-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EWsvzzsHTENKePLDE90Y3chXmDqBGd24fvRi3QkOw8/gqGoMXQ6L/uXuCJFfP2fs DtN9fEEggADiP//2QNS2nA== 0000880034-02-000001.txt : 20020415 0000880034-02-000001.hdr.sgml : 20020415 ACCESSION NUMBER: 0000880034-02-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENGLE HOMES INC /FL CENTRAL INDEX KEY: 0000880034 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 592214791 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19633 FILM NUMBER: 02589263 BUSINESS ADDRESS: STREET 1: 123 N W 13TH ST STE 300 CITY: BOCA RATON STATE: FL ZIP: 33432 BUSINESS PHONE: 4073914012 MAIL ADDRESS: STREET 1: 123 NW 13TH STREET STREET 2: SUITE 300 CITY: BOCA RATON STATE: FL ZIP: 33432 10-K 1 tenk2001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2001 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 No. 333-40741 Engle Homes, Inc. (Exact name of registrant as specified in its charter) Florida 59-2214791 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 123 N.W. 13th Street Boca Raton, Florida 33432 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (561) 391-4012 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: None (Title of Class) 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 No X Note: The Company is not subject to the filing requirements of the Securities Exchange Act of 1934. This report is filed pursuant to contractual obligations imposed on the Registrant by two Indentures, dated as of February 2, 1998 and June 12, 1998, respectively, under which the Registrant is the issuer of certain debt. Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. x All of the Registrant's common stock has been held by affiliates since November 22, 2000. As a result, there is no aggregate market value of shares of Common Stock held by non-affiliates. The number of shares of common stock of the registrant outstanding as of January 29, 2002 was 100 shares. Documents Incorporated by Reference: None 2 PART I Item 1. BUSINESS General Engle Homes, Inc. ("Engle" or the "Company") designs, constructs, markets and sells detached single-family residences, townhomes, patio homes and condominiums to entry level and move-up buyers, retirees and second home, seasonal buyers. The Company operates throughout Florida with divisions in Broward county; Palm Beach and Martin counties; Orlando; Fort Myers; and Naples. The Company also has divisions operating outside Florida including Dallas, Texas; Denver, Colorado; Virginia; and Phoenix, Arizona. The Company offers a variety of home styles at prices ranging from approximately $90,000 to over $600,000 with an average sales price in 2001 of approximately $246,000. In addition, the Company operates a mortgage company which provides mortgages primarily to its home buyers in all of its geographic markets and a title company which provides services to its home buyers and third parties in Florida, Denver, Colorado, and Dallas, Texas. Over the past five years, the Company's total revenues have grown from $425 million for the fiscal year ended October 31, 1997 to $1 billion in calendar 2001. The number of homes delivered increased from 1,992 in fiscal 1997 to 3,893 in calendar 2001. At the end of calendar 2001, Engle was marketing homes in 87 communities. On November 22, 2000, the Company became a wholly-owned subsidiary of Engle Holdings Corp., in turn a wholly-owned subsidiary of Technical Olympic USA, Inc. ("Technical Olympic"), pursuant to a merger agreement dated October 12, 2000. Technical Olympic is a wholly-owned indirect subsidiary of Technical Olympic S.A., a publicly traded Greek corporation. Company stockholders received $19.10 for each share of the Company's common stock at the time of the merger. Following the merger, the common stock of the Company ceased to be publicly traded. The Company is not subject to the filing requirements of the Securities Exchange Act of 1934. This Form 10-K is filed pursuant to contractual obligations imposed on the Company by two Indentures dated as of February 2, 1998 and June 12, 1998, respectively, under which the Company is the issuer of certain debt. For accounting purposes, the merger was accounted for as of November 22, 2000 using the purchase method of accounting. Accordingly, the consolidated financial statements for periods after that date reflect the push-down of the purchase price allocations made by Technical Olympic to the assets and liabilities of the Company and, therefore, are not comparable to those before the acquisition. The consolidated financial statements for the period from January 1, 2001 through December 31, 2001 and November 22, 2000 through December 31, 2000 are labeled Successor. Statements for the twelve months ended October 31, 2000 and October 31, 1999 and the period from November 1, 2000 though November 21, 2000 are based on the historical accounts of the Company and are labeled Predecessor. 3 The acquisition was valued at approximately $542 million, including the assumption of approximately $326 million of assumed liabilities. As a result of the push down of the purchase price, the Company recorded goodwill of approximately $15.1 million. As a result of the change in control of the Company, the indentures governing the Company's Senior Notes due 2008 ("Senior Notes") required that an offer be made to purchase all such outstanding Senior Notes at a price of 101% of the principal plus accrued interest. Through the termination of the offer in January 2001, the Company repurchased approximately $237 million of $250 million of its Senior Notes. On March 6, 2001, Newmark Homes Corp. ("Newmark"), a company that is 80% owned by Technical Olympic, announced it is considering the possible merger of Newmark with Engle Holdings Corp., the parent company of the Company. The Special Committee of Newmark's independent directors is reviewing the transaction and will make a recommendation to Newmark's full board. There are no assurances that the Special Committee will either recommend the merger or that such a merger will be consummated. Any merger would also be subject to execution of a definitive agreement, certain regulatory and other approvals as well as the approval of various lenders of Engle, Newmark, and Technical Olympic Inc. If the merger is consummated, it is contemplated that shares of Engle Holdings Corp. would be exchanged for shares of Newmark. During 2001, in connection with the proposed merger, the Company incurred approximately $2 million in legal, consulting, and related costs. These costs are included in acquisition and merger related charges in the accompanying statement of income. Land Acquisition and Development The Company prefers to acquire improved residential lots ready for construction by entering into option contracts, whenever possible, or through outright purchases. The Company also acquires tracks of land that require site improvements prior to the start of home construction. Occasionally, the Company purchases larger tracts of land with the intention of reselling portions of the tracts to other builders as a source of additional revenue. Specifically, the Company purchased large tracts of land in South Florida and sold parcels to other builders in connection with the development of its master planned communities, including Embassy Lakes, North Passage, Lakeside Green and most recently, Pembroke Falls. Unlike the Company's more typical subdivision projects, the Company's master-planned communities have involved significantly larger tracts of land, greater planning and site improvement activities and the development of more extensive recreational facilities and related amenities. The Company's master-planned communities normally take five or more years to complete depending on the project's size, economic conditions prevailing at the time and the Company's strategy for the particular project. Engle's more traditional residential developments usually take two to three years to complete. The Company's land purchase agreements are typically subject to numerous conditions, including, but not limited to, the Company's ability to 4 obtain necessary zoning and other governmental approvals for the proposed subdivision. During the contingency period, the Company also confirms the availability of utilities, conducts hazardous waste and other environmental analysis, and completes its marketing feasibility studies. The Company expends considerable effort in developing a design and marketing concept for each of its subdivisions, which includes determination of size, style and price range of the homes and, in certain projects, layout of streets, layout of individual lots and overall community design. The product line offered in a particular subdivision depends upon many factors, including housing generally available in the area, the needs of the particular market and the Company's costs of lots in the subdivision. The Company, where necessary, undertakes development activities that include government approvals, site planning, engineering, as well as constructing roads, sewer, water and drainage facilities and, where applicable for recreational facilities and other amenities. 5 At December 31, 2001, the Company was marketing 44 subdivisions in Florida; 13 in Dallas, Texas; 24 in the Southwest and 6 in the Mid-Atlantic region. The Company's residential real estate inventory at December 31, 2001 was as follows:
Lots Available Homes Under Construction for Future Construction Total Lots ------------------------------- ----------------------------- Division Available Sold (1) Speculative (2) Models Sold(1) Unsold Options Florida(3) 4,750(4) 775 155 59 498 1,125 2,138 Dallas, TX 1,195 70 53 14 30 353 675 Southwest(5) 4,136 247 109 69 58 1,709 1,944 Mid-Atlantic(6) 1,635 92 29 4 40 81 1,389 ------ ----- --- --- --- ----- ----- Total 11,716 1,184 346 146 626 3,268 6,146 ====== ===== === === === ===== ===== (1) Under contract, but not delivered. See the discussion of the Company's backlog under "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Speculative units are unsold homes that are completed or under construction. (3) Florida refers to Broward County, Palm Beach County, Martin County, Orlando, Tampa, Sarasota, Naples, and Fort Myers. (4) Includes 409 remaining lots in Pembroke Falls and 27 lots remaining in Lake Bernadette. (5) Southwest refers to Denver, Colorado and Phoenix, Arizona. (6) Mid-Atlantic refers to Virginia.
6 Construction The Company acts as the general contractor for the construction of its residential developments. Company employees monitor the construction of each project, participate in all material design and building decisions, coordinate the activities of subcontractors and suppliers, subject their work to quality and cost controls and monitor compliance with zoning and building codes. Subcontractors typically are retained for a specified project pursuant to a contract which obligates the subcontractor to complete construction at a fixed price. The Company does not maintain significant inventories of construction materials except for work in process materials for homes under construction and a limited amount of other construction materials. Generally, the construction materials used in the Company's operations are readily available from numerous sources. Marketing and Sales The Company sells its homes primarily through commissioned employees, who typically work from sales offices located at the model homes in each Engle subdivision, as well as through cooperating independent brokers. In all instances, Company personnel are available to assist prospective buyers by providing them with floorplans, price information, tours of model homes and the selection of various options and upgrades. Options and upgrades are generally priced to have a positive effect on profit margins. Sales personnel are trained by the Company and attend periodic meetings to be updated on the availability of financing, construction schedules, marketing and advertising plans. The Company advertises in newspapers, magazines and on billboards. Engle also uses the internet, out-of-state home shows, radio, video tapes, direct mail advertising, special promotional events, illustrated brochures and model homes in its comprehensive marketing program. The Company also uses a cross-referral program that encourages Company personnel to direct customers to other Engle subdivisions based on the customers' needs. The Company maintains a website at www.englehomes.com that provides information on each homebuilding division as well as its financial services divisions. The website provides the user the ability to access information, including community location and information, floor plans and pricing in all of the Company's homebuilding divisions. Virtual tours of models are currently available in select divisions. Customer Service and Quality Control; Warranties The Company's customer service department is responsible for pre-closing and post-closing customer needs. Prior to closing, a Company employee accompanies the buyer on a home orientation and inspection tour. The Company is continuing with its objective to provide quality construction through on-going training programs to maintain its high quality construction standards. The Company also provides home buyers with a limited warranty 7 program which, in general, provides for a one-year warranty on workmanship and building materials and a ten-year structural warranty. In addition, the Company purchases, when required by local or state ordinances, builder liability insurance for major structural defects. Financial Services The Company's financial services subsidiaries provide mortgage banking and title insurance services. Mortgage Banking. Preferred Home Mortgage Company ("PHMC"), a wholly- owned subsidiary, is a full service mortgage banker which arranges financing through the origination of mortgage loans to the Company's homebuyers and to a lesser extent third party loans that are not associated with homes built by the Company. PHMC is an approved lender by the Federal National Mortgage Association ("FNMA") to deliver loan origination to FNMA and to other investors and to service such loans. During fiscal 2001, PHMC sold approximately $489 million in mortgage loans (including servicing rights), representing a significant portion of the Company's homebuyers that requested mortgage financing. Substantially all of PHMC's revenues are derived from mortgages on homes built by Engle. At December 31, 2001, PHMC was originating mortgages in all Engle homebuilding divisions. PHMC must comply with various federal and state laws and consumer credit rules and regulations in connection with its mortgage lending activities. In addition, the mortgage banking industry in the United States is highly competitive. PHMC competes with other mortgage companies and financial institutions to provide mortgage financing to both the Company's customers as well as the general public. Title Services. Universal Land Title ("ULT"), a wholly-owned subsidiary, currently provides title services to the Company's homebuyers in Florida, Denver, Colorado and Dallas, Texas, as well as third parties. At December 31, 2001, ULT was operating 18 offices in Florida, 1 office in Aurora, Colorado, and 1 office in Dallas, Texas. Government Regulation and Environmental Matters In developing housing communities, the Company must obtain the approval of numerous government authorities regulating such matters as permitted land uses and levels of density, the installation of utility services such as water and waste disposal and the dedication of acreage for open space, parks, schools and other community purposes. Several authorities in Florida and other states have imposed impact fees as a means of defraying the cost of providing certain governmental services to developing areas and the amount of these fees has increased significantly during recent years. Many state laws require the use of specific construction materials which reduce the need for energy-consuming heating and cooling systems. Local governments also, at times, declare moratoriums on the issuance of building permits and impose other restrictions in areas where sewage treatment 8 facilities and other public facilities do not reach minimum standards. To date, the governmental approval processes and the restrictive zoning and moratoriums discussed above have not had a material adverse effect on the Company's development activities. However, there is no assurance that these and other restrictions will not adversely affect the Company in the future. The Company is also subject to a variety of Federal, state and local statutes, ordinances, rules and regulations concerning protection of health and the environment. The particular environmental laws which apply to any given community vary greatly according to the community site, the site's environmental conditions and the present and former uses of the site. These environmental laws may result in delays, cause the Company to incur substantial compliance and other costs and prohibit or severely restrict development in certain environmentally sensitive regions or areas. Prior to consummating the purchase of land, the Company engages independent environmental engineers to evaluate such land for the presence of hazardous or toxic materials, wastes or substances. The Company has not been materially affected to date by the presence or potential presence of such materials. To varying degrees, certain permits and approvals will be required to complete the residential developments currently being planned by the Company. The ability of the Company to obtain necessary approvals and permits for these projects is often beyond the Company's control, and could restrict or prevent the development of otherwise desirable property. The length of time necessary to obtain permits and approvals increases the carrying costs of unimproved property acquired for the purpose of development and construction. In addition, the continued effectiveness of permits already granted is subject to factors such as changes in policies, rules and regulations and their interpretation and application. To minimize these risks, the Company restricts land purchases to tracts that have zoning entitlements. In recent years, regulation by Federal and state authorities relating to the sale and advertising of residential real estate has also become more restrictive. In order to advertise and sell condominiums and other residential real estate in many jurisdictions, the Company has been required to prepare registration statements or other disclosure documents and, in some cases, to file such materials with designated regulatory agencies. Competition and Market Factors The development and sale of residential properties is highly competitive and fragmented. The Company competes in each of its markets with numerous national, regional and local builders, including some builders with greater financial resources. Builders of new homes compete not only for home buyers, but also for desirable properties, raw materials and skilled subcontractors. The Company also competes for residential sales with individual sales of existing homes and available rental housing. The housing industry is cyclical and affected by consumer confidence levels, prevailing economic conditions generally and interest rate levels. A variety of other factors affect the housing industry and demand for new homes, including the availability of labor and materials and increases in 9 the costs thereof, changes in costs associated with home ownership such as increases in property taxes and energy costs, changes in consumer preferences, demographic trends and the availability of and changes in mortgage financing programs. Seasonality of Operations. The homebuilding industry generally is seasonal, as there are more sales in the spring and summer months when the weather is good, resulting in more home closings in the fall. We operate primarily in the Southwest and Southeast, where weather conditions are more suitable to a year-round construction process than in other parts of the country. The seasonality of school terms also affects our operations, but this seasonality is somewhat reduced by the fact that many of our buyers no longer have children in school. Our revenues may fluctuate from quarter to quarter as a result of a number of factors, including (i) the timing and price mix of home closings; (ii) our ability to continue to acquire land options on acceptable terms; (iii) the timing of receipt of regulatory approvals for the construction of homes; (iv) the condition of the real estate market and economic conditions generally (v) the cyclical nature of the homebuilding industry; (vi) prevailing interest rates and the availability of mortgage financing; (vii) pricing policies of our competitors; (viii) the timing of the opening of new residential projects; (ix) weather; and (x) the cost and availability of materials and labor. Our historical financial performance is not necessarily a meaningful indicator of our future results and we expect our financial results to vary from quarter to quarter. Employees At December 31, 2001, the Company employed approximately 866 persons, including sales and marketing personnel, executive, administrative and clerical personnel, construction employees and financial services personnel. Although none of the Company's employees are covered by collective bargaining agreements, certain of the subcontractors which the Company engages are represented by labor unions or are subject to collective bargaining agreements. The Company believes that its relations with its employees and subcontractors are good. Market for Engle Holdings' Common Equity and Related Stockholder Matters There is no current trading market for the common stock of Engle. Technical Olympic, Inc. owns all the outstanding common stock of Engle Holdings Corp., which owns all the outstanding common stock of Engle. Technical Olympic acquired Engle in November 2000 through a merger with a subsidiary of Technical Olympic's wholly-owned subsidiary, Engle Holdings. As a result , the common stock of Engle ceased to be publicly traded and was therefore delisted from the Nasdaq National Market. Thus, neither Engle Holdings nor Engle Homes is subject to the reporting requirements of the Exchange Act. However, under the terms of two indentures dated February 2, 10 1998 and June 12, 1998, respectively, under which Engle issued certain debt while it was publicly traded, Engle is contractually obligated to file annual and quarterly reports with the SEC while that debt remains outstanding. Item 2. PROPERTIES The Company's corporate office is located at 123 N.W. 13th Street, Suite 300, Boca Raton, Florida 33432 where the Company leases 9,356 square feet of office space for a term expiring in August 2006. Engle's building divisions, PHMC and ULT branch operations lease additional office space at various locations for their day-to-day operations. Item 3. LEGAL PROCEEDINGS The Company is involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company's consolidated financial position or results of operations. From time to time, the Company is involved in matters with state and local governments regarding compliance with real estate development and land use regulations and related permitting. The Company has made, and in the future may be required to make, payments to state or local government entities in order to resolve these matters. Subsequent to a press release on March 6, 2001 regarding the possibility of a merger with Newmark Homes Corp., we were notified of the filing of two class action suits challenging any transaction between us and Newmark as a violation of fiduciary duty. The first case was filed in the District Court, Clark County, Nevada and is entitled: Cause No. A431555; Barry Feldman v. Michael J. Poulos, Yannis Delikanakis, Michael S. Stevens, Constantinos Stengos, Georgios Stengos, Andreas Stengos, James M. Carr, William A. Hasler, Larry D. Horner, Lonnie M. Fedrick, Engle Holdings Corp, and Newmark Homes Corp. The second case was filed in the 80th Judicial District Court of Harris County, Texas and is entitled: Cause No. 2001- 14194; and Michael Gormley v. Michael J. Poulos, Yannis Delikanakis, Michael S. Stevens, Constantinos Stengos, Georgios Stengos, Andreas Stengos, James M. Carr, William A Hasler, Larry D. Horner, Lonnie M. Fedrick, Engle Holdings Corp. and Newmark Homes Corp. The first class action lawsuit filed in Nevada has been stayed indefinitely pending the resolution of the second class action lawsuit filed in Texas. Our obligation to answer the complaint in the second class action lawsuit has been deferred pursuant to an agreement with the plaintiffs. Although these class actions are in their early stages, we believe that the plaintiffs have only a small likelihood of success at trial. We intend to vigorously defend these actions. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the Companys' 2001 fiscal year. 11 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS As of November 22, 2000, the outstanding shares of Common Stock of Engle ceased trading as a result of the merger of the Company with a subsidiary of Technical Olympic. Since such date, all shares of Common Stock of the Company are beneficially owned by Engle Holdings, a subsidiary of Technical Olympic, and none have traded.
