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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-23677

Technical Olympic USA, Inc.

Registrant’s telephone number, including area code: (954) 364-4000

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

     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   o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. o

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes   o   No   x

     The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $32.4 million as of February 6, 2003.

     As of February 3, 2003, there were 27,878,787 shares of the Registrant’s common stock outstanding.

Documents Incorporated By Reference

     Portions of the Registrant’s definitive proxy statement for its 2003 annual meeting of shareholders, which proxy statement will be filed no later than 120 days after the close of the Registrant’s fiscal year ended December 31, 2002, are hereby incorporated by reference in Part III of this Annual Report on Form 10-K.

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PART I

ITEM 1. BUSINESS

     We are the twelfth largest homebuilder in the United States, based on the number of homes we closed in 2001 and have a geographically diversified, national presence. We operate in 14 metropolitan markets located in four major geographic regions: Florida, Texas, the West and the Mid-Atlantic. We seek to operate in rapidly growing markets characterized by strong projected population and employment growth and relatively high income levels. Currently, we conduct homebuilding operations in five of the top ten U.S. homebuilding states ranked by total permit activity. For the twelve months ended December 31, 2002, we delivered 5,085 homes, with an average sales price of $265,000, and generated approximately $1.3 billion in revenues from home sales and $67.0 million in income from continuing operations.

     We design, build and market high quality detached single-family residences, town homes and condominiums primarily for “move-up” homebuyers. We also offer homes to homebuyers who are relocating to a new city or state, “first-time” homebuyers, buyers of vacation homes and homebuyers with grown children who want a smaller home (“empty nesters”). We market our homes under various brand names, including Newmark®, Fedrick Harris Estate Homes, Engle, DS Ware and Masonry. As of December 31, 2002, we owned, or had options to acquire, 26,320 lots, and we were actively building or marketing in 159 communities. Our backlog of homes sold but not closed at December 31, 2002, was 2,280, representing approximately $636.9 million in expected revenues.

     In addition to our homebuilding operations, we also offer a variety of financial services, including mortgage financing, title insurance and closing services, to homebuyers in the majority of our markets. Our mortgage financing operation derives most of its revenues from buyers of our homes although it also offers its services to other homebuyers and existing homeowners refinancing their mortgages. Our title insurance and closing services are subscribed to by buyers of our homes and other people purchasing or refinancing residential or commercial real estate.

Company History

     Our predecessor company was founded in Houston, Texas in 1983. Our company was formed in 1994 as a Nevada corporation under the name Newmark Homes Corp. We completed our initial public offering of common stock in March 1998. In December 1999, Technical Olympic, Inc. acquired 80% of our common stock. Technical Olympic is a wholly-owned subsidiary of Technical Olympic (UK) PLC, a corporation formed under the laws of Great Britain, which is a wholly-owned subsidiary of Technical Olympic S.A., a publicly-traded Greek corporation. In March 2001, we changed the state of our incorporation from Nevada to Delaware.

     On April 15, 2002, we sold the stock of our wholly-owned subsidiary, Westbrooke Acquisition Corp., to Standard Pacific. Westbrooke Acquisition and its subsidiaries build homes in South Florida under the name of “Westbrooke Homes.”

     On June 25, 2002, Engle Holdings Corp., a wholly-owned subsidiary of our majority stockholder, Technical Olympic, merged with and into us and we changed our name to Technical Olympic USA, Inc. As a result of the merger, Technical Olympic currently owns 91.75% of our outstanding common stock.

     On October 4, 2002, we acquired the net assets of DS Ware Homes LLC, a homebuilder operating in Jacksonville, Florida, for $35.6 million in cash, of which $30.0 million was funded with proceeds from our revolving credit facility. In addition, if certain earnings targets are met for the five-month period after the closing, we will be obligated to pay an additional $5.2 million in cash to the sellers in 2003.

     On November 18, 2002, we acquired the net assets of Masonry Homes, Inc., a homebuilder operating in the northwestern suburbs of Baltimore, Maryland and southern Pennsylvania, for $17.1 million in cash, of which approximately $15.0 million was funded with proceeds from our revolving credit facility. In addition, if certain targets are met regarding home closings, the development and/or subdivision of certain lots and earnings for the

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2003 and 2004 fiscal years, we will be obligated to pay up to an additional $21.3 million in cash to the sellers over a two-year period, of which $11.3 million has been paid as of February 5, 2003.

Business Strategies

Focus on Growth in Current Markets

     Unlike many large homebuilders that concentrate on achieving national scale, we focus primarily on expanding our homebuilding operations in our current regions in Florida, Texas, the West and the Mid-Atlantic. These areas are generally characterized by high job growth and in-migration trends, creating strong demand for new housing. We seek to expand our product offerings, enter into new communities and branch out into adjacent markets as a means to establish ourselves as a top-five builder in each of the markets in which we compete. We believe that this strategy will permit us to further strengthen our competitive position, expand overall economies of scale and increase our revenues and profitability. We believe that we can capitalize on attractive opportunities to grow in our current markets, both organically and through complementary acquisitions.

Implement Profit Improvement and Other Efficiency Initiatives

     As part of our goal of strengthening our return on assets, we have recently adopted a detailed performance improvement plan that includes initiatives to realize enhanced operating efficiencies. We are implementing best practices across our companies, and believe that this operating strategy will allow us to:

	•		reduce the time necessary to complete each stage in the home construction cycle;
	•		minimize our inventory of unsold homes;
	•		use our volume purchasing power to achieve favorable terms with our vendors;
	•		achieve more favorable pricing of lot premiums and options; and
	•		implement innovative information systems to monitor homebuilding production, scheduling and budgeting.

Grow Our Financial Services Businesses

     Our Financial Services operation is a relatively high-margin transactional business that complements our homebuilding operations. We believe that we have an opportunity to grow our Financial Services business by:

	•		increasing the percentage of our homebuyers using our Financial Services;
	•		marketing our Financial Services more actively to buyers of homes built by other homebuilders, including smaller homebuilders who do not provide their own financial services; and
	•		offering services that complement our existing Financial Services business, such as homeowners’ insurance and mortgage refinancing, in all our markets.

Expand Into New Markets

     We intend to supplement our primary growth strategy of expansion in our current markets with a disciplined, return-on-assets focused approach to entering new markets through organic growth and strategic acquisitions of other homebuilders. We will focus on entering metropolitan areas that have favorable homebuilding characteristics, including substantial job and population growth, significant single-family home permit activity, a diversified economy, an abundant supply of obtainable lots and an availability of strong management with local market expertise. We believe this long-term emphasis on geographic diversification across a range of fast growing markets with strong fundamentals will enable us to minimize our exposure to adverse economic conditions, seasonality and housing cycles in individual local markets.

