Technical Olympic USA, Inc.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form
10-K
|
|
|
(Mark One)
|
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
December 31, 2005
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from
to
|
Commission file number: 001-32322
Technical Olympic USA,
Inc.
(Exact Name of Registrant as
Specified in Its Charter)
|
|
|
Delaware
|
|
76-0460831
|
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S. Employer Identification
No.)
|
4000 Hollywood Boulevard,
Suite 500 North
Hollywood, Florida
|
|
33021
|
(Address of Principal Executive
Offices)
|
|
(Zip
Code)
|
Registrants telephone number, including area code:
(954) 364-4000
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which
Registered
|
|
Common Stock, $.01 par value
|
|
New York Stock Exchange
|
9% Senior Notes due 2010
(CUSIP No. 878483 AC0)
|
|
New York Stock Exchange
|
9% Senior Notes due 2010
(CUSIP No. 878483 AG1)
|
|
New York Stock Exchange
|
103/8% Senior
Subordinated Notes due 2012 (CUSIP No. 878483 AD8)
|
|
New York Stock Exchange
|
71/2% Senior
Subordinated Notes due 2011 (CUSIP No. 878483 AJ5)
|
|
New York Stock Exchange
|
71/2% Senior
Subordinated Notes due 2015 (CUSIP No. 878483 AL0)
|
|
New York Stock Exchange
|
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
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 Registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large Accelerated
Filer o Accelerated
Filer þ Non-Accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately
$363.0 million as of June 30, 2005.
As of March 6, 2006, there were 59,554,997 shares of
the Registrants common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive proxy statement for
its 2006 annual meeting of stockholders, which proxy statement
will be filed no later than 120 days after the close of the
Registrants fiscal year ended December 31, 2005, are
hereby incorporated by reference in Part III of this Annual
Report on
Form 10-K.
PART I
We design, build and market high quality detached single-family
residences, town homes, and condominiums. We operate in markets
characterized by strong population and income growth. Currently,
we conduct homebuilding operations through our consolidated
operations and unconsolidated joint ventures in various
metropolitan markets in ten states, located in four major
geographic regions: Florida, the Mid-Atlantic, Texas, and the
West. As used in this
Form 10-K,
consolidated information refers only to information
relating to our operations which are consolidated in our
financial statements; combined information includes
consolidated information and information relating to our
unconsolidated joint ventures.
For the year ended December 31, 2005, on a combined basis,
we delivered 9,435 homes with an average sales price of
$298,000, had 10,623 net sales orders and ended the year
with 10,021 homes in backlog. Our consolidated operations
delivered 7,769 homes in 2005, having an average sales price of
$292,000, had 8,614 net sales orders and generated
$2.5 billion in homebuilding revenues and
$218.3 million in net income. At December 31, 2005, we
had 5,272 consolidated homes in backlog with an aggregate sales
value of $1.8 billion, and our unconsolidated joint
ventures had 4,749 homes in backlog with an aggregate sales
value of $1.5 billion. As of December 31, 2005, we
controlled approximately 94,300 homesites on a combined basis.
We market our homes to a diverse group of homebuyers, including
first-time homebuyers, move-up
homebuyers, homebuyers who are relocating to a new city or
state, buyers of second or vacation homes, active-adult
homebuyers and homebuyers with grown children who want a smaller
home (empty-nesters). We market our homes under
various brand names including Engle Homes, Newmark Homes, Trophy
Homes, and Transeastern Homes.
As part of our objective to provide homebuyers a seamless home
purchasing experience, we have developed, and are expanding, our
complementary financial services business. As part of this
business, we provide mortgage financing, closing and settlement
services, and offer title, homeowners and other insurance
products. Our mortgage financing operations revenues
consist primarily of origination and premium fee income,
interest income and the gain on the sale of the mortgages. We
sell substantially all of our mortgages and the related
servicing rights to third parties. Our mortgage financing
operation derives most of its revenues from buyers of our homes,
although existing homeowners may also use these services. By
comparison, our title and closing services and our insurance
agency operations are used by our homebuyers and a broad range
of other clients purchasing or refinancing residential or
commercial real estate.
For financial information about our homebuilding and financial
services operating segments, please see our consolidated
financial statements on pages F-1 through F-38 of this
Form 10-K.
Business
Strategies
Capitalize
on Growth Potential in Our Current Markets
We believe that a significant portion of our future growth will
stem from our ability to increase our homes sales and capture
additional market share within our current markets. Currently,
we conduct homebuilding operations in various metropolitan
markets, each of which is highly fragmented with other
homebuilders. Our reputation as a high quality homebuilder
combined with our financial resources gives us an advantage over
many smaller homebuilders with whom we compete. Consequently, we
have an opportunity to significantly strengthen our market
position by expanding our product offerings and increasing the
size and number of our active selling communities. Generally,
our current markets have demonstrated solid income and
population growth trends.
2
|
|
|
Expand
Our Use of Joint Ventures and Option Contracts to Maximize our
Return on Equity and Manage Risk
|
We have entered into, and expect to expand our use of, joint
ventures that acquire and develop land for our homebuilding
operations, and/or joint ventures that develop land and also
build and market homes. We believe that these joint ventures
help us acquire attractive land positions, mitigate and share
the risk associated with land ownership and development,
increase our return on equity and extend our capital resources.
In addition, we seek to use option contracts to acquire land
whenever feasible. Option contracts allow us to control
significant homesite positions with minimal capital investment
and substantially reduce the risks associated with land
ownership and development. At December 31, 2005, we
controlled approximately 68,900 homesites on a consolidated
basis of which 60% were controlled through various option
contracts. Additionally, our joint ventures controlled
approximately 25,400 homesites at December 31, 2005.
|
|
|
Grow
Our Financial Services Business
|
Our financial services operations require minimal capital
investment and are financially advantageous because of the cost
savings resulting from using our affiliated mortgage financing
operation and the earnings generated by the high volume of
transactions completed by our title insurance and closing
services operations. We believe that these financial services
complement our homebuilding operations and provide homebuyers a
more efficient and seamless home purchasing experience. For the
year ended December 31, 2005, 65% of our non-cash
homebuyers (excluding the Transeastern joint venture) used our
mortgage services (approximately 11% of our homebuyers paid in
cash), while 91% of our homebuyers used our title and closing
services and 19% used our insurance agencies to obtain
insurance. We believe that we have an opportunity to grow our
financial services business by:
|
|
|
|
|
increasing the percentage of our homebuyers who use our
financial services; and
|
|
|
|
marketing our financial services to buyers of homes built by
other homebuilders, including smaller homebuilders that do not
provide their own financial services.
|
|
|
|
Selectively
Expand Into New Markets
|
We intend to supplement our primary growth strategy of expansion
in our current markets with a disciplined approach to entering
new markets. We select our target geographic markets based on,
among other things, historical and projected population growth,
projected job and income growth, regional economic conditions,
availability of strong management with local expertise, land
availability, single-family home permit activity and price, the
local land development process, consumer tastes, competition,
housing inventory and secondary home sales activity. We believe
this long-term emphasis on geographic diversification across a
range of growing markets with strong fundamentals will enable us
to minimize our exposure to adverse economic conditions,
seasonality and housing cycles in individual local markets. We
may enter new markets through strategic acquisitions of other
homebuilders or through initiating operations using our existing
management expertise and resources.
Homebuilding
Operations
We operate in various metropolitan markets in ten states located
in four major geographic regions: Florida, the Mid-Atlantic,
Texas, and the West. For the year ended December 31, 2005,
Phoenix was our
3
largest metropolitan market, representing approximately 25% of
our combined home deliveries. We currently do not expect the
Phoenix market to represent as large a portion of our combined
home deliveries in 2006.
|
|
|
|
|
|
|
Florida
|
|
Mid-Atlantic
|
|
Texas
|
|
West
|
|
Jacksonville
|
|
Baltimore/Southern Pennsylvania
|
|
Austin
|
|
Colorado
|
Orlando
|
|
Delaware
|
|
Dallas/Ft. Worth
|
|
Las Vegas
|
Southeast Florida
|
|
Nashville
|
|
Houston
|
|
Phoenix
|
Southwest Florida
|
|
Northern Virginia
|
|
San Antonio
|
|
|
Tampa/St. Petersburg
|
|
|
|
|
|
|
Florida. Our Florida region is comprised of
five metropolitan markets: Jacksonville; Orlando; Southeast
Florida, which is comprised of Miami-Dade, Broward, Palm Beach,
Martin, St. Lucie, and Indian River Counties; and Southwest
Florida, which is comprised of the Fort Myers/ Naples area.
Our Transeastern joint venture operates in these Florida markets
as well as the Tampa/St. Petersburg area. For the year ended
December 31, 2005, our consolidated operations delivered
2,785 homes in Florida, generating revenue of
$829.4 million, or 36.6% of our consolidated revenues from
home sales.
Mid-Atlantic. Our Mid-Atlantic region is
comprised of four metropolitan markets: Baltimore,
Maryland/Southern Pennsylvania; Delaware; Nashville, Tennessee;
and Northern Virginia. For the year ended December 31,
2005, our consolidated operations delivered 697 homes in our
Mid-Atlantic region generating revenue of $290.3 million,
or 12.8% of our consolidated revenues from home sales.
Texas. Our Texas region is comprised of four
metropolitan markets: Austin; Dallas/Ft. Worth; Houston;
and San Antonio. For the year ended December 31,2005,
our consolidated operations delivered 2,059 homes in Texas,
generating revenue of $500.6 million, or 22.1% of our
consolidated revenues from home sales.
West. Our West region is comprised of three
metropolitan markets: Colorado, which is comprised of Denver,
Boulder and Colorado Springs; Las Vegas, Nevada; and Phoenix,
Arizona. For the year ended December 31, 2005, our
consolidated operations delivered 2,228 homes in our West region
generating revenue of $646.3 million, or 28.5% of our
consolidated revenues from home sales.
In addition to these consolidated deliveries, our unconsolidated
joint ventures delivered an additional 1,666 homes during the
year ended December 31, 2005.
We select our product mix in a particular geographic market
based on the demographics of the market, demand for a particular
product, margins and the economic strength of the market. We
regularly review our product mix in each of our markets so that
we can quickly respond to market changes and opportunities.
For the year ended December 31, 2005, 36% of our combined
home deliveries were from homes in the $200,000 to $300,000
price range, 26% of our combined home deliveries were from homes
in the $300,000 to $400,000 price range, 22% of our combined
home deliveries were from homes in the under $200,000 price
range, and 16% of our combined home deliveries were from homes
in the over $400,000 price range. For 2005, 85% of our combined
home deliveries were generated from single family homes and 15%
of our combined home deliveries were generated from multi-family
homes, as compared to 88% of our combined home deliveries from
single family homes and 12% of our combined home deliveries from
multi-family homes for the year ended December 31, 2004.
Land is a key raw material and one of our most valuable assets.
We believe that by acquiring land and homesites in premier
locations, we enhance our competitive standing and reduce our
exposure to economic downturns. We believe that homes in premier
locations continue to attract homebuyers in both strong and weak
economic conditions. We consider that our disciplined
acquisition strategy of balancing homesites and land we own and
those we can acquire under option contracts provides us access
to a substantial supply of quality homesites and land while
conserving our invested capital, optimizing our returns, and
managing risk.
4
Types of Land and Homesites. In our
homebuilding operations, we generally acquire land or homesites
that are entitled. Land is entitled when all
requisite residential zoning has been obtained for it.
Competition for attractive land in certain of our more active
markets, however, leads us to acquire land that is not yet
entitled and undertake the entitlement process ourselves.
We also generally seek to acquire entitled land and homesites
that have water and sewage systems, streets and other
infrastructure in place (we refer to these properties as
developed homesites) because they are ready to have
homes built on them. When we acquire entitled homesites that are
not developed, we must first put in place the necessary
infrastructure before commencing construction. However, we
believe that there are economic benefits to undertaking the
development of some of the land that we may acquire, and in
those cases, we will attempt to take advantage of those economic
benefits by engaging in land development activities. In some of
these cases, we seek to use special assessment districts to
finance any necessary public infrastructure improvements and the
costs of land development. These special assessment districts
typically issue tax exempt bonds to finance these improvements
and costs. These tax exempt bonds are typically secured by the
property, are non-recourse to us and are repaid from assessments
levied on the property.
We generally acquire homesites that are located adjacent to or
near our other homesites in a community, which enables us to
build and market our homes more cost efficiently than if the
homesites were scattered throughout the community. Cost
efficiencies arise from economies of scale, such as shared
marketing expenses and project management.
Land Acquisition Policies. We have adopted
strict land acquisition policies and procedures that cover all
homesite acquisitions, including homesites acquired through
option contracts. These policies and procedures impose strict
standards for assessing all proposed land purchases with the
goal of minimizing risk and maximizing our financial returns.
Initially, our experienced management teams in each of our
divisions conduct extensive analysis on the local market to
determine if we want to enter or expand our operations in that
market. As part of this analysis, we consider a variety of
factors, including:
|
|
|
|
|
historical and projected population and employment rates for the
surrounding area;
|
|
|
|
demographic information such as age, education and economic
status of the homebuyers in the area;
|
|
|
|
suitability for development within two to four years of
acquisition;
|
|
|
|
desirability of location, including proximity to metropolitan
area, local traffic corridors and amenities; and
|
|
|
|
prices of comparable new and resale homes in the area.
|
We then evaluate and identify specific homesites in desirable
locations that are consistent with our strategy for the
particular market, including the type of home and anticipated
sales price that we wish to offer in the community. In addition,
we review:
|
|
|
|
|
estimated costs of completed homesite development;
|
|
|
|
current and anticipated competition in the area, including the
type and anticipated sales prices of homes offered by our
competitors;
|
|
|
|
opportunity to acquire additional homesites in the future, if
desired; and
|
|
|
|
results of financial analyses, such as projected profit margins
and return on invested capital.
|
In addition, we conduct environmental due diligence, including
on-site
inspection and soil testing, and confirm that the land has, or
is reasonably likely to obtain, the necessary zoning and other
governmental entitlements required to develop and use the
property for residential home construction.
Each land acquisition proposal, which contains specific
information relating to the market, property and community, is
then subject to review and approval by our Asset Committee. The
Asset Committee is
5
comprised of representatives from our land, finance, sales and
marketing, product development, supply management, and legal
departments.
Land Supply. We acquire the land and homesites
we require for our homebuilding operations through a combination
of purchase agreements, option contracts and joint ventures. At
December 31, 2005, we controlled approximately 94,300
combined homesites in our homesite inventory. Of this amount, we
owned approximately 27,300 homesites, had option contracts on
approximately 41,600 homesites and our unconsolidated joint
ventures controlled approximately 25,400 homesites. This
represents supply for approximately 10.0 years of
operations, based on our 2005 deliveries. The table below shows
our approximate homesite inventory by region and in total for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
20,100
|
|
|
|
17,000
|
|
|
|
19,900
|
|
Mid-Atlantic
|
|
|
7,300
|
|
|
|
5,900
|
|
|
|
4,900
|
|
Texas
|
|
|
12,400
|
|
|
|
6,200
|
|
|
|
8,100
|
|
West
|
|
|
29,100
|
|
|
|
15,900
|
|
|
|
15,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
|
68,900
|
|
|
|
45,000
|
|
|
|
48,200
|
|
Unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
19,800
|
|
|
|
200
|
|
|
|
|
|
Mid-Atlantic
|
|
|
400
|
|
|
|
600
|
|
|
|
|
|
Texas
|
|
|
500
|
|
|
|
|
|
|
|
|
|
West
|
|
|
4,700
|
|
|
|
4,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated joint ventures total
|
|
|
25,400
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined total(1)
|
|
|
94,300
|
|
|
|
50,000
|
|
|
|
48,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes approximately 60,700, 36,000, and 35,800 homesites
under option contracts by us and our unconsolidated joint
ventures as of December 31, 2005, 2004, and 2003,
respectively.
|
Option Contracts. Option contracts allow us to
control significant homesite positions with minimal capital
investment, allowing us to increase our return on equity, extend
our capital resources and manage the risks associated with land
ownership and development. Consequently, we seek to use option
contracts to acquire land whenever feasible. Under the option
contracts, we have the right, but not the obligation, to buy
homesites at predetermined prices on a predetermined takedown
schedule anticipated to be commensurate with home starts. Option
contracts generally require the payment of a cash deposit or the
posting of a letter of credit, which is typically less than 20%
of the underlying purchase price. These option contracts are
either with land sellers or financial investors who have
acquired the land to enter into the option contract with us.
Homesite option contracts are generally nonrecourse, thereby
limiting our financial exposure for non-performance to our cash
deposits and/or letters of credit. At December 31, 2005, we
had option contracts on approximately 41,600 homesites and had
approximately $218.5 million in cash deposits and
$186.9 million in letters of credit under those option
contracts. At December 31, 2005, our unconsolidated joint
ventures had option contracts on approximately 19,100 homesites.
Joint Ventures. We believe that using joint
ventures in our homebuilding operations to acquire and develop
land and/or to acquire and develop land and build and market
homes helps us acquire attractive land positions, mitigate and
share the risks associated with land ownership and development,
increase our return on equity and extend our capital resources.
We significantly expanded our use of joint ventures during the
year ended December 31, 2005, through our acquisition of
the homebuilding assets and operations of Transeastern
Properties, Inc. We expect to continue to use joint ventures in
the future.
6
Our partners in these joint ventures generally are unrelated
homebuilders, land sellers, financial investors, or other real
estate entities. In joint ventures where the acquisition,
development and/or construction of the property are being
financed with debt, the borrowings are non-recourse to us,
except that we have agreed to complete certain property
development commitments in the event the joint ventures default
and to indemnify the lenders for losses resulting from fraud,
misappropriation and similar acts. In addition to joint ventures
that acquire and develop land for our homebuilding operations,
and/or joint ventures that develop land and also build and
market homes, we have, on a selective basis, entered into joint
ventures that acquire and develop land for sale to unrelated
third party builders.
At December 31, 2005, our joint ventures controlled
approximately 25,400 homesites. At December 31, 2005, we
had investments in and receivables from unconsolidated joint
ventures of $315.0 million. During the year ended
December 31, 2005, our unconsolidated joint ventures had a
total of 2,009 net sales orders and 1,666 homes delivered,
and at year end our unconsolidated joint ventures had 4,749
homes in backlog with a sales value of $1.5 billion.
Land Sales. As part of our land inventory
management strategy, we regularly review our land portfolio to
determine whether to sell all or a portion of the homesites and
land that we have purchased to capitalize on market
opportunities. Our division managers are constantly reviewing
the competitive landscape and characteristics of each of our
local markets. As a result of these reviews, we will seek to
sell land when we have changed our strategy for a certain
property or market and/or we have determined that the potential
profit realizable from a sale of property outweighs the
economics of developing a community. Land sales are incidental
to our homebuilding operations and may fluctuate significantly
from period to period. Revenues from land sales for the year
ended December 31, 2005 were $194.9 million, as
compared to $115.8 million for the year ended
December 31, 2004.
We use our purchasing power and a team-oriented sourcing
methodology to achieve volume discounts and the best possible
service from our suppliers, thereby reducing costs, ensuring
timely deliveries and reducing the risk of supply shortages due
to allocations of materials. Our team-oriented sourcing
methodology involves the use of corporate, regional, and
divisional teams of supply management personnel who are
responsible for identifying which commodities should be
purchased and used on a national, regional, or divisional level
to optimize our purchasing power. We have negotiated price
arrangements, which we believe are favorable, to purchase
lumber, sheetrock, appliances, heating and air conditioning,
counter tops, bathroom fixtures, roofing and insulation
products, concrete, bricks, floor coverings and other housing
equipment and materials. Our purchase contracts are with high
quality national and regional suppliers and do not have any
minimum purchase requirements.
Our supply management team uses our quality control and safety
database to monitor and assess the effectiveness of our
suppliers and subcontractors within our overall building
processes. In addition, our design process includes input from
our supply management team to develop product designs that take
into account standard material sizes and quantities with the
goal of creating product designs that eliminate unnecessary
material and labor costs.
To appeal to the tastes and preferences of local communities, we
expend considerable effort in developing an appropriate design
and marketing concept for each community, including determining
the size, style and price range of the homes and, in certain
projects, the layout of streets, individual homesites and
overall community design. In addition, in certain markets,
outside architects who are familiar with the local communities
in which we build, assist us in preparing home designs and floor
plans. The product line that we offer in a particular community
depends upon many factors, including the housing generally
available in the area, the needs of the particular market and
our costs of homesites in the community. To improve the
efficiency of our design process and make full use of our
resources and expertise, we maintain a company-wide database of
detailed information relating to the design and construction of
our homes, including
7
architectural plans previously or currently used in our
communities. We also use an accelerated product development
process that involves gathering our architects, strategic
suppliers and subcontractors, and divisional management teams
together in intensive working sessions intended to allow us to
develop and deploy new product designs faster than the industry
norm. As discussed above, this cross-functional approach to
product development and design also focuses on reducing costs
and inefficiencies in the building process by ensuring that the
design process takes into account supply management, building
technology and sales and marketing issues.
We maintain design centers in most of our markets as part of our
marketing process and to assist our homebuyers in selecting
options and upgrades, which can result in additional revenues.
The design centers heighten interest in our homes by allowing
homebuyers to participate in the design process and introducing
homebuyers to the various flooring, lighting, fixture and
hardware options available to them. In keeping with our regional
approach, each region decides what type of design center is
suitable for the local area. While the size and content of our
design centers vary between markets, the focus of all of our
design centers is on making the homebuyers selection
process less complicated and an enjoyable experience, while
increasing our profitability.
Subcontractors perform substantially all of our construction
work. Our construction superintendents monitor the construction
of each home, coordinate the activities of subcontractors and
suppliers, subject the work of subcontractors to quality and
cost controls and monitor compliance with zoning and building
codes. We typically retain subcontractors pursuant to a contract
that obligates the subcontractor to complete construction at a
fixed price in a workmanlike manner. In addition,
under these contracts the subcontractor generally provides us
with standard indemnifications and warranties. Typically, we
work with the same subcontractors within each market, which
provides us with a stable and reliable work force and better
control over the costs and quality of the work performed.
Although we compete with other homebuilders for qualified
subcontractors, we have established long-standing relationships
with many of our subcontractors and have not experienced any
material difficulties in obtaining the services of desired
subcontractors.
We typically complete the construction of a home within four to
ten months after the receipt of relevant permits. Construction
time, however, depends on weather, availability of labor,
materials and supplies, and other factors. We do not maintain
significant inventories of construction materials, except for
materials related to work in progress for homes under
construction. While the availability and cost of construction
materials may be negatively impacted from time to time due to
various factors, including weather conditions, generally, the
construction materials used in our operations are readily
available from numerous sources. We have established price
arrangements or contracts, which we believe are favorable, with
suppliers of certain of our building materials, but we are not
under specific purchasing requirements.
We have, and will continue to establish and maintain,
information systems and other practices and procedures that
allow us to effectively manage our subcontractors and the
construction process. For example, we have implemented
information systems that monitor homebuilding production,
scheduling and budgeting. We also strongly encourage our
subcontractors to participate in a peer review process using an
independent quality control database designed to assist us in
identifying and addressing quality control issues and operating
inefficiencies. We believe that this program has and will
continue to improve our efficiency and decrease our construction
time.
We currently market our homes primarily under the Engle Homes
brand name in Florida, most of the Mid-Atlantic, and the West,
and under the Newmark Homes brand name in Texas and in
Nashville, Tennessee. We also market our homes targeted to
first-time homebuyers under the Trophy Homes brand
name, and we market homes in Florida through an unconsolidated
joint venture using the Transeastern Homes brand name.
8
We have recently consolidated our brands to leverage our most
successful brands and reduce the costs associated with
maintaining multiple brands. We believe our brands are widely
recognized in the markets in which we operate for providing
quality homes in desirable locations and enjoy a solid
reputation among potential homebuyers.
We build and market different types of homes to meet the needs
of different homebuyers and the needs of different markets. We
employ a variety of marketing techniques to attract potential
homebuyers through numerous avenues, including Internet web
sites for our various homebuilding brands, advertising and other
marketing programs. We advertise on television, in newspapers
and other publications, through our own brochures and
newsletters, on billboards, and in brochures and newsletters
produced and distributed by real estate and mortgage brokers.
We typically conduct home sales activities from sales offices
located in furnished model homes in each community. We use
commissioned sales personnel who assist prospective buyers by
providing them with floor plans, price information, tours of
model homes and information on the available options and other
custom features. We provide our sales personnel with extensive
training, and we keep them updated as to the availability of
financing, construction schedules and marketing and advertising
plans to facilitate their marketing and sales activities. We
supplement our in-house training program with training by
outside marketing and sales consultants.
We market and sell homes through our own sales personnel and in
cooperation with independent real estate brokers. Because
approximately 65% of our sales (based on combined homes
delivered) originate from independent real estate brokers, we
sponsor a variety of programs and events, including breakfasts,
contests and other events to provide the brokers with a level of
familiarity with our communities, homes and financing options
necessary to successfully market our homes.
Sales of our homes generally are made pursuant to a standard
sales contract that is tailored to the requirements of each
jurisdiction. Generally, our sales contracts require a deposit
of a fixed amount or percentage, typically averaging about five
percent of the purchase price, plus additional deposits for
options and upgrades selected by homebuyers. The contract
typically includes a financing contingency which permits the
customer to cancel in the event mortgage financing cannot be
obtained within a specified period, usually 30 days from
the signing. The contract may include other contingencies, such
as the prior sale of a buyers existing home. We estimate
that the average period between the execution of a sales
contract for a presold home and closing ranges from four months
to over a year, depending on the market.
|
|
|
Customer
Service and Quality Control
|
Our operating divisions are responsible for both pre-delivery
quality control inspections and responding to customers
post-delivery needs. We believe that the prompt, courteous
response to homebuyers needs reduces post-delivery repair
costs, enhances our reputation for quality and service and
ultimately leads to significant repeat and referral business. We
conduct home orientations and pre-delivery inspections with
homebuyers immediately before closing. In conjunction with these
inspections, we create a list of unfinished construction items
and address outstanding issues promptly.
An integral part of our customer service program includes
post-delivery surveys. In most of our markets we contract with
independent third parties to conduct periodic post-delivery
evaluations of the customers satisfaction with their home,
as well as the customers experience with our sales
personnel, construction department and title and mortgage
services. Typically, we use a national customer satisfaction
survey company to mail customer satisfaction surveys to
homeowners within 60 days of their home closing. These
surveys provide us with a direct link to the customers
perception of the entire buying experience as well as valuable
feedback on the quality of the homes we deliver and the services
we provide.
For all homes we build, we provide our homebuyers with a
one-year or two-year limited warranty on workmanship and
materials, and a five to ten-year limited warranty covering
major structural defects. The
9
extent of these warranties may differ in some or all of the
states in which we operate. We currently have a homebuilder
protective policy which covers warranty claims for structure and
design defects related to homes sold by us during the policy
period, subject to a significant self-insured retention per
occurrence. We have a warranty administration program in
conjunction with our homebuilder protective policy insurance
carrier that we believe will allow us to more effectively manage
and resolve our warranty claims. We subcontract homebuilding
work to subcontractors who generally provide us with an
indemnity and a certificate of insurance before receiving
payments for their work and, therefore, claims relating to
workmanship and materials are the primary responsibility of our
subcontractors. However, there is no assurance that we will be
able to enforce these contractual indemnities. After we deliver
a home, we process all warranty requests through our customer
service departments located in each of our markets. If a
warranty repair is necessary, we manage and supervise the repair
to ensure that the appropriate subcontractor takes prompt and
appropriate corrective action. Additionally, we have developed a
pro-active response and remediation protocol to address any
warranty claim that may result in mold damage. We generally have
not had any material litigation or claims regarding warranties
or latent defects with respect to construction of homes. Current
claims and litigation are expected to be substantially covered
by our reserves or insurance.
Financial
Services
As part of our objective to provide homebuyers a seamless home
purchasing experience, we have developed, and are expanding, our
complementary financial services business. As part of this
business, we provide mortgage financing, closing and settlement
services, and offer title, homeowners and other insurance
products. Our mortgage financing operation derives most of its
revenues from buyers of our homes, although existing homeowners
may also use these services. By comparison, our title and
closing services and our insurance agency operations are used by
our homebuyers and a broad range of other clients purchasing or
refinancing residential or commercial real estate.
Our mortgage business provides a full selection of conventional,
FHA-insured and VA-guaranteed mortgage products to our
homebuyers. We are an approved Fannie Mae seller/servicer. We
sell substantially all of our loans and the related servicing
rights to third party investors. We conduct this business
through our subsidiary, Preferred Home Mortgage Company, which
has its headquarters in Tampa, Florida and has offices in each
of our markets.
For the year ended December 31, 2005, approximately 11% of
our homebuyers paid in cash and 65% (excluding the Transeastern
JV) of our non-cash homebuyers utilized the services of our
mortgage business. During 2005, we closed 7,232 loans totaling
$1.3 billion in principal amount.
Through our title services business, we, as agent, obtain
competitively-priced title insurance for, and provide closing
services to, our homebuyers as well as third party homebuyers.
We conduct this business through our subsidiary, Universal Land
Title, Inc. and its subsidiaries.
Universal Land Title works with national underwriters and
lenders to facilitate client service and coordinates closings at
its offices. It is equipped to handle
e-commerce
applications,
e-mail
closing packages and digital document delivery. The principal
sources of revenues generated by our title insurance business
are fees paid to Universal Land Title for title insurance
obtained for our homebuyers and other third party residential
purchasers. Universal Land Title operates as a title agency with
its headquarters in West Palm Beach, Florida and has 29
additional offices.
For the year ended December 31, 2005, approximately 91% of
our homebuyers used Universal Land Title or its affiliates for
their title insurance agency and closing services. We continue
to expand our title services business to markets not currently
served by Universal Land Title. Third party homebuyers (or
non-company customers) accounted for 73% of our title services
business revenue for the year ended December 31, 2005.
Alliance Insurance and Information Services, LLC, owned by
Universal Land Title, is a full service insurance agency serving
all of our markets. Alliance markets homeowners, flood and
auto insurance directly to homebuyers and others in all of our
markets and also markets life insurance in Florida. Interested
homebuyers obtain free quotes and have the necessary paperwork
delivered directly to the closing table for
10
added convenience. For the year ended December 31, 2005,
19% of our new homebuyers used Alliance for their insurance
needs.