Year Ended ------------------------------------- December 31, 2001 October 31, 2000 ----------------- ---------------- High Low High Low ------ ------- ------ ------ First Quarter N/A N/A $13.63 $10.31 Second Quarter N/A N/A $11.00 $ 9.13 Third Quarter N/A N/A $10.56 $ 9.13 Fourth Quarter N/A N/A $18.94 $ 9.56
For the fiscal years ended December 31, 2001 and October 31, 2000, the Company declared and paid per share dividends as set forth in the following table: Cash Dividends -----------------------
2001 2000 ---- ---- First Quarter $.06 Second Quarter $.06 Third Quarter $.06 Fourth Quarter -
During the twelve months ended December 31, 2001, the Company made distributions to its parent company of approximately $29.5 million. The payment of future cash dividends will be at the discretion of the Board of Directors of the Company and will depend upon, among other things, results of operations, capital requirements, the Company's financial condition, debt covenant restrictions and such other factors as the Board of Directors may consider. The indentures for the Company's 9 1/4% Senior Notes due 2008 (the "Senior Notes") contain restrictions on the payment of dividends, dependent, 12 in part, on the Company's net income earned since February 1, 1998. The Company's bank credit agreement also restricts the Company from declaring or paying dividends with certain exceptions. Item 6. SELECTED FINANCIAL DATA The income statement data and balance sheet data have been derived from the audited consolidated financial statements of the Company. The following data should be read in conjunction with "ITEM 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements, and related notes included in "ITEM 8, Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Engle's fiscal year end changed from October 31 to December 31. It is not practicable to restate results for prior years, so the October 31 fiscal year is retained for discussions of results from those years. 13 SELECTED FINANCIAL DATA YEARS ENDED
(In thousands, except unit amounts) December 31, October 31, ------------ ----------------------------------- 2001 2000 1999 1998 1997 ------------ -------- -------- -------- -------- Successor Predecessor ----------------------> Income Statement Data: Total revenues $1,006,695 $844,011 $741,940 $536,040 $425,295 Income before income taxes 111,392 57,198 45,645 28,370 21,899 Provision for income taxes 42,068 21,534 17,619 10,922 8,431 Income before extraordinary items 69,324 35,664 28,026 17,448 13,468 Extraordinary items (2,612) Net income $ 69,324 $ 35,664 $ 28,026 $ 14,836 $ 13,468 ============ ======== ======== ======== ======== Selected Operating Data (unaudited): Deliveries (in units) 3,893 3,573 3,514 2,605 1,992 Backlog at end of period (a) Units 1,810 2,065 1,860 1,621 869 Aggregate sales value $475,700 $497,800 $411,100 $324,000 $174,000 SELECTED FINANCIAL DATA-(Continued) December 31, October 31, ------------ ----------------------------------- 2001 2000 1999 1998 1997 ------------ -------- -------- -------- -------- Successor Predecessor ----------------------> Balance Sheet Data: Inventories (b) $456,303 $409,458 $386,804 $352,620 $230,108 Total assets 654,848 542,697 514,893 431,428 288,412 Borrowings (c) 254,524 269,463 280,411 230,907 166,593 Total shareholders' equity 259,558 217,691 186,432 161,724 93,180 14 (a) See Item 7-Management's Discussion and Analysis of Financial Condition and Operations-Overview. (b) See Note 2 of Notes to the Company's Consolidated Financial Statements. (c) Borrowings exclude consolidated land bank obligations of approximately $30 million at December 31, 2001. These amounts primarily represent liabilities associated with entities that did not meet the accounting criteria to qualify as unconsolidated special purpose entities. As a result, the liabilities and the corresponding assets have been consolidated in Engle's financial statements. (d) On November 22, 2000, the Company became a wholly-owned subsidiary of Engle Holdings Corp., in turn a wholly-owned subsidiary of Technical Olympic USA, Inc. ("Technical Olympic"), pursuant to a merger agreement dated October 12, 2000. Technical Olympic is a wholly-owned indirect subsidiary of Technical Olympic S.A., a publicly traded Greek corporation. Company stockholders received $19.10 for each share of the Company's common stock at the time of the merger. Following the merger, the common stock of the Company ceased to be publicly traded. The Company is not subject to the filing requirements of the Securities Exchange Act of 1934. This Form 10-K is filed pursuant to contractual obligations imposed on the Company by two Indentures dated as of February 2, 1998 and June 12, 1998, respectively, under which the Company is the issuer of certain debt. For accounting purposes, the merger was accounted for as of November 22, 2000 using the purchase method of accounting. Accordingly, the consolidated financial statements for periods after that date reflect the push-down of the purchase price allocations made by Technical Olympic to the assets and liabilities of the Company and, therefore, are not comparable to those before the acquisition. The consolidated financial statements for the period from January 1, 2001 through December 31, 2001 and November 22, 2000 through December 31, 2000 are labeled Successor. Statements for the twelve months ended October 31, 2000 and October 31, 1999 and the period from November 1, 2000 though November 21, 2000 are based on the historical accounts of the Company and are labeled Predecessor.
15 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Statement Concerning Forward-looking Statements The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements concerning anticipated operating results, financial resources, growth and expansion. Such forward-looking information involves important risks and uncertainties that could significantly affect actual results and cause them to differ materially from expectations expressed therein. These risks and uncertainties include local, regional and national economic conditions, the effects of governmental regulation, the competitive environment in which the Company operates, fluctuations in interest rates, changes in home prices, the availability and cost of land for future growth, the availability of capital, the availability and cost of labor and materials, and weather conditions. The following discussion also should be read in conjunction with the information set forth in "Item 6. Selected Financial Data" and the Company's Consolidated Financial Statements and related notes included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. General. The following table sets forth for the years indicated certain items of the Company's Consolidated Financial Statements expressed as a percentage of the Company's total revenues: Percentage of Total Revenues
For the Twelve Months Ended --------------------------------------- December 31, October 31, October 31, 2001 2000 1999 ------------ ----------- ----------- Sales of homes 95.2% 94.1% 95.0% Sales of land 1.0 2.9 1.5 Rent and other .6 .4 .5 Financial services 3.2 2.6 3.0 ------------ ----------- ----------- Total 100% 100% 100% ============ =========== =========== Cost of sales-homes 75.9 78.7 79.9 Cost of sales-land .9 2.5 1.4 Selling, general and administrative expenses 9.7 9.4 9.6 Financial services expenses 1.8 1.8 2.1 Income before income taxes 11.1 6.8 6.2 Net income 6.9 4.2 3.8
16 The following tables set fourth information relating to homes closed, new sales contracts and sales backlog by operating division for the years ended December 31, 2001, October 31, 2000, and October 31, 1999:
December 31, Year Ended October 31, --------------- -------------------------------- 2001 2000 1999 --------------- --------------- --------------- Homes Closed Closed Percent Closed Percent Closed Percent - ------------ ------ ------- ------ ------- ------ ------- Florida 1,931 49.6% 1,739 48.7% 1,668 47.5% Dallas, TX 369 9.5 368 10.3 282 8.0 Southwest 1,057 27.1 1,047 29.3 1,111 31.6 Mid-Atlantic 536 13.8 419 11.7 453 12.9 ------ ------- ------ ------- ------ ------- Total 3,893 100% 3,573 100% 3,514 100% ====== ======= ====== ======= ====== =======
Year Ended December 31, Year Ended October 31, (Dollars in thousands) (Dollars in thousands) --------------- -------------------------------- 2001 2000 1999 --------------- --------------- --------------- Sold Dollars Sold Dollars Sold Dollars ----- ------- ----- ------- ----- -------- New Sales Contracts - ------------------- Florida 1,987 $477,700 1,893 $412,800 1,836 $374,400 Dallas, TX 322 62,800 343 66,100 300 55,900 Southwest 945 260,100 1,025 261,800 1,100 244,900 Mid-Atlantic 355 120,400 517 140,500 517 116,500 ----- -------- ----- -------- ----- -------- Total 3,609 $921,000 3,778 $881,200 3,753 $791,700 ===== ======== ===== ======== ===== ========
17
Year Ended December 31, Year Ended October 31, (Dollars in thousands) (Dollars in thousands) --------------- -------------------------------- 2001 2000 1999 --------------- --------------- --------------- Homes Dollars Homes Dollars Homes Dollars ----- ------- ----- ------- ----- ------- Sales Backlog - ------------- FLorida 1,273 $326,000 1,220 $282,200 1,066 $228,700 Dallas, TX 100 19,600 134 26,000 159 30,500 Southwest 305 82,100 407 106,900 429 99,800 Mid-Atlantic 132 48,000 304 82,700 206 52,100 ----- -------- ----- -------- ----- -------- Total 1,810 $475,700 2,065 $497,800 1,860 $411,100 ===== ======== ===== ======== ===== ========
Backlog. Sales of the Company's homes are generally made pursuant to a standard contract which requires a down payment of up to 10% of the sales price. The contract includes a financing contingency which permits the customer to cancel in the event mortgage financing at prevailing interest rates (including financing arranged by the Company) is unobtainable within a specified period, typically four to six weeks. The Company includes an undelivered home sale in its backlog upon execution of the sales contract and receipt of the down payment. Revenue is recognized only upon the closing and delivery of a home. The Company estimates that the average period between the execution of a purchase agreement for a home and delivery is approximately four to six months. Results of Operations Year Ended December 31, 2001 Compared to Year Ended October 31, 2000. The Company's revenues from home sales during calendar 2001 increased $163.7 million (or 20.6%) compared to the twelve months ended October 31, 2000. The number of homes delivered by the Company increased 9.0% (to 3,893 from 3,573) and the average selling price of homes delivered increased 10.8% (to $246,000 from $222,000). Management believes that changes in the average selling price of homes delivered from period to period are attributable to discrete factors at each of its subdivisions, including product mix and premium lot availability, and cannot be predicted for future periods with any degree of certainty. Cost of home sales increased approximately $98.9 million (or 14.9%) compared to the twelve months ended October 31, 2000, primarily due to the related increase in home sales revenues. Cost of home sales as a percentage of home sales revenues decreased to 79.7% from 83.7% as a result of the product mix of homes delivered. The Company's selling, general and administrative ("S,G&A") expenses increased approximately $16.8 million (or 21.2%) during calendar 2001 as compared to the twelve months ended October 31, 2000. S,G&A expenses as a 18 percentage of total revenues for calendar 2001 was consistent with the twelve months ended October 31, 2000. Calendar 2001 income before income taxes increased $54.2 million (or 94.7%) as compared to the twelve months ended October 31, 2000, primarily due to the increase in revenues from home sales and a decrease in cost of home sales as a percentage of home sales revenue. For the Period November 1, 2000 Through December 31, 2000. The Company's revenues from homes sales during the period November 1, 2000 through December 31, 2000 amounted to $108.7 million. The number of homes delivered amounted to 469 and the average selling price was $232,000. Cost of home sales amounted to $89.6 million for the period November 1, 2000 through December 31, 2000. Cost of home sales as a percentage of home sales revenues is 82.4% for the period November 1, 2000 through December 31, 2000. Acquisition and merger related charges amounted to $20.1 million for the period November 1, 2000 through December 31, 2000. Loss before income taxes amounted to $13 million due to the acquisition and merger related charges of $20.1 million for the period November 1, 2000 through December 31, 2000. Year Ended October 31, 2000 Compared to Year Ended October 31, 1999. The Company's revenues from home sales during fiscal 2000 increased $89.9 million (or 12.8%) compared to fiscal 1999. The number of homes delivered by the Company increased 1.7% (to 3,573 from 3,514) and the average selling price of homes delivered increased 10.5% (to $222,000 from $201,000). Management believes that changes in the average selling price of homes delivered from period to period are attributable to discrete factors at each of its subdivisions, including product mix and premium lot availability, and cannot be predicted for future periods with any degree of certainty. The Company's revenues from land sales increased approximately $12.8 million (or 114%) during fiscal 2000 as compared to fiscal 1999 primarily as a result of an increase in commercial and residential land sales in the west coast of Florida, Virginia, and South Florida. Cost of home sales increased approximately $71.8 million (or 12.1%) compared to fiscal 1999, primarily due to the related increase in home sales revenues. Cost of home sales as a percentage of home sales revenues decreased to 83.7% from 84.2% as a result of the product mix of homes delivered. Cost of land sales increased approximately $10.7 million (or 101%) during fiscal 2000 as compared to fiscal 1999, primarily as a result of the increase in land sales. Costs of land sales as a percentage of land sales decreased to 89.0% from 94.9% as a result of the mix of land sold. The Company's selling, general and administrative ("S,G&A") expenses increased approximately $8.1 million (or 11.4%) during fiscal 2000 as compared to fiscal 1999. S, G & A expenses as a percentage of total revenues was consistent with fiscal 1999. Fiscal 2000 income before income taxes increased $11.6 million (or 25.3%) as compared to fiscal 1999, primarily due to the increase in 19 revenues from home sales and a decrease in cost of home sales as a percentage of home sales revenue. Liquidity and Capital Resources General. The Company's financing needs historically have been provided by cash flows from operations, unsecured bank borrowings and from time to time the public debt and equity markets. At December 31, 2001, Engle had cash and cash equivalents of $92.8 million. Inventories (including land and improvements held for development and residential homes under construction) at December 31, 2001 were $456.3 million, an increase of $12.2 million, or 2.7%, from $444.1 million at December 31, 2000. This increase results from general growth in Engle's business. At December 31, 2001, Engle had homebuilding borrowings of approximately $215.8 million outstanding and an aggregate of $57.1 million in letters of credit and performance bonds outstanding. Outstanding homebuilding borrowings at December 31, 2001 consisted of $202 million aggregate principal amount of unsecured borrowings from financial institutions, $13.0 million of the 9 1/4% Senior Notes due 2008 (see below) and $0.9 million aggregate principal amount of other borrowings. The letters of credit and performance bonds are required for certain development activities, deposits on land and lot purchase contract deposits. Deposits for future purchases of land totaled $25.9 million at December 31, 2001. The Company believes that funds generated from operations and expected borrowing availability under the Credit Facility will be sufficient to fund the Company's working capital requirements during fiscal 2002, with the exception of major land acquisitions, if any. For a further description of the Company's borrowings, see Note 4 of the Company's Consolidated Financial Statements. In connection with the acquisition of Engle by Technical Olympic on November 22, 2000, Engle entered into a Credit Agreemnet (the "Credit Agreement") with a bank providing for a $100 million term loan and a $275 million revolving credit facility (subject to reduction based upon periodic determinations of a borrowing base). Proceeds from these facilities were used to finance Engle's required repurchase its then outstanding $250 million principal amount of 9 1/4% Senior Notes due 2008 ("Senior Notes") (see below). In addition, the revolving credit facility provides working capital and credit support for the issuance of letters of credit needed from time to time. The term loan and revolving credit facility are scheduled to terminate on November 22, 2002 whereupon all amounts outstanding become due. Engle's previous bank revolving credit facility was repaid and cancelled. At December 31, 2001, $100 million under the term notes and $102 million under the revolving credit facility were outstanding. As a result of the change in control, Engle was required by the indentures governing its Senior Notes to offer to repurchase all of its outstanding Senior Notes at a price of 101% of the principal amount plus accrued and unpaid interest. Upon termination of the offer in January 2001, Engle repurchased approximately $237 million aggregate principal amount of its Senior Notes. The repurchase of these Senior Notes were funded with $100 million term loan under the Credit Agreement and additional advances under Engle's revolving credit facility. Approximately $13 million of the Senior Notes were not tendered and remain outstanding as of December 31, 2001. The following table sets forth the maturities of Engle's borrowings: 20 Year Ended December 31, Amount -------------- ------------- 2002 $ 202,000,000 2003 938,000 2004 - 2005 - Thereafter 12,897,000 ------------- $ 215,835,000 The Company anticipates that it will fund the maturities of its debt and required expenditures relating to its developments primarily with cash flow from operations and credit lines. See "Note 4 of Notes to the Company's Consolidated Financial Statements". During the twelve months ended December 31, 2001, the Company made distributions to its parent company of approximately $29.5 million. Land Acquisition. The Company is continually exploring opportunities to purchase parcels of land for its homebuilding operations and is, at any given time, in various stages of proposing, making offers for, and negotiating the acquisition of various parcels, whether outright or through options. The Company has continued to increase its land development and construction activities in response to current and anticipated demand and expects to pursue additional land acquisition and development opportunities in the future. Debt Service. Scheduled and estimated maturities of the Company's homebuilding borrowings aggregate approximately $202 million during 2002. The Company anticipates that it will fund the maturities of its debt and required expenditures relating to its developments primarily with cash flow