================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended AUGUST 31, 1998 Commission File Number: 1-11749 LENNAR CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 59-1281887 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 NORTHWEST 107TH AVENUE, MIAMI, FLORIDA 33172 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (305) 559-4000 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 _____ Common shares outstanding as of September 30, 1998: Common 48,226,304 Class B Common 9,909,631 ================================================================================
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> LENNAR CORPORATION AND SUBSIDIARIES Consolidated Condensed Balance Sheets (In thousands, except share amounts) (UNAUDITED) AUGUST 31, NOVEMBER 30, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> ASSETS HOMEBUILDING: Cash and cash equivalents $ 49,372 52,926 Receivables, net 28,163 34,646 Inventories 1,308,147 806,975 Operating properties and equipment, net 11,857 8,598 Investments in partnerships 148,775 108,064 Other assets 124,692 127,631 ----------------------------------- 1,671,006 1,138,840 FINANCIAL SERVICES 258,652 156,988 LIMITED-PURPOSE FINANCE SUBSIDIARIES - COLLATERAL FOR BONDS AND NOTES PAYABLE 37,888 47,456 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 1,967,546 1,343,284 ======================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY HOMEBUILDING: Accounts payable and other liabilities $ 262,347 198,386 Income taxes currently payable 13,353 22,634 Mortgage notes and other debts payable 803,129 527,303 ----------------------------------- 1,078,829 748,323 FINANCIAL SERVICES 201,998 108,506 LIMITED-PURPOSE FINANCE SUBSIDIARIES - BONDS AND NOTES PAYABLE 37,888 47,456 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 1,318,715 904,285 STOCKHOLDERS' EQUITY: Common stock of $0.10 par value per share, 48,226,304 shares outstanding at August 31, 1998 4,823 4,322 Class B common stock of $0.10 par value per share, 9,909,631 shares outstanding at August 31, 1998 991 994 Additional paid-in capital 523,290 388,797 Retained earnings 119,727 44,886 - ------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 648,831 438,999 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,967,546 1,343,284 ======================================================================================================================== </TABLE> See accompanying notes to consolidated condensed financial statements. 1
<TABLE> <CAPTION> LENNAR CORPORATION AND SUBSIDIARIES Consolidated Condensed Statements of Earnings (Unaudited) (In thousands, except per share amounts) THREE MONTHS ENDED NINE MONTHS ENDED AUGUST 31, AUGUST 31, ---------------------------- ----------------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> REVENUES: Homebuilding $ 558,723 310,115 1,443,358 765,386 Financial services 61,287 21,577 147,361 67,981 Limited-purpose finance subsidiaries 925 928 3,034 3,632 - ------------------------------------------------------------------------------------------------------------------ Total revenues 620,935 332,620 1,593,753 836,999 - ------------------------------------------------------------------------------------------------------------------ COSTS AND EXPENSES: Homebuilding 487,629 277,439 1,279,106 700,130 Financial services 52,200 12,508 125,952 38,503 Limited-purpose finance subsidiaries 925 924 3,034 3,628 Corporate general and administrative 8,303 3,655 21,095 10,265 Interest 13,437 5,460 36,443 14,891 - ------------------------------------------------------------------------------------------------------------------ Total costs and expenses 562,494 299,986 1,465,630 767,417 - ------------------------------------------------------------------------------------------------------------------ EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 58,441 32,634 128,123 69,582 Income taxes 23,376 12,727 51,249 27,137 - ------------------------------------------------------------------------------------------------------------------ EARNINGS FROM CONTINUING OPERATIONS 35,065 19,907 76,874 42,445 EARNINGS FROM DISCONTINUED OPERATIONS (net of income taxes: three months - $5,354; nine months - $17,433) - 8,374 - 27,267 - ------------------------------------------------------------------------------------------------------------------ NET EARNINGS $ 35,065 28,281 76,874 69,712 ================================================================================================================== BASIC EARNINGS PER SHARE: Continuing operations $ 0.61 0.55 1.40 1.18 Discontinued operations - 0.23 - 0.76 - ------------------------------------------------------------------------------------------------------------------ $ 0.61 0.78 1.40 1.94 ================================================================================================================== DILUTED EARNINGS PER SHARE: Continuing operations $ 0.59 0.55 1.37 1.17 Discontinued operations - 0.23 - 0.75 - ------------------------------------------------------------------------------------------------------------------ $ 0.59 0.78 1.37 1.92 ================================================================================================================== - ------------------------------------------------------------------------------------------------------------------ CASH DIVIDENDS PER COMMON SHARE $ 0.0125 0.025 0.0375 0.075 - ------------------------------------------------------------------------------------------------------------------ CASH DIVIDENDS PER CLASS B COMMON SHARE $ 0.01125 0.0225 0.03375 0.0675 ================================================================================================================== </TABLE> See accompanying notes to consolidated condensed financial statements. 2
