10-Q 1 q901.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ---- EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ------------------ OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ----------- For Quarter Ended Commission file number 0-19633 --------- ------- ENGLE HOMES, INC. -------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) FLORIDA 59-2214791 ------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 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 ---------------------- NONE -------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to filing requirements for the past 90 days. YES x NO ------ ------ Number of shares of common stock outstanding as of September 30, 2001: 100 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENGLE HOMES, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF TECHNICAL OLYMPIC USA, INC.) Condensed Consolidated Balance Sheets (unaudited) (dollars in thousands, except per share data)

2 ENGLE HOMES, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF TECHNICAL OLYMPIC USA, INC.) Condensed Consolidated Statements of Income (Unaudited) (in thousands, except per share data)

3 ENGLE HOMES, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF TECHNICAL OLYMPIC USA, INC.) Condensed Consolidated Statement of Shareholder's Equity For the Nine Months Ended September 30, 2001 (Unaudited) (in thousands except number of shares)

4 ENGLE HOMES, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF TECHNICAL OLYMPIC USA, INC.) Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands)

5 ENGLE HOMES, INC. AND SUBSIDIARIES (A WHOLLY-OWNED SUBSIDIARY OF TECHNICAL OLYMPIC USA, INC.) Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1 BASIS OF PRESENTATION AND BUSINESS Engle Homes, Inc. and subsidiaries are engaged principally in construction and sale of residential homes and land development in Florida; Dallas, Texas; Denver, Colorado; Atlanta, Georgia; Phoenix, Arizona and Virginia. Ancillary products and services to its residential homebuilding include land sales to other builders, origination and sale of mortgage loans, and title transfer 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. 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-Q 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 condensed consolidated financial statements for periods after that date reflect the push-down of the purchase price allocations (based on preliminary estimates and subject to adjustment) made by Technical Olympic to the assets and liabilities of the Company and, therefore, are not comparable to those before the acquisition. The condensed consolidated financial statements for the period from January 1, 2001 through September 30, 2001 are labeled Successor. Statements for the nine months ended October 31, 2000 are based on the historical accounts of the Company and are labeled Predecessor. Had the acquisition been effected as of February 1, 2000, net income for the three months and the nine months ended October 31, 2000 would have been $10.3 million and $29.9 million, respectively. On November 22, 2000, the Company changed its fiscal year from October 31 to December 31. The condensed consolidated financial statements are presented for the three and nine months ended September 30, 2001 and the three and nine months ended October 31, 2000. The Company did not recast the data for the prior year. Therefore, the Company has presented the period in the prior year which would be most comparable due to the effects of seasonal or other factors. Consequently, the results for the three and nine months ended September 30, 2001 are not directly comparable to the three and nine months ended October 31, 2000. The acquisition was valued at approximately $465 million, including the assumption of approximately $250 million of debt. As a result of the push down of the purchase price, the Company recorded goodwill of approximately $15.2 million which is being amortized over 20 years. 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 6 in January 2001, the Company repurchased approximately $237.0 million of $250 million of its Senior Notes. 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. All of the stock of Engle Holdings Corp. and 80% of the stock of Newmark is owned by Technical Olympic. 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 and certain regulatory and other approvals as well as the approval of various lenders of Engle Holdings Corp., the Company, Newmark and Technical Olympic. If the merger is consummated, it is contemplated that shares of Engle Holdings Corp. would be exchanged for shares of Newmark. These statements do not contain all information required by accounting principles generally accepted in the United States that are included in a full set of financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting primarily of normal recurring items necessary to present fairly the financial position of the Company at September 30, 2001 and December 31, 2000, and results of its operations for the three and nine months ended and its cash flows for the nine months ended September 30, 2001 and October 31, 2000. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes contained in the Company's Annual Report on Form 10-K for the year ended October 31, 2000 and the transitional report filed on Form 10-QT for the two months ended December 31, 2000. Results of operations for these periods are not necessarily indicative of results to be expected for the full year. NOTE 2 CONSOLIDATED INCOME TAX RETURNS As a result of the merger as described in Note 1, the Company files consolidated income tax returns with Technical Olympic. For the three and nine months ended September 30, 2001, income taxes are allocated to the Company based upon a "stand alone" computation. NOTE 3 INVENTORIES (dollars in thousands)

7 NOTE 4 CAPITALIZATION OF INTEREST (dollars in thousands) Included in inventory is the following:

NOTE 5 - 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 accoounting 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. 8 Part 1 - Item II MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following table sets forth for the periods indicated certain items of the Company's financial statements expressed as a percentage of the Company's total revenues:

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 contracts 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 six months. The following table sets forth the Company's backlog for the periods indicated:

