PulteGroup - 10-K annual report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9804

PULTE HOMES, INC.
(Exact name of registrant as specified in its charter)

33 Bloomfield Hills Parkway, Suite 200
Bloomfield Hills, Michigan 48304
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (248) 647-2750
Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [   ]

Aggregate market value of voting stock held by nonaffiliates of the registrant as of February 28, 2002: $2,568,284,622
Number of shares of common stock outstanding as of February 28, 2002: 60,342,644

Documents Incorporated by Reference

Applicable portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form.

Table of Contents

PULTE HOMES, INC.
TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

Pulte Homes, Inc.

     Pulte Homes, Inc. (“Pulte” or the “Company”) is a publicly held holding company whose subsidiaries engage in the homebuilding and financial services businesses. Our assets consist principally of the capital stock of our subsidiaries, cash and investments. Our income primarily consists of dividends from our subsidiaries and interest on investments. Our direct subsidiaries include Pulte Diversified Companies, Inc. (PDCI), Del Webb Corporation and other subsidiaries which are engaged in the homebuilding business. PDCI’s operating subsidiaries include Pulte Home Corporation (PHC), Pulte International Corporation (International) and other subsidiaries which are engaged in the homebuilding business. PDCI’s non-operating thrift subsidiary, First Heights Bank, fsb (First Heights), is classified as a discontinued operation (see Note 4 of Notes to Consolidated Financial Statements). We also have a mortgage banking company, Pulte Mortgage Corporation (PMC), which is a subsidiary of PHC.

     We have three reportable business segments: Homebuilding, Financial Services and Corporate. The Homebuilding segment consists of the following two business units:

     The Financial Services segment consists principally of mortgage banking operations conducted through PMC and its subsidiaries.

     Corporate is a non-operating business segment whose primary purpose is to support the operations of our subsidiaries as the internal source of financing, to develop and implement strategic initiatives centered on new business development and operating efficiencies, and to provide the necessary administrative functions to support Pulte as a publicly traded entity.

     Financial information, including revenue, pre-tax income and identifiable assets of each of our business segments is included in Note 2 of Notes to Consolidated Financial Statements.

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Homebuilding Operations

     Unit sales (settlements) and net new orders in any year are strongly influenced by local, regional and national market economic conditions.

Domestic Homebuilding

     We build a wide variety of homes, including detached units, townhouses, condominium apartments and duplexes, with varying prices, models, options and lot sizes, all sold for use as principal residences. Since 1990, we have more than quadrupled our annual unit closings, unit orders and unit backlog levels. Including 2001 sales of nearly 23,000 homes, we have closed nearly 300,000 homes since our inception.

     On July 31, 2001, we merged with Del Webb Corporation in a tax-free stock-for-stock transaction. Del Webb is primarily a homebuilder with operations in six states. For the fiscal year ended June 30, 2001, Del Webb reported net income of $91.2 million on revenues of $1.9 billion and 7,038 unit settlements. Backlog reported at June 30, 2001, was 3,682 units valued at approximately $994 million. This merger expands and supports our leadership position. In particular, we believe the merger will strengthen our position among active adult homebuyers, enhance our overall land position, provide operational savings from economies of scale while enhancing purchasing leverage, and enhance our overall competitive position. In accordance with our operational strategy, we will continue to evaluate available strategic acquisition opportunities that coincide with our long-range goals.

     As of December 31, 2001, our Domestic Homebuilding operations offered homes for sale in 440 communities at sales prices ranging from $75,000 to $1,200,000. Sales prices of homes currently offered for sale in 76% of our communities fall within the range of $150,000 to $450,000 with a 2001 average unit selling price of $225,000. Sales of single-family detached homes, as a percentage of total unit sales, were 82% in 2001 and 2000 and 79% in 1999, respectively. Our Domestic Homebuilding operations are geographically diverse to better insulate us from demand changes in individual markets. As of December 31, 2001, our Domestic Homebuilding business operated in 43 markets spanning 25 states.