<TABLE> <CAPTION> LENNAR CORPORATION AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows (Unaudited) (In thousands) NINE MONTHS ENDED AUGUST 31, ------------------------------- 1998 1997 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Earnings from continuing operations $ 76,874 42,445 Earnings from discontinued operations - 27,267 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 15,630 6,455 Amortization of discount/premium on debt, net (2,167) - Equity in earnings of partnerships (8,923) (29,905) Gain on sales of other real estate (2,378) (16,160) Deferred income taxes 11,026 (11,823) Changes in assets and liabilities, net of effect of acquisitions: Decrease in receivables 7,714 13,404 Increase in inventories (211,107) (128,794) Increase in other assets (3,150) (5,922) Increase in financial services loans held for sale or disposition (35,014) (5,576) Increase in accounts payable and accrued liabilities 55,100 14,378 Decrease in income taxes currently payable (9,281) (18,543) - -------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (105,676) (112,774) - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Operating properties and equipment: Additions (10,432) (43,469) Sales 6 17,319 Decrease (increase) in investments in partnerships (21,653) 70,005 Decrease in financial services mortgage loans 428 16 Purchases of investment securities (2,603) (106,056) Receipts from investment securities 1,600 152,459 Acquisitions of properties and businesses, net of cash acquired (188,725) - Other, net 140 (1,211) - -------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (221,239) 89,063 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving credit agreement 35,450 27,900 Net borrowings (repayments) under financial services short-term debt 59,792 (7,493) Net proceeds from issuance of zero coupon senior convertible debentures 222,960 - Mortgage notes and other debts payable: Proceeds from borrowings 113,700 147,254 Principal payments (121,687) (133,036) Limited-purpose finance subsidiaries: Principal reduction of mortgage loans and other receivables 9,491 7,253 Principal reduction of bonds and notes payable (8,994) (7,102) Common stock: Issuance 40,894 2,107 Dividends (2,033) (2,626) - -------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 349,573 34,257 - -------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 22,658 10,546 Cash and cash equivalents at beginning of period 62,599 60,670 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 85,257 71,216 ============================================================================================================== </TABLE> 3
<TABLE> <CAPTION> LENNAR CORPORATION AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows -- Continued (Unaudited) (In thousands) NINE MONTHS ENDED AUGUST 31, ------------------------------- 1998 1997 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> Summary of cash and cash equivalent balances: Homebuilding $ 49,372 51,624 Financial services 35,885 13,981 Discontinued operations - 5,611 - -------------------------------------------------------------------------------------------------------------- $ 85,257 71,216 - -------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid for interest, net of amounts capitalized $ 13,078 23,315 Cash paid for income taxes $ 39,002 74,185 Supplemental disclosures of non-cash investing and financing activities: Purchases of inventory financed by sellers $ 22,300 25,300 ============================================================================================================== </TABLE> See accompanying notes to consolidated condensed financial statements. 4
LENNAR CORPORATION AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements (Unaudited) (1) BASIS OF PRESENTATION The accompanying consolidated condensed financial statements include the accounts of Lennar Corporation, its wholly-owned subsidiaries and partnerships in which it holds a controlling interest (the "Company"). The Company's investments in partnerships (and similar entities) in which a significant, but less than controlling, interest is held are accounted for by the equity method. All significant intercompany transactions and balances have been eliminated. The financial statements have been prepared by management without audit by independent public accountants and should be read in conjunction with the November 30, 1997 audited financial statements in the Company's Annual Report on Form 10-K for the year then ended. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for fair presentation of the accompanying consolidated condensed financial statements have been made. Certain prior year amounts in the consolidated condensed financial statements have been reclassified to conform with the current period presentation. As a result of the Company's spin-off of its commercial real estate investment and management business, including the Investment Division business segment, on October 31, 1997 (the "Spin-off"), the accompanying 1997 financial statements have been restated to reflect the Investment Division as a discontinued operation (see Note 3). Accordingly, the revenues and expenses of the Investment Division have been excluded from the respective captions in the consolidated condensed statements of earnings and have been reported as "earnings from discontinued operations" for the three and nine months ended August 31, 1997. The Company historically has experienced, and expects to continue to experience, variability in quarterly results. The consolidated condensed statements of earnings for the three and nine months ended August 31, 1998 are not necessarily indicative of the results to be expected for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (2) BUSINESS SEGMENTS The Company has two business segments: Homebuilding and Financial Services. The limited-purpose finance subsidiaries are not considered a business segment. See Note 3 regarding the discontinued Investment Division business segment. Homebuilding operations include the construction and sale of single-family attached and detached homes in Florida, California, Texas, Arizona and Nevada. These activities also include the purchase, development and sale of residential land. The Company has a non-controlling 50% interest in Lennar Land Partners ("LLP"), a general partnership formed with LNR Property Corporation ("LNR") at the time of the Spin-off, to acquire, develop and sell land to Lennar, LNR and others. The Company manages the day-to-day operations of LLP and receives a management fee. On October 31, 1997, the Company completed a merger with Pacific Greystone Corporation. The merger expanded the Company's homebuilding operations in California and Arizona and provided the Company with operations in Nevada. 5
