 4. Submission of Matters to a Vote of Security Holders.....................................19
ITEM 5. Other Information.......................................................................19
ITEM 6. Exhibits and Reports on Form 8-K........................................................19
Exhibits................................................................................19
Reports on Form 8-K.....................................................................20
Signatures..............................................................................21
Certifications ........................................................................................22
2
EXPLANATORY NOTE
None of the supplemental information included herein in any way restates the
financial results contained in Technical Olympic USA, Inc.'s consolidated
statement of financial condition, statements of income or statements of cash
flows at, and as of, September 30, 2002 that were contained in the Quarterly
Report on Form 10-Q for the three and nine months ended September 30, 2002, but
we have changed certain disclosures in our management's discussion & analysis of
financial condition and results of operations. Technical Olympic USA, Inc.
hereby files this amended version of its Quarterly Report on Form 10-Q/A for the
three and nine month periods ended September 30, 2002. The Quarterly Report on
Form 10-Q for these periods was initially filed with the Securities and Exchange
Commission on November 13, 2002 (the "Original Q3 10-Q"). This amended version
(the "Q3 10-Q/A") is provided to clarify certain disclosures contained in the
Original Q3 10-Q. The accompanying disclosures were prepared in response to
comments received by us from the staff of the division of Corporation Finance of
the Securities and Exchange Commission as part of a review of our recent
periodic filings. This Q3 10-Q/A does not update all information contained in
the Original Q3 10-Q.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TECHNICAL OLYMPIC USA, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(unaudited)
DECEMBER 31, SEPTEMBER 30,
2001 2002
------------ -------------
ASSETS
HOMEBUILDING:
Cash and cash equivalents:
Unrestricted $ 67,206 $ 47,707
Restricted 7,738 27,527
Inventory 645,986 717,689
Property and equipment, net 10,694 12,500
Other assets 10,897 33,894
Goodwill, net 57,726 57,726
Westbrooke assets held for sale 117,160 --
------------ ------------
917,407 897,043
FINANCIAL SERVICES:
Cash and cash equivalents:
Unrestricted 7,930 4,977
Restricted 19,605 22,864
Mortgage loans held for sale 50,933 48,437
Other assets 3,295 3,577
------------ ------------
81,763 79,855
------------ ------------
Total assets $ 999,170 $ 976,898
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
HOMEBUILDING:
Accounts payable and other liabilities $ 56,295 $ 94,756
Customer deposits 25,674 26,202
Consolidated land bank obligations 30,022 23,540
Homebuilding borrowings 308,697 367,424
Westbrooke liabilities associated with assets held for sale 71,800 --
------------ ------------
492,488 511,922
FINANCIAL SERVICES:
Accounts payable and other liabilities 18,828 21,275
Financial services borrowings 38,689 41,694
------------ ------------
57,517 62,969
------------ ------------
Total liabilities 550,005 574,891
Minority interest 35,795 17,073
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 62,255
------------ ------------
Total stockholders' equity 413,370 384,934
------------ ------------
Total liabilities and stockholders' equity $ 999,170 $ 976,898
============ ============
See accompanying notes.
4
TECHNICAL OLYMPIC USA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2002 2001 2002
-------------- -------------- -------------- --------------
HOMEBUILDING:
Revenues:
Homes sales $ 357,297 $ 330,682 $ 1,015,624 $ 984,769
Land/lot sales 3,264 9,540 14,300 11,956
-------------- -------------- -------------- --------------
360,561 340,222 1,029,924 996,725
Cost of sales:
Home sales 280,568 261,623 804,524 782,177
Land/lot sales 3,110 8,494 12,867 10,785
-------------- -------------- -------------- --------------
283,678 270,117 817,391 792,962
-------------- -------------- -------------- --------------
Gross profit 76,883 70,105 212,533 203,763
Selling, general and administrative expenses 40,818 38,392 113,046 117,993
Depreciation and amortization 2,179 1,300 6,596 4,540
Severance and merger related expenses -- (5,874) 1,864 18,593
Loss on early extinguishment of debt -- -- -- 5,411
Other income, net (1,076) (1,270) (2,509) (4,138)
-------------- -------------- -------------- --------------
Homebuilding pretax income 34,962 37,557 93,536 61,364
FINANCIAL SERVICES:
Revenues 8,848 11,222 23,065 28,599
Expenses 4,488 6,439 12,737 15,254
-------------- -------------- -------------- --------------
Financial Services pretax income 4,360 4,783 10,328 13,345
-------------- -------------- -------------- --------------
Income from continuing operations before income
taxes 39,322 42,340 103,864 74,709
Income tax expense 14,363 16,002 37,812 27,879
-------------- -------------- -------------- --------------
Income from continuing operations 24,959 26,338 66,052 46,830
Discontinued operations:
Income from discontinued operations 2,107 -- 4,410 7,922
Income tax expense 810 -- 1,336 2,959
-------------- -------------- -------------- --------------
Income from discontinued operations, net of
taxes 1,297 -- 3,074 4,963
-------------- -------------- -------------- --------------
Net income $ 26,256 $ 26,338 $ 69,126 $ 51,793
============== ============== ============== ==============
EARNINGS PER COMMON SHARE (BASIC AND DILUTED):
From continuing operations $ 0.90 $ 0.95 $ 2.37 $ 1.68
From discontinued operations 0.05 -- 0.11 0.18
-------------- -------------- -------------- --------------
Net income $ 0.95 $ 0.95 $ 2.48 $ 1.86
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic and diluted 27,878,787 27,878,787 27,878,787 27,878,787
============== ============== ============== ==============
See accompanying notes.