Governmental
Regulation
We must comply with federal, state, and local laws and
regulations relating to, among other things, zoning, treatment
of waste, land development, required construction materials,
density requirements, building design, and elevation of homes in
connection with the construction of our homes. These include
laws requiring use of construction materials that reduce the
need for energy-consuming heating and cooling systems. In
addition, we and our subcontractors are subject to laws and
regulations relating to employee health and safety. These laws
and regulations are subject to frequent change and often
increase construction costs. In some cases, there are laws
requiring that commitments to provide roads and other
infrastructure be in place prior to the commencement of new
construction. These laws and regulations are usually
administered by individual counties and municipalities and may
result in fees and assessments or building moratoriums. In
addition, certain new development projects are subject to
assessments for schools, parks, streets and highways and other
public improvements, the costs of which can be substantial.
The residential homebuilding industry also is subject to a
variety of local, state and federal statutes, ordinances, rules
and regulations concerning the protection of health and the
environment. The requirements, interpretation and/or enforcement
of these environmental laws and regulations are subject to
change. Environmental laws and conditions may result in delays,
may cause us to incur substantial compliance and other costs and
can prohibit or severely restrict homebuilding activity in
environmentally sensitive regions or areas. In recent years,
several cities and counties in which we have developments have
submitted to voters and/or approved slow growth or
no growth initiatives and other ballot measures,
which could impact the affordability and availability of homes
and land within those localities.
Our title insurance agency subsidiaries must comply with
applicable insurance laws and regulations. Our mortgage
financing subsidiary must comply with applicable real estate
lending laws and regulations. In addition, to make it possible
for purchasers of some of our homes to obtain FHA-insured or
VA-guaranteed mortgages, we must construct those homes in
compliance with regulations promulgated by those agencies.
The mortgage financing and title insurance subsidiaries are
licensed in the states in which they do business and must comply
with laws and regulations in those states regarding mortgage
financing, homeowners insurance, and title insurance
companies. These laws and regulations include provisions
regarding capitalization, operating procedures, investments,
forms of policies, and premiums.
Competition
and Market Forces
The development and sale of residential properties is a highly
competitive business. We compete in each of our markets with
numerous national, regional, and local builders on the basis of
a number of interrelated factors including location, price,
reputation, amenities, design, quality, and financing. Builders
of new homes compete for homebuyers, and for desirable
properties, raw materials, and reliable, skilled subcontractors.
We also compete with resales of existing homes, available rental
housing and, to a lesser extent, resales of condominiums. We
believe we generally compare favorably to other builders in the
markets in which we operate, due primarily to:
|
|
|
|
|
our experience within our geographic markets;
|
|
|
|
the ability of our local managers to identify and quickly
respond to local market conditions; and
|
|
|
|
our reputation for service and quality.
|
The housing industry is cyclical and is affected by consumer
confidence levels and prevailing economic conditions, including
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 the costs
thereof, changes in costs associated with home ownership such as
increases in property taxes, energy costs, changes in consumer
preferences, demographic trends, and the availability of and
changes in mortgage financing programs.
11
We compete with other mortgage lenders, including national,
regional and local mortgage bankers, mortgage brokers, banks,
and other financial institutions, in the origination, sale, and
servicing of mortgage loans. Principal competitive factors
include interest rates and other features of mortgage loan
products available to the consumer. We compete with other
insurance agencies, including national, regional, and local
insurance agencies, and attorneys in the sale of title
insurance, homeowner insurance, and related insurance services.
Principal competitive factors include the level of service
available, technology, cost and other features of insurance
products available to the consumer.
Seasonality
The homebuilding industry tends to be seasonal, as generally
there are more homes sold in the spring and summer months when
the weather is milder, although the number of sales contracts
for new homes is highly dependent on the number of active
communities and the timing of new community openings. Because
new home deliveries trail new home contracts by a number of
months, we typically have the greatest percentage of home
deliveries in the fall and winter, and slow sales in the spring
and summer months could negatively affect our full year results.
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. Our
operations in Florida and Texas are at risk of repeated and
potentially prolonged disruptions during the Atlantic hurricane
season, which lasts from June 1 until November 30.
Backlog
At December 31, 2005, our consolidated operations had 5,272
homes in backlog representing $1.8 billion in revenue, as
compared to 5,094 homes in backlog representing
$1.6 billion in revenue as of December 31, 2004. In
addition, our unconsolidated joint ventures had 4,749 homes in
backlog at December 31, 2005, as compared to 669 homes at
December 31, 2004. Backlog represents home purchase
contracts that have been executed and for which earnest money
deposits have been received, but for which the sale has not yet
closed. We do not record home sales as revenues until the
closings occur. Historically, most of the homes in our backlog
at any given point in time have been closed in the following
12-month
period. Although cancellations can disrupt anticipated home
closings, we believe that cancellations have not had a material
negative impact on our operations or liquidity during the last
several years. We attempt to reduce the number of cancellations
by reviewing each homebuyers ability to obtain mortgage
financing early in the sales process and by closely monitoring
the mortgage approval process. Our combined home cancellation
rate for the year ended December 31, 2005 was approximately
17%, as compared to 16% for the year ended December 31,
2004.
Employees
At December 31, 2005, we employed 2,467 people in our
consolidated operations and our unconsolidated joint ventures
employed an additional 580 people. None of our employees are
covered by collective bargaining agreements. We believe our
relations with our employees are good.
Risks
Related to Our Business
Economic
downturns, excess housing supply or decreased consumer
confidence in the geographic areas in which we operate could
adversely affect demand and prices for new homes in those areas
and could have an adverse effect on our revenues and
earnings.
Although we operate in various major metropolitan markets, our
operations are concentrated in Florida, Texas, and Arizona.
Adverse economic or other business conditions, including excess
housing supply or decreased consumer confidence in the real
estate market in these regions or in any of the particular
markets in which we operate, all of which are outside of our
control, could have an adverse effect on our revenues and
earnings.
12
We may
not be able to acquire suitable land at reasonable prices, which
could increase our costs and reduce our earnings and profit
margins.
We have experienced an increase in competition for available
land and developed homesites in most of our markets as a result
of the strength of the economy in many of these markets over the
past few years and the availability of more capital to major
homebuilders. Our ability to continue our development activities
over the long-term depends upon our ability to locate and
acquire suitable parcels of land or developed homesites to
support our homebuilding operations. As competition for land
increases, the cost of acquiring it may rise, and the
availability of suitable parcels at acceptable prices may
decline. If we are unable to acquire suitable land or developed
homesites at reasonable prices, it could limit our ability to
develop new projects or result in increased land costs that we
may not be able to pass through to our customers. Consequently,
it could reduce our earnings and profit margins.
Changes
in economic or other business conditions could cause our
significant level of debt to adversely affect our financial
condition and prevent us from fulfilling our debt service
obligations.
We currently have a significant amount of debt, and our ability
to meet our debt service obligations will depend on our future
performance. Numerous factors outside of our control, including
changes in economic or other business conditions generally, or
in the markets or industry in which we do business, may
adversely affect our operating results and cash flows, which in
turn may affect our ability to meet our debt service
obligations. As of December 31, 2005, on a consolidated
basis, we had approximately $876.6 million aggregate
principal amount of debt outstanding (excluding obligations for
inventory not owned of $124.6 million and the impact of
original issue discounts and premiums), of which
$810.0 million in aggregate principal amount matures in
2010 through 2015. As of December 31, 2005, we would have
had the ability to borrow an additional $316.1 million
under our revolving credit facility, subject to our satisfying
the relevant borrowing conditions in that facility. In addition,
subject to restrictions in our financing documents, we may incur
additional debt.
If we are unable to meet our debt service obligations, we may
need to restructure or refinance our debt, seek additional
equity financing or sell assets. We may be unable to restructure
or refinance our debt, obtain additional equity financing or
sell assets on satisfactory terms or at all.
Our
debt instruments impose significant operating and financial
restrictions, which may limit our ability to finance future
operations or capital needs and pursue business opportunities,
thereby limiting our growth.
The indentures governing our outstanding notes and our revolving
credit facility impose significant operating and financial
restrictions on us. These restrictions limit our ability to,
among other things:
|
|
|
|
|
incur additional debt;
|
|
|
|
pay dividends or make other restricted payments;
|
|
|
|
create or permit certain liens, other than customary and
ordinary liens;
|
|
|
|
sell assets other than in the ordinary course of our business;
|
|
|
|
invest in joint ventures above the amounts established in such
instruments;
|
|
|
|
create or permit restrictions on the ability of our restricted
subsidiaries to pay dividends or make other distributions to us;
|
|
|
|
engage in transactions with affiliates; and
|
|
|
|
consolidate or merge with or into other companies or sell all or
substantially all of our assets.
|
These restrictions could limit our ability to finance our future
operations or capital needs, make acquisitions, or pursue
available business opportunities. In addition, our revolving
credit facility requires us to maintain specified financial
ratios and satisfy certain financial covenants, the indentures
governing our
13
outstanding notes require us to maintain a specified minimum
consolidated net worth, and our warehouse lines of credit
require us to maintain the collateral value of our borrowing
base. We may be required to take action to reduce our debt or to
act in a manner contrary to our business objectives to meet
these ratios and satisfy these covenants. A breach of any of the
covenants in, or our inability to maintain the required
financial ratios under, our revolving credit facility and
warehouse lines of credit would prevent us from borrowing
additional money under those facilities and could result in a
default under those facilities and our other debt obligations.
Our failure to maintain the specified minimum consolidated net
worth under the indentures will require us to offer to purchase
a portion of our outstanding notes. If we fail to purchase these
notes, it would result in a default under the indentures and may
result in a default under other debt facilities.
We may
not be successful in our effort to identify, complete, integrate
and/or manage acquisitions or joint ventures, which could
adversely affect our results of operations and future
growth.
A principal component of our strategy is to continue to grow
profitably in a controlled manner, including, where appropriate,
by acquiring other property developers or homebuilders or by
entering into joint ventures. We may not be successful in
implementing our acquisition or joint venture strategy, and
growth may not continue at historical levels or at all. The
failure to identify or complete business acquisitions or joint
ventures, successfully integrate the businesses we acquire, or
otherwise realize the expected benefits of any acquisitions or
joint ventures, could adversely affect our results of operations
and future growth. Even if we overcome these challenges and
risks, we may not realize the expected benefits of our
acquisitions or joint ventures, if any.
We may
need additional financing to fund our operations or for the
expansion of our business, and if we are unable to obtain
sufficient financing or such financing is obtained on adverse
terms, we may not be able to operate or expand our business as
planned, which could adversely affect our results of operations
and future growth.
Our operations require significant amounts of cash. If our
business does not achieve the levels of profitability or
generate the amount of cash that we anticipate or if we expand
through acquisitions, joint ventures, or organic growth faster
than anticipated, we may need to seek additional debt or equity
financing to operate and expand our business. If we are unable
to obtain sufficient financing to fund our operations or
expansion, it could adversely affect our results of operations
and future growth. We may be unable to obtain additional
financing on satisfactory terms or at all. If we raise
additional funds through the incurrence of debt, we will incur
increased debt service costs and may become subject to
additional restrictive financial and other covenants.
Changes
in accounting rules relating to the consolidation of assets
associated with option contracts and joint ventures, or a change
in the interpretation or application of such rules, could
adversely affect our financial condition and limit our use of
such arrangements, which could impact our future
growth.
We use option contracts and joint ventures to help us acquire
attractive land positions, mitigate and share the risk
associated with land ownership and development, increase our
return on equity, and extend our capital resources. Under
current accounting rules, the assets and liabilities associated
with certain of these option contracts and joint ventures may
not be required to be consolidated in our financial statements.
A change in accounting rules or a change in the interpretation
of application of such rules to require the consolidation of the
assets and liabilities associated with these off-balance sheet
arrangements could negatively affect our leverage ratios and
could limit our future growth.
In the
event that tax liabilities arise in connection with the October
2003 restructuring, there can be no assurance that we will not
be liable for such amounts.
Prior to a restructuring transaction which occurred in October
2003, Technical Olympic, Inc., which we refer to as Technical
Olympic, was the parent of our consolidated tax reporting group,
and we were jointly and severally liable for any
U.S. federal income tax owed by Technical Olympic or any
other member of the consolidated group. As part of the
restructuring, Technical Olympic was merged into TOI, LLC, a
newly-
14
formed limited liability company of which we are the sole
member, and we became the parent of our consolidated tax
reporting group. Also, as part of the restructuring, Technical
Olympic Services, Inc., which we refer to as TOSI, a
newly-formed corporation wholly-owned by Technical Olympic S.A.,
assumed all liabilities of Technical Olympic. We do not believe
that any material tax liabilities will arise by reason of the
restructuring. However, there can be no assurance that material
tax liabilities will not arise in connection with the
restructuring, that we will not be held liable for such amounts
or that we will be able to collect from TOSI any amounts for
which they may have assumed liability. The assessment of
material tax liabilities in connection with the restructuring
could have an adverse effect on our financial condition and
results of operations.
Our
business revenues and profitability may be adversely affected by
natural disasters or weather conditions.
Homebuilders are particularly subject to natural disasters and
severe weather conditions as they can delay our ability to
timely complete or deliver homes, damage the partially complete
or other unsold homes that are in our inventory, negatively
impact the demand for homes, and/or negatively affect the price
and availability of qualified labor and materials. Our
operations are located in many areas that are especially subject
to natural disasters; for example, we have significant
operations in Florida which is especially at risk of hurricanes.
To the extent that hurricanes, severe storms, floods, tornadoes
or other natural disasters or similar weather events occur, our
business may be adversely affected. To the extent our insurance
is not adequate to cover business interruption or losses
resulting from these events, our revenues and profitability may
be adversely affected.
Technical
Olympic S.A., our majority stockholder, can cause us to take, or
prevent us from taking, actions without the approval of the
other stockholders and may have interests that could conflict
with the interests of our other stockholders.
Technical Olympic S.A. currently owns approximately 67% of the
voting power of our common stock. As a result, Technical Olympic
S.A. has the ability to control the outcome of virtually all
corporate actions requiring stockholder approval, including the
election of a majority of our directors, the approval of any
merger, and other significant corporate actions. Technical
Olympic S.A. may authorize actions or have interests that could
conflict with those of our other stockholders.
Control
of our company by Technical Olympic S.A. and/or our issuance of
preferred stock could make it difficult for a third party to
acquire us.
Through its ownership of voting control of our common stock,
Technical Olympic, S.A. can prevent a change in control of us
and may be able to prevent or discourage certain other
transactions, such as tender offers or stock repurchases, that
could give holders of our common stock the opportunity to
realize a premium over the then-prevailing market price for
their shares of common stock. In addition, our board of
directors has the authority to issue preferred stock and to
determine the preferences, limitations and relative rights of
shares of preferred stock and to fix the number of shares
constituting any series and the designation of such series,
without any further vote or action by our stockholders. The
preferred stock could be issued with voting, liquidation,
dividend and other rights superior to the rights of our common
stock. The potential issuance of preferred stock may delay or
prevent a change in control of us, discourage bids for the
common stock at a premium over the market price, and adversely
affect the market price of our common stock and the voting and
other rights of the holders of our common stock.
Our
common stock price has been and could continue to be
volatile.
Our common stock price has been, and could continue to be,
volatile. These price fluctuations may be rapid and severe and
may leave investors little time to react. Factors that affect
the market price of our common stock include:
|
|
|
|
|
the limited amount of our common stock held by non-affiliates;
|
|
|
|
quarterly variations in our operating results;
|
15
|
|
|
|
|
general conditions in the homebuilding industry;
|
|
|
|
changes in the markets expectations about our earnings;
|
|
|
|
changes in financial estimates and recommendations by securities
analysts concerning our company or the homebuilding industry in
general;
|
|
|
|
operating and stock price performance of other companies that
investors deem comparable to us;
|
|
|
|
material announcements by us or our competitors;
|
|
|
|
news reports relating to trends in our markets;
|
|
|
|
changes in laws and regulations affecting our business;
|
|
|
|
sales of substantial amounts of common stock by our directors,
executive officers or majority stockholder, Technical Olympic,
S.A., or the perception that such sales could occur; and
|
|
|
|
general economic and political conditions such as recessions and
acts of war or terrorism.
|
Any of these factors could have a material adverse effect on the
market price of our common stock.
Risks
Related to Our Industry
Changes
in economic or other business conditions could adversely affect
demand and prices for new homes, which could decrease our
revenues.
The homebuilding industry historically has been cyclical and is
affected significantly by adverse changes in general and local
economic conditions, such as:
|
|
|
|
|
employment levels;
|
|
|
|
population growth;
|
|
|
|
consumer confidence and stability of income levels;
|
|
|
|
availability of financing for land and homesite acquisitions,
and the availability of construction and permanent mortgages;
|
|
|
|
interest rates;
|
|
|
|
inventory levels of both new and existing homes;
|
|
|
|
supply of rental properties; and
|
|
|
|
conditions in the housing resale market.
|
Adverse changes in one or more of these conditions, all of which
are outside of our control, could reduce demand and/or prices
for new homes in some or all of the markets in which we operate.
A decline in demand or the prices we can obtain for our homes
could decrease our revenues and earnings.
We are
subject to substantial risks with respect to the land and home
inventories we maintain, and fluctuations in market conditions
may affect our ability to sell our land and home inventories at
expected prices, if at all, which would reduce our profit
margins.
As a homebuilder, we must constantly locate and acquire new
tracts of land for development and developed homesites to
support our homebuilding operations. There is a lag between the
time we acquire land for development or developed homesites and
the time that we can bring the communities to market and sell
homes. Lag time varies on a project-by-project basis; however,
historically, we have experienced a lag time of up to three
years. As a result, we face the risk that demand for housing may
decline or costs of labor or materials may increase during this
period and that we will not be able to dispose of developed
properties or undeveloped land or homesites acquired for
development at expected prices or profit margins or within
anticipated time frames or at all. The market value of home
inventories, undeveloped land, and developed
16
homesites can fluctuate significantly because of changing market
conditions. In addition, inventory carrying costs (including
interest on funds used to acquire land or build homes) can be
significant and can adversely affect our performance. Because of
these factors, we may be forced to sell homes or other property
at a loss or for prices that generate lower profit margins than
we anticipate. We may also be required to make material
write-downs of the book value of our real estate assets in
accordance with generally accepted accounting principles if
values decline.
Supply
risks and shortages relating to labor and materials can harm our
business by delaying construction and increasing
costs.
The homebuilding industry from time to time has experienced
significant difficulties with respect to:
|
|
|
|
|
shortages of qualified trades people and other labor;
|
|
|
|
inadequately capitalized local subcontractors;
|
|
|
|
shortages of materials; and
|
|
|
|
volatile increases in the cost of certain materials, including
lumber, framing, roofing, and cement, which are significant
components of home construction costs.
|
These difficulties can, and often do, cause unexpected
short-term increases in construction costs and cause
construction delays. In addition, to the extent our
subcontractors incur increased costs associated with increases
in insurance premiums and compliance with state and local
regulations, these costs are passed on to us as homebuilders. We
are generally unable to pass on any unexpected increases in
construction costs to those customers who have already entered
into sales contracts, as those contracts generally fix the price
of the house at the time the contract is signed, which may be up
to one year in advance of the delivery of the home. Furthermore,
sustained increases in construction costs may, over time, erode
our profit margins. We have historically been able to offset
sustained increases in the costs of materials with increases in
the prices of our homes and through operating efficiencies.
However, in the future, pricing competition may restrict our
ability to pass on any additional costs, and we may not be able
to achieve sufficient operating efficiencies to maintain our
current profit margins.
|
|
|
Future
increases in interest rates or a decrease in the availability of
government-sponsored mortgage financing could prevent potential
customers from purchasing our homes, which would adversely
affect our revenues and profitability.
|
Almost all of our customers finance their purchases through
mortgage financing obtained from us or other sources. Increases
in interest rates or decreases in the availability of mortgage
funds provided or sponsored by Fannie Mae, Freddie Mac, the
Federal Housing Administration, or the Veterans
Administration could cause a decline in the market for new homes
as potential homebuyers may not be able to obtain affordable
financing. In particular, because the availability of mortgage
financing is an important factor in marketing many of our homes,
any limitations or restrictions on the availability of those
types of financing could reduce our home sales and the lending
volume at our mortgage subsidiary. Increased interest rates can
also limit our ability to realize our backlog because our sales
contracts typically provide our customers with a financing
contingency. Financing contingencies allow customers to cancel
their home purchase contracts in the event they cannot arrange
for financing. Even if our potential customers do not need
financing, changes in interest rates and mortgage availability
could make it harder for them to sell their existing homes to
potential buyers who need financing. Interest rates currently
are at one of their lowest levels in decades, and any future
increases in interest rates could adversely affect our revenues
and profitability.
|
|
|
The
competitive conditions in the homebuilding industry could
increase our costs, reduce our revenues, and otherwise adversely
affect our results of operations.
|
The homebuilding industry is highly competitive and fragmented.
We compete in each of our markets with numerous national,
regional and local builders. Some of these builders have greater
financial resources, more experience, more established market
positions and better opportunities for land and homesite
acquisitions
17
than we do and have lower costs of capital, labor and material
than us. Builders of new homes compete for homebuyers, as well
as for desirable properties, raw materials and skilled
subcontractors. The competitive conditions in the homebuilding
industry could, among other things:
|
|
|
|
|
increase our costs and reduce our revenues and/or profit margins;
|
|
|
|
make it difficult for us to acquire suitable land or homesites
at acceptable prices;
|
|
|
|
require us to increase selling commissions and other incentives;
|
|
|
|
result in delays in construction if we experience a delay in
procuring materials or hiring laborers; and
|
|
|
|
result in lower sales volumes.
|
We also compete with resales of existing homes, available rental
housing and, to a lesser extent, condominium resales. An
oversupply of attractively priced resale or rental homes in the
markets in which we operate could adversely affect our ability
to sell homes profitably.
Our financial services operations are also subject to
competition from third party providers, many of which are
substantially larger, may have a lower cost structure and may
focus exclusively on providing such services.
|
|
|
We are
subject to product liability and warranty claims arising in the
ordinary course of business that could adversely affect our
results of operations.
|
As a homebuilder, we are subject in the ordinary course of our
business to product liability and home warranty claims. We
provide our homebuyers with a one-year or two-year limited
warranty covering workmanship and materials and a five to
ten-year limited warranty covering major structural defects.
Claims arising under these warranties and general product
liability claims are common in the homebuilding industry and can
be costly. Although we maintain product liability insurance, the
coverage offered by, and availability of, product liability
insurance for construction defects is currently limited and,
where coverage is available, it may be costly. We currently have
a homebuilder protective policy which covers warranty claims for
structure and design defects related to homes sold by us during
the policy period, subject to a significant self-insured
retention per occurrence. However, our product liability
insurance and homebuilder protective policies contain
limitations with respect to coverage, and there can be no
assurance that these insurance rights will be adequate to cover
all product liability and warranty claims for which we may be
liable or that coverage will not be further restricted and
become more costly. In addition, although we generally seek to
require our subcontractors and design professionals to indemnify
us for liabilities arising from their work, we may be unable to
enforce any such contractual indemnities. Uninsured and
unindemnified product liability and warranty claims, as well as
the cost of product liability insurance and our homebuilder
protective policy, could adversely affect our results of
operations.
|
|
|
We are
subject to mold litigation and claims arising in the ordinary
course of business that could adversely affect our results of
operations.
|
Lawsuits have been filed against homebuilders and insurers
asserting claims of property damages and personal injury caused
by the presence of mold in residential dwellings. Some of these
lawsuits have resulted in substantial monetary judgments or
settlements. Many insurance carriers, including our insurance
carriers to some extent, exclude coverage for claims arising
from the presence of mold. Uninsured mold liability and claims
could adversely affect our results of operations. Historically,
we have had a low level of mold litigation and mold related
claims and expenses related to any such litigation or claims
have been immaterial to our net income. However, there can be no
assurance that the amount of mold litigation and claims brought
against us will not increase and adversely affect our net income
in the future.
18
|
|
|
States,
cities, and counties in which we operate have, or may adopt,
slow or no growth initiatives that would reduce our ability to
build in these areas and could adversely affect our future
revenues.
|
Several states, cities, and counties in which we operate have
approved, and others in which we operate may approve, various
slow growth or no growth initiatives and
other ballot measures that could negatively impact the
availability of land and building opportunities within those
localities. Approval of slow or no growth measures would reduce
our ability to build and sell homes in the affected markets and
create additional costs and administration requirements, which
in turn could have an adverse effect on our future revenues.
|
|
|
Our
business is subject to governmental regulations that may delay,
increase the cost of, prohibit or severely restrict our
development and homebuilding projects.
|
We are subject to extensive and complex laws and regulations
that affect the land development and homebuilding process,
including laws and regulations related to zoning, permitted land
uses, levels of density, building design, elevation of
properties, water and waste disposal, and use of open spaces. In
addition, we and our subcontractors are subject to laws and
regulations relating to workers health and safety. We also are
subject to a variety of local, state, and federal laws and
regulations concerning the protection of health and the
environment. In some of the markets in which we operate, we are
required to pay environmental impact fees, use energy saving
construction materials and give commitments to provide certain
infrastructure such as roads and sewage systems. We must also
obtain permits and approvals from local authorities to complete
residential development or home construction. The laws and
regulations under which we and our subcontractors operate, and
our and their obligations to comply with them, may result in
delays in construction and development, cause us to incur
substantial compliance and other increased costs, and prohibit
or severely restrict development and homebuilding activity in
certain areas in which we operate.
Our financial services operations are subject to numerous
federal, state, and local laws and regulations. Failure to
comply with these requirements can lead to administrative
enforcement actions, the loss of required licenses, and claims
for monetary damages.
Special
Note Regarding Forward Looking Statements
This annual report contains forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Discussions
containing forward-looking statements may be found in the
material set forth in the sections entitled Business
and Managements Discussion and Analysis of Financial
Condition and Results of Operations. These statements
concern expectations, beliefs, projections, future plans and
strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts, and typically
include the words anticipate, believe,
expect, estimate, project,
and future. Specifically, this annual
report contains forward-looking statements regarding:
|
|
|
|
|
our expectations regarding growth opportunities in the
homebuilding industry and our ability to successfully take
advantage of such opportunities to expand our operations;
|
|
|
|
our expectations regarding population growth and median income
growth trends and their impact on future housing demand in our
markets;
|
|
|
|
our expectation regarding the impact of geographic and customer
diversification;
|
|
|
|
our ability to successfully integrate our current operations and
any future acquisitions, and to recognize anticipated operating
efficiencies, cost savings, and revenue increases;
|
|
|
|
our expectations regarding our land and homesite acquisition
strategy and its impact on our business, including our estimate
of the number of years our supply of homesites affords us;
|
|
|
|
our belief that homes in premier locations will continue to
attract homebuyers in both strong and weak economic conditions;
|
|
|
|
our expectations regarding future land sales;
|
19
|
|
|
|
|
our belief regarding growth opportunities within our financial
services business;
|
|
|
|
our estimate that we have adequate financial resources to meet
our current and anticipated working capital, including our
annual debt service payments, and land acquisition and
development needs;
|
|
|
|
our expectations regarding the implementation of certain recent
accounting pronouncements, including SFAS No. 123(R);
|
|
|
|
the impact of inflation on our future results of operations;
|
|
|
|
our expectations regarding our ability to pass through to our
customers any increases in our costs;
|
|
|
|
our expectations regarding the impact on our business and
profits of intentional efforts by us and our joint ventures to
slow sales rates to match production rates;
|
|
|
|
our expectations regarding our continued use of option
contracts, investments in unconsolidated joint ventures and
other off-balance sheet arrangements to control homesites and
manage our business and their effect on our business;
|
|
|
|
our expectations regarding the labor and supply shortages and
increases in costs of materials caused by recent hurricanes and
the high cost of petroleum;
|
|
|
|
our expectations regarding the housing market in 2006;
|
|
|
|
our expectations regarding the portion of our combined home
deliveries in 2006 that will come from the Phoenix market;
|
|
|
|
our expectations regarding the effects of hurricane seasons and
land development and permitting issues on our combined net sales
orders; and
|
|
|
|
our expectations regarding our use of cash in operations.
|
These forward-looking statements reflect our current views about
future events and are subject to risks, uncertainties and
assumptions. As a result, actual results may differ
significantly from those expressed in any forward-looking
statement. The most important factors that could prevent us from
achieving our goals, and cause the assumptions underlying
forward-looking statements and the actual results to differ
materially from those expressed in or implied by those
forward-looking statements include, but are not limited to, the
following:
|
|
|
|
|
our significant level of debt and the impact of the restrictions
imposed on us by the terms of this debt;
|
|
|
|
our ability to borrow or otherwise finance our business in the
future;
|
|
|
|
our ability to identify and acquire, at anticipated prices,
additional homebuilding opportunities and/or to effect our
growth strategies in our homebuilding operations and financial
services business;
|
|
|
|
our relationship with Technical Olympic S.A. and its control
over our business activities;
|
|
|
|
our ability to successfully integrate and to realize the
expected benefits of any acquisitions;
|
|
|
|
economic or other business conditions that affect the desire or
ability of our customers to purchase new homes in markets in
which we conduct our business, such as increases in interest
rates, inflation, or unemployment rates or declines in median
income growth, consumer confidence or the demand for, or the
price of, housing;
|
|
|
|
events which would impede our ability to open new communities
and/or deliver homes within anticipated time frames and/or
within anticipated budgets;
|
|
|
|
our ability to successfully enter into, utilize, and recognize
the anticipated benefits of, joint ventures and option contracts;
|
|
|
|
a decline in the value of the land and home inventories we
maintain;
|
|
|
|
an increase in the cost of, or shortages in the availability of,
qualified labor and materials;
|
20
|
|
|
|
|
our ability to successfully dispose of developed properties or
undeveloped land or homesites at expected prices and within
anticipated time frames;
|
|
|
|
our ability to compete in our existing and future markets;
|
|
|
|
the impact of hurricanes, tornadoes or other natural disasters
or weather conditions on our business, including the potential
for shortages and increased costs of materials and qualified
labor and the potential for delays in construction and obtaining
government approvals;
|
|
|
|
an increase or change in government regulations, or in the
interpretation and/or enforcement of existing government
regulations; and
|
|
|
|
the impact of any or all of the above risks on the operations or
financial results of our unconsolidated joint ventures.
|
Availability
of Reports and Other Information
Our corporate website is www.tousa.com. We make
available, free of charge, access to our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
Proxy Statements on Schedule 14A and amendments to those
materials filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 on our website
under Investor Information SEC
Filings, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
United States Securities and Exchange Commission. Information on
our website is not part of this document.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We lease our executive offices located at 4000 Hollywood Blvd.,
Suite 500 N, Hollywood, Florida 33021. We own a
19,000 square foot facility in Sugar Land, Texas, which
houses our Houston homebuilding operations and a design center,
which allows a prospective homebuyer to view samples of some of
the products and features we offer in our homes in Houston. We
lease substantially all of the office space required for our
homebuilding and financial services operations and our corporate
offices. We believe that our existing facilities are adequate
for our current and planned levels of operations and that
additional office space suitable for our needs is reasonably
available in the markets within which we operate. We do not
believe that any single leased property is material to our
current or planned operations.
|
|
Item 3.
|
Legal
Proceedings
|
We are involved in various claims and legal actions arising in
the ordinary course of business. We do not believe that the
ultimate resolution of these matters will have a material
adverse effect on our financial condition or results of
operations.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock began trading on the Nasdaq National Market on
March 12, 1998 under the symbol NHCH. Following
our merger with Engle Holdings Corp. on June 25, 2002, our
common stock began trading under the symbol TOUS. On
November 9, 2004, the listing of our common stock was
transferred to
21
the New York Stock Exchange, where it currently trades under the
symbol TOA. The table below sets forth the high and
low sales price for our common stock as reported by the Nasdaq
National Market or the New York Stock Exchange for the periods
indicated. These prices have been adjusted for our three-for-two
stock split paid on June 1, 2004, and our five-for-four
stock split paid on March 31, 2005, discussed below.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal Year Ended
December 31, 2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
25.56
|
|
|
$
|
18.48
|
|
Second Quarter
|
|
$
|
25.69
|
|
|
$
|
20.70
|
|
Third Quarter
|
|
$
|
30.43
|
|
|
$
|
23.15
|
|
Fourth Quarter
|
|
$
|
26.46
|
|
|
$
|
19.03
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal Year Ended
December 31, 2004
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
17.38
|
|
|
$
|
12.40
|
|
Second Quarter
|
|
$
|
17.99
|
|
|
$
|
11.27
|
|
Third Quarter
|
|
$
|
15.77
|
|
|
$
|
10.66
|
|
Fourth Quarter
|
|
$
|
15.14
|
|
|
$
|
12.62
|
|
As of March 6, 2006, there were 31 record holders of our
common stock. The closing sale price of our common stock on
March 6, 2006 was $19.70 per share.
