Exhibit 99.2
PERMA-BILT, A NEVADA CORPORATION
BALANCE SHEET
At September 30, 2002 and December 31, 2001
(Dollars in thousands)
September 30, December 31,
2002 2001
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(Unaudited)
ASSETS
Cash and cash equivalents $ 6,350 $ 2,098
Investments available for sale and
other short term investments 251 --
Properties under construction 31,068 35,267
Land held for development 32,724 27,976
Property and equipment, net 192 244
Other assets 475 857
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Total assets $71,060 $66,442
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LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable $ 3,727 $ 3,835
Accrued liabilities 3,286 1,932
Loans from parent company 26,717 28,553
Construction and other notes payable 17,183 16,186
Deferred income taxes 1,053 1,042
Other liabilities 1,643 --
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Total liabilities 53,609 51,548
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Stockholder's equity:
Common stock, no par value 250 250
Retained earnings 17,200 14,644
Net unrealized appreciation on investments 1 --
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Total retained earnings 17,201 14,644
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Total stockholder's equity 17,451 14,894
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Total liabilities and stockholder's equity $71,060 $66,442
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See accompanying notes to financial statements.
PERMA-BILT, A NEVADA CORPORATION
STATEMENT OF INCOME
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(Dollars in thousands)
Nine Months Ended
-------------------
2002 2001
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REVENUES
Operating revenues $70,789 $62,088
Gain on land sales - 768
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Total Revenues 70,789 62,856
COSTS AND EXPENSES
Cost of sales 61,019 53,644
General and administration 4,637 4,117
Sales and marketing 1,201 1,097
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Total costs and expenses 66,857 58,858
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Income before provision for taxes 3,932 3,998
Provision for income taxes 1,376 1,399
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Net Income $ 2,556 $ 2,599
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See accompanying notes to financial statements.
PERMA-BILT, A NEVADA CORPORATION
STATEMENT OF CASH FLOW
For the Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(Dollars in thousands)
Nine Months Ended
-----------------
2002 2001
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,515 $ 3,316
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Cash flows from investing activities:
Purchase of property and equipment (11) (95)
Purchase of investments (250) --
Proceeds from land sale escrow -- 982
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NET CASH USED IN INVESTMENT ACTIVITIES (261) 887
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Cash flows from financing activities:
Cash received from bank construction loans 52,308 51,696
Cash payments on bank construction loans (51,941) (49,002)
Cash received from intercompany notes payable 1,553 --
Cash received from land seller notes payable 630 --
Cash payments on intercompany notes payable (1,552) (7,103)
Cash payments on seller notes payable -- (1,361)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 998 (5,770)
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Net increase (decrease) in cash and cash equivalents 4,252 (1,567)
Cash and cash equivalents at beginning of period 2,098 2,381
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Cash and cash equivalents at end of period $ 6,350 $ 814
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See accompanying notes to financial statements.
PERMA-BILT, A NEVADA CORPORATION
Notes to Unaudited Interim Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
ORGANIZATION AND NATURE OF BUSINESS
Perma-Bilt, A Nevada Corporation (the "Company") was formed in the State
of Nevada to engage in the business of acquiring, developing, and selling
real estate, primarily the construction and sale of single-family detached
homes, in Las Vegas, Nevada. Prior to December 11, 2001, the Company was
wholly owned by Zenith National Insurance Corp. On December 11, 2001 the
ownership of the Company was transferred to Zenith Insurance Company
("Zenith"), a wholly owned subsidiary of Zenith National Insurance Corp.
BASIS OF PRESENTATION
The accompanying interim financial statements have been prepared in
accordance with generally accepted accounting principles generally
accepted in the United States. The unaudited financial statements reflect
all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the Company's financial position and results
of operations for the periods presented. The results of operations for any
interim period are not necessarily indicative of results to be expected
for a full fiscal year or for any future periods.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and liquid short-term
investments. Liquid short-term investments are investments which are both
readily convertible to determinable amounts of cash and have maturities of
three months or less when purchased.