from operations and credit lines. See "Note 4 of Notes to the Company's Consolidated Financial Statements." Management does not anticipate that PHMC's expansion of its operation will significantly impact liquidity because the mortgages are generally sold within a short period of time after their origination to the Federal National Mortgage Association (FNMA) or other qualified investors. PHMC has established the capability to retain the servicing of loans, however, during fiscal 2001 in connection with the sale of mortgages all servicing rights were sold. Inflation The Company, as well as the homebuilding industry in general, may be adversely affected during periods of high inflation, primarily because of higher land and construction costs. In addition, higher mortgage interest rates may significantly affect the affordability of permanent mortgage financing to prospective purchasers. Inflation also increases the Company's interest costs and costs of labor and materials. The Company attempts to pass through to its customers any increases in its costs through increased selling prices and, to date, inflation has not had a material adverse effect on the Company's results of operations. However, there is no assurance that inflation will not have a material adverse impact on the Company's future results of operation. Interest Rates The Company's operations are interest rate sensitive. Overall housing demand is adversely affected by increases in interest costs. If mortgage 21 interest rates increase significantly, this may negatively impact the ability of a homebuyer to secure adequate financing. Such results of higher interest rates may result in adversely affecting the Company's revenues, gross margins and net income. Seasonal Aspects of Operations. The homebuilding industry generally is seasonal, as there are more sales in the spring and summer months when the weather is good, resulting in more home closings in the fall. We operate primarily in the Southwest and Southeast, where weather conditions are more suitable to a year-round construction process than in other parts of the country. The seasonality of school terms also affects our operations, but this seasonality is somewhat reduced by the fact that many of our buyers no longer have children in school. Our revenues may fluctuate from quarter to quarter as a result of a number of factors, including (i) the timing and price mix of home closings; (ii) our ability to continue to acquire land and options on acceptable terms; (iii) the timing of receipt of regulatory approvals for the construction of homes; (iv) the condition of the real estate market and economic conditions generally; (v) the cyclical nature of the homebuilding industry; (vi) prevailing interest rates and the availability of mortgage financing; (vii) pricing policies of our competitors; (viii) the timing of the opening of new residential projects; (ix) weather; (x) the cost and availability of materials and labor. Our historical financial performance is not necessarily a meaningful indicator of our future results and we expect our financial results to vary from quarter to quarter. Critical Accounting Policies In the preparation of its financial statements, the Company applies accounting principles generally accepted in the United States. The application of generally accepted accounting principles may require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying results. As discussed in Note 1 to the Company's consolidated financial statements, housing and other real estate sales are recognized when title passes to the buyer and certain other conditions are met. As a result, the Company's revenue recognition process does not involve significant judgements or estimations. However, the Company does rely on certain estimates to determine the related construction and land costs and resulting gross margins associated with revenues recognized. The Company's construction and land costs are comprised of direct and allocated costs, including estimated costs for future warranties and amenities. 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 inclulde related interest and property taxes incurred until development is substantially completed. As discussed in Note 2 to the consolidated financial statements, the Company has entered into option agreements with third parties to acquire developed lots. Under these option arrangements, the Company has placed nonrefundable deposits, which provide the Company the right to acquire the lots from time to time subject to the terms and conditions of such agreements. Although the Company does not have legal title to the assets of these third parties and have not guaranteed the liabilities, the Company does exercise certain rights of ownership over the entities assets. As a result, the Company has included their assets and corresponding liabilities in the consolidated statement of financial condition. 22 As discussed in Note 7 to the consolidated financial statements, the Company is involved in litigation incidental to its business, the disposition of which is expected to have no material effect on the Company's financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company's assumptions related to these proceedings. The Company accrues its best estimate of the probable cost for the resolution of legal claims. Such estimates are developed in consultation with outside counsel handling these matters and are based upon a combination of litigation and settlement strategies. To the extent additional information arises or the Company's strategies change, it is possible that the Company's best estimate of its probable liability in these matters may change. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) approved Statement of Financial Accounting Standard 141 (Statement 141), Business Combinations, and Statement of Financial Accounting Standards 142 (Statement 142), Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Statement 142 will be effective for the Company's fiscal year 2002 and is immediately effective for goodwill and intangible assets acquired after June 30, 2001. Management is in the process of evaluating the effect these standards will have on its financial statements. In September 2000, the FASB issued Statement of Financial Accounting Standards 140 (Statement 140), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Statement 140 amends Statement 125 and provides revised accounting and financial reporting rules for sales, securitizations, and servicing of receivables and other financial assets, and for secured borrowing and collateral transactions. The provisions concerning servicing assets and liabilities as well as extinguishments of liabilities remain consistent with Statement 125. Statement 140 is applicable to transfers occurring after March 31, 2001. The impact of adopting Statement 140 has not been significant to the Company's financial statements. 23 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk primarily related to potential adverse changes in interest rates. The Company's exposure to market risks is changes to interest rates related to the Company's variable rate loans. The interest rates relative to the Company's variable rate loans fluctuate with the prime and LIBOR lending rates, both upwards and downwards. From time to time, the Company may enter into interest rate hedging arrangements in order to minimize its exposure to changes in interest rates. At February 19, 2002, the Company has not entered into any such hedging arrangements. The Company does not enter into, or intend to enter into, derivative financial instruments for trading or speculative purposes. PHMC, the Company's mortgage subsidiary, orignates residential mortgage loans and sells them in the residential mortgage market. During fiscal 2001, PHMC sold approximately $489 million in mortgage loans (including servicing rights). The Company minimizes the market risk and impact of changing mortgage interest rates by selling loans within a short period of time after origination or through other means of contractual protection. Although these mortgage loan portfolios are subject to interest rate risks, the Company does not believe that its mortgage business is subject to risk of losses resulting from changes in the home mortgage markets that could materially impact the Company. 24 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Reports of Independent Certified Public Accountants 26 Consolidated Balance Sheets as of December 31, 2001 and December 31, 2000 28 Consolidated Statements of Income For the Twelve Months Ended December 31, 2001, the Period From November 22, 2000 through December 31, 2000, the Period From November 1, 2000 through November 21, 2000, the Twelve Months Ended October 31, 2000, and the Twelve Months Ended October 31, 1999 30 Consolidated Statements of Shareholder's Equity For the Twelve Months Ended December 31, 2001, the Period From November 22, 2000 through December 31, 2000, the Period From November 1, 2000 through November 21, 2000, the Twelve Months Ended October 31, 2000, and the Twelve Months Ended October 31, 1999 31 Consolidated Statements of Cash Flows For the Twelve Months Ended December 31, 2001, the Period From November 22, 2000 through December 31, 2000, the Period From November 1, 2000 through November 21, 2000, the Twelve Months Ended October 31, 2000, and the Twelve Months Ended October 31, 1999 33 Notes to Consolidated Financial Statements 35 25 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Stockholder Engle Homes, Inc. We have audited the accompanying consolidated balance sheet of Engle Homes, Inc., and subsidiaries as of December 31, 2001 and the related consolidated statements of income, stockholder's equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Engle Homes, Inc. and subsidiaries at December 31, 2001, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. Miami, Florida ERNST & YOUNG LLP January 18, 2002 26 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholder Engle Homes, Inc. We have audited the accompanying consolidated balance sheet of Engle Homes, Inc., and subsidiaries as of December 31, 2000 and the related consolidated statements of income, shareholder's equity and cash flows for the periods from November 22, 2000 to December 31, 2000 and November 1, 2000 to November 21, 2000, and for the fiscal years ended October 31, 2000 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Engle Homes, Inc. and subsidiaries at December 31, 2000, and the results of their operations and their cash flows for the periods from November 22, 2000 to December 31, 2000 and November 1, 2000 to November 21, 2000, and for the fiscal years ended October 31, 2000 and 1999, in conformity with accounting principles generally accepted in the United States of America. Miami, Florida BDO SEIDMAN, LLP February 27, 2001 27 ENGLE HOMES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, -------------------- 2001 2000 -------- -------- ASSETS HOMEBUILDING: CASH AND CASH EQUIVALENTS Unrestricted $ 57,487 $ 15,460 Restricted 7,738 3,841 INVENTORIES 456,303 444,070 PROPERTY AND EQUIPMENT, net 5,474 5,330 OTHER ASSETS 27,126 21,549 GOODWILL, net of accumulated amortization of $953 and $105, respectively 14,788 15,128 DEFERRED TAX ASSET 4,169 9,557 -------- -------- 573,085 514,935 -------- -------- FINANCIAL SERVICES: CASH AND CASH EQUIVALENTS Unrestricted 7,930 2,618 Restricted 19,605 6,364 MORTGAGE LOANS HELD FOR SALE 50,933 14,406 OTHER ASSETS 3,295 1,240 -------- -------- 81,763 24,628 -------- -------- TOTAL ASSETS $654,848 $539,563 ======== ======== LIABILITIES HOMEBUILDING: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 34,226 $ 27,293 CUSTOMER DEPOSITS 21,994 21,817 CONSOLIDATED LAND BANK OBLIGATION 30,022 BORROWINGS 202,938 217,532 SENIOR NOTES PAYABLE 12,897 38,065 -------- -------- 302,077 304,707 -------- -------- FINANCIAL SERVICES: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 18,828 6,035 FINANCIAL SERVICE BORROWINGS 38,689 9,071 -------- -------- 57,517 15,106 -------- -------- TOTAL LIABILITIES $359,594 $319,813 -------- -------- MINORITY INTEREST 35,696 28 SHAREHOLDER'S EQUITY COMMON STOCK, $.01 par, 1,000 shares authorized and 100 shares issued and outstanding ADDITIONAL PAID-IN CAPITAL 215,709 215,709 RETAINED EARNINGS 43,849 4,041 -------- -------- TOTAL SHAREHOLDER'S EQUITY 259,558 219,750 -------- -------- $654,848 $539,563 ======== ======== See accompanying notes to consolidated financial statements
29 ENGLE HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands)
Period From Period From November 22, November 1, 2000 2000 Years Ended Year Ended Through Through October 31, December 31, December 31, November 21, ----------------- 2001 2000 2000 2000 1999 ------------ ------------ ------------ -------- -------- Successor Successor Predecessor Predecessor HOMEBUILDING: REVENUES Sales of homes $ 958,125 $ 82,999 $ 25,768 $794,445 $704,563 Sales of land 10,499 1,374 360 24,053 11,236 Rent and other 5,412 351 400 3,383 3,450 --------- --------- ---------- -------- -------- 974,036 84,724 26,528 821,881 719,249 --------- --------- ---------- -------- -------- COSTS AND EXPENSES Cost of sales-homes 763,708 68,189 21,385 664,818 593,046 Cost of sales-land 9,639 1,326 268 21,405 10,659 Selling, general and administrative 95,947 8,247 4,726 79,158 71,079 Acquisition and merger related charges 1,864 20,118 Depreciation and amortization 6,457 721 330 6,108 5,604 --------- -------- -------- -------- -------- 877,615 78,483 46,827 771,489 680,388 --------- -------- -------- -------- -------- Homebuilding pretax income (loss) 96,421 6,241 (20,299) 50,392 38,861 --------- -------- -------- -------- -------- Financial Services: Revenue 32,659 2,562 1,078 22,130 22,691 Expenses 17,688 1,635 961 15,324 15,907 --------- -------- -------- -------- -------- Financial services pretax income 14,971 927 117 6,806 6,784 --------- -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 111,392 7,168 (20,182) 57,198 45,645 Provision (benefit) for income taxes 42,068 2,764 (5,949) 21,534 17,619 --------- -------- -------- -------- -------- NET INCOME (LOSS) $ 69,324 $ 4,404 $(14,233) $ 35,664 $ 28,026 ========= ======== ======== ======== ======== See accompanying notes to consolidated financial statements
30 ENGLE HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (in thousands, except number of shares)
Common Stock Additional ----------------- Paid-In Retained Shares Amount Capital Earnings Total ---------- ------ -------- --------- ------- Predecessor Company: Amounts at October 31, 1998 11,169,000 $112 $103,134 $58,478 $161,724 Net Income 28,026 28,026 Dividends to shareholders (2,242) (2,242) Common stock issued in connection with employee stock bonus plan 69,000 882 882 Common stock issued in connection with exercise of stock options 10,000 96 96 Common stock purchased in connection with Company's share repurchase plan (200,000) (2) (2,052) (2,054) ---------- ---- -------- -------- -------- Amounts at October 31, 1999 11,048,000 $110 $102,060 $84,262 $186,432 Net Income 35,664 35,664 Dividends to shareholders (2,641) (2,641) Common stock issued in connection with employee stock bonus plan 127,000 1 1,222 1,223 Common stock issued in connection with exercise of stock options 5,000 1 55 56 Common stock purchased in connection with Company's share repurchase plan (308,000) (3) (3,040) (3,043) ---------- ---- -------- -------- -------- Amounts at October 31, 2000 10,872,000 $109 $100,297 $117,285 $217,691 Net loss for the period November 1, 2000 through November 21, 2000 (14,233) (14,233) Cancellation of Company's shares as a result of merger (10,872,000) (109) (100,297)(103,052)(203,458) ---------- ---- -------- -------- -------- Amounts at November 21, 2000 0 $ 0 $ 0 $ 0 $ 0 ========== ==== ======== ======== ======== Successor Company: 31 Conversion of Helios Acquisition Corporation stock to Company stock under Merger 100 - 215,709 215,709 Net income for the period November 22, 2000 through December 31, 2000 4,404 4,404 Net Distributions to Parent (363) (363) ---------- ---- -------- -------- -------- Amounts at December 31, 2000 100 - $215,709 $ 4,041 $219,750 Net income 69,324 69,324 Net Distributions to Parent (29,516) (29,516) ---------- ---- -------- -------- -------- Amounts at December 31, 2001 100 - $215,709 $ 43,849 $259,558 ========== ==== ======== ======== ======== See accompanying notes to consolidated financial statements
32 ENGLE HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Period From Period From November 22, November 1, 2000 2000 Years Ended Year Ended Through Through October 31, December 31, December 31, November 21, ----------------- 2001 2000 2000 2000 1999 ------------ ------------ ------------ -------- -------- Successor Successor Predecessor Predecessor CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 69,324 $ 4,404 $ (14,233) $35,664 $28,026 Adjustments to reconcile net income (loss) to net cash provided (required) by operating activities: Depreciation and amortization 6,457 721 330 6,108 5,604 Impairment loss 530 161 3,979 2,690 Deferred tax provision (benefit) 5,388 2,764 (5,949) (1,692) (226) Employee stock compensation 1,223 882 Other (516) Changes in assets and liabilities: (Increase) decrease in restricted cash (17,138) (494) 4 (1,622) (1,018) (Increase) in inventories (12,763) (3,124) (29,314) (26,633) (36,874) (Increase) in other assets (9,367) (3,525) (61) (1,688) (2,699) (Increase) decrease in mortgages held for sale (36,527) (6,062) 14,027 4,951 (1,553) Increase (decrease) in accounts payable and accrued expenses 19,726 (17,426) 16,513 2,843 5,201 Increase (decrease) in customer deposits 177 (62) 950 4,650 4,052 -------- -------- ------- -------- -------- Net cash provided (required) by operating activities 25,291 (22,643) (17,733) 27,783 4,085 -------- -------- ------- -------- -------- 33 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment (4,009) (32) (521) (3,829) (6,176) -------- -------- ------- -------- -------- Net cash (required) by investing activities (4,009) (32) (521) (3,829) (6,176) -------- -------- ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings 27,001 215,000 22,000 Repayment of borrowings (66,764) (214,925) (21) (2,249) (72,399) Proceeds from issuance of senior debt 96,587 Repurchase of common stock (3,043) (2,054) Distributions to shareholders (2,641) (2,242) Distributions to parent (29,516) (363) Proceeds from exercise of stock options 56 96 Decrease (increase) in financial service borrowings 29,618 5,585 (14,371) (8,919) 1,006 Increase in minority interest 35,696 Increase in consolidated land bank obligation 30,022 -------- -------- -------- -------- -------- Net cash provided (required) by financing activities 26,057 5,297 (14,392) (16,796) 42,994 -------- -------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH 47,339 (17,378) (32,646) 7,158 40,903 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,078 35,456 68,102 60,944 20,041 -------- -------- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 65,417 $ 18,078 $ 35,456 $ 68,102 $ 60,944 ======== ======== ======== ======== ======== See accompanying notes to consolidated financial statements