During the twelve months ended December 31, 2004, we
declared a cash dividend of $.015 per share of common stock
in each of May 2004, August 2004 and November 2004. During the
twelve months ended December 31, 2005, we declared a cash
dividend of $.015 per share of common stock in each of
February 2005, May 2005, August 2005, and November 2005. On
February 22, 2006, our Board of Directors declared a cash
dividend of $0.015 per share on our outstanding common
stock payable on March 17, 2006 to shareholders of record
at the close of business on March 6, 2006. The credit
agreement relating to our revolving credit facility and the
indentures governing our senior notes and senior subordinated
notes contain covenants that limit the amount of dividends or
distributions we can pay on our common stock and the amount of
common stock we can repurchase. Under the terms of our new
revolving credit facility, we may not pay cash dividends in
excess of 4% of our consolidated net income prior to
January 1, 2007, or in excess of 5% of our consolidated net
income thereafter.
Our board of directors periodically evaluates the propriety of
declaring cash dividends. Subject to their evaluation, the board
of directors may, from time to time and upon unanimous consent,
declare future cash dividends, subject to the restrictions
described above and applicable law.
On April 27, 2004, our Board of Directors authorized a
three-for-two stock split on all outstanding shares of our
common stock. The stock split was effected on June 1, 2004
in the form of a 50% stock dividend to shareholders of record at
the close of business on May 14, 2004.
On March 1, 2005, our Board of Directors authorized a
five-for-four stock split on all outstanding shares of our
common stock. The stock split was effected on March 31,
2005 in the form of a 25% stock dividend to shareholders of
record at the close of business on March 11, 2005.
22
The following table gives information about our common stock
that may be issued upon the exercise of options, warrants, and
rights under all existing equity compensation plans as of
December 31, 2005.
EQUITY
COMPENSATION PLAN INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of
|
|
|
|
|
|
Remaining Available
|
|
|
|
Securities to be
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Issued Upon
|
|
|
Weighted-Average
|
|
|
Under Equity
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
(Excluding Securities
|
|
|
|
Options, Warrants
|
|
|
Options, Warrants
|
|
|
Reflected in
|
|
Plan Category
|
|
and Rights
|
|
|
and Rights
|
|
|
Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
6,606,611
|
|
|
$
|
11.06
|
|
|
|
719,061
|
|
Equity compensation plans not
approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,606,611
|
|
|
$
|
11.06
|
|
|
|
719,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002(1)(2)
|
|
|
2001(1)(2)
|
|
|
|
(Dollars in millions, except per
share data)
|
|
|
Statement of Income
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,509.0
|
|
|
$
|
2,135.3
|
|
|
$
|
1,680.7
|
|
|
$
|
1,408.4
|
|
|
$
|
1,422.0
|
|
Homebuilding revenues
|
|
$
|
2,461.5
|
|
|
$
|
2,100.8
|
|
|
$
|
1,642.6
|
|
|
$
|
1,377.7
|
|
|
$
|
1,392.9
|
|
Homebuilding gross margin
|
|
$
|
604.9
|
|
|
$
|
428.4
|
|
|
$
|
323.2
|
|
|
$
|
276.1
|
|
|
$
|
284.6
|
|
Homebuilding pretax income
|
|
$
|
336.4
|
|
|
$
|
181.7
|
|
|
$
|
114.7
|
|
|
$
|
91.2
|
|
|
$
|
128.5
|
|
Financial services pretax income
|
|
$
|
8.5
|
|
|
$
|
8.3
|
|
|
$
|
15.6
|
|
|
$
|
15.7
|
|
|
$
|
11.5
|
|
Income from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations before income taxes
|
|
$
|
344.9
|
|
|
$
|
190.0
|
|
|
$
|
130.3
|
|
|
$
|
106.9
|
|
|
$
|
140.0
|
|
Income from continuing operations
|
|
$
|
218.3
|
|
|
$
|
119.6
|
|
|
$
|
82.7
|
|
|
$
|
67.0
|
|
|
$
|
87.8
|
|
Share
Data(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
per share basic
|
|
$
|
3.82
|
|
|
$
|
2.13
|
|
|
$
|
1.57
|
|
|
$
|
1.28
|
|
|
$
|
1.68
|
|
Income from continuing operations
per share diluted
|
|
$
|
3.68
|
|
|
$
|
2.08
|
|
|
$
|
1.56
|
|
|
$
|
1.28
|
|
|
$
|
1.68
|
|
Cash dividends per share
|
|
$
|
0.057
|
|
|
$
|
0.036
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.12
|
|
Statement of Financial
Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
1,740.8
|
|
|
$
|
1,281.2
|
|
|
$
|
1,177.9
|
|
|
$
|
753.9
|
|
|
$
|
646.0
|
|
Total assets
|
|
$
|
2,422.7
|
|
|
$
|
1,920.6
|
|
|
$
|
1,536.2
|
|
|
$
|
1,012.6
|
|
|
$
|
999.2
|
|
Homebuilding notes payable and
bank borrowings(4)
|
|
$
|
876.6
|
|
|
$
|
811.4
|
|
|
$
|
497.9
|
|
|
$
|
413.1
|
|
|
$
|
308.7
|
|
Total borrowings(4)(5)
|
|
$
|
911.7
|
|
|
$
|
860.4
|
|
|
$
|
561.1
|
|
|
$
|
461.4
|
|
|
$
|
347.4
|
|
Stockholders equity
|
|
$
|
971.3
|
|
|
$
|
662.7
|
|
|
$
|
537.6
|
|
|
$
|
405.1
|
|
|
$
|
413.4
|
|
|
|
(1)
|
On June 25, 2002, we completed the merger with Engle
Holdings Corp. As both entities were under the common control of
Technical Olympic, Inc., our parent company at the time, the
merger was accounted for as a reorganization of entities under
common control. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 141,
Business Combinations, we recognized the acquired
assets and liabilities of Engle Holdings Corp. at their
historical carrying amounts. As both entities came under common
control of Technical Olympic on November 22, 2000, our
financial statements and other operating data have been restated
to include the operations of Engle Holdings Corp. from
November 22, 2000.
|
|
(2)
|
On April 15, 2002, we completed the sale of Westbrooke,
formerly one of our Florida homebuilding subsidiaries. In
accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the results
of Westbrookes operations have been classified as
discontinued operations, and prior periods have been restated.
|
|
(3)
|
The shares issued and outstanding, the earnings per share and
the cash dividends per share amounts have been adjusted to
reflect a three-for-two stock split effected in the form of a
50% stock dividend paid on June 1, 2004 and a five-for-four
stock split effected in the form of a 25% stock dividend paid on
March 31, 2005. Cash dividends per share for 2001 have been
restated to reflect the total shares outstanding as a result of
the merger.
|
|
(4)
|
Homebuilding notes payable and bank borrowings and total
borrowings do not include obligations for inventory not owned of
$124.6 million, $136.2 million, $246.2 million,
$16.3 million, and $30.0 million as of
December 31, 2005, 2004, 2003, 2002, and 2001 respectively.
|
|
(5)
|
Total borrowings include Homebuilding borrowings and Financial
Services borrowings.
|
24
|
|
Item
7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with
Selected Financial Data and the consolidated
financial statements and related notes included elsewhere in
this report.
Executive
Summary
We generate revenues from our homebuilding operations
(Homebuilding) and financial services operations
(Financial Services), which comprise our operating
segments. Through our Homebuilding operations we design, build
and market high-quality detached single-family residences, town
homes and condominiums in various metropolitan markets in ten
states located in four major geographic regions: Florida, the
Mid-Atlantic, Texas and the West.
|
|
|
|
|
|
|
Florida
|
|
Mid-Atlantic
|
|
Texas
|
|
West
|
|
Jacksonville
|
|
Baltimore/Southern Pennsylvania
|
|
Austin
|
|
Colorado
|
Orlando
|
|
Delaware
|
|
Dallas/Ft. Worth
|
|
Las Vegas
|
Southeast Florida
|
|
Nashville
|
|
Houston
|
|
Phoenix
|
Southwest Florida
|
|
Northern Virginia
|
|
San Antonio
|
|
|
Tampa/St. Petersburg
|
|
|
|
|
|
|
We conduct our Homebuilding operations through our consolidated
subsidiaries and through various joint ventures that acquire and
develop land for our Homebuilding operations and/or joint
ventures that additionally build and market homes. None of these
joint ventures is consolidated. At December 31, 2005, our
investment in these unconsolidated joint ventures was
$254.5 million. Additionally, we had receivables of
$60.5 million from these joint ventures. We also seek to
use option contracts to acquire land whenever feasible. Option
contracts allow us to control significant homesite positions
with minimal capital investment and substantially reduce the
risks associated with landownership and development. At
December 31, 2005, we controlled approximately 68,900 home
sites of which 60% were controlled through various option
arrangements. Additionally, our joint ventures controlled
approximately 25,400 homesites at December 31, 2005.
For the year ended December 31, 2005, total consolidated
revenues increased 18%, consolidated net income increased 83%,
combined net sales orders increased 7% and combined home
deliveries increased 29% as compared to the prior year.
Consolidated sales value in backlog at December 31, 2005 as
compared to December 31, 2004 increased by 12% to
$1.8 billion. Our joint ventures had an additional
$1.5 billion in sales backlog at December 31, 2005.
Our combined home cancellation rate was approximately 17% for
the year ended December 31, 2005 as compared to 16% for the
year ended December 31, 2004.
Homebuilding Operations. We build homes for
inventory (speculative homes) and on a pre-sold basis. At
December 31, 2005, we had 7,467 homes completed or under
construction on a combined basis compared to 3,990 homes at
December 31, 2004. Approximately 19% of these homes were
unsold at December 31, 2005 compared to 24% at
December 31, 2004. At December 31, 2005, we had 143
completed unsold homes in our inventory on a combined basis,
down 30% from 203 homes at December 31, 2004. Approximately
34% of our completed, unsold homes at December 31, 2005 had
been completed for more than 90 days. We actively work to
control our finished speculative home inventory to reduce
carrying costs, increase our available capital and improve our
gross margins.
Once a sales contract with a buyer has been approved, we
classify the transaction as a new sales order and
include the home in backlog. Such sales orders are
usually subject to certain contingencies such as the
buyers ability to qualify for financing. At closing, title
passes to the buyer and a home is considered to be
delivered and is removed from backlog. Revenue and
cost of sales are recognized upon the delivery of the home, land
or homesite when title is transferred to the buyer. We estimate
that the average period between the execution of a sales
contract for a home and closing is approximately four months to
over a year for presold homes; however, this varies by market.
The principal expenses of our Homebuilding operations are
(i) cost of sales and (ii) selling, general and
administrative (SG&A) expenses. Costs of home
sales include land and land development costs, home construction
costs, previously capitalized indirect costs, capitalized
interest and
25
estimated warranty costs. SG&A expenses for our Homebuilding
operations include administrative costs, advertising expenses,
on-site
marketing expenses,sales commission costs, and closing costs.
Sales commissions are included in selling, general and
administrative costs when the related revenue is recognized. As
used herein, Homebuilding includes results of home
and land sales. Home sales includes results related
only to the sale of homes.
Our Homebuilding operations continue to be impacted by labor and
supply shortages and increases in the cost of materials caused
by the recent active hurricane seasons and the high costs of
petroleum. We have been notified by several vendors and
subcontractors to expect increases in the costs of materials and
labor. We are proactively responding to these situations by
(1) actively working to reduce the amount of time from sale
to delivery; (2) increasing cost contingencies in our home
budgets; and (3) increasing home sales prices as quickly as
the competitive market will allow. In general, we anticipate a
more challenging housing market in 2006, characterized by
softening demand, decreased ability to raise home prices,
lengthening regulatory processes and higher material costs.
Financial Services Operations. To provide
homebuyers with a seamless home purchasing experience, we have a
complementary financial services business which provides
mortgage financing and closing services and offers title,
homeowners and other insurance products to our homebuyers
and others. Our mortgage financing operation derives most of its
revenues from buyers of our homes, although it also offers its
services to existing homeowners refinancing their mortgages. Our
title and closing services and our insurance agency operations
are used by our homebuyers and a broad range of other clients
purchasing or refinancing residential or commercial real estate.
Our mortgage financing operations revenues consist
primarily of origination and premium fee income, interest
income, and the gain on the sale of the mortgages. Our title
operations revenues consist primarily of fees and premiums
from title insurance and closing services. The principal
expenses of our Financial Services operations are SG&A
expenses, which consist primarily of compensation and interest
expense on our warehouse lines of credit.
Critical
Accounting Policies
In the preparation of our consolidated financial statements, we
apply accounting principles generally accepted in the United
States. The application of generally accepted accounting
principles may require management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying results. Listed below are those
policies that we believe are critical or require the use of
complex judgment in their application.
Homebuilding
Revenues and Cost of Sales
Revenue from the sale of homes and the sale of land and
homesites is recognized at closing when title passes to the
buyer and all of the following conditions are met: (1) a
sale is consummated; (2) a significant down payment is
received; (3) the earnings process is complete; and
(4) the collection of any remaining receivables is
reasonably assured. As a result, our revenue recognition process
does not involve significant judgments or estimates. However, we
do rely on certain estimates to determine the related
construction and land costs and resulting gross profit
associated with revenues recognized. Our construction and land
costs are comprised of direct and allocated costs, including
interest, indirect construction costs and estimated costs for
future warranties and indemnities. Our estimates are based on
historical results, adjusted for current factors. Land, land
improvements and other common costs are generally allocated on a
relative fair value basis to units within a parcel or community.
Land and land development costs generally include related
interest and property taxes incurred until construction is
substantially completed.
Financial
Services Revenues and Expenses
Our Financial Services operations generate revenues from their
mortgage financing and title operations. Our mortgage financing
operations revenues consist primarily of origination and
premium fee income, interest income and the gain on the sale of
the mortgages. Revenue from our mortgage financing operations is
recognized when the mortgage loans and related servicing rights
are sold to third-party investors. Substantially
26
all of our mortgages are sold to private investors within
30 days of closing. Title operations revenues consist
primarily of title insurance agency and closing services, which
are recognized as homes are delivered. As a result, our revenue
recognition process does not involve significant judgments or
estimates.
Impairment
of Long-Lived Assets
Housing communities and land/homesites under development are
stated at the lower of cost or net realizable value. Property
and equipment is carried at cost less accumulated depreciation.
We assess these assets for impairment in accordance with the
provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 requires that long-lived assets be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets is measured by
comparing the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by the asset. These
evaluations for impairment are significantly impacted by
estimates of future revenues, costs and expenses and other
factors involving some amount of uncertainty. If an asset is
considered to be impaired, the impairment loss to be recognized
is measured by the amount by which the carrying amount of the
asset exceeds the fair value of the asset.
Goodwill
Goodwill is accounted for in accordance with the provisions of
SFAS No. 142, Goodwill and Other Intangible
Assets. Pursuant to SFAS No. 142, goodwill is
not subject to amortization. Goodwill is subject to at least an
annual assessment for impairment by applying a fair-value based
test. For purposes of the impairment test, we consider each
division a reporting unit. Our impairment test is based on
discounted cash flows derived from internal projections. This
process requires us to make assumptions on future revenues,
costs, and timing of expected cash flows. Due to the degree of
judgment required and uncertainties surrounding such estimates,
actual results could differ from such estimates. To the extent
additional information arises or our strategies change, it is
possible that our conclusion regarding goodwill impairment could
change, which could have a material effect on our financial
position and results of operations. For these reasons, we
consider the accounting estimate related to goodwill impairment
to be a critical accounting estimate. We performed our annual
impairment test as of December 31, 2005 and determined that
goodwill was not impaired.
Homesite
Option Contracts and Consolidation of Variable Interest
Entities
In the ordinary course of business we enter into option
contracts to purchase homesites and land held for development.
Option contracts allow us to control significant homesite
positions with minimal capital investment and substantially
reduce the risks associated with land ownership and development.
Our liability for nonperformance under such contracts is
generally limited to forfeiture of the related deposits. At
December 31, 2005, we owned approximately 27,300 homesites
and had option contracts on 41,600 homesites, and our
unconsolidated joint ventures controlled 25,400 homesites. At
December 31, 2005 and December 31, 2004, we had
refundable and nonrefundable deposits aggregating
$218.5 million and $132.8 million, respectively,
included in inventory. In addition, at December 31, 2005
and December 31, 2004, we had issued $186.9 million
and $86.6 million, respectively, in letters of credit under
option contracts.
We enter into option contracts with land sellers and third-party
financial entities as a method of acquiring developed homesites.
From time to time to leverage our ability to acquire and finance
the development of these homesites, we transfer our option right
to third parties. Option contracts generally require the payment
of a non-refundable cash deposit or the issuance of a letter of
credit for the right to acquire homesites over a specified
period of time at predetermined prices. Typically, our deposits
or letters of credit are less than 20% of the underlying
purchase price. We generally have the right at our discretion to
terminate our obligations under these option agreements by
forfeiting our cash deposit or repaying amounts drawn under the
letter of credit with no further financial responsibility. We do
not have legal title to these assets. Additionally, we do not
have an investment in the third-party acquiror and do not
guarantee their liabilities. However, if certain conditions are
met, including the deposit
and/or
letters of credit exceeding certain significance levels as
27
compared to the remaining homesites under the option contract,
we will include the homesites in inventory with a corresponding
liability in obligations for inventory not owned.
Homebuilders may enter into option contracts for the purchase of
land or homesites with land sellers and third-party financial
entities, some of which qualify as Variable Interest Entities
(VIEs) under Financial Accounting Standards Board
(FASB) Interpretation No. 46 (Revised),
Consolidation of Variable Interest Entities
(FIN 46(R) ). FIN 46(R) addresses
consolidation by business enterprises of VIEs in which an entity
absorbs a majority of the expected losses, receives a majority
of the entitys expected residual returns, or both, as a
result of ownership, contractual or other financial interests in
the entity, which have one or both of the following
characteristics: (1) the equity investment at risk is not
sufficient to permit the entity to finance its activities
without additional subordinated support from other parties,
which is provided through other interests that will absorb some
or all of the expected losses of the entity; or (2) the
equity investors lack one or more of the following essential
characteristics of a controlling financial interest:
(a) the direct or indirect ability to make decisions about
the entitys activities through voting rights or similar
rights; or (b) the obligation to absorb the expected losses
of the entity if they occur, which makes it possible for the
entity to finance its activities; or (c) the right to
receive the expected residual returns of the entity if they
occur, which is the compensation for the risk of absorbing the
expected losses.
In applying FIN 46(R) to our homesite option contracts and
other transactions with VIEs, we make estimates regarding cash
flows and other assumptions. We believe that our critical
assumptions underlying these estimates are reasonable based on
historical evidence and industry practice. Based on our analysis
of transactions entered into with VIEs, we determined that we
are the primary beneficiary of certain of these homesite option
contracts. Consequently, FIN 46(R) requires us to
consolidate the assets (homesites) at their fair value, although
(1) we have no legal title to the assets, (2) our
maximum exposure to loss is generally limited to the deposits or
letters of credits placed with these entities, and
(3) creditors, if any, of these entities have no recourse
against us. We classify these assets as inventory not
owned with a corresponding liability in obligations
for inventory not owned in the accompanying consolidated
statement of financial condition. Additionally, we have entered
into arrangements with VIEs to acquire homesites in which our
variable interest is insignificant and, therefore, we have
determined that we are not the primary beneficiary and are not
required to consolidate the assets of such VIEs.
Warranty
Reserves
In the normal course of business we will incur warranty related
costs associated with homes that have been delivered to the
homebuyers. Warranty reserves are established by charging cost
of sales and recognizing a liability for the estimated warranty
costs for each home that is delivered. We monitor this reserve
on a regular basis by evaluating the historical warranty
experience in each market in which we operate and the reserve is
adjusted as appropriate for current quantitative and qualitative
factors. Actual future warranty costs could differ from our
currently estimated amounts.
Insurance
and Litigation Reserves
Insurance and litigation reserves have been established for
estimated amounts based on an analysis of past history of
claims. We have, and require the majority of our subcontractors
to have, general liability insurance that protects us against a
portion of our risk of loss from construction-related claims. We
reserve for costs to cover our self-insured retentions and
deductible amounts under these policies and for any costs in
excess of our coverage limits. Because of the high degree of
judgment required in determining these estimated reserve
amounts, actual future claim costs could differ from our
currently estimated amounts.
Recent
Acquisitions
On August 1, 2005, through a joint venture (the
Transeastern JV), we completed the acquisition of
the homebuilding assets and operations of Transeastern
Properties, Inc. (Transeastern) headquartered in
Coral Springs, Florida. Our joint venture partner is an entity
controlled by the former majority owners of Transeastern. The
Transeastern JV acquired Transeasterns homebuilding
assets, including work in process,
28
finished lots and certain land option rights, for approximately
$826.2 million (which includes the assumption of
$112.0 million of liabilities, net of $30.8 million of
cash). Additional consideration of up to $75.0 million will
be paid to the sellers pursuant to an earn out agreement if
certain conditions are met, such as achieving predetermined
quarterly EBITDA targets and delivery of entitlement on certain
tracts of land currently held under lot option contracts. In
addition to the net assets acquired in the transaction, the
Transeastern JV will have a right of first offer on land
developed by a related entity of our joint venture partner for a
period of five years. We are the managing member of the
Transeastern JV and hold a 50% voting interest. Under the
limited liability company agreement that governs the operations
of the Transeastern JV (the JV agreement), the
Transeastern JV is required to make a preferred payment to our
joint venture partner. The preferred payment is to be made
quarterly and to the extent allowable under certain covenants
and restrictions imposed by the joint ventures bank
borrowings. To the extent the joint venture is not allowed to
make these payments we are required, under the JV agreement, to
advance funds to the Transeastern JV in the form of a member
loan in an amount sufficient to make the payment. The member
loan bears interest at 18% per annum and is payable once certain
conditions and covenants under the JV agreement and the joint
ventures bank borrowings are met. The Transeastern JV was
funded with $675.0 million of third party debt capacity (of
which $560.0 million was drawn upon acquisition), a
$20.0 million subordinated bridge loan from us and
$165.0 million of equity, of which $90.0 million was
contributed by us. The third party debt is secured by the
Transeastern JVs assets and ownership interests and is
non-recourse to us, except that we have agreed to complete any
property development commitments on the existing work in process
at the time of closing in the event the Transeastern JV defaults
and to indemnify the lenders for losses resulting from fraud,
misappropriation and similar acts.
Selected
Homebuilding Operating Data
The following tables set forth certain operating and financial
data for our homebuilding operations in our four major
geographic regions, Florida, the Mid-Atlantic, Texas, and the
West (dollars in millions, except average price in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Deliveries:
|
|
Homes
|
|
|
$
|
|
|
Homes
|
|
|
$
|
|
|
Homes
|
|
|
$
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
2,785
|
|
|
$
|
829.4
|
|
|
|
2,361
|
|
|
$
|
632.8
|
|
|
|
2,311
|
|
|
$
|
562.5
|
|
Mid-Atlantic
|
|
|
697
|
|
|
|
290.3
|
|
|
|
562
|
|
|
|
235.3
|
|
|
|
636
|
|
|
|
209.3
|
|
Texas
|
|
|
2,059
|
|
|
|
500.6
|
|
|
|
1,827
|
|
|
|
459.9
|
|
|
|
1,557
|
|
|
|
407.5
|
|
West
|
|
|
2,228
|
|
|
|
646.3
|
|
|
|
2,471
|
|
|
|
657.0
|
|
|
|
1,631
|
|
|
|
425.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
|
7,769
|
|
|
|
2,266.6
|
|
|
|
7,221
|
|
|
|
1,985.0
|
|
|
|
6,135
|
|
|
|
1,604.4
|
|
Unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
347
|
|
|
|
106.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
|
185
|
|
|
|
55.5
|
|
|
|
61
|
|
|
|
16.0
|
|
|
|
|
|
|
|
|
|
West
|
|
|
1,134
|
|
|
|
382.0
|
|
|
|
55
|
|
|
|
18.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unconsolidated joint ventures
|
|
|
1,666
|
|
|
|
544.1
|
|
|
|
116
|
|
|
|
34.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined total
|
|
|
9,435
|
|
|
$
|
2,810.7
|
|
|
|
7,337
|
|
|
$
|
2,019.7
|
|
|
|
6,135
|
|
|
$
|
1,604.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Net Sales Orders(1):
|
|
Homes
|
|
|
$
|
|
|
Homes
|
|
|
$
|
|
|
Homes
|
|
|
$
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
2,794
|
|
|
$
|
959.2
|
|
|
|
3,711
|
|
|
$
|
1,107.8
|
|
|
|
2,662
|
|
|
$
|
672.1
|
|
Mid-Atlantic
|
|
|
597
|
|
|
|
243.1
|
|
|
|
682
|
|
|
|
289.0
|
|
|
|
616
|
|
|
|
207.3
|
|
Texas
|
|
|
2,754
|
|
|
|
682.6
|
|
|
|
1,876
|
|
|
|
473.9
|
|
|
|
1,673
|
|
|
|
427.7
|
|
West
|
|
|
2,469
|
|
|
|
817.6
|
|
|
|
3,274
|
|
|
|
942.0
|
|
|
|
1,884
|
|
|
|
481.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
|
8,614
|
|
|
|
2,702.5
|
|
|
|
9,543
|
|
|
|
2,812.7
|
|
|
|
6,835
|
|
|
|
1,788.9
|
|
Unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
391
|
|
|
|
120.1
|
|
|
|
32
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
|
141
|
|
|
|
47.3
|
|
|
|
160
|
|
|
|
44.8
|
|
|
|
|
|
|
|
|
|
West
|
|
|
1,477
|
|
|
|
548.0
|
|
|
|
198
|
|
|
|
65.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unconsolidated joint ventures
|
|
|
2,009
|
|
|
|
715.4
|
|
|
|
390
|
|
|
|
117.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined total
|
|
|
10,623
|
|
|
$
|
3,417.9
|
|
|
|
9,933
|
|
|
$
|
2,930.3
|
|
|
|
6,835
|
|
|
$
|
1,788.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
Avg
|
|
|
|
|
|
|
|
|
Avg
|
|
|
|
|
|
|
|
|
Avg
|
|
Sales Backlog:
|
|
Homes
|
|
|
$
|
|
|
Price
|
|
|
Homes
|
|
|
$
|
|
|
Price
|
|
|
Homes
|
|
|
$
|
|
|
Price
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
2,937
|
|
|
$
|
1,036.7
|
|
|
$
|
353
|
|
|
|
2,896
|
|
|
$
|
898.9
|
|
|
$
|
310
|
|
|
|
1,546
|
|
|
$
|
423.8
|
|
|
$
|
274
|
|
Mid-Atlantic
|
|
|
246
|
|
|
|
94.7
|
|
|
$
|
385
|
|
|
|
346
|
|
|
|
141.9
|
|
|
$
|
410
|
|
|
|
224
|
|
|
|
87.6
|
|
|
$
|
391
|
|
Texas
|
|
|
1,238
|
|
|
|
319.3
|
|
|
$
|
258
|
|
|
|
543
|
|
|
|
137.3
|
|
|
$
|
253
|
|
|
|
494
|
|
|
|
123.3
|
|
|
$
|
250
|
|
West
|
|
|
851
|
|
|
|
303.8
|
|
|
$
|
357
|
|
|
|
1,309
|
|
|
|
388.9
|
|
|
$
|
297
|
|
|
|
864
|
|
|
|
220.7
|
|
|
$
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total*
|
|
|
5,272
|
|
|
|
1,754.5
|
|
|
$
|
333
|
|
|
|
5,094
|
|
|
|
1,567.0
|
|
|
$
|
308
|
|
|
|
3,128
|
|
|
|
855.4
|
|
|
$
|
274
|
|
Unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
3,114
|
|
|
|
895.6
|
|
|
$
|
288
|
|
|
|
32
|
|
|
|
7.8
|
|
|
$
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
|
92
|
|
|
|
31.3
|
|
|
$
|
341
|
|
|
|
136
|
|
|
|
39.5
|
|
|
$
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West
|
|
|
1,543
|
|
|
|
585.5
|
|
|
$
|
379
|
|
|
|
501
|
|
|
|
163.1
|
|
|
$
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unconsolidated joint
ventures*
|
|
|
4,749
|
|
|
|
1,512.4
|
|
|
$
|
318
|
|
|
|
669
|
|
|
|
210.4
|
|
|
$
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined total*
|
|
|
10,021
|
|
|
$
|
3,266.9
|
|
|
$
|
326
|
|
|
|
5,763
|
|
|
$
|
1,777.4
|
|
|
$
|
308
|
|
|
|
3,128
|
|
|
$
|
855.4
|
|
|
$
|
274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes acquired backlog. |
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
Sales
|
|
|
|
|
|
Sales
|
|
Average Price:
|
|
Deliveries
|
|
|
Orders
|
|
|
Deliveries
|
|
|
Orders
|
|
|
Deliveries
|
|
|
Orders
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
$
|
298
|
|
|
$
|
343
|
|
|
$
|
268
|
|
|
$
|
299
|
|
|
$
|
243
|
|
|
$
|
253
|
|
Mid-Atlantic
|
|
$
|
417
|
|
|
$
|
407
|
|
|
$
|
419
|
|
|
$
|
424
|
|
|
$
|
329
|
|
|
$
|
337
|
|
Texas
|
|
$
|
243
|
|
|
$
|
248
|
|
|
$
|
252
|
|
|
$
|
253
|
|
|
$
|
262
|
|
|
$
|
256
|
|
West
|
|
$
|
290
|
|
|
$
|
331
|
|
|
$
|
266
|
|
|
$
|
288
|
|
|
$
|
261
|
|
|
$
|
256
|
|
Consolidated total
|
|
$
|
292
|
|
|
$
|
314
|
|
|
$
|
275
|
|
|
$
|
295
|
|
|
$
|
262
|
|
|
$
|
262
|
|
Unconsolidated joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
$
|
307
|
|
|
$
|
307
|
|
|
|
|
|
|
$
|
242
|
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
$
|
300
|
|
|
$
|
336
|
|
|
$
|
263
|
|
|
$
|
280
|
|
|
|
|
|
|
|
|
|
West
|
|
$
|
337
|
|
|
$
|
371
|
|
|
$
|
339
|
|
|
$
|
329
|
|
|
|
|
|
|
|
|
|
Total unconsolidated joint ventures
|
|
$
|
327
|
|
|
$
|
356
|
|
|
$
|
299
|
|
|
$
|
301
|
|
|
|
|
|
|
|
|
|
Combined total
|
|
$
|
298
|
|
|
$
|
322
|
|
|
$
|
275
|
|
|
$
|
295
|
|
|
$
|
262
|
|
|
$
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Homebuilding
Revenues
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Gross Margin
|
|
|
24.6
|
%
|
|
|
20.4
|
%
|
|
|
19.7
|
%
|
SG&A
|
|
|
13.1
|
%
|
|
|
12.0
|
%
|
|
|
12.9
|
%
|
Income from joint ventures
|
|
|
(1.9
|
)%
|
|
|
(0.1
|
)%
|
|
|
|
|
Other (income) expense, net
|
|
|
(0.3
|
)%
|
|
|
(0.1
|
)%
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax income
|
|
|
13.7
|
%
|
|
|
8.6
|
%
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2005 Compared to Fiscal Year 2004
Total revenues increased 18% to $2.5 billion for the year
ended December 31, 2005, from $2.1 billion for the
year ended December 31, 2004. This increase is attributable
to an increase in Homebuilding revenues of 17%, and an increase
in Financial Services revenues of 38%.