Financial Services activities are conducted primarily through Lennar Financial Services, Inc. ("LFS") and its subsidiaries. These companies provide mortgage financing, title insurance and closing services for Lennar homebuyers and others; acquire, package and resell mortgage loans and mortgage-backed securities; perform mortgage loan servicing activities and provide cable television and alarm monitoring services to residents of Lennar communities and others. In prior years, the limited-purpose finance subsidiaries of the Financial Services Division placed mortgages and other receivables as collateral for various long-term financings. These limited-purpose finance subsidiaries pay the principal of, and interest on, these financings primarily from the cash flows generated by the related pledged collateral which includes a combination of mortgage notes, mortgage-backed securities and funds held by trustees. These limited-purpose finance subsidiaries are not considered a part of the financial services operations and are reported separately. (3) DISCONTINUED OPERATIONS On June 10, 1997, the Company's Board of Directors approved a plan to spin-off the commercial real estate investment and management business, which primarily consisted of the Investment Division segment. The Spin-off, which was conducted through the distribution of the stock of LNR Property Corporation to existing shareholders of the Company in the form of a tax-free distribution, was completed effective October 31, 1997. The components of earnings from discontinued operations were as follows for the three and nine months ended August 31, 1997 (unaudited): <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED (IN THOUSANDS) AUGUST 31, 1997 AUGUST 31, 1997 - ----------------------------------------------------------------------------------------------------- <S> <C> <C> Revenues $ 19,831 98,268 Costs and expenses 1,638 43,072 - ----------------------------------------------------------------------------------------------------- Operating earnings 18,193 55,196 Interest 4,465 10,496 - ----------------------------------------------------------------------------------------------------- Earnings from discontinued operations before income taxes 13,728 44,700 Income taxes 5,354 17,433 - ----------------------------------------------------------------------------------------------------- Earnings from discontinued operations $ 8,374 27,267 ===================================================================================================== </TABLE> (4) ACQUISITIONS In the third quarter of 1998, the Company acquired the properties of two California homebuilders, ColRich Communities and Polygon Communities. In the first quarter of 1998, the Company acquired a Northern California homebuilder, Winncrest Homes, and the North American Asset Development Group of companies, which provide title and escrow services in California, Arizona, and Colorado. In connection with these acquisitions for $200 million in cash (inclusive of cash acquired of $12 million) and the issuance of $95 million in common stock, the Company received assets with a fair value of $334 million, assumed liabilities totaling $46 million and recorded goodwill of $7 million. The acquisitions were accounted for using the purchase method of accounting. (5) ISSUANCE OF ZERO COUPON SENIOR CONVERTIBLE DEBENTURES In the third quarter of 1998, the Company issued, for $229 million, Zero Coupon Senior Convertible Debentures due 2018 ("Debentures") with a face amount at maturity of $493 million. The Debentures were issued at a price of $464.31 per $1,000 face amount at maturity, which equates to a yield to maturity over the life of the Debentures of 3 7/8%. Proceeds from the offering, after 6
underwriting discount and expenses, were approximately $223 million. The Company used the proceeds to repay $100 million in short-term loans which were used to fund acquisitions, and to reduce balances outstanding under its revolving credit facilities. The Debentures are convertible at any time into the Company's common stock at the rate of 12.4 shares per $1,000 face amount at maturity, which equates to an initial conversion price of $37.50 per share, although if converted during the first five years, the Company may elect to pay cash equal to the fair value of the common stock at the time of the conversion. Holders have the option to require the Company to repurchase the Debentures on any of the fifth, tenth, or fifteenth anniversary dates from the issue date for the initial issue price plus accrued original issue discount. The Company has the option to satisfy the repurchases with any combination of cash and/or shares of the Company's common stock. The Company will have the option to redeem the Debentures, in cash, at any time after the fifth anniversary date for the initial issue price plus accrued original issue discount. (6) EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which requires a dual presentation of basic and diluted earnings per share on the face of the statement of earnings. Basic earnings per share is computed by dividing earnings attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The Company adopted SFAS No. 128 in the first quarter of 1998. Earnings per share for all prior periods presented have been restated to conform with SFAS No. 128. Basic and diluted earnings per share were calculated as follows (unaudited): <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED AUGUST 31, AUGUST 31, -------------------------- ----------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> NUMERATOR: Numerator for basic earnings per share - net earnings $ 35,065 28,281 76,874 69,712 Interest on zero coupon convertible debentures 391 - 391 - - --------------------------------------------------------------------------------------------------------- Numerator for diluted earnings per share $ 35,456 28,281 77,265 69,712 ========================================================================================================= DENOMINATOR: Denominator for basic earnings per share - weighted average shares 57,447 36,041 54,834 36,000 Effect of dilutive securities: Employee stock options 1,059 409 1,034 349 Zero coupon convertible debentures 1,971 - 657 - - --------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 60,477 36,450 56,525 36,349 ========================================================================================================= Basic earnings per share $ 0.61 0.78 1.40 1.94 ========================================================================================================= Diluted earnings per share $ 0.59 0.78 1.37 1.92 ========================================================================================================= </TABLE> 7
