SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended October 31, 1998
or
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ______________ to_______________.
Commission File No. 0-19633
Engle Homes, Inc.
(Exact name of registrant as specified in its charter)
Florida 59-2214791
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
123 N.W. 13th Street
Boca Raton, Florida 33432
(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 391-4012
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this form 10-K. x
The aggregate market value of shares of Common Stock held by non-
affiliates of the Registrant as of November 10, 1998, was approximately
$101,878,406 based on the $14.00 closing price for the Common Stock on The
Nasdaq National Market on such date. For purposes of this computation, all
executive officers and directors of the Registrant have been deemed to be
affiliates. Such determination should not be deemed to be an admission that
such directors and officers are, in fact, affiliates of the Registrant.
The number of shares of Common Stock of the Registrant outstanding as of
November 10, 1998 was 11,169,237.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement relating to the
Registrant's 1999 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission not later than 120 days after the end of
the fiscal year covered by this report are incorporated by reference into
Part III of this report.
<PAGE>
PART I
Item 1. BUSINESS
General
Engle Homes, Inc. ("Engle" or the "Company") designs, constructs,
markets and sells detached single-family residences, townhomes, patio homes
and condominiums to entry level and move-up buyers, retirees and second
home, seasonal buyers. Engle operates in nine geographic markets: Broward
County, Palm Beach County and Martin County in South Florida; Orlando in
Central Florida; Tampa, Sarasota, Naples and Fort Myers on the west coast of
Florida; Denver, Colorado; Dallas, Texas; Virginia and Maryland; Raleigh,
North Carolina; Phoenix, Arizona; and Atlanta, Georgia. The Company offers
a variety of home styles at prices ranging from approximately $70,000 to
over $400,000 with an average sales price in fiscal 1998 of approximately
$192,000. In addition, the Company operates a mortgage company which
provides mortgages primarily to its home buyers in substantially all of its
geographic markets and a title company which provides services to its home
buyers and third parties in Florida and Denver, Colorado.
Engle is a leading Florida homebuilder. The Company believes that it
is one of the top five builders of single-family homes in South Florida and
Central Florida. Florida is the number one homebuilding state in the United
States in terms of total housing starts. In addition, Florida is currently
the fourth largest state based upon total population and has consistently
ranked among the top four states in population growth over the past seven
decades.
Since 1993, Engle has expanded into eight of the top 20 homebuilding
markets in the nation through both start-up operations and the acquisition
of a homebuilder in Denver, Colorado. In fiscal 1998, approximately 44% of
the Company's revenues from home sales were generated outside of the Florida
markets as compared to none in fiscal 1993.
Over the past five years, the Company's total revenues have grown from
$224 million in fiscal 1994 to $536 million in fiscal 1998. The number of
homes delivered increased from 1,992 in fiscal 1997 to 2,605 in fiscal 1998.
At the end of fiscal 1998, Engle was marketing homes in 91 communities.
Recent Developments
The Company completed a number of transactions during fiscal 1998
that strengthened the Company's total capitalization as follows:
During fiscal 1998, the Company called for the early redemption of its
7% Convertible Subordinated Notes due 2003 (the "1993 Notes"). The Company
redeemed approximately $14.6 million aggregate principal amount of the
1993 Notes and $15.4 million aggregate principal amount of the 1993 Notes
were converted by the holders thereof into approximately 1.1 million
shares of common stock of the Company.
In February 1998, the Company consummated (i) an underwritten
public offering of 3,105,000 shares (including 405,000 shares issued
pursuant to an over-allotment option) of the Company's Common Stock and (ii)
an underwritten public offering of $100,000,000 aggregate principal amount
of 9 1/4% Senior Notes due 2008 ("New Notes"). The net proceeds to the
Company from these offerings was approximately $137.2 million. The
Company used the net proceeds as follows: (i) $115.9 million to repay
amounts outstanding under certain of the Company's homebuilding lines of
credit; (ii) $5.1 million to repay outstanding amounts under the Company's
mortgage company subsidiary line of credit; (iii) $16.2 million for general
corporate purposes.
In May 1998, the Company entered into a $170 million unsecured
revolving credit agreement (the "Credit Facility") with various banks.
The Credit Facility replaced all of the Company's secured lines of credit.
All outstanding borrowings under the Credit Facility are due in May 2001.
In June 1998, the Company sold $50,000,000 aggregate principal amount
of 9-1/4% Series B Senior Notes due 2008 (the "Series B Notes") in a
transaction not registered under the Securities Act of 1933, as amended, at
a price to investors of 98.5% of the principal amount thereof. The net
proceeds to the Company from such sale were approximately $48.0 million.
The Company used the net proceeds primarily to redeem all of the $40 million
aggregate principal amount of its 11-3/4% Senior Notes due 2000 outstanding
at a price of 105.875% of the principal amount thereof and the remainder to
repay outstanding amounts under the Credit Facility. On August 24, 1998,
the Company completed an exchange of the Series B Notes and substantially
all of the New Notes for approximately $150,000,000 aggregate principal
amount of 9-1/4% Series C Senior Notes due 2008.
Business Strategy
Engle believes that its success has been due to its market-oriented
approach which it applies to each of the following: (i) identifying new
markets; (ii) acquiring land; and (iii) diversifying its product offerings
and price ranges to appeal to most segments of the home buying public.
Engle believes that this strategy enables it to respond more rapidly to
changing market conditions.
Expand in Existing and New Markets. The Company has successfully
expanded its operations through both start-up operations in new and existing
markets and the acquisition of a homebuilder in Denver, Colorado. Within
its existing markets, the Company believes that it is able to gain greater
market share by increasing the number of residential projects, thereby
leveraging its existing management structure and enhancing profitability
through economies of scale. As part of its strategy to further diversify
geographically, the Company continually seeks and evaluates market expansion
opportunities, including potential acquisitions of homebuilding companies.
The Company seeks to expand into geographic markets with significant
single-family home permit activity, substantial job growth, a diversified
economy and an availability of strong management with local market
expertise. Since its initial public offering in January 1992, the Company
has expanded into eight new geographic markets.
Offer a Broad Selection of Products. The Company designs its homes to
appeal to a wide variety of home buyers, including entry level and move-up
buyers, retirees and second home seasonal buyers. Accordingly, the Company
offers a number of home styles and price ranges at various locations in each
market, including golf and waterfront communities in certain markets.
Engle's product offerings include estate homes, detached single-family
residences, townhomes, semi-detached patio homes/duplexes and condominiums.
Management believes that the Company's long-standing policy of product
diversification enables it to respond more rapidly to changing market
conditions.
Selectively Acquire Land. Engle seeks to identify and acquire superior
locations in each market and offer a number of communities with diverse
products and sales prices. In addition, when economically advantageous to
the Company, Engle enters into partnerships or joint venture agreements with
other major homebuilders to purchase and develop well located parcels of
land. The Company generally purchases land only after required zoning
entitlements have been obtained.
Maintain Stringent Cost Controls. The Company believes that
maintaining stringent cost controls is a key factor in achieving
profitability. The Company seeks to reduce its costs and risks by (i)
obtaining required zoning entitlements prior to purchasing land, (ii) using
subcontractors to perform home construction and site improvement work on a
fixed price basis, (iii) minimizing inventory of unsold homes, (iv)
improving construction cycle time for homes, (v) using its position as a
leading homebuilder to obtain national volume discounts on construction
materials and favorable pricing from subcontractors and (vi) maintaining a
sophisticated management information system that allows it to monitor
homebuilding production, scheduling and budgeting on a daily basis.
Commitment to Customer Satisfaction. The Company is dedicated to
providing customer satisfaction through quality construction and customer
service. Divisional managers are responsible for the quality of
construction and the level of customer satisfaction in their respective
divisions.
Experienced Management with Decentralized Operating Structure. To
serve the needs of each of its markets, the Company relies upon the
expertise of its division managers, each of whom has significant experience
in the homebuilding industry. In order to align corporate and divisional
profit goals, division managers receive bonuses based on the return on
assets of their respective divisions. The division managers benefit from
Engle's corporate expertise in sales and marketing, land acquisition,
financial services and its centralized accounting department. The Company
believes that this interaction between the divisional managers and corporate
management provides enhanced operating results.
Land Acquisition and Development
The Company prefers to acquire improved residential lots ready for
construction by entering into option contracts, whenever possible, or
through outright purchases. The Company also acquires tracks of land that
require site improvements prior to the start of home construction.
Occasionally, the Company purchases larger tracts of land with the intention
of reselling portions of the tracts to other builders as a source of
additional revenue. Specifically, the Company purchased in South Florida
large tracts of land and sold parcels to other builders in connection with
the development of its master planned communities, including Embassy Lakes,
North Passage, Lakeside Green and most recently, Pembroke Falls. Unlike the
Company's more typical subdivision projects, the Company's master-planned
communities have involved significantly larger tracts of land, greater
planning and site improvement activities and the development of more
extensive recreational facilities and related amenities. The Company's
master-planned communities normally take five or more years to complete
depending on the project's size, economic conditions prevailing at the time
and the Company's strategy for the particular project. Engle's more
traditional residential developments usually take two to three years to
complete.
Management believes that the Company's Pembroke Falls project
exemplifies the opportunities available to the Company when developing
master-planned communities. In February 1994, the Company acquired this
approximately 1,500 acre parcel located in southwest Broward County,
Florida, a rapidly developing housing market. The purchase price for the
Pembroke Falls parcel was $25.7 million, or approximately $17,100 per acre.
The Company expects to build approximately 2,000 single-family housing units
and has sold to others most of the approximately 222 acres of land zoned for
commercial and multi-family use. Through October 31, 1998, approximately
$43.7 million in land sales contracts had closed. Management believes that
the purchase of this relatively large parcel enabled the Company to obtain
desirable land inventory in its core market for future development at a
lower cost than if the Company had purchased smaller parcels available for
immediate construction of homes.
The Company's land purchase agreements are typically subject to
numerous conditions, including, but not limited to, the Company's ability to
obtain necessary zoning and other governmental approvals for the proposed
subdivision. During the contingency period, the Company also confirms the
availability of utilities, conducts hazardous waste and other environmental
analysis, and completes its marketing feasibility studies.