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Homebuilding Operations (continued)

International Homebuilding

     International Homebuilding operations are primarily conducted through subsidiaries of Pulte International Corporation in Mexico, Puerto Rico and Argentina. International Homebuilding product offerings focus on the demand of first-time buyers and social interest housing in Mexico and Puerto Rico. Housing for middle-to-upper income consumers is available in Puerto Rico and Argentina. We have agreements in place with multi-national corporations to provide social interest housing in Mexico.

     Mexico    International’s 100%-owned subsidiary, Pulte International Mexico, Inc., conducts its operations primarily through five joint ventures located throughout Mexico. The largest of these ventures, Condak-Pulte S. De R.L. De C.V. (Condak-Pulte), is based in Cuidad Juarez. Condak-Pulte is currently developing communities in Juarez, Chihuahua, Nuevo Laredo, Monterrey, Reynosa, Saltillo and Matamoros, under agreements with Delphi Automotive Systems, Gigante, S.A. de C.V. and Centro Comerciales Soriana, S.A. De C. V.

     Desarrollos Residenciales Turisticos, S.A. de C.V. (DRT), another joint venture in Mexico, is constructing primarily social interest housing in Central Mexico. Current development plans for this venture include housing projects in the Bajio region surrounding Mexico City, targeting the cities of Celaya, Leon, Puebla, Queretaro, San Jose du Iturbide and San Juan del Rio.

     Effective January 1, 2002, Pulte International reorganized its structure within Mexico to create a single company, Pulte Mexico, which ranks as one of the largest builders in the country. The new operating structure will facilitate growth, enable operating leverage and improve efficiencies through standardized systems and procedures. The new company, which combines several entities, including Condak-Pulte and DRT, will be consolidated into our financial statements.

     Puerto Rico    Operations in Puerto Rico are primarily conducted through International’s 100%-owned subsidiary, Pulte International Caribbean Corporation. Desarrolladores Urbanos (Canovanas), S.E., its Puerto Rican joint venture, is developing 121 acres located in Metropolitan San Juan.

     Argentina    Operations in Argentina are conducted through Pulte S.R.L., International’s 100%-owned Argentine subsidiary which recorded its first closings during the second quarter of 2001.

Land Acquisition and Development

     Locations for development of homebuilding communities are selected after completing extensive market research, enabling us to match the location and product offering with our targeted consumer group. Factors considered include proximity to developed areas, population and job growth patterns and, if applicable, estimated development costs. We have historically managed the risk of controlling our land positions through use of option contracts and outright acquisition. We typically control land with the intent to complete sales of housing units within 24 months from the date of opening a community, except in the case of certain active-adult developments and our Del Webb operations for which the completion of housing unit sales require a longer time period. As a result, land is generally controlled after it is properly zoned and developed or is ready for development. In addition, we dispose of owned land not required in the business. Where we develop land, we engage directly in many phases of the development process, including land and site planning, obtaining environmental and other regulatory approvals, as well as constructing roads, sewers, water and drainage facilities, and other amenities. We use our staff and the services of independent engineers and consultants for land development activities. Land development work is performed primarily by subcontractors and local government authorities which construct sewer and water systems in some areas. At December 31, 2001, we owned approximately 82,400 lots and had approximately 35,000 lots under option.

Sales and Marketing

     We are dedicated to improving the quality and value of our domestic homes through innovative proprietary architectural and community designs and state-of-the-art customer marketing techniques. Analyzing various qualitative and quantitative data obtained through extensive market research, we segment our potential customers into well-defined buyer profiles. Once the demands of potential buyers are understood, we link our home design and community development efforts to the specific lifestyle of each targeted consumer group.