(7) FINANCIAL SERVICES The assets and liabilities related to the Company's financial services operations (as described in Note 2) are summarized as follows: <TABLE> <CAPTION> (UNAUDITED) (IN THOUSANDS) AUGUST 31, 1998 NOVEMBER 30, 1997 - ------------------------------------------------------------------------------------ <S> <C> <C> ASSETS: Cash and receivables, net $ 44,412 14,993 Mortgage loans, net 19,138 19,600 Loans held for sale or disposition, net 139,344 106,020 Title plants 15,917 800 Other 39,841 15,575 - ------------------------------------------------------------------------------------ $ 258,652 156,988 ==================================================================================== LIABILITIES: Notes and other debts payable $ 157,210 86,936 Other 44,788 21,570 - ------------------------------------------------------------------------------------ $ 201,998 108,506 ==================================================================================== </TABLE> (8) SUPPLEMENTAL INFORMATION ON GREYSTONE HOMES, INC. Greystone Homes, Inc. ("Greystone Homes") is a wholly-owned subsidiary of the Company. Greystone Homes is the obligor on 10.75% Senior Notes ("Notes") with a current aggregate principal amount of $124.8 million. The Notes were recorded at fair value of $138.2 million at the time of the merger between the Company and Pacific Greystone Corporation. The Notes are fully and unconditionally guaranteed by the Company. Separate financial statements and other related disclosures for Greystone Homes are not presented, as the Company's management does not consider the information material to investors. Summarized financial information for Greystone Homes for the periods indicated is presented below. <TABLE> <CAPTION> SUMMARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) AUGUST 31, 1998 NOVEMBER 30, 1997 - ------------------------------------------------------------------------------------ <S> <C> <C> ASSETS: Cash and cash equivalents $ 615 5,565 Inventories 478,202 330,568 Goodwill, net 43,894 45,612 Other assets 23,095 42,521 - ------------------------------------------------------------------------------------ $ 545,806 424,266 ==================================================================================== LIABILITIES AND STOCKHOLDER'S EQUITY: Accounts payable and other liabilities $ 70,979 47,460 Intercompany payable to Lennar Corporation 107,810 19,600 Notes payable 687 4,160 Senior unsecured notes payable 134,750 137,812 - ------------------------------------------------------------------------------------ 314,226 209,032 Stockholder's equity 231,580 215,234 - ------------------------------------------------------------------------------------ $ 545,806 424,266 ==================================================================================== </TABLE> 8
<TABLE> <CAPTION> SUMMARY CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) ----------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------- ---------------------------------- PRO FORMA PRO FORMA AUGUST 31, SEPTEMBER 30, AUGUST 31, SEPTEMBER 30, (IN THOUSANDS) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> HOMEBUILDING REVENUES $ 164,897 158,585 435,580 409,308 COSTS AND EXPENSES: Cost of homes sold 132,730 125,492 343,513 324,303 Selling, general and administrative 20,083 15,392 54,632 41,137 Interest and other, net 3,779 3,963 10,191 9,871 - ----------------------------------------------------------------------------------------------------- Total costs and expenses 156,592 144,847 408,336 375,311 EARNINGS BEFORE INCOME TAXES 8,305 13,738 27,244 33,997 Income taxes 3,322 5,720 10,898 14,274 - ----------------------------------------------------------------------------------------------------- NET EARNINGS $ 4,983 8,018 16,346 19,723 ===================================================================================================== </TABLE> The pro forma results for the three and nine months ended September 30, 1997 reflect all relevant purchase accounting adjustments resulting from the Company's merger with Pacific Greystone Corporation. (9) CASH AND CASH EQUIVALENTS Cash and cash equivalents as of August 31, 1998 and November 30, 1997 included $21.6 million and $41.9 million, respectively, of cash held in escrow for periods of up to three days. (10) NEW ACCOUNTING PRONOUNCEMENT In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 requires public companies to report certain information about their operating segments in their annual and interim financial statements. It also requires public companies to report certain information about their products and services, the geographic areas in which they operate and their major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and the Company will adopt the statement no later than December 1, 1998. This statement will require additional financial statement disclosures but will not have an impact on the Company's results of operations or financial position. 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS CONTAINED IN THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE "FORWARD-LOOKING STATEMENTS" AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO, CHANGES IN GENERAL ECONOMIC CONDITIONS, THE MARKET FOR HOMES GENERALLY AND IN AREAS WHERE THE COMPANY HAS DEVELOPMENTS, THE AVAILABILITY AND COST OF LAND SUITABLE FOR RESIDENTIAL DEVELOPMENT, MATERIALS PRICES, LABOR COSTS, INTEREST RATES, CONSUMER CONFIDENCE, COMPETITION, ENVIRONMENTAL FACTORS AND GOVERNMENT REGULATIONS AFFECTING THE COMPANY'S OPERATIONS. SEE THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED NOVEMBER 30, 1997 FOR A FURTHER DISCUSSION OF THESE AND OTHER RISKS AND UNCERTAINTIES APPLICABLE TO THE COMPANY'S BUSINESS. (1) RESULTS OF OPERATIONS OVERVIEW On October 31, 1997, Lennar completed the spin-off of its commercial real estate investment and management business consisting of the Investment Division segment, the portions of the Financial Services Division involved in commercial mortgage lending and investments and certain assets of the Homebuilding Division utilized in related businesses. The spin-off was conducted through the distribution of the stock of LNR Property Corporation ("LNR"). At the time of the spin-off transaction, Lennar and LNR formed a general partnership ("Lennar Land Partners") to acquire, develop and sell land. Lennar and LNR contributed properties to Lennar Land Partners in exchange