INVESTMENTS
Investments represent U.S. Treasury strips yielding approximately 3.13%
with approximately two year maturity dates on the date of acquisition.
PROPERTIES UNDER CONSTRUCTION, LAND HELD FOR DEVELOPMENT AND LAND HELD FOR
SALE
Properties under construction, land held for development and land held for
sale are stated at cost, unless determined to be impaired, in which case
the carrying value is reduced to fair value. Costs include land
acquisition and related costs, direct and indirect construction costs, and
indirect construction-related overhead costs. Interest and property taxes
are capitalized when development activities begin, and capitalization ends
when the property is available for sale.
The Company reviews real estate inventories whenever events or changes in
circumstances indicate the cost basis of such assets may not be
recoverable. If the cost basis of a real estate project is greater than
its projected future undiscounted net cash flows, exclusive of interest,
the real estate project is considered impaired and the carrying value of
the property is reduced to its fair value.
The estimation process in determining the value of land held for
development or sale is inherently uncertain and relies to a considerable
extent on current and future economic and market conditions. Such economic
and market conditions may affect management's development and marketing
plans. Accordingly, the ultimate realization of the Company's real estate
inventories is dependent upon future events and conditions that may cause
realization to differ from amounts previously estimated.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated
useful lives of the assets. Property and equipment are depreciated over
their estimated useful lives of 4-7 years. Maintenance and repairs are
charged to expense as incurred, and significant improvements are
capitalized. Upon sale or disposition, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is
included in income.
REVENUE AND COST RECOGNITION
Revenue from home sales is recognized when a closing occurs, which is when
title, possession and other attributes of ownership have been transferred
to the buyer and the Company is not obligated to perform significant
activities after the sale. Prior to closing, customer deposits are treated
as liabilities. Capitalized costs are charged to cost of sales upon
closing. Selling commissions and escrow closing costs are expensed as
incurred.
Gain on sale of land is recognized when the risks of ownership have been
transferred to the buyer, collectability of the sales price is reasonably
assured and the Company is not obligated to perform significant activities
after the sale.
INCOME TAXES
The provision for income taxes represents the tax payable for the period
and the change during the year in deferred tax assets and liabilities.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and the tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is established
when necessary, to reduce deferred income tax assets to the amount
expected to be realized. The Company is included in the consolidated tax
return of its parent company.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from the estimates made.
2. PROPERTIES UNDER CONSTRUCTION
Properties under construction at September 30, 2002 and December 31, 2001
consists of the following (in thousands):
September 30, 2002
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Development
Land Costs Total
------------ ------------ ------------
$16,160 $14,908 $31,068
December 31, 2001
-----------------
Development
Land Costs Total
------------ ------------ ------------
$11,252 $24,015 $35,267
3. LAND HELD FOR DEVELOPMENT
Land held for development at September 30, 2002 and December 31, 2001 consists
of the following (in thousands):
September 30, 2002
------------------
Development
Land Costs Total
------------ ------------ ------------
$8,971 $23,753 $32,724
December 31, 2001
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Development
Land Costs Total
------------ ------------ ------------
$18,837 $9,139 $27,976
4. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2002 and December 31, 2001 consists of
the following (in thousands):
September 30, December 31,
2002 2001
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Furniture and Fixtures $ 285 278
Computer equipment and software 168 168
Vehicles 203 198
Construction Equipment 14 14
Leasehold improvements -- 115
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$ 670 773
Less accumulated depreciation (478) (529)
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Net $ 192 $ 244
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Depreciation expense amounted to $71,026 and $83,681 for the nine months ended
September 30, 2002 and 2001, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities at September 30, 2002 and December 31, 2001 consists of the
following (in thousands):
September 30, December 31,
2002 2001
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Option deposits $ 682 355
Accrued bonuses 1,376 1,247
Other accrued liabilities 1,228 330
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$3,286 $1,932
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PERMA-BILT, A NEVADA CORPORATION
Notes to Unaudited Interim Financial Statements
6. INCOME TAXES
The Company files a consolidated tax return with its parent company. The method
of allocation between companies is subject to written agreement. Allocation is
based upon separate tax return calculations using the corporate tax rate of 35%.