5
TECHNICAL OLYMPIC USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 69,126 $ 51,793
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Income from discontinued operations (3,074) (4,963)
Depreciation and amortization 6,596 4,540
Write-off of deferred financing costs -- 1,095
Deferred income taxes -- (5,518)
Changes in operating assets and liabilities:
Restricted cash (243) (23,048)
Inventory 9,693 (71,703)
Other assets (30,292) (3,604)
Accounts payable and other liabilities 13,879 40,908
Customer deposits 3,452 528
Mortgage loans held for sale (18,556) 2,496
------------ ------------
Net cash provided by (used in) operating activities 50,581 (7,476)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property and equipment (4,842) (6,346)
------------ ------------
Net cash used in investing activities (4,842) (6,346)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes offering -- 350,000
Payments for deferred financing costs -- (15,252)
Net proceeds from revolving credit facilities 13,447 12,888
Repayments on Homebuilding borrowings -- (379,577)
Net proceeds from Financial Services borrowings 14,166 3,005
Minority interest in consolidated subsidiaries 99 (18,722)
Distributions by Engle (29,516) (4,813)
Dividends (6,210) --
Other -- (6,482)
------------ ------------
Net cash used in financing activities (8,014) (58,953)
------------ ------------
Net cash provided by (used in) operations 37,725 (72,775)
Net cash provided by discontinued operations 1,809 50,323
------------ ------------
Increase (decrease) in cash and cash equivalents 39,534 (22,452)
Cash and cash equivalents at beginning of period 24,251 75,136
------------ ------------
Cash and cash equivalents at end of period $ 63,785 $ 52,684
============ ============
See accompanying notes.
6
TECHNICAL OLYMPIC USA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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, the Mid-Atlantic, Texas and the West. The Company
also provides title and mortgage brokerage services to its homebuyers and
others. The Company does not retain or service the mortgages that it originates
but, rather, sells the mortgages and related servicing rights to investors.
ORGANIZATION
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. Pursuant to the merger (the Merger), each issued and outstanding share of
Engle common stock was exchanged for 1,724.0829 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 (the TOI Debt). The TOI Debt accrued interest at rates ranging from 13.5% to
14.875% and was to mature on September 30, 2004. 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 a result of the exchange of equity interests in the Merger, TOI owns
91.75% of the Company. 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 Company's assumption of the $75,000 of TOI Debt has been accounted for
as a distribution.
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 from the Notes Offering were used to repay
certain indebtedness of both Newmark and Engle and the TOI Debt that was assumed
in connection with the Merger. The notes are fully and unconditionally
guaranteed by all of the Company's material domestic subsidiaries, which are
100% owned by the Company. The guarantees are joint and several. Any
subsidiaries of the Company, other than the subsidiary guarantors, are minor and
the Company has no independent assets or operations. There are no restrictions
on the ability of the Company to obtain funds from its subsidiaries by dividend
or loan. Additionally, the Company entered into a revolving credit facility,
which provides for loans up to $220,000 that is available for the Company's
working capital requirements. As of September 30, 2002, the Company has drawn
down $10,000 and has issued letters of credit of $15,000 and as a result, has
$195,000 in availability under this credit facility.
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 at the time
of the acquisition. Following the acquisition, the common stock of Engle ceased
to be publicly traded. The acquisition of Engle was accounted for using the
purchase method of accounting. Total consideration for the acquisition
approximated $542,000, including $216,000 in cash and the assumption of $326,000
of liabilities. The "push down" basis of accounting resulted in the Company
allocating approximately $527,000 to inventories and other identifiable assets
and $15,000 to goodwill.
7
As a result of the change in control of Engle, 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 remained outstanding as of December 31,
2001. These notes have been discharged with the proceeds from the Notes
Offering.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. 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. All significant intercompany
balances and transactions have been eliminated in the consolidated financial
statements.
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.
INTERIM PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
by the Company and are unaudited. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
accounting principles generally accepted in the United States have been omitted
from the accompanying statements. The Company's management believes the
disclosures made are adequate to make the information presented not misleading.
However, the financial statements included as part of this 10-Q filing should be
read in conjunction with the financial statements and notes thereto included in
the Company's December 31, 2001 Annual Report on Form 10-K and as modified in
the Company's Form 8-K dated September 9, 2002. The accompanying unaudited
consolidated financial statements reflect all adjustments, consisting primarily
of normal recurring items that, in the opinion of the management of the Company,
are considered necessary for a fair presentation of the financial position,
results from operations and cash flows for the periods presented. Results of
operations achieved through September 30, 2002 are not necessarily indicative of
those which may be achieved for the year ending December 31, 2002.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized.
The Company adopted SFAS 142 on January 1, 2002. The impairment test of goodwill
performed by the Company at January 1, 2002 indicated no impairment. Application
of the provisions of SFAS No. 142 by the Company resulted in the elimination of
goodwill amortization expense beginning in the first quarter of 2002.