34 ENGLE HOMES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Business: Engle Homes, Inc. and subsidiaries ("the Company") is engaged principally in the construction and sale of residential homes and land development. The Company operates throughout Florida with divisions in Broward County; Palm Beach and Martin Counties; Orlando; Fort Myers; and Naples. The Company also has divisions operating outside Florida including Dallas, Texas; Denver, Colorado; Virginia; and Phoenix, Arizona. Ancillary products and services to its residential home building include land sales to other builders, origination and sale of mortgage loans and title services. The consolidated financial statements include the accounts of the Company and all subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Basis of Presentation: On November 22, 2000, the Company became a wholly-owned subsidiary of Technical Olympic Inc., formerly known as Technical Olympic USA., Inc. ("Technical Olympic"), pursuant to a merger agreement dated October 12, 2000. Technical Olympic is a wholly-owned subsidiary of Technical Olympic (UK) PLC that is a wholly-owned subsidiary of Technical Olympic S.A., a publicly traded Greek corporation. Company stockholders received $19.10 for each share of the Company's common stock at the time of the merger. Following the merger, the common stock of the Company ceased to be publicly traded. For accounting purposes, the merger is being accounted for as of November 22, 2000 using the purchase method. Accordingly, the consolidated financial statements for periods after that date reflect the push-down of the purchase price allocations made by Technical Olympic to the assets and liabilities of the Company. Total consideration for the acquisition approximated $542 million, including $326 million of assumed liabilities and $216 million in cash paid. The "push down" basis of accounting resulted in the Company allocating approximately $527 million to inventories and other identifiable assets and $15 million to goodwill. As a result of the change in control of the Company, the Company was required by the indentures governing its Senior Notes to offer to repurchase all of its outstanding Senior Notes at a price of 101% of the principal plus accrued interest. Upon termination of the offer in January 2001, the Company repurchased approximately $237 million of $250 million of its Senior Notes. Approximately $13 million of the Senior Notes were not tendered and remain outstanding as of December 31, 2001. Acquisition related charges amounting to $20.1 million are included in the results of operations in the period from November 1, 2000 through November 21, 2000. There is no disclosure of earnings per share since the Company has no registered trading capital stock. 35 Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain reclassifications have been made to conform the prior periods' amounts to the current year's presentation. Segment Reporting: Effective October 31, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information. Under the provisions of SFAS 131, our operating segments consist of homebuilding and financial services. These two segments are segregated in the accompanying consolidated financial statements under "Homebuilding" and "Financial Services", respectively. Asset Impairments: The Company periodically reviews the carrying value of certain of its assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company would estimate the undiscounted sum of the expected future cash flows of such assets to determine if such sum is less than the carrying value of such assets to ascertain if a permanent impairment exists. If a permanent impairment exists, the Company would determine the fair value by using quoted market prices, if available, for such assets, or if quoted market prices are not available, the Company would discount the expected future cash flows of such assets and would recognize the impairment through a charge to operations. Cash and Cash Equivalents: Unrestricted cash includes amounts in transit from title companies for home closings and highly liquid investments with an initial maturity of three months or less. Restricted cash consists of amounts held in escrow as required by purchase contracts or by law for escrow deposits held by our title company and compensating balances for various open letters of credit. Inventories: Inventories are stated at the lower of cost or fair value. Inventories under development or held for development are stated at an accumulated cost unless such cost would not be recovered from the cash flows generated by future disposition. In this instance, such inventories are recorded at fair value. Inventories to be disposed of are carried at the lower of cost or fair value less cost to sell. Interest, real estate taxes and certain development costs are capitalized to land and construction costs during the development and construction period and are amortized to costs of sales as closings occur. 36 Property and Equipment, Depreciation and Amortization: Property and equipment are stated at cost. Depreciation and amortization are provided over the assets' estimated useful lives ranging from 18 months to 30 years, primarily on the straight-line method. Loan costs are deferred and amortized over the term of the outstanding borrowings. Goodwill: The Company has classified the excess of cost over the fair value of the net assets of companies acquired in purchase transactions as goodwill. Goodwill is being amortized on a straight-line method over 20 years. Amortization charged to operations amounted to $856,531, $104,992, $20,373, $349,236 and $343,871 for the year ended December 31, 2001, the period from November 22, 2000 through December 31, 2000, the period from November 1, 2000 through November 21, 2000, and the fiscal years ended October 31, 2000, and October 31, 1999, respectively. Revenue Recognition: Revenues and profits from sales of commercial and residential real estate and related activities are recognized when closings have occurred and the purchaser has made a minimum down payment and other criteria for sale and profit recognition are satisfied in accordance with generally accepted accounting principles governing profit recognition for real estate transactions. Selling and Marketing: Selling and marketing costs are expensed as incurred. Selling and marketing costs included in selling, marketing, and general and administrative expenses in the accompanying consolidated statement of income amount to approximately $63,400,000, $5,700,000, $2,300,000, $53,300,000, and $50,600,000 for the year ended December 31, 2001, the period from November 22, 2000 through December 31, 2000, the period from November 1, 2000 through November 21, 2000, and the fiscal years ended October 31, 2000, and October 31, 1999, respectively. Income Taxes: As a result of the merger as described in Note 1, the Company filed consolidated income tax returns with Technical Olympic beginning November 22, 2000. For the periods ended December 31, 2001, and 2000, income taxes are allocated to the Company based upon a "stand alone" computation in the accompanying consolidated statement of income. Financial Instruments: The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate, and unless otherwise disclosed, the fair values of financial instruments approximate their recorded values. Stock Based Compensation: The Company recognizes compensation expense for its stock option incentive plans using the intrinsic value method of accounting. Under the terms of the intrinsic value method, compensation cost is the excess, if 37 any, of the quoted market price of the stock at the grant date, or other measurement date, over the amount an employee must pay to acquire the stock. New Accounting Pronouncements: In June 2001, the Financial Accounting Standards Board (FASB) approved Statement of Financial Accounting Standard 141 (Statement 141), Business Combinations, and Statement of Financial Accounting Standards 142 (Statement 142), Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Statement 142 will be effective for the Company's fiscal year 2002 and is immediately effective for goodwill and intangible assets acquired after June 30, 2001. Management is in the process of evaluating the effect these standards will have on its financial statements. In September 2000, the FASB issued Statement of Financial Accounting Standards 140 (Statement 140), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Statement 140 amends Statement 125 and provides revised accounting and financial reporting rules for sales, securitizations, and servicing of receivables and other financial assets, and for secured borrowing and collateral transactions. The provisions concerning servicing assets and liabilities as well as extinguishments of liabilities remain consistent with Statement 125. Statement 140 is applicable to transfers occurring after March 31, 2001. The impact of adopting Statement 140 has not been significant to the Company's financial statements. NOTE 2-INVENTORIES Inventories consist of (dollars in thousands):
December 31, -------------------- 2001 2000 -------- -------- Land and improvements held for development $302,630 $301,426 Residential homes under construction 153,673 142,644 -------- -------- $456,303 $444,070 ======== ========
38 Included in inventory is the following (dollars in thousands):
Period From Period From November 22, November 1, For the 2000 2000 For the year Year ended Through Through ended October 31, December December 31, November 21, ------- ------- 31, 2001 2000 2000 2000 1999 ---------- ------------ ------------ ------- ------- Interest capitalized, beginning of period $ 23,019 $ 22,296 $ 21,684 $19,205 $16,326 Interest incurred and capitalized 18,294 3,169 1,451 24,185 22,098 Amortized to cost of sales - homes (27,664) (2,352) (832) (19,746) (18,625) Amortized to cost of sales - land (808) (94) (7) (1,960) (594) Reduction of capitalized interest - transferred to land bank (3,407) ---------- ------------ ------------ ------- ------- Interest capitalized, end of period $ 9,434 $ 23,019 $ 22,296 $21,684 $19,205 ========== ============ ============ ======= ======= Included in cost of sales - homes during the year ended December 31, 2001, the period from November 1, 2000 through December 31, 2000, and the fiscal years ended October 31, 2000, and October 31, 1999, are impairment losses of approximately $530,000, $161,000, $3,979,000 and $2,690,000, respectively, to reduce certain projects under development to fair value.
During 2001, the Company sold to an investment limited liability company ("Investment Company") certain undeveloped real estate tracts. The Investment Company is owned by several of the current and former executive officers of the Company, including without limitation related trusts of management. As of December 31, 2001, the remaining value of lots that can be acquired by the Company approximates $43 million. The Company has placed deposits, entered into a number of agreements, including option contracts and construction contracts with the Investment Company, to develop and buy back fully developed lots from time to time subject to the terms and conditions of such agreements. Additionally, under these agreements, the Company can cancel these agreements to purchase the land by forfeiture of the Company's deposit. The Company believes that the terms of the purchase contract and the terms of the related option and development contracts were comparable to those available from unaffiliated parties. Although Engle does not have legal title to the assets of the Investment Company and has not guaranteed the liabilities of the Investment Company, Engle does exercise certain rights of ownership over the Investment Company assets. Consequently, the assets and associated liabilities of the Investment Company have been recorded in the accompanying Consolidated Balance Sheet as of December 31, 2001. Minority interest in consolidated subsidiaries, represents the equity provided by members of management. 39 During 2001, the Company entered into option arrangements with independent third parties to acquire developed lots. Under these option arrangements, the Company placed deposits, which provide the right to acquire developed lots at market prices. Additionally, under these arrangements, the Company can cancel these arrangements to purchase the land by forfeiture of the deposit. Although the Company does not have legal title to the assets of these independent third parties and have not guaranteed the liabilities, the Company does exercise certain rights of ownership over the entity's assets. Consequently, the assets and associated liabilities of these entities have been recorded in the accompanying consolidated statement of financial condition as of December 31, 2001. As a result of the above transaction, the Company has included on its consolidated statement of financial condition inventory and land deposits of approximately $66 million, minority interest of approximately $36 million, which represents the equity of investors, and consolidated land bank obligation of approximately $30 million. These obligations are at market interest rates and are repaid on lot closings with a final maturity through 2004. NOTE 3 - FINANCIAL SERVICES Financial service revenue and expenses consist of the following (dollars in thousands):
Period From Period From November 22, November 1, 2000 2000 Years Ended Year Ended Through Through October 31, December 31, December 31, November 21, ----------------- 2001 2000 2000 2000 1999 ------------ ------------ ------------ -------- -------- Successor Successor Predecessor Predecessor Revenue: Mortgage Services $ 16,400 $ 1,265 $ 432 $ 10,277 $ 9,745 Title Services 16,259 1,297 646 11,853 12,946 ------------ ----------- ------------ -------- -------- Total Financial Service Revenue 32,659 2,562 1,078 22,130 22,691 ------------ ----------- ------------ -------- -------- Expenses: Mortgage Services 6,800 545 378 5,635 5,517 Title Services 10,888 1,090 583 9,689 10,390 ------------ ----------- ------------ -------- -------- Total Financial Service Expense 17,688 1,635 961 15,324 15,907 ------------ ----------- ------------ -------- -------- Total Financial Service Income Before Income Taxes $ 14,971 $ 927 $ 117 $ 6,806 $ 6,784 ========= =========== ============ ======== ======== Intercompany charges have been eliminated.
40 In order to fund the origination of residential mortgage loans, the Company entered into a $40 million revolving warehouse line of credit (including a purchase agreement) whereby funded mortgage loans are pledged as collateral. The line of credit bears interest at the Federal Funds rate plus 1.375% (2.895% at December 31, 2001). The line of credit includes restrictions including maintenance of certain financial covenants. The Company is required to fund 2% of all mortgages originated and to sell all funded mortgages within 90 days. The warehouse line of credit expires July 5, 2002. As of December 31, 2001, the Company was committed to selling its entire portfolio of mortgage loans held for sale. NOTE 4 - BORROWINGS (dollars in thousands)
Borrowings consist of: December 31, --------------------- 2001 2000 -------- -------- Unsecured borrowings from banks $202,000 $215,000 Senior Notes due 2008, at 9.25% 12,897 38,065 Other 938 2,532 -------- -------- $215,835 $255,597 ======== ======== In connection with the acquisition of the Company by Technical Olympic on November 22, 2000, the Company entered into a Credit Agreement (the "Credit Agreement") with a bank providing for a $100 million term loan commitment and a $275 million revolving credit facility (subject to reduction based upon periodic determinations of a borrowing base). Proceeds from these facilities provide working capital and financed the required repurchase offer made to holders of the Company's then outstanding $250 million principal amount of 9 1/4% Senior Notes due 2008 ("Senior Notes"). The term loan and revolving credit facility terminate on November 22, 2002 whereupon all amounts outstanding become due. The revolving credit facility also provides credit support for the issuance of letters of credit needed from time to time in the Company's business. The Company's previous bank revolving credit facility was repaid and cancelled. The terms of the Credit Agreement contain restrictive covenants which require the Company, among other things, to maintain a minimum tangible net worth and maintain certain financial ratios. As a result of the change in control of the Company, the Company was required by the indentures governing its Senior Notes to offer to repurchase all of its outstanding Senior Notes at a price of 101% of the principal plus accrued interest. Upon termination of the offer in January 2001, the Company repurchased approximately $237 million of its Senior Notes. Funds to repurchase these Senior Notes were provided from the issuance of the $100 million term loan under the Credit Agreement and additional advances under the Company's revolving credit facility. Approximately $13 million of the Senior Notes were not tendered and remain outstanding as of December 31, 2001. 41 Maturities of borrowings are as follows: Year Ended December 31, 2001 2002 202,000 2003 938 2004 2005 Thereafter 12,897 -------- $215,835 ======== The carrying amount of the Company's borrowings approximates fair value as of December 31, 2001 due to their fluctuating interest rates based on the prime rate or LIBOR.
NOTE 5 - STOCK BASED COMPENSATION There are no common stock options outstanding at December 31, 2001 and December 31, 2000. During the year ended October 31, 2000, 4,900 common stock options were exercised at an average exercise price of $11.50. Additionally, 20,000 common stock options were forfeited. As a result of the change of control in November 2000 (see Note 1), all of the outstanding common stock options (965,000) were bought out by the Company. Under the Company's former Performance Bonus Plan established in 1997, the Company issued 127,000 and 69,000 shares of common stock valued at approximately $1,223,000 and $882,000 during the fiscal years ended October 31, 2000, and 1999, respectively. No shares under the Plan were issued during 2001 and the period ended from November 1, 2000, through December 31, 2000. At October 31, 2000, the Company had a fixed stock option plan which is described below. The Company applies APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for the Plan. Under APB Opinion 25, if the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Under the 1991 Stock Option Plan ("the Plan"), as amended, options were authorized to be granted to purchase 1,000,000 common shares of the Company's stock at not less than the fair market value at the date of the grant. Options expire ten years from the date of grant, and typically vest evenly over a five year period. SFAS Statement No. 123, Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net income and net income per share as if compensation cost associated with options granted under the Company's stock option plan had been determined in accordance with the fair value based method prescribed in SFAS Statement No 123. During the year ended October 31, 1999, the Company granted 10,000 options to purchase shares of the Company's common stock at $12.75 and 110,000 options at $10.88, the closing prices on the date of each grant. There were no options granted subsequent to fiscal year October 31, 1999. The Company's pro forma net income and income per share under the accounting provisions of SFAS Statement No. 123 did not materially differ from the reported amounts and are presented below.