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Homebuilding Operations (continued)

Sales and Marketing (continued)

     To meet the demands of our various domestic customers, we have established a solid design expertise for a wide array of product lines. We believe that we are an innovator in the design of our homes and we view design capacity as an integral aspect of our marketing strategy. Our in-house architectural services teams and management, supplemented by outside consultants, are successful in creating distinctive design features, both in exterior facades and interior options and features. A strategy in certain markets is to offer “the complete house” in which all features shown in the home are included in the sales price. Standard features typically offered include vaulted ceilings, appliances, and a selection of flooring and carpet, which the buyer chooses.

     Typically, our own domestic sales teams, together with outside sales brokers, are responsible for managing the customer through the sales process. We have been committed to industry-leading customer service through a variety of quality initiatives, including the customer care program, which ensures that homeowners are comfortable at every stage of the building process. Using a seven-step, interactive process, homeowners are kept informed during their homebuilding and home owning experience. The steps include (1) a pre-construction meeting with the superintendent; (2) pre-dry wall frame walk; (3) quality assurance inspection; (4) first homeowner orientation; (5) 30-day follow-up after the close of the home; (6) three-month follow-up; and (7) an 11-month quality list after the close of the home. Fully furnished and landscaped model homes are used to showcase our homes and their distinctive design features. We have great success with the first-time buyer in the low to moderate price range; in such cases, financing under United States Government-insured and guaranteed programs is often used and is facilitated through our mortgage company. We also enjoy strong sales to the move-up buyer and, in certain markets, offer semi-custom homes in higher price ranges.

     In 2001, J.D. Power and Associates recognized our Colorado, Charlotte, Las Vegas and Southern California markets for ranking the highest in their markets in customer satisfaction in the J.D. Power and Associates 2001 New Home Builder Customer Satisfaction StudySM. The survey of ten U.S. markets noted customer service and home readiness as the two factors that most heavily influenced the customer’s overall level of satisfaction. We finished third or better in seven of the ten markets surveyed. Building on this quality foundation is our brand development program with our “Three I’s on Quality” platform. Developing the Pulte Homes brand and leveraging the strength of the “DiVosta,” “Del Webb” and “Sun City” names not only distinguishes our communities from the competition, but it also earns a price premium in the marketplace, reduces overall customer acquisition costs and can result in additional sales.

     In addition, our Homeowner for Life™ strategy and philosophy has increased our business from those who have previously owned a Pulte home or been referred by a Pulte homeowner by ensuring a positive home buying and home owning experience. In 2001, we saw an increase to 36 percent of these repeat/referral buyers. That represents almost $2 billion in revenues in 2001. We introduce our homes to prospective buyers through a variety of media advertising, illustrated brochures, Internet listings and link placements, and other advertising displays. Customers are also obtained through referrals from other Pulte customers. In addition, our website, www.pulte.com, enables users to search for their home, obtain details regarding the local schools, services and other features, examine mortgage options using an online calculator, learn more about us and communicate directly with us. Over three million potential customers have visited www.pulte.com since January 1, 2000.

     As a result of the merger with Del Webb, we are better able to address the needs of active adults, the fastest growing homebuying segment. With destination communities offering highly amenitized products, such as golf courses, recreational centers and educational classes, the active adult buyer has many options to maintain an active lifestyle.

     Our international sales and marketing efforts focus on the identification of regions throughout Mexico, Puerto Rico and Argentina which are experiencing population and industrial growth. In Mexico and Puerto Rico, the demand for affordable and social interest housing is strong. In Mexico, Condak-Pulte has entered into three separate agreements to construct affordable social interest housing with Delphi Automotive Systems, Gigante, S. A. de C.V. and Centrol Comerciales Soriana, S. A. de C.V. In Puerto Rico, the strongest customer demand is for single-family detached homes, but affordable alternative product offerings include two story attached units (townhomes) and three-story condominium units with exterior stairs (walk-ups). The Argentine market offers low levels of competition and a very large residential market in Buenos Aires.