8
The following table sets forth reported net income and earnings per share, as
adjusted to exclude goodwill amortization expense:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
-------------------- --------------------
Income from continuing operations, as reported $ 24,959 $ 66,052
Add back of amortization expense, net of taxes 365 1,159
-------------------- --------------------
$ 25,324 $ 67,211
==================== ====================
Earnings per common share (basic and diluted), as reported $ 0.90 $ 2.37
==================== ====================
Earnings per common share (basic and diluted), as adjusted $ 0.91 $ 2.41
==================== ====================
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 with early adoption encouraged. The
Company has adopted the provisions of SFAS 145 during the quarter ended June 30,
2002. As a result of the adoption of SFAS 145, the Company has included the loss
associated with the early extinguishment of debt in the determination of income
from continuing operations.
SEGMENT REPORTING
In accordance with SFAS 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.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing earnings attributable to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company.
RECLASSIFICATION
Certain reclassifications have been made to conform the prior year's amounts to
the current year's presentation.
3. INVENTORY
Inventory consists of the following as of December 31, 2001 and September 30,
2002:
DECEMBER 31, SEPTEMBER 30,
2001 2002
------------ ------------
Deposits and lots and land under development $ 264,893 $ 352,547
Residences completed and under construction 381,093 365,142
------------ ------------
$ 645,986 $ 717,689
============ ============
9
A summary of homebuilding interest capitalized in inventory is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2002 2001 2002
------------ ------------ ------------ ------------
Interest capitalized, beginning of period $ 18,185 $ 6,029 $ 25,489 $ 12,226
Interest incurred 5,823 8,944 19,189 17,053
Less interest included in:
Cost of sales (8,562) (6,014) (28,199) (20,300)
Interest expense (337) -- (1,370) (20)
------------ ------------ ------------ ------------
Interest capitalized, end of period $ 15,109 $ 8,959 $ 15,109 $ 8,959
============ ============ ============ ============
4. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The Company does not believe that the ultimate
resolution of these matters will have a material adverse effect on the financial
condition or results of operations of the Company.
In early February 2002, Alec Engelstein, then Chief Executive Officer of Engle
Homes, Inc., and David Shapiro, then Vice President-Chief Financial Officer of
Engle Homes, Inc., resigned from their executive positions with Engle Homes,
Inc. and alleged that they were entitled to receive severance packages in the
aggregate amount of approximately $9,400, plus other benefits, including a claim
by Mr. Engelstein of a monthly retirement benefit equal to 1/12th of his annual
salary with such payments to continue for a period of 60 consecutive months. The
Company accrued $13,748 in connection with this matter based on the Company's
estimate of its probable exposure at the time. During September 2002, the
Company reached an agreement whereby the Company would pay $7,607. As a result,
the Company recognized a $6,141 reduction of this accrual. This reduction has
been included in severance and merger related expenses for the three and nine
months ended September 30, 2002.
In connection with the Company's announcement in March 2001 of its proposed
merger with Engle, there was a class action suit filed in District Court, Clark
County, Nevada, and a class action suit filed in the 80th Judicial District
Court of Harris County, Texas, each of which challenged the merger as a breach
of fiduciary duty. In addition, two interveners filed interventions in the Texas
class action. In March 2002, the Company reached an agreement in principle for
the settlement of the class actions and interventions. Under the terms of the
settlement, the Company has agreed to pay the plaintiffs' attorneys' fees and
expenses in an amount not to exceed $350 in the aggregate. The settlement was
subject to a number of conditions, including the closing of the Merger,
providing notice to the class, conducting confirmatory discovery, executing a
definitive settlement agreement and obtaining final approval by the court. The
parties originally contemplated that the settlement would be consummated in the
Texas action. In the third quarter, the parties learned that the anticipated
Texas forum was unavailable due to a prior dismissal. The parties are
negotiating a settlement relating to the Nevada action and we anticipate
executing a settlement agreement similar to the original agreement in principle.
After payments made by its insurance provider, the Company anticipates being
obligated to pay $160 in connection with the settlement of this litigation. This
amount has been accrued for in the Company's financial statements as of
September 30, 2002.
5. SALE OF WESTBROOKE
During March 2002, management of the Company committed to a plan to dispose of
Westbrooke Acquisition Corp. and its subsidiaries (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.
Standard Pacific satisfied approximately $54,000 of Westbrooke's debt that
included approximately $14,000 of intercompany liabilities owed to the Company.
The Company recognized a gain of approximately $4,300, net of taxes upon the
sale of Westbrooke.
6. MERGER AND SEVERANCE RELATED EXPENSES
Included in merger and severance related charges in the accompanying
consolidated statement of income for the nine months ended September 30, 2002
are costs of the merger and integration, such as professional fees, investment
banking fees and printing fees. These fees approximate $5,500. Additionally, the
Company incurred approximately
10
$5,000 in severance charges attributable to former executives of the Company
whose employment was terminated in connection with the Merger. Merger and
severance related expenses also include the accrual for severance payments with
respect to Mr. Engelstein and Mr. Shapiro. See also Note 4 above.
7. SUBSEQUENT EVENT
On October 4, 2002, the Company acquired the net assets of DS Ware Homes LLC (DS
Ware), a homebuilder based in Jacksonville, Florida, for approximately $35,000
in cash. In addition, if certain earnings targets are met, the Company will be
obligated to pay an additional $5,150. As a result of this acquisition, the
Company has drawn down an additional $30,000 under its credit facility.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
This Quarterly Report on Form 10-Q may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, Section
21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995. Such matters involve risks and
uncertainties, including the Company's exposure to certain market risks, changes
in economic conditions, tax and interest rates, increases in raw material and
labor costs, weather conditions, and general competitive factors that may cause
actual results to differ materially.