Income before provision for income taxes increased by 82% to
$344.9 million for the year ended December 31, 2005,
from $190.0 million for the comparable period in 2004. This
increase is attributable to an increase in Homebuilding pretax
income to $336.4 million for the year ended
December 31, 2005, from $181.7 million for the year
ended December 31, 2004.
Our effective tax rate was 36.7% and 37.0% for the years ended
December 31, 2005 and 2004, respectively. This change
primarily is due to the impact of the American Jobs Creation Act
of 2004, which was partially offset by an increase in state
income taxes resulting from increased income in states with
higher tax rates.
As a result of the above, net income increased to
$218.3 million (or $3.68 per diluted share) for the year
ended December 31, 2005 from $119.6 million (or
$2.08 per diluted share) for the year ended
December 31, 2004.
Results
of Operations
Homebuilding
Homebuilding revenues increased 17% to $2.5 billion for the
year ended December 31, 2005, from $2.1 billion for
the year ended December 31, 2004. This increase is due to
an increase in revenues from home
31
sales to $2.3 billion for the year ended December 31,
2005, from $2.0 billion for the comparable period in 2004
and an increase in revenues from land sales to
$194.9 million for the year ended December 31, 2005,
as compared to $115.8 million for the year ended
December 31, 2004. The 14% increase in revenue from home
sales was due to (1) an 8% increase in consolidated home
deliveries to 7,769 from 7,221 for the year ended
December 31, 2005 and 2004, respectively, and (2) a 6%
increase in the average selling price on consolidated homes
delivered to $292,000 from $275,000 in the comparable period of
the prior year. A significant component of this increase was the
31% increase in revenues from home sales in our Florida region
for the year ended December 31, 2005 as compared to the
same period in 2004. This increase was due to an 18% increase in
consolidated homes delivered in Florida and an 11% increase in
the average selling price of such homes. The increase in
revenues from land sales is due to the sale of various large
tracts of land, particularly in the Phoenix market, in an
attempt to diversify our risk and recognize embedded profits. As
part of our land inventory management strategy, we regularly
review our land portfolio. As a result of these reviews, we will
seek to sell land when we have changed our strategy for a
certain property
and/or we
have determined that the potential profit realizable from a sale
of a property outweighs the economics of developing a community.
Land sales are incidental to our residential homebuilding
operations and are expected to continue in the future, but may
fluctuate significantly from period to period.
Our homebuilding gross margin increased 41% to
$604.9 million for the year ended December 31, 2005,
from $428.4 million for the year ended December 31,
2004. This increase is primarily due to improved gross margin on
home sales and an increase in revenue from home sales as well as
an increase in gross margin from land sales. Our gross margin on
home sales increased to 24.7% for the year ended
December 31, 2005, from 19.8% for the year ended
December 31, 2004. This increase from period to period is
primarily due to: (1) reducing the time period from signing
a contract to closing; (2) the phasing of sales to maximize
revenues and improve margins; (3) our ability to increase
prices in markets with strong housing demand; (4) improved
control over costs, such as the re-engineering of existing
products to reduce costs of construction and achieve cost
synergies from our vendor relationships; and (5) the
reduction of carrying costs on inventory through improved
control over the number of unsold homes completed or under
construction, particularly in our Texas and West regions. For
the year ended December 31, 2005, we generated gross margin
from land sales of $45.0 million, as compared to
$35.4 million for the comparable period in 2004.
SG&A expenses increased to $322.9 million for the year
ended December 31, 2005, from $251.7 million for the
year ended December 31, 2004. The increase in SG&A
expenses is due to increased compensation resulting from
(1) increased headcount and (2) significantly
increased incentive compensation tied to increased earnings,
including increased gross profit from land sales and income from
unconsolidated joint ventures. This increase in SG&A was
partially offset by a decrease of $5.1 million in stock
based compensation expense. For the years ended
December 31, 2005 and 2004, we recognized a compensation
charge of $3.5 million and $8.6 million, respectively,
due to the variable accounting treatment of certain stock-based
awards which include performance-based accelerated vesting
criteria and certain other common stock purchase rights. The
timing and amount of compensation expense recognized by us with
respect to these stock-based awards and common stock purchase
rights, if any, is uncertain and depends on the price of our
common stock, which fluctuates based upon various factors, many
of which are outside of our control. The accelerated vesting of
our performance-based stock options depends on the extent to
which our stock price performance exceeds the stock price
performance of certain of our peers.
SG&A expenses as a percentage of revenues from home sales
for the year ended December 31, 2005 increased to 14.2%, as
compared to 12.7% for the year ended December 31, 2004. The
150 basis point increase in SG&A expenses as a
percentage of home sales revenues is due to the increased
compensation discussed above. Our ratio of SG&A expenses as
a percentage of revenues from home sales is also affected by the
fact that our consolidated revenues from home sales do not
include revenues recognized by our unconsolidated joint
ventures; however, the compensation and other expenses incurred
by us in connection with certain of these joint ventures are
included in our consolidated SG&A expenses. For the year
ended December 31, 2005, the income associated with these
joint ventures was $45.7 million, including management fees
of $27.2 million, and is shown separately as income from
joint ventures in our consolidated statement of income.
32
Other income consists primarily of interest income earned on the
investment of cash.
Our net profit margin is calculated by dividing net income by
home sales revenues. For the year ended December 31, 2005,
our net profit margin increased to 9.6% from 6.0% due to
improved gross margins on home sales, increased gross margin
from land sales, and increased income from unconsolidated joint
ventures.
Net
Sales Orders and Homes in Backlog (combined)
For the year ended December 31, 2005, net sales orders
increased by 7% as compared to the same period in 2004.
Approximately half of this increase was attributable to the
Transeastern joint venture. Our net sales orders in Florida for
2005 were negatively impacted by the adverse weather conditions
and preparation and recovery efforts related to the 2005
hurricane season. Additionally, our 2005 net sales orders
were adversely impacted by our intentional efforts to slow sales
rates to match our production rates, particularly in our
Transeastern joint venture. On a broader basis, land development
and permitting issues prevented us from opening certain
communities within previously anticipated time frames. We expect
these factors to continue to negatively impact our combined net
sales orders in the near term.
We had 10,021 homes in backlog as of December 31, 2005, as
compared to 5,763 homes in backlog as of December 31, 2004.
The acquisition of Transeasterns homebuilding assets and
operations during 2005 included a significant amount of backlog
(3,038 homes). Additionally, during 2005, we transferred 699
homes in backlog and 642 homes under construction, from our
consolidated operations in the West Region to an unconsolidated
joint venture.
Backlog
Sales Value (consolidated)
The sales value of backlog increased 12% to $1.8 billion at
December 31, 2005, from $1.6 billion at
December 31, 2004, while the average selling price of homes
in backlog increased to $333,000 from $308,000 from period to
period. The increase in the average selling price of homes in
backlog was primarily due to our ability to increase prices in
markets with strong housing demand as well as our continued
efforts to phase sales to maximize gross margins.
Joint
Venture Backlog Sales Value
Joint venture revenues are not included in our consolidated
financial statements. At December 31, 2005, the sales value
of our joint ventures homes in backlog was
$1.5 billion compared to $210.4 million at
December 31, 2004.
Financial
Services
Financial Services revenues increased to $47.5 million for
the year ended December 31, 2005, from $34.5 million
for the year ended December 31, 2004. This 38% increase is
due primarily to an increase in the number of closings at our
title and mortgage operations offset by reduced gains in selling
mortgages in the secondary market caused by a shift toward more
adjustable rate mortgage loans and market reductions in the
interest rate margin. For the year ended December 31, 2005,
our mix of mortgage originations was 37% adjustable rate
mortgages (of which approximately 76% were interest only) and
63% fixed rate mortgages, which is a shift from the comparable
period in the prior year of 33% adjustable rate mortgages and
67% fixed rate mortgages. The average FICO score of our
homebuyers during the year ended December 31, 2005 was 728,
and the average loan to value ratio on first mortgages was 77%.
For the year ended December 31, 2005, approximately 11% of
our homebuyers paid in cash as compared to 12% during the year
ended December 31, 2004. Our combined mortgage operations
capture ratio for non-cash homebuyers increased to 65%
(excluding the Transeastern JV) for the year ended
December 31, 2005 from 58% for the year ended
December 31, 2004. The number of closings at our mortgage
operations increased to 5,455 for the year ended
December 31, 2005, from 4,577 for the year ended
December 31, 2004. Our combined title operations capture
ratio decreased to 91% of our homebuyers for the year ended
December 31, 2005, from 96% for the comparable period in
2004. However, the number of closings at our title operations
increased to 23,530 for the year ended December 31,
33
2005, from 19,750 for the same period in 2004. Non-affiliated
customers accounted for approximately 73% of our title company
revenues for the year ended December 31, 2005.
Financial Services expenses increased to $39.0 million for
the year ended December 31, 2005, from $26.2 million
for the year ended December 31, 2004. This 49% increase is
a result of higher staff levels to support increased activity.
Fiscal
Year 2004 Compared to Fiscal Year 2003
Total revenues increased 27% to $2.1 billion during the
year ended December 31, 2004, from $1.7 billion during
the year ended December 31, 2003. This increase is
attributable to an increase in Homebuilding revenues of 28%
offset by a 10% decrease in Financial Services revenues.
Although this was a large increase, delays related to the
hurricanes in Florida caused our deliveries to lag behind our
expectations.
Income before provision for income taxes increased by 46% to
$190.0 million for the year ended December 31, 2004,
from $130.3 million for the comparable period in 2003. This
increase is attributable to an increase in Homebuilding pretax
income to $181.7 million for the year ended
December 31, 2004, from $114.7 million for the year
ended December 31, 2003. This was partially offset by a
decline in Financial Services pretax income to $8.3 million
for the year ended December 31, 2004 from
$15.6 million for the year ended December 31, 2003.
Our effective tax rate was 37.0% and 36.5% for the years ended
December 31, 2004 and 2003, respectively. This increase was
due to increases in income in states with higher tax rates.
As a result of the above, net income increased to
$119.6 million (or $2.08 per diluted share) for the year
ended December 31, 2004, from $82.7 million (or
$1.56 per diluted share) for the year ended
December 31, 2003.
Results
of Operations
Homebuilding
Homebuilding revenues increased 28% to $2.1 billion for the
year ended December 31, 2004, from $1.6 billion for
the year ended December 31, 2003. This increase is due
primarily to an increase in revenues from home sales to
$2.0 billion for the year ended December 31, 2004,
from $1.6 billion for 2003. The 24% increase in revenue
from home sales was due to (1) an 18% increase in
consolidated home deliveries to 7,221 from 6,135 for the years
ended December 31, 2004 and 2003, respectively and
(2) a 5% increase in the average selling price on
consolidated homes delivered to $275,000 from $262,000 in the
prior year. A significant component of this increase was the 55%
increase in revenues from home sales in our West region for the
year ended December 31, 2004 as compared to 2003. This
increase was due to the increased number of consolidated homes
delivered and the higher average selling price of such homes.
Land sales increased to $115.8 million for the year ended
December 31, 2004, as compared to $38.2 million for
the year ended December 31, 2003.
Our Homebuilding gross margin increased 33% to
$428.4 million for the year ended December 31, 2004,
from $323.2 million for the year ended December 31,
2003. This increase is primarily due to an increase in revenue
from home sales. Our gross margin on home sales increased to
19.8% for the year ended December 31, 2004, from 19.5% for
the year ended December 31, 2003. For the year ended
December 31, 2004, we generated gross margin on land sales
of $35.4 million as compared to $10.6 million for the
year ended December 31, 2003.
SG&A expenses increased to $251.7 million for the year
ended December 31, 2004, from $212.1 million for the
year ended December 31, 2003. As a percentage of
Homebuilding revenues, SG&A expenses decreased to 12.0% for
the year ended December 31, 2004, as compared to 12.9% for
2003. The 90 basis point improvement in SG&A expenses
as a percentage of Homebuilding revenues is primarily
attributable to the increase in Homebuilding revenues and our
ability to generate higher revenue levels while leveraging fixed
SG&A costs. The combination of improved gross margins and
reduced SG&A expenses as a percentage of
34
Homebuilding revenues caused our Homebuilding pretax income as a
percentage of homebuilding revenues to increase to 8.6% for the
year ended December 31, 2004, from 7.0% for the year ended
December 31, 2003.
SG&A expenses as a percentage of revenues from home sales
for the year ended December 31, 2004 decreased to 12.7%, as
compared to 13.2% for the prior year. For the years ended
December 31, 2004 and 2003, we recognized a compensation
charge of $8.6 million and $1.2 million, respectively,
for variable accounting of certain stock-based awards which
include performance-based accelerated vesting criteria that were
partially vested during the year.
For the year ended December 31, 2004, income from joint
ventures of $3.2 million includes our share of net earnings
from these entities and management fees.
Net
Sales Orders and Backlog Homes (consolidated)
For the year ended December 31, 2004, net sales orders
increased by 40% and the value of net sales orders increased by
57%, as compared to 2003. The increase is due to strong housing
demand in the majority of our markets and an increase in the
number of communities in which we are marketing. The average
sales price on net sales orders increased by 12.6% to $295,000
for the year ended December 31, 2004, as compared to
$262,000 for the year ended December 31, 2003.
We had 5,094 homes in backlog, as of December 31, 2004, as
compared to 3,128 homes in backlog as of December 31, 2003.
This increase in backlog of 63% is primarily attributable to the
increased sales activity in many of our existing markets. As a
result of the strong housing demand in these markets, we have
been able to increase prices in those markets and have
experienced a change in the product mix of our homes in backlog.
Consequently, our average selling price of homes in backlog has
increased to $308,000 as of December 31, 2004 from $274,000
as of December 31, 2003. The increase in homes in backlog
was also partially due to fourth quarter delays in delivering
homes in several of our markets.
Financial
Services
Financial Services revenues decreased to $34.5 million for
the year ended December 31, 2004 from $38.1 million
for the year ended December 31, 2003. This 10% decrease is
due primarily to a decrease in the number of closings at our
title and mortgage operations and reduced gains in selling
mortgages in the secondary market caused by a shift toward more
adjustable rate mortgage loans and market reductions in the
interest margin. For the year ended December 31, 2004, our
mix of mortgage originations was 33% adjustable rate mortgages
(of which approximately half were interest only) and 67% fixed
rate mortgages, which is a shift from the comparable period in
the prior year of 17% adjustable rate mortgages and 83% fixed
rate mortgages. The average FICO score of our homebuyers during
the year ended December 31, 2004 was 728 and the average
loan to value ratio on first mortgages was 76%. During the year
ended December 31, 2004, approximately 12% of our
homebuyers paid in cash as compared to 8% during the year ended
December 31, 2003. Our mortgage operations capture ratio
for non-cash homebuyers decreased to 58% for the year ended
December 31, 2004, from 59% in 2003. The number of closings
at our mortgage operations decreased to 4,577 for the year ended
December 31, 2004, from 4,663 for the year ended
December 31, 2003, primarily due to an increase in the
number of homebuyers paying in cash. Our title operations
capture ratio increased to 96% of our homebuyers for the year
ended December 31, 2004, from 82% in 2003. However, the
number of closings at our title operations decreased to 19,750
for the year ended December 31, 2004, from 20,773 for 2003
primarily due to a decrease in refinancing transactions by
non-affiliated customers. Non-affiliated customers accounted for
approximately 73% of our title company revenues for the year
ended December 31, 2004.
Financial Services expenses increased to $26.2 million for
the year ended December 31, 2004, from $22.5 million
for the year ended December, 31 2003. This 16% increase is a
result of higher staff levels and $1.5 million in moving
costs and employee separation expenses incurred in connection
with the relocation of our mortgage company headquarters to
Tampa, Florida.
35
Financial
Condition, Liquidity and Capital Resources
Sources
and Uses of Cash
Our Homebuilding operations primary uses of cash have been
for land acquisitions, construction and development
expenditures, joint venture investments, and SG&A
expenditures. Our sources of cash to finance these uses have
been primarily cash generated from operations and cash from our
financing activities.
Our Financial Services operations primarily use cash to fund
mortgages, prior to their sale, and SG&A expenditures. We
rely primarily on internally generated funds, which include the
proceeds generated from the sale of mortgages, and from the
mortgage operations warehouse lines of credit to fund
these operations.
At December 31, 2005, we had unrestricted cash and cash
equivalents of $34.9 million as compared to
$268.5 million at December 31, 2004.
Our net income generally is our most significant source of
operating cash flow. However, because of our rapid growth in
recent periods, our operations have generally used more cash
than they have generated. We expect this trend to continue. As a
result, cash used in operating activities was
$172.3 million during the year ended December 31,
2005, as compared to $15.0 million during the year ended
December 31, 2004. The increase in the use of cash in
operating activities primarily is due to an increase of
$470.1 million in additional inventory to support our
growth. These expenditures have been financed by retaining
earnings and with the issuance of common stock.
Cash used in investing activities was $199.9 million during
the year ended December 31, 2005, as compared to
$83.3 million during the year ended December 31, 2004.
The increase in the use of cash in investing activities
primarily is due to an additional $115.0 million spent for
investments in unconsolidated joint ventures (including
$92.7 million associated with the Transeastern JV) and an
additional $20.0 million in loans to the Transeastern JV
during the year ended December 31, 2005.
On September 13, 2005, pursuant to an underwritten public
offering, we sold 3,358,000 shares of our common stock at a
price of $28.00 per share. The net proceeds of the offering
to us were $89.2 million, after deducting offering costs
and underwriting fees of $4.8 million. The offering
proceeds were used to pay outstanding indebtedness under our
revolving credit facility.
Financing
Activities
Our consolidated borrowings at December 31, 2005 were
$911.7 million, up from $860.4 million at
December 31, 2004. At December 31, 2005, our
Homebuilding borrowings of $876.6 million included
$300.0 million in 9% senior notes due 2010,
$185.0 million of
103/8% senior
subordinated notes due 2012, $125.0 million of
71/2% senior
subordinated notes due 2011, $200.0 million of
71/2% senior
subordinated notes due 2015, and $65.0 million of revolving
credit facility borrowings which bear interest at the
reserve-adjusted Eurodollar base rate plus 1.6%. Our weighted
average debt to maturity is 5.9 years, while our average
inventory turnover is 1.4 times per year.
Our outstanding senior notes are guaranteed, on a joint and
several basis, by the Guarantor Subsidiaries, which are all of
our material direct and indirect subsidiaries, other than our
mortgage and title operations subsidiaries (the Non-guarantor
Subsidiaries). Our outstanding senior subordinated notes are
guaranteed on a senior subordinated basis by all of the
Guarantor Subsidiaries. The senior notes rank pari passu
in right of payment with all of our existing and future
unsecured senior debt and senior in right of payment to the
senior subordinated notes and any future subordinated debt. The
senior subordinated notes rank pari passu in right of
payment with all of our existing and future unsecured senior
subordinated debt. The indentures governing the senior notes and
senior subordinated notes require us to maintain a minimum net
worth and place certain restrictions on our ability, among other
things, to incur additional debt (other than under our revolving
credit facility), pay or make dividends or other distributions,
sell assets, enter into transactions with affiliates, invest in
joint ventures above specified amounts, and merge or consolidate
with other entities. Interest on our outstanding senior notes
and senior subordinated notes is payable semi-annually each year.
36
Our financial leverage, as measured by the ratio of Homebuilding
net debt to capital, decreased slightly to 46.7% at
December 31, 2005 from 47.3% at December 31, 2004, due
primarily to the issuance of common stock and the retention of
earnings. As noted above, however, we have made significant
investments in inventory consistent with our growth strategy
which we have financed, in part, through debt, additional
equity, and internally generated cash. We believe that our
financial leverage is appropriate given our industry, size and
current growth strategy.
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
|
|
Net Debt to Capital
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
Notes payable
|
|
$
|
811.6
|
|
|
$
|
811.4
|
|
Bank borrowings
|
|
|
65.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding borrowings(1)
|
|
$
|
876.6
|
|
|
$
|
811.4
|
|
Less: unrestricted cash
|
|
|
26.2
|
|
|
|
217.6
|
|
|
|
|
|
|
|
|
|
|
Homebuilding net debt
|
|
$
|
850.4
|
|
|
$
|
593.8
|
|
Stockholders equity
|
|
|
971.3
|
|
|
|
662.7
|
|
|
|
|
|
|
|
|
|
|
Total capital(2)
|
|
$
|
1,821.7
|
|
|
$
|
1,256.5
|
|
|
|
|
|
|
|
|
|
|
Ratio
|
|
|
46.7
|
%
|
|
|
47.3
|
%
|
|
|
|
(1) |
|
Does not include obligations for inventory not owned of
$124.6 million at December 31, 2005 and
$136.2 million at December 31, 2004, all of which are
non-recourse to us. |
|
(2) |
|
Does not include Financial Services bank borrowings of
$35.1 million at December 31, 2005 and
$49.0 million at December 31, 2004. |
Homebuilding net debt to capital is not a financial measure
required by generally accepted accounting principles (GAAP) and
other companies may calculate it differently. We have included
this information as we believe that the ratio of Homebuilding
net debt to capital provides comparability among other
publicly-traded homebuilders. In addition, management uses this
information in measuring the financial leverage of our
homebuilding operations, which is our primary business.
Homebuilding net debt to capital has limitations as a measure of
financial leverage because it excludes Financial Services bank
borrowings and it reduces our Homebuilding debt by the amount of
our unrestricted cash. Management compensates for these
limitations by using Homebuilding net debt to capital as only
one of several comparative tools, together with GAAP
measurements, to assist in the evaluation of our financial
leverage. It should not be construed as an indication of our
operating performance or as a measure of our liquidity.
On March 9, 2006, we entered into a new unsecured credit
facility replacing our previous $600.0 million revolving
credit facility. Our new revolving credit facility is
substantially similar to our prior revolving credit facility but
permits us to borrow up to the lesser of
(i) $800.0 million or (ii) our borrowing base
(calculated in accordance with the revolving credit facility
agreement) minus our outstanding senior debt. The facility has a
letter of credit subfacility of $400.0 million. In
addition, we have the right to increase the size of the facility
to provide up to an additional $150.0 million of revolving
loans, provided we give 10 business days notice of our
intention to increase the size of the facility and we meet the
following conditions: (i) at the time of and after giving
effect to the increase, we are in pro forma compliance with our
financial covenants; (ii) no default or event of default
has occurred and is continuing or would result from the
increase; and (iii) the conditions precedent to a borrowing
are satisfied as of such date. The revolving credit facility
expires on March 9, 2010, at which time we will be required
to repay all outstanding principal. Loans outstanding under the
facility may be base rate loans or Eurodollar loans, at our
election. Base rate loans accrue interest at a rate per annum
equal to (i) an applicable margin plus (ii) the higher
of (A) Citicorps base rate or (B) 0.5% plus the
Federal Funds Rate. Eurodollar loans accrue interest at a rate
per annum equal to (i) an applicable margin plus
(ii) the reserve-adjusted Eurodollar base rate for the
interest period. Applicable margins will be adjusted based on
the
37
ratio of our liabilities (net of our unrestricted cash in excess
of $10 million) to our adjusted tangible net worth or our
senior debt rating. The revolving credit facility requires us to
maintain specified financial ratios regarding leverage, interest
coverage, adjusted tangible net worth and certain operational
measurements. The revolving credit facility also places certain
restrictions on, among other things, our ability to pay or make
dividends or other distributions, create or permit certain
liens, make investments in joint ventures, enter into
transactions with affiliates and merge or consolidate with other
entities. Our obligations under the revolving credit facility
are guaranteed by our material domestic subsidiaries, other than
our mortgage and title subsidiaries (unrestricted subsidiaries).
As of December 31, 2005, we had $65.0 million
outstanding under our prior revolving credit facility, and had
issued letters of credit totaling $218.9 million. As of
March 9, 2006, we had $323.0 million outstanding under
our new revolving credit facility, and had issued letters of
credit totaling $244.6 million. Therefore, as of
March 9, 2006, we had $232.4 million remaining in
availability under the new revolving credit facility, all of
which we could have borrowed without violating any of our debt
covenants.
Our mortgage subsidiary has the ability to borrow up to
$200.0 million under two warehouse lines of credit to fund
the origination of residential mortgage loans. The primary
revolving warehouse line of credit (the Primary Warehouse
Line of Credit) provides for revolving loans of up to
$150.0 million. The Primary Warehouse Line of Credit
expires on December 8, 2006. The Primary Warehouse Line of
Credit bears interest at the 30 day LIBOR rate plus a
margin of 1.125% to 3.0%, except for certain specialty mortgage
loans, determined based upon the type of mortgage loans being
financed. The Primary Warehouse Line of Credit also places
certain restrictions on, among other things, our mortgage
subsidiarys ability to incur additional debt, create
liens, pay or make dividends or other distributions, make equity
investments, enter into transactions with affiliates, and merge
or consolidate with other entities.
Our mortgage subsidiarys other warehouse line of credit
(the Secondary Warehouse Line of Credit) is
comprised of (1) a credit facility providing for revolving
loans of up to $30.0 million, subject to meeting borrowing
base requirements based on the value of collateral provided, and
(2) a recently added mortgage loan purchase and sale
agreement which provides for the purchase by the lender of up to
$20.0 million in mortgage loans generated by our mortgage
subsidiary. At no time may the amount outstanding under this
Secondary Warehouse Line of Credit plus the amount of purchased
loans pursuant to the purchase and sale agreement exceed
$50.0 million. The Secondary Warehouse Line of Credit is
used to fund the origination of residential mortgage loans in
addition to the Primary Warehouse Line of Credit. The Secondary
Warehouse Line of Credit bears interest at the 30 day LIBOR
rate plus a margin of 1.125% and expires February 11, 2007.
Both lines of credit are secured by funded mortgages, which are
pledged as collateral, and require our mortgage subsidiary to
maintain certain financial ratios and minimums. At
December 31, 2005, we had $35.1 million in borrowings
under our mortgage subsidiarys warehouse lines of credit.
We believe that we have adequate financial resources, including
unrestricted cash, availability under our current revolving
credit facility and the warehouse lines of credit, and
relationships with financial partners to meet our current and
anticipated working capital, land acquisition and development
needs and our estimated consolidated annual debt service
payments of $76.5 million (at December 31, 2005, based
on the outstanding balances and interest rates as of such date).
However, there can be no assurance that the amounts available
from such sources will be sufficient. If we identify new
acquisition opportunities, or if our operations do not generate
sufficient cash from operations at levels currently anticipated,
we may seek additional debt or equity financing to operate or
expand our business.
At December 31, 2005, the amount of our annual debt service
payments was $76.5 million. This amount included annual
debt service payments on the senior and senior subordinated
notes of $70.6 million and interest payments on the
revolving credit facility, the warehouse lines of credit, and
other notes of $5.9 million based on the balances
outstanding as of December 31, 2005. The amount of our
annual debt service payments on the revolving credit facility
fluctuates based on the principal outstanding under the facility
and the interest rate. An increase or decrease of 1% in interest
rates will change our annual debt service payment by
$1.0 million per year.