The Company expends considerable effort in developing a design and
marketing concept for each of its subdivisions, which includes determination
of size, style and price range of the homes and, in certain projects, layout
of streets, layout of individual lots and overall community design. The
product line offered in a particular subdivision depends upon many factors,
including housing generally available in the area, the needs of the
particular market and the Company's costs of lots in the subdivision. The
Company, where necessary, undertakes development activities that include
government approvals, site planning, engineering, as well as constructing
roads, sewer, water and drainage facilities and, where applicable for
recreational facilities and other amenities.
<PAGE>
<TABLE>
At October 31, 1998, the Company was marketing 17 subdivisions in South
Florida; 20 in Central Florida; 14 on the west coast of Florida; 9 in Denver,
Colorado; 7 in Dallas, Texas; 7 in Virginia and Maryland; 3 in Raleigh,
North Carolina; 10 in Phoenix, Arizona; and 4 in Atlanta, Georgia. The Company's
residential real estate inventory at October 31, 1998 was as follows:
<CAPTION>
Lots Available
Homes Under Construction for Future Construction
Total Lots ------------------------------- -----------------------------
Division Available Sold (1) Speculative (2) Models Sold(1) Unsold Options
<S> <C> <C> <C> <C> <C> <C> <C>
South Florida(3) 3,116(4) 199 148 21 166 2,291 291
Central Florida(5) 1,620 172 33 21 183 483 728
West Coast FL(6) 2,968(7) 127 31 16 51 2,213 530
Denver, CO 1,429 157 64 9 64 402 733
Dallas, TX 1,290 93 32 11 48 382 724
Virginia/Maryland 456 44 16 10 47 86 253
Raleigh, NC 209 23 20 1 9 156 -
Atlanta, GA 589 15 17 4 4 32 517
Phoenix, AZ 1,487 168 25 23 51 608 612
------ --- --- --- --- ----- -----
Total 13,164 998 386 116 623 6,653 4,388
====== === === === === ===== =====
<FN>
(1) Under contract, but not delivered. See the discussion of the Company's
backlog under "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(2) Speculative units are unsold homes that are completed or under
construction.
(3) South Florida refers to Broward County, Palm Beach County and Martin County.
(4) Includes 1,394 remaining lots in Pembroke Falls.
(5) Central Florida refers to Orlando.
(6) West Coast Florida refers to Tampa, Sarasota, Naples and Fort Myers.
(7) Includes 841 remaining lots in Lake Bernadette.
</FN>
/TABLE
<PAGE>
Construction
The Company acts as the general contractor for the construction of its
residential developments. Company employees monitor the construction of
each project, participate in all material design and building decisions,
coordinate the activities of subcontractors and suppliers, subject their
work to quality and cost controls and monitor compliance with zoning and
building codes. Subcontractors typically are retained for a specified
project pursuant to a contract which obligates the subcontractor to complete
construction at a fixed price.
The Company does not maintain significant inventories of construction
materials except for work in process materials for homes under construction
and a limited amount of other construction materials. Generally, the
construction materials used in the Company's operations are readily
available from numerous sources.
Marketing and Sales
The Company sells its homes primarily through commissioned employees,
who typically work from sales offices located at the model homes in each
Engle subdivision, as well as through cooperating independent brokers. In
all instances, Company personnel are available to assist prospective buyers
by providing them with floorplans, price information, tours of model homes
and the selection of various options and upgrades. Options and upgrades are
generally priced to have a positive effect on profit margins. Sales
personnel are trained by the Company and attend periodic meetings to be
updated on the availability of financing, construction schedules, marketing
and advertising plans.
The Company advertises in newspapers, magazines and on billboards.
Engle also uses out-of-state home shows, radio, video tapes, direct mail
advertising, special promotional events, illustrated brochures and model
homes in its comprehensive marketing program. The Company also uses a
cross-referral program that encourages Company personnel to direct customers
to other Engle subdivisions based on the customers' needs.
Customer Service and Quality Control; Warranties
The Company's customer service department is responsible for
pre-closing and post-closing customer needs. Prior to closing, a Company
employee accompanies the buyer on a home orientation and inspection tour.
The Company is continuing with its objective to provide quality construction
through on-going training programs to maintain its high quality construction
standards. The Company also provides home buyers with a limited warranty
program which, in general, provides for a one-year warranty on workmanship
and building materials and a ten-year structural warranty. In addition, the
Company purchases, when required by local or state ordinances, builder
liability insurance for major structural defects.
Financial Services
The Company's financial services subsidiaries provide mortgage banking
and title insurance services.
Mortgage Banking. In April 1992, the Company established Preferred
Home Mortgage Company ("PHMC"). PHMC is a full service mortgage banker
which arranges financing through the origination of mortgage loans to the
Company's homebuyers and to a lesser extent third party loans that are not
associated with homes built by the Company. PHMC is an approved lender by
the Federal National Mortgage Association ("FNMA") to deliver loan
origination to FNMA and to other investors and to service such loans.
During fiscal 1998, PHMC sold approximately $201 million in mortgage
loans (including servicing rights), representing a significant portion of
the Company's homebuyers that requested mortgage financing. Substantially
all of PHMC's revenues are derived from mortgages on homes built by Engle.
At October 31, 1998, PHMC was originating mortgages in substantially all
Engle homebuilding divisions.
PHMC must comply with various federal and state laws and consumer
credit rules and regulations in connection with its mortgage lending
activities. In addition, the mortgage banking industry in the United States
is highly competitive. PHMC competes with other mortgage companies and
financial institutions to provide mortgage financing to both the Company's
customers as well as the general public.
Title Services. In September 1992, the Company purchased all the
outstanding common stock of The Title Store, Inc. In May 1994, the Company
acquired all the capital stock of Universal Land Title, Inc. ("ULT"), a
company that sells, but does not underwrite, title policies and
simultaneously merged with the Title Store, Inc. to form one company. ULT
currently provides title services to the Company's homebuyers in Florida and
Denver, Colorado, as well as third parties. At October 31, 1998, ULT was
operating 16 offices in Florida and four offices in Denver, Colorado.
Government Regulation and Environmental Matters
In developing housing communities, the Company must obtain the approval
of numerous government authorities regulating such matters as permitted land
uses and levels of density, the installation of utility services such as
water and waste disposal and the dedication of acreage for open space,
parks, schools and other community purposes. Several authorities in Florida
and other states have imposed impact fees as a means of defraying the cost
of providing certain governmental services to developing areas and the
amount of these fees has increased significantly during recent years. Many
state laws require the use of specific construction materials which reduce
the need for energy-consuming heating and cooling systems. Local
governments also, at times, declare moratoriums on the issuance of building
permits and impose other restrictions in areas where sewage treatment
facilities and other public facilities do not reach minimum standards. To
date, the governmental approval processes and the restrictive zoning and
moratoriums discussed above have not had a material adverse effect on the
Company's development activities. However, there is no assurance that these
and other restrictions will not adversely affect the Company in the future.
The Company is also subject to a variety of Federal, state and local
statutes, ordinances, rules and regulations concerning protection of health
and the environment. The particular environmental laws which apply to any
given community vary greatly according to the community site, the site's
environmental conditions and the present and former uses of the site. These
environmental laws may result in delays, cause the Company to incur
substantial compliance and other costs and prohibit or severely restrict
development in certain environmentally sensitive regions or areas. Prior to
consummating the purchase of land, the Company engages independent
environmental engineers to evaluate such land for the presences of hazardous
or toxic materials, wastes or substances. The Company has not been
materially affected to date by the presence or potential presence of such
materials.
To varying degrees, certain permits and approvals will be required to
complete the residential developments currently being planned by the
Company. The ability of the Company to obtain necessary approvals and
permits for these projects is often beyond the Company's control, and could
restrict or prevent the development of otherwise desirable property. The
length of time necessary to obtain permits and approvals increases the
carrying costs of unimproved property acquired for the purpose of
development and construction. In addition, the continued effectiveness of
permits already granted is subject to factors such as changes in policies,
rules and regulations and their interpretation and application. To minimize
these risks, the Company restricts land purchases to tracts that have zoning
entitlements.
In recent years, regulation by Federal and state authorities relating
to the sale and advertising of residential real estate has also become more
restrictive. In order to advertise and sell condominiums and other
residential real estate in many jurisdictions, the Company has been required
to prepare registration statements or other disclosure documents and, in
some cases, to file such materials with designated regulatory agencies.
Competition and Market Factors
The development and sale of residential properties is highly
competitive and fragmented. The Company competes in each of its markets
with numerous national, regional and local builders, including some builders
with greater financial resources. Builders of new homes compete not only
for home buyers, but also for desirable properties, raw materials and
skilled subcontractors. The Company also competes for residential sales
with individual sales of existing homes and available rental housing.
The housing industry is cyclical and affected by consumer confidence
levels, prevailing economic conditions generally and interest rate levels.
A variety of other factors affect the housing industry and demand for new
homes, including the availability of labor and materials and increases in
the costs thereof, changes in costs associated with home ownership such as
increases in property taxes and energy costs, changes in consumer
preferences, demographic trends and the availability of and changes in
mortgage financing programs.
Employees
At October 31, 1998, the Company employed approximately 744 persons,
including sales and marketing personnel, executive, administrative and
clerical personnel, construction employees and financial services personnel.
Although none of the Company's employees are covered by collective
bargaining agreements, certain of the subcontractors which the Company
engages are represented by labor unions or are subject to collective
bargaining agreements. The Company believes that its relations with its
employees and subcontractors are good.
Item 2. PROPERTIES
The Company's corporate office is located at 123 N.W. 13th Street,
Suite 300, Boca Raton, Florida 33432 where the Company leases 9,356 square
feet of office space for a term expiring in August 2006. Engle's building
divisions, PHMC and ULT branch operations lease additional office space at
various locations for their day-to-day operations. Management believes that
the current leased offices are adequate for its needs for the foreseeable
future.
Item 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the Company's consolidated financial position or results
of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the Company's 1998 fiscal year.