for 50% general partnership interests in Lennar Land Partners. Lennar also completed a merger with Pacific Greystone Corporation ("Greystone"), thereby significantly expanding its homebuilding operations in California and Arizona and entering the Nevada market. The merger was effective October 31, 1997. Earnings from continuing operations increased to $35.1 million, or $0.59 per share diluted ($0.61 per share basic), in the third quarter of 1998, from $19.9 million, or $0.55 per share (basic and diluted), in the third quarter of 1997. For the nine months ended August 31, 1998, earnings from continuing operations were $76.9 million, or $1.37 per share diluted ($1.40 per share basic), compared to $42.4 million, or $1.17 per share diluted ($1.18 per share basic), a year earlier. Homebuilding operating earnings increased significantly in both periods due to growth in the Company's California market as a result of the merger with Greystone on October 31, 1997, acquisitions made during 1998 and growth in the Company's existing California operations, as well as growth in the Texas market. Financial Services operating earnings were relatively consistent in the third quarter and lower in the first nine months of 1998 compared to the same periods last year. Earnings in both 1998 periods include a significant contribution from North American Title, which was acquired in January 1998. Earnings in both 1998 periods also reflect the absence of the portions of this division previously involved in commercial mortgage lending and investments which were included in the assets spun-off on October 31, 1997. 10
HOMEBUILDING The following tables set forth selected financial and operational information related to the Homebuilding Division for the periods indicated (unaudited): <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED AUGUST 31, AUGUST 31, (DOLLARS IN THOUSANDS, EXCEPT ---------------------------- --------------------------- AVERAGE SALES PRICES) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> REVENUES: Sales of homes $ 545,512 290,687 1,395,070 708,992 Sales of land and other revenues 13,211 19,428 48,288 56,394 - ------------------------------------------------------------------------------------------------- Total revenues 558,723 310,115 1,443,358 765,386 COSTS AND EXPENSES: Cost of homes sold 427,376 232,606 1,100,205 573,287 Cost of land and other expenses 10,293 12,565 34,546 37,031 Selling, general and administrative 49,960 32,268 144,355 89,812 - ------------------------------------------------------------------------------------------------- Total costs and expenses 487,629 277,439 1,279,106 700,130 - ------------------------------------------------------------------------------------------------- OPERATING EARNINGS $ 71,094 32,676 164,252 65,256 ================================================================================================= Gross margin - home sales $ 118,136 58,081 294,865 135,705 Gross margin percentage 21.7% 20.0% 21.1% 19.1% S,G&A as a percentage of total homebuilding revenues 8.9% 10.4% 10.0% 11.7% Average sales price $ 194,000 165,000 192,000 160,000 ================================================================================================= </TABLE> <TABLE> <CAPTION> SUMMARY OF HOME AND BACKLOG DATA THREE MONTHS ENDED NINE MONTHS ENDED AUGUST 31, AUGUST 31, ---------------------- ------------------------ DELIVERIES 1998 1997 1998 1997 - ----------------------------------------------------------------------------- <S> <C> <C> <C> <C> Florida 851 915 2,421 2,286 California 908 109 1,979 209 Texas 662 582 1,841 1,480 Arizona 292 158 803 450 Nevada 98 - 240 - - ----------------------------------------------------------------------------- 2,811 1,764 7,284 4,425 ============================================================================= NEW ORDERS - ----------------------------------------------------------------------------- Florida 1,069 861 3,163 2,698 California 744 174 2,246 490 Texas 603 696 2,016 1,795 Arizona 262 119 911 421 Nevada 97 - 317 - - ----------------------------------------------------------------------------- 2,775 1,850 8,653 5,404 ============================================================================= </TABLE> 11
<TABLE> <CAPTION> AUGUST 31, ------------------------ BACKLOG - HOMES 1998 1997 - ----------------------------------------------------------------------------- <S> <C> <C> Florida 2,037 1,617 California 1,593 320 Texas 843 753 Arizona 562 218 Nevada 195 - - ----------------------------------------------------------------------------- 5,230 2,908 - ----------------------------------------------------------------------------- BACKLOG - DOLLAR VALUE (IN THOUSANDS) $ 1,072,774 537,928 ============================================================================= </TABLE> Homebuilding revenues increased significantly in the three and nine months ended August 31, 1998 compared to the same periods in 1997 due to increases in the number of home deliveries and average sales price in both periods. The fourth quarter 1997 merger with Greystone (which has operations primarily in California) and expansion of the Company's existing California operations significantly contributed to the increases in both new home deliveries and the average sales price of homes delivered. In addition, the Company's Texas homebuilding operations contributed to the increase in the number of homes delivered in both 1998 periods. Gross margin percentages from sales of homes increased approximately 170 basis points and 200 basis points in the three and nine months ended August 31, 1998, respectively, compared to the same periods in 1997. These increases were primarily due to expansion in California where the Company currently generates higher margins than the overall Company average. Sales of land and other revenues were lower in the three and nine months ended August 31, 1998 compared to the same periods last year. These decreases were primarily due to the transfer of land to Lennar Land Partners on October 31, 1997 and the resulting reduction in third party land sales by the Company. In addition, land sales and margins on land sales may vary significantly from period to period. Other revenues included equity in earnings from partnerships of $1.8 million and $8.9 million in the three and nine months ended August 31, 1998, respectively, compared to ($0.1) million and $3.9 million in the same periods in 1997, respectively. The 1998 increases were due primarily to the Company's equity in earnings from Lennar Land Partners. Selling, general and administrative expenses as a percentage of homebuilding revenues decreased in both the three and nine months ended August 31, 1998 compared to the same periods in 1997. These decreases were due primarily to the increase in revenues. At August 31, 1998, the Company's backlog of sales contracts increased to 5,230 homes ($1.1 billion) compared to 2,908 homes ($537.9 million) at August 31, 1997. The increase in backlog was attributable to an increase in new orders in all states in which the Company operates. The most significant increases in new orders and backlog were generated in California, primarily as a result of the merger with Greystone in October 1997 and acquisitions made in 1998. 12