RESULTS OF OPERATIONS
SELECTED FINANCIAL AND OTHER INFORMATION
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2002 2001 2002
------------ ------------ ------------ ------------
HOMEBUILDING:
Revenues:
Home sales $ 357,297 $ 330,682 $ 1,015,624 $ 984,769
Land/lot sales 3,264 9,540 14,300 11,956
------------ ------------ ------------ ------------
360,561 340,222 1,029,924 996,725
Cost of Sales:
Home sales 280,568 261,623 804,524 782,177
Land/lot sales 3,110 8,494 12,867 10,785
------------ ------------ ------------ ------------
283,678 270,117 817,391 792,962
------------ ------------ ------------ ------------
Gross profit 76,883 70,105 212,533 203,763
Selling, general & administrative expenses 40,818 38,392 113,046 117,993
Depreciation and amortization 2,179 1,300 6,596 4,540
Severance and merger related expenses -- (5,874) 1,864 18,593
Loss on early extinguishment of debt -- -- -- 5,411
Other income, net (1,076) (1,270) (2,509) (4,138)
------------ ------------ ------------ ------------
Homebuilding pretax income 34,962 37,557 93,536 61,364
FINANCIAL SERVICES:
Revenues 8,848 11,222 23,065 28,599
Expenses 4,488 6,439 12,737 15,254
------------ ------------ ------------ ------------
Financial Services pretax income 4,360 4,783 10,328 13,345
------------ ------------ ------------ ------------
Income from continuing operations before income taxes 39,322 42,340 103,864 74,709
Income tax expense 14,363 16,002 37,812 27,879
------------ ------------ ------------ ------------
Income from continuing operations $ 24,959 $ 26,338 $ 66,052 $ 46,830
============ ============ ============ ============
Cash flow from operating activities 10,664 (31,104) $ 50,581 $ (7,476)
Cash flow from investing activities (1,445) (221) $ (4,842) $ (6,346)
Cash flow from financing activities (1,044) 281 $ (8,014) $ (58,953)
Earnings before interest, taxes, depreciation and amortization(1) $ 50,545 $ 50,680 $ 137,231 $ 100,545
Gross margin on home sales 21.5% 20.9% 20.8% 20.6%
Ratio of SG&A expenses to revenues from home sales 11.4% 11.6% 11.1% 12.0%
Ratio of Homebuilding pretax income to revenues from
home sales 9.8% 11.4% 9.2% 6.2%
Total active communities at period end 144 145 -- --
Homes closed 1,379 1,252 3,947 3,713
Average sales price per home closed $ 259 $ 264 $ 257 $ 265
Backlog at end of period in sales value $ 691,993 $ 659,893 -- --
Backlog at end of period in number of homes 2,590 2,337 -- --
----------
(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 some investors use it 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.
Following is a reconciliation of income from continuing operations to EBITDA:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2002 2001 2002
------------ ------------ ------------ ------------
Income from continuing operations $ 24,959 $ 26,338 $ 66,052 $ 46,830
Add: income taxes 14,363 16,002 37,812 27,879
Add: interest in cost of sales 8,929 6,306 26,049 20,542
Add: interest expense 115 -- 722 20
Add: amortization of deferred finance costs -- 734 -- 734
Add: depreciation and amortization expense 2,179 1,300 6,596 4,540
------------ ------------ ------------ ------------
EBITDA $ 50,545 $ 50,680 $ 137,231 $ 100,545
------------ ------------ ------------ ------------
12
SELECTED HOMEBUILDING OPERATING DATA
The following table sets forth home sales and backlog data by region:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2002 2001 2002
------------ ------------ ------------ ------------
HOMES CLOSED:
Florida 503 427 1,421 1,477
Mid-Atlantic 181 135 509 416
Texas 412 430 1,212 1,141
West 283 260 805 679
------------ ------------ ------------ ------------
Total 1,379 1,252 3,947 3,713
AVERAGE SALES PRICE PER HOME CLOSED:
Florida $ 226 $ 245 $ 223 $ 246
Mid-Atlantic $ 313 $ 335 $ 301 $ 339
Texas $ 270 $ 258 $ 269 $ 261
West $ 269 $ 268 $ 272 $ 269
Total $ 259 $ 264 $ 257 $ 265
REVENUES FROM HOME SALES:
Florida $ 113,435 $ 104,814 $ 317,154 $ 363,415
Mid-Atlantic 56,740 45,223 153,424 141,162
Texas 111,135 111,044 326,338 297,451
West 75,987 69,601 218,708 182,741
------------ ------------ ------------ ------------
Total $ 357,297 330,682 $ 1,015,624 $ 984,769
NEW SALES CONTRACTS, NET OF CANCELLATIONS:
Florida 469 424 1,703 1,342
Mid-Atlantic 77 90 416 470
Texas 295 397 1,163 1,240
West 196 284 769 849
------------ ------------ ------------ ------------
Total 1,037 1,195 4,051 3,901
BACKLOG AT END OF PERIOD IN NUMBER OF HOMES:
Florida 1,499 1,138 -- --
Mid-Atlantic 245 223 -- --
Texas 465 501 -- --
West 381 475 -- --
------------ ------------ ------------ ------------
Total 2,590 2,337 -- --
BACKLOG AT END OF PERIOD IN SALES VALUE:
Florida $ 377,835 $ 312,137 -- --
Mid-Atlantic 71,452 93,332 -- --
Texas 136,631 125,659 -- --
West 106,075 128,765 -- --
------------ ------------ ------------ ------------
Total $ 691,993 $ 659,893 -- --
13
SEPTEMBER 30, 2001 COMPARED TO SEPTEMBER 30, 2002
Net income increased from $26,256 (or $0.95 per share) for the three months
ended September 30, 2001 (the 2001 Quarter) to $26,338 (or $0.95 per share) for
the three months ended September 30, 2002 (the 2002 Quarter). Income from
continuing operations increased from $24,959 (or $0.90 per share) for the 2001
Quarter to $26,338 (or $0.95 per share) for the 2002 Quarter. The increase in
income from continuing operations was attributable to increases in Homebuilding
pretax income of $2,595 and Financial Services pretax income of $423.