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Engle's Common Stock is traded on The Nasdaq National Market under the
symbol "ENGL." The following table sets forth, for the periods indicated,
the high and low closing sales price for the Common Stock, as reported on
The Nasdaq National Market. As of November 10, 1998 there were approximately
56 shareholders of record. The closing sale price of the Company's Common
Stock as reported on The Nasdaq National Market, on November 20, 1998, was
$13.75
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------
1998 1997
------------- ---------------
High Low High Low
----- ----- ----- -----
<S> <C> <C> <C> <C>
First Quarter 19.50 13.88 9.00 8.50
Second Quarter 18.00 14.44 10.75 8.25
Third Quarter 17.50 13.69 11.88 9.13
Fourth Quarter 15.63 11.00 15.50 11.75
</TABLE>
The Company has declared per share quarterly dividends as set forth in
the following table.
<TABLE>
Cash Dividend
-----------------------
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
First Quarter $.04 $.04
Second Quarter $.04 $.04
Third Quarter $.04 $.04
Fourth Quarter(a) $.04 $.04
- ------------------
<FN>
(a) Dividends declared in November of 1997 and 1998.
</FN>
</TABLE>
The Company has declared $.04 per share quarterly cash dividends in
each fiscal quarter since the fiscal quarter ended April 30, 1992. The
Company presently intends to continue to declare and pay quarterly cash
dividends equal to $.04 per share of Common Stock. The payment of cash
dividends will be at the discretion of the Board of Directors of the Company
and will depend upon, among other things, results of operations, capital
requirements, the Company's financial condition and such other factors as
the Board of Directors may consider. There can be no assurance as to the
amount, if any, or timing of cash dividends.
The Company's loan agreement currently limits the amount of dividends
that the Company may pay in any fiscal quarterly period to no more than 50%
of the Company's consolidated net income for such period. Generally, the
indenture for the Company's Senior Notes provides that the Company may not
declare or pay any dividend or make certain other payments or take certain
other actions (collectively,'Restricted Payments') unless the aggregate
amount of all Restricted Payments declared or made after February 1, 1998
does not exceed the sum of (i) 50% of the Company's cumulative Consolidated
Net Income (as defined in the indenture) since February 1, 1998 plus (ii)
cash proceeds to the Company from certain issuances of capital stock of the
Company plus (iii) $5.0 million.
Item 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended
October 31, 1998, 1997, 1996, 1995 and 1994 have been derived from the
consolidated financial statements of the Company which have been audited by
BDO Seidman, LLP, independent certified public accountants. The following
data should be read in conjunction with "ITEM 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Company's Consolidated Financial Statements, and related notes included in
"ITEM 8, Financial Statements and Supplementing Data" of this Annual Report
on Form 10-K.
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
<CAPTION>
(In thousands, except per share and unit amounts)
Years Ended October 31,
-----------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues $536,040 $425,295 $332,088 $244,528 $224,459
Income before income taxes 28,370 21,899 13,701 9,536 12,179
Provision for income taxes 10,922 8,431 5,206 3,624 4,604
Income before extraordinary
items and cumulative
effect of change in
accounting for income
taxes 17,448 13,468 8,495 5,912 7,575
Extraordinary items and
cumulative effect of change
in accounting for income
taxes (2,612) 1,332
Net income $ 14,836 $ 13,468 $ 8,495 $ 5,912 $ 8,907
======== ======== ======== ======== ========
Income per share before
extraordinary items and
cumulative effect of
change in accounting for
income taxes
Basic $ 1.75 $ 1.94 $ 1.23 $ .86 $ 1.13
Diluted $ 1.70 $ 1.58 $ 1.03 $ .74 $ .96
(Loss) income per share from
extraordinary items and
cumulative effect
of change in accounting
for income taxes
Basic $ (.26) $ .20
Diluted $ (.25) $ .15
Net income per share
Basic $ 1.49 $ 1.94 $ 1.23 $ .86 $ 1.33
Diluted $ 1.45 $ 1.58 $ 1.03 $ .74 $ 1.11
Cash dividends $ 1,617 $ 1,109 $ 1,109 $ 1,109 $ 1,066
======== ======== ======== ======== ========
Weighted average number
of outstanding shares
Basic 9,974 6,931 6,929 6,908 6,674
Diluted 10,578 9,246 9,251 9,132 8,817
Selected Operating Data:
Deliveries (in units) 2,605 1,992 1,567 1,137 1,225
Backlog at end of period (a)
Units 1,621 869 1,016 804 560
Aggregate sales value $324,000 $174,000 $210,300 $161,900 $108,200
SELECTED FINANCIAL DATA
(Continued)
October 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Balance Sheet Data:
Inventories (b) $352,620 $230,108 $220,564 $198,664 $138,428
Total assets 431,428 288,412 284,789 251,918 188,913
Borrowings 205,137 152,064 152,117 147,454 99,428
Total shareholders' equity 161,724 93,180 81,492 74,106 66,303
<FN>
(a) See Item 7, Management's Discussion and Analysis of Financial
Condition and Operations - Overview.
(b) See Note 2 of Notes to the Company's consolidated Financial
Statements.
NOTE: The earnings per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards No. 128,
Earnings per Share. For further discussion of earnings per share and the
impact of Statement No. 128, see Notes to Consolidated Financial Statements
beginning on page 32.
</FN>
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
including, but not limited to, statements concerning anticipated operating
results, financial resources, growth and expansion. Such forward-looking
information involves important risks and uncertainties that could
significantly affect actual results and cause them to differ materially from
expectations expressed therein. These risks and uncertainties include
local, regional and national economic conditions, the effects of
governmental regulation, the competitive environment in which the Company
operates, fluctuations in interest rates, changes in home prices, the
availability and cost of land for future growth, the availability of
capital, the availability and cost of labor and materials, and weather
conditions. The following discussion also should be read in conjunction
with the information set forth in "Item 6. Selected Financial Data" and the
Company's Consolidated Financial Statements and related notes included in
"Item 8. Financial Statements and Supplementary Data" of this Annual Report
on Form 10-K.
General. The following table sets forth for the years indicated
certain items of the Company's Consolidated Financial Statements expressed
as a percentage of the Company's total revenues:
<TABLE>
Percentage of Total Revenues
<CAPTION>
Year Ended October 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales of homes 93.5% 95.1% 91.5%
Sales of land 2.6 1.8 5.3
Rent and other .5 .4 .5
Financial services income 3.4 2.7 2.7
---- ---- ----
Total 100% 100% 100%
==== ==== ====
Cost of sales-homes 79.5 81.2 78.5
Cost of sales-land 2.4 1.7 4.7
Selling, marketing,
general and administrative expenses 9.9 9.3 9.6
Income before income taxes 5.3 5.1 4.1
Net income before extraordinary items 3.3 3.2 2.6
</TABLE>
The following tables set fourth information relating to homes closed, new
sales contracts and sales backlog by operating division for fiscal years
1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Homes Closed Closed Percent Closed Percent Closed Percent
- ------------ ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
South Florida 756 29.0% 847 42.4% 624 39.8
Central Florida 484 18.5 386 19.4 343 21.9
West Coast Florida 257 9.9 84 4.2 66 4.2
Dallas, TX 221 8.5 173 8.7 107 6.8
Denver, CO 414 15.9 334 16.8 269 17.2
Virginia/Maryland 148 5.7 103 5.2 102 6.5
Raleigh, NC 59 2.3 64 3.2 56 3.6
Atlanta, GA 32 1.2
Phoenix, AZ 234 9.0 1 .1
------ ------- ------ ------- ------ -------
Total 2,605 100% 1,992 100% 1,567 100%
====== ======= ====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31,
(Dollars in thousands)
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Sold Dollars Sold Dollars Sold Dollars
----- ------- ----- ------- ----- --------
New Sales Contracts
- -------------------
<S> <C> <C> <C> <C> <C> <C>
South Florida 781 $156,400 628 $135,100 643 $141,200
Central Florida 695 131,000 365 69,200 378 70,500
West Coast Florida 327 53,800 153 25,400 81 12,200
Dallas, TX 299 47,300 148 23,800 179 30,200
Denver, CO 535 109,700 346 67,800 318 59,600
Virginia/Maryland 198 49,000 110 27,600 111 24,700
Raleigh, NC 75 14,200 37 7,700 69 14,000
Atlanta, GA 51 8,200
Phoenix, AZ 396 81,400 58 11,500
----- -------- ----- -------- ----- --------
Total 3,357 $651,000 1,845 $368,100 1,779 $352,400
===== ======== ===== ======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31,
(Dollars in thousands)
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Homes Dollars Homes Dollars Homes Dollars
----- ------- ----- ------- ----- -------
Sales Backlog
- -------------
<S> <C> <C> <C> <C> <C> <C>
South Florida 365 $78,000 340 $ 72,600 559 $126,500
Central Florida 355 71,100 144 28,400 165 31,000
West Coast Florida 178 29,300 108 18,000 39 5,800
Dallas, TX 141 23,400 63 9,900 90 14,500
Denver, CO 221 45,600 100 19,400 86 15,700
Virginia/Maryland 91 21,500 41 10,900 34 8,000
Raleigh, NC 32 6,000 16 3,400 43 8,800
Atlanta, GA 19 3,300
Phoenix, AZ 219 45,800 57 11,400
----- -------- --- -------- ----- --------
Total 1,621 $324,000 869 $174,000 1,016 $210,300
===== ======== === ======== ===== ========
</TABLE>
Backlog. Sales of the Company's homes are generally made pursuant to a
standard contract which requires a down payment of up to 10% of the sales
price. The contract includes a financing contingency which permits the
customer to cancel in the event mortgage financing at prevailing interest
rates (including financing arranged by the Company) is unobtainable within
a specified period, typically four to six weeks. The Company includes an
undelivered home sale in its backlog upon execution of the sales contract
and receipt of the down payment. Revenue is recognized only upon the
closing and delivery of a home. The Company estimates that the average
period between the execution of a purchase agreement for a home and delivery
is approximately four to six months.
The Company's backlog increased approximately 86.2% or $150.0 million
from October 31, 1997 to October 31, 1998 primarily as a result of increased
sale activities in the all homebuilding divisions.