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Homebuilding Operations (continued)

Construction

     The construction process for our domestic homes begins with the in-house design of the homes we sell. The building phase is conducted under the supervision of our on-site construction superintendents. The construction work is usually performed by subcontractors under contracts which, in many instances, cover both labor and materials on a fixed-price basis. We believe that Pulte Preferred Partnerships (P3), an extension of our quality assurance program, continues to establish new standards for contractor relations. Using a selective process, we have teamed up with what we believe are premier contractors and suppliers to improve all aspects of the land development and house construction processes.

     We maintain efficient construction operations by using standard materials and components from a variety of sources and, when possible, by building on contiguous lots. To minimize the effects of changes in construction costs, the subcontracting and purchasing of building supplies and materials are generally negotiated at or near the time when related sales contracts are signed. In addition, we utilize the leverage our size affords by actively negotiating our materials needs on a national or regional basis to minimize component production cost. We are also working to establish a more integrated system that can effectively link suppliers, contractors and the production schedule through various strategic business partnerships and e-business initiatives.

     Housing in Mexico and Puerto Rico consists primarily of reinforced poured concrete, concrete and ceramic block and/or brick construction with flat roofs and public water, electric and sanitary system connections. Our Argentine housing product is designed and constructed in a similar fashion to our domestic product but is customized for local preferences. Building materials, supplies and components are sourced locally and the construction work is performed by general contractors and/or subcontractors under contracts, which in many cases, include both labor and materials.

     We cannot determine the extent to which necessary building materials will be available at reasonable prices in the future and have, on occasion, experienced shortages of skilled labor in certain trades and of building materials in some markets.

Competition and Other Factors

     Our dedication to customer satisfaction is evidenced by our consumer and value-based brand approach to product development, and is something that we believe distinguishes us in the homebuilding industry and contributes to our long-term competitive advantage. The housing industry in the United States, however, is highly competitive. In each of our market areas, there are numerous homebuilders with which we compete. Any provider of housing units, for-sale or to rent, including apartment builders, may be considered a competitor. Conversion of apartments to condominiums further provides certain segments of the population an alternative to traditional housing, as does manufactured housing. We compete primarily on the basis of price, reputation, design and quality of our homes as well as location. The housing industry is cyclical and is affected by a number of economic and other factors including: (1) significant national and world events, which impact consumer confidence; (2) changes in interest rates; (3) changes in other costs associated with home ownership, such as property taxes and energy costs; (4) various demographic factors; (5) changes in federal income tax laws; and (6) changes in government mortgage financing programs. In addition to these factors, our business and operations could be affected by unanticipated shifts in demand for new homes.

     Our operations are subject to building, environmental and other regulations of various federal, state, local and foreign governing authorities. For our homes to qualify for Federal Housing Administration (FHA) or Veterans Administration (VA) mortgages, we must satisfy valuation standards and site, material and construction requirements of those agencies. Our compliance with federal, state, local and foreign laws relating to protection of the environment has had, to date, no material effect upon capital expenditures, earnings or competitive position. More stringent requirements could be imposed in the future on homebuilders and developers, thereby increasing the cost of compliance.

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Financial Services Operations

     Our financial services operations are conducted by our mortgage banking and other financial subsidiaries, including Pulte Mortgage Corporation and Del Webb Mortgage Corporation.

Mortgage Banking

     Our mortgage bank arranges financing through the origination of mortgage loans primarily for the benefit of our domestic homebuyers, but also services the general public. We also engage in the sale of such loans and the related servicing rights. We are a lender approved by the FHA and VA and are a seller/servicer approved by Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and other investors. In our conventional mortgage lending activities, we follow underwriting guidelines established by FNMA and FHLMC.

     Our mortgage underwriting, processing and closing functions are centralized in Denver, Colorado using a mortgage operations center (MOC) concept. We also use a centralized telephone loan officer concept where loan officers are centrally located at a mortgage application center (MAC) in Denver. Our sales representatives, who are the mortgage customers’ main contact, forward the loan applications to a MAC loan counselor who calls the customer to complete the loan application and then forwards it to the MOC for processing. We believe both the MOC and the MAC improve the speed and efficiency of our mortgage operations, thereby improving profitability and allowing us to focus on creating attractive mortgage financing opportunities for our customers.