42 Year ended October 31, 2000 1999 ------- ------- Net income, as reported $35,664 $28,026 Estimated stock compensation costs (497) (512) ------- ------- Pro forma net income $35,167 $27,514 ======= ======= The Black-Scholes method was used to compute the pro forma amounts presented above, utilizing the weighted average assumptions summarized below. The weighted average fair value of options granted was $4.76 for the year ended October 31, 1999. 1999 ------- Risk-free interest rate 5.15% Volatility % 45.83% Expected life (in years) 7 years Dividend yield rate 2.00%
A summary of the status of the Plan and changes are presented below:
Period from November 1, 2000 Through Year Ended Year Ended November 21, 2000 October 31, 2000 October 31, 1999 ----------------- ---------------- ---------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- ------ ------- ------ ------- ------ Outstanding at beginning of year 965,100 $11.70 990,000 $11.74 895,200 $11.81 Granted 120,000 11.04 Exercised (4,900) 11.50 (10,200) 9.49 Repurchased (965,100) 11.70 Forfeited (20,000) 13.75 (15,000) 11.68 ------- ------ ------- ------ ------- ------ Outstanding at end of year 0 $ 0 965,100 $11.70 990,000 $11.74 ======= ====== ======= ====== ======= ====== Options exercisable at year-end 0 $ 0 709,100 $11.31 610,400 $11.24 ======= ====== ======= ====== ======= ====== Weighted average fair value of options granted during the year $ 4.76 ======
43 NOTE 6 - INCOME TAXES The income tax provision in the consolidated statements of income consists of the following components (dollars in thousands):
Period From Period From November 22, November 1, For the 2000 2000 For the Years Year ended Through Through Ended October 31, December 31, December 31, November 21, -------------------- 2001 2000 2000 2000 1999 ------------ ------------ ------------ ------- ------- Current: Federal $ 37,030 $ $ $21,252 $15,287 State 3,951 1,974 2,558 ------------ ------------ ------------ ------- ------- 40,981 0 0 23,226 17,845 ------------ ------------ ------------ ------- ------- Deferred: Federal 877 2,449 (5,389) (1,994) (194) State 210 315 (560) 302 (32) ------------ ------------ ------------ ------- ------- 1,087 2,764 (5,949) (1,692) (226) ------------ ------------ ------------ ------- ------- Total $ 42,068 $ 2,764 $ (5,949) $21,534 $17,619 ============ ============ ============ ======= ======= The provision for income taxes was different from the amount computed by applying the statutory rate due to the effect of state income taxes, except for the period for November 1, 2000 through November 21, 2000, which included merger related expenses not deductable for tax purposes.
Temporary differences which gave rise to deferred income tax assets and liabilities at December 31, 2001 and December 31, 2000 are as follows (dollars in thousands):
December 31, December 31, 2001 2000 ------------ ------------ Deferred tax liabilities: Differences in reporting selling and marketing costs for tax purposes $ (744) $ (1,096) Other (120) (572) ------------ ------------ Gross deferred tax liabilities (864) (1,668) Deferred tax assets: Inventory 4,745 5,771 Property and equipment 250 468 Income recognized for tax purposes and deferred for financial reporting purposes 38 107 Net operating loss for tax purposes 4,879 ------------ ------------ 44 Gross deferred tax assets 5,033 11,225 ------------ ------------ Net deferred tax asset $ 4,169 $ 9,557 ============ ============
NOTE 7 - COMMITMENTS AND CONTINGENCIES The Company is subject to the normal obligations associated with entering into contracts for the purchase, development and sale of real estate in the routine conduct of its business. The Company is committed under various letters of credit and performance bonds which are required for certain development activities, deposits on land and lot purchase contract deposits. Deposits for future purchases of land totaled approximately $25.6 million at December 31, 2001. Outstanding letters of credit and performance bonds under these arrangements totaled approximately $57.1 million at December 31, 2001. The Company and its subsidiaries occupy certain facilities, including the Company's headquarters in Boca Raton, Florida, under lease arrangements. Rent expense, net of sublease income, amounted to approximately $2,200,000, $269,000, $127,000, $2,000,000, and $1,900,000, for the year ended December 31, 2001, the period from November 22, 2000 through December 31, 2000, the period from November 1, 2000 through November 21, 2000, and the fiscal years ended October 31, 2000, and 1999, respectively. Sublease income is derived primarily from tenants occupying space under month-to-month and annual leases. Future minimum rental commitments for operating leases with non-cancelable terms in excess of one year are as follows: 2002 $2,410,000 2003 2,000,000 2004 1,674,000 2005 1,246,000 2006 906,000 2007 253,000 2008 242,000 2009 242,000 The Company has a defined contribution plan established pursuant to Section 401(k) of the Internal Revenue Code. Employees contribute to the plan a percentage of their salaries, subject to certain dollar limitations, and the Company matches a portion of the employees' contributions. The Company's contribution to the plan for the year ended December 31, 2001, the period from November 22, 2000 through December 31, 2000, the period from November 1, 2000 through November 21, 2000, and the fiscal years ended October 31, 2000, and 1999, amounted to $615,000, $65,000, $24,000, $429,000, and $181,000, respectively. Concurrently with the signing of the merger agreement with Technical Olympic, the Company entered into employment contracts with certain executive officers. The agreements provide for an initial employment term beginning on the closing of the tender offer and ending December 31, 2003. Pursuant to the employee agreements, executive officers received annual base salaries aggregating approximately $2,474,000 for the calendar year, with scheduled annual increases beginning January 1, 2001 thereafter. In addition, the employee agreements establish incentive bonus formulas comparable to the criteria previously used by the Company in determining annual discretionary incentive bonuses. Total compensation under the employee agreement with the Company's former Chairman of the Board, President, and Chief Executive Officer amounted to $2,355,770 for the year ended December 31, 2001. The Company has entered into an agreement with an insurance company to 45 underwrite Private Mortgage Insurance on certain loans originated by PHMC. Under the terms of the agreement, the Company shares in premiums generated on the loans and is exposed to losses in the event of loan default. At December 31, 2001, the Company's maximum exposure to losses relating to loans insured is approximately $1,387,000, which is further limited to the amounts held in trust of approximately $511,000. The Company minimizes the credit risk associated with such loans through credit investigations of customers as part of the loan origination process and by monitoring the status of the loans and related collateral on a continuous basis. The Company is involved, from time to time, in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company's consolidated financial position or results of operations. NOTE 8 - ACQUISITION AND MERGER RELATED CHARGES On March 6, 2001, Newmark Homes Corp. ("Newmark") announced it is considering the possible merger of Newmark with Engle Holdings Corp., the parent company of the Company. The Special Committee of Newmark's independent directors is reviewing the transaction and will make a recommendation to Newmark's full board. There are no assurances that the Special Committee will either recommend the merger or that such a merger will be consummated. Any merger would also be subject to execution of a definitive agreement, certain regulatory and other approvals as well as the approval of various lenders of Engle, Newmark, and Technical Olympic Inc. If the merger is consummated, it is contemplated that shares of Engle Holdings Corp. would be exchanged for shares of Newmark. During 2001, in connection with the proposed merger, the Company incurred approximately $2 million in legal, consulting, and related costs. These costs are included in acquisition and merger related charges in the accompanying statement of income. NOTE 9 - RELATED PARTY TRANSACTIONS During 2001, Engle Homes entered into purchasing agreements with Technical Olympic S.A. The agreements provide that Technical Olympic S.A. would purchase certain of the materials and supplies necessary for operations and sell them to Engle Homes, all in an effort to consolidate the purchasing function. Although Technical Olympic S.A. would incur certain franchise tax expense, the subsidiaries would not be required to pay such additional liability. NOTE 10 - QUARTERLY RESULTS FOR 2001 and 2000 (unaudited) Quarterly results for the twelve months ended December 31, 2001 and October 31, 2000 follow (dollars in thousands):
2001 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter -------- -------- -------- -------- Revenues $222,581 $254,576 $260,032 $269,506 Income before income taxes 22,555 26,139 31,150 31,548 Net Income 14,153 16,402 19,547 19,222 2000 Revenues $167,174 $212,112 $224,308 $240,417 Income before income taxes 8,660 14,572 16,620 17,346 Net Income 5,490 9,239 10,537 10,398
46 NOTE 11 - UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATION AND CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
Period From Period From November 22, November 1, 2000 2000 Three Months Through Through Ended December 31, November 21, January 31, 2000 2000 2000 ------------ ------------ ------------- Revenues $ 87,286 $ 27,606 $167,174 Costs and Expenses 80,118 47,788 158,514 ------------ ------------ ------------- Income (Loss) Before Income Tax (Benefit) 7,168 (20,182) 8,660 Provision (Benefit) for income taxes (Benefit) 2,764 (5,949) 3,170 ------------ ------------ ------------- Net Income (Loss) 4,404 (14,233) 5,490 ============ ============ =============
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Period From Period From November 22, November 1, 2000 2000 Three Months Through Through Ended December 31, November 21, January 31, 2000 2000 2000 ------------ ------------ ------------- Net Cash (Provided) Required By Operating Activities $ (22,643)$ (17,733) $ (24,300) ------------ ------------ ------------- Net Cash (Required) by Investing Activities (32) (521) (1,012) ------------ ------------ ------------- Net Cash Provided (Required) by Financing Activities 5,297 (14,392) (1,784) ------------ ------------ ------------- Net Increase (Decrease) in Cash (17,378) (32,646) (27,096) Cash and Cash Equivalents at Beginning of Period 35,456 68,102 60,944 ------------ ------------ ------------- Cash and Cash Equivalents at End of Period $ 18,078 $ 35,456 $ 33,848 ============ ============ =============
47 NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Period From Period From November 22, November 1, For the For the 2000 2000 year ended Year Ended Through Through October 31, December 31, December 31, November 21, -------- -------- 2001 2000 2000 2000 1999 ------------ ------------ ------------ -------- -------- Interest paid (net of interest capitalized) $ 1,889 $ 5,611 $ - $ 374 $ - ============ ============ ============ ======== ======== Income taxes paid $ 38,752 $ - $ 1,000 $ 23,612 $ 16,418 ============ ============ ============ ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE See Form 8-K in exhibits whereby the Company's Board dismissed BDO Seidman, LLP as independent certified public accountants and engaged Ernst & Young, LLP as its new independent certified public accountants. 48 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company holding office as of February 19, 2002 are as follows:
NAME AGE POSITION WITH COMPANY - ------------------- - --- ---------------------------- Constantine Stengos 66 Chairman of the Board of Directors Antonio B. Mon 56 President, Chief Executive Officer and Director *Alec Engelstein 71 Chief Executive Officer and Director Harry Engelstein 67 Executive Vice President and Chief Construction Officer John A. Kraynick 47 Executive Vice President Lawrence R. Shawe 46 Senior Vice President-Sales and Marketing Tommy McAden 39 Vice President, Chief Financial Officer, Treasurer, and Director *David Shapiro 46 Vice President-Finance, Chief Financial Officer and Director Paul M. Leikert 46 Senior Vice President, Chief Accounting Officer Holly A. Hubenak 51 Vice President Ronald J. Korn 61 Director Yannis Delikanakis 35 Director, Vice President Andreas Stengos 40 Director George Stengos 35 Director
*Messrs. Engelstein and Shapiro resigned from the Company on February 1, 2002. Messrs. Mon and Mcaden were elected to the Board of Directors on February 13, 2002. CONSTANTINE STENGOS, a director of the Company, has served as Chairman of the Board of Directors since November 22, 2000. He has served as a director of Newmark Homes Corp., and as its Chairman of the Board, since December 15, 1999. Mr. Stengos has also served as Chairman of the Board of Directors of Engle Holdings Corp., the Company's direct parent, since November 22, 2000. He is also a director and the President of Technical Olympic, the indirect parent of the Company, and a director of Technical Olympic (UK) PLC, the immediate parent of Technical Olympic, all since November 1999. Technical Olympic (UK) PLC is a wholly owned subsidiary of Technical Olympic S.A. Mr. Stengos formed Technical Olympic S.A. in 1965 and serves as a director, the Chairman of its board of directors and the Managing Director. Mr. Stengos owns more than 5% of the outstanding equity of Technical Olympic S.A. Each of Newmark Homes Corp., Technical Olympic, Technical Olympic (UK) PLC, Technical Olympic S.A., Newmark Homes Corp., and Engle Holdings Corp. are affiliates of the Company. Mr. Stengos graduated 49 from the National Technical University, Athens, Greece with a Masters of Science in Civil Engineering. Constantine Stengos is the father of Andreas Stengos and George Stengos and the father-in-law of Yannis Delikanakis. ALEC ENGELSTEIN, a co-founder of the Company and Harry Engelstein's brother, has served as its Chief Executive Officer since its organization in August 1982. Mr. Engelstein resigned from the Company on February 1, 2002. HARRY ENGELSTEIN, a co-founder of the Company and Alec Engelstein's brother, has served as Executive Vice President and Chief Construction Officer since the Company's inception in August 1982. Harry Engelstein has over 34 years of experience in home construction. JOHN A. KRAYNICK has served as a Vice President of the Company since August 1986, was appointed Senior Vice President in July 1991 and appointed Executive Vice President in December 1998. Mr. Kraynick is responsible for administrative matters and coordinating the Company's compliance with Federal, state and local regulatory requirements. Mr. Kraynick has over 23 years of experience in the homebuilding industry. LAWRENCE R. SHAWE has served as the Company's Vice President-Sales and Marketing since April 1986 and was appointed Senior Vice President Sales and Marketing in December, 1998. Mr. Shawe joined the Company in April 1984 and since such time has been responsible for the Company's sales and marketing efforts. Mr. Shawe has over 21 years of experience in the homebuilding industry. TOMMY L. MCADEN has served as a director and Chief Financial Officer of the Company since February 2002 and as a Vice President since November 2000. Mr. McAden is also a director and Vice President and Chief Financial Officer of Technical Olympic, Inc., the indirect parent of the Company. Mr. McAden has held previous CFO and CAO positions with Pacific USA Holdings Corp. and Pacific Realty Group, and was an accountant with KPMG for three years. Mr. McAden has over 15 years of experience in finance and accounting, and over 12 years of experience in the real estate and homebuilding industries. DAVID SHAPIRO joined the Company in June 1991, served as the Company's Chief Financial Officer since July 1991, and was appointed a director on December 17, 1997. Mr. Shapiro resigned from the Company on February 1, 2002. David Shapiro is Alec Engelstein's son-in-law. PAUL M. LEIKERT has served as the Vice President-Chief of Accounting since March 1994, in January of 1995, was appointed Vice President-Chief Accounting Officer and appointed Senior Vice President-Chief Accounting Officer in December, 1998. Mr. Leikert was appointed President of the Company's mortgage subsidiary, Preferred Home Mortgage Company, in February 2000. Mr. Leikert is a certified public accountant and has over 17 years of experience in the homebuilding industry. HOLLY HUBENAK has served as a Vice President of the Company since November 2000. Ms. Hubenak is also a Vice President and General Counsel for Technical Olympic, Inc., the indirect parent of the Company. She is an attorney and has practiced for over 20 years, with particular expertise in land development, corporate and securities law, public administrative law, and litigation across various industries. RONALD J. KORN, chairman of the Compensation and Audit Committees of the Board of Directors, has served as a director of the Company since October 1991. He has also served as a director of Engle Holdings Corp. since November 22, 2000. Since July 1991, Mr. Korn has served as President 50 of Ronald Korn Consulting, a business consulting firm. From August 1985 until June 1991, Mr. Korn served as the managing partner of the Miami office of KPMG Peat Marwick, a nationally recognized firm of independent public accountants. Mr. Korn is a director of Horizon Bank, FSB, a Federal Savings Bank and Cynocom Corporation, an application service provider. ANTONIO B. MON has served as President, Chief Executive Officer and director of the Company since February 2002 and as Chief Executive Officer of Technical Olympic, Inc. since October 2001. Mr. Mon was a consultant to Technical Olympic from May 2001 through October 2001. From 1997 to 2001, Mr. Mon was the Chairman of Maywood Investment Company, LLC. a private firm engaged in private equity investments and general consulting. In 1991, Mr. Mon co-founded Pacific Greystone Corporation, a west-coast homebuilder that merged with Lennar Corporation in 1997 and served as its Vice Chairman from 1991 to 1997. Prior to 1991, Mr. Mon worked for the Ryland Group, Inc. (a national homebuilder), M. J. Brock Corporation (a California homebuilder) and Cigna Corporation (a financial services corporation). ANDREAS STENGOS, a director of the Company, has served as a director and the treasurer of Technical Olympic since November 1999 and a director and the General Director of Technical Olympic (UK) PLC since January 1997. He has served as a director of Newmark Homes Corp. since November 1999. Mr. Stengos has been a director of Technical Olympic S.A. since 1989, served as its Managing Director from 1989 to 1995 and has been its General Manager since 1995. Mr. Stengos earned a Bachelor of Science in Civil Engineering from City University, London, and a Master of Science in Civil Engineering from the National Technical University, Athens, Greece. Andreas Stengos is Constantine Stengos' son. GEORGE STENGOS, a director of the Company, has served as a director of Technical Olympic since November 1999 and as a director and the Corporate Secretary of Technical Olympic (UK) PLC since 1997. He has served as director of Newmark Homes Corp. since November 1999. Mr. Stengos has been the Executive Vice President (1993-2001) and since 2001 the President and Chairman of the Board of Mochlos S.A., a publicly listed subsidiary on the Athens Stock Exchange, of Technical Olympic, S.A. George Stengos is Constantine Stengos' son. YANNIS DELIKANAKIS, a director of the Company, has served as a director and Vice President of Technical Olympic since November 1999. He has served as a director of Newmark Homes Corp. since November 1999, and as a director of Engle Holdings Corp. since November 22, 2000. Mr. Delikanakis is the Real Estate and Housing Director of Technical Olympic S.A. and has been employed in such capacity since September 1999. Mr. Delikanakis was a director and was the manager of the Real Estate Development and Project Management Departments of Lambert Smith Hampton S.A. from 1994 to 1999. Mr. Delikanakis graduated from the University of Texas at Austin with a Master of Science in Civil Engineering and earned his diploma of Civil Engineering from the National Technical University of Athens, Greece. Yannis Delikanakis is the son-in-law of Constantine Stengos. There are no arrangements or understandings with respect to the selection of officers or directors. 51 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth, for the years ended December 31, 2001, 2000, and 1999, respectively, the aggregate compensation paid to the Company's Chief Executive Officer and the four other most highly compensated officers of the Company (the Chief Executive Officer and such other executive officers are sometimes referred to herein as the "Named Executive Officers").