Results of Operations
Year Ended October 31, 1998 Compared to Year Ended October 31, 1997.
The Company's revenues from home sales during fiscal 1998 increased
$96.6 million (or 23.9%) compared to fiscal 1997. The number of homes
delivered by the Company increased 30.8% (to 2,605 from 1,992) and the
average selling price of homes delivered decreased 5.4% (to $192,000 from
$203,000). The increase of revenues and homes delivered is primarily
attributable to the improved sales activity in all homebuilding divisions as
compared to fiscal 1997. Management believes that changes in the average
selling price of homes delivered from period to period are attributable to
discrete factors at each of its subdivisions, including product mix and
premium lot availability, and cannot be predicted for future periods with
any degree of certainty.
The Company's revenues from land sales increased approximately $6.3
million (or 82.4%) during fiscal 1998 as compared to fiscal 1997 primarily
as a result of an increase in commercial land sales at Pembroke Falls.
Cost of home sales increased approximately $80.8 million (or 23.4 %)
compared to fiscal 1997, primarily due to the related increase in home
sales. Cost of home sales as a percentage of home sales decreased to 85.0%
from 85.4% as a result of the product mix of homes delivered.
Cost of land sales increased approximately $5.8 million (or 81.4%)
during fiscal 1998 as compared to fiscal 1997, primarily as a result of the
increase in land sales. Costs of land sales as a percentage of land sales
was consistent with fiscal 1997.
The Company's selling, marketing, general and administrative ("S,G&A")
expenses increased approximately $13.2 million (or 33.3%) during fiscal 1998
as compared to fiscal 1997, primarily as a result of selling costs
associated with the greater number of homes closed. S, G & A expenses as a
percentage of total revenues increased from 9.3% in fiscal 1997 to 9.9% in
fiscal 1998, primarily due to an increase in selling expenditures related to
an increase in the number of residential subdivisions.
Financial services income increased $2.8 million during fiscal 1998 as
compared to fiscal 1997. This increase in income is due to increases in
both mortgages originated and title policies written during 1998. The
increase in mortgage origination fees is directly attributable to the
increase in home sales. The increase in title policies written related
primarily to new and existing home sales, mortgage refinancings and opening
of additional offices.
Fiscal 1998 income before income taxes increased $6.5 million
(or 30.0%) as compared to fiscal 1997, primarily due to the increase in
revenues from home sales and financial services.
Year Ended October 31, 1997 Compared to Year Ended October 31, 1996.
The Company's revenues from home sales during fiscal 1997 increased
$100.4 million (or 33.0%) compared to fiscal 1996. The number of homes
delivered by the Company increased 27.1% ( to 1,992 from 1,567) and the
average selling price of homes delivered increased 4.6% (to $203,000 from
$194,000). The increase of revenues and homes delivered is primarily
attributable to a higher percentage of backlog being delivered during fiscal
1997. Management believes that changes in the average selling price of
homes delivered from period to period are attributable to discrete factors
at each of its subdivisions, including product mix and premium lot
availability, and cannot be predicted for future periods with any degree of
certainty.
The Company's revenues from land sales decreased approximately $9.9
million (or 56.3%) during fiscal 1997 as compared to fiscal 1996 primarily
as a result of a decrease in the amount of commercial and multi-family land
sales at Pembroke Falls in fiscal 1997.
Cost of home sales increased approximately $84.6 million (or 32.5%)
compared to fiscal 1996, primarily due to the related increase in home sales
revenues. Cost of home sales as a percentage of home sales decreased to
85.4% from 85.7% as a result of the product mix of homes delivered.
Cost of land sales decreased approximately $8.5 million (or 54.5%)
during fiscal 1996, primarily as a result of the decrease in land sales.
Cost of land sales as a percentage of land sales increased to 92.3% from
88.7%, which was primarily attributable to lower margin single family lots
available for sale. Margins from land sales at Pembroke Falls in fiscal
1997 were comparable to fiscal 1996.
The Company's S,G&A expenses increased approximately $7.7 million (or
24.2%) during fiscal 1997 as compared to fiscal 1996, primarily as a result
of variable selling costs associated with the greater number of homes closed
and an increase in selling expenditures related to an increase in the number
of residential subdivisions. S,G & A expenses as a percentage of total
revenues decreased from 9.6% in fiscal 1996 to 9.3% in fiscal 1997,
primarily due to certain economies of scale.
Fiscal 1997 income before income taxes increased $8.2 million (or
59.8%) as compared to fiscal 1996, primarily due to the increase in home
sales revenues.
Liquidity and Capital Resources
General. The Company's financing needs are provided by cash flows from
operations, unsecured bank borrowings and from time to time the public debt
and equity markets.
Cash flow from operations, before inventory additions, has improved as
a result of increased revenue from all homebuilding divisions. The Company
anticipates that cash flow from operations before inventory additions will
continue to increase in fiscal year 1999 as a result of increased new home
deliveries.
During fiscal 1998, the Company called for the early redemption of the
1993 Notes. Approximately $14.6 million aggregate principal amount of the
1993 Notes were redeemed and the remaining $15.4 million principal amount of
the 1993 Notes were converted by the holders thereof into 1,100,129 shares
of the Company's Common Stock.
On February 2, 1998, the Company consummated an underwritten public
offering of 3,105,000 shares (including 405,000 shares issued pursuant to an
overallotment option) of the Company's Common Stock and an underwritten
public offering of $100,000,000 aggregate principal amount of 9 1/4% Senior
Notes due 2008 ("New Notes"). The net proceeds to the Company from these
offerings was approximately $137.2 million. The Company used the net
proceeds to repay amounts outstanding under certain of the Company's
homebuilding and mortgage company subsidiary lines of credit and for general
corporate purposes.
On May 28, 1998, the Company entered into a $170 million unsecured
revolving credit agreement (the" Credit Facility") with various banks.
Borrowings under the Credit Facility bear interest at a fluctuating rate
based upon the prime rate, the federal funds rate or LIBOR. All outstanding
borrowings under the Credit Facility are due in May 2001. Under the terms
of the agreement the Company may request, and the banks shall make an annual
determination as to whether or not to extend the maturity of the commitment
by one year. The terms of the Credit Facility contain restrictive covenants
which require the Company, among other things, to maintain a minimum net
worth and maintain certain financial ratios. The agreement also places
limitations on the amount of additional indebtedness that may be incurred by
the Company, limitations on acquisitions and certain types of inventories
and dividends. The Company's subsidiaries are guarantors for the Company's
obligations under the Credit Facility. Available borrowings under the
Credit Facility are limited to certain percentages of finished lots,
construction costs, land and land under development.
In June 1998, the Company sold $50,000,000 aggregate principal amount
of 9-1/4% Series B Senior Notes due 2008 (the "Series B Notes") in a
transaction not registered under the Securities Act of 1933, as amended, at
a price to investors of 98.5% of the principal amount thereof. The net
proceeds to the Company from such sale were approximately $48.0 million.
The Company used the net proceeds primarily to redeem all of the $40 million
aggregate principal amount of its 11-3/4% Senior Notes due 2000 outstanding
at a price of 105.875% of the principal amount thereof and the remainder to
repay outstanding amounts under the Credit Facility. On August 24, 1998,
the Company completed an exchange of the Series B Notes and substantially
all of the New Notes for approximately $150,000,000 aggregate principal
amount of 9-1/4% Series C Senior Notes due 2008.
In June 1998 Moody's Rating Group upgraded the Company's $150 million
senior notes to B1.
At October 31, 1998, the Company had outstanding borrowings of
approximately $205.1 million and $5.0 million of letters of credit
outstanding. The Company believes that funds generated from operations and
expected borrowing availability under the Credit Facility will be
sufficient to fund the Company's working capital requirements during fiscal
1999, with the exception of major land acquisitions, if any. For a further
description of the Company's borrowings, see Note 4 of the Company's
Consolidated Financial Statements.
In addition, PHMC has a warehouse line of credit for $40.0 million
which is guaranteed by the Company. At October 31, 1998 the outstanding
balance was $25.8 million to service origination of mortgage loans. The
Company believes that this line is sufficient for its mortgage banking
operation for the 1999 fiscal year. For further description of PHMC's
warehouse line see Note 3 of the Company's Consolidated Financial
Statements.
Land Acquisition. The Company is continually exploring opportunities
to purchase parcels of land for its homebuilding operations and is, at any
given time, in various stages of proposing, making offers for, and
negotiating the acquisition of various parcels, whether outright or through
options. The Company has continued to increase its land development and
construction activities in response to current and anticipated demand and
expects to pursue additional land acquisition and development opportunities
in the future.
Debt Service. Scheduled and estimated maturities of the Company's
borrowings aggregate approximately $7.1 million during fiscal 1999. The
Company anticipates that it will fund the maturities of its debt and
required expenditures relating to its developments primarily with cash flow
from operations and existing credit lines. See Note 4 of Notes to the
Company's Consolidated Financial Statements.
Management does not anticipate that PHMC's expansion of its operation
will significantly impact liquidity because the mortgages are generally sold
within a short period of time after their origination to the Federal
National Mortgage Association (FNMA) or other qualified investors.
PHMC has established the capability to retain the servicing of loans,
however, during fiscal 1998 all servicing rights were sold.
Inflation
The Company, as well as the homebuilding industry in general, may be
adversely affected during periods of high inflation, primarily because of
higher land and construction costs. In addition, higher mortgage interest
rates may significantly affect the affordability of permanent mortgage
financing to prospective purchasers. Inflation also increases the Company's
interest costs and costs of labor and materials. The Company attempts to
pass through to its customers any increases in its costs through increased
selling prices and, to date, inflation has not had a material adverse effect
on the Company's results of operations. However, there is no assurance that
inflation will not have a material adverse impact on the Company's future
results of operation.
Interest Rates
The Company's operations are interest rate sensitive. Overall housing
demand is adversely affected by increases in interest costs. If mortgage
interest rates increase significantly, this may negatively impact the
ability of a homebuyer to secure adequate financing. Such results of higher
interest rates may result in adversely affecting the Company's revenues,
gross margins and net income.