Net income decreased from $69,126 (or $2.48 per share) for the nine months ended
September 30, 2001 (the 2001 Nine Month Period) to $51,793 (or $1.86 per share)
for the nine months ended September 30, 2002 (the 2002 Nine Month Period).
Income from continuing operations decreased from $66,052 (or $2.37 per share)
for the 2001 Nine Month Period to $46,830 (or $1.68 per share) for 2002 Nine
Month Period. The decrease in net income and income from continuing operations
was primarily a result of a decrease in Homebuilding pretax income of $32,172
which was partially offset by an increase in Financial Services pretax income of
$3,017.
For the 2002 Quarter and the 2002 Nine Month Period, the Company's provision for
income taxes was 38% and 37%, respectively, which is consistent with that of the
corresponding periods in the prior year.
HOMEBUILDING
Homebuilding revenues decreased from $360,561 for the 2001 Quarter to $340,222
for the 2002 Quarter. The decline in revenues of $20,339, or 5.6%, was
attributable to the decrease in sales of homes during the 2002 Quarter as
compared to the 2001 Quarter. Revenue from the sale of homes decreased $26,615
or 7.4%, to $330,682 for the 2002 Quarter. This decrease was attributable to a
decline in closings from 1,379 during the 2001 Quarter to 1,252 during the 2002
Quarter. This decrease was partially offset by an increase in the Company's
average selling price from $259 during the 2001 Quarter to $264 during the 2002
Quarter. This increase in average selling price was primarily attributable to a
change in product mix and the change in mix of homes closed in the Company's
regions. This decline in sales of homes was partially offset by an increase in
the sale of land of $6,276 for the 2002 Quarter from the 2001 Quarter.
Homebuilding revenues decreased from $1,029,924 for the 2001 Nine Month Period
to $996,725 for the 2002 Nine Month Period. The decline in revenues of $33,199,
or 3.2%, was primarily due to a decline in the closings from 3,947 to 3,713, or
5.9%. This decline in closings was partially offset by an increase in the
average selling price from $257 during the 2001 Nine Month Period to $265 during
the 2002 Nine Month Period.
The decline in closings in comparing the 2002 periods to the 2001 periods was
primarily a result of the decline in the number of communities that the Company
was actively marketing during the corresponding periods. At the beginning of the
2001 Quarter, the Company was actively marketing at approximately 150
communities as compared to approximately 130 at the beginning of the 2002
Quarter.
Gross margins on revenues from home sales decreased slightly from 21.5% and
20.8% during the 2001 Quarter and the 2001 Nine Month Period to 20.9% and 20.6%
for the 2002 Quarter and the 2002 Nine Month Period. The decline was primarily
attributable to an increase in the average lot cost per closing and an increase
in incentives at several of our divisions. This was partially offset by an
increase in our gross margin on options and upgrades.
Selling, general & administrative (SG&A) expenses decreased $2,426 or 5.9%, from
$40,818 for the 2001 Quarter to $38,392 for the 2002 Quarter. SG&A expenses
increased $4,947 or 4.4%, from $113,046 for the 2001 Nine Month Period to
$117,993 for the 2002 Nine Month Period. As a percentage of revenues from home
sales, SG&A remained relatively consistent at 11.6% and 12.0% for the 2002
Quarter and the 2002 Nine Month Period as compared to 11.4% and 11.1% for the
2001 Quarter and the 2001 Nine Month Period. The increase as a percentage of
revenues from the 2001 periods to the 2002 periods was primarily attributable to
an increase in information technology, compensation, legal and insurance
expenses.
During the 2002 Nine Month Period, the Company incurred $18,593 in severance and
merger related expenses. These expenses include severance accrued related to
former executives of both Newmark and Engle. Additionally, in connection with
the Merger, the Company incurred approximately $5,500 in legal, consulting and
advisory fees. During the 2002 Quarter, the Company reached a settlement
agreement with certain former executives of the Company for an amount less than
the amount previously estimated. Accordingly, during the 2002 quarter the
Company recognized a reversal of previously recorded severance expenses of
approximately $6,100.
14
During the 2002 Nine Month Period, in connection with the Notes Offering, the
Company recognized a loss on the early extinguishment of debt of $5,411. This
charge relates to the exit fees incurred and the write off of unamortized
deferred finance costs associated with the then existing borrowings.