9 The Company is marketing in 100 subdivisions at September 30, 2001, consisting of 13 subdivisions in South Florida; 26 in Central Florida; 10 in West Coast Florida; 12 in Denver, Colorado; 14 in Dallas, Texas; 8 in Virginia; 16 in Phoenix, Arizona and 1 in Atlanta, Georgia. Result of Operations: Three Months Ended September 30, 2001 compared to the Three Months Ended October 31, 2000. The Company's revenues from home sales for the quarter ended September 30, 2001 increased $18.5 million (or 8.1%) compared to the three months ended October 31, 2000. The number of homes delivered increased 1.6% (to 1,007 from 991) and the average selling price of homes delivered increased 6.5% (to $246,000 from $231,000). 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 $2.8 million (or 1.5%) compared to the quarter ended October 31, 2000 primarily due to the related increase in home sale revenues. Cost of home sales as a percentage of home sales revenue decreased to 78.9% from 84.0% as a result of the product mix of homes delivered. The Company's selling, marketing, general and administrative ("S,G&A") expenses increased approximately $3.9 million (or 18.3%) during the three months ended September 30, 2001, as compared to the three months ended October 31, 2000. S,G&A expense as a percentage of total revenues for the three months ended September 30, 2001 increased to 9.7% compared to 8.9% for the quarter ended October 31, 2000. The increase in S,G&A as a percentage of total revenue is primarily due to higher closing costs related to home sales and performance compensation as a result of increased profitability. Primarily as a result of the increase in revenues and a decrease in cost of home sales, net income increased by $9.1 million in the three months ended September 30, 2001 as compared to the three months ended October 31, 2000. Nine Months Ended September 30, 2001 compared to the Nine Months Ended October 31, 2000. The Company's revenues from home sales for the nine months ended September 31, 2001 increased $60.6 million (or 9.5%) compared to the nine months ended October 31, 2000. The number of homes delivered increased 1.4% (to 2,879 from 2,838) and the average selling price of homes delivered increased 8% (to $243,000 from $225,000). The increase of revenues and homes delivered is primarily attributable to an increased level of backlog at the beginning of the current period compared with the prior year period. 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 $24.5 million (or 4.6%) for the nine months ended September 30, 2001 compared to the nine months ended October 31, 2000 primarily due to the related increase in home sale revenues. Cost of home sales as a percentage of home sales decreased to 79.9% from 83.6% as a result of the product mix of homes delivered. The Company's S,G&A expenses increased approximately $7.6 million (or 12.3%) during the nine months ended September 30, 2001, as compared to the nine 10 months ended October 31, 2000. S,G&A expense as a percentage of total revenues for the nine months ended September 30, 2001 increased to 9.4% compared to 9.2% for the nine months ended October 31, 2000. Primarily as a result of the increase in revenues and a decrease in cost of home sales, net income increased by $19.9 million in the nine months ended September 30, 2001 as compared to October 31, 2000. Liquidity and Capital Resources The Company's financing needs are provided by cash flows from operations and unsecured bank borrowings. Cash flow from operations has improved as a result of increased net income. The Credit Facility and Refinancing. 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 matures November 22, 2003. The revolving credit facility terminates 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. 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 September 30, 2001. During the nine months ended September 30, 2001, the Company made distributions to its parent company of approximately $29.5 million. As of September 30, 2001, $142 million under the revolving credit facility and $100 million under the term notes, both under the Credit Agreement, were outstanding. In addition, Preferred Home Mortgage Company (PHMC) has a warehouse line of credit (including a purchase agreement) in the aggregate amount of $40 million, which is guaranteed by the Company. At September 30, 2001 the outstanding balance was $23.2 million to service origination of mortgage loans. The Company believes the facilities are sufficient for its mortgage banking operation for the remainder of fiscal 2001. Management does not anticipate that any expansion of PHMC's 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 the ability to retain the servicing of loans, however, as of September 30, 2001, the Company has not retained servicing rights relating to loans sold. 11 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 expects to pursue additional land acquisition and development opportunities in the future. During the nine months ended September 30, 2001, the Company sold to an investment limited liability company ("Investment Company") certain undeveloped real estate tracts for a purchase price of $42.4 million. The Investment Company is owned by several of the executive officers or prior stockholders of the Company, including without limitation trusts of the Engelstein family. The Company 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. The Company believes that the terms of the purchase contract and that the terms of the related option and development contracts were comparable to those available from unaffiliated parties. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Report and other such Company filings (collectively, "SEC filings") under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (as well as information communicated orally or in writing between the dates of such SEC filings) contains or may contain information that is forward looking, related to subject matter such as national and local economic conditions, the effect of governmental regulation on the Company, the competitive environment in which the Company operates, changes in interest rates, home prices, availability and cost of land for future growth, availability of working capital and the availability and cost of labor and materials. Such forward looking information involves important risks and uncertainties that could significantly affect expected results. These risks and uncertainties are addressed in this and other SEC filings. Part 1 - Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is exposed to market risk primarily related to potential adverse changes in interest rates as discussed below. The Company's exposure to market risks is changes to interest rates related to the Company's loans. The interest rates relative to the Company's loans fluctuate with the prime and Libor lending rates, both upwards and downwards. 12 Part II - Other Information Item 1. Legal Proceedings. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of the Company's management, the ultimate disposition of these matters is not expected to have a material effect on the financial condition or results of operations of the Company. Item 2. Changes in Securities. None. No disclosure required. Item 3. Defaults Upon Senior Securities. None. No disclosure required. Item 4. Submission of Matters to a Vote of Security Holders. None. No disclosure required. Item 5. Other Information. None. No disclosure required. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. None. (b) Reports on Form 8-K. None. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENGLE HOMES, INC. ----------------- (Registrant) Date: NOVEMBER 7, 2001 \s\ ALEC ENGELSTEIN ------------------------ ------------------------ Alec Engelstein Chief Executive Officer Date: NOVEMBER 7, 2001 \s\ DAVID SHAPIRO ------------------------ ------------------------ David Shapiro Chief Financial Officer 14

ENGLE HOMES INC /FL 10-Q