Year 2000 Issues
The Company conducts its business primarily with commercial software
provided by third party vendors. After an analysis of the Company's
exposure to the impact of year 2000 issues, management believes that such
commercial software is substantially year 2000 compliant and expects the
cost of addressing remaining year 2000 issues to be less than $10,000. As
part of its assessment, Company management has been evaluating year 2000
compliance by those with whom it does business and to date has not
discovered any year 2000 problems with significant counterparties that it
believes are reasonably likely to have a material adverse effect upon the
Company. However, no assurances can be given that potential year 2000
problems at those with whom the Company does business will not occur, and if
these occur, consequences to the Company will not be material.
New FASB Pronouncements:
During 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings Per Share" ("SFAS No. 128"). SFAS No.
128 replaced the existing methodology for calculating and presenting
earnings per share. Under SFAS No. 128, primary earnings per share has been
replaced with a presentation of basic earnings per share and fully diluted
earnings per share has been be replaced with diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing
income available to common shares outstanding for the period by the weighted
average of common shares outstanding. Diluted earnings per share is
computed similarly to fully diluted earnings per share in accordance with
the Accounting Principles Board ("APB") Opinion No. 15. The impact of the
adoption of SFAS No. 128 has not been material.
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information ("SFAS No. 131"), which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," establishes standards for
the way that public enterprises report information about operating segments
in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued
to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate the resources
and in assessing performance.
Both SFAS No. 130 and No. 131 were issued in June 1997 and were adopted
by the Company in 1998. The adoption of these statements did not impact the
Company's financial statement disclosures.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. The
Statement applies to all entities and is effective for all fiscal quarters
of the fiscal years beginning after June 15, 1999. The Company did not
engage in derivative instruments or hedging activities in any periods
presented in the consolidated financial statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants 26
Consolidated Balance Sheets
as of October 31, 1998 and 1997 27
Consolidated Statements of Income
For the Years Ended October 31, 1998, 1997 and 1996 28
Consolidated Statements of Shareholders' Equity
For the Years Ended October 31, 1998, 1997 and 1996 30
Consolidated Statements of Cash Flows
For the Years Ended October 31, 1998, 1997 and 1996 31
Notes to Consolidated Financial Statements 32
Consolidated Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 51
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders' and Board of Directors
Engle Homes, Inc.
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of Engle
Homes,Inc., and subsidiaries as of October 31, 1998 and 1997 and the
related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended October 31, 1998.
We have also audited Schedule II, Valuation and Qualifying Accounts
listed in the accompanying index. These financial statements and the
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Engle
Homes, Inc. and subsidiaries at October 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended October 31, 1998 in conformity with generally accepted
accounting principles.
Also, in our opinion, the schedule presents fairly, in all material
respects, the information set forth therein.
Miami, Florida BDO SEIDMAN, LLP
November 10, 1998
<PAGE>
<TABLE>
ENGLE HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
October 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CASH
Unrestricted $ 20,041 $ 15,565
Restricted 1,074 981
INVENTORIES 352,620 230,108
PROPERTY AND EQUIPMENT, net 4,339 2,623
OTHER ASSETS 19,925 15,803
GOODWILL, net of accumulated
amortization of $1,485 and $1,149, respectively 5,291 5,627
DEFERRED TAX ASSET 2,368 3,176
MORTGAGE LOANS HELD FOR SALE 25,770 14,529
-------- --------
TOTAL ASSETS $431,428 $288,412
======== ========
LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 26,570 $ 21,167
CUSTOMER DEPOSITS 12,227 7,472
BORROWINGS 55,856 82,064
SENIOR NOTES PAYABLE, (net of unamortized
discount of $719 in 1998 and including
$5,390 to related parties in 1997) 149,281 40,000
CONVERTIBLE SUBORDINATED NOTES 30,000
FINANCIAL SERVICE BORROWINGS 25,770 14,529
-------- --------
TOTAL LIABILITIES $269,704 $195,232
-------- --------
SHAREHOLDERS' EQUITY
PREFERRED STOCK, $.01 par,
shares authorized 1,000,000; none issued
COMMON STOCK, $.01 par shares authorized
25,000,000; issued and outstanding
11,169,237 and 6,931,693, respectively 112 69
ADDITIONAL PAID-IN CAPITAL 103,134 47,852
RETAINED EARNINGS 58,478 45,259
-------- --------
TOTAL SHAREHOLDERS' EQUITY 161,724 93,180
-------- --------
$431,428 $288,412
======== ========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>>
<TABLE>
ENGLE HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<CAPTION>
For the Year Ended October 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Sales of homes $501,009 $404,407 $303,972
Sales of land 14,019 7,685 17,571
Rent and other 2,799 1,513 1,485
Financial services 18,213 11,690 9,060
-------- -------- --------
536,040 425,295 332,088
-------- -------- --------
COSTS AND EXPENSES
Cost of sales-homes 426,054 345,295 260,651
Cost of sales-land 12,867 7,095 15,589
Selling, marketing, and
general and administrative 52,815 39,620 31,906
Depreciation and amortization 3,162 2,374 2,977
Financial services 12,772 9,012 7,264
-------- -------- --------
507,670 403,396 318,387
-------- -------- --------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS 28,370 21,899 13,701
Provision for income taxes 10,922 8,431 5,206
-------- -------- --------
NET INCOME BEFORE EXTRAORDINARY ITEMS 17,448 13,468 8,495
Loss on extinguishments of debt,
net of income taxes of $1,636 (2,612)
-------- -------- --------
NET INCOME $ 14,836 $ 13,468 $ 8,495
======== ======== ========
Net income per share before
extraordinary items
Basic 1.75 1.94 1.23
Diluted 1.70 1.58 1.03
Extraordinary items
Basic (0.26)
Diluted (0.25)
Net income per share
Basic 1.49 1.94 1.23
Diluted 1.45 1.58 1.03
Shares used in earnings per
share calculations
Basic 9,974 6,931 6,929
Diluted 10,578 9,246 9,251
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
ENGLE HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<CAPTION>
Common Stock Additional
----------------- Paid-In Retained
Shares Amount Capital Earnings Total
---------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Amounts at October 31, 1995 6,929,200 $ 69 $48,523 $25,514 $74,106
Net income 8,495 8,495
Dividends to Shareholders (1,109) (1,109)
---------- ---- ------- ------- -------
Amounts at October 31, 1996 6,929,200 $ 69 $48,523 $32,900 $81,492
Net income 13,468 13,468
Dividends to shareholders (1,109) (1,109)
Distribution in connection
with land purchase (694) (694)
Common Stock issued in
connection with employee
stock bonus plan 2,493 23 23
---------- ---- ------- ------- -------
Amounts at October 31, 1997 6,931,693 $69 $47,852 $45,259 $93,180
Net income 14,836 14,836
Dividends to shareholders (1,617) (1,617)
Issuance of common stock 3,105,000 31 39,481 39,512
Common stock issued in
connection with
conversion of debt 1,100,129 11 15,391 15,402
Common stock issued in
connection with employee
stock bonus plan 15,115 237 237
Common stock issued in
connection with exercise
of stock options 17,300 1 173 174
---------- ---- ------- ------ -------
Amounts at October 31, 1998 11,169,237 112 103,134 58,478 161,724
========== ==== ======= ====== =======
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<TABLE>
ENGLE HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<CAPTION>
For the Year Ended October 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,836 $ 13,468 $ 8,495
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,162 2,374 2,977
Impairment loss 852 2,156 1,948
Extraordinary loss on extinguishment of debt 2,612
Deferred tax provision (benefit) 808 (2,626) (1,508)
Employee stock compensation 237 24
Change in assets and liabilities:
(Increase) decrease in restricted cash (93) 2,457 819
Increase in inventories (123,364) (11,700) (23,848)
(Increase) decrease in other assets (2,133) 3,231 (5,396)
Increase in mortgages held for sale (11,241) (1,523) (6,533)
Increase (decrease) in accounts payable and
accrued expenses 5,403 (5,003) 12,462
Increase (decrease) in deposits 4,755 (4,532) 2,785
Increase in financial service borrowings 11,241 1,523 6,533
-------- -------- --------
Net cash required by operating activities (92,925) (151) (1,266)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (3,951) (1,282) (707)
Proceeds from sale of property 592 7,538
-------- -------- --------
Net cash (required) provided by investing
activities (3,951) (690) 6,831
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in borrowings 196,378 47,510 94,872
Repayment of borrowings (222,555) (47,563) (90,209)
Proceeds from issuance of senior debt 145,875
Redemption of bonds (56,415)
Proceeds from issuance of common stock 39,512
Distributions to shareholders (1,617) (1,803) (1,109)
Proceeds from exercise of stock options 174
-------- -------- --------
Net cash provided (required)
by financing activities 101,352 (1,856) 3,554
-------- -------- --------
NET INCREASE (DECREASE) IN CASH 4,476 (2,697) 9,119
CASH AT BEGINNING OF PERIOD 15,565 18,262 9,143
-------- -------- --------
CASH AT END OF PERIOD $ 20,041 $ 15,565 $ 18,262
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
ENGLE HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Business:
Engle Homes, Inc. and subsidiaries ("the Company") is engaged
principally in the construction and sale of residential homes and land
development. The Company's primary market is Florida with divisions in
Dallas, Texas; Denver, Colorado; Virginia and Maryland; Raleigh, North
Carolina; Phoenix, Arizona; and Atlanta, Georgia. Ancillary products
and services to its residential home building include land sales to other
builders, origination and sale of mortgage loans and title services. The
consolidated financial statements include the accounts of the Company and
all subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Asset Impairments:
The Company periodically reviews the carrying value of certain of its
assets in relation to historical results, current business conditions and
trends to identify potential situations in which the carrying value of
assets may not be recoverable. If such reviews indicate that the carrying
value of such assets may not be recoverable, the Company would estimate the
undiscounted sum of the expected future cash flows of such assets to
determine if such sum is less than the carrying value of such assets to
ascertain if a permanent impairment exists. If a permanent impairment
exists, the Company would determine the fair value by using quoted market
prices, if available, for such assets, or if quoted market prices are not
available, the Company would discount the expected future cash flows of such
assets.