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Homebuilding Operations

Markets

     We operate in 14 metropolitan markets located in four major geographic regions: Florida, Texas, the West and the Mid-Atlantic. For the twelve months ended December 31, 2002, none of our metropolitan markets represented more than 18% of our total revenues. We select our target geographic markets based on, among other things, historical and projected population growth, projected job growth, regional economic conditions, availability of strong management with local expertise, land availability, single-family home permit activity and price, the local land development process, consumer tastes, competition, housing inventory and secondary home sales activity.

     Florida. Our Florida region is comprised of four metropolitan markets: South Florida, which is comprised of Fort Lauderdale, Palm Beach and Martin Counties; Orlando; Jacksonville; and Southwest Florida, which is comprised of Fort Myers and Naples. We conduct business in our South Florida, Orlando and Southwest Florida markets under the Engle name. We entered the Jacksonville market in October 2002 through the acquisition of DS Ware and continue to conduct business in Jacksonville under the DS Ware name. For the twelve months ended December 31, 2002, we closed 2,024 homes in Florida, generating $496.7 million, or 36.8% of our revenues from home sales.

     Texas. Our Texas region is comprised of four metropolitan markets: Houston; Austin; Dallas/Ft. Worth; and San Antonio. We conduct business in all of our markets in Texas under the Newmark name and conduct business under the Engle name in the Dallas/Fort Worth market. We build in both mini-master and master plan communities in Texas. Approximately half of our homes in the Houston market are “speculative” homes which means we build the homes prior to having sold them to a homebuyer. All four of our Texas markets have design centers and interior designers who are available for consultations with our homebuyers. For the twelve months ended December 31, 2002, we closed 1,539 homes in Texas, generating $397.1 million, or 29.4% of our revenues from home sales.

     West. Our West region is comprised of three metropolitan markets: Phoenix, Arizona; and Denver and Colorado Springs, Colorado. We conduct business in all of our markets in the West region under the Engle name. Our Phoenix market has a design center located near the sales office that features vendors for carpeting, pools, home theaters, landscape and light fixtures who work in the design center and have a representative on-site to assist homebuyers. For the twelve months ended December 31, 2002, we closed 958 homes in our West region generating $258.1 million, or 19.1% of our revenues from home sales.

     Mid-Atlantic. Our Mid-Atlantic region is comprised of three metropolitan markets: Northern Virginia/Washington D.C.; Baltimore, Maryland; and Nashville, Tennessee. We conduct business in Northern Virginia/Washington D.C. under the Engle name. We entered the Baltimore market in November 2002 through the acquisition of Masonry and continue to conduct business in Baltimore under the Masonry name. We conduct business in Nashville under the Newmark name. For the twelve months ended December 31, 2002, we closed 564 homes in our Mid-Atlantic region generating $197.8 million, or 14.7% of our revenues from home sales.

Product Mix

     We select our product mix in a particular geographic market based on the demographics of the market, demand for a particular product, margins and the economic strength of the market. We regularly review our product mix in each of our markets so that we can quickly respond to market changes and opportunities.

     Of our 2002 revenues from home sales, 42% were generated from sales of homes in the $200,000 to $300,000 price range, 16% were generated from sales of homes in the under $200,000 price range; 26% were generated from sales of homes in the $300,000 to $400,000 price range; and 16% were generated from sales of homes in the over $400,000 price range.

Land Policies and Positions

     Land Acquisition. To support our homebuilding operations, we only acquire “entitled” land. Land is entitled when all of the necessary approvals for residential homebuilding have been obtained for it. We attempt to acquire entitled lots that have sewage systems, drainage and other similar infrastructure in place (we refer to these lots as

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“developed lots”) because these lots are ready to have houses constructed on them. Before we can build a house on entitled land that is not developed, we must construct sewage systems, drainage and other infrastructure.

     We generally acquire multiple developed lots that are located adjacent to or near each other in a community, which enables us to build and market our homes more cost efficiently than if the lots were located in separate locations. Cost efficiencies arise from economies of scale, such as shared marketing expenses and project management.

     We have experienced management teams at each of our divisions who do extensive analysis on the local market and evaluate and identify land in desirable locations that are consistent with our strategy for the particular market.

     We have adopted land acquisition policies and procedures that cover all land acquisitions including land acquired through option contracts. The policies and procedures are strictly enforced by our Management Executive Committee, which employs strict standards for assessing all proposed land purchases with the goal of minimizing risk and maximizing our return on capital. The Management Executive Committee is comprised of our Chief Executive Officer, Chief Financial Officer, General Counsel and representatives of our Homebuilding, Financial Services and Land Development departments. Our land acquisition policies and procedures require that a division president submit each land acquisition proposal in writing to our Vice President of Land Development and that such proposal contains specific information relating to the property. Our Vice President of Land Development then assesses the proposal and submits both the proposal and his or her recommendation to the Management Executive Committee. All land acquisitions must be approved as follows:

     We select land for development based on a variety of factors, including:

	•		historical and projected population and employment rates for the surrounding area;
	•		demographic information such as age, education and economic status of the homebuyers in the area;
	•		suitability for development within two to four years of acquisition;
	•		desirability of location, including proximity to metropolitan area, local traffic corridors and amenities;
	•		results of financial analysis, such as projected profit margins and return on capital;
	•		prices of comparable new and resale houses in the area;
	•		estimated costs of completed lot development; and
	•		competition in the area.

     In addition, before we acquire property, we conduct extensive environmental due diligence, including on-site inspection and soil testing, and we confirm that the land has the necessary zoning and other governmental entitlements required to develop and use the property for home construction. The results of this due diligence are submitted to our Management Executive Committee together with the land acquisition proposal.

     Land Supply. We acquire the developed lots and the other entitled land we require for our homebuilding operations through a combination of purchases and option contracts. Our objective is to own approximately one and one half to two years supply of land and option an additional two to four years supply.

     Purchases are financed through traditional bank financing or working capital. Under the option contracts, we purchase the right, but not the obligation, to buy land at predetermined prices on a predetermined takedown schedule anticipated to be commensurate with home closings. Lot option contracts are generally non-recourse, thereby limiting our financial exposure to non-refundable deposits, which are typically 10-15% of the sales price. This enables us to control significant lot positions with a minimal capital investment and reduces the risks associated with land ownership and development. Historically, we have been able to acquire a majority of our

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developed lots through option contracts rather than purchase contracts due to the awareness of our brand names among developers and their willingness to option lots. There has been increased competition for available lots and increasingly, we have been required to acquire more of our developed lots under purchase contracts. At December 31, 2002, approximately 62.6% of our total lot supply was controlled under option or similar contracts, and we had approximately $56.1 million in deposits on real estate under those option contracts.

     Occasionally, we sell a portion of the entitled land we purchase and develop to third-party builders to provide a source of additional revenue and to reduce the risk we incur by holding these lots in inventory.