FINANCIAL SERVICES The following table presents selected financial data related to the Financial Services Division for the periods indicated (unaudited): <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED AUGUST 31, AUGUST 31, ------------------------- ------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenues $ 61,287 21,577 147,361 67,981 Costs and expenses 52,200 12,508 125,952 38,503 - ------------------------------------------------------------------------------------------------------- Operating earnings $ 9,087 9,069 21,409 29,478 ======================================================================================================= Dollar volume of mortgages originated $ 262,818 100,849 676,565 256,896 - ------------------------------------------------------------------------------------------------------- Number of mortgages originated 1,987 870 5,212 2,259 - ------------------------------------------------------------------------------------------------------- Principal balance of servicing portfolio $ 3,119,000 3,147,000 - ------------------------------------------------------------------------------------------------------- Number of loans serviced 41,000 40,000 ======================================================================================================= </TABLE> Operating earnings from the Financial Services Division were relatively consistent in the third quarter and lower in the first nine months of 1998 compared to the same periods last year. Comparisons were impacted by the absence during both 1998 periods of earnings from the Division's investment in commercial real estate mortgage-backed securities, partnerships and commercial loans ("Distributed Investments") which were distributed as part of the spin-off of the Company's commercial real estate investment and management business in 1997. Excluding the 1997 operating results related to the Distributed Investments, operating earnings increased $6.4 million and $11.8 million in the three and nine months ended August 31, 1998 compared to the same periods last year. These increases were primarily due to a significant contribution from North American Title, which was acquired in January 1998. Higher mortgage profits, which resulted from increased mortgage originations, also contributed to the increases. The increases in dollar value and number of mortgages originated resulted primarily from higher homebuilding deliveries and a greater capture rate of Lennar homebuyers. CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES Corporate general and administrative expenses as a percentage of total revenues were 1.3% in both the three and nine months ended August 31, 1998 compared to 1.1% and 1.2% in the three and nine months ended August 31, 1997, respectively. INTEREST EXPENSE Interest expense was higher in the three and nine months ended August 31, 1998 compared to the same periods last year as a result of higher debt levels due to the Company's expansion and an increase in the amount of capitalized interest charged to expense due to a greater number of homes delivered and an increase in interest per home delivered. 13
DISCONTINUED OPERATIONS On June 10, 1997, the Company's Board of Directors approved a plan to spin-off the commercial real estate investment and management business, which primarily consisted of the Investment Division segment. The spin-off, which was conducted through the distribution of the stock of LNR Property Corporation to existing shareholders of the Company in the form of a tax-free distribution, was completed effective October 31, 1997. Earnings from discontinued operations totaled $8.4 million, or $0.23 per share (basic and diluted), in the third quarter of 1997 and $27.3 million, or $0.75 per share diluted ($0.76 per share basic), in the nine months ended August 31, 1997. (2) PRO FORMA RESULTS OF OPERATIONS The following pro forma results of operations for 1997 give effect to the spin-off of the Company's commercial real estate investment and management business, the merger with Pacific Greystone Corporation and the formation of Lennar Land Partners, all of which were completed on October 31, 1997, as if such transactions had occurred at the beginning of the periods. Lennar Corporation pro forma results were derived from the three and nine months ended August 31; Pacific Greystone Corporation pro forma results were derived from the three and nine months ended September 30. The following pro forma information is presented to show results of operations for 1998 and 1997 on a more comparable basis. The following pro forma financial information for the 1997 periods is not necessarily indicative of the results of operations which would have been reported if the transactions had occurred on the dates or for the periods indicated. 14