Cash:
Unrestricted cash includes amounts in transit from title companies for
home closings and highly liquid investments with an initial maturity of
three months or less.
Restricted cash consists of amounts held in escrow as required by
purchase contracts or by law for rental security deposits and compensating
balances for various open letters of credit.
Inventories:
Inventories are stated at the lower of cost or fair value. Inventories
under development or held for development are stated at an accumulated cost
unless such cost would not be recovered from the cash flows generated by
future disposition. In this instance, such inventories are reserved at
fair value.
Interest, real estate taxes and similar development costs are
capitalized to land and construction costs during the development and
construction period and are amortized to costs of sales as closings occur.
Property and Equipment, Depreciation and Amortization:
Property and equipment are stated at cost. Depreciation and
amortization are provided over the assets' estimated useful lives ranging
from 18 months to 30 years, primarily on the straight-line method. Loan
costs are deferred and amortized over the term of the outstanding
borrowings.
Goodwill:
The Company has classified the excess of cost over the fair value of
the net assets of companies acquired in purchase transactions as goodwill.
Goodwill is being amortized on a straight-line method over 20 years.
Amortization charged to operations amounted to $336,550 in fiscal 1998, 1997
and 1996, respectively.
Revenue Recognition:
Revenues and profits from sales of commercial and residential real
estate and related activities are recognized when closings have occurred and
the purchaser has made a minimum down payment and other criteria for sale
and profit recognition are satisfied in accordance with generally accepted
accounting principles governing profit recognition for real estate
transactions.
Selling and Marketing:
Certain selling and marketing costs associated with residential
projects are deferred and amortized as closings related to those sales occur
and revenue is recognized. Deferred selling and marketing costs amounted to
$1,300,000 at October 31, 1998. The Company amortized selling and marketing
cost of $37,600,000, $27,800,000 and $22,100,000 in 1998, 1997 and 1996,
respectively.
Income Taxes:
The Company accounts for income taxes under the asset and liability
method in accordance with Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes."
Earnings Per Share:
Net income per share is based on the weighted average number of shares
of Common Stock outstanding during each year, after giving effect to the
convertible debt and stock options described in Notes 5 and 6. During 1998,
the Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128 "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 replaced the
existing methodology for calculating and presenting earnings per share.
Under SFAS No. 128, primary earnings per share has been replaced with a
presentation of basic earnings per share and fully diluted earnings per
share has been replaced with diluted earnings per share. Basic earnings per
share excludes dilution and is computed by dividing income available to
common shares outstanding for the period by the weighted average of common
shares outstanding. Diluted earnings per share is computed similarly to
fully diluted earnings per share in accordance with the Accounting
Principles Board ("APB") Opinion No. 15. The impact of the adoption of SFAS
No. 128 has not been material.
Financial Instruments:
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques, as appropriate, and
unless otherwise disclosed, the fair values of financial instruments
approximate their recorded values.
Stock Based Compensation:
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of
the intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date, or other measurement
date, over the amount an employee must pay to acquire the stock.
New Accounting Pronouncements:
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131"), which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," establishes standards for
the way that public enterprises report information about operating segments
in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued
to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate the resources
and in assessing performance.
Both SFAS No. 130 and No. 131, issued in June 1997, were adopted by
the Company in 1998. The adoption of these statements did not impact the
Company's financial statement disclosures.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. The
Statement applies to all entities and is effective for all fiscal quarters
of the fiscal years beginning after June 15, 1999. The Company did not
engage in derivative instruments or hedging activities in any periods
presented in the consolidated financial statements.
Financial Statement Reclassifications:
Certain amounts reflected in the consolidated financial statements for
the years ended October 31, 1997 and 1996 have been reclassified to conform
to the presentation for the year ended October 31, 1998.
NOTE 2 INVENTORIES
<TABLE>
Inventories consist of (dollars in thousands):
<CAPTION>
October 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Land and improvements for residential
homes under development $269,044 $182,279
Residential homes under construction 83,576 46,049
Land zoned for commercial development 1,780
-------- --------
$352,620 $230,108
======== ========
</TABLE>
<TABLE>
Included in inventory is the following (dollars in thousands):
<CAPTION>
For the Year Ended October 31,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest capitalized,
beginning of period $16,378 $16,821 $13,092
Interest incurred and capitalized 17,757 15,623 15,272
Amortized to cost of sales - homes (16,150) (15,254) (10,411)
Amortized to cost of sales - land (1,659) (812) (1,132)
------- ------- -------
Interest capitalized, end of period $16,326 $16,378 $16,821
======= ======= =======
<FN>
Included in cost of sales - homes during the years ended October 31, 1998,
1997 and 1996 are impairment losses of $852,000, $2,200,000 and $1,900,000,
respectively, to reduce certain projects under development to fair value.
</FN>
</TABLE>
NOTE 3 MORTGAGE COMPANY
The mortgage company's activities include the origination, sale and
servicing of residential mortgages. The mortgage company has established a
$40.0 million line of credit at LIBOR plus 1.25% (6.94% at October 31,
1998), $10 million expiring December 1998 and $30 million expiring July
1999, to finance such mortgage originations. As of October 31, 1998 the
balance outstanding under the line of credit was approximately $25.8
million. The following is a summary of the mortgage company's results of
operations and financial position (dollars in thousands):
<TABLE>
Preferred Home Mortgage Company
Income Statement Information
(dollars in thousands)
<CAPTION>
For the Year Ended October 31,
----------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
REVENUES
Loan origination fees $5,690 $3,556 $3,041
Interest 971 577 494
------- ------- ------
TOTAL REVENUES 6,661 4,133 3,535
======= ======= ======
COSTS AND EXPENSES
General and administrative 2,404 1,724 1,716
Interest 989 570 514
Application processing costs 841 566 512
------ ------ ------
TOTAL EXPENSES 4,234 2,860 2,742
------ ------ ------
INCOME BEFORE TAXES $2,427 $1,273 $ 793
====== ====== ======
</TABLE>
<TABLE>
Preferred Home Mortgage Company
Balance Sheet Information
(dollars in thousands)
<CAPTION>
October 31,
--------------------
1998 1997
------- -------
<S>
ASSETS <C> <C>
CASH $ 289 $ 102
MORTGAGE LOANS HELD FOR SALE 25,770 14,529
MORTGAGE LOANS RECEIVABLE 141 171
OTHER 989 559
ADVANCES TO PARENT(a) 3,762 1,877
------- -------
TOTAL ASSETS $30,951 $17,238
======= =======
LIABILITIES AND EQUITY
ACCOUNTS PAYABLE $ 111 $ 66
NOTES PAYABLE 25,770 14,529
------- -------
TOTAL LIABILITIES 25,881 14,595
SHAREHOLDER'S EQUITY 5,070 2,643
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,951 $17,238
======= =======
<FN>
(a) Certain intercompany transactions and balances are eliminated in
consolidation and have no effect on consolidated earnings or equity.
</FN>
</TABLE>
<TABLE>
NOTE 4 BORROWINGS (dollars in thousands)
<CAPTION>
Borrowings consist of:
October 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Unsecured borrowings from banks $ 45,000
Secured borrowings from banks $ 80,516
Senior Notes due 2008, at 9.25% 150,000
Senior Notes due 2000, at 11 3/4% 40,000
Convertible Subordinated Notes due 2003,
at 7% 30,000
Mortgages and other debt at interest rates
ranging from 6% to 9%, maturing through 2001 10,856 1,548
Unamortized discount (719)
-------- --------
$205,137 $152,064
======== ========
<FN>
On May 28, 1998, the Company entered into a $170 million unsecured
revolving credit agreement (the"Credit Facility") with various banks.
Borrowings under the Credit Facility generally bear interest at a
fluctuating rate based upon the prime rate, the federal funds rate or LIBOR.
All outstanding borrowings under the Credit Facility are due in May 2001.
Under the terms of the agreement the Company may request, and the banks
shall make an annual determination as to whether or not to extend the
maturity of the commitment by one year. Available borrowings under the
Credit Facility are limited to certain percentages of finished lots,
construction costs, land and land under development.
The weighted average interest rate of the Company's bank borrowings was
7.8% and 8.4% at October 31, 1998 and 1997, respectively.
During 1998, the Company redeemeded approximately $14.6 million
aggregate principal amount of the 7% Convertible Subordinated Notes due 2003
(the "1993 Notes") and the remaining $15.4 million principal amount of the
1993 Notes were converted by the holders thereof into 1,100,129 shares of
the Company's Common Stock.
On February 2, 1998, the Company consummated an underwritten public
offering of 3,105,000 shares of the Company's Common Stock and an
underwritten public offering of $100,000,000 aggregate principal amount of 9
1/4% Senior Notes due 2008 ("New Notes"). The net proceeds to the Company
from these offerings was approximately $137.2 million. A portion of such
proceeds were used to repay the Company's secured bank borrowings.
In June 1998, the Company sold $50,000,000 aggregate principal amount
of 9-1/4% Series B Senior Notes due 2008 (the "Series B Notes") in a
transaction not registered under the Securities Act of 1933, as amended, at
a price to investors of 98.5% of the principal amount thereof. The net
proceeds to the Company from such sale were approximately $48.0 million.
The Company used the net proceeds primarily to redeem all of the $40 million
aggregate principal amount of its 11-3/4% Senior Notes due 2000 outstanding
at a price of 105.875% of the principal amount thereof and the remainder to
repay outstanding amounts under the Credit Facility. On August 24, 1998,
the Company completed an exchange of the Series B Notes and substantially
all of the New Notes for approximately $150,000,000 aggregate principal
amount of 9-1/4% Series C Senior Notes due 2008.
Maturities of borrowings are as follows:
Year Ended October 31,
1999 $ 4,907
2000 2,250
2001 48,699
2002
2003
Thereafter 149,281
--------
$205,137
========
The aggregate fair market value of the $150 million senior notes, based
upon their quoted market price as of October 31, 1998, was approximately
$140,625. All other borrowings, due to their relative short-term maturity,
approximate fair market value as of October 31, 1998.