     The table below shows our lot inventory by region and in total for the periods indicated:

Operating Structure

     Our homebuilding operations are decentralized to give more flexibility to our local operations. We have 13 separate operating divisions, some of which are located in the same state. Each operating division is headed by a division president. We believe in giving our division presidents autonomy to conduct the operations of our divisions because we are confident that they will make sound business decisions based on their knowledge and experience in the local and regional markets. Our division presidents and local operators have an average of over 20 years of experience in their local and regional markets. The compensation of our division presidents is integrally tied to achieving certain targeted levels of return on assets.

     Each operating division is responsible for:

	•		selecting sites;
	•		negotiating lot option or similar contracts;
	•		overseeing land development;
	•		planning homebuilding schedule;
	•		selecting building plans and architectural schemes;
	•		obtaining all necessary building approvals; and
	•		developing a marketing plan.
	The following functions are centralized at the corporate level for all our divisions:
	•		evaluation and selection of geographic markets;
	•		final approval of land and lot acquisitions;
	•		allocation of capital resources to the markets where we operate, including with respect to land acquisitions;
	•		financing;
	•		purchasing;

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	•		maintenance of strong centralized controls on accounting and financial policies and procedures; and
	•		monitoring the return on assets achieved by our operating divisions.

Purchasing

     We utilize centralized purchasing to leverage our purchasing power into volume discounts, and thereby reduce costs, ensure timely deliveries and reduce the risk of supply shortages due to allocations of materials. We have negotiated price arrangements, which we believe are favorable, to purchase lumber, sheetrock, appliances, heating and air conditioning, counter tops, bathroom fixtures, roofing and insulation products, concrete, bricks, floor coverings and other housing equipment and materials. Our purchase contracts are with high quality national and regional suppliers, including E.I. du Pont de Nemours & Company, General Electric Appliances, Moen Incorporated, Mohawk Industries, Inc., National Gypsum Company, Owens Corning, Rheem Manufacturing Sales, Inc., Royal Baths Manufacturing Co., Schlage Lock Company, a subsidiary of Ingersoll-Rand Company, The Dow Chemical Company, The Sherwin-Williams Company and Weyerhaeuser Company. There are no minimum purchase requirements for these arrangements.

Design

     To appeal to the tastes and preferences of local communities, we expend considerable effort in developing an appropriate design and marketing concept for each of our subdivisions, including determining the size, style and price range of the homes and, in certain projects, the layout of streets, individual lots and overall community design. In addition, in certain markets, outside architects who are familiar with the local communities in which we build, prepare some of our home designs and floor plans. We also have the capability to change our standard floor plans to accommodate individual homebuyers. While most design modifications are significant to homebuyers, they typically involve relatively minor adjustments by us that allow us to maintain construction efficiencies and result in greater profitability due to increased margins. The product line that we offer in a particular subdivision depends upon many factors, including the housing generally available in the area, the needs of the particular market and our costs of lots in the subdivision.

     In most of our markets, we provide design centers to assist our homebuyers with options and upgrades. These design centers are convenient to homebuyers because it brings many of the choices for flooring, carpeting, light fixtures, and hardware to one location. In keeping with our regional approach, each region decides what types of design center is suitable for the local area. For example, in the Phoenix market, vendors specializing in landscape, pools and home theaters work at the design center to assist homebuyers. The design center displays samples of carpeting, ceramic tile and hardwood floors as well as countertop surfaces, cabinetry and paint colors. While design centers are varied in each market, the focus in all of our design centers is on making the homebuyer’s selection process less complicated and an enjoyable experience.

Construction

     Subcontractors perform substantially all of our construction work. Our construction superintendents monitor the construction of each home, coordinate the activities of subcontractors and suppliers, subject the work of subcontractors to quality and cost controls and monitor compliance with zoning and building codes. We typically retain subcontractors pursuant to a contract that obligates the subcontractor to complete construction at a fixed price in a “workmanlike manner.” In addition, under these contracts the subcontractor provides us with standard indemnifications and warranties. Typically, we work with the same subcontractors within each market, which provides us with a stable and reliable work force and better control over the costs and quality of the work performed. Although we compete with other homebuilders for qualified subcontractors, we have established long-standing relationships with many of our subcontractors and have not experienced any material difficulties in obtaining the services of desired subcontractors.

     We typically complete the construction of a home within four to five months. Construction time, however, depends on weather, availability of labor, materials, supplies and other factors. We do not maintain significant inventories of construction materials, except for materials related to work in progress for homes under construction. Generally, the construction materials used in our operations are readily available from numerous sources. We have price arrangements or contracts, which we believe are favorable, with suppliers of certain of our building materials,

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but we are not under specific purchasing requirements. In recent years, we have not experienced significant delays in construction due to shortages of materials.

Marketing and Sales

     We build and market different types of homes to meet the needs of different homebuyers and the needs of different markets. We employ a variety of marketing techniques to attract potential homebuyers through numerous avenues, including Internet web sites for our various homebuilding brands and subsidiaries, extensive telemarketing and advertising and other marketing programs. We advertise on television, in newspapers and other publications, through our own brochures and newsletters, on billboards and in brochures and newsletters produced and distributed by real estate and mortgage brokers. Some of our suppliers participate in our advertising and promotional materials, either through co-branding, cost-sharing or through rebates.

     We typically conduct home sales from sales offices located in furnished model homes in each community. We use commissioned sales personnel who assist prospective buyers by providing them with floor plans, price information, tours of model homes and information on the available options and other custom features. We provide our sales personnel with extensive training, and we keep them updated as to the availability of financing, construction schedules and marketing and advertising plans to facilitate their marketing and sales activities. We supplement our in-house training program with training by outside sales and marketing consultants.

     In addition to using model homes, we build a limited number of speculative homes in most communities in advance of any specific customer order or contract to enhance our marketing and sales activity. We build speculative homes to satisfy the requirements of relocated buyers, move-up homebuyers, and other buyers who need completed homes prior to the completion of the typical four to five month construction period. The number of speculative homes we build in any given community is influenced by local market factors, such as new employment opportunities, significant job relocations, housing demand and the length of time we have operated in the market.

     We market and sell homes through our own commissioned sales personnel and in cooperation with independent real estate brokers. Because a significant portion of our sales originate from independent real estate brokers, we sponsor a variety of programs and events, including breakfasts, contests and other events to provide the brokers with a level of familiarity with our communities, homes and financing options necessary to successfully market our homes. We also offer other incentives to brokers to actively market our homes.

     Sales of our homes generally are made pursuant to a standard sales contract that is tailored to the requirements of each jurisdiction. Generally, our sales contracts require a down payment of a fixed amount (typically between $1,000 and $5,000) on our less expensive homes and as a percentage of the sales price (typically 5% to 10%) on our more expensive customized homes. The contract includes a financing contingency which permits the customer to cancel in the event mortgage financing at prevailing interest rates cannot be obtained within a specified period, typically four to six weeks from the signing. The contract may include other contingencies, such as the prior sale of a buyer’s existing home. We estimate that the average period between the execution of a sales contract for a home and closing is approximately four to six months for presold homes.