38
The following summarizes our significant contractual obligations
and commitments as of December 31, 2005 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
Contractual
Obligations(1)
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Long-Term Debt Obligations
|
|
$
|
910.1
|
|
|
$
|
35.1
|
(2)
|
|
$
|
65.0
|
(4)
|
|
$
|
300.0
|
(3)
|
|
$
|
510.0
|
(3)
|
Capital Lease Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
|
31.5
|
|
|
|
8.0
|
|
|
|
15.1
|
|
|
|
5.0
|
|
|
|
3.4
|
|
Purchase Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-Term Liabilities
Reflected on the Registrants Statement of Financial
Condition under GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
941.6
|
|
|
$
|
43.1
|
|
|
$
|
80.1
|
|
|
$
|
305.0
|
|
|
$
|
513.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include obligations for inventory not owned
of $124.6 million at December 31, 2005. See
notes 2 and 3 to the consolidated financial statements
included elsewhere in this
Form 10-K
for more information on obligations for inventory not
owned. |
|
(2) |
|
Represents borrowings under the Financial Services warehouse
lines of credit outstanding at December 31, 2005. |
|
(3) |
|
Includes $810.0 million in aggregate principal amount of
outstanding senior and senior subordinated notes. Does not
include aggregate annual interest of $70.6 million on such
senior and senior subordinated notes. See note 6 to the
consolidated financial statements included elsewhere in this
Form 10-K
for more information on the senior and senior subordinated notes. |
|
(4) |
|
Represents borrowings under the revolving credit facility at
December 31, 2005. |
Off
Balance Sheet Arrangements
Land and
Homesite Option Contracts
We enter into land and homesite option contracts to procure land
or homesites for the construction of homes. Option contracts
generally require the payment of cash or the posting of a letter
of credit for the right to acquire land or homesites during a
specified period of time at a certain price. Option contracts
allow us to control significant homesite positions with a
minimal capital investment and substantially reduce the risk
associated with land ownership and development. At
December 31, 2005, we had refundable and non-refundable
deposits of $218.5 million and had issued letters of credit
of approximately $186.9 million associated with our option
contracts. The financial exposure for nonperformance on our part
in these transactions generally is limited to our deposits
and/or
letters of credit.
Additionally, at December 31, 2005, we had performance /
surety bonds outstanding of approximately $265.7 million
and letters of credit outstanding of approximately
$32.0 million primarily related to land development
activities.
Investments
in Unconsolidated Joint Ventures
We have entered, and expect to continue to enter, into joint
ventures that acquire and develop land for our Homebuilding
operations
and/or that
also build and market homes for sale to third parties. Through
joint ventures, we reduce and share our risk associated with
land ownership and development and extend our capital resources.
Our partners in these joint ventures generally are unrelated
homebuilders, land sellers, financial investors or other real
estate entities. In joint ventures where the assets are being
financed with debt, the borrowings are non-recourse to us except
that we have agreed to complete certain property development
commitments in the event the joint ventures default and to
indemnify the lenders for losses resulting from fraud,
misappropriation and similar acts. At December 31, 2005, we
had investments in unconsolidated joint ventures of
$254.5 million. We account for these investments under the
equity method of accounting. These
39
unconsolidated joint ventures are limited liability companies or
limited partnerships in which we have a limited partnership
interest and a minority interest in the general partner. At
December 31, 2005, we had receivables of $60.5 million
from these joint ventures due to loans and advances, unpaid
management fees and other items. The debt covenants under our
new revolving credit facility contain limitations on the amount
of our direct cash investments in joint ventures.
We believe that the use of off-balance sheet arrangements
enables us to acquire rights in land which we may not have
otherwise been able to acquire at favorable terms. As a result,
we view the use of off-balance sheet arrangements as beneficial
to our Homebuilding activities.
Dividends
We paid aggregate cash dividends of $0.057 per share of
common stock during the year ended December 31, 2005 and
$0.036 per share of common stock during the year ended
December 31, 2004. We did not declare or pay any dividends
during the year ended December 31, 2003.
Recent
Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R),
Share Based Payment. SFAS No. 123(R)
establishes accounting standards for transactions in which a
company exchanges its equity instruments for goods or services.
In particular, this Statement requires companies to record
compensation expense for all share-based payments, such as
employee stock options, at fair market value. This Statement is
effective as of the beginning of the first annual reporting
period that begins after June 15, 2005. As a result,
beginning January 1, 2006, we will adopt SFAS 123(R)
and begin reflecting the stock option expense determined under
fair value based methods in our income statement rather than as
pro forma disclosure in the notes to the financial statements.
We expect the effect of adopting SFAS 123(R) to be similar
to the effect represented in our proforma disclosure related to
SFAS 123.
On March 9, 2004, the SEC issued Staff Accounting
Bulletin No. 105, Application of Accounting
Principles to Loan Commitments
(SAB No. 105), which provides guidance
regarding interest rate lock commitments (IRLCs) that are
accounted for as derivative instruments under Statement of
Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities
(SFAS No. 133). In SAB No. 105,
the Commission stated that the value of expected future cash
flows related to servicing rights and other intangible
components should be excluded when determining the fair value of
the derivative IRLCs and such value should not be recognized
until the underlying loans are sold. This guidance must be
applied to IRLCs initiated after March 31, 2004. Our IRLCs
were directly offset by forward trades; accordingly, the
implementation of SAB No. 105 did not have a material
impact on our financial position or results of operations.
On June 29, 2005, the Emerging Issues Task Force
(EITF) reached a consensus on Issue
No. 04-5,
Determining Whether a General Partner, or General Partners as
a Group, Controls a Limited Partnership or Similar Entity When
the Limited Partners Have Certain Rights
(EITF 04-5).
The scope of
EITF 04-5
is limited to limited partnerships or similar entities (such as
limited liability companies that have governing provisions that
are the functional equivalent of a limited partnership) that are
not VIEs under FIN 46(R) and provides a new framework for
addressing when a general partner in a limited partnership, or
managing member in the case of a limited liability company,
controls the entity.
EITF 04-5
is effective after June 29, 2005 for new entities formed
after such date and for existing entities for which agreements
are subsequently modified and is effective for us on
January 1, 2006 for all other entities. We do not
anticipate that the adoption of
EITF 04-5
with respect to our agreements entered into prior to
June 29, 2005 will have a material effect on our
consolidated financial statements.
Seasonality
of Operations
The homebuilding industry tends to be seasonal, as generally
there are more homes sold in the spring and summer months when
the weather is milder, although the number of sales contracts
for new homes is highly dependent on the number of active
communities and the timing of new community openings. Because
new
40
home deliveries trail new home contracts by a number of months,
we typically have the greatest percentage of home deliveries in
the fall and winter, and slow sales in the spring and summer
months could negatively affect our full year results. 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. Our operations in
Florida and Texas are at risk of repeated and potentially
prolonged disruptions during the Atlantic hurricane season,
which lasts from June 1 until November 30.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
As a result of the senior and senior subordinated notes
offerings, $810.0 million of our outstanding borrowings are
based on fixed interest rates. We are exposed to market risk
primarily related to potential adverse changes in interest rates
on our warehouse lines of credit and revolving credit facility.
The interest rates relative to these borrowings fluctuate with
the prime, Federal Funds, LIBOR, and Eurodollar lending rates.
We have not entered into derivative financial instruments for
trading or speculative purposes. As of December 31, 2005,
we had an aggregate of approximately $100.1 million drawn
under our revolving credit facility and warehouse lines of
credit that are subject to changes in interest rates. An
increase or decrease of 1% in interest rates will change our
annual debt service payments by $1.0 million per year as a
result of our bank loan arrangements that are subject to changes
in interest rates.
The following table presents the future principal payment
obligations and weighted average interest rates associated with
our long-term debt instruments assuming our actual level of
long-term debt indebtedness as of December 31, 2005:
Expected
Maturity Date
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
|
Fair Value
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
(71/2%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
325.0
|
|
|
$
|
279.4
|
|
Fixed rate (9.0%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
300.0
|
|
|
|
|
|
|
$
|
303.4
|
|
Fixed rate
(103/8%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
185.0
|
|
|
$
|
182.0
|
|
Variable rate, credit facility
(5.84% at December 31, 2005)
|
|
|
|
|
|
|
|
|
|
$
|
65.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
65.0
|
|
Variable rate, warehouse line of
credit (5.46% at December 31, 2005)
|
|
$
|
35.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our operations are interest rate sensitive as overall housing
demand is adversely affected by increases in interest rates. If
mortgage interest rates increase significantly, this may
negatively affect the ability of homebuyers to secure adequate
financing. Higher interest rates also increase our borrowing
costs because, as indicated above, our bank loans will fluctuate
with the prime, Federal Funds, LIBOR, and Eurodollar lending
rates.
We may be adversely affected during periods of high inflation,
primarily because of higher land and construction costs. In
addition, inflation may result in higher interest rates. This
may significantly affect the affordability of permanent mortgage
financing for prospective purchasers, which in turn adversely
affects overall housing demand. In addition, this may increase
our interest costs. We attempt to pass through to our customers
any increases in our costs through increased selling prices and,
to date, inflation has not had a material adverse effect on our
results of operations. However, there is no assurance that
inflation will not have a material adverse impact on our future
results of operations.
41
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Financial statements and supplementary data for us are on pages
F-1 through F-38.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
To ensure that the information we must disclose in our filings
with the Securities and Exchange Commission is recorded,
processed, summarized, and reported on a timely basis, we have
formalized our disclosure controls and procedures. Our principal
executive officer and principal financial officer have reviewed
and evaluated the effectiveness of our disclosure controls and
procedures, as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e),
as of December 31, 2005. Based on such evaluation, such
officers have concluded that, as of December 31, 2005, our
disclosure controls and procedures were effective. There has
been no change in our internal control over financial reporting
during the quarter ended December 31, 2005 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Managements
Report on Internal Control Over Financial Reporting
Managements Report on Internal Control over Financial
Reporting is included on
page F-2
of this
Form 10-K.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2005 has been audited by Ernst &Young
LLP, an independent registered public accounting firm, as stated
in their attestation report which is included on
page F-3
of this
Form 10-K.
Item 9B. Other
Information
On March 9, 2006, we entered into a new unsecured credit
facility with Citicorp North America, Inc., as agent for the
participating banks, replacing our previous $600.0 million
revolving credit facility. Our new revolving credit facility is
substantially similar to our prior revolving credit facility and
permits us to borrow up to the lesser of
(i) $800.0 million or (ii) our borrowing base
(calculated in accordance with the revolving credit facility
agreement) minus our outstanding senior debt. The facility has a
letter of credit subfacility of $400.0 million. In
addition, we have the right to increase the size of the facility
to provide up to an additional $150.0 million of revolving
loans, provided we give 10 business days notice of our
intention to increase the size of the facility and we meet the
following conditions: (i) at the time of and after giving
effect to the increase, we are in pro forma compliance with our
financial covenants; (ii) no default or event of default
has occurred and is continuing or would result from the
increase, and (iii) the conditions precedent to a borrowing
are satisfied as of such date. The revolving credit facility
expires on March 9, 2010, at which time we will be required
to repay all outstanding principal. Loans outstanding under the
facility may be base rate loans or Eurodollar loans, at our
election. Base rate loans accrue interest at a rate per annum
equal to (i) an applicable margin plus (ii) the higher
of (A) Citicorps base rate or (B) 0.5% plus the
Federal Funds Rate. Eurodollar loans accrue interest at a rate
per annum equal to (i) an applicable margin plus
(ii) the reserve-adjusted Eurodollar base rate for the
interest period. Applicable margins will be adjusted based on
the ratio of our liabilities (net of our unrestricted cash in
excess of $10 million) to our adjusted tangible net worth
or our senior debt rating. The revolving credit facility
requires us to maintain specified financial ratios regarding
leverage, interest coverage, adjusted tangible net worth and
certain operational measurements. The revolving credit facility
also places certain restrictions on, among other things, our
ability to pay or make dividends or other distributions, create
or permit certain liens, make investments in joint ventures,
enter into transactions with affiliates and merge or consolidate
with other entities. Our obligations under the revolving credit
facility are guaranteed by our material domestic subsidiaries,
other than our mortgage and title subsidiaries (unrestricted
subsidiaries).
42
The Company and its affiliates do not have any material
relationship with any of the lenders under our new revolving
credit facility, other than as disclosed below. Citicorp North
America, Inc. was a lender under our prior revolving credit
facility. Deutsche Bank Securities, Inc., J.P. Morgan Chase
Bank, N.A., and KeyBank National Association were each lenders
under our prior revolving credit facility and currently
participate in the credit facilities of three of our
unconsolidated joint ventures. Guaranty Bank, the lender under
the Secondary Warehouse Line of Credit, participated in our
prior revolving credit facility and currently participates in
the credit facility of one of our unconsolidated joint ventures.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
We have adopted a Code of Business Conduct and Ethics that
applies to our Chief Executive Officer, Chief Financial Officer,
Chief Accounting Officer and Corporate Controller. The Code of
Business Conduct and Ethics is located on our internet web site
at www.tousa.com under Investor
Information Corporate Governance and is
available in print free of charge to any stockholder who submits
a written request for such document to Technical Olympic USA,
Inc., Attn: Investor Relations, 4000 Hollywood Blvd.,
Suite 500 N, Hollywood, Florida 33021.
On May 13, 2005, we submitted to the New York Stock
Exchange an Annual CEO Certification, signed by our
Chief Executive Officer, certifying that our Chief Executive
Officer was not aware of any violation by the Company of the New
York Stock Exchanges corporate governance listing
standards. Additionally, we have filed as exhibits to this
Form 10-K
the CEO/CFO Certifications required under Section 302 of
the Sarbanes-Oxley Act.
The remainder of the items required by Part III,
Item 10 are incorporated herein by reference from the
Registrants Proxy Statement for its 2006 Annual Meeting of
Stockholders to be filed on or before April 30, 2006.
|
|
Item 11.
|
Executive
Compensation
|
The items required by Part III, Item 11 are
incorporated herein by reference from the Registrants
Proxy Statement for its 2006 Annual Meeting of Stockholders to
be filed on or before April 30, 2006.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The items required by Part III, Item 12 are
incorporated herein by reference from the Registrants
Proxy Statement for its 2006 Annual Meeting of Stockholders to
be filed on or before April 30, 2006.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The items required by Part III, Item 13 are
incorporated herein by reference from the Registrants
Proxy Statement for its 2006 Annual Meeting of Stockholders to
be filed on or before April 30, 2006.
|
|
ITEM 14.
|
Principal
Accounting Fees and Services
|
The items required by Part III, Item 14 are
incorporated herein by reference from the Registrants
Proxy Statement for its 2006 Annual Meeting of Stockholders to
be filed on or before April 30, 2006.
43
PART IV
|
|
Item 15.
|
Exhibits and
Financial Statement Schedules
|
Documents filed as part of this report:
(1) Financial Statements
See Item 8. Financial Statements and Supplementary
Data for Financial Statements included with this Annual
Report on
Form 10-K.
(2) Financial Statement Schedules
None.
(3) Exhibits
|
|
|
|
|
Number
|
|
Exhibit Description
|
|
|
3
|
.1
|
|
Certificate of Incorporation of
Newmark Homes Corp (Incorporated by reference to the
Form 8-K,
dated March 23, 2001, previously filed by the Registrant).
|
|
3
|
.2
|
|
Certificate of Amendment to the
Certificate of Incorporation (Incorporated by reference to the
Registration Statement on
Form S-4
previously filed by the Registrant (Registration Statement
No. 333-100013)).
|
|
3
|
.3
|
|
Amended and Restated Bylaws.
(Incorporated by reference to the Registration Statement on
Form S-4
previously filed by the Registrant (Registration Statement
No. 333-100013)).
|
|
3
|
.4
|
|
Certificate of Amendment to the
Certificate of Incorporation, filed on April 28, 2004
(Incorporated by reference to the
Form 10-Q
for the quarter ended March 31, 2004, previously filed by
the Registrant).
|
|
4
|
.1
|
|
Indenture, dated as of
June 25, 2002, by and among Technical Olympic USA, Inc. and
the subsidiaries named therein and Wells Fargo Bank Minnesota,
National Association, as Trustee covering up to $200,000,000
9% Senior Notes due 2010 (Incorporated by reference to the
Form 8-K,
dated July 9, 2002, previously filed by the Registrant).
|
|
4
|
.2
|
|
Indenture, dated as of
June 25, 2002, by and among Technical Olympic USA, Inc.,
the subsidiaries name therein and Wells Fargo Bank Minnesota,
National Association, as Trustee covering up to $150,000,000
103/8%
Senior Subordinated Notes due 2012 (Incorporated by reference to
the
Form 8-K,
dated July 9, 2002, previously filed by the Registrant).
|
|
4
|
.3
|
|
Form of Technical Olympic USA,
Inc. 9% Senior Note due 2010 (included in Exhibit A to
Exhibit 4.1) (Incorporated by reference to the
Form 8-K,
dated July 9, 2002, previously filed by the Registrant).
|
|
4
|
.4
|
|
Form of Technical Olympic USA,
Inc.
103/8% Senior
Subordinated Note due 2012 (included in Exhibit A of
Exhibit 4.2) (Incorporated by reference to the
Form 8-K,
dated July 9, 2002, previously filed by the Registrant).
|
|
4
|
.5
|
|
Registration Rights Agreement,
dated June 25, 2002, among Technical Olympic USA, Inc. and
Technical Olympic, Inc. (Incorporated by reference to
Exhibit 2.2 to the
Form 8-K,
dated July 9, 2002, previously filed by the Registrant).
|
|
4
|
.6
|
|
Specimen of Stock Certificate of
Technical Olympic USA, Inc. (Incorporated by reference to
Exhibit 4.1 to the Registration Statement on
Form S-8
previously filed by the Registrant (Registration
No. 333-99307)).
|
|
4
|
.7
|
|
Indenture for the 9% Senior
Notes due 2010, dated as of February 3, 2003, among
Technical Olympic USA, Inc., the subsidiaries named therein,
Salomon Smith Barney Inc., Deutsche Bank Securities Inc., Fleet
Securities, Inc. and Credit Lyonnais Securities (USA) Inc.
(Incorporated by reference to Exhibit 4.13 to the
Form 10-K
for the year ended December 31, 2002, previously filed by
the Registrant).
|
|
4
|
.8
|
|
Form of Technical Olympic USA,
Inc. 9% Senior Note due 2010 (included in Exhibit A to
Exhibit 4.7) (Incorporated by reference to
Exhibit 4.13 to the
Form 10-K
for the year ended December 31, 2002, previously filed by
the Registrant).
|
44
|
|
|
|
|
Number
|
|
Exhibit Description
|
|
|
4
|
.9
|
|
Technical Olympic USA, Inc.
103/8% Senior
Subordinated Note due 2012, dated as of April 22, 2003, in
the amount of $35,000,000. (Incorporated by reference to
Exhibit 4.19 to the Registration Statement on
Form S-1
previously filed by the Registrant (Registration Statement
No. 333-106537)).
|
|
4
|
.10
|
|
Indenture for the 7
1/2% Senior
Subordinated Notes due 2011, dated as of March 17, 2004,
among Technical Olympic USA, Inc., the subsidiaries named
therein and Wells Fargo Bank, N.A., as Trustee (Incorporated by
reference to Exhibit 4.24 to the Registration Statement on
Form S-4
previously filed by the Registrant (Registration Statement
No. 333-114587)).
|
|
4
|
.11
|
|
Form of Technical Olympic USA,
Inc. 7
1/2% Senior
Subordinated Note due 2011 (included in Exhibit A to
Exhibit 4.10) (Incorporated by reference to
Exhibit 4.24 to the Registration Statement on
Form S-4
previously filed by the Registrant (Registration Statement
No. 333-114587)).
|
|
4
|
.12
|
|
Indenture for the
7 1/2% Senior
Subordinated Notes due 2015, dated as of December 21, 2004,
among Technical Olympic USA, Inc., the subsidiaries named
therein and Wells Fargo Bank, N.A., as Trustee (Incorporated by
reference to the Registration Statement on
Form S-4
previously filed by the Registrant (Registration Statement
No. 333-122450)).
|
|
4
|
.13
|
|
Form of Technical Olympic USA,
Inc.
7 1/2% Senior
Subordinated Note due 2015 (included in Exhibit A to
Exhibit 4.12) (Incorporated by reference to the
Registration Statement on
Form S-4
previously filed by the Registrant (Registration Statement
No. 333-122450)).
|
|
10
|
.1+
|
|
Form of Indemnification Agreement
(Incorporated by reference to the
Form 10-K
for the year ended December 31, 2003, previously filed by
the Registrant).
|
|
10
|
.2+
|
|
Amended and Restated Employment
Agreement between Technical Olympic USA, Inc. and Antonio B. Mon
dated January 27, 2004, effective as of July 26, 2003
(Incorporated by reference to Exhibit 10.9 to the
Form 10-K
for the year ended December 31, 2003, previously filed by
the Registrant).
|
|
10
|
.3+
|
|
Employment Agreement between
Technical Olympic USA, Inc. and Tommy L. McAden dated
July 12, 2002, effective June 25, 2002 (Incorporated
by reference to Exhibit 10.10 to the
Form 10-Q
for the quarter ended June 30, 2002, previously filed by
the Registrant).
|
|
10
|
.4+
|
|
Technical Olympic USA, Inc. Annual
and Long-Term Incentive Plan, as amended and restated.
(Incorporated by reference to Exhibit 10.5 to the
Form 10-K
for the fiscal year ended December 31, 2004, previously
filed by the Registrant).
|
|
10
|
.5
|
|
Contractor Agreement, effective as
of November 6, 2000, between Technical Olympic USA, Inc.
(f/k/a Newmark Homes Corp.) and Technical Olympic S.A.
(Incorporated by reference to Exhibit 10.26 to the
Registration Statement on
Form S-1
previously filed by the Registrant (Registration
No. 333-106537)).
|
|
10
|
.6
|
|
Supplemental Contractor Agreement,
effective as of January 4, 2001, between Technical Olympic
USA, Inc. (f/k/a Newmark Homes Corp.) and Technical Olympic S.A.
(Incorporated by reference to Exhibit 10.27 to the
Registration Statement on
Form S-1
previously filed by the Registrant (Registration Statement
No. 333-106537)).
|
|
10
|
.7
|
|
Contractor Agreement, effective as
of November 22, 2000, between TOUSA Homes, Inc. (f/k/a
Engle Homes, Inc.) and Technical Olympic S.A. (Incorporated by
reference to Exhibit 10.28 to the Registration Statement on
Form S-1
previously filed by the Registrant (Registration Statement
No. 333-106537)).
|
|
10
|
.8
|
|
Supplemental Contractor Agreement,
effective as of January 3, 2001, between TOUSA Homes, Inc.
(f/k/a Engle Homes Inc.) and Technical Olympic S.A.
(Incorporated by reference to Exhibit 10.29 to the
Registration Statement on
Form S-1
previously filed by the Registrant (Registration Statement
No. 333-106537)).
|
|
10
|
.9
|
|
Amended and Restated Management
Services Agreement, dated as of June 13, 2003, between
Technical Olympic USA, Inc. and Technical Olympic, Inc.
(Incorporated by reference to Exhibit 10.33 to the
Registration Statement on
Form S-1
previously filed by the Registrant (Registration Statement
No. 333-106537)).
|
|
10
|
.10+
|
|
Employment Agreement, dated as of
May 1, 2004, between David J. Keller and Technical Olympic
USA, Inc. (Incorporated by reference to Exhibit 10.44 to
the
Form 10-Q
for the quarter ended June 30, 2004, previously filed by
the Registrant).
|
45
|
|
|
|
|
Number
|
|
Exhibit Description
|
|
|
10
|
.11
|
|
Credit Agreement, dated as of
October 26, 2004, among Technical Olympic USA, Inc., the
lenders and issuers party thereto, Citicorp North America, Inc.,
Deutsche Bank Securities, Inc., KeyBank National Association,
J.P. Morgan Securities, Inc., and CitiGroup Global Markets,
Inc. (Incorporated by reference to Exhibit 10.45 to the
Form 10-Q
for the quarter ended September 30, 2004, previously filed
by the Registrant).
|
|
10
|
.12
|
|
Revolving Credit and Security
Agreement, dated as of October 22, 2004, among Preferred
Home Mortgage Company and Countrywide Warehouse Lending
(Incorporated by reference to Exhibit 10.46 to the
Form 10-Q
for the quarter ended September 30, 2004, previously filed
by the Registrant).
|
|
10
|
.13+
|
|
Technical Olympic USA, Inc.
Executive Savings Plan, effective as of December 1, 2004,
comprised of the Basic Plan Document and the Adoption Agreement.
(Incorporated by reference to Exhibit 99.1 to the
Form 8-K,
dated November 30, 2004, previously filed by the
Registrant).
|
|
10
|
.14+
|
|
Addendum to Technical Olympic USA,
Inc. Executive Savings Plan, effective as of December 1,
2004 (Incorporated by reference to Exhibit 99.2 to the
Form 8-K,
dated November 30, 2004, previously filed by the
Registrant).
|
|
10
|
.15*+
|
|
Term Sheet for the Performance
Unit Program under the Technical Olympic USA, Inc. Annual and
Long-Term Incentive Plan, as amended and restated.
|
|
10
|
.16+
|
|
Employment Agreement, dated as of
February 16, 2005, by and between TOUSA Associates Services
Company and Harry Engelstein. (Incorporated by reference to
Exhibit 10.22 to the
Form 8-K,
dated February 16, 2005, previously filed by the
Registrant).
|
|
10
|
.17+
|
|
Employment Agreement, dated as of
February 16, 2005, by and between TOUSA Associates Services
Company and Mark Upton. (Incorporated by reference to
Exhibit 10.23 to the
Form 8-K,
dated February 16, 2005, previously filed by the
Registrant).
|
|
10
|
.18+
|
|
Employment Agreement, dated as of
November 15, 2004, between Technical Olympic USA, Inc. and
Edward Wohlwender. (Incorporated by reference to
Exhibit 10.24 to the
Form 10-K
for the fiscal year ended December 31, 2004, previously
filed by the Registrant).
|
|
10
|
.19+
|
|
Employment Agreement, dated as of
January 1, 2004, between TOUSA Associates Services Company
and John Kraynick. (Incorporated by reference to
Exhibit 10.25 to the
Form 10-K
for the fiscal year ended December 31, 2004, previously
filed by the Registrant).
|
|
10
|
.20+
|
|
Form of Director Non-Qualified
Stock Option Agreement. (Incorporated by reference to
Exhibit 10.26 to the
Form 8-K,
dated March 3, 2005, previously filed by the Registrant).
|
|
10
|
.21+
|
|
Form of Director Restricted Stock
Grant Agreement. (Incorporated by reference to
Exhibit 10.27 to the
Form 10-K
for the fiscal year ended December 31, 2004, previously
filed by the Registrant).
|
|
10
|
.22+
|
|
Form of Associate Non-Qualified
Stock Option Agreement. (Incorporated by reference to
Exhibit 10.28 to the
Form 10-K
for the fiscal year ended December 31, 2004, previously
filed by the Registrant).
|
|
10
|
.23+
|
|
Policy for Compensation of Outside
Directors of Technical Olympic USA, Inc. (Incorporated by
reference to Exhibit 10.30 to the
Form 10-Q
for the quarter ended March 31, 2005, previously filed by
the Registrant).
|
|
10
|
.24
|
|
Asset Purchase Agreement, dated as
of June 6, 2005, among EH/Transeastern, LLC, Transeastern
Properties, Inc. and the other sellers identified therein,
Arthur J. Falcone and Edward W. Falcone. (Incorporated by
reference to Exhibit 10.31 to the
Form 10-Q
for the quarter ended June 30, 2005, previously filed by
the Registrant).
|
|
10
|
.25
|
|
Amendment No. 1, dated as of
July 28, 2005, to the Credit Agreement dated as of
October 26, 2004, among Technical Olympic USA, Inc.,
Citicorp North America, Inc., as administrative agent, and the
Lenders party thereto. (Incorporated by reference to
Exhibit 10.32to the
Form 10-Q
for the quarter ended June 30, 2005, previously filed by
the Registrant).
|
|
10
|
.26*
|
|
Commitment Letter for Revolving
Credit and Security Agreement, dated December 9, 2005, by
and between Preferred Home Mortgage Company and Countrywide
Warehousing Lending, amending that certain Revolving Credit and
Security Agreement, dated as of October 22, 2004, by and
between Preferred Home Mortgage Company and Countrywide
Warehousing Lending. (Portions of this exhibit have been omitted
pursuant to a request for confidential treatment).
|
46
|
|
|
|
|
Number
|
|
Exhibit Description
|
|
|
10
|
.27*+
|
|
Amendment to the Amended and
Restated Employment Agreement, dated January 13, 2006, by
and between Technical Olympic USA, Inc. and Antonio B. Mon.
|
|
10
|
.28*+
|
|
Employment Agreement, dated as of
January 13, 2006, by and between Technical Olympic USA,
Inc. and Tommy L. McAden.
|
|
10
|
.29*+
|
|
Employment Agreement, dated as of
January 13, 2006, by and between Technical Olympic USA,
Inc. and John Kraynick.
|
|
10
|
.30*
|
|
Credit Agreement, dated as of
March 9, 2006, among Technical Olympic USA, Inc., the
lenders and issuers party thereto, Citicorp North America, Inc.,
Deutsche Bank Securities, Inc., J.P. Morgan Chase Bank, N.A.,
Wachovia Capital Markets, LLC, and CitiGroup Global Markets, Inc.
|
|
21
|
.0*
|
|
Subsidiaries of the Registrant.
|
|
23
|
.1*
|
|
Consent of Ernst & Young
LLP independent registered public accounting firm.
|
|
31
|
.1*
|
|
Certification of Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
31
|
.2*
|
|
Certification of Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
32
|
.1*
|
|
Certification of Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
32
|
.2*
|
|
Certification of Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
* |
|
Filed herewith. |
|
+ |
|
Management contract or compensatory plan or arrangement. |
47
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.
Technical Olympic USA, Inc.