     In originating mortgage loans, we initially use our own funds and borrowings made available to us through various credit arrangements. Subsequently, we sell such mortgage loans and mortgage-backed securities to outside investors.

     During the years ended December 31, 2001, 2000 and 1999, we originated mortgage loans for 60%, 56% and 55%, respectively, of the homes we sold. Such originations represented 79%, 83% and 79%, respectively, of our originations.

     We sell our servicing rights on a flow basis through fixed price servicing sales contracts to reduce the risks inherent in servicing loans. This strategy results in owning the servicing rights for only a short period of time, usually three to four months after the loan is originated, which substantially reduces impairment issues with respect to the fair value of these reported assets.

     The mortgage industry in the United States is highly competitive. We compete with other mortgage companies and financial institutions to provide attractive mortgage financing to both our customers and to the general public. In originating and servicing mortgage loans, we are subject to rules and regulations of the FHA, VA, GNMA, FNMA and FHLMC. The Internet is also an important resource for homebuyers in obtaining financing as a number of companies provide online approval for their customers. These Internet-based mortgage companies may also be considered competitors.

Discontinued Operations

     During the first quarter of 1994, we adopted a plan of disposal for First Heights and announced our strategy to exit the thrift industry and increase our focus on housing and related mortgage banking. First Heights sold all but one of its 32 bank branches and related deposits to two unrelated purchasers. The sale was substantially completed during the fourth quarter of 1994.

     Although in 1994, we expected to complete the plan of disposal within a reasonable period of time, contractual disputes with the Federal Deposit Insurance Corporation (FDIC) prevented the prepayment of the Federal Savings and Loan Insurance Corporation Resolution Fund (FRF) notes, thereby precluding us from completing the disposal in accordance with our original plan. To provide liquidity for the sale, First Heights liquidated its investment portfolios and its single-family residential loan portfolio and, as provided in the Assistance Agreement, entered into a Liquidity Assistance Note (LAN) with the FDIC acting in its capacity as manager of the FRF notes. The LAN was collateralized by the FRF notes. The LAN and FRF notes matured in September 1998; however, payment of these obligations was withheld by both parties pending resolution of all open matters with the FDIC. As discussed in Note 10 of Notes to Consolidated Financial Statements, the Company settled its litigation with the FDIC in October 2001, and as part of that settlement all obligations under the LAN and FRF notes were extinguished.

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Financial Services Operations (continued)

Discontinued Operations (continued)

     First Heights no longer holds any deposits, nor does it maintain an investment portfolio. First Heights’ day-to-day activities are principally devoted to supporting residual regulatory compliance matters and the litigation with the United States government and are not reflective of the active operations of the former thrift, such as maintaining traditional transaction accounts, (e.g., checking and savings accounts) or making loans. Accordingly, such operations are presented as discontinued.

Corporate

     Corporate is a non-operating segment that is comprised of the Company and PDCI, both of which are holding companies. The primary purpose of Corporate is to support the operations of our subsidiaries as the internal source of financing, and to develop and implement strategic initiatives centered around new business development and operating efficiencies. Business development activities include the pursuit of additional domestic and international opportunities as well as the development of innovative building components and processes. Corporate also includes the activities associated with supporting a publicly traded company listed on the New York Stock Exchange.

     Corporate assets include equity investments in its subsidiaries, short-term financial instruments and affiliate advances. Liabilities include senior and subordinated debt and income taxes. Corporate revenues consist primarily of investment earnings of excess funds, while its expenses include costs associated with supporting a publicly traded company and its subsidiaries’ operations, and investigating strategic initiatives.

Organization/Employees

     All subsidiaries and operating units operate independently with respect to daily operations. Homebuilding real estate purchases and other significant homebuilding, mortgage banking, financing activities and similar operating decisions must be approved by the business unit and/or corporate senior management.