The 1998 actual and 1997 pro forma results of operations and selected Homebuilding financial data were as follows for the periods indicated (unaudited): <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------ ------------------------------ AUGUST 31/ AUGUST 31/ (DOLLARS IN THOUSANDS, EXCEPT AUGUST 31, SEPTEMBER 30, AUGUST 31, SEPTEMBER 30, AVERAGE SALES PRICES) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> REVENUES: Homebuilding $ 558,723 452,239 1,443,358 1,136,359 Financial services 61,287 12,088 147,361 36,104 Limited-purpose finance subsidiaries 925 928 3,034 3,632 - -------------------------------------------------------------------------------------------------------- Total revenues $ 620,935 465,255 1,593,753 1,176,095 - -------------------------------------------------------------------------------------------------------- OPERATING EARNINGS: Homebuilding $ 71,094 46,004 164,252 105,853 Financial services 9,087 2,638 21,409 9,581 Limited-purpose finance subsidiaries - 4 - 4 - -------------------------------------------------------------------------------------------------------- Total operating earnings 80,181 48,646 185,661 115,438 Corporate general and administrative expenses 8,303 6,571 21,095 17,017 Interest expense 13,437 6,615 36,443 17,996 - -------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 58,441 35,460 128,123 80,425 Income taxes 23,376 14,409 51,249 32,845 - -------------------------------------------------------------------------------------------------------- NET EARNINGS $ 35,065 21,051 76,874 47,580 ======================================================================================================== HOMEBUILDING: Gross margin - home sales $ 118,136 86,993 294,865 213,209 Gross margin percentage 21.7% 19.4% 21.1% 19.1% S,G&A as a percentage of total homebuilding revenues 8.9% 8.7% 10.0% 9.9% Average sales price $ 194,000 184,000 192,000 181,000 New home deliveries 2,811 2,438 7,284 6,187 New orders 2,775 2,582 8,653 7,439 Backlog - homes 5,230 3,909 Backlog - dollar value $ 1,072,774 791,237 ======================================================================================================== </TABLE> HOMEBUILDING Homebuilding revenues, on a pro forma basis, increased 24% in the third quarter and 27% in the nine months ended August 31, 1998 compared to the same periods in 1997. Revenues were higher primarily due to increases in the number of home deliveries and average sales prices in both periods. The California and Texas homebuilding markets generated the largest increases in new home deliveries in the three and nine months ended August 31, 1998 compared to the same periods last year. The increase in the average sales price was primarily due to a higher percentage of deliveries coming from the California market, where sales prices are higher, and an increase in the average sales price in Texas. Homebuilding revenues included land sales of $9.6 million and $33.1 million in the three and nine months ended August 31, 1998, respectively, compared to pro forma land sales of $1.4 million and $5.7 million, respectively, in the same periods last year. Gross margin percentages on home sales, on a pro forma basis, increased in both the third quarter and first nine months of 1998 compared to the same periods in 1997. The third quarter increase was a result of higher gross margin percentages in each state in which the Company operates, combined 15
with a greater percentage of deliveries coming from the California market, where the Company currently generates higher than average gross margin percentages. The nine month increase was primarily attributable to increased margins in the Company's California and Texas markets. Gross margins from land sales totaled $0.2 million and $2.4 million in the three and nine months ended August 31, 1998, respectively, compared to ($1.0) million (pro forma) and $0.6 million (pro forma), respectively, in the same periods in 1997. Margins achieved on sales of land may vary significantly from period to period. Selling, general and administrative expenses as a percentage of homebuilding revenues were 8.9% and 10.0% in the three and nine months ended August 31, 1998, respectively, compared to 8.7% (pro forma) and 9.9% (pro forma) in the three and nine months ended August 31, 1997, respectively. FINANCIAL SERVICES Operating earnings for the Financial Services Division increased in both the three and nine months ended August 31, 1998, on a pro forma basis, due primarily to contributions from North American Title, which was acquired in January 1998, as well as higher mortgage services profits. CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES Corporate general and administrative expenses as a percentage of total revenues were 1.3% in both the three and nine months ended August 31, 1998 compared to 1.4% (pro forma) in both the three and nine months ended August 31, 1997. The decrease in both 1998 periods was due primarily to the growth in revenues. INTEREST In the third quarter of 1998, interest incurred was $15.0 million and interest expense was $13.4 million. This compares to interest incurred of $8.9 million (pro forma) and interest expense of $6.6 million (pro forma) in the third quarter of 1997. In the nine months ended August 31, 1998, interest incurred was $38.3 million and interest expense was $36.4 million compared to interest incurred of $26.1 million (pro forma) and interest expense of $18.0 million (pro forma) in the nine months ended August 31, 1997. The increase in interest expense in both periods was primarily the result of higher debt levels due to the Company's expansion and an increase in the amount of capitalized interest charged to expense due to a greater number of homes delivered and an increase in interest per home delivered. (3) LIQUIDITY AND FINANCIAL RESOURCES In the nine months ended August 31, 1998, $105.7 million in cash was used in the Company's operating activities compared to $112.8 million in the corresponding period in 1997. In the nine months ended August 31, 1998, $211.1 million of cash was used to increase inventories through land purchases, land development and construction, $35.0 million was used by the Financial Services Division in its mortgage loan origination operations and $9.3 million was used to reduce current income taxes payable. These uses of cash were partially offset by $76.9 million of net earnings and an increase in accounts payable and accrued liabilities of $55.1 million. In the nine months ended August 31, 1997, cash flows used in operating activities related primarily to $128.8 million of cash used to increase inventories through land purchases, land development and construction. Cash used in investing activities totaled $221.2 million in the nine months ended August 31, 1998, compared to cash generated from investing activities of $89.1 million in the corresponding period in 1997. In the nine months ended August 31, 1998, $188.7 million of cash was used in the acquisitions of properties and businesses and $21.7 million was used to increase the Company's investments in partnerships. In the nine months ended August 31, 1997, $106.1 million of cash was used to purchase investment securities by both the discontinued Investment Division and the Financial 16