The Company's loan agreements contain restrictive covenants which
require the Company to, among other things, maintain a minimum net worth and
maintain certain financial ratios. The Company's loan agreements also limit
the amount of dividends that the Company may pay in any fiscal quarterly
period to no more than 50% of the Company's Consolidated Net Income, as
defined, for such period and that the aggregate amount of dividends and
certain other payments made after February 1, 1998 does not exceed the sum
of 50% of the Company's cumulative Consolidated Net Income since February 1,
1998 plus cash proceeds to the Company from certain issuances of capital
stock of the Company plus $5.0 million. Certain of such loans also provide
that the lender may, at its option, accelerate such loans as a result of,
among other things, a material adverse change in the Company's financial
position or results of operations.
The Senior Notes and the Credit Facility are guaranteed by all
of the Company's subsidiaries on a full, unconditional, joint and several
basis. The financial statements of the subsidiary guarantors are omitted as
management has determined that separate financial statements and other
disclosures concerning the subsidiaries would not be meaningful to
investors.
</FN>
</TABLE>
<TABLE>
Summarized financial information of guarantor subsidiaries are as
follows (dollars in thousands):
<CAPTION>
October 31, 1998
Engle Guarantor
Homes, Subsidi- Eliminating
Inc. aries Entries Consolidated
-------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Total Assets $239,225 $421,275 $(229,072) $431,428
Total Liabilities 189,333 309,443 (229,072) 269,704
Total Revenues 7,430 528,610 536,040
Cost of Sales Homes and Land 6,387 432,534 438,921
Net (Loss) Income (12,096) 26,932 14,836
October 31, 1997
Total Assets 176,252 247,966 (135,806) $288,412
Total Liabilities 184,221 146,817 (135,806) 195,232
Total Revenues 46,299 378,996 425,295
Cost of Sales Homes and Land 58,506 293,884 352,390
Net Income 3,238 10,230 13,468
October 31, 1996
Total Assets 122,080 239,402 (76,693) $284,789
Total Liabilities 124,945 155,045 (76,693) 203,297
Total Revenues 38,985 293,103 332,088
Cost of Sales Homes and Land 34,722 241,518 276,240
Net (Loss) Income (2,846) 11,341 8,495
</TABLE>
NOTE 5 EARNINGS PER SHARE
<TABLE>
During the first quarter of fiscal 1998, the Company adopted SFAS No.
128, "Earnings Per Share." As a result, all previously reported earnings
per share data has been restated to conform with SFAS No. 128. Basic and
diluted earnings per share before extraordinary items are calculated as
follows:
<CAPTION>
For the Years Ended
October 31,
---------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Basic:
Income before
extraordinary items $17,448 $13,468 $8,495
Weighted average number of
shares outstanding 9,974 6,931 6,929
------- ------- ------
Basic earnings per share 1.75 1.94 1.23
======= ======= ======
Diluted:
Income before
extraordinary items 17,448 13,468 8,495
Interest on 7% convertible
debentures reflected in cost
of sales, net of tax effect 506 1,114 1,071
------- ------- ------
Income before extraordinary items
applicable to diluted common shares $17,954 $14,582 $9,566
======= ======= ======
Weighted average number of
common shares outstanding 9,974 6,931 6,929
Contingently issuable shares 179
Weighted average shares
issuable from assumed
exercise of 7% convertible
debentures 411 2,143 2,143
Options to acquire common stock 193 172
------ ----- ------
Diluted weighted average
common shares outstanding 10,578 9,246 9,251
------ ----- ------
Diluted earnings per share before
extraordinary items $ 1.70 $ 1.58 $ 1.03
====== ===== ======
</TABLE>
NOTE 6 STOCK BASED COMPENSATION
At October 31, 1998, the Company has a fixed stock option plan which is
described below. The Company applies APB Opinion 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for the Plan.
Under APB Opinion 25, if the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of
grant, no compensation is recognized.
Under the 1991 Stock Option Plan ("the Plan" ), as amended, options were
authorized to be granted to purchase 1,000,000 common shares of the
Company's stock at not less than the fair market value at the date of the
grant. Options expire ten years from the date of grant, and typically vest
evenly over a five year period.
SFAS Statement No. 123, Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information regarding net income
and net income per share as if compensation cost associated with options
granted under the Company's stock option plan had been determined in
accordance with the fair value based method prescribed in SFAS Statement No.
123. During the year ended October 31, 1998, the Company granted 300,000
options to purchase shares of the Company's common stock at $13.75, the
closing price on the date of grant. There were no options granted during
the year ended October 31, 1997. The Company' s pro forma net income and
income per share under the accounting provisions of SFAS Statement No. 123
did not materially differ from the reported amounts and are presented below.
Year ended October 31, 1998
Net income, as reported $14,836
Estimated stock compensation costs (187)
-------
Pro forma net income $14,649
=======
Pro forma net income per share - Basic $ 1.47
Pro forma net income per share - Diluted $ 1.43
The Black-Scholes method was used to compute the pro forma amounts presented
above, utilizing the weighted average assumptions summarized below. The
weighted average fair value of options granted was $6.80 for the year ended
October 31, 1998.
Risk-free interest rate 5.56%
Volatility % 46.50%
Expected life (in years) 7 years
Dividend yield rate 1.00%
<TABLE>
A summary of the status of the Plan as of October 31, 1998 and 1997,
and changes during the years then ended on those dates are presented below:
<CAPTION>
As of As of As of
October 31, 1998 October 31, 1997 October 31, 1996
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Price
------- ------ ------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 612,500 $10.77 612,500 $10.77 630,000 $10.81
Granted 300,000 13.75 5,000 9.00
Exercised (17,300) 10.07
Forfeited (22,500) $11.50
------- ----- ------- ------ ------- ------
Outstanding at
end of year 895,200 $11.81 612,500 $10.77 612,500 $10.77
======= ====== ======= ====== ======= =====
Options exercisable
at year-end 531,160 11.05 508,000 $11.10 392,000 $11.20
Weighted average
fair value of
options granted
during the year 300,000 6.80 5,000 $ 9.00
</TABLE>
<TABLE>
The following table summarizes information about fixed options outstanding
at October 31, 1998:
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 10/31/98 Life Price at 10/31/98 Price
<S> <C> <C> <C> <C> <C>
$9.00 to $11.50 595,200 4.1 years $ 10.83 531,160 $ 11.05
$13.75 300,000 9.6 years $ 13.75 0 0
- --------------- ----------- ----------- -------- ----------- --------
<FN>
During fiscal 1997 the Company established the 1997 Performance Bonus
Plan (the "Bonus Plan"). In fiscal 1998, the Company amended the Bonus Plan
to provide for the issuance of up to 250,000 shares at "Fair Market Value"
to certain executives and employees of the Company. The Company issued
15,115 shares valued at approximately $237,000, and 2,493 shares valued at
approximately $24,000 during fiscal year 1998 and 1997, respectively.
</FN>
</TABLE>
NOTE 7 INCOME TAXES
<TABLE>
The income tax provision in the consolidated statements of income
consists of the following components(dollars in thousands):
<CAPTION>
For the Years Ended October 31,
---------------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Current:
Federal $8,657 $9,467 $5,734
State 1,457 1,589 981
------- ------- ------
$10,114 $11,056 $6,715
------- ------- ------
Deferred:
Federal 691 (2,250) (1,288)
State 117 (375) (221)
------- ------ ------
808 (2,625) (1,509)
------- ------ ------
Total $10,922 $8,431 $5,206
======= ====== ======
<FN>
The provision for income taxes was different from the amount computed
by applying the statutory rate due to the effect of state income taxes.
</FN>
</TABLE>
<TABLE>
Temporary differences which gave rise to deferred income tax assets and
liabilities at October 31, 1998 and 1997 are as follows (dollars in
thousands):
<CAPTION>
October 31,
--------------------
1998 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Differences in reporting selling and
marketing costs for tax purposes $ 1,131 $ 818
Other 126 97
------- -------
Gross deferred tax liabilities $ 1,257 $ 915
Deferred tax assets:
Inventory 2,670 2,822
Property and equipment 442 384
Income recognized for tax purposes
and deferred for financial reporting
purposes 513 885
------- -------
Gross deferred tax assets 3,625 4,091
------- -------
Net deferred tax asset $(2,368) $(3,176)
======= =======
</TABLE>
NOTE 8 COMMITMENTS AND CONTINGENCIES
The Company is subject to the normal obligations associated with
entering into contracts for the purchase, development and sale of real
estate in the routine conduct of its business. The Company is committed
under various letters of credit and performance bonds which are required for
certain development activities, deposits on land and lot purchase contract
deposits. Outstanding letters of credit and performance bonds under these
arrangements totaled approximately $34.7 million at October 31, 1998.
The Company and its subsidiaries occupy certain facilities, including
the Company's headquarters in Boca Raton, Florida, under lease arrangements.
Rent expense, net of sublease income, amounted to $331,749, $293,541, and
$302,582 in fiscal 1998, 1997 and 1996, respectively. Future minimum rental
commitments for operating leases with non-cancelable terms in excess of one
year are $800,000 per year through 2006. Sublease income is derived
primarily from tenants occupying space under month-to-month and annual
leases.
The Company has a defined contribution plan established pursuant to
Section 401(k) of the Internal Revenue Code. Employees contribute to the
plan a percentage of their salaries, subject to certain dollar limitations,
and the Company matches a portion of the employees' contributions. The
Company's contribution to the plan for the years ended October 31, 1998,
1997, and 1996 amounted to $108,000, 93,000 and 61,000, respectively.
The Internal Revenue Service is in the process of reviewing the
Company's tax returns for the years 1994 through 1996. While the Company
cannot be certain of the results of these audits, it believes that
adjustments, if any, will not be material.
The Company is involved, from time to time, in litigation arising in
the ordinary course of business, none of which is expected to have a
material adverse effect on the Company's consolidated financial position or
results of operations.