LONG-TERM ANNUAL COMPENSATION(1) COMPENSATION ------------------------------- NUMBER OF OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS GRANTED COMPENSATION(2) - --------------------------- ------ -------- ----------- ------------ -------------- 2001 $754,453 $ 1,597,867 -- $6,850 Alec Engelstein 2000 $656,250 $ 1,084,400 -- $2,235,153 Chief Executive Officer 1999 $504,166 $ 500,000 -- $5,353 Harry Engelstein 2001 $385,000 $ 585,083 -- $4,981 Executive Vice President 2000 $315,000 $ 410,000 25,000 $1,134,481 Chief Construction Officer 1999 $300,000 $ 295,000 -- $2,725 John A. Kraynick 2001 $385,000 $ 585,083 -- $5,725 Executive Vice President 2000 $300,000 $ 410,000 -- $ 957,429 1999 $250,000 $ 300,000 20,000 $4,069 Lawrence R. Shawe 2001 $300,000 $ 427,583 -- $7,369 Senior Vice President 2000 $260,000 $ 275,000 -- $1,030,363 Sales & Marketing 1999 $210,000 $ 120,000 20,000 $4,962 Paul M. Leikert 2001 $325,000 $ 1,078,312 -- $4,747 Senior Vice President 2000 $237,500 $ 558,038 -- $ 418,445 Chief Accounting Officer 1999 $210,000 $ 110,000 25,000 $3,145 - ---------- (1) The column for "Other Annual Compensation" has been omitted because there is no compensation required to be reported in such column. The aggregate amount of perquisites and other personal benefits provided to each Named Executive Officer is less than 10% of the total of annual salary and bonus 52 of such officer. (2) Represents contributions made by the Company to the Company's 401(k) plan pursuant to the match available to all Engle employees and payments related to stock options as a result of the merger with Technical Olympic USA, Inc.
53 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES All outstanding options were exercised, purchased, or cancelled in connection with the acquisition of the Company by Technical Olympic in November 2000. OPTIONS GRANTS IN LAST FISCAL YEAR No options were granted to any of the Named Executive Officers (as defined below) during the fiscal year ended October 31, 2000 or on any date thereafter. DIRECTOR COMPENSATION The Company pays each director who is not an employee an annual retainer of $16,000 and a $500 fee for each meeting of the Board of Directors attended. The Company reimburses all directors for expenses incurred in connection with their activities as directors. EMPLOYMENT CONTRACTS On October 12, 2000 the Company entered into employment agreements (the "Employment Agreements") with the Named Executive Officers to be effective immediately prior to the closing of the tender offer contemplated by the merger agreement, except as described below. As part of his employment agreement, Alec Engelstein also entered into a separate Non-Competition Agreement that is deemed to be part of his Employment Agreement. Copies of the Employment Agreements with the Executive Officers of the Company were filed as exhibits to the form 10-K for the fiscal year ended October 31, 2000 and are incorporated herein by reference, and the following summary is qualified in its entirety by reference to such agreements. The Employment Agreements provide for an initial employment term beginning on the closing of the tender offer and ending on December 31, 2003. Unless earlier terminated by the Company or the Named Executive Officer, the Employment Agreements will renew on a month-to-month basis commencing in 2004. In early February 2002, Alec Engelstein, Chief Executive Officer of Engle Homes, and David Shapiro, Vice President-Chief Financial Officer of Engle Homes, resigned from their executive positions with Engle Homes and alleged that they were entitled to receive severance packages in excess of $10,000,000 in the aggregate. Engle Homes has accepted the resignations but disputes that it owes the severance payments. Pursuant to the Employment Agreements, the current annual base salaries of Messrs. Alec Engelstein, Harry Engelstein, Kraynick, Shawe, and Leikert are $771,375, $385,000, $385,000, $300,000, and $325,000, respectively, for the 2001 calendar year, with scheduled annual increases beginning on January 1, 2001 and thereafter. In addition, the Employment Agreements establish incentive bonus formulas comparable to the criteria previously used by the Company in determining annual discretionary incentive bonuses. The agreement with Alec Engelstein also provides for five years continued base pay as a retirement benefit upon his termination of employment. The Employment Agreements provide severance payments and benefits in the event a Named Executive Officer is terminated without cause or resigns due to a reduction in duties or for certain other reasons as set forth in the Employment Agreements. In addition, upon a qualifying termination of employment following a future change of control (as defined in the 54 Employment Agreements), the agreements (other than Alec Engelstein's) provide, in general, for a payment equal to two times the individual's base salary plus bonus. The agreement with Alec Engelstein provides for a payment upon a change of control of three times his base salary, bonus and the cost of certain benefits provided to him. Upon a termination of employment, he would also be entitled to the severance benefits provided by the agreement. The Employment Agreements also provide for an additional "make-whole" payment from the Company if the Named Executive Officer is subject to the excise tax on "parachute payments" pursuant to the Internal Revenue Code Beginning with their date of execution, the Employment Agreements bar the Named Executive Officers (1) from using or disclosing confidential information or trade secrets and soliciting employees of the Company for 18 months following their termination of employment and (2) from engaging in a competing business (as defined in the Employment Agreements) with the Company prior to the earlier of the first anniversary of their termination of employment or December 31, 2003. The foregoing employment agreements were negotiated in arm's-length negotiations with representatives of Technical Olympic in connection with its acquisition of the Company and were approved by a disinterested committee of the board of directors of the Company. In view of the terms of the agreements and the method of negotiation, there has been no policy set by the compensation committee of the Company with respect to executive employment compensation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information with respect to the beneficial ownership of the Company's Common Stock by (i) each person known by the Company to be a beneficial owner of more than 5% of the Common Stock, (ii) each of the "Named Executive Officers", (iii) each other director of the Company, and (iv) all directors and executive officers of the Company as a group.
AMOUNT AND NATURE PERCENT OF OUTSTANDING NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP SHARES - --------------------------- ----------------------- ---------------------- Engle Holdings Corp.(1) 100(2) 100% 1200 Soldiers Field Drive Sugar Land, Texas 77479 Constantine Stengos 0 0 Alec Engelstein 0 0 Harry Engelstein 0 0 John A. Kraynick 0 0 Lawrence R. Shawe 0 0 Tommy McAden 0 0 David Shapiro 0 0 Paul M. Leikert 0 0 Holly A. Hubenak 0 0 Ronald J. Korn 0 0 Yannis Delikanakis 0 0 Andreas Stengos 0 0 George Stengos 0 0 Antonio B. Mon 0 0 All directors and executive 0 0 55 officers as a group (11 persons) 0 0
- ---------- (1) Technical Olympic USA, Inc. changed its name to Technical Olympic, Inc. on January 16, 2002. (2) Technical Olympic Inc. holds the Company's shares through its wholly owned subsidiary, Engle Holdings Corp. Technical Olympic, Inc. is a wholly owned subsidiary of Technical Olympic UK (PLC), which is a wholly owned subsidiary of Technical Olympic S.A. Each of the foregoing entities may be considered beneficial owner of the shares held by Technical Olympic USA, Inc. by virtue of their ownership of the other Technical Olympic affiliated entities. Constantine Stengos owns more than 5% of the outstanding voting stock of Technical Olympic S.A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH MANAGEMENT During 2001, the Company sold to an investment limited liability company ("Investment Company") certain undeveloped real estate tracts. The Investment Company is owned by several of the current and former executive officers of the Company, including without limitation related trusts of management. As of December 31, 2001, the remaining value of lots that can be acquired by the Company approximates $43 million. The Company has placed deposits, entered into a number of agreements, including option contracts and construction contracts with the Investment Company, to develop and buy back fully developed lots from time to time subject to the terms and conditions of such agreements. Additionally, under these agreements, the Company can cancel these agreements to purchase the land by forfeiture of the Company's deposit. The Company believes that the terms of the purchase contract and the terms of the related option and development contracts were comparable to those available from unaffiliated parties. Although Engle does not have legal title to the assets of the Investment Company and has not guaranteed the liabilities of the Investment Company, Engle does exercise certain rights of ownership over the Investment Company assets. Consequently, the assets and associated liabilities of the Investment Company have been recorded in the accompanying Consolidated Balance Sheet as of December 31, 2001. Minority interest in consolidated subsidiaries, represents the equity provided by members of management. TAX ALLOCATION AGREEMENT-TOUSA Pursuant to a Tax Allocation Agreement between Technical Olympic and the Company dated March 22, 2000 and effective as of March 15, 2000, the Company's earnings may be included in the consolidated federal income tax returns filed by Technical Olympic. The amount of the Company's liability to (or entitlement to payment from) Technical Olympic will equal the amount of taxes that the Company would owe (or refund that it would receive) had it prepared its federal tax returns on a stand-alone basis. In addition, under federal income tax law, each member of a consolidated group (as determined for federal income tax purposes) is also jointly and severally liable for the federal income tax liability of the consolidated group. Pursuant to the Tax Allocation Agreement-Technical Olympic, Technical Olympic has agreed to indemnify the Company for payments which Technical Olympic has already received from the Company or with respect to any tax liabilities of Technical Olympic or its affiliated entities other than the Company. The Company made payments totaling $34.5 million during and for the year ending December 31, 2001 related to this agreement. 56 MORTGAGE COMPANY BUSINESS On March 9, 2001 the Company acquired for nominal consideration a 49.01% limited partner interest and 1% general partner interest (through affiliates) in Technical Mortgage, L.P., a Texas limited partnership, that is a mortgage origination company owned jointly with subsidiaries of Newmark Homes Corp., a Delaware corporation that is an affiliate of Technical Olympic. Preferred Home Mortgage Company underwrites, orginates and sells mortgages for homes the Company builds and for other homebuilders. The Company's capital is not at risk in connection with these mortgages beyond its limited partnership interest. TITLE COMPANY BUSINESS On April 1, 2001, the Company acquired for $20,000 a 50% limited partnership interest and a 1% general partnership interest (through affiliates) in Universal Land Title of South Florida, LTD., a Florida limited partnership, that is a title insurance business owned jointly with The Westbrooke Companies, Inc., an affiliate of Technical Olympic. The Company assumes no title insurance risk associated with the title policies. CONTRACTOR AGREEMENT. On November 22, 2000, the Company entered into a Contractor Agreement with Technical Olympic S.A. ("TOSA"), an affiliate of TOUSA. TOSA agreed to provide certain construction services and to purchase such materials, supplies and labor on behalf of the Company pursuant to certain third-party contracts assigned to TOSA by the Company or its subsidiaries, all in an effort to consolidate the purchasing function. The Company maintained the right to contract directly for any construction services and purchase any goods and services from any vendors in its own free unlimited discretion. (Although TOSA would incur certain franchise tax expense, the Company and its subsidiaries are not liable for such additional purchasing liability.) The Company paid on behalf of TOSA, for goods and services pursuant to this Agreement, $205.6 million during the fiscal year ending December 31, 2001. 57 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements: Reference is made to the index set forth in "ITEM 8, FINANCIAL STATEMENTS and SUPPLEMENTARY DATA" of this Annual Report on Form 10-K. 2. Financial Statement Schedules: None. 3. Exhibits: The following exhibits are filed as part of this Annual Report on Form 10-K. Exhibit No. Description ------- 2.1 Agreement and Plan of Merger, dated as of October 12, 2000, by and among the Company, Technical Olympic and Helios Acquisition Corp., hereby incorporated by reference to Exhibit (d)(1) to Technical Olympic's Tender Offer Statement on Schedule TO dated October 20, 2000. (File No. 005-42975) 3.1 Registrant's Amended Articles of Incorporation, hereby incorporated by reference to Exhibit 3.1 to Engle Homes, Inc.'s Form 10-K405 dated February 12, 2001 (File No. 000-19633). 3.2 Registrant's Bylaws, hereby incorporated by reference to Exhibit 3.2 to Engle Homes, Inc.'s Form 10-K405 dated February 12, 2001 (File No. 000-19633). 4.2 Indenture, dated as of February 2, 1998, between the Registrant, the Guarantors named therein and the American Stock Transfer & Trust Company, as trustee, relating to the Registrant's 9-1/4% Senior Notes due 2008, hereby incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-2 (File No. 333-40741). 4.3 Indenture dated as of June 12, 1998, between the Registrant, the Guarantors named therein and the American Stock Transfer & Trust Company, as trustee, relating to the Registrant's 9-1/4% Series C Senior Notes due 2008, hereby incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-4(File No. 333-59057). 10.1 Indemnification Agreement between the Registrant and each of its directors and certain executive officers, hereby incorporated by reference to Exhibit 10.2 of the Company's Registration Statement of Form S-1 (File No. 33-58678). 10.2 Credit Agreement, dated as of November 22, 2000, by and among the Registrant, as Borrower, the Lenders named therein, Bank of America, N.A., as 58 Administrative Agent, and Banc of America Securities LLC as Sole Lead Arranger and Sole Book Manager, hereby incorporated by reference to Exhibit 10.2 to the Company's Form 10-K405 dated February 12, 2001 (File No. 000-19633). 10.3 First Amendment, dated as of January 23, 2001 to the Credit Agreement, dated as of November 22, 2000, by and among the Registrant, as Borrower, the Lenders named therein, Bank of America, N.A., as Administrative Agent, and Banc of America Securities LLC as Sole Lead Arranger and Sole Book Manager, hereby incorporated by reference to Exhibit 10-3 to the Company's Form 10-K405 dated February 12, 2001 (File No. 000-19633). 10.3A Second Amendment, dated as of September 20, 2001, by and among the Registrant, as Borrower, the Lenders named therein, Bank of America, N.A. as Administrative Agent, filed herewith. 10.3B Third Amendment, dated as of February 28, 2002, by and among the Registrant, as Borrower, the Lenders named therein, Bank of America, N.A. as Administrative Agent, filed herewith. 10.4 Employment Agreement, dated as of October 12, 2000, between the Company and Alec Engelstein (Including a Non-Competition Agreement in the form attached as exhibit A), hereby incorporated by reference to Exhibit (d)(3) to Technical Olympic's Tender Offer Statement on Schedule TO dated October 20, 2000 (File No. 005-42975). 10.5 Employment Agreement, dated as of October 12, 2000, between the Company and Harry Engelstein, hereby incorporated by reference to Exhibit (d)(4) to Technical Olympic's Tender Offer Statement on Schedule TO dated October 20, 2000. (File No. 005-42975) 10.6 Employment Agreement, dated as of October 12, 2000, between the Company and John A. Kraynick, hereby incorporated by reference to Exhibit (d)(5) to Technical Olympic's Tender Offer Statement on Schedule TO dated October 20, 2000. (File No. 005-42975) 10.7 Employment Agreement, dated as of October 12, 2000, between the Company and Lawrence R. Shawe, hereby incorporated by reference to Exhibit (d)(6) to Technical Olympic's Tender Offer Statement on Schedule TO dated October 20, 2000. (File No. 005-42975) 10.8 Employment Agreement, dated as of October 12, 2000, between the Company and David Shapiro, hereby incorporated by reference to Exhibit (d)(7) to Technical Olympic's Tender Offer Statement on Schedule TO dated October 20, 2000. (File No. 005-42975) 10.9 Employment Agreement, dated as of October 12, 2000, between the Company and Paul M. Leikert, hereby incorporated by reference to Exhibit (d)(8) to Technical Olympic's Tender Offer Statement on Schedule TO dated October 20, 2000. (File No. 005-42975) 22.1 List of Subsidiaries, filed herewith. 