Customer Service and Quality Control

     Our operating divisions are responsible for both pre-closing quality control inspections and responding to customers’ post-closing needs. We believe that the prompt, courteous response to homebuyers’ needs reduces post-closing repair costs, enhances our reputation for quality and service and ultimately leads to significant repeat and referral business. We conduct home orientations and pre-closing inspections with homebuyers immediately before closing. In conjunction with these inspections, we create a list of unfinished construction items and address outstanding issues promptly.

     An integral part of our customer service program includes post-closing interviews. In most markets, we send a customer service representative into each new home within 45 days of closing to evaluate the homeowners’ satisfaction with the home, as well as their experience with our sales personnel, construction department and title and mortgage services. Typically, approximately one year after we sell a house we conduct a follow-up interview with the homeowner to determine the level of the homeowner’s continued satisfaction. These interviews provide us

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with a direct link to the customer’s perception of the entire buying experience as well as valuable feedback on the quality of the homes we deliver and the services we provide.

Warranty Program

     For the homes we build under the Engle brand, we generally provide a one-year limited warranty of workmanship and materials. We generally provide a two-year limited warranty of workmanship and materials for the homes we build under all our other brand names. We subcontract homebuilding work to subcontractors who provide us with an indemnity and a certificate of insurance before receiving payments for their work and, therefore, claims relating to workmanship and materials are the primary responsibility of our subcontractors. We generally provide an additional eight-year limited homeowners’ warranty covering major structural defects for all of the homes we build except those built under the Engle brand. For the homes we build under the Engle name, we generally provide a ten-year structural warranty. The extent of the warranties we offer relating to workmanship and materials and structural defects may differ in some or all of the states in which we operate. We generally have not had any material litigation or claims regarding warranties or latent defects with respect to construction of homes. Current claims and litigation are expected to be substantially covered by our reserve or insurance. After we close a home, we process all warranty requests through our customer service departments located in each of our markets. In most instances, a customer service manager inspects the warranty request within 48 hours of receipt. If a warranty repair is necessary, the construction superintendent who built the particular home manages and supervises the repair to ensure that the appropriate subcontractor takes prompt and appropriate corrective action.

Financial Services

     In addition to our homebuilding operations, we also offer a variety of financial services, including mortgage financing, title insurance and closing services, to homebuyers in the majority of our markets. Our mortgage origination operation derives most of its revenues from buyers of our homes, although it also offers its services to other homebuyers and existing homeowners refinancing their mortgages. Our title insurance and closing services are more broadly subscribed to by buyers of our homes and other people purchasing or refinancing residential or commercial real estate.

     Our mortgage business consists of providing our homebuyers and third party homebuyers with loan origination services, purchase financing and, to a lesser extent, mortgage refinancing. We conduct this business through our subsidiaries, Preferred Home Mortgage Company and its subsidiary, Technical Mortgage, L.P. Preferred Home has its headquarters in Boca Raton, Florida and has eight additional offices.

     We are an approved seller/servicer of Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Housing Administration, Veteran’s Association and U.S. Department of Housing and Urban Development loans. We generally sell substantially all of our loans and substantially all of the servicing rights.

     Currently, approximately 69% of our homebuyers buying homes under the Engle brand use our mortgage business. A significantly smaller percentage of our homebuyers buying homes under our other brand names use our mortgage services. Accordingly, we believe we have an opportunity to expand this business. We originated approximately $782.8 million aggregate principal amount of mortgage loans for the twelve months ended December 31, 2002. Our mortgage business generated pre-tax income of $13.5 million for the twelve months ended December 31, 2002.

     Our title insurance business consists of providing our homebuyers, third party homebuyers and buyers of commercial properties with competitive title insurance and closing services. We conduct this business through our subsidiary, Universal Land Title, Inc., and its subsidiaries. Universal Land Title has its headquarters in West Palm Beach, Florida and has 23 additional offices.

     Universal Land Title works with many national underwriters and lenders to facilitate client service and coordinate closings at its offices. It is equipped to handle e-commerce applications, e-mail closing packages, digital document delivery and web-based closings. The principal sources of revenues generated by our title insurance business are fees paid to Universal Land Title for title insurance provided to our homebuyers, third party residential purchasers and commercial real estate purchasers.

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     Currently, approximately 96% of our homebuyers buying homes under the Engle brand use Universal Land Title for their title insurance and closing services. A significantly smaller percentage of our homebuyers buying homes under our other brand names use our title insurance services. Accordingly, we believe we have an opportunity to expand this business. Approximately 87% of our revenues for the twelve months ended December 31, 2002 were derived from customers who were third party homebuyers or buyers of commercial properties. Our title insurance business generated pre-tax income of $5.9 million for the twelve months ended December 31, 2002.

Governmental Regulation

     Our homes must comply with state and local laws and regulations relating to, among other things, zoning, treatment of waste, construction materials which must be used, density requirements, building design and minimum elevation of properties. These include laws requiring use of construction materials that reduce the need for energy- consuming heating and cooling systems. These laws and regulations are subject to frequent change and often increase construction costs. In some cases, there are laws that require that commitments to provide roads and other offsite infrastructure be in place prior to the commencement of new construction. These laws and regulations are usually administered by individual counties and municipalities and may result in fees and assessments or building moratoriums. In addition, certain new development projects are subject to assessments for schools, parks, streets and highways and other public improvements, the costs of which can be substantial.

     The residential homebuilding industry also is subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. Environmental laws and conditions may result in delays, may cause us to incur substantial compliance and other costs and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas.

     In recent years, several cities and counties in which we have developments have submitted to voters “slow growth” or “no growth” initiatives and other ballot measures which could impact the affordability and availability of homes and land within those localities.

     In order to make it possible for purchasers of some of our homes to obtain FHA-insured or VA-guaranteed mortgages, we must construct those homes in compliance with regulations promulgated by those agencies.

     Our title insurance agency subsidiaries must comply with applicable insurance laws and regulations. Our mortgage financing subsidiaries must comply with applicable real estate lending laws and regulations. The mortgage banking and title insurance subsidiaries are licensed in the states in which they do business and must comply with laws and regulations in those states regarding mortgage banking and title insurance companies. These laws and regulations include provisions regarding capitalization, operating procedures, investments, forms of policies and premiums.

Competition and Market Forces

     The development and sale of residential properties is a highly competitive business. We compete in each of our markets with numerous national, regional and local builders on the basis of a number of interrelated factors including location, price, reputation, amenities, design, quality and financing. Builders of new homes compete for homebuyers, as well as for desirable properties, raw materials and reliable, skilled subcontractors. We also compete with resales of existing homes, available rental housing and, to a lesser extent, resales of condominiums. We believe we generally compare favorably to other builders in the markets in which we operate, due primarily to:

	•		our experience within our geographic markets;
	•		the ability of our local managers to identify and quickly respond to local market conditions; and
	•		our reputation for service and quality.