Services Division and $43.5 million was used to purchase operating properties and equipment, primarily by the discontinued Investment Division. These purchases were more than offset by $152.5 million of proceeds from investment securities and $70.0 million of cash provided from partnership investments, both of which related primarily to the spun-off real estate investment and management business. The Company meets the majority of its short-term financing needs with cash generated from operations and funds available under its unsecured revolving credit facilities. At August 31, 1998, the Company had unsecured revolving credit facilities in the aggregate amount of $650 million, which may be used to refinance existing indebtedness, for working capital, for acquisitions and for general corporate purposes. At August 31, 1998, $412.0 million was outstanding under the Company's revolving credit facilities, compared to $376.5 million outstanding at November 30, 1997. The increase was a result of the Company's continued growth. In the third quarter of 1998, the Company issued, for $229 million, Zero Coupon Senior Convertible Debentures due 2018 ("Debentures") with a face amount at maturity of $493 million. The Debentures were issued at a price of $464.31 per $1,000 face amount at maturity, which equates to a yield to maturity over the life of the Debentures of 3 7/8%. Proceeds from the offering, after underwriting discount and expenses, were approximately $223 million. The Company used the proceeds to repay $100 million in short-term loans which were used to fund acquisitions, and to reduce balances outstanding under its revolving credit facilities. The Debentures are convertible at any time into the Company's common stock at the rate of 12.4 shares per $1,000 face amount at maturity, which equates to an initial conversion price of $37.50 per share, although if converted during the first five years, the Company may elect to pay cash equal to the fair value of the common stock at the time of the conversion. Holders have the option to require the Company to repurchase the Debentures on any of the fifth, tenth, or fifteenth anniversary dates from the issue date for the initial issue price plus accrued original issue discount. The Company has the option to satisfy the repurchases with any combination of cash and/or shares of the Company's common stock. The Company will have the option to redeem the Debentures, in cash, at any time after the fifth anniversary date for the initial issue price plus accrued original issue discount. In March 1998, the Company entered into an equity draw-down agreement with a major international banking firm (the "Firm") under which the Company has the option to sell common stock, up to proceeds of $120 million, to the Firm in increments of up to $15 million (or such higher amount as may be agreed to by the parties) per month. As of August 31, 1998, the Company had issued 1.1 million shares under the agreement resulting in proceeds to the Company of $36 million. In February 1998, the Company filed a shelf registration statement and prospectus with the Securities and Exchange Commission to offer, from time to time, its common stock, preferred stock, depositary shares, debt securities or warrants at an aggregate initial offering price not to exceed $500 million. As of August 31, 1998, the Company had $235 million available under the shelf registration statement. Proceeds can be used for repayment of debt, acquisitions and general corporate purposes. In the third quarter of 1998, the Company acquired the properties of two California homebuilders, ColRich Communities and Polygon Communities. In the first quarter of 1998, the Company acquired a Northern California homebuilder, Winncrest Homes, and the North American Asset Development Group of companies, which provide title and escrow services in California, Arizona, and Colorado. In connection with these acquisitions for $200 million in cash (inclusive of cash acquired of $12 million) and the issuance of $95 million in common stock, the Company received assets with a fair value of $334 million, assumed liabilities totaling $46 million and recorded goodwill of $7 million. The acquisitions were accounted for using the purchase method of accounting. 17
Based on the Company's current financial condition and financial market resources, management believes that its operations and capital resources will provide for its current and long-term capital requirements at the Company's anticipated levels of growth. YEAR 2000 The Company utilizes a number of computer information systems in conjunction with its homebuilding and financial services operations. The Company is in the process of converting the majority of its computer information systems to one company-wide system. This new system is Year 2000 compliant. The Company has completed a significant portion of the implementation of this new system and expects to complete the implementation by the middle of 1999. The Company is also making modifications to its existing computer information systems to make them Year 2000 compliant in the event it is not able to complete the conversion to the new company-wide system before the year 2000. The Company is in the process of surveying its significant vendors and suppliers to assess their state of readiness for the Year 2000. The Company cannot currently determine to what extent the Year 2000 issue will affect these parties and, consequently, the Company. The financial impact of becoming Year 2000 compliant has not been and is not expected to be material to the Company's financial position or results of operations. PART II. OTHER INFORMATION ITEMS 1-5. NOT APPLICABLE. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: (27) Financial Data Schedule. (b) Reports on Form 8-K: A report on Form 8-K dated July 24, 1998 was filed by the Registrant providing information in connection with the Company's offering of Zero Coupon Senior Convertible Debentures due 2018. 18
SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LENNAR CORPORATION ------------------------------- (Registrant) Date: OCTOBER 14, 1998 /S/ BRUCE E. GROSS ------------------------------- Bruce E. Gross Chief Financial Officer Date: OCTOBER 14, 1998 /S/ DIANE J. BESSETTE ------------------------------- Diane J. Bessette Controller 19
EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 27 Financial Data Schedule