President and Chief Executive Officer
Date: March 9, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Antonio
B. Mon
Antonio
B. Mon
|
|
Executive Vice Chairman,
President, Chief Executive Officer (Principal Executive Officer)
and Director
|
|
March 9, 2006
|
|
|
|
|
|
/s/ David
J. Keller
David
J. Keller
|
|
Senior Vice President, Chief
Financial Officer and Treasurer (Principal Financial Officer)
|
|
March 9, 2006
|
|
|
|
|
|
/s/ Randy
L. Kotler
Randy
L. Kotler
|
|
Vice President
Chief Accounting Officer (Principal Accounting Officer)
|
|
March 9, 2006
|
|
|
|
|
|
/s/ Konstantinos
Stengos
Konstantinos
Stengos
|
|
Chairman of the Board and Director
|
|
March 9, 2006
|
|
|
|
|
|
/s/ Andreas
Stengos
Andreas
Stengos
|
|
Director
|
|
March 9, 2006
|
|
|
|
|
|
/s/ George
Stengos
George
Stengos
|
|
Executive Vice President and
Director
|
|
March 9, 2006
|
|
|
|
|
|
/s/ Marianna
Stengou
Marianna
Stengou
|
|
Director
|
|
March 9, 2006
|
|
|
|
|
|
/s/ Larry
D. Horner
Larry
D. Horner
|
|
Director
|
|
March 9, 2006
|
|
|
|
|
|
/s/ William
A. Hasler
William
A. Hasler
|
|
Director
|
|
March 9, 2006
|
|
|
|
|
|
/s/ Michael
J. Poulos
Michael
J. Poulos
|
|
Director
|
|
March 9, 2006
|
48
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Susan
B. Parks
Susan
B. Parks
|
|
Director
|
|
March 9, 2006
|
|
|
|
|
|
/s/ J.
Bryan Whitworth
J.
Bryan Whitworth
|
|
Director
|
|
March 9, 2006
|
|
|
|
|
|
/s/ Tommy
L. McAden
Tommy
L. McAden
|
|
Executive Vice President and
Director
|
|
March 9, 2006
|
49
TECHNICAL
OLYMPIC USA, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-10
|
|
F-1
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f)
and 15d 15(f). Under the supervision and with
the participation of management, including our principal
executive officer and principal financial officer, we conducted
an evaluation of the effectiveness of our internal control over
financial reporting based upon the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in
Internal Control Integrated Framework,
our management concluded that our internal control over
financial reporting was effective as of December 31, 2005.
Our managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2005 has been audited by Ernst &Young
LLP, an independent registered public accounting firm, as stated
in their attestation report which is included herein.
Technical Olympic USA, Inc.
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Technical Olympic USA, Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that Technical Olympic USA, Inc. maintained
effective internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Technical Olympic USA,
Inc.s management is responsible for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness
of the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Technical
Olympic USA, Inc. maintained effective internal control over
financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Technical Olympic USA, Inc. maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statements of financial condition as of
December 31, 2005 and 2004, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2005 of Technical Olympic USA, Inc. and our
report dated March 1, 2006, except for the second paragraph
of Note 6 Footnote (b) as to which the date is March 9,
2006, expressed an unqualified opinion thereon.
Ernst & Young LLP
Certified Public Accountants
Miami, Florida
March 1, 2006
F-3
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Technical Olympic USA, Inc.
We have audited the accompanying consolidated statements of
financial condition of Technical Olympic USA, Inc. and
subsidiaries (the Company) as of December 31, 2005 and
2004, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2005. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Technical Olympic USA, Inc. and
subsidiaries at December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Technical Olympic USA, Inc.s internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 1, 2006 expressed an unqualified
opinion thereon.
Ernst & Young LLP
Certified Public Accountants
Miami, Florida
March 1, 2006, except for
the second paragraph of Note 6 footnote (b)
as to which the date is March 9, 2006
F-4
TECHNICAL
OLYMPIC USA, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in millions,
|
|
|
|
except par value)
|
|
|
ASSETS
|
HOMEBUILDING:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Unrestricted
|
|
$
|
26.2
|
|
|
$
|
217.6
|
|
Restricted
|
|
|
3.1
|
|
|
|
8.0
|
|
Inventory:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
218.5
|
|
|
|
132.8
|
|
Homesites and land under
development
|
|
|
650.3
|
|
|
|
341.2
|
|
Residences completed and under
construction
|
|
|
747.4
|
|
|
|
671.0
|
|
Inventory not owned
|
|
|
124.6
|
|
|
|
136.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,740.8
|
|
|
|
1,281.2
|
|
Property and equipment, net
|
|
|
27.1
|
|
|
|
26.7
|
|
Investments in unconsolidated
joint ventures
|
|
|
254.5
|
|
|
|
66.6
|
|
Receivables from unconsolidated
joint ventures
|
|
|
60.5
|
|
|
|
3.4
|
|
Other assets
|
|
|
133.2
|
|
|
|
67.7
|
|
Goodwill
|
|
|
108.8
|
|
|
|
110.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,354.2
|
|
|
|
1,781.9
|
|
FINANCIAL SERVICES:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Unrestricted
|
|
|
8.7
|
|
|
|
50.9
|
|
Restricted
|
|
|
3.1
|
|
|
|
2.2
|
|
Mortgage loans held for sale
|
|
|
43.9
|
|
|
|
75.8
|
|
Other assets
|
|
|
12.8
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68.5
|
|
|
|
138.7
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,422.7
|
|
|
$
|
1,920.6
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
HOMEBUILDING:
|
|
|
|
|
|
|
|
|
Accounts payable and other
liabilities
|
|
$
|
329.4
|
|
|
$
|
188.9
|
|
Customer deposits
|
|
|
79.3
|
|
|
|
69.1
|
|
Obligations for inventory not owned
|
|
|
124.6
|
|
|
|
136.2
|
|
Notes payable
|
|
|
811.6
|
|
|
|
811.4
|
|
Bank borrowings
|
|
|
65.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,409.9
|
|
|
|
1,205.6
|
|
FINANCIAL SERVICES:
|
|
|
|
|
|
|
|
|
Accounts payable and other
liabilities
|
|
|
6.4
|
|
|
|
3.3
|
|
Bank borrowings
|
|
|
35.1
|
|
|
|
49.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41.5
|
|
|
|
52.3
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,451.4
|
|
|
|
1,257.9
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred
stock $0.01 par value;
3,000,000 shares authorized; none issued or outstanding
|
|
|
|
|
|
|
|
|
Common
stock $0.01 par value;
97,000,000 shares authorized and 59,554,977 and
56,070,510 shares issued and outstanding at
December 31, 2005, and December 31, 2004, respectively
|
|
|
0.6
|
|
|
|
0.6
|
|
Additional paid-in capital
|
|
|
480.5
|
|
|
|
388.3
|
|
Unearned compensation
|
|
|
(7.7
|
)
|
|
|
(9.0
|
)
|
Retained earnings
|
|
|
497.9
|
|
|
|
282.8
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
971.3
|
|
|
|
662.7
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
2,422.7
|
|
|
$
|
1,920.6
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
TECHNICAL
OLYMPIC USA, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions, except per
share amounts)
|
|
|
HOMEBUILDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales
|
|
$
|
2,266.6
|
|
|
$
|
1,985.0
|
|
|
$
|
1,604.4
|
|
Land sales
|
|
|
194.9
|
|
|
|
115.8
|
|
|
|
38.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,461.5
|
|
|
|
2,100.8
|
|
|
|
1,642.6
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home sales
|
|
|
1,706.7
|
|
|
|
1,592.0
|
|
|
|
1,291.8
|
|
Land sales
|
|
|
149.9
|
|
|
|
80.4
|
|
|
|
27.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,856.6
|
|
|
|
1,672.4
|
|
|
|
1,319.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
604.9
|
|
|
|
428.4
|
|
|
|
323.2
|
|
Selling, general and
administrative expenses
|
|
|
322.9
|
|
|
|
251.7
|
|
|
|
212.1
|
|
(Income) from joint ventures, net
|
|
|
(45.7
|
)
|
|
|
(3.2
|
)
|
|
|
|
|
Other (income), net
|
|
|
(8.7
|
)
|
|
|
(1.8
|
)
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax income
|
|
|
336.4
|
|
|
|
181.7
|
|
|
|
114.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL SERVICES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
47.5
|
|
|
|
34.5
|
|
|
|
38.1
|
|
Expenses
|
|
|
39.0
|
|
|
|
26.2
|
|
|
|
22.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services pretax income
|
|
|
8.5
|
|
|
|
8.3
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
344.9
|
|
|
|
190.0
|
|
|
|
130.3
|
|
Provision for income taxes
|
|
|
126.6
|
|
|
|
70.4
|
|
|
|
47.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
218.3
|
|
|
$
|
119.6
|
|
|
$
|
82.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.82
|
|
|
$
|
2.13
|
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
3.68
|
|
|
$
|
2.08
|
|
|
$
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
57,120,031
|
|
|
|
56,060,371
|
|
|
|
52,720,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
59,359,355
|
|
|
|
57,410,700
|
|
|
|
53,180,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH DIVIDENDS PER SHARE
|
|
$
|
0.057
|
|
|
$
|
0.036
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
TECHNICAL
OLYMPIC USA, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Unearned
|
|
|
Retained
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(Dollars in millions)
|
|
|
Balance at January 1, 2003
|
|
|
52,272,726
|
|
|
$
|
0.5
|
|
|
$
|
322.2
|
|
|
$
|
|
|
|
$
|
82.5
|
|
|
$
|
405.2
|
|
Common stock issued to directors
|
|
|
19,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
3,750,000
|
|
|
|
0.1
|
|
|
|
48.4
|
|
|
|
|
|
|
|
|
|
|
|
48.5
|
|
Unearned compensation
|
|
|
|
|
|
|
|
|
|
|
8.5
|
|
|
|
(7.3
|
)
|
|
|
|
|
|
|
1.2
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82.7
|
|
|
|
82.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
56,041,943
|
|
|
|
0.6
|
|
|
|
379.1
|
|
|
|
(7.3
|
)
|
|
|
165.2
|
|
|
|
537.6
|
|
Common stock issued to directors
|
|
|
13,646
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
Stock option exercises
|
|
|
14,921
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.0
|
)
|
|
|
(2.0
|
)
|
Unearned compensation
|
|
|
|
|
|
|
|
|
|
|
8.9
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
7.2
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119.6
|
|
|
|
119.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
56,070,510
|
|
|
|
0.6
|
|
|
|
388.3
|
|
|
|
(9.0
|
)
|
|
|
282.8
|
|
|
|
662.7
|
|
Common stock issued to directors
|
|
|
10,842
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Stock option exercises
|
|
|
115,625
|
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.2
|
)
|
|
|
(3.2
|
)
|
Sale of common stock
|
|
|
3,358,000
|
|
|
|
|
|
|
|
89.2
|
|
|
|
|
|
|
|
|
|
|
|
89.2
|
|
Unearned compensation
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
1.3
|
|
|
|
|
|
|
|
2.1
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218.3
|
|
|
|
218.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
59,554,977
|
|
|
$
|
0.6
|
|
|
$
|
480.5
|
|
|
$
|
(7.7
|
)
|
|
$
|
497.9
|
|
|
$
|
971.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
TECHNICAL
OLYMPIC USA, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in millions)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
218.3
|
|
|
$
|
119.6
|
|
|
$
|
82.7
|
|
Adjustments to reconcile net income
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
13.3
|
|
|
|
12.6
|
|
|
|
9.3
|
|
Non-cash compensation expense
|
|
|
3.7
|
|
|
|
8.8
|
|
|
|
1.4
|
|
Loss on impairment of inventory
|
|
|
6.2
|
|
|
|
4.8
|
|
|
|
|
|
Deferred income taxes
|
|
|
2.0
|
|
|
|
(0.7
|
)
|
|
|
(0.7
|
)
|
Undistributed equity in earnings
from unconsolidated entities
|
|
|
(18.5
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
4.0
|
|
|
|
15.6
|
|
|
|
(1.6
|
)
|
Inventory
|
|
|
(470.1
|
)
|
|
|
(216.6
|
)
|
|
|
(137.3
|
)
|
Receivables from unconsolidated
joint ventures
|
|
|
(37.1
|
)
|
|
|
(3.4
|
)
|
|
|
|
|
Other assets
|
|
|
(67.5
|
)
|
|
|
(19.3
|
)
|
|
|
(3.1
|
)
|
Mortgage loans held for sale
|
|
|
31.9
|
|
|
|
(0.6
|
)
|
|
|
(16.4
|
)
|
Accounts payable and other
liabilities
|
|
|
131.4
|
|
|
|
31.1
|
|
|
|
55.5
|
|
Customer deposits
|
|
|
10.1
|
|
|
|
33.6
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(172.3
|
)
|
|
|
(15.0
|
)
|
|
|
(3.0
|
)
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net additions to property and
equipment
|
|
|
(14.1
|
)
|
|
|
(15.6
|
)
|
|
|
(19.1
|
)
|
Investments in unconsolidated joint
ventures
|
|
|
(176.1
|
)
|
|
|
(61.1
|
)
|
|
|
(5.5
|
)
|
Loans to unconsolidated joint
ventures
|
|
|
(20.0
|
)
|
|
|
|
|
|
|
|
|
Amounts paid for acquisitions, net
of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(59.6
|
)
|
Earn out consideration paid for
acquisitions
|
|
|
|
|
|
|
(6.6
|
)
|
|
|
(18.1
|
)
|
Capital distributions from joint
ventures
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(199.9
|
)
|
|
|
(83.3
|
)
|
|
|
(102.3
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from (repayments on)
revolving credit facilities
|
|
|
65.0
|
|
|
|
(10.0
|
)
|
|
|
(45.2
|
)
|
Proceeds from notes offerings
|
|
|
|
|
|
|
330.0
|
|
|
|
129.3
|
|
Principal payments on unsecured
borrowings and senior notes
|
|
|
|
|
|
|
(7.9
|
)
|
|
|
|
|
Net (repayments on) proceeds from
Financial Services bank borrowings
|
|
|
(13.9
|
)
|
|
|
(14.3
|
)
|
|
|
14.9
|
|
Payments for deferred financing
costs
|
|
|
(0.3
|
)
|
|
|
(5.9
|
)
|
|
|
(5.4
|
)
|
Minority interest in consolidated
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
(9.1
|
)
|
Net proceeds from sale of common
stock
|
|
|
89.2
|
|
|
|
|
|
|
|
48.4
|
|
Proceeds from stock option exercises
|
|
|
1.8
|
|
|
|
0.1
|
|
|
|
|
|
Dividends paid
|
|
|
(3.2
|
)
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
138.6
|
|
|
|
290.0
|
|
|
|
132.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(233.6
|
)
|
|
|
191.7
|
|
|
|
27.6
|
|
Cash and cash equivalents at
beginning of period
|
|
|
268.5
|
|
|
|
76.8
|
|
|
|
49.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
34.9
|
|
|
$
|
268.5
|
|
|
$
|
76.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-8
Supplemental disclosure of non-cash investing and financing
activities (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
(Decrease) increase in obligations
for inventory not owned and corresponding (decrease) increase in
inventory not owned
|
|
$
|
(11.6
|
)
|
|
$
|
(110.0
|
)
|
|
$
|
229.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cash paid for income taxes
|
|
$
|
61.4
|
|
|
$
|
60.4
|
|
|
$
|
43.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-9
TECHNICAL
OLYMPIC USA, INC. AND SUBSIDIARIES
December 31, 2005
|
|
1.
|
Business
and Organization
|
Business
Technical Olympic USA, Inc. is a homebuilder with a
geographically diversified national presence. We operate in
various metropolitan markets in ten states, located in four
major geographic regions: Florida, the Mid-Atlantic, Texas, and
the West. We design, build, and market detached single-family
residences, town homes and condominiums. We also provide title
insurance and mortgage brokerage services to our homebuyers and
others. Generally, we do not retain or service the mortgages
that we originate but, rather, sell the mortgages and related
servicing rights.
Organization
Technical Olympic S.A. owns approximately 67% of our outstanding
common stock. Technical Olympic S.A. is a publicly-traded Greek
company whose shares are traded on the Athens Stock Exchange.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Our accounting and reporting policies conform to accounting
principles generally accepted in the United States and general
practices within the homebuilding industry. The following
summarizes the more significant of these policies.
Principles
of Consolidation and Basis of Presentation
The consolidated financial statements include our accounts and
those of our subsidiaries. All significant intercompany balances
and transactions have been eliminated in the consolidated
financial statements.
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Due to our normal operating cycle being in excess of one year,
we present unclassified consolidated statements of financial
condition.
Segment
Reporting
In accordance with Statement of Financial Accounting Standard
(SFAS) No. 131, Disclosures about Segments
of an Enterprise and Related Information, we have concluded
that 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.
For the years ended December 31, 2005, 2004, and 2003, we
have eliminated inter-segment financial services revenues of
$9.8 million, $7.3 million, and $5.8 million,
respectively.
Homebuilding
Inventory
Inventory is stated at the lower of cost or fair value.
Inventory under development or held for development is stated at
an accumulated cost unless such cost would not be recovered from
the cash flows generated by future disposition. In this
instance, such inventories are recorded at fair value. Inventory
to be disposed of is carried at the lower of cost or fair value
less cost to sell. We utilize the specific identification method
of charging construction costs to cost of sales as homes are
delivered. Common construction project costs are allocated to
each individual home in the various communities based upon the
total number of homes
F-10
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to be constructed in each community. Interest, real estate
taxes, and certain development costs are capitalized to land and
construction costs during the development and construction
period and are amortized to costs of sales as deliveries occur.
Obligations
for Inventory Not Owned
Homebuilders may enter into option contracts for the purchase of
land or homesites with land sellers and third-party financial
entities, some of which qualify as Variable Interest Entities
(VIEs) under Financial Accounting Standards Board
(FASB) Interpretation No. 46 (Revised),
Consolidation of Variable Interest Entities
(FIN 46(R)). FIN 46(R) addresses
consolidation by business enterprises of VIEs in which an entity
absorbs a majority of the expected losses, receives a majority
of the entitys expected residual returns, or both, as a
result of ownership, contractual or other financial interests in
the entity. Obligations for inventory not owned in our
consolidated statements of financial condition represent
liabilities associated with our land banking and similar
activities, including obligations in VIEs which have been
consolidated by us and in which we have a less than 50%
ownership interest, and the creditors have no recourse against
us. As a result, the obligations have been specifically excluded
from the calculation of leverage ratios pursuant to the terms of
our revolving credit facility.
In applying FIN 46(R) to our homesite option contracts and
other transactions with VIEs, we make estimates regarding cash
flows and other assumptions. We believe that our critical
assumptions underlying these estimates are reasonable based on
historical evidence and industry practice. Based on our analysis
of transactions entered into with VIEs, we determined that we
are the primary beneficiary of certain of these homesite option
contracts. Consequently, FIN 46(R) requires us to
consolidate the assets (homesites) at their fair value, although
(1) we have no legal title to the assets, (2) our
maximum exposure to loss is generally limited to the deposits or
letters of credits placed with these entities, and
(3) creditors, if any, of these entities have no recourse
against us.
Investments
in Joint Ventures
We analyze our homebuilding and land development joint ventures
under FIN 46(R) and Emerging Issues Task Force
(EITF) Issue
No. 04-5,
Determining Whether a General Partner, or General Partners as
a Group, Controls a Limited Partnership or Similar Entity When
the Limited Partners Have Certain Rights
(EITF 04-5).
On June 29, 2005, the EITF reached a consensus on
EITF 04-5.
The scope of
EITF 04-5
is limited to limited partnerships or similar entities (such as
limited liability companies that have governing provisions that
are the functional equivalent of a limited partnership) that are
not VIEs under FIN 46(R) and provides a new framework for
addressing when a general partner in a limited partnership, or
managing member in the case of a limited liability company,
controls the entity.
EITF 04-5
is effective after June 29, 2005 for new entities formed
after such date and for existing entities for which agreements
are subsequently modified and is effective for us on
January 1, 2006 for all other entities. We do not
anticipate that the adoption of
EITF 04-5
with respect to our agreements entered into prior to
June 29, 2005 will have a material effect on our
consolidated financial statements.
Investments in our unconsolidated homebuilding and land
development joint ventures are accounted for under the equity
method of accounting. Under the equity method, we recognize our
proportionate share of earnings and losses generated by the
joint venture upon the delivery of homes or homesites to third
parties. All joint venture profits generated from land sales to
us are deferred and recorded as a reduction of the cost basis in
the homesites purchased until the homes are ultimately sold by
us to third parties. Our ownership interests in our
unconsolidated joint ventures vary, but are generally less than
or equal to 50%. We account for these investments under the
equity method because: (i) the entities are not VIEs in
accordance with FIN 46(R); (ii) for those entities
determined to be VIEs, we are not considered the primary
beneficiary; (iii) we do not have the voting control,
and/or, in the case of joint ventures where we are the general
partner or managing
F-11
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
member, the limited partners (or non-managing members) have
substantive participatory rights in accordance with
EITF 04-5.
Revenue
Recognition
Our primary source of revenue is the sale of homes to
homebuyers. To a lesser degree, we engage in the sale of land to
other homebuilders. Revenue is recognized on home sales and land
sales at closing when title passes to the buyer and all of the
following conditions are met: a sale is consummated, a
significant down payment is received, the earnings process is
complete and the collection of any remaining receivables is
reasonably assured.
Warranty
Costs
We provide homebuyers with a limited warranty of workmanship and
materials from the date of sale for up to two years. We
generally have recourse against the subcontractors for claims
relating to workmanship and materials. We also provide up to a
ten-year homebuyers warranty which covers major structural
defects. Estimated warranty costs are recorded at the time of
sale based on historical experience and current factors.
Advertising
Costs
Advertising costs, consisting primarily of newspaper and trade
publications, and the cost of maintaining an internet web-site,
are expensed as incurred. Advertising expense included in
selling, general and administrative expenses for the years ended
December 31, 2005, 2004, and 2003 amounted to
$9.8 million, $12.4 million, and $12.6 million,
respectively.
Financial
Services
Title Company
Escrow Deposits
As a service to its customers, our title company subsidiary,
Universal Land Title, administers escrow and trust deposits
which totaled approximately $102.9 million and
$67.0 million at December 31, 2005 and 2004,
respectively, representing undisbursed amounts received for
settlements of mortgage loans, payments on mortgage loans, and
indemnities against specific title risks. These escrow funds are
not considered our assets and, therefore, are excluded from the
accompanying consolidated statements of financial condition.
Mortgage
Loans Held for Sale
Mortgage loans held for sale are stated at the lower of
aggregate cost or fair value based upon such commitments for
loans to be delivered or prevailing market rates for uncommitted
loans. Substantially all of the loans originated by us are sold
to private investors within 30 days of origination.
Interest
Rate Lock Commitments
On March 9, 2004, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 105, Application of
Accounting Principles to Loan Commitments
(SAB No. 105), which provides guidance
regarding interest rate lock commitments (IRLCs)
that are accounted for as derivative instruments under SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities. In SAB No. 105, the SEC stated
that the value of expected future cash flows related to
servicing rights and other intangible components should be
excluded when determining the fair value of the derivative IRLCs
and such value should not be recognized until the underlying
loans are sold. This guidance must be applied to IRLCs initiated
after March 31, 2004. Our IRLCs were directly offset by
forward trades; accordingly, the implementation of
SAB No. 105 did not have a material impact on our
financial position or results of operations.
F-12
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
Recognition
Loan origination revenues, net of direct origination costs, and
loan discount points are deferred as an adjustment to the
carrying value of the related mortgage loans held for sale, and
are recognized as income when the related loans are sold to
third-party investors. Gains and losses from the sale of loans
are recognized to the extent that the sales proceeds exceed, or
are less than, the book value of the loans. Mortgage interest
income is earned during the interim period before mortgage loans
are sold and is accrued as earned.
Fees derived from our title services are recognized as revenue
in the month of closing of the underlying sale transaction.
General
Cash and
Supplemental Cash Flow Information
Cash includes amounts in transit from title companies for home
deliveries 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.
Accounting
for the Impairment of Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, we carry
long-lived assets at the lower of the carrying amount or fair
value. Impairment is evaluated by estimating future undiscounted
cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected undiscounted
future cash flows is less than the carrying amount of the
assets, an impairment loss is recognized. Fair value, for
purposes of calculating impairment, is measured based on
estimated future cash flows, discounted at a market rate of
interest. During the years ended December 31, 2005 and
2004, we recorded impairment losses of $6.2 million and
$4.8 million, respectively, which were determined based on
prices for similar assets. These losses are included in cost of
sales in the accompanying consolidated statements of income.
Concentration
of Credit Risk
We conduct business primarily in four geographical regions:
Florida, the Mid-Atlantic, Texas, and the West. Accordingly, the
market value of our inventory is susceptible to changes in
market conditions that may occur in these locations. With
regards to the mortgage loans held for sale, we will generally
only originate loans which have met underwriting criteria
required by purchasers of our loan portfolios. Additionally, we
generally sell our mortgage loans held for sale within
30 days which minimizes our credit risk. We are exposed to
credit risk as our mortgage loans held for sale are sold
primarily to one investor.
Property
and Equipment
Property and equipment, consisting primarily of office premises,
transportation equipment, office furniture and fixtures,
capitalized software costs, and model home furniture, are stated
at cost net of accumulated depreciation. Repairs and maintenance
are expensed as incurred.
Depreciation generally is provided using the straight-line
method over the estimated useful life of the asset, which ranges
from 3 to 31 years. At December 31, 2005 and 2004,
accumulated depreciation approximated $25.4 million and
$20.7 million, respectively.
F-13
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill
Goodwill represents the excess of the purchase price of our
acquisitions over the fair value of the net assets acquired.
Additional consideration paid in subsequent periods under the
terms of purchase agreements is included as acquisition costs.
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, we test goodwill for impairment at least
annually. For purposes of the impairment test, we consider each
division a reporting unit. Our impairment test is based on
discounted cash flows derived from internal projections. This
process requires us to make assumptions on future revenues,
costs, and timing of expected cash flows. Due to the degree of
judgment required and uncertainties surrounding such estimates,
actual results could differ from such estimates. To the extent
additional information arises or our strategies change, it is
possible that our conclusion regarding goodwill impairment could
change, which could have a material adverse effect on our
financial position and results of operations. We performed our
annual impairment test as of December 31, 2005 and
determined that goodwill was not impaired.
The change in goodwill for the years ended December 31,
2005 and 2004 is as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Balance at January 1
|
|
$
|
110.7
|
|
|
$
|
100.1
|
|
Earn out consideration paid or
accrued on acquisitions
|
|
|
|
|
|
|
10.6
|
|
Other adjustments
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
108.8
|
|
|
$
|
110.7
|
|
|
|
|
|
|
|
|
|
|
Insurance
and Litigation Reserves
Insurance and litigation reserves have been established for
estimated amounts based on an analysis of past history of
claims. We have, and require the majority of our subcontractors
to have, general liability insurance that protects us against a
portion of our risk of loss from construction-related claims. We
reserve for costs to cover our self-insured retentions and
deductible amounts under these policies and for any costs in
excess of our coverage limits. Because of the high degree of
judgment required in determining these estimated reserve
amounts, actual future claim costs could differ from our
currently estimated amounts.
Income
Taxes
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes
(SFAS No. 109). Under
SFAS No. 109, income taxes are accounted for using the
asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date.
Earnings
Per Share
Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings
per share is computed based on the weighted average number of
shares of common stock and dilutive securities
F-14
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
outstanding during the period. Dilutive securities are options
or other common stock equivalents that are freely exercisable
into common stock at less than market prices. Dilutive
securities are not included in the weighted average number of
shares when inclusion would increase the earnings per share or
decrease the loss per share.
The following table represents a reconciliation of weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Basic weighted average shares
outstanding
|
|
|
57,120,031
|
|
|
|
56,060,371
|
|
|
|
52,720,185
|
|
Net effect of common stock
equivalents assumed to be exercised
|
|
|
2,239,324
|
|
|
|
1,350,329
|
|
|
|
460,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
outstanding
|
|
|
59,359,355
|
|
|
|
57,410,700
|
|
|
|
53,180,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The shares issued and outstanding and the earnings per share
amounts in the consolidated financial statements have been
adjusted to reflect a
five-for-four
stock split effected in the form of a 25% stock dividend paid on
March 31, 2005 and a
three-for-two
stock split effected in the form of a 50% stock dividend paid on
June 1, 2004.
On September 13, 2005, pursuant to an underwritten public
offering, we sold 3,358,000 shares of our common stock at a
price of $28.00 per share. The net proceeds of the offering
to us were $89.2 million, after deducting offering costs
and underwriting fees of $4.8 million. The offering
proceeds were used to pay outstanding indebtedness under our
revolving credit facility.
F-15
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-Based
Compensation
We account for our stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees
(APB No. 25), and related interpretations. As
such, compensation expense is recorded on the date of grant only
if the current market price of the underlying stock exceeds the
exercise price. We have adopted the disclosure-only provisions
of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123).
Accordingly, no compensation cost has been recognized as all
stock options granted under our stock option plan have exercise
prices at or greater than the market value of our stock on the
grant date. If the methodologies of SFAS No. 123 were
applied to determine compensation expense for our stock options
based on the fair value of our common stock at the grant dates
for awards under our option plan, our net income and earnings
per share for the years ended December 31, 2005, 2004, and
2003 would have been adjusted to the pro forma amounts indicated
below (dollars in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net income as reported
|
|
$
|
218.3
|
|
|
$
|
119.6
|
|
|
$
|
82.7
|
|
Add: Stock-based employee
compensation included in reported net income, net of tax
|
|
|
2.2
|
|
|
|
5.4
|
|
|
|
0.8
|
|
Deduct: Stock-based employee
compensation expense determined under the fair value method, net
of tax
|
|
|
(2.7
|
)
|
|
|
(4.1
|
)
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
217.8
|
|
|
$
|
120.9
|
|
|
$
|
80.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported basic earnings per share
|
|
$
|
3.82
|
|
|
$
|
2.13
|
|
|
$
|
1.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic earnings per share
|
|
$
|
3.81
|
|
|
$
|
2.16
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported diluted earnings per share
|
|
$
|
3.68
|
|
|
$
|
2.08
|
|
|
$
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted earnings per
share
|
|
$
|
3.67
|
|
|
$
|
2.11
|
|
|
$
|
1.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values of options granted were estimated on the date of
their grant using the Black-Scholes option pricing model based
on the following assumptions for all the years presented:
|
|
|
|
|
Expected volatility
|
|
|
0.42% - 0.48%
|
|
Expected dividend yield
|
|
|
0%
|
|
Risk-free interest rate
|
|
|
1.47% - 4.02%
|
|
Expected life
|
|
|
4-10 years
|
|
Fair
Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, requires companies to disclose the
estimated fair value of their financial instrument assets and
liabilities. Fair value estimates are made at a specific point
in time, based upon relevant market information about the
financial instrument. These estimates do not reflect any premium
or discount that could result from offering for sale at one time
our entire holdings of a particular instrument. The carrying
values of cash and mortgage loans held for sale approximate
their fair values due to their short-term nature. The carrying
value of financial service borrowings and obligations for
inventory not owned approximate their fair value as
substantially all of the debt has a fluctuating interest rate
based upon a current market index. The fair value of the
$300.0 million senior notes and $510.0 million senior
subordinated notes at December 31, 2005 is
$303.4 million and $461.4 million, respectively, as
determined by quoted market prices.