Depreciation and amortization decreased from the 2001 periods primarily due to
the reduction in goodwill amortization as a result of the adoption of SFAS 142
effective January 1, 2002.
FINANCIAL SERVICES
Our Financial Services businesses generally provide mortgage financing, title
insurance and closing services for both our homebuyers and others. Financial
Services revenues increased $2,374 or 26.8% from $8,848 for the 2001 Quarter to
$11,222 for the 2002 Quarter. Financial Services pretax income increased $423 or
9.7% from $4,360 for the 2001 Quarter to $4,783 for the 2002 Quarter. For the
2002 Nine Month Period, Financial Services revenues increased $5,534 or 24.0%,
to $28,599 and pretax income increased $3,017 or 29.2%, to $13,345. The
increases in the Company's Financial Services operations are primarily
attributable to an increase in the capture ratio of our closings.
LIQUIDITY AND CAPITAL RESOURCES
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
cash generated from operations and cash borrowed under prior 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.
At September 30, 2002, the Company had unrestricted cash and cash equivalents of
$52,684, as compared to $75,136 at December 31, 2001. The decrease in
unrestricted cash was primarily attributable to cash used in operating
activities. During the 2002 Nine Month Period, the Company used cash of $8,775
to meet its operating needs, which primarily consisted of increases in inventory
as part of the Company's strategy to increase the number of active communities
and its land positions. During the 2002 Nine Month Period, inventory increased
by $71,703 as our controlled lots increased from 16,576 to 19,142. This use of
cash was partially offset by the cash generated from the Company's sale of
Westbrooke during April 2002 and income generated from continuing operations.
This, along with the proceeds from the Company's Notes Offering, were used to
repay $379,577 in existing Homebuilding borrowings and TOI debt assumed in the
Merger.
On June 25, 2002, the Company completed a private placement of $200,000 9%
Senior Notes due 2010 (the 9% Notes) and $150,000 10 3/8% Senior Subordinated
Notes due 2012 (the 10 3/8% Notes and together with the 9% Notes, the Notes).
The net proceeds of approximately $335,000 and cash on hand were used to repay
existing Homebuilding borrowings and approximately $75,000 in debt assumed from
TOI in the Merger. Interest on the Notes is payable on January 1 and July 1 of
each year, commencing on January 1, 2003. The interest rates on the Notes are
higher than the collective interest rates on the obligations that 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 prior borrowings. Therefore, the increased interest
incurred will have an effect on gross margins in future periods. The Notes are
secured by guarantees from all of the Company's material domestic subsidiaries.
The 9% Notes rank pari passu in right of payment with all of the Company's
existing and future senior debt and senior in right of payment to the 10 3/8%
Notes and any future subordinated debt. The 10 3/8% Notes rank pari passu in
right of payment with all of the Company's existing and future subordinated
debt. The indentures governing the Notes require the Company to maintain a
minimum net worth and place certain restrictions on the Company's ability, among
other things, to incur additional debt, pay or make dividends or other
distributions, sell assets, enter into transactions with affiliates and merger
or consolidate with other entities.
Additionally, the Company entered into a $220,000 revolving credit facility. The
revolving credit facility expires on the third anniversary from the date the
first loan was made. As of September 30, 2002, the Company has drawn down
$10,000 and has issued letters of credit of $15,000 and as a result, has
$195,000 in availability under the revolving credit facility. Loans outstanding
under the revolving credit facility accrue interest at LIBOR or prime plus a
spread (6.0% per annum at September 30, 2002). The revolving
15
credit facility requires the Company to (1) maintain specified financial ratios
regarding leverage, interest coverage, consolidated tangible net worth and
certain operational measurements and (2) satisfy certain financial condition
tests. The revolving credit facility also places certain restrictions on, among
other things, the Company's ability to incur additional debt or liens, pay or
make dividends or other distributions, sell assets, enter into transactions with
affiliates and merger or consolidate with other entities. The revolving credit
facility is secured by substantially all of the assets of the Company and
certain of its subsidiaries and by guarantees from certain of its subsidiaries.
Preferred Home Mortgage Company (PHMC), one of the Company's subsidiaries, has
entered into a $50,000 revolving warehouse line of credit, which we refer to as
our warehouse line of credit. The warehouse line of credit expires on June 24,
2003. As of September 30, 2002, the Company had $41,694 outstanding under the
warehouse line of credit at an average interest rate of 1.375%. Interest accrues
at a base rate or Eurodollar rate plus margin. The warehouse line of credit
requires PHMC to maintain certain financial ratios and minimums. The warehouse
line of credit is secured by a guarantee from the Company and by funded
mortgages which are pledged as collateral.
On October 4, 2002, the Company acquired the net assets of DS Ware Homes LLC (DS
Ware), a homebuilder based in Jacksonville, Florida, for approximately $35,000
in cash. In addition, if certain earnings targets are met, the Company will be
obligated to pay an additional $5,150. As a result of this acquisition, the
Company has drawn down an additional $30,000 under the revolving credit
facility.