     The housing industry is cyclical and is affected by consumer confidence levels and prevailing economic conditions, including interest rate levels. A variety of other factors affect the housing industry and demand for new homes, including the availability of labor and materials and increases in the costs thereof, changes in costs associated with home ownership such as increases in property taxes, energy costs, changes in consumer preferences, demographic trends and the availability of and changes in mortgage financing programs.

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     We compete with other mortgage lenders, including national, regional and local mortgage bankers, savings and loan associations and other financial institutions, in the origination, sale and servicing of mortgage loans. Principal competitive factors include interest rates and other features of mortgage loan products available to the consumer. We compete with other insurance companies, including national, regional and local insurance companies and agencies, in the sale of title insurance, homeowner insurance and related insurance services. Principal competitive factors include cost and other features of insurance products available to the consumer.

Seasonality

     The homebuilding industry tends to be seasonal, as generally there are more homes sold in the spring and summer months when the weather is milder, although the rate of sales contracts for new homes is highly dependent on the number of active communities and the timing of new community openings. We operate primarily in the Southwest and Southeast, where weather conditions are more suitable to a year-round construction process than in other parts of the country. Because new home closings trail new home sales by several months, we typically have a greater percentage of home closings in the fall months.

Backlog

     Our sales backlog at December 31, 2002 was 2,280 homes compared to 2,149 homes at December 31, 2001. Backlog represents home purchase contracts that have been executed and for which earnest money deposits have been received, but for which the sale has not yet closed. We do not record home sales as revenues until the closings occur. Historically, substantially all of the homes in our backlog at any given point in time have been closed in the following 12-month period. Although cancellations can disrupt anticipated home closings, we believe that cancellations have not had a material negative impact on our operations or liquidity during the last several years. We attempt to reduce the cancellations by reviewing each homebuyer’s ability to obtain mortgage financing early in the sales process and by closely monitoring the mortgage approval process.

Employees

     At December 31, 2002, we employed 1,418 people, 377 of whom were sales and marketing personnel, 669 of whom were executive, administrative and clerical personnel and 372 of whom were construction personnel. None of our employees are covered by collective bargaining agreements. We believe our relations with our employees are good.

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RISK FACTORS

Risks Related to Our Business

Our significant level of debt could adversely affect our financial condition and prevent us from fulfilling our debt service obligations

     We currently have a significant amount of debt, and our ability to meet our debt service obligations will depend on our future performance. Numerous factors outside of our control, including changes in economic or other business conditions generally or in the markets or industry in which we do business, may adversely affect our operating results and cash flows, which in turn may affect our ability to meet our debt service obligations. As of December 31, 2002, on a consolidated basis and as adjusted for our February 2003 offering of 9% Senior Notes, we had approximately $506.4 million aggregate principal amount of debt outstanding (including our revolving credit facility, our June 2002 Notes, our warehouse line of credit and our other credit facilities, but excluding consolidated land bank obligations of $16.3 million). At December 31, 2002, as adjusted for our February 2003 offering of 9% Senior Notes, we also had the capacity to borrow an additional $140.1 million under our revolving credit facility and $16.7 million under our warehouse line of credit, subject to our satisfying the relevant borrowing conditions in those facilities. In addition, subject to restrictions in our financing documents, we may incur additional debt.

     If we are unable to meet our debt service obligations, we may need to restructure or refinance our debt, seek additional equity financing or sell assets. We may be unable to restructure or refinance our debt, obtain additional equity financing or sell assets on satisfactory terms or at all.

The indentures governing our outstanding notes and our credit facility impose significant operating and financial restrictions which may limit our ability to finance future operations or capital needs and pursue business opportunities thereby limiting our growth.

     The indentures governing our outstanding notes and our credit facility impose significant operating and financial restrictions on us. These restrictions limit our ability to, among other things:

	•		incur additional debt;
	•		pay dividends or make other restricted payments;
	•		create or permit certain liens;
	•		sell assets;
	•		create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us;
	•		engage in transactions with affiliates; and
	•		consolidate or merge with or into other companies or sell all or substantially all of our assets.

     The agreements governing the debt of some of the subsidiary guarantors contain similar restrictions applicable to those guarantors. These restrictions could limit our ability to finance our future operations or capital needs, make acquisitions or pursue available business opportunities. In addition, our credit facility requires us to maintain specified financial ratios and satisfy certain financial covenants, the indentures governing our outstanding notes require us to maintain a specified minimum consolidated net worth and our warehouse line of credit requires us to maintain the collateral value of our borrowing base. We may be required to take action to reduce our debt or to act in a manner contrary to our business objectives to meet these ratios and satisfy these covenants. A breach of any of the covenants in, or our inability to maintain the required financial ratios under, our credit facility would prevent us from borrowing additional money under the facility and could result in a default under it. Our failure to maintain the specified minimum consolidated net worth under the indentures will require us to offer to purchase a portion of our outstanding notes. If we fail to purchase these notes, it would result in a default under the indentures and may result in a default under other debt facilities.

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Economic downturns in the geographic areas in which we operate could adversely affect demand and prices for new homes in those areas and could have an adverse effect on our revenues and earnings.

     Although we operate in 14 major metropolitan areas, our operations are concentrated in the southwestern and southeastern United States. Adverse economic or other business conditions in these regions or in the particular markets in which we operate, all of which are outside of our control, could have an adverse effect on our revenues and earnings.

We may not be able to acquire suitable land at reasonable prices, which could increase our costs and reduce our profit margins.

     We have experienced an increase in competition for available land and developed lots in some of our markets as a result of the strength of the economy in many of these markets over the past few years and the availability of more capital to major homebuilders. Our ability to continue our development activities over the long term depends upon our ability to locate suitable parcels of land or developed lots and acquire them to support our homebuilding operations. As competition for land increases, the cost of acquiring it may rise and the availability of suitable parcels at acceptable prices may decline. If we are unable to acquire suitable land or developed lots at reasonable prices, it could limit our ability to develop new projects or result in increased land costs which we may not be able to pass through to our customers. Consequently, it could reduce our profit margins.

We may not be successful in our effort to identify, complete or integrate acquisitions, which could adversely affect our results of operations and future growth.

     A principal component of our strategy is to continue to grow profitably in a controlled manner, including, where appropriate, by acquiring other property developers or homebuilders. We may not be successful in implementing our acquisition strategy, and growth may not continue at historical levels or at all. We completed the merger with Engle on June 25, 2002, and we acquired the assets of DS Ware and Masonry in the fourth quarter of 2002. The failure to identify, complete or successfully integrate the businesses we acquire could adversely affect our results of operations and future growth. Specifically, any delays or difficulties in converting our various information systems or implementing our internal policies and procedures could increase costs and otherwise affect our results of operations. Even if we overcome these challenges and risks, we may not realize the expected benefits of the acquisitions.