F-16
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Reclassifications
Certain reclassifications have been made to conform the prior
periods amounts to the current periods presentation.
These reclassifications include the netting of financial
services restricted cash relating to escrow deposits and the
escrow liability related to such escrow deposits administered by
our title company.
Recent
Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R),
Share Based Payment
(SFAS No. 123(R)).
SFAS No. 123(R) establishes accounting standards for
transactions in which a company exchanges its equity instruments
for goods or services. In particular, this Statement requires
companies to record compensation expense for all share-based
payments, such as employee stock options, at fair market value.
This Statement is effective as of the beginning of the first
annual reporting period that begins after June 15, 2005. As
a result, beginning January 1, 2006, we will adopt
SFAS No. 123(R) and begin reflecting the stock option
expense determined under fair value based methods in our income
statement rather than as pro forma disclosure in the notes to
the financial statements. We expect the effect of adopting
SFAS No. 123(R) to be similar to the effect
represented in our proforma disclosure related to
SFAS No. 123.
On March 29, 2005, the SEC issued SAB No. 107
(SAB No. 107). SAB No. 107
provides the SEC staff position regarding the application of
SFAS No. 123(R). SAB No. 107 contains
interpretive guidance related to the interaction between
SFAS No. 123(R) and certain SEC rules and regulations,
as well as provides the staffs views regarding the
valuation of share-based payment arrangements for public
companies. SAB No. 107 also highlights the importance
of disclosures made related to the accounting for share-based
payment transactions. We will adopt the provisions of
SAB No. 107 in connection with our adoption of
SFAS No. 123(R).
In December 2004, the FASB issued Staff Position 109-1,
Application of FASB Statement No. 109, Accounting for
Income Taxes to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of
2004 (FSP 109-1). The American Jobs Creation
Act, which was signed into law in October 2004, provides a tax
deduction on qualified domestic production activities. When
fully phased-in, the deduction will be up to 9% of the lesser of
qualified production activities income or taxable
income. Based on the guidance provided by FSP 109-1, this
deduction should be accounted for as a special deduction under
SFAS No. 109 and will reduce tax expense in the period
or periods that the amounts are deductible on the tax return.
FSP 109-1 was effective December 21, 2004.
F-17
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of homebuilding interest capitalized in inventory is
as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Interest capitalized, beginning of
period
|
|
$
|
36.8
|
|
|
$
|
29.7
|
|
|
$
|
11.6
|
|
Interest incurred
|
|
|
81.5
|
|
|
|
66.1
|
|
|
|
55.1
|
|
Less interest included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
66.3
|
|
|
|
50.5
|
|
|
|
35.3
|
|
Other*
|
|
|
4.3
|
|
|
|
8.5
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest capitalized, end of period
|
|
$
|
47.7
|
|
|
$
|
36.8
|
|
|
$
|
29.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Included in Other above for the years ended
December 31, 2005 and 2004 is interest which was
capitalized to inventory that was subsequently contributed to an
unconsolidated joint venture. For the years ended
December 31, 2005, 2004, and 2003, all interest incurred
has been capitalized. |
In the ordinary course of business, we enter into contracts to
purchase homesites and land held for development. At
December 31, 2005 and 2004, we had refundable and
non-refundable deposits aggregating $218.5 million and
$132.8 million, respectively, included in inventory in the
accompanying consolidated statements of financial condition. Our
liability for nonperformance under such contracts is generally
limited to forfeiture of the related deposits.
The effect of FIN 46(R) at December 31, 2005 was to
increase inventory by $70.3 million, excluding deposits of
$10.5 million, which had been previously recorded, with a
corresponding increase to obligations for inventory not
owned in the accompanying consolidated statement of
financial condition. Additionally, we have entered into
arrangements with VIEs to acquire homesites in which our
variable interest is insignificant and, therefore, we have
determined that we are not the primary beneficiary and are not
required to consolidate the assets of such VIEs.
From time to time, we transfer title to certain parcels of land
to unrelated third parties and enter into options with the
purchasers to acquire fully developed homesites. As we have
retained a continuing involvement in these properties, in
accordance with SFAS No. 66, Accounting for the
Sales of Real Estate, we have accounted for these
transactions as financing arrangements. At December 31,
2005, $54.3 million of inventory not owned and obligations
for inventory not owned relates to sales with continuing
involvement.
F-18
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Investments
in Unconsolidated Joint Ventures
|
Summarized condensed combined financial information on
unconsolidated entities in which we have investments that are
accounted for by the equity method is (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Land
|
|
|
Home
|
|
|
|
|
|
|
Development
|
|
|
Construction
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
13.4
|
|
|
$
|
60.5
|
|
|
$
|
73.9
|
|
Inventories
|
|
|
306.1
|
|
|
|
1,023.6
|
|
|
|
1,329.7
|
|
Other assets
|
|
|
3.3
|
|
|
|
227.5
|
|
|
|
230.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
322.8
|
|
|
$
|
1,311.6
|
|
|
$
|
1,634.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
equity:
|
Accounts payable and other
liabilities
|
|
$
|
6.6
|
|
|
$
|
211.2
|
|
|
$
|
217.8
|
|
Notes payable
|
|
|
142.0
|
|
|
|
781.5
|
|
|
|
923.5
|
|
Equity of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Olympic USA, Inc.
|
|
|
86.1
|
|
|
|
167.1
|
|
|
|
253.2
|
|
Others
|
|
|
88.1
|
|
|
|
151.8
|
|
|
|
239.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
174.2
|
|
|
|
318.9
|
|
|
|
493.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
equity
|
|
$
|
322.8
|
|
|
$
|
1,311.6
|
|
|
$
|
1,634.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
Land
|
|
|
Home
|
|
|
|
|
|
|
Development
|
|
|
Construction
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1.4
|
|
|
$
|
14.8
|
|
|
$
|
16.2
|
|
Inventories
|
|
|
74.0
|
|
|
|
196.8
|
|
|
|
270.8
|
|
Other assets
|
|
|
1.4
|
|
|
|
8.4
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
76.8
|
|
|
$
|
220.0
|
|
|
$
|
296.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
equity:
|
Accounts payable and other
liabilities
|
|
$
|
11.0
|
|
|
$
|
10.0
|
|
|
$
|
21.0
|
|
Notes payable
|
|
|
32.0
|
|
|
|
81.8
|
|
|
|
113.8
|
|
Equity of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Olympic USA, Inc.
|
|
|
15.6
|
|
|
|
51.0
|
|
|
|
66.6
|
|
Others
|
|
|
18.2
|
|
|
|
77.2
|
|
|
|
95.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
33.8
|
|
|
|
128.2
|
|
|
|
162.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
equity
|
|
$
|
76.8
|
|
|
$
|
220.0
|
|
|
$
|
296.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2005
|
|
|
Year Ended December 31,
2004
|
|
|
|
Land
|
|
|
Home
|
|
|
|
|
|
Land
|
|
|
Home
|
|
|
|
|
|
|
Development
|
|
|
Construction
|
|
|
Total
|
|
|
Development
|
|
|
Construction
|
|
|
Total
|
|
|
Revenues
|
|
$
|
34.6
|
|
|
$
|
553.4
|
|
|
$
|
588.0
|
|
|
$
|
19.3
|
|
|
$
|
34.8
|
|
|
$
|
54.1
|
|
Cost and expenses
|
|
|
35.3
|
|
|
|
512.7
|
|
|
|
548.0
|
|
|
|
16.8
|
|
|
|
32.8
|
|
|
|
49.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (losses) of
unconsolidated entities
|
|
$
|
(0.7
|
)
|
|
$
|
40.7
|
|
|
$
|
40.0
|
|
|
$
|
2.5
|
|
|
$
|
2.0
|
|
|
$
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our share of net earnings (losses)
|
|
$
|
(0.7
|
)
|
|
$
|
19.2
|
|
|
$
|
18.5
|
|
|
$
|
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
Management fees earned
|
|
|
3.1
|
|
|
|
24.1
|
|
|
|
27.2
|
|
|
|
|
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from joint ventures
|
|
$
|
2.4
|
|
|
$
|
43.3
|
|
|
$
|
45.7
|
|
|
$
|
|
|
|
$
|
3.2
|
|
|
$
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We enter into strategic joint ventures to acquire, to develop
and to sell land
and/or
homesites, as well as to construct and sell homes, in which we
have a voting ownership interest of 50% or less and do not have
a controlling interest. Our partners generally are unrelated
homebuilders, land sellers, financial partners or other real
estate entities. At December 31, 2005, we had receivables
of $60.5 million from these joint ventures, of which
$43.4 million represent notes receivable.
In many instances, we are appointed as the day-to-day manager of
the unconsolidated entities and receive management fees for
performing this function. We received management fees from these
unconsolidated entities of $27.2 million and
$2.7 million for the years ended December 31, 2005 and
2004, respectively. These fees are included in income from joint
ventures in the accompanying consolidated statements of income.
We did not receive any management fees during the year ended
December 31, 2003 as our unconsolidated joint venture
operations were insignificant. In the aggregate, these joint
ventures delivered 1,666 and 116 homes for the years ended
December 31, 2005 and 2004, respectively.
In December 2004, we entered into a joint venture agreement with
Sunbelt Holdings (Sunbelt) to form Engle/Sunbelt Holdings,
LLC (Engle/Sunbelt). Engle/Sunbelt was formed to develop
finished homesites and deliver homes in the Phoenix, Arizona
market, and upon its inception, the partnership acquired eight
of our existing communities in Phoenix, Arizona. We and Sunbelt
contributed capital of approximately $28.0 million and
$3.2 million, respectively, to Engle/Sunbelt and the joint
venture itself obtained financing arrangements with an aggregate
borrowing capacity of $180.0 million, of which
$150.0 million related to a term loan and
$30.0 million related to a revolving mezzanine financing
instrument.
In July 2005, we contributed assets to Engle/Sunbelt resulting
in a net capital contribution by us of $5.4 million. At
this time, Engle/Sunbelt amended its financing arrangements to
increase the aggregate borrowing capacity to
$280.0 million, of which $250.0 million related to a
term loan and $30.0 million related to a revolving
mezzanine financing instrument. The borrowings by Engle/Sunbelt
are non-recourse to us; however, through our subsidiary Engle
Homes Residential, LLC, we have agreed to complete any property
development commitments in the event Engle/Sunbelt defaults.
Additionally, we have indemnified the lenders for losses
resulting from fraud, misappropriation and similar acts.
In connection with these contributions of assets to
Engle/Sunbelt, we recognized a gain of $42.6 million. Due
to our continuing involvement with these assets through our
investment, we deferred $36.3 million of this gain of which
$18.7 million was recognized during 2005, and included in
cost of sales-land in the accompanying consolidated statement of
income. At December 31, 2005, $17.6 million continues
to be deferred and is included in accounts payable and other
liabilities in the accompanying consolidated statement of
financial condition. This deferral is being recognized in income
as homes are delivered by the joint venture.
On August 1, 2005, through a joint venture (the
Transeastern JV), we completed the acquisition of
the homebuilding assets and operations of Transeastern
Properties, Inc. (Transeastern) headquartered in
Coral
F-20
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Springs, Florida. Our joint venture partner is an entity
controlled by the former majority owners of Transeastern. The
Transeastern JV acquired Transeasterns homebuilding
assets, including work in process, finished lots and certain
land option rights, for approximately $826.2 million (which
included the assumption of $112.0 million of liabilities,
net of $30.8 million of cash). Additional consideration of
up to $75.0 million will be paid to the sellers pursuant to
an earn out agreement if certain conditions are met, such as
achieving predetermined quarterly EBITDA targets and delivery of
entitlement on certain tracts of land currently held under lot
option contracts. In addition to the net assets acquired in the
transaction, the Transeastern JV has a right of first offer on
land developed by a related entity of our joint venture partner
for a period of five years. Under the limited liability company
agreement that governs the operations of the Transeastern JV
(the JV agreement), the Transeastern JV is required
to make a preferred payment to our joint venture partner. The
preferred payment is to be made quarterly and to the extent
allowable under certain covenants and restrictions imposed by
the joint ventures bank borrowings. To the extent the
joint venture is not allowed to make these payments we are
required, under the JV agreement, to advance funds to the
Transeastern JV in the form of a member loan in an amount
sufficient to make the payment. The member loan bears interest
at 18% per annum and is payable once certain conditions and
covenants under the JV agreement and the joint ventures
bank borrowings are met. We are the managing member of the
Transeastern JV and hold a 50% voting interest. The Transeastern
JV was funded with $675.0 million of third party debt
capacity (of which $560.0 million was drawn upon
acquisition), a $20.0 million subordinated loan from us and
$165.0 million of equity, of which $90.0 million was
contributed by us. Our $20.0 million subordinated bridge
loan to the Transeastern JV, bears interest at 18% per annum and
is only payable once certain conditions and covenants under the
JV agreement and the joint ventures bank borrowings are
met. The third party debt is secured by the Transeastern
JVs assets and ownership interests and is non-recourse to
us, except that we have agreed to complete any property
development commitments on the existing work in process at the
time of closing in the event the Transeastern JV defaults and to
indemnify the lenders for losses resulting from fraud,
misappropriation and similar acts.
|
|
5.
|
Accounts
Payable and Other Liabilities
|
Accounts payable and other liabilities consist of the following
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Homebuilding:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
66.5
|
|
|
$
|
58.4
|
|
Interest
|
|
|
32.7
|
|
|
|
26.2
|
|
Compensation
|
|
|
42.3
|
|
|
|
22.7
|
|
Taxes, including income and real
estate
|
|
|
80.5
|
|
|
|
16.7
|
|
Accrual for unpaid invoices on
delivered homes
|
|
|
24.9
|
|
|
|
24.8
|
|
Accrued expenses
|
|
|
33.5
|
|
|
|
20.9
|
|
Warranty costs
|
|
|
7.0
|
|
|
|
6.5
|
|
Deferred revenue
|
|
|
42.0
|
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and other
liabilities
|
|
$
|
329.4
|
|
|
$
|
188.9
|
|
|
|
|
|
|
|
|
|
|
F-21
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the years ended December 31, 2005 and 2004 changes
in our warranty accrual consisted of (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Accrued warranty costs at
January 1
|
|
$
|
6.5
|
|
|
$
|
4.9
|
|
Liability recorded for warranties
issued during the period
|
|
|
12.0
|
|
|
|
11.3
|
|
Warranty work performed
|
|
|
(9.1
|
)
|
|
|
(8.0
|
)
|
Adjustments
|
|
|
(2.4
|
)
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
Accrued warranty costs at
December 31
|
|
$
|
7.0
|
|
|
$
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Homebuilding
and Financial Services Borrowings
|
Homebuilding
Borrowings
Homebuilding borrowings consists of the following (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Senior notes due 2010, at 9%(a)
|
|
$
|
300.0
|
|
|
$
|
300.0
|
|
Discount on senior notes
|
|
|
(3.1
|
)
|
|
|
(3.8
|
)
|
Senior subordinated notes due
2012, at
103/8%(a)
|
|
|
185.0
|
|
|
|
185.0
|
|
Senior subordinated notes due
2011, at
71/2%(a)
|
|
|
125.0
|
|
|
|
125.0
|
|
Senior subordinated notes due
2015, at
71/2%(a)
|
|
|
200.0
|
|
|
|
200.0
|
|
Premium on senior subordinated
notes
|
|
|
4.7
|
|
|
|
5.2
|
|
Revolving credit facility(b)
|
|
|
65.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
876.6
|
|
|
$
|
811.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Interest on the senior notes due 2010 and senior subordinated
notes due 2012 is payable semi-annually on January 1 and
July 1 of each year. Interest on the senior subordinated
notes due 2011 and 2015 is payable semi-annually on
March 15 and September 15 of each year, and
January 15 and July 15 of each year, respectively. Our
outstanding senior notes are guaranteed, on a joint and several
basis, by the Guarantor Subsidiaries, which are all of our
material direct and indirect subsidiaries, other than our
mortgage and title operations subsidiaries (the Non-guarantor
Subsidiaries). Our outstanding senior subordinated notes are
guaranteed on a senior subordinated basis by all of the
Guarantor Subsidiaries. The indentures governing the senior
notes and senior subordinated notes require us to maintain a
minimum net worth and place certain restrictions on our ability,
among other things, to incur additional debt (other than under
our revolving credit facility), pay or make dividends or other
distributions, sell assets, enter into transactions with
affiliates, invest in joint ventures above specified amounts,
and merge or consolidate with other entities. |
|
|
|
Our outstanding senior notes and senior subordinated notes have
call features that allow redemption of the notes prior to
maturity, upon payment of a make-whole premium or,
in certain cases, a stated premium as provided in the relevant
indenture. |
|
(b) |
|
At December 31, 2005, our revolving credit facility permits
us to borrow up to the lesser of (i) $600.0 million or
(ii) our borrowing base (calculated in accordance with the
revolving credit facility agreement) minus our outstanding
senior debt. The credit facility also has a letter of credit
subfacility of $300.0 million. In addition, we have the
right to increase the size of the facility to provide up to an
additional |
F-22
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
$150.0 million of revolving loans, provided we give
10 business days notice of our intention to increase
the size of the facility and we meet the following conditions:
(i) at the time of and after giving effect to the increase,
we are in pro forma compliance with our financial covenants;
(ii) no default or event of default has occurred and is
continuing or would result from the increase, and (iii) the
conditions precedent to a borrowing are satisfied as of such
date. The revolving credit facility expires on October 26,
2008. Loans outstanding under the facility may be base rate
loans or Eurodollar loans, at our election. Base rate loans
accrue interest at a rate per annum equal to (i) an
applicable margin plus (ii) the higher of
(A) Citicorps base rate or (B) 0.5% plus the
Federal Funds Rate. Eurodollar loans accrue interest at a rate
per annum equal to (i) an applicable margin plus
(ii) the reserve-adjusted Eurodollar base rate for the
interest period. Applicable margins will be adjusted based on
the ratio of our liabilities (net of unrestricted cash in excess
of $10 million) to our adjusted tangible net worth or our
senior debt rating. The revolving credit facility requires us to
maintain specified financial ratios regarding leverage, interest
coverage, adjusted tangible net worth and certain operational
measurements. The revolving credit facility also places certain
restrictions on, among other things, our ability to pay or make
dividends or other distributions, create or permit certain
liens, make investments in joint ventures, enter into
transactions with affiliates and merge or consolidate with other
entities. Our obligations under the revolving credit facility
are guaranteed by our significant domestic subsidiaries, other
than our mortgage and title subsidiaries (unrestricted
subsidiaries). As of December 31, 2005, we had
$65.0 million in borrowings under the revolving credit
facility and had issued letters of credit totaling
$218.9 million. |
|
|
|
On March 9, 2006, we entered into an unsecured revolving
credit facility replacing our previous $600.0 million
revolving credit facility. The new credit facility is
substantially similar to our prior revolving credit facility and
permits us to borrow to the lesser of
(i) $800.0 million or (ii) our borrowing base
(calculated in accordance with the revolving credit facility
agreement) minus our outstanding senior debt. The credit
facility also has a letter of credit subfacility of
$400.0 million. In addition, we have the right to increase
the size of the facility to provide up to an additional
$150.0 million of revolving loans, provided we satisfy
conditions similar to those contained in our prior revolving
credit facility as described above. |
Financial
Services Borrowings
Our mortgage subsidiary has the ability to borrow up to
$170.0 million under two warehouse lines of credit to fund
the origination of residential mortgage loans. The primary
revolving warehouse line of credit (the Primary Warehouse
Line of Credit) provides for revolving loans of up to
$150.0 million. The Primary Warehouse Line of Credit
expires on December 8, 2006. The Primary Warehouse Line of
Credit bears interest at the 30 day LIBOR rate plus a margin of
1.125% to 3.0%, except for certain specialty mortgage loans,
determined based upon the type of mortgage loans being financed.
The Primary Warehouse Line of Credit also places certain
restrictions on, among other things, our mortgage
subsidiarys ability to incur additional debt, create
liens, pay or make dividends or other distributions, make equity
investments, enter into transactions with affiliates, and merge
or consolidate with other entities.
Our mortgage subsidiarys other warehouse line of credit
(the Secondary Warehouse Line of Credit) provides
for revolving loans of up to $20.0 million, subject to
meeting borrowing base requirements based on the value of
collateral provided. The Secondary Warehouse Line of Credit is
used to fund the origination of residential mortgage loans in
addition to the Primary Warehouse Line of Credit. The Secondary
Warehouse Line of Credit bears interest at the 30 day
Eurodollar rate plus a margin of 1.125%.
On February 11, 2006, our Secondary Warehouse Line of
Credit was amended and is comprised of (1) a credit
facility providing for revolving loans of up to
$30.0 million, subject to meeting borrowing base
requirements based on the value of collateral provided, and
(2) a mortgage loan purchase and sale agreement which
provides for the purchase by the lender of up to
$20.0 million in mortgage loans generated by our mortgage
subsidiary. At no time may the amount outstanding under this
Secondary Warehouse Line of Credit,
F-23
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
as amended, plus the amount of purchased loans pursuant to the
purchase and sale agreement exceed $50.0 million. The
Secondary Warehouse Line of Credit, as amended, bears interest
at the 30 day LIBOR rate plus a margin of 1.125% and
expires February 11, 2007.
Both lines of credit are secured by funded mortgages, which are
pledged as collateral, and require our mortgage subsidiary to
maintain certain financial ratios and minimums. At
December 31, 2005, we had $35.1 million in borrowings
under our mortgage subsidiarys warehouse lines of credit.
Borrowing
Capacity
At December 31, 2005, we had the capacity to borrow an
additional $316.1 million under the revolving credit
facility and $134.9 million under the warehouse lines of
credit, subject to satisfying the relevant borrowing conditions
in those facilities.
|
|
7.
|
Commitments
and Contingencies
|
We provide homebuyers with a limited warranty of workmanship and
materials from the date of sale for up to two years. We
generally have recourse against our subcontractors for claims
relating to workmanship and materials. We also provide up to a
ten-year homeowners warranty which covers major structural
defects.
We are subject to the normal obligations associated with
entering into contracts for the purchase, development and sale
of real estate in the routine conduct of our business. We are
committed under various letters of credit and performance bonds
which are required for certain development activities, deposits
on land and homesite purchase contract deposits. At
December 31, 2005, we had total outstanding letters of
credit and performance/surety bonds under these arrangements of
approximately $218.9 million and $265.7 million,
respectively.
We entered into an agreement with an insurance company to
underwrite private mortgage insurance on certain loans
originated by our mortgage services subsidiary. Under the terms
of the agreement, we share in the premiums generated on the
loans and are exposed to losses in the event of a loan default.
At December 31, 2005, our maximum exposure to losses
relating to loans insured is approximately $5.3 million,
which is further limited to the amounts held in trust of
approximately $1.6 million. We minimize 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.
We are involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters is not expected to
have a material adverse effect on our consolidated financial
position or results of operations.
At December 31, 2005, we are obligated under
non-cancellable operating leases of office space, model homes
and equipment. For the years ended December 31, 2005, 2004,
and 2003 rent expense under operating leases was
$14.4 million, $13.9 million, and $4.5 million,
respectively. Minimum annual lease payments under these leases
at December 31, 2005 are as follows (dollars in millions):
|
|
|
|
|
2006
|
|
$
|
8.0
|
|
2007
|
|
|
5.9
|
|
2008
|
|
|
5.2
|
|
2009
|
|
|
4.0
|
|
2010
|
|
|
3.0
|
|
Thereafter
|
|
|
5.4
|
|
|
|
|
|
|
|
|
$
|
31.5
|
|
|
|
|
|
|
F-24
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Related
Party Transactions
|
In 2000, we entered into a purchasing agreement with our
ultimate parent, Technical Olympic S.A. The agreement provided
that Technical Olympic S.A. would purchase certain of the
materials and supplies necessary for operations and sell them to
our entities, all in an effort to consolidate the purchasing
function. Although Technical Olympic S.A. would incur certain
franchise tax expense, we would not be required to pay such
additional purchasing liability. Technical Olympic S.A.
purchased $347.1 million, $302.6 million, and
$203.7 million of materials and supplies on our behalf
during the years ended December 31, 2005, 2004, and 2003,
respectively. These materials and supplies bought by Technical
Olympic S.A. under the purchasing agreement are provided to us
at Technical Olympic S.A.s cost. We do not pay a fee or
other consideration to Technical Olympic S.A. under the
purchasing agreement. We may terminate the purchasing agreement
upon 60 days prior notice.
In 2000, we entered into a management services agreement with
Technical Olympic, Inc., whereby Technical Olympic, Inc. will
provide certain advisory, administrative and other services. The
management services agreement was amended and restated on
June 13, 2003. Technical Olympic, Inc. assigned its
obligations and rights under the amended and restated management
agreement to Technical Olympic Services, Inc., a Delaware
corporation wholly-owned by Technical Olympic S.A., effective as
of October 29, 2003. For the years ended December 31,
2005, 2004, and 2003, we incurred $3.5 million,
$2.5 million, and $2.5 million, respectively. At
December 31, 2005 and 2004, $3.0 million and
$2.0 million, respectively, has been accrued and is
included in accounts payable and other liabilities in the
accompanying consolidated statements of financial condition.
These expenses are included in selling, general and
administrative expenses in the accompanying consolidated
statements of income.
We have sold certain undeveloped real estate tracts to, and
entered into a number of agreements (including option contracts
and construction contracts) with, Equity Investments, a limited
liability company controlled by the brother of one of our
executives. We made payments of $11.8 million,
$5.5 million, and $7.2 million to this entity pursuant
to these agreements during the years ended December 31,
2005, 2004, and 2003, respectively. We believe that the terms of
these agreements include purchase prices that approximate fair
market values.
In November 2005, we purchased the right to acquire land from
the Transeastern JV that was controlled by the joint venture
pursuant to an option arrangement. The owner of the land is a
related entity of our joint venture partner in the Transeastern
JV. We paid a net $5.8 million assignment fee to
Transeastern for this right. We subsequently exercised our
option and purchased the property for $78.2 million.
During 2005, we acquired $15.5 million in work in process
inventory from Transeastern Properties, Inc. and simultaneously
entered into an agreement to sell the inventory to the
Transeastern JV at a future date. In December 2005, the
Transeastern JV purchased the inventory for approximately
$16.6 million. We have deferred the $1.1 million gain
on the transaction.
As of December 31, 2005, we had funded $3.8 million in
member loans to the Transeastern JV in accordance with the
limited liability company agreement.
In connection with the acquisition, we advanced funds to the
Transeastern JV of $11.0 million to pay for costs
associated with the acquisition.
F-25
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of income tax expense (benefit) consist of (dollars
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
120.0
|
|
|
$
|
65.5
|
|
|
$
|
43.4
|
|
State
|
|
|
4.6
|
|
|
|
5.6
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124.6
|
|
|
|
71.1
|
|
|
|
46.4
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2.0
|
|
|
|
(0.6
|
)
|
|
|
1.5
|
|
State
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
(0.7
|
)
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126.6
|
|
|
$
|
70.4
|
|
|
$
|
47.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between total reported income taxes and expected
income tax expense computed by applying the federal statutory
income tax rate of 36.7% for 2005, 2004, and 2003 to income
before provision for income taxes is reconciled as follows
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Computed income tax expense at
statutory rate
|
|
$
|
120.1
|
|
|
$
|
66.5
|
|
|
$
|
45.6
|
|
State income taxes
|
|
|
5.8
|
|
|
|
2.7
|
|
|
|
1.7
|
|
Other, net
|
|
|
0.7
|
|
|
|
1.2
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
126.6
|
|
|
$
|
70.4
|
|
|
$
|
47.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant temporary differences that give rise to the deferred
tax assets and liabilities are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Warranty, legal and insurance
reserves
|
|
$
|
5.7
|
|
|
$
|
4.5
|
|
Inventory
|
|
|
9.0
|
|
|
|
7.7
|
|
Accrued compensation
|
|
|
6.5
|
|
|
|
4.0
|
|
Investments in unconsolidated
entities
|
|
|
1.7
|
|
|
|
|
|
State net operating loss
carryforwards
|
|
|
0.6
|
|
|
|
0.3
|
|
Other
|
|
|
2.8
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
26.3
|
|
|
|
18.7
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(1.1
|
)
|
|
|
|
|
Amortizable intangibles
|
|
|
(12.1
|
)
|
|
|
(9.6
|
)
|
Prepaid expenses
|
|
|
(2.4
|
)
|
|
|
(0.1
|
)
|
Prepaid commissions and
differences in reporting selling and marketing
|
|
|
(4.5
|
)
|
|
|
(4.3
|
)
|
Other
|
|
|
(1.2
|
)
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(21.3
|
)
|
|
|
(15.7
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
5.0
|
|
|
$
|
3.0
|
|
|
|
|
|
|
|
|
|
|
The net deferred tax asset included in other assets in the
accompanying consolidated statements of financial condition at
December 31, 2005 and 2004 was $5.0 million and
$3.0 million, respectively. We believe that it is more
likely than not that the gross deferred tax assets will be
realized or settled due to our ability to generate taxable
income exclusive of reversing timing differences. Accordingly,
no valuation allowance has been established at December 31,
2005 and 2004.
Prior to October 2003, we were included in the consolidated
federal income tax return with Technical Olympic pursuant to a
Tax Allocation Agreement between Technical Olympic and us.
Payments of $28.3 million were made to Technical Olympic
for federal income taxes during 2003.
On November 19, 2003, we sold, pursuant to an underwritten
public offering, 2.0 million shares of our common stock at
a price of $26.00 per share (unadjusted for subsequent
stock splits). The net proceeds of the offering to us were
$48.4 million, after deducting offering costs and
underwriting fees of $3.6 million. The offering proceeds
were used to pay outstanding indebtedness under our revolving
credit facility.
On September 13, 2005, pursuant to an underwritten public
offering, we sold 3,358,000 shares of our common stock at a
price of $28.00 per share. The net proceeds of the offering
to us were $89.2 million, after deducting offering costs
and underwriting fees of $4.8 million. The offering
proceeds were used to pay outstanding indebtedness under our
revolving credit facility.
At December 31, 2005, our chief executive officer had the
right to purchase 1% of our outstanding common stock on
January 1, 2007 for $16.23 per share and an additional
1% on January 1, 2008 for $17.85 per share. These
rights were being accounted for under the variable accounting
method as provided by APB No. 25. In connection with these
rights, we recognized compensation expense of $1.3 million
during the
F-27
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
year ended December 31, 2005 which is included in selling,
general and administrative expenses in the accompanying
consolidated statement of income.