At September 30, 2002, the amount of the Company's annual debt service payments
was $34,200. This amount included debt service payments on the Notes of $33,600
and interest payments on the revolving credit facility of $600. The amount of
the Company's annual debt service payments on the revolving credit facility
fluctuates based on the principal outstanding under the facility and the
interest rate. An increase or decrease of 1% in interest rates will change the
Company's annual debt service payments by $100 per year. The revolving credit
facility terminates in June 2005 at which time the Company will be required to
repay all outstanding principal. Under certain circumstances, the Company may
extend the facility in one-year increments, for up to two additional years.
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 revolving 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.
CRITICAL ACCOUNTING POLICIES
In the preparation of our financial statements, we apply 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.
Revenue from home and other real estate sales are recognized when title passes
to the buyer and certain other conditions are met. As a result, our revenue
recognition process does not involve significant judgments or estimates.
However, we do rely on certain estimates to determine the related construction
and land costs and resulting gross margins associated with revenues recognized.
Our construction and lot 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 allocated interest and property taxes incurred until
development is substantially completed.
The Company had goodwill of $57,726 at September 30, 2002. We periodically
evaluate goodwill for impairment by determining whether the carrying amount can
be recovered through future undiscounted cash flows. Our estimates of future
cash flows are based on reasonable and supportable assumptions and represent our
best estimates of the cash flows expected to result from the use of the
corresponding assets and their eventual disposition.
We enter into option contracts with third parties to acquire developed lots.
From time to time to leverage our ability to acquire and finance the development
of these lots, we transfer our option right to third parties, including special
purpose entities owned by third parties, including our former officers or trusts
related to them. These special purpose entities incur debt to finance the
acquisition and development of the lots and grant us an option to acquire these
assets. In consideration for these options, we make a non-refundable deposit,
typically less than 20% of the option price. We do not have legal title to the
special purpose entities or their assets and have not guaranteed their
liabilities. However, because we have the right to exercise the options, we may
be deemed to have certain rights of ownership over these entities' assets. As a
result, we are required to include the assets of these entities and their
corresponding liabilities in our financial statements under the caption
"Consolidated Land Bank Obligations."
16
We are involved in litigation incidental to our business, the disposition of
which is expected to have no material effect on our financial position or
results of operations. We accrue our 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 our strategies change, it is possible that our best estimate of our
probable liability in these matters may change.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the Notes Offering, $350 million of the Company's outstanding
borrowings are based on fixed interest rates. The Company is exposed to market
risk primarily related to potential adverse changes in interest rates on its
existing construction loan and warehouse line of credit and the Company's new
revolving credit facility. The interest rates relative to these borrowings
fluctuate with the prime and LIBOR lending rates, both upwards and downwards.
The Company does not enter into, or intend to enter into, derivative financial
instruments for trading or speculative purposes. We expect the interest rates
relative to our bank loans to fluctuate with the prime and LIBOR lending rates,
both upwards and downwards. As of September 30, 2002, we had an aggregate of
approximately $10 million drawn under our bank loan arrangements that is subject
to changes in interest rates. An increase or decrease of 1% in interest rates
will change our annual debt service payments by $100,000 per year as a result of
our bank loan arrangements that is subject to changes in interest rates.
Our operations are interest rate sensitive. Overall housing demand is adversely
affected by increases in interest rates. If mortgage interest rates increase
significantly, this may negatively affect the ability of homebuyers to secure
adequate financing. Higher interest rates will adversely affect our revenues,
gross margins and net income. Higher interest rates also increase our borrowing
costs because, as indicated above, our bank loans will fluctuate with the prime
and LIBOR lending rates, both upwards and downwards.
We may be adversely affected during periods of high inflation, primarily because
of higher land and construction costs. In addition, inflation may result in
higher mortgage interest rates, which may significantly affect the affordability
of permanent mortgage financing for prospective purchasers. Inflation also
increases our interest costs. We attempt to pass through to our customers any
increases in our costs through increased selling prices and, to date, inflation
has not had a material adverse effect on our results of operations. However,
there is no assurance that inflation will not have a material adverse impact on
our future results of operations.
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Discussions
containing forward-looking statements may be found in the material set forth in
the section, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
These statements concern expectations, beliefs, projections, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. Specifically, this Quarterly Report
contains forward-looking statements regarding:
o our estimate that we have adequate financial resources to meet
our current working capital and land acquisition and
development needs for the foreseeable future;
o the impact of inflation on our future results of operations;
and
o our ability to pass through to our customers in the form of
increased sales prices any increases in our costs.
These forward-looking statements reflect our current views about future events
and are subject to risks, uncertainties and assumptions. We wish to caution
readers that certain important factors may have affected and could in the future
affect our actual results and could cause actual results to differ significantly
from those expressed in any forward-looking statement. The most important
factors that could prevent us from achieving our goals, and cause the
assumptions underlying forward-looking statements and the actual results to
differ materially from those expressed in or implied by those forward-looking
statements include, but are not limited to, the following:
17
o our significant level of debt;
o our ability to borrow or otherwise finance our business in the
future;
o our ability to locate lots or parcels of land at anticipated;
o our relationship with Technical Olympic, Inc., our parent
company, and its control over our board and business
activities;
o our ability to successfully integrate the Engle companies or
to realize the expected benefits of the merger discussed in
this prospectus;
o economic or other business conditions that affect the desire
or ability of our customers to purchase new homes in markets
in which we conduct our business;
o a decline in the demand for housing;
o a decline in the value of the land and home inventories we
maintain;
o an increase in the cost of, or shortages in the availability
of, skilled labor or construction materials;
o an increase in interest rates;
o our ability to successfully dispose of developed properties or
undeveloped land or lots at expected prices and within
anticipated time frames;
o our ability to compete in our existing and future markets; and
o an increase or change in governmental regulations.