59 (b) Reports on Form 8-K The Registrant filed a Current Report on Form 8-K during the fourth quarter of 2001, reporting a change in Registrant's certifying accountant. On October 8, 2001, Engle filed a Form 8-K disclosing that on October 1, 2001 its Board dismissed BDO Seidman, LLP as its independent accountants and engaged Ernst & Young LLP as its new independent certified public accountants. The date of the report is October 1, 2001, and as of that date the Company had not consulted Ernst & Young LLP on any accounting issues. The reports of BDO Seidman, LLP on the Company's financial statements for the past two fiscal years (2000 and 1999) contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principle. In connection with its audits for the two most recent years and through October 1, 2001, there have been no disagreements with BDO Seidman, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of BDO Seidman, LLP would have caused them to make reference thereto in their report on the financial statements for such years. During the last two years and for the interim period through October 1, 2001, there were no reportable events of the type described in Item 304(a)(1)(v) of Regulation S-K. BDO Seidman, LLP provided a letter dated October 8, 2001 agreeing with the statement made above. Engle Homes, Inc.'s Form 8-K disclosure filed October 8, 2001 is an exhibit to this 10-K, and is incorporated by reference. 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ENGLE HOMES, INC. By /s/ ANTONIO B. MON ----------------------- Antonio B. Mon Dated: March 27, 2002 Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated: Signatures Title Date /s/ CONSTANTINE STENGOS Chairman of the Board, March 27, 2002 - ----------------------- Director Constantine Stengos /s/ YANNIS DELIKANAKIS Director March 27, 2002 - ---------------------- Yannis Delikanakis /s/ ANDREAS STENGOS Director March 27, 2002 - ------------------- Andreas Stengos /s/ GEORGE STENGOS Director March 27, 2002 - ------------------ George Stengos /s/ TOMMY MCADEN Director, Chief Financial March 27, 2002 - ---------------- Officer, Vice President Tommy McAden /s/ PAUL LEIKERT Senior Vice President - March 27, 2002 - ---------------- Chief Accounting Officer Paul Leikert (Principal Accounting Officer) /s/ RONALD J. KORN Director March 27, 2002 - ------------------ Ronald J. Korn 61 Exhibit 10.3A EXECUTION COPY SECOND AMENDMENT AND WAIVER TO THE CREDIT AGREEMENT SECOND AMENDMENT AND WAIVER, executed this 20th day of September, 2001, amends the Credit Agreement dated as of November 22, 2000 (as amended by the First Amendment to the Credit Agreement dated as of January 23, 2001, the "Credit Agreement") among Engle Homes Inc., a Florida corporation (the "Borrower"), the banks and other financial institutions party thereto (the "Lenders") and Bank of America, N.A., as administrative agent (in such capacity, the "Administrative Agent") for the Lenders. Capitalized terms not otherwise defined herein shall have the same meanings as specified therefor in the Credit Agreement. PRELIMINARY STATEMENT The Borrower, the Administrative Agent and the Lenders have agreed (i) that a mutual mistake was made in Section 10.6 of the Credit Agreement at the time of execution thereof in that the parties failed to correct a typographical error contained in said Section 10.6, (ii) that the parties intend to correct that mistake and typographical error by amending Section 10.6 of the Credit Agreement to exclude distributions for taxes made pursuant to Section 10.6(c)(ii) from the determination of the amount of dividends and other distributions which are permitted pursuant to Section 10.6(d) of the Credit Agreement and (iii) to waive any Events of Default under Section 11(c) of the Credit Agreement that may have occurred as a result of the failure of the Borrower to comply with Section 10.6(d) of the Credit Agreement as it was written prior to the Second Amendment Effective Date (as hereinafter defined). The Administrative Agent and the Lenders have indicated their willingness to agree to the amendments and waivers described in this Preliminary Statement on the terms and subject to the satisfaction of the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: SECTION 1. Amendments of Certain Provisions of the Credit Agreement. The Credit Agreement is, upon the occurrence of the Second Amendment Effective Date, hereby amended to read as follows: (a) Section 1.1 of the Credit Agreement is hereby amended to add the following new definitions in appropriate alphabetical order: "Second Amendment" means this Second Amendment to the Credit Agreement executed September 20, 2001, effective as of November 22, 2000. "Second Amendment Effective Date" means November 22, 2000, so long as all of the conditions precedent to the effectiveness of the Second Amendment are satisfied. (b) Section 10.6 of the Credit Agreement is hereby amended as of the Second Amendment Effective Date by restating clause (d) of Section 10.6 to read in its entirety as follows: (d) the Borrower may declare and pay dividends and other distributions to the Parent in cash for any purpose not otherwise prohibited under the terms of the Loan Documents if, after giving 62 effect to each such declaration and payment, the aggregate amount of all dividends and other distributions made pursuant to this Section 10.6 (other than any such dividend or other distribution made pursuant to subclause (c) hereof) during the immediately preceding twelve month period (or if less than twelve months have elapsed since the date hereof, such period from the date hereof to the date on which such dividend or other distribution is to be paid), shall not exceed 50% of Consolidated Net Income for such period; SECTION 2. Waivers. Each of the Administrative Agent and the Lenders waive any Events of Default under Section 11(c) of the Credit Agreement which may have occurred as a result of the failure of the Borrower to comply with Section 10.6(d) of the Credit Agreement prior to the Second Amendment Effective Date. SECTION 3. Conditions Precedent. This Second Amendment is subject to satisfaction of each of the following conditions precedent: (a) The Administrative Agent shall have received counterparts of this Second Amendment executed by the Borrower, each Guarantor and the Required Lenders or, as to any Lender, advice satisfactory to the Administrative Agent that such Lender has executed and delivered this Second Amendment. (b) The representations and warranties contained in Section 4 of this Second Amendment and each of the Loan Documents shall be correct in all material respects on and as of the Second Amendment Effective Date, before and after giving effect to this Second Amendment, as though made on and as of such date (except for any such representation and warranty that, by its terms, refers to a specific date other than the Second Amendment Effective Date, in which case as of such specific date). (c) The Administrative Agent shall have received from the Acquisition Bridge Agent (as such term is defined in the Intercreditor Agreement) an executed consent to this Second Amendment in substantially the form of Exhibit A hereto. (d) No Default or Event of Default shall have occurred and be continuing on the Second Amendment Effective Date (after giving effect to the waiver provided for in Section 2 of this Second Amendment). (e) All of the accrued fees and expenses of the Administrative Agent (including the accrued fees and expenses of counsel for the Administrative Agent) in connection with this Second Amendment shall have been paid in full. This Second Amendment is subject to the provisions of Section 13.1 of the Credit Agreement. The execution of this Second Amendment by the Administrative Agent shall evidence the satisfaction of the conditions precedent contained in this Section 3 and the provisions of Section 13.1 of the Credit Agreement. SECTION 4. Representations and Warranties. To induce the Administrative Agent and the Lenders to enter into this Second Amendment, the Borrower and each of the other Loan Parties hereby represents and warrants to the Administrative Agent and the Lenders: (a) The Borrower and each other Loan Party (i) has the corporate power and authority to make, deliver and perform this Second Amendment and (ii) has taken all necessary corporate action to authorize the execution, delivery and performance of this Second Amendment. 63 (b) No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with this Second Amendment or with the execution, delivery, performance, validity or enforceability of this Second Amendment. (c) This Second Amendment has been duly executed and delivered on behalf of the Borrower and each other Loan Party. (d) This Second Amendment, when executed, constitutes a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. SECTION 5. Reference to and Effect on the Loan Documents. (a) On and after the Second Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement, and each reference in the Notes and each of the other Loan Documents to "the Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended and otherwise modified hereby. (b) The Credit Agreement and each of the other Loan Documents, as amended and otherwise modified by the amendments specifically provided above in Sections 1 and 2, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. (c) The execution, delivery and effectiveness of this Second Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Administrative Agent or any of the Lenders under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. SECTION 6. Costs and Expenses. The Borrower hereby agrees to pay on demand all reasonable costs and expenses of the Administrative Agent (including, without limitation, the reasonable fees and expenses of counsel for the Administrative Agent) in connection with the preparation, execution, delivery, administration, modification and amendment of this Second Amendment and all of the instruments, agreements and other documents delivered or to be delivered in connection herewith, all in accordance with the terms of Section 13.5 of the Credit Agreement. SECTION 7. No Defenses, Release. None of the Borrower nor any other Loan Party has any claims, counterclaims, offsets or defenses to the Loan Documents or the Obligations, or if any such Person does have any claims, counterclaims, offsets or defenses to the Loan Documents or the Obligations, the same are hereby waived, relinquished and released in consideration of the execution and delivery of this Second Amendment by the Lenders, the Swingline Lender and the Issuing Lender parties hereto. By its execution hereof and in consideration of the mutual covenants contained herein and the accommodations granted to the Borrower hereunder, the Borrower on behalf of itself and the other Loan Parties expressly waives and releases any and all claims and causes of actions any of them may have, or allege to have (and all defenses which may arise out of any of the foregoing), whether known or unknown, against the Administrative Agent or the Swingline Lender, or the Issuing Lender or any Lender or any of their affiliates, employees, directors, officers, attorneys or agents, arising out of or relating to the credit relationship between the Borrower the Lenders, the Swingline Lender, 64 and the Issuing Lender up to and including the Second Amendment Effective Date. SECTION 8. Execution in Counterparts. This Second Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Second Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Second Amendment. SECTION 9. Governing Law. This Second Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. ENGLE HOMES INC., as Borrower By /s/ Holly Hubenak ------------------- Name: Holly Hubenak Title: Vice President BANK OF AMERICA, N.A., as Administrative Agent for the Lenders By /s/ Mark Lariviere -------------------- Name: Mark W. Lariviere Title: Managing Director BANK OF AMERICA, N.A., as Lender, Swingline Lender and Issuing Lender By /s/ Mark Lariviere -------------------- Name: Mark W. Lariviere Title: Managing Director FLEET NATIONAL BANK, as Lender By /s/ Andrew D. Stickney ------------------------ Name: Andrew D. Stickney Title: Vice President WACHOVIA BANK, N.A., as Lender By /s/ Bruce Perrine, Jr. ------------------------ Name: Bruce Perrine, Jr. Title: Senior Vice President OHIO SAVINGS BANK, as Lender By /s/ Ralph C. Kirk ------------------- Name: Ralph C. Kirk 65 Title: Vice President Acknowledged and Accepted: The Guarantors: ENGLE HOLDINGS CORP., a Delaware corporation By: /s/ Holly Hubenak -------------------- Name: Holly Hubenak Title: Vice President ENGLE HOMES REALTY, INC., a Georgia corporation ENGLE HOMES/ARIZONA, INC., a Florida corporation ENGLE HOMES/ARIZONA CONSTRUCTION, INC., an Arizona corporation ENGLE HOMES/ATLANTA, INC., a Florida corporation BANYAN TRAILS, INC., a Florida corporation ENGLE HOMES/BROWARD, INC., a Florida corporation ENGLE HOMES/COLORADO, INC., a Florida corporation ENGLE HOMES/GEORGIA, INC., a Georgia corporation GREENLEAF HOMES, INC., a Florida corporation ENGLE HOMES/GULF COAST, INC., a Florida corporation ENGLE HOMES/JACKSONVILLE, INC., a Florida corporation By: /s/ Holly Hubenak -------------------- Name: Holly Hubenak Title: Vice President Acknowledged and Accepted: The Guarantors: ENGLE HOMES/LAKE BERNADETTE, INC., a Florida corporation ENGLE HOMES/NORTH CAROLINA, INC., 66 a Florida corporation ENGLE HOMES/ORLANDO, INC., a Florida corporation ENGLE HOMES/PALM BEACH, INC., a Florida corporation ENGLE HOMES/PEMBROKE, INC., a Florida corporation PEMBROKE FALLS REALTY, INC., a Florida corporation PREFERRED BUILDERS REALTY, INC., a Florida corporation PREFERRED HOME MORTGAGE COMPANY, a Florida corporation ENGLE HOMES/SOUTHWEST FLORIDA, INC., a Florida corporation ST. TROPEZ AT BOCA GOLF, INC., a Florida corporation ENGLE HOMES/TEXAS, INC., a Florida corporation UNIVERSAL LAND TITLE, INC., a Florida corporation UNIVERSAL LAND TITLE OF COLORADO, INC., a Colorado corporation ENGLE HOMES/VIRGINIA, INC., a Florida corporation By: /s/ Holly Hubenak -------------------- Name: Holly Hubenak Title: Vice President Acknowledged and Accepted: The Guarantors: UNIVERSAL LAND TITLE OF VIRGINIA, INC., a Virginia corporation UNIVERSAL LAND TITLE OF TEXAS, INC., a Texas corporation UNIVERSAL LAND TITLE AGENCY, INC., an Arizona corporation UNIVERSAL LAND TITLE OF THE PALM BEACHES, LTD., a Florida limited partnership PROFESSIONAL ADVANTAGE TITLE, LTD., a Florida limited partnership 67 THE CENTURY TITLE AGENCY, LTD., a Florida limited partnership EASTERN TITLE SERVICES, LTD., a Florida limited partnership By: UNIVERSAL LAND TITLE, INC. a Florida corporation and its general partner By: /s/ Holly Hubenak -------------------- Name: Holly Hubenak Title: Vice President ENGLE HOMES DELAWARE, INC., a Delaware corporation By: /s/ Mildred Smith -------------------- Name: Mildred Smith Title: President ENGLE HOMES FINANCING, INC., a Delaware corporation By: /s/ Mildred Smith -------------------- Name: Mildred Smith Title: President 68 EXHIBIT A FORM OF CONSENT Dated as of September 20, 2001 Reference is made to that certain Intercreditor Agreement dated as of November 22, 2000, as amended (the "Intercreditor Agreement"; terms used herein but not otherwise defined herein shall have the meaning assigned to such term in the Intercreditor Agreement), by and among (i) Banc of America Mortgage Capital Corporation, as the administrative agent (together with any successor or assign appointed pursuant to the terms of the Acquisition Bridge Loan Documents, the "Acquisition Bridge Agent") for the Acquisition Bridge Lenders and (ii) Bank of America, N.A., as administrative agent (together with any successor or assign appointed pursuant to the terms of the Senior Loan Documents, the "Senior Agent"). Engle Homes Inc. ("Engle") has requested that the Senior Lenders and the Senior Agent enter into a second amendment and waiver to the Senior Credit Agreement (the "Second Amendment") for the purpose of amending Section 10.6 of the Senior Credit Agreement to exclude distributions for taxes made pursuant to Section 10.6(c)(ii) from the determination of the amount of dividends and distributions which are permitted pursuant to Section 10.6(d) of the Senior Credit Agreement. Pursuant to Section 5(a) of the Intercreditor Agreement, the Senior Agent and the Senior Lenders have agreed not to amend Section 10.6 of the Senior Credit Agreement in a manner adverse to the interests of the Acquisition Bridge Lenders without the consent of the Acquisition Bridge Agent on behalf of the Acquisition Bridge Lenders. As a condition precedent to the effectiveness of the Second Amendment, the Senior Agent and the Senior Lenders have required Engle to obtain the consent of the Acquisition Bridge Agent on behalf of the Acquisition Bridge Lenders to the terms of the Second Amendment. Please indicate your consent to the Second Amendment by executing this Consent in the space provided below. This Consent shall be governed by, and construed in accordance with, the laws of the State of New York. BANC OF AMERICA MORTGAGE CAPITAL CORPORATION as Acquisition Bridge Agent and Acquisition Bridge Lender By /s/ Thomas E. Schubert ------------------------- Name: Thomas E. Schubert Title: Managing Director Acknowledged and Accepted: BANK OF AMERICA, N.A. as Senior Agent By /s/ Mark Lariviere -------------------- Name: Mark W. Lariviere Title: Managing