On January 13, 2006, our chief executive officers
employment agreement was amended to grant him 1,323,940 options
at an exercise price of $23.62 per share and provide for a
bonus award of $8.7 million in lieu of the common stock
purchase rights described above. The amendment is subject to
stockholder approval of an amendment to our stock option plan to
increase the number of shares available for grant thereunder.
On February 22, 2006, our Board of Directors declared a
cash dividend of $0.015 per share on our outstanding common
stock payable on March 17, 2006 to shareholders of record
at the close of business on March 6, 2006.
During 2001, we adopted the Technical Olympic USA, Inc. Annual
and Long-Term Incentive Plan (as amended and restated on
October 5, 2004), formerly known as the Newmark Homes Corp.
Annual and Long-Term Incentive Plan (the Plan), pursuant to
which our employees, consultants and directors, and those of our
subsidiaries and affiliated entities are eligible to receive
options to purchase shares of common stock. Each stock option
expires on a date determined when options are granted, but not
more than ten years after the date of grant. Stock options
granted have a vesting period ranging from immediate vesting to
a graded vesting over five years. Under the Plan, subject to
adjustment as defined, the maximum number of shares with respect
to which awards may be granted is 7,500,000. The Board has
authorized a 750,000 share increase in the Plan subject to
stockholder approval to be sought at the 2006 annual meeting.
Activity under the Plan for the years ended December 31,
2005, 2004 and 2003 is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options outstanding at beginning
of year
|
|
|
6,827,755
|
|
|
$
|
11.12
|
|
|
|
6,420,880
|
|
|
$
|
10.44
|
|
|
|
4,116,463
|
|
|
$
|
10.34
|
|
Granted
|
|
|
16,374
|
|
|
$
|
24.19
|
|
|
|
450,000
|
|
|
$
|
21.60
|
|
|
|
2,326,940
|
|
|
$
|
10.53
|
|
Exercised
|
|
|
(115,625
|
)
|
|
$
|
10.43
|
|
|
|
(15,000
|
)
|
|
$
|
10.08
|
|
|
|
|
|
|
$
|
|
|
Forfeited
|
|
|
(121,893
|
)
|
|
$
|
16.47
|
|
|
|
(28,125
|
)
|
|
$
|
17.76
|
|
|
|
(22,523
|
)
|
|
$
|
9.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of year
|
|
|
6,606,611
|
|
|
$
|
11.06
|
|
|
|
6,827,755
|
|
|
$
|
11.12
|
|
|
|
6,420,880
|
|
|
$
|
10.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
4,881,757
|
|
|
$
|
10.76
|
|
|
|
3,628,558
|
|
|
$
|
10.10
|
|
|
|
1,925,164
|
|
|
$
|
9.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for grant at end
of year
|
|
|
719,061
|
|
|
|
|
|
|
|
657,245
|
|
|
|
|
|
|
|
1,059,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair market value
per share of options granted during the year under
SFAS No. 123
|
|
$
|
7.33
|
|
|
|
|
|
|
$
|
7.68
|
|
|
|
|
|
|
$
|
3.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Contractual Life
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
Range of Exercise
Price
|
|
Options
|
|
|
(Years)
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
$ 8.33-$10.08
|
|
|
3,537,530
|
|
|
|
7.00
|
|
|
$
|
9.47
|
|
|
|
2,404,009
|
|
|
$
|
9.62
|
|
$10.61-$12.20
|
|
|
2,683,342
|
|
|
|
7.02
|
|
|
$
|
11.62
|
|
|
|
2,388,592
|
|
|
$
|
11.61
|
|
$17.25-$19.35
|
|
|
131,250
|
|
|
|
8.19
|
|
|
$
|
18.27
|
|
|
|
76,875
|
|
|
$
|
18.00
|
|
$20.88-$21.29
|
|
|
73,125
|
|
|
|
8.21
|
|
|
$
|
20.99
|
|
|
|
|
|
|
|
|
|
$22.96-$25.25
|
|
|
143,864
|
|
|
|
8.30
|
|
|
$
|
24.03
|
|
|
|
12,281
|
|
|
$
|
24.00
|
|
$25.76-$28.34
|
|
|
37,500
|
|
|
|
8.33
|
|
|
$
|
27.05
|
|
|
|
|
|
|
|
|
|
Included in the 6,606,611 options outstanding as of
December 31, 2005 are 1,567,078 options granted to
executives which contain performance based
accelerated vesting criteria. These options are being accounted
for under the variable accounting method as provided for by APB
Opinion No. 25. During 2005 and 2004, we recognized an
expense of $2.2 million and $7.2 million,
respectively, as the market value of our common stock as of our
fiscal year end was greater than the exercise price and the
vesting accelerated for some of the performance-based options
due to targets being achieved during 2005. This expense is
included in selling, general and administrative expense in the
accompanying consolidated statements of income for the years
ended December 31, 2005 and 2004. No expense was recorded
during the year ended 2003 as the exercise price was greater
than the current market price of the stock.
|
|
12.
|
Employee
Benefit Plans
|
We have 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 we match a portion of the
employees contributions. Our contributions to the plan for
the years ended December 31, 2005, 2004, and 2003, amounted
to $2.7 million, $1.9 million, and $1.6 million,
respectively.
|
|
13.
|
Quarterly
Results (Unaudited)
|
Quarterly results for the years ended December 31, 2005 and
2004, which have been restated for conformity with the year end
presentation, are reflected below (dollars in millions, except
per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
543.6
|
|
|
$
|
627.2
|
|
|
$
|
676.0
|
|
|
$
|
662.2
|
|
Homebuilding gross margin
|
|
$
|
115.8
|
|
|
$
|
137.7
|
|
|
$
|
185.2
|
|
|
$
|
166.2
|
|
Net income
|
|
$
|
26.4
|
|
|
$
|
45.7
|
|
|
$
|
70.3
|
|
|
$
|
75.9
|
|
Basic earnings per share
|
|
$
|
0.47
|
|
|
$
|
0.82
|
|
|
$
|
1.24
|
|
|
$
|
1.27
|
|
Diluted earnings per share
|
|
$
|
0.45
|
|
|
$
|
0.79
|
|
|
$
|
1.18
|
|
|
$
|
1.23
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
433.5
|
|
|
$
|
507.7
|
|
|
$
|
515.4
|
|
|
$
|
678.7
|
|
Homebuilding gross margin
|
|
$
|
80.5
|
|
|
$
|
95.8
|
|
|
$
|
101.8
|
|
|
$
|
150.3
|
|
Net income
|
|
$
|
18.0
|
|
|
$
|
24.1
|
|
|
$
|
28.1
|
|
|
$
|
49.4
|
|
Basic earnings per share
|
|
$
|
0.32
|
|
|
$
|
0.43
|
|
|
$
|
0.50
|
|
|
$
|
0.88
|
|
Diluted earnings per share
|
|
$
|
0.32
|
|
|
$
|
0.42
|
|
|
$
|
0.49
|
|
|
$
|
0.85
|
|
F-29
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Quarterly and
year-to-date
computations of per share amounts are made independently.
Therefore, the sum of per share amounts for the quarters may not
agree with the per share amounts for the year. The first quarter
2004 per share amounts have been adjusted for the
three-for-two
stock split declared April 27, 2004 and effected on
June 1, 2004. The 2004 per share amounts have been
adjusted for the
five-for-four
stock split effected in the form of a 25% stock dividend paid on
March 31, 2005.
In the fourth quarter of 2005, a $3.4 million income tax
benefit resulting from applying provisions of the American Jobs
Creation Act is included in income tax expense.
In the fourth quarter of 2004, we recorded $3.9 million of
variable stock based compensation expense related to the
accelerated vesting of certain stock options containing
performance based acceleration criteria which were satisfied
during the fourth quarter of 2004. No such acceleration of
vesting took place in 2005.
F-30
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Summarized
Financial Information
|
Our outstanding senior notes and senior subordinated notes are
fully and unconditionally guaranteed, on a joint and several
basis, by the Guarantor Subsidiaries, which are all of the
Companys material direct and indirect subsidiaries, other
than our mortgage and title operations subsidiaries (the
Non-guarantor Subsidiaries). Each of the Guarantor Subsidiaries
is directly or indirectly 100% owned by the Company. In lieu of
providing separate audited financial statements for the
Guarantor Subsidiaries, consolidated condensed financial
statements are presented below. Separate financial statements
and other disclosures concerning the Guarantor Subsidiaries are
not presented because management has determined that they are
not material to investors.
Consolidating
Statement of Financial Condition
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Olympic
|
|
|
Guarantor
|
|
|
Non-guarantor
|
|
|
Intercompany
|
|
|
|
|
|
|
USA, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
|
ASSETS
|
HOMEBUILDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21.9
|
|
|
$
|
7.4
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
29.3
|
|
Inventory
|
|
|
|
|
|
|
1,740.8
|
|
|
|
|
|
|
|
|
|
|
|
1,740.8
|
|
Property and equipment, net
|
|
|
7.3
|
|
|
|
19.8
|
|
|
|
|
|
|
|
|
|
|
|
27.1
|
|
Investments in unconsolidated joint
ventures
|
|
|
|
|
|
|
254.5
|
|
|
|
|
|
|
|
|
|
|
|
254.5
|
|
Receivables from unconsolidated
joint ventures
|
|
|
|
|
|
|
60.5
|
|
|
|
|
|
|
|
|
|
|
|
60.5
|
|
Investments in/advances to
consolidated subsidiaries
|
|
|
1,946.8
|
|
|
|
(427.7
|
)
|
|
|
(3.7
|
)
|
|
|
(1,515.4
|
)
|
|
|
|
|
Other assets
|
|
|
26.3
|
|
|
|
106.9
|
|
|
|
|
|
|
|
|
|
|
|
133.2
|
|
Goodwill
|
|
|
|
|
|
|
108.8
|
|
|
|
|
|
|
|
|
|
|
|
108.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,002.3
|
|
|
|
1,871.0
|
|
|
|
(3.7
|
)
|
|
|
(1,515.4
|
)
|
|
|
2,354.2
|
|
FINANCIAL SERVICES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
11.8
|
|
|
|
|
|
|
|
11.8
|
|
Mortgage loans held for sale
|
|
|
|
|
|
|
|
|
|
|
43.9
|
|
|
|
|
|
|
|
43.9
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
12.8
|
|
|
|
|
|
|
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68.5
|
|
|
|
|
|
|
|
68.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,002.3
|
|
|
$
|
1,871.0
|
|
|
$
|
64.8
|
|
|
$
|
(1,515.4
|
)
|
|
$
|
2,422.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOMEBUILDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other
liabilities
|
|
$
|
154.4
|
|
|
$
|
175.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
329.4
|
|
Customer deposits
|
|
|
|
|
|
|
79.3
|
|
|
|
|
|
|
|
|
|
|
|
79.3
|
|
Obligations for inventory not owned
|
|
|
|
|
|
|
124.6
|
|
|
|
|
|
|
|
|
|
|
|
124.6
|
|
Notes payable
|
|
|
811.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
811.6
|
|
Bank borrowings
|
|
|
65.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,031.0
|
|
|
|
378.9
|
|
|
|
|
|
|
|
|
|
|
|
1,409.9
|
|
FINANCIAL SERVICES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other
liabilities
|
|
|
|
|
|
|
|
|
|
|
6.4
|
|
|
|
|
|
|
|
6.4
|
|
Bank borrowings
|
|
|
|
|
|
|
|
|
|
|
35.1
|
|
|
|
|
|
|
|
35.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41.5
|
|
|
|
|
|
|
|
41.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,031.0
|
|
|
|
378.9
|
|
|
|
41.5
|
|
|
|
|
|
|
|
1,451.4
|
|
Total stockholders equity
|
|
|
971.3
|
|
|
|
1,492.1
|
|
|
|
23.3
|
|
|
|
(1,515.4
|
)
|
|
|
971.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
2,002.3
|
|
|
$
|
1,871.0
|
|
|
$
|
64.8
|
|
|
$
|
(1,515.4
|
)
|
|
$
|
2,422.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Financial Condition
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Olympic
|
|
|
Guarantor
|
|
|
Non-guarantor
|
|
|
Intercompany
|
|
|
|
|
|
|
USA, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOMEBUILDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
159.3
|
|
|
$
|
66.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
225.6
|
|
Inventory
|
|
|
|
|
|
|
1,281.2
|
|
|
|
|
|
|
|
|
|
|
|
1,281.2
|
|
Property and equipment, net
|
|
|
6.8
|
|
|
|
19.9
|
|
|
|
|
|
|
|
|
|
|
|
26.7
|
|
Investments in unconsolidated joint
ventures
|
|
|
|
|
|
|
66.6
|
|
|
|
|
|
|
|
|
|
|
|
66.6
|
|
Receivables from unconsolidated
joint ventures
|
|
|
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
3.4
|
|
Investments in/Advances to
consolidated subsidiaries
|
|
|
1,349.9
|
|
|
|
24.0
|
|
|
|
(62.8
|
)
|
|
|
(1,311.1
|
)
|
|
|
|
|
Other assets
|
|
|
22.4
|
|
|
|
45.3
|
|
|
|
|
|
|
|
|
|
|
|
67.7
|
|
Goodwill
|
|
|
|
|
|
|
110.7
|
|
|
|
|
|
|
|
|
|
|
|
110.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,538.4
|
|
|
|
1,617.4
|
|
|
|
(62.8
|
)
|
|
|
(1,311.1
|
)
|
|
|
1,781.9
|
|
FINANCIAL SERVICES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
53.1
|
|
|
|
|
|
|
|
53.1
|
|
Mortgage loans held for sale
|
|
|
|
|
|
|
|
|
|
|
75.8
|
|
|
|
|
|
|
|
75.8
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
9.8
|
|
|
|
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138.7
|
|
|
|
|
|
|
|
138.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,538.4
|
|
|
$
|
1,617.4
|
|
|
$
|
75.9
|
|
|
$
|
(1,311.1
|
)
|
|
$
|
1,920.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOMEBUILDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other
liabilities
|
|
$
|
64.3
|
|
|
$
|
124.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
188.9
|
|
Customer deposits
|
|
|
|
|
|
|
69.1
|
|
|
|
|
|
|
|
|
|
|
|
69.1
|
|
Obligations for inventory not owned
|
|
|
|
|
|
|
136.2
|
|
|
|
|
|
|
|
|
|
|
|
136.2
|
|
Notes payable
|
|
|
811.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
811.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
875.7
|
|
|
|
329.9
|
|
|
|
|
|
|
|
|
|
|
|
1,205.6
|
|
FINANCIAL SERVICES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other
liabilities
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
3.3
|
|
Bank borrowings
|
|
|
|
|
|
|
|
|
|
|
49.0
|
|
|
|
|
|
|
|
49.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52.3
|
|
|
|
|
|
|
|
52.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
875.7
|
|
|
|
329.9
|
|
|
|
52.3
|
|
|
|
|
|
|
|
1,257.9
|
|
Total stockholders equity
|
|
|
662.7
|
|
|
|
1,287.5
|
|
|
|
23.6
|
|
|
|
(1,311.1
|
)
|
|
|
662.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
1,538.4
|
|
|
$
|
1,617.4
|
|
|
$
|
75.9
|
|
|
$
|
(1,311.1
|
)
|
|
$
|
1,920.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Olympic
|
|
|
Guarantor
|
|
|
Non-guarantor
|
|
|
Intercompany
|
|
|
|
|
|
|
USA, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
HOMEBUILDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
2,461.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,461.5
|
|
Cost of sales
|
|
|
|
|
|
|
1,856.6
|
|
|
|
|
|
|
|
|
|
|
|
1,856.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
604.9
|
|
|
|
|
|
|
|
|
|
|
|
604.9
|
|
Selling, general and
administrative expenses
|
|
|
75.3
|
|
|
|
257.4
|
|
|
|
|
|
|
|
(9.8
|
)
|
|
|
322.9
|
|
(Income) from joint ventures, net
|
|
|
|
|
|
|
(45.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(45.7
|
)
|
Other (income) expense, net
|
|
|
(281.8
|
)
|
|
|
30.2
|
|
|
|
|
|
|
|
242.9
|
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax income
|
|
|
206.5
|
|
|
|
363.0
|
|
|
|
|
|
|
|
(233.1
|
)
|
|
|
336.4
|
|
FINANCIAL SERVICES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
57.3
|
|
|
|
(9.8
|
)
|
|
|
47.5
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
44.8
|
|
|
|
(5.8
|
)
|
|
|
39.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services pretax income
|
|
|
|
|
|
|
|
|
|
|
12.5
|
|
|
|
(4.0
|
)
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit)
for income taxes
|
|
|
206.5
|
|
|
|
363.0
|
|
|
|
12.5
|
|
|
|
(237.1
|
)
|
|
|
344.9
|
|
Provision (benefit) for income
taxes
|
|
|
(11.8
|
)
|
|
|
133.5
|
|
|
|
4.9
|
|
|
|
|
|
|
|
126.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
218.3
|
|
|
$
|
229.5
|
|
|
$
|
7.6
|
|
|
$
|
(237.1
|
)
|
|
$
|
218.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Olympic
|
|
|
Guarantor
|
|
|
Non-guarantor
|
|
|
Intercompany
|
|
|
|
|
|
|
USA, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
HOMEBUILDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
2,100.8
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,100.8
|
|
Cost of sales
|
|
|
(0.1
|
)
|
|
|
1,672.5
|
|
|
|
|
|
|
|
|
|
|
|
1,672.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
0.1
|
|
|
|
428.3
|
|
|
|
|
|
|
|
|
|
|
|
428.4
|
|
Selling, general and
administrative expenses
|
|
|
50.2
|
|
|
|
208.8
|
|
|
|
|
|
|
|
(7.3
|
)
|
|
|
251.7
|
|
(Income) from joint ventures, net
|
|
|
|
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(3.2
|
)
|
Other (income) expense, net
|
|
|
(153.7
|
)
|
|
|
2.1
|
|
|
|
|
|
|
|
149.8
|
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax income
|
|
|
103.6
|
|
|
|
220.6
|
|
|
|
|
|
|
|
(142.5
|
)
|
|
|
181.7
|
|
FINANCIAL SERVICES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
41.8
|
|
|
|
(7.3
|
)
|
|
|
34.5
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
31.6
|
|
|
|
(5.4
|
)
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services pretax income
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
|
|
(1.9
|
)
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit)
for income taxes
|
|
|
103.6
|
|
|
|
220.6
|
|
|
|
10.2
|
|
|
|
(144.4
|
)
|
|
|
190.0
|
|
Provision (benefit) for income
taxes
|
|
|
(16.0
|
)
|
|
|
81.7
|
|
|
|
4.7
|
|
|
|
|
|
|
|
70.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
119.6
|
|
|
$
|
138.9
|
|
|
$
|
5.5
|
|
|
$
|
(144.4
|
)
|
|
$
|
119.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Olympic
|
|
|
Guarantor
|
|
|
Non-guarantor
|
|
|
Intercompany
|
|
|
|
|
|
|
USA, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
HOMEBUILDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
1,642.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,642.6
|
|
Cost of sales
|
|
|
|
|
|
|
1,319.4
|
|
|
|
|
|
|
|
|
|
|
|
1,319.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
323.2
|
|
|
|
|
|
|
|
|
|
|
|
323.2
|
|
Selling, general and
administrative expenses
|
|
|
38.6
|
|
|
|
179.3
|
|
|
|
|
|
|
|
(5.8
|
)
|
|
|
212.1
|
|
Other (income) expense, net
|
|
|
(114.7
|
)
|
|
|
(10.1
|
)
|
|
|
|
|
|
|
121.2
|
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding pretax income
|
|
|
76.1
|
|
|
|
154.0
|
|
|
|
|
|
|
|
(115.4
|
)
|
|
|
114.7
|
|
FINANCIAL SERVICES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
43.9
|
|
|
|
(5.8
|
)
|
|
|
38.1
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
30.7
|
|
|
|
(8.2
|
)
|
|
|
22.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Services pretax income
|
|
|
|
|
|
|
|
|
|
|
13.2
|
|
|
|
2.4
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit)
for income tax
|
|
|
76.1
|
|
|
|
154.0
|
|
|
|
13.2
|
|
|
|
(113.0
|
)
|
|
|
130.3
|
|
Provision (benefit) for income
taxes
|
|
|
(6.6
|
)
|
|
|
48.6
|
|
|
|
5.6
|
|
|
|
|
|
|
|
47.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
82.7
|
|
|
$
|
105.4
|
|
|
$
|
7.6
|
|
|
$
|
(113.0
|
)
|
|
$
|
82.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Olympic
|
|
|
Guarantor
|
|
|
Non-guarantor
|
|
|
Intercompany
|
|
|
|
|
|
|
USA, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
218.3
|
|
|
$
|
229.5
|
|
|
$
|
7.6
|
|
|
$
|
(237.1
|
)
|
|
$
|
218.3
|
|
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3.9
|
|
|
|
8.2
|
|
|
|
1.2
|
|
|
|
|
|
|
|
13.3
|
|
Non-cash compensation expense
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.7
|
|
Loss on impairment of inventory
|
|
|
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
6.2
|
|
Deferred income taxes
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
Undistributed equity in earnings
from unconsolidated entities
|
|
|
|
|
|
|
(18.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(18.5
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(1.7
|
)
|
|
|
6.6
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
4.0
|
|
Inventory
|
|
|
0.2
|
|
|
|
(470.3
|
)
|
|
|
|
|
|
|
|
|
|
|
(470.1
|
)
|
Other assets
|
|
|
(3.4
|
)
|
|
|
(61.7
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
(67.5
|
)
|
Receivables from unconsolidated
joint ventures
|
|
|
|
|
|
|
(37.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(37.1
|
)
|
Accounts payable and other
liabilities
|
|
|
88.7
|
|
|
|
39.5
|
|
|
|
3.2
|
|
|
|
|
|
|
|
131.4
|
|
Customer deposits
|
|
|
|
|
|
|
10.1
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Mortgage loans held for sale
|
|
|
|
|
|
|
|
|
|
|
31.9
|
|
|
|
|
|
|
|
31.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
309.7
|
|
|
|
(285.5
|
)
|
|
|
40.6
|
|
|
|
(237.1
|
)
|
|
|
(172.3
|
)
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net additions to property and
equipment
|
|
|
(4.4
|
)
|
|
|
(7.8
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
(14.1
|
)
|
Investments in unconsolidated joint
ventures
|
|
|
|
|
|
|
(176.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(176.1
|
)
|
Capital distributions from joint
ventures
|
|
|
|
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
10.3
|
|
Loans to unconsolidated joint
ventures
|
|
|
|
|
|
|
(20.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(20.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(4.4
|
)
|
|
|
(193.6
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
(199.9
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from revolving credit
facility
|
|
|
65.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65.0
|
|
Net proceeds from sale of common
stock
|
|
|
89.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89.2
|
|
Net repayments on Financial
Services bank borrowings
|
|
|
|
|
|
|
|
|
|
|
(13.9
|
)
|
|
|
|
|
|
|
(13.9
|
)
|
Payments for deferred financing
costs
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
Proceeds from stock option exercises
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
Dividends paid
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
(8.0
|
)
|
|
|
8.0
|
|
|
|
(3.2
|
)
|
Increase (decrease) in intercompany
transactions
|
|
|
(596.9
|
)
|
|
|
426.8
|
|
|
|
(59.0
|
)
|
|
|
229.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(444.4
|
)
|
|
|
426.8
|
|
|
|
(80.9
|
)
|
|
|
237.1
|
|
|
|
138.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash
equivalents
|
|
|
(139.1
|
)
|
|
|
(52.3
|
)
|
|
|
(42.2
|
)
|
|
|
|
|
|
|
(233.6
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
159.3
|
|
|
|
58.3
|
|
|
|
50.9
|
|
|
|
|
|
|
|
268.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
20.2
|
|
|
$
|
6.0
|
|
|
$
|
8.7
|
|
|
$
|
|
|
|
$
|
34.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Olympic
|
|
|
Guarantor
|
|
|
Non-guarantor
|
|
|
Intercompany
|
|
|
|
|
|
|
USA, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
119.6
|
|
|
$
|
138.9
|
|
|
$
|
5.5
|
|
|
$
|
(144.4
|
)
|
|
$
|
119.6
|
|
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2.9
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
12.6
|
|
Non-cash compensation expense
|
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.8
|
|
Loss on impairment of inventory
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
4.8
|
|
Deferred income taxes
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
Undistributed equity in earnings
from unconsolidated entities
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
1.5
|
|
|
|
11.7
|
|
|
|
2.4
|
|
|
|
|
|
|
|
15.6
|
|
Inventory
|
|
|
1.4
|
|
|
|
(218.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(216.6
|
)
|
Other assets
|
|
|
52.5
|
|
|
|
(16.8
|
)
|
|
|
(2.4
|
)
|
|
|
(52.6
|
)
|
|
|
(19.3
|
)
|
Receivables from unconsolidated
joint ventures
|
|
|
|
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(3.4
|
)
|
Accounts payable and other
liabilities
|
|
|
20.9
|
|
|
|
(39.2
|
)
|
|
|
(3.2
|
)
|
|
|
52.6
|
|
|
|
31.1
|
|
Customer deposits
|
|
|
|
|
|
|
33.6
|
|
|
|
|
|
|
|
|
|
|
|
33.6
|
|
Mortgage loans held for sale
|
|
|
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
206.9
|
|
|
|
(79.2
|
)
|
|
|
1.7
|
|
|
|
(144.4
|
)
|
|
|
(15.0
|
)
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net additions to property and
equipment
|
|
|
(1.9
|
)
|
|
|
(13.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(15.6
|
)
|
Investments in unconsolidated joint
ventures
|
|
|
|
|
|
|
(61.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(61.1
|
)
|
Earn out consideration paid for
acquisitions
|
|
|
|
|
|
|
(6.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(6.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(1.9
|
)
|
|
|
(81.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(83.3
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments on revolving credit
facilities
|
|
|
(10.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.0
|
)
|
Proceeds from notes offering
|
|
|
330.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330.0
|
|
Principal payments on unsecured
borrowings and senior notes
|
|
|
|
|
|
|
(7.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(7.9
|
)
|
Net repayments on Financial
Services bank borrowings
|
|
|
|
|
|
|
|
|
|
|
(14.3
|
)
|
|
|
|
|
|
|
(14.3
|
)
|
Payments for deferred financing
costs
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.9
|
)
|
Proceeds from stock option exercises
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
Dividends paid
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
(24.7
|
)
|
|
|
24.7
|
|
|
|
(2.0
|
)
|
Increase (decrease) in intercompany
transactions
|
|
|
(403.9
|
)
|
|
|
199.1
|
|
|
|
85.1
|
|
|
|
119.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(91.7
|
)
|
|
|
191.2
|
|
|
|
46.1
|
|
|
|
144.4
|
|
|
|
290.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash
equivalents
|
|
|
113.3
|
|
|
|
30.6
|
|
|
|
47.8
|
|
|
|
|
|
|
|
191.7
|
|
Cash and cash equivalents at
beginning of period
|
|
|
46.0
|
|
|
|
27.7
|
|
|
|
3.1
|
|
|
|
|
|
|
|
76.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
159.3
|
|
|
$
|
58.3
|
|
|
$
|
50.9
|
|
|
$
|
|
|
|
$
|
268.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
TECHNICAL OLYMPIC USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical Olympic
|
|
|
Guarantor
|
|
|
Non-guarantor
|
|
|
Intercompany
|
|
|
|
|
|
|
USA, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(Dollars in millions)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
82.7
|
|
|
$
|
105.4
|
|
|
$
|
7.6
|
|
|
$
|
(113.0
|
)
|
|
$
|
82.7
|
|
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2.0
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
9.3
|
|
Non-cash compensation expense
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.4
|
|
Deferred income taxes
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.7
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
2.5
|
|
|
|
(0.1
|
)
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
(1.6
|
)
|
Inventory
|
|
|
0.6
|
|
|
|
(137.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(137.3
|
)
|
Other assets
|
|
|
(48.4
|
)
|
|
|
(7.3
|
)
|
|
|
0.1
|
|
|
|
52.5
|
|
|
|
(3.1
|
)
|
Accounts payable and other
liabilities
|
|
|
17.8
|
|
|
|
83.0
|
|
|
|
7.2
|
|
|
|
(52.5
|
)
|
|
|
55.5
|
|
Customer deposits
|
|
|
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
7.2
|
|
Mortgage loans held for sale
|
|
|
|
|
|
|
|
|
|
|
(16.4
|
)
|
|
|
|
|
|
|
(16.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
57.9
|
|
|
|
57.6
|
|
|
|
(5.5
|
)
|
|
|
(113.0
|
)
|
|
|
(3.0
|
)
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net additions to property and
equipment
|
|
|
(6.4
|
)
|
|
|
(12.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(19.1
|
)
|
Investments in unconsolidated joint
ventures
|
|
|
|
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(5.5
|
)
|
Amounts paid for acquisitions, net
of cash acquired
|
|
|
|
|
|
|
(59.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(59.6
|
)
|
Earn out consideration paid for
acquisitions
|
|
|
|
|
|
|
(18.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(18.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(6.4
|
)
|
|
|
(95.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(102.3
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayments on revolving credit
facilities
|
|
|
(45.0
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(45.2
|
)
|
Proceeds from notes offering
|
|
|
129.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129.3
|
|
Net proceeds from Financial
Services bank borrowings
|
|
|
|
|
|
|
|
|
|
|
14.9
|
|
|
|
|
|
|
|
14.9
|
|
Payments for deferred financing
costs
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.4
|
)
|
Minority interest in consolidated
subsidiaries
|
|
|
|
|
|
|
(9.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(9.1
|
)
|
Net proceeds from sale of common
stock
|
|
|
48.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.4
|
|
Increase (decrease) in intercompany
transactions
|
|
|
(170.3
|
)
|
|
|
68.0
|
|
|
|
(10.7
|
)
|
|
|
113.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(43.0
|
)
|
|
|
58.7
|
|
|
|
4.2
|
|
|
|
113.0
|
|
|
|
132.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
8.5
|
|
|
|
20.4
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
27.6
|
|
Cash and cash equivalents at
beginning of period
|
|
|
37.5
|
|
|
|
7.3
|
|
|
|
4.4
|
|
|
|
|
|
|
|
49.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
46.0
|
|
|
$
|
27.7
|
|
|
$
|
3.1
|
|
|
$
|
|
|
|
$
|
76.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38