ITEM 4. CONTROLS AND PROCEDURES
In order to ensure that the information the Company must disclose in its filings
with the Securities and Exchange Commission is recorded, processed, summarized
and reported on a timely basis, the Company has formalized its disclosure
controls and procedures. The Company's principal executive officer and principal
financial officer have reviewed and evaluated the effectiveness of the Company's
disclosure controls and procedures, as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c), as of a date within 90 days prior to the filing date of this
report (the "Evaluation Date"). Based on such evaluation, such officers have
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures were effective in timely alerting them to material information
relating to the Company (and its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings. Since the Evaluation Date, there
have not been any significant changes in the internal controls of the Company,
or in other factors that could significantly affect these controls subsequent to
the Evaluation Date.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. The Company does not believe that the ultimate
resolution of these matters will have a material adverse effect on the financial
condition or results of operations of the Company.
In early February 2002, Alec Engelstein, then Chief Executive Officer of Engle
Homes, Inc., and David Shapiro, then Vice President-Chief Financial Officer of
Engle Homes, Inc., resigned from their executive positions with Engle Homes,
Inc. and alleged that they were entitled to receive severance packages in the
aggregate amount of approximately $9.4 million, plus other benefits, including a
claim by Mr. Engelstein of a monthly retirement benefit equal to 1/12th of his
annual salary with such payments to continue for a period of 60 consecutive
months. During September 2002, the Company reached an agreement whereby the
Company will pay a combined amount of approximately $7.6 million to Messrs.
Engelstein and Shapiro,
18
In connection with the Company's announcement in March 2001 of its proposed
merger with Engle, there was a class action suit filed in District Court, Clark
County, Nevada, and a class action suit filed in the 80th Judicial District
Court of Harris County, Texas, each of which challenged the merger as a breach
of fiduciary duty. In addition, two interveners filed interventions in the Texas
class action. In March 2002, the Company reached an agreement in principle for
the settlement of the class actions and interventions. Under the terms of the
settlement, the Company has agreed to pay the plaintiffs' attorneys' fees and
expenses in an amount not to exceed $350,000 in the aggregate. The settlement is
subject to a number of conditions, including the closing of the Merger,
providing notice to the class, conducting confirmatory discovery, executing a
definitive settlement agreement and obtaining final approval by the court. The
parties originally contemplated that the settlement would be consummated in the
Texas action. Subsequent to this agreement, the parties learned that the
anticipated Texas forum was unavailable due to the prior dismissal. The parties
are negotiating a settlement relating to the Nevada action and we anticipate
executing a settlement agreement similar to the original agreement in principle.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
10.1 Employment Agreement between Technical Olympic USA, Inc. and
Tommy L. McAden dated July 12, 2002, effective June 25, 2002.
(incorporated by reference to Exhibit 10.10 to the Company's
Form 10-Q filed August 13, 2002)
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
19
(b) Reports on Form 8-K: The following reports on Form 8-K were filed during the
period covered by this report.
Current Report on 8-K dated July 9, 2002, was filed on July 9, 2002. In the
Current Report, the Company reported under Item 2 that Engle had merged with and
into Newmark pursuant to a stock-for-stock merger, with Newmark as the surviving
corporation which subsequently changed its name as a result of the Merger to
"Technical Olympic USA, Inc." The Company also reported under Item 5 that it had
completed a private placement of $200 million 9% Senior Notes due 2010 and $150
million 10 3/8% Senior Subordinated Notes due 2012.
Current Report on 8-K dated August 14, 2002, was filed on August 14, 2002. In
the Current Report, the Company reported under Item 5 certain financial results
for the quarter ended June 30, 2002.
Current Report on 8-K dated September 9, 2002, was filed on September 9, 2002.
In the Current Report, the Company reported under Item 2 the restatement of its
Selected Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Consolidated Financial Statements and Notes
thereto to reflect the Merger.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Technical Olympic USA, Inc.
Date: November 15, 2002 By: /s/ Tommy L. McAden
---------------------------- ---------------------------------
Name: Tommy L. McAden
Title: Vice President-Finance and
Administration and Chief
Financial Officer
Date: November 15, 2002 By: /s/ Randy L. Kotler
---------------------------- ---------------------------------
Name: Randy L. Kotler
Title: Vice President-Chief Accounting
Officer
21
CERTIFICATIONS
I, Antonio B. Mon, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Technical
Olympic USA, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-13 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 15, 2002
By: /s/ ANTONIO B. MON
--------------------------------
Name: Antonio B. Mon
Title: Chief Executive Officer
22
CERTIFICATIONS
I, Tommy McAden, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Technical
Olympic USA, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-13 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
d. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
7. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 15, 2002
By: /s/ TOMMY L. MCADEN
-----------------------------
Name: Tommy L. McAden
Title: Chief Financial Officer
23
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Employment Agreement between Technical Olympic USA, Inc. and
Tommy L. McAden dated July 12, 2002, effective June 25, 2002.
(incorporated by reference to Exhibit 10.10 to the Company's
Form 10-Q filed August 13, 2002)
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.