Income tax expense consists of the following for the nine months ended
September 30, 2002 and 2001 (in thousands):
2002 2001
---- ----
Current $1,321 $1,343
Deferred 55 56
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Income tax expense $1,376 $1,399
====== ======
In accordance with Nevada tax statute, no state income tax is payable by the
Company.
Deferred income tax assets and liabilities have been netted to reflect the tax
impact of temporary differences. The components of the net deferred income tax
liability as of September 30, 2002 and December 31, 2001 are as follows (in
thousands):
September 30, December 31,
2002 2001
------------- -------------
LIABILITY
Capitalized interest and taxes $ 1,063 $1,076
Depreciation 1 1
Warranty reserve (44) (35)
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$ 1,020 $1,042
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7. LOANS FROM PARENT COMPANY
Loans from parent company at September 30, 2002 consist of the following
(in thousands):
September 30, December 31,
2002 2001
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Revolving credit promissory note from Zenith National
Insurance Corp., the parent company of Zenith Insurance
Company, uncollateralized, quarterly interest only
payments, with the unpaid principal maturing on
December 31, 2002 $26,717 $26,717
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The Company is charged interest on all borrowed or advanced monies from Zenith
Insurance Company, including a portion of its equity balance (which could
otherwise be converted to intercompany indebtedness). Such interest is charged
at the rate of prime plus 2% (4.75% at September 30, 2002 and 6.75% at December
31, 2001). For the nine months ended September 30, 2002 and 2001 the Company
incurred and capitalized $2,693,319 and $2,821,400, respectively, of such
interest for properties under construction and land held for development.
8. CONSTRUCTION AND OTHER NOTES PAYABLE
Construction and other notes payable at September 30, 2002 consist of the
following (in thousands):
September 30, December 31,
2002 2001
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Revolving line of credit from a financial institution up
to a maximum of $60,000,000 with interest at prime plus
0.50% per annum (4.75% at September 30, 2002 and 5.25% at
December 31, 2001), collateralized by one or more deed(s)
of trust on various projects, interest only payable monthly,
and principal is payable based on a minimum price per unit
closed, as set forth in the agreement, which matures on
April 18, 2003. $16,553 $16,186
PERMA-BILT, A NEVADA CORPORATION
Notes to Unaudited Interim Financial Statements
Other notes payable, collateralized by deeds of trust
payable on certain land parcels, principal due under
varying terms from annual installments to balloon
payments. The interest rate varies between 8% and
12% and is payable quarterly, monthly or annually
with the final principal balance due February, 2003.
$ 630 --
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$17,183 $16,186
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For the nine months ended September 30, 2002 and 2001, the Company capitalized
$666,320 and $1,155,380, respectively, of interest from construction and other
notes payable.
Capitalized interest on the loans from parent company and construction and other
notes payable included in cost of sales for the nine months ended September 30,
2002 and 2001 amount to $3,972,401 and 4,505,058, respectively.
9. COMMITMENTS
LEASE
The Company leases office space and vehicles under operating leases expiring in
various years through 2005.
The future minimum rental payments under noncancellable operating leases having
remaining terms in excess of one year at December 31, 2001 are as follows
(in thousands):
YEAR ENDING
DECEMBER 31,
2002 $78
2003 12
2004 3
2005 and thereafter --
-----
Total minimum future rental payments $ 93
=====
For the nine months ended September 30, 2002 and 2001, rental expense amounted
to $100,941 and $109,624, respectively.
10. SUBSEQUENT EVENT
Effective October 1, 2002, Meritage Corporation acquired the homebuilding assets
of the Company. In connection with the purchase, the loans to parent company and
all of the construction loans and other notes payable were paid off in full.