We may need additional financing to fund our operations or for the expansion of our business, and if we are unable to obtain sufficient financing, we may not be able to operate or expand our business as planned, which could adversely affect our results of operations and future growth.

     Our operations require significant amounts of cash. If our business does not achieve the levels of profitability or generate the amount of cash that we anticipate or if we expand through acquisitions or organic growth faster than anticipated, we may need to seek additional debt or equity financing to operate and expand our business. If we are unable to obtain sufficient financing to fund our operations or expansion, it could adversely affect our results of operations and future growth. We may be unable to obtain additional financing on satisfactory terms or at all. If we raise additional funds through the incurrence of debt, we will incur increased debt service costs and may become subject to additional restrictive financial and other covenants.

Technical Olympic, our principal stockholder, can cause us to take certain actions or preclude us from taking actions without the approval of the other stockholders and may have interests that could conflict with your interests.

     Technical Olympic currently owns 91.75% of the voting power of our common stock. As a result, Technical Olympic has the ability to control the outcome of virtually all corporate actions requiring stockholder approval, including the election of a majority of our directors, the approval of any merger and other significant corporate action. Technical Olympic may authorize actions or have interests that could conflict with your interests.

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Risks Related to Our Industry

Changes in economic or other business conditions could adversely affect demand and prices for new homes, which could decrease our revenues.

     The homebuilding industry historically has been cyclical and is affected significantly by adverse changes in general and local economic conditions, such as:

	•		employment levels;
	•		population growth;
	•		consumer confidence and stability of income levels;
	•		availability of financing for land acquisitions, construction and permanent mortgages;
	•		interest rates;
	•		inventory levels of both new and existing homes;
	•		supply of rental properties; and
	•		conditions in the housing resale market.

     One or more of these conditions, all of which are outside of our control, could adversely affect demand and the prices for new homes in some or all of the regions in which we operate. A decline in demand or the prices we can obtain for our homes could decrease our revenues.

We are subject to substantial risks with respect to the land and home inventories we maintain, and fluctuations in market conditions may affect our ability to sell our land and home inventories at expected prices, if at all, which would reduce our profit margins.

     As a homebuilder, we must constantly locate and acquire new tracts of land for development and developed lots to support our homebuilding operations. There is often a lag time between the time we acquire land for development or developed lots and the time that we can bring the developed properties to market and sell them. Lag time varies on a project-by-project basis; however, historically, we have experienced a lag time of approximately 9 to 12 months. As a result, we face the risk that demand for housing may decline during this period and that we will not be able to dispose of developed properties or undeveloped land or lots acquired for development at expected prices or within anticipated time frames or at all. The market value of housing inventories, undeveloped land and developed lots can fluctuate significantly because of changing market conditions. In addition, inventory carrying costs (including interest on funds used to acquire land or build homes) can be significant and can adversely affect our performance. Because of these factors, we may be forced to sell homes or other property at a loss or for prices that generate lower profit margins than we anticipate. We may also be required to make material write-downs of the book value of our real estate assets in accordance with generally accepted accounting principles if values decline.

Supply risks and shortages relating to labor and materials can harm our business by delaying construction and increasing costs.

     The homebuilding industry from time to time has experienced significant difficulties with respect to:

	•		shortages of qualified trades people and other labor;
	•		inadequately capitalized local contractors;
	•		shortages of materials; and
	•		volatile increases in the cost of certain materials, including lumber, framing and cement, which are significant components of home construction costs.

     These difficulties can, and often do, cause unexpected short-term increases in construction costs and cause construction delays. We are generally unable to pass on any unexpected increases in construction costs to those

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customers who have already entered into sales contracts, as those contracts generally fix the price of the house at the time the contract is signed, which may be up to one year in advance of the delivery of the home. Furthermore, sustained increases in construction costs may, over time, erode our profit margins. We have historically been able to offset sustained increases in the costs of materials with increases in the prices of our homes and through operating efficiencies. However, in the future, pricing competition may restrict our ability to pass on any additional costs and we may not be able to achieve sufficient operating efficiencies to maintain our current profit margins.

Future increases in interest rates or a decrease in the availability of government-sponsored mortgage financing could prevent potential customers from purchasing our homes, which would adversely affect our revenues.

     Almost all of our customers finance their purchases through mortgage financing obtained from us or other sources. Increases in interest rates or decreases in the availability of Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Federal Housing Administration or Veteran’s Association mortgage financing could cause a decline in the market for new homes as potential homebuyers may not be able to obtain affordable financing. Increased interest rates can also limit our ability to realize our backlog because our sales contracts typically provide our customers with a financing contingency. Financing contingencies allow customers to cancel their home purchase contracts in the event they cannot arrange for financing at interest rates that were prevailing when they signed their contracts. In particular, because the availability of mortgage financing is an important factor in marketing many of our homes, any limitations or restrictions on the availability of those types of financing could reduce our home sales and the lending volume at our mortgage subsidiary. Even if our potential customers do not need financing, changes in interest rates and mortgage availability could make it harder for them to sell their existing homes to potential buyers who need financing. Interest rates currently are at their lowest level in decades, and any future increases in interest rates could adversely affect our revenues.

The competitive conditions in the homebuilding industry could increase our costs, reduce our revenues and otherwise adversely affect our results of operations.

     The homebuilding industry is highly competitive and fragmented. We compete in each of our markets with numerous national, regional and local builders, including some builders with greater financial resources, more experience and more established market positions than ours and who have lower costs of capital, labor and material than us and better opportunities for land acquisitions. Builders of new homes compete for homebuyers, as well as for desirable properties, raw materials and skilled subcontractors. The competitive conditions in the homebuilding industry could among other things:

	•		increase our costs and reduce our revenues;
	•		make it difficult for us to acquire suitable land at acceptable prices;
	•		require us to increase selling commissions and other incentives;
	•		result in delays in construction if we experience a delay in procuring materials or hiring laborers; and
	•		result in lower sales volumes.

     We also compete with resales of existing homes, available rental housing and, to a lesser extent, condominium resales. An oversupply of attractively priced resale or rental homes in the markets in which we operate could adversely affect our ability to sell homes profitably.

     Our financial services operations are also subject to competition from third-party providers, many of which are substantially larger, may have a lower cost of funds or overhead than we do and may focus exclusively on providing such services.

We are subject to product liability and warranty claims arising in the ordinary course of business that could adversely affect our results of operations.

     As a homebuilder, we are subject in the ordinary course of our business to product liability and home warranty claims. These claims are common in the homebuilding industry and can be costly. While we maintain product liability insurance and generally seek to require our subcontractors and design professionals to indemnify us for liabilities arising from their work, there can be no assurance that these insurance rights and indemnities will be

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adequate to cover all product liability and warranty claims for which we may be liable. For example, we may be unable to enforce contractual indemnities and be responsible for applicable self-insured retentions, and certain claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered by, and availability of, product liability insurance for construction defects is currently limited and where coverage is available, it may be costly. There can be no assurance that coverage will not be further restricted and become more costly. Uninsured and unindemnified product liability and warranty claims as well as the cost of product liability insurance could adversely affect our results of operations.