The Company, as well as the homebuilding industry in general, may be
adversely affected during periods of high inflation, primarily because of
higher land and construction costs. In addition, higher mortgage interest
rates may significantly affect the affordability of permanent mortgage
financing to prospective purchasers. Inflation also increases the Company's
interest costs and costs of labor and materials. The Company attempts to
pass through to its customers any increases in its costs through increased
selling prices and, to date, inflation has not had a material adverse effect
on the Company's results of operations. However, there is no assurance that
inflation will not have a material adverse impact on the Company's future
results of operation.
The Company's operations are interest rate sensitive. Overall housing
demand is adversely affected by increases in interest costs. If mortgage
interest rates increase significantly, this may negatively impact the
ability of a homebuyer to secure adequate financing. Such results of higher
interest rates may result in adversely affecting the Company's revenues,
gross margins and net income.
<TABLE>
NOTE 9 QUARTERLY RESULTS FOR 1998 AND 1997 (unaudited)
Quarterly results for the years ended October 31, 1998 and 1997 follow
(dollars in thousands, except share data):
<CAPTION>
1998 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 90,409 $124,343 $156,825 $164,463
Income before income taxes
and extraordinary items 4,709 6,047 8,168 9,446
Income before extraordinary
items 2,896 3,719 5,023 5,810
Net income per share before
extraordinary items
Basic 0.42 0.35 0.45 0.52
Diluted 0.37 0.34 0.44 0.51
Shares used in earnings
per share calculation:
Basic 6,976 10,634 11,152 11,166
Diluted 8,226 10,837 11,369 11,297
1997
Revenues $100,108 $105,120 $107,125 $112,942
Income before income taxes 4,618 4,999 5,856 6,426
Net Income 2,840 3,074 3,602 3,952
Net income per share
Basic 0.41 0.44 0.52 0.57
Diluted 0.34 0.36 0.43 0.46
Shares used in earnings
per share calculation:
Basic 6,929 6,929 6,930 6,931
Diluted 9,132 9,105 9,106 9,246
<FN>
Quarterly and year to date computation of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may
not agree with per share amounts for the year.
</FN>
</TABLE>
<TABLE>
NOTE 10 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<CAPTION>
For the Year Ended October 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest paid $ 16,115 $ 15,623 $ 15,293
======== ======== ========
Income taxes paid $ 10,950 $ 10,324 $ 4,902
======== ======== ========
</TABLE>
Non-Cash Investing and Financing Activities:
During fiscal 1996 the Company sold certain commercial properties in
exchange for cash of $7.5 million and notes receivable of $3.9 million.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this Item 10 will be contained in the
company's definitive proxy materials to be filed with the Securities and
Exchange Commission and is incorporated in this Annual Report on Form 10-K
by this reference.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item 12 will be contained in the
Company's definitive proxy materials to be filed with the Securities and
Exchange Commission and is incorporated in this Annual Report on Form 10-K
by this reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item 12 will be contained in the
Company's definitive proxy materials to be filed with the Securities and
Exchange Commission and is incorporated in this Annual Report on Form 10-K
by this reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be contained in the
Company's definitive proxy materials to be filed with the Securities and
Exchange Commission and is incorporated in this Annual Report on Form 10-K
by this reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements:
Reference is made to the index set forth in "ITEM 8,
FINANCIAL STATEMENTS and SUPPLEMENTARY DATA" of this Annual
Report on Form 10-K.
2. Financial Statement Schedules:
Reference is made to the index set forth in "ITEM 8,
FINANCIAL STATEMENTS and SUPPLEMENTARY DATA" of this Annual
Report on Form 10-K.
3. Exhibits:
The following exhibits are filed as part of this Annual
Report on Form 10-K.
Exhibit
No. Description
-------
3.1 Registrant's Amended and Restated Articles of
Incorporation, hereby incorporated by reference
to Exhibit 3.1 of the Registrant's Registration
Statement on Form S-1 (File No. 33-58678).
3.2 Registrant's Amended and Restated Bylaws, hereby
incorporated by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form S-1
(File No. 33-43305).
4.1 Specimen Stock Certificate for Registrant's
Common Stock, hereby incorporated by reference to
Exhibit 4.1 of the Registrant's Registration
Statement on Form S-1 (File No. 33-43305).
4.2 Indenture, dated as of February 2, 1998, between
the Registrant, the Guarantors named therein and
the American Stock Transfer & Trust Company, as
trustee, relating to the Registrant's 9-1/4%
Senior Notes due 2008, hereby incorporated by
reference to Exhibit 4.1 of the Registrant's
Registration Statement on Form S-2 (File No.
333-40741).
4.3 Indenture dated June 12, 1998, between the
Registrant, the Guarantors named therein and the
American Stock Transfer & Trust Company, as
trustee, relating to the Registrant's 9-1/4%
Series C Senior Notes due 2008, hereby
incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form S-4
(File No. 333-59057).
10.1 Registrant's Third Amended and Restated 1991
Stock Option Plan (Compensatory Plan), hereby
incorporated by reference to Exhibit A of
Registrant's Proxy Statement for its 1998 Annual
Meeting.
10.2 Indemnification Agreement between the Registrant
and each of its directors and certain executive
officers, hereby incorporated by reference to
Exhibit 10.2 of the Company's Registration
Statement of Form S-1 (File No. 33-58678).
10.3 Asset Purchase Agreement, dated May 13, 1994,
among Engle Homes, Inc., Park Homes West, Inc.
and David H. Feinberg, and Amendment No. 1
thereto, dated June 14, 1994, hereby incorporated
by reference to Exhibit 2.1 of the Registrant's
Current Report on Form 8-K, dated June 28, 1994.
10.4 Registrant's Amended and Restated 1997 Bonus
Performance Plan (Compensatory Plan), hereby
incorporated by reference to Exhibit B of
Registrant's Proxy Statement for its 1998 Annual
Meeting.
10.5 Credit Agreement, dated as of May 28, 1998, by
and among the Registrant, as Borrower, the Banks
named therein, SunTrust Bank, South Florida,
National Association, a national banking
association, as Administrative Agent, and
NationsBank, N.A., a national banking
association, as Documentation Agent, hereby
incorporated by reference to Exhibit 10.6 of the
Registrant's Registration Statement on Form S-4
(File No. 333-59057).
21.1 Subsidiaries of the Registrant
23.1 Consent of BDO Seidman, LLP
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ENGLE HOMES, INC.
By /s/ ALEC ENGELSTEIN
----------------------
Alec Engelstein
Chairman of the Board, President
Dated: November 23, 1998 and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signatures Title Date
/s / ALEC ENGELSTEIN Chairman of the Board, November 23, 1998
- -------------------- President and Chief
Executive Officer(Principal
Executive Officer)
/s/ DAVID SHAPIRO Vice President-Finance, Chief November 23, 1998
- ----------------- Financial Officer and Director
David Shapiro (Principal Financial Officer)
/s/ PAUL LEIKERT Senior Vice President - Chief November 23, 1998
- ---------------- Accounting Officer
Paul Leikert (Principal Accounting Officer)
/s/ HARRY ENGELSTEIN Executive Vice President, November 23, 1998
- -------------------- Chief Construction Officer
Harry Engelstein and Director
/s/ JOHN A. KRAYNICK Senior Vice President November 23, 1998
- -------------------- and Director
John A. Kraynick
/s/ HENRY H. FISHKIND Director November 23, 1998
- ---------------------
Henry H. Fishkind
/s/ RONALD J. KORN Director November 23, 1998
- ------------------
Ronald J. Korn
/s/ ALAN L. SHULMAN Director November 23, 1998
- -------------------
Alan L. Shulman<PAGE>
Exhibit 22.1
List of Registrant's Subsidiaries
Subsidiary Name State of Incorporation
Banyan Trails, Inc. Florida
Preferred Builders Realty, Inc. Florida
Engle Homes/Orlando, Inc. Florida
Preferred Home Mortgage Company Florida
St. Tropez At Boca Golf, Inc. Florida
Engle Homes/Palm Beach, Inc. Florida
Engle Homes/Broward, Inc. Florida
Engle Homes/Gulf Coast, Inc. Florida
Engle Homes/Texas, Inc. Florida
Engle Homes/Pembroke, Inc. Florida
Engle Homes/Virginia, Inc. Florida
Engle Homes/North Carolina, Inc. Florida
Universal Land Title, Inc. Florida
Engle Homes/Colorado Inc. Florida
Engle Homes/Lake Bernadette, Inc. Florida
Engle Homes/Southwest Florida Florida
Engle Homes/Arizona, Inc. Florida
Engle Homes/Atlanta, Inc. Florida
Greenleaf Homes, Inc. Florida
Pembroke Falls Realty, Inc. Florida
Engle Homes/Arizona Construction, Inc. Arizona
Universal Land Title of Colorado, Inc. Colorado
Biltmore South Corp Florida
Engle Homes/Jacksonville, Inc. Florida
Engle Homes Realty, Inc. Georgia
<TABLE>
SCHEDULE II
ENGLE HOMES, INC AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended October 31, 1998, 1997 and 1996
(amounts in thousands)
<CAPTION>
Balance Additions
at charged to Balance
beginning costs and at end
Description of year expenses Deductions of year
- ---------------------------- --------- -------- ----------- -------
<S> <C> <C> <C> <C>
Year ended October 31, 1998
Valuation allowance 2,027 852 1,663 1,216
Year ended October 31, 1997
Valuation allowance 1,948 2,156 2,077 2,027
Year ended October 31, 1996
Valuation allowance 1,948 1,948
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 21,115
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 352,620
<CURRENT-ASSETS> 0
<PP&E> 4,339
<DEPRECIATION> 0
<TOTAL-ASSETS> 431,428
<CURRENT-LIABILITIES> 0
<BONDS> 149,281
0
0
<COMMON> 112
<OTHER-SE> 161,612
<TOTAL-LIABILITY-AND-EQUITY> 161,724
<SALES> 515,028
<TOTAL-REVENUES> 536,040
<CGS> 438,921
<TOTAL-COSTS> 438,921
<OTHER-EXPENSES> 15,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 28,370
<INCOME-TAX> 10,922
<INCOME-CONTINUING> 17,448
<DISCONTINUED> 0
<EXTRAORDINARY> (2,612)
<CHANGES> 0
<NET-INCOME> 14,836
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.45
</TABLE>