Director 69 Exhibit 10.3B EXECUTION COPY THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT THIRD AMENDMENT AND WAIVER, executed this 28th day of February, 2002, to the Credit Agreement dated as of November 22, 2000 (as amended by the First Amendment to the Credit Agreement dated as of January 23, 2001 and the Second Amendment and Waiver to the Credit Agreement dated as of September 20, 2001, the "Credit Agreement") among Engle Homes Inc., a Florida corporation (the "Borrower"), the banks and other financial institutions party thereto (the "Lenders") and Bank of America, N.A., as administrative agent (in such capacity, the "Administrative Agent") for the Lenders. Capitalized terms not otherwise defined herein shall have the same meanings as specified therefor in the Credit Agreement. PRELIMINARY STATEMENTS (1) The Borrower, the Administrative Agent and the Lenders have agreed (a) to amend the Credit Agreement in order, among other things, (i) to consent, as provided for in the definition of "Change of Control", to the appointment of Antonio B. Mon as President and Chief Executive Officer of Borrower and the appointment of Tommy McAden as the Chief Financial Officer of Borrower and (ii) to modify the Revolving Credit Maturity Date and the Term Loan Maturity Date and the other applicable provisions of the Loan Documents to eliminate the extension options set forth therein and (b) to waive any Event of Default under Section 11(m) of the Credit Agreement that may have occurred and be continuing due to the occurrence of a Change of Control resulting solely from the resignation of Alec Engelstein as President and Chief Executive Officer of the Borrower and David Shapiro as Chief Financial Officer of the Borrower and the appointments of Antonio B. Mon and Tommy McAden as described in subclause (a)(i) above prior to the Third Amendment Effective Date (as hereinafter defined). (2) The Borrower, the Administrative Agent and the Lenders have indicated their willingness to agree to the amendments, modifications and waivers described above in Preliminary Statement (1) on the terms and subject to the satisfaction of the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows: SECTION 1. Amendments of Certain Provisions of the Credit Agreement. The Credit Agreement is, on and as of the Third Amendment Effective Date, amended to read as follows: (a) Section 1.1 of the Credit Agreement is hereby amended by amending and restating the following definitions: "Revolving Credit Termination Date": the earlier to occur of (i) November 22, 2002 and (ii) the date of termination in whole of the aggregate Revolving Credit Commitments pursuant to Sections 3.4 or 11 or the date of acceleration of the outstanding Revolving Credit Loans pursuant to Section 11. "Term Loan Maturity Date": the earlier to occur of November 22, 2003 and (ii) the date of termination in whole of the aggregate Term Loan Commitments pursuant to Section 2.3 or Section 11 or the date of acceleration of the outstanding Term Loans pursuant to Section 11. 70 (b) Section 1.1 of the Credit Agreement is hereby further amended by (i) restating subclause (h)(i) of the definition of "Change of Control" to read in its entirety as follows "(i) Antonio B. Mon shall cease to be the President and Chief Executive Officer of the Borrower;", (ii) restating subclause (h)(ii) of the definition of "Change of Control" to read in its entirety as follows: "Tommy McAden shall cease to be the Chief Financial Officer of the Borrower;" and (iii) by replacing the reference to "this clause (g)" in the last sentence of such definition with the new reference "this clause (h)". (c) Section 1.1 of the Credit Agreement is hereby further amended by deleting therefrom the definitions of "Applicable Lenders", "Consenting Lender", "Extension Assuming Lender", "Extension Date", and "Non - Consenting Lender". (d) Section 6.15 of the Credit Agreement is hereby deleted in its entirety. SECTION 2. Waivers. All Defaults and Events of Default under Section 11(m) of the Credit Agreement that may have occurred and be continuing as a result of the occurrence prior to the Third Amendment Effective Date of the Change of Control described in Preliminary Statement (1) to this Amendment and Waiver are, on and as of the Third Amendment Effective Date, hereby waived by the Administrative Agent and the Lenders. SECTION 3. Conditions Precedent to the Effectiveness of this Third Amendment and Waiver. This Third Amendment and Waiver shall become effective as of the first date (the "Third Amendment Effective Date") on which each of the following conditions precedent are satisfied: (a) The Administrative Agent shall have received counterparts of (i) this Third Amendment and Waiver executed by the Borrower, the Parent and the Required Lenders or, as to any Lender, advice satisfactory to the Administrative Agent that such Lender has executed and delivered this Third Amendment and Waiver, and (ii) the Consent to Third Amendment and Waiver attached hereto executed by each of the Loan Parties (other than the Borrower and the Parent). (b) The representations and warranties contained in Section 4 of this Third Amendment and Waiver and each of the Loan Documents shall be correct in all material respects on and as of the Third Amendment Effective Date, before and after giving effect to this Third Amendment and Waiver, as though made on and as of such date (except for any such representation and warranty that, by its terms, refers to a specific date other than the date first above written, in which case as of such specific date). (c) No Default or Event of Default shall have occurred and be continuing (after giving effect to the waiver provided for in Section 2 of this Third Amendment and Waiver). (d) The Borrower shall have paid to the Administrative Agent, for the ratable account of each of the Lenders that has executed and delivered a counterpart of this Third Amendment and Waiver to the Administrative Agent on or prior to the date of this Third Amendment and Waiver (or advised the Administrative Agent in a manner satisfactory to it that such Lender has executed this Third Amendment and Waiver on or prior to the date of this Third Amendment and Waiver), an amendment fee equal to 0.05% of the aggregate Term Loan Commitments and Revolving Credit Commitments of such Lenders. (e) All of the accrued fees and expenses of the Administrative Agent 71 and the Lenders (including the accrued fees and expenses of counsel for the Administrative Agent) shall have been paid in full. The effectiveness of this Third Amendment and Waiver is further conditioned upon the accuracy of all of the factual matters described herein. This Third Amendment and Waiver is subject to the provisions of Section 13.1 of the Credit Agreement. SECTION 4. Representations and Warranties. To induce the Administrative Agent and the Lenders to enter into this Third Amendment and Waiver, the Borrower and each of the other Loan Parties hereby represent and warrant to the Administrative Agent and the Lenders: (a) The Borrower and each other Loan Party (i) has the corporate power and authority to make, deliver and perform this Third Amendment and Waiver or the Consent attached hereto, as applicable, and (ii) has taken all necessary corporate action to authorize the execution, delivery and performance of this Third Amendment and Waiver or such Consent. (b) No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with this Third Amendment and Waiver or the Consent attached hereto or with the execution, delivery, performance, validity or enforceability of this Third Amendment and Waiver or such Consent. (c) This Third Amendment and Waiver and the Consent attached hereto have been duly executed and delivered on behalf of the Borrower and each other Loan Party party to such document. (d) This Third Amendment and Waiver and the Consent attached hereto, when executed, constitute a legal, valid and binding obligation of the Borrower and each other Loan Party party to such document, enforceable against the Borrower and each other Loan Party party to such document in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. SECTION 5. Reference to and Effect on the Loan Documents. (a) On and after the Third Amendment Effective Date, each reference in the Credit Agreement to "this Agreement"; "hereunder", "hereof" or words of like import referring to the Credit Agreement, and each reference in the Notes and each of the other Loan Documents to "the Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended and otherwise modified hereby. (b) The Credit Agreement and each of the other Loan Documents, as amended and otherwise modified by the amendments, modifications and waivers specifically provided above in Sections 1 and 2, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. (c) The execution, delivery and effectiveness of this Third Amendment and Waiver shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Administrative Agent or any of the Lenders under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. 72 SECTION 6. Costs and Expenses. The Borrower hereby agrees to pay on demand all reasonable costs and expenses of the Administrative Agent (including, without limitation, the reasonable fees and expenses of counsel for the Administrative Agent) in connection with the preparation, execution, delivery, administration, modification and amendment of this Third Amendment and Waiver and all of the instruments, agreements and other documents delivered or to be delivered in connection herewith, all in accordance with the terms of Section 13.5 of the Credit Agreement. SECTION 7. Execution in Counterparts. This Third Amendment and Waiver may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Third Amendment and Waiver by telecopier shall be effective as delivery of a manually executed counterpart of this Third Amendment and Waiver. SECTION 8. Governing Law. This Third Amendment and Waiver shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment and Waiver to be executed by their respective officers thereunto duly authorized, as of the date first above written. ENGLE HOMES INC., as Borrower By /s/ Holly Hubenak ----------------- Name: Holly Hubenak Title: Vice President ENGLE HOLDINGS CORP., as Guarantor By /s/ Holly Hubenak ------------------- Name: Holly Hubenak Title: Vice President BANK OF AMERICA, N.A., as Administrative Agent for the Lenders By /s/ Mark W. Lariviere --------------------- Name: Mark W. Lariviere Title: Managing Director BANK OF AMERICA, N.A., as Lender, Swingline Lender and Issuing Lender By /s/ Mark W. Lariviere --------------------- Name: Mark W. Lariviere Title: Managing Director 73 FLEET NATIONAL BANK, as Lender By /s/ Andrew D. Stickney ---------------------- Name: Andrew D. Stickney Title: Vice President WACHOVIA BANK, N.A., as Lender By /s/ Bruce W. Perrine, Jr. ------------------------- Name: Bruce W. Perrine, Jr. Title: Sr. Vice President OHIO SAVINGS BANK, as Lender By /s/ Ralph C. Kirk ----------------- Name: Ralph C. Kirk Title: Vice President 74 CONSENT TO THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT Reference is made to (a) Third Amendment and Waiver to Credit Agreement dated as of February 28th, 2002 (the "Third Amendment and Waiver"; capitalized terms not otherwise defined herein being used herein as defined in the Third Amendment and Waiver and in the Credit Agreement referred to therein), (b) the Credit Agreement dated as of November 22, 2000 (as amended by the First Amendment to the Credit Agreement dated as of January 23, 2001 and the Second Amendment and Waiver to the Credit Agreement dated as of September 20, 2001, the "Credit Agreement") among Engle Homes Inc., a Florida corporation (the "Borrower"), the banks and other financial institutions party thereto (the "Lenders") and Bank of America, N.A., as administrative agent (in such capacity, the "Administrative Agent") for the Lenders and (c) the Guarantee dated as of November 22, 2000 made by the Parent and each Subsidiary of the Borrower in favor of the Administrative Agent for the ratable benefit of the Guaranteed Parties referred to therein (the "Guarantee"). Each of the undersigned, in its capacity as a Subsidiary Guarantor under the Guarantee in favor of the Guaranteed Parties referred to therein hereby consents to the execution, delivery and performance of the Third Amendment and Waiver and confirms and agrees that the Guarantee and each of the other Loan Documents to which it is a party is, and shall continue to be, in full force and effect and is hereby in all respects ratified and confirmed on the Third Amendment Effective Date, except that, on and after the Third Amendment Effective Date, each reference to "the Credit Agreement", "thereunder", "thereof", "therein" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement, as amended and otherwise modified by the Third Amendment and Waiver. This Consent to Third Amendment and Waiver shall be governed by, and construed in accordance with, the laws of the State of New York, excluding (to the fullest extent a New York court would permit) any rule of law that would cause application of the laws of any jurisdiction other than the State of New York. Delivery of an executed counterpart of a signature page of this Consent to Third Amendment and Waiver by telecopier shall be effective as the delivery of a manually executed counterpart of this Consent to Third Amendment and Waiver. ENGLE HOMES REALTY, INC., a Georgia corporation ENGLE HOMES/ARIZONA, INC., a Florida corporation By /s/ Holly Hubenak ------------------- Name: Holly Hubenak Title: Vice President ENGLE HOMES/ARIZONA CONSTRUCTION, INC., an Arizona corporation ENGLE HOMES/ATLANTA, INC., a Florida corporation 75 BANYAN TRAILS, INC., a Florida corporation ENGLE HOMES/BROWARD, INC., a Florida corporation ENGLE HOMES/COLORADO, INC., a Florida corporation ENGLE HOMES/GEORGIA, INC., a Georgia corporation GREENLEAF HOMES, INC., a Florida corporation ENGLE HOMES/GULF COAST, INC., a Florida corporation ENGLE HOMES/JACKSONVILLE, INC., a Florida corporation ENGLE HOMES/LAKE BERNADETTE, INC., a Florida corporation ENGLE HOMES/NORTH CAROLINA, INC., a Florida corporation ENGLE HOMES/ORLANDO, INC., a Florida corporation ENGLE HOMES/PALM BEACH, INC., a Florida corporation By /s/ Holly Hubenak ------------------- Name: Holly Hubenak Title: Vice President ENGLE HOMES/PEMBROKE, INC., a Florida corporation PEMBROKE FALLS REALTY, INC., a Florida corporation PREFERRED BUILDERS REALTY, INC., a Florida corporation PREFERRED HOME MORTGAGE COMPANY, a Florida corporation ENGLE HOMES/SOUTHWEST FLORIDA, INC., a Florida corporation ST. TROPEZ AT BOCA GOLF, INC., a Florida corporation ENGLE HOMES/TEXAS, INC., a Florida corporation UNIVERSAL LAND TITLE, INC., a Florida corporation 76 UNIVERSAL LAND TITLE OF COLORADO, INC., a Colorado corporation ENGLE HOMES/VIRGINIA, INC., a Florida corporation UNIVERSAL LAND TITLE OF VIRGINIA, INC., a Virginia corporation UNIVERSAL LAND TITLE OF TEXAS, INC., a Texas corporation UNIVERSAL LAND TITLE AGENCY, INC., an Arizona corporation By /s/ Holly Hubenak ------------------- Name: Holly Hubenak Title: Vice President UNIVERSAL LAND TITLE OF THE PALM BEACHES, LTD., a Florida limited partnership PROFESSIONAL ADVANTAGE TITLE, LTD., a Florida limited partnership THE CENTURY TITLE AGENCY, LTD., a Florida limited partnership EASTERN TITLE SERVICES, LTD., a Florida limited partnership By: UNIVERSAL LAND TITLE, INC. a Florida corporation and its general partner By /s/ Holly Hubenak ----------------- Name: Holly Hubenak Title: Vice President ENGLE HOMES DELAWARE, INC., a Delaware corporation By /s/ Holly Hubenak ------------------- Name: Holly Hubenak Title: Vice President ENGLE HOMES FINANCING, INC., a Delaware corporation By /s/ Holly Hubenak ------------------- Name: Holly Hubenak Title: Vice President 77 Exhibit 22.1 List of Registrant's Subsidiaries Subsidiary Name State of Incorporation Banyan Trails, Inc. Florida Preferred Builders Realty, Inc. Florida Engle Homes/Orlando, Inc. Florida Preferred Home Mortgage Company Florida St. Tropez At Boca Golf, Inc. Florida Engle Homes/Palm Beach, Inc. Florida Engle Homes/Broward, Inc. Florida Engle Homes/Gulf Coast, Inc. Florida Engle Homes/Texas, Inc. Florida Engle Homes/Pembroke, Inc. Florida Engle Homes/Virginia, Inc. Florida Engle Homes/North Carolina, Inc. Florida Universal Land Title, Inc. Florida Engle Homes/Colorado Inc. Florida Engle Homes/Lake Bernadette, Inc. Florida Engle Homes/Southwest Florida Florida Engle Homes/Arizona, Inc. Florida Engle Homes/Atlanta, Inc. Florida Greenleaf Homes, Inc. Florida Pembroke Falls Realty, Inc. Florida Engle Homes/Arizona Construction, Inc. Arizona Universal Land Title of Colorado, Inc. Colorado Universal Land Title of Texas, Inc. Texas Engle Homes/Jacksonville, Inc. Florida Engle Homes Realty, Inc. Georgia Engle Homes Delaware, Inc. Delaware Engle Homes Financing, Inc. Delaware The Century Title Agency, Ltd. Florida 78 Universal Land Title of the Palm Beaches, Ltd. Florida Professional Advantage Title, Ltd. Florida Universal Land Title of Virginia, Inc. Virginia Universal Land Title Investment #3 L.L.C. Florida Universal Land Title Investment #4 L.L.C. Florida Engle Homes Reinsurance Limited Turks and Caicos TM Investments L.L.C. Texas Engle Homes/Georgia, Inc. Georgia McKay Landing, L.L.C. Colorado Engle/James L.L.C. Colorado 79 -----END PRIVACY-ENHANCED MESSAGE-----