States, cities and counties in which we operate have, or may adopt, slow or no growth initiatives reducing our ability to build in these areas, which could adversely affect our future revenues.

     Several states, cities and counties in which we operate have approved, and others in which we operate may approve, various “slow growth” or “no growth” initiatives and other ballot measures that could negatively impact the availability of land and building opportunities within those localities. Approval of slow or no growth measures would reduce our ability to build and sell homes in the affected markets and create additional costs and administration requirements, which in turn could have an adverse effect on our future revenues.

Our business is subject to governmental regulations that may delay, increase the cost of, or prohibit or severely restrict our development and homebuilding projects.

     We are subject to extensive and complex laws and regulations that affect the land development and homebuilding process, including laws and regulations related to zoning, permitted land uses, levels of density, building design, elevation of properties, water and waste disposal and use of open spaces. We also are subject to a variety of local, state and federal laws and regulations concerning the protection of health and the environment. In some of the markets in which we operate, we are required to pay environmental impact fees, use energy saving construction materials and give commitments to provide certain infrastructure such as roads and sewage systems. We must also obtain permits and approvals from local authorities to complete residential development or home construction. The laws and regulations under which we operate and our obligations to comply with them may result in delays in construction and development, cause us to incur substantial compliance and other increased costs and prohibit or severely restrict development and homebuilding activity in certain areas in which we operate.

     Our financial services operations are subject to numerous federal, state and local laws and regulations. Failure to comply with these requirements can lead to administrative enforcement actions, the loss of required licenses and claims for monetary damages.

Our business revenues and profitability may be adversely affected by natural disasters or weather conditions.

     The climates in Florida and Texas present risks of natural disasters. To the extent that hurricanes, severe storms, floods, tornadoes or other natural disasters or similar weather events occur, our business may be adversely affected. To the extent our insurance is not adequate to cover business interruption or losses resulting from these events, our revenues and profitability may be adversely affected.

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ITEM 2. PROPERTIES

     Our executive offices are located at 4000 Hollywood Blvd., Suite 500-N, Hollywood, Florida 33021. We own a 19,000 square foot facility in Sugar Land, Texas, which houses our Houston homebuilding operations and a design center, which allows a prospective homebuyer to view samples of some of the products and features we offer in our homes in Houston. We lease an aggregate of approximately 100,000 square feet of additional office space in our markets for our homebuilding and financial services operations and our corporate and executive offices. We believe our existing facilities are adequate for our current and planned levels of operations.

ITEM 3. LEGAL PROCEEDINGS

     We are involved in various claims and legal actions arising in the ordinary course of business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On October 29, 2002, we held our Annual Meeting of Stockholders (the “Meeting”). At the Meeting, the Stockholders voted on the election of ten directors to serve until the 2003 Annual Meeting of Stockholders.

     The voting results were as follows:

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock began trading on the Nasdaq National Market on March 12, 1998 under the symbol “NHCH.” Following the merger on June 25, 2002, our common stock began trading under the symbol “TOUS.” The table below sets forth the high and low sales price for our common stock as reported by the Nasdaq National Market for the periods indicated:

     As of February 5, 2003, there were approximately 33 record holders of our common stock.

     We declared a dividend on March 6, 2001 of $0.54 per share of common stock in the twelve months ended December 31, 2001, which would have been equal to $0.22 per share as restated to reflect the total shares outstanding as a result of the merger. We did not declare or pay any cash dividends on our common stock in the twelve months ended December 31, 2002. Any future determination as to the declaration and payment of cash dividends will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and any other factors our board of directors deems relevant. The credit agreement relating to our revolving credit facility and the indentures governing our senior notes and senior subordinated notes generally contain covenants that limit the amount of dividends or distributions we can pay on our common stock and the amount of common stock we can repurchase.

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ITEM 6. SELECTED FINANCIAL DATA

(Dollars in thousands, except per share data)

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data” and the consolidated financial statements and related notes included elsewhere in this report.

     We generate our revenues from our homebuilding operations (“Homebuilding’’) and financial services operations (“Financial Services’’). In accordance with Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information,’’ we have determined that Homebuilding and Financial Services comprise our operating segments. Through our Homebuilding operations, we design, build and sell single-family homes, town homes and patio homes in 14 metropolitan markets located in four major geographic regions: Florida, Texas, the West and the Mid-Atlantic.

     Our Homebuilding operation generates the majority of its revenues from the sale of homes to homebuyers and to a lesser degree from the sale of land to other homebuilders. The majority of our homes are offered for sale in advance of their construction. Once a sales contract has been signed, we classify the transaction as a “sale’’ and include the home in “backlog.’’ Such sales contracts are usually subject to certain contingencies such as the buyer’s ability to qualify for financing. Revenue from the sale of homes and the sale of land is recognized at closing when title passes to the buyer. The principal expenses of our Homebuilding operations are (i) cost of sales and (ii) SG&A expenses. Homebuilding cost of sales consists primarily of the cost of home construction and land purchases. SG&A expenses for our Homebuilding operations include administrative costs, advertising expenses, on-site marketing expenses, commission costs and closing costs.

     At December 31, 2002, we were marketing homes in 159 communities, by comparison at December 31, 2001 we were marketing homes in 146 communities, and at December 31, 2000 we were marketing in 161 communities.

     Through our Financial Services operations, we offer a variety of financial services products, including mortgage banking and title insurance agency and closing services. Our Financial Services operations generate their revenues from their mortgage and title operations. Our mortgage operations revenues consist primarily of origination and premium fee income, credit application fee income and the gain on the sale of the mortgages. Revenue from our mortgage operations is generally recognized when the mortgage loans and related servicing rights are sold to third-party investors. Substantially all of our mortgages are sold to private investors within 30 days. Title operations revenues consist primarily of title insurance and closing services and are recognized as homes are closed. All of our underwriting risk associated with title insurance policies is transferred to third-party insurers. The principal expenses of our Financial Services operations are SG&A expenses. SG&A expenses for our Financial Services operations consist primarily of compensation and interest expense on our warehouse line of credit.

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Critical Accounting Policies

     In the preparation of our consolidated financial statements, we apply accounting principles generally accepted in the United States. The application of generally accepted accounting principles may require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying results. Listed below are those policies that we believe are critical and require the use of complex judgment in their application.

Homebuilding Revenues and Cost of Sales

     Our Homebuilding operations generates the majority of its revenues from the sale of homes to homebuyers and to a lesser degree from the sale of land to other homebuilders. The majority of our homes are designed to appeal to move-up homebuyers and are generally offered for sale in advance of their construction. Once a sales contract has been signed, we classify the transaction as a “sale” and include the home in “backlog.” Such sales contracts are usually subject to certain contingencies such as the buyer’s ability to qualify for financing. Revenue from the sale of homes and the sale of land is recognized at closing when title passes to the buyer and all of the following conditions are met: a sale is consummated, a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. As a result, our revenue recognition process does not involve significant judgments or estimates. However, we do rely on certain estimates to determine the related construction and land costs and resulting gross margins associated with revenues recognized. Our construction and land costs are comprised of direct and allocated costs, including estimated costs for future warranties and indemnities. Our estimates are based on historical results, adjusted for current factors. Land, land improvements and other common costs are generally allocated on a relative fair value basis to units within a parcel or subdivision. Land and land development costs generally include related interest and property taxes incurred until construction is substantially completed.

Financial Services Revenues and Expenses

     Our Financial Services operations generates its revenues from its mortgage and title operations. Our mortgage operations revenues consist primarily of origination and premium fee income, credit application fee income and the gain on the sale of the mortgages. Revenue from our mortgage operations is generally recognized when the mortgage loans and related servicing rights are sold to third-party investors. Substantially all of our mortgages are sold to private investors within 30 days. Title operations revenues consist primarily of title insurance and closing services which are recognized as homes are closed. All of our underwriting risk associated with title insurance policies is transferred to third-party insurers. Expenses associated with our Financial Services operations consists primarily of selling, general & administrative (SG&A) expenses, which consist primarily of compensation and interest expense related to our mortgage warehouse line of credit.

Goodwill

     Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” Upon the adoption of SFAS No. 142, goodwill is no longer subject to amortization. Goodwill is subject to at least an annual assessment for impairment by applying a fair value-based test. If the carrying amount exceeds the fair value, goodwill is considered to be impaired. We continually evaluate whether events and circumstances have occurred that indicate the remaining balance of goodwill may not be recoverable. In evaluating impairment, we estimate the sum of the expected future cash flows derived from such goodwill. Such evaluations for impairment are significantly impacted by estimates of future revenues, costs and expenses and other factors. If the goodwill is considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the goodwill exceeds the fair value of the expected future cash flows.

Impairment of Long-Lived Assets

     Housing projects and land/lots under development are stated at the lower of costs or net realizable value. Property and equipment is carried at cost less accumulated depreciation. We assess these assets for impairment in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in

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circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. These evaluations for impairment are significantly impacted by estimates of revenues, costs and expenses and other factors. If these assets are considered to be impaired, the impairment loss to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

     During March 2002, we committed to a plan to dispose of Westbrooke. Pursuant to this plan of disposition, we would sell 100% of the common stock of Westbrooke. On April 15, 2002, we completed the sale of Westbrooke to Standard Pacific. Accordingly, as of March 31, 2002, we had determined that in accordance with SFAS No. 144, the criteria to classify the Westbrooke assets as held for sale were met. Results of Westbrooke’s operations have been classified as discontinued operations and prior periods have been restated.

Lot Option Contracts

     We enter into option contracts with land sellers and third-party financial entities as a method of acquiring developed lots. From time to time to leverage our ability to acquire and finance the development of these lots, we transfer our option right to third parties. Option contracts generally require the payment of a non-refundable cash deposit or the issuance of a letter of credit for the right to acquire lots over a specified period of time at predetermined prices. Typically, our deposits or letter of credit are less than 20% of the option price. We generally have the right at our discretion to terminate our obligations under these option agreements by forfeiting our cash deposit or repaying amounts drawn under the letter of credit with no further financial responsibility. We do not have legal title to these assets. Additionally, we do not have an investment in the third-party acquirer and do not guarantee their liabilities. However, if certain conditions are met, including the deposit and/or letters of credit exceeding certain significance levels as compared to the remaining lots under the option contract, we will include the lots in inventory with a corresponding liability in consolidated land bank obligations.

Warranty Reserves

     In the normal course of business we will incur warranty related costs associated with homes which have previously closed. Warranty reserves are established by charging cost of sales and recognizing a liability for the estimated warranty costs for each home that is closed. We monitor this reserve on a monthly basis by evaluating the historical warranty experience in each market in which we operate and the reserve is adjusted as appropriate for current quantitative and qualitative factors. Actual future warranty costs could differ from our currently estimated amounts.

Recent Transactions

     On November 18, 2002, we acquired the net assets of Masonry Homes, Inc., a homebuilder operating in the northwestern suburbs of Baltimore and southern Pennsylvania, for $17.1 million in cash. In addition, if certain targets are met regarding home sale closings, the development and/or subdivision of certain lots and earnings for the 2003 and 2004 fiscal years, we will be obligated to pay up to an additional $21.3 million in cash to the sellers over a two-year period. Based on our preliminary allocation of the purchase price, this acquisition resulted in no material amount of goodwill being recorded.

     On October 4, 2002, we acquired the net assets of DS Ware Homes LLC, a homebuilder operating in Jacksonville, Florida, for $35.0 million in cash. In addition, if certain earnings targets are met for the five-month period after the closing, we will be obligated to pay an additional $5.1 million in cash to the sellers in 2003. Based on our preliminary allocation of the purchase price, this acquisition resulted in $21.0 million of goodwill being recorded.

     On June 25, 2002, Engle merged with and into us and we changed our name from Newmark Homes Corp. to Technical Olympic USA, Inc. Each issued and outstanding share of Engle common stock was exchanged for 1,724.08294 shares of our common stock. At the date of the merger, there were 9,500 shares of Engle common stock issued and outstanding, all of which were held by Technical Olympic, Inc. (TOI). As a result of the merger, 16,378,787 of additional shares were issued to TOI. In addition, we assumed approximately $75.4 million of debt incurred by TOI. As both we and Engle were under the control of TOI, in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” the merger was accounted for in a manner

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similar to a pooling of interests, whereby we recognized the acquired assets and liabilities of Engle at their historical carrying amounts. As both entities came under common control of TOI on November 22, 2000, our financial statements and other operating data has been restated to include the operations of Engle from November 22, 2000. The assumption of the $75.4 million of debt incurred by TOI was accounted for as a distribution as of June 25, 2002. See Note 1 to the consolidated financial statements included elsewhere in this Form 10-K.

     On April 15, 2002, we sold all the stock of Westbrooke Acquisition Corp., formerly one of our Florida homebuilding subsidiaries, to Standard Pacific Corp. for consideration consisting of $41.0 million in cash and the repayment by Standard Pacific of $54.4 million of Westbrooke’s debt, including $14.2 million of intercompany liabilities owed to us. We sold Westbrooke to eliminate operating redundancies in our South Florida markets which would arise as a result of the merger with Engle and to strengthen our financial position. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the results of Westbrooke’s operations have been classified as discontinued operations, and prior periods have been restated. See Note 8 to the consolidated financial statements included elsewhere in this Form 10-K.

Results of Operations

Selected Financial and Other Information

     The following table includes selected statement of income and other data (dollars in thousands):

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Selected Homebuilding Operating Data

     The following table sets forth home sales and backlog data by region (dollars in thousands):