     At December 31, 2001, we employed approximately 9,400 persons. Our employees are not represented by any union. Subcontracted work, however, may be performed by union subcontractors. Homebuilding and mortgage banking management personnel are paid performance bonuses and incentive compensation. Performance bonuses are based on individual performance while incentive compensation is based on the performance of the applicable division or subsidiary. Our corporate management personnel are paid incentive compensation based on overall performance of the Company (see Note 7 of Notes to Consolidated Financial Statements). Each subsidiary is given autonomy regarding employment of personnel, although our senior corporate management act in an advisory capacity in the employment of subsidiary officers. We consider our employee and subcontractor relations to be satisfactory.

ITEM 2. PROPERTIES

     Our homebuilding and corporate headquarters are located at 33 Bloomfield Hills Parkway, Suite 200, Bloomfield Hills, Michigan 48304, where 34,559 square feet of office space is leased. We also lease 21,612 square feet of office space at 165 Kirts Boulevard, Troy, Michigan 48084 for certain centralized business support services. We own 148,727 square feet of office space at 6001 North 24th Street, Phoenix, Arizona 85016 for use by our Del Webb operations and for certain corporate and business services. Pulte Mortgage Corporation’s offices are located at 7475 South Joliet Street, Englewood, Colorado 80112. At this location, approximately 60,000 square feet of office space is leased. Our homebuilding markets and mortgage branch operations generally lease office space for their day-to-day operations. First Heights’ administrative office is located in 918 square feet of leased space at 2010 North Loop West, Suite 220, Houston, Texas 77018.

     Because of the nature of our homebuilding operations, significant amounts of property are held as inventory in the ordinary course of our homebuilding business. Such properties are not included in response to this Item.

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ITEM 3. LEGAL PROCEEDINGS

     We are involved in various litigation incidental to our continuing business operations. We believe that none of this litigation will have a material adverse impact on our results of operations, our financial position or our cash flows.

First Heights-related litigation

     We were a party to three lawsuits relating to First Heights’ 1988 acquisition from the Federal Savings and Loan Insurance Corporation (FSLIC) and First Heights’ ownership of five failed Texas thrifts. The first lawsuit (the “District Court Case”) was filed on July 7, 1995, in the United States District Court, Eastern District of Michigan, by the Federal Deposit Insurance Corporation (FDIC) against the Company, PDCI and First Heights (collectively, the “Pulte Parties”). The second lawsuit (the “Court of Federal Claims Case”) was filed on December 26, 1996, in the United States Court of Federal Claims (Washington, D.C.) by the Pulte Parties against the United States. The third lawsuit was filed by First Heights on January 10, 2000, in the United States District Court, Eastern District of Michigan against the FDIC regarding the amounts, including interest, the FDIC was obligated to pay First Heights on two promissory notes which had been executed by the FDIC’s predecessor, the FSLIC.

     In the District Court Case, the FDIC, as successor to the FSLIC, sought a declaration of rights and other relief related to the Assistance Agreement entered into between First Heights and the FSLIC. The FDIC and the Pulte Parties disagreed about the proper interpretation of provisions in the Assistance Agreement which provide for sharing of certain tax benefits achieved in connection with First Heights’ 1988 acquisition and ownership of the five failed Texas thrifts. The District Court Case also included certain other claims relating to the foregoing, including claims resulting from the Company’s and First Heights’ amendment of a tax sharing and allocation agreement between the Company and First Heights. The Pulte Parties disputed the FDIC’s claims and filed an answer and a counterclaim, seeking, among other things, a declaration that the FDIC had breached the Assistance Agreement in numerous respects. On December 24, 1996, the Pulte Parties voluntarily dismissed without prejudice certain of their claims in the District Court Case and, on December 26, 1996, initiated the Court of Federal Claims Case.

     On March 5, 1999, the United States District Court (the Court), entered a “Final Judgment” against First Heights and PDCI resolving by summary judgment in favor of the FDIC most of the FDIC’s claims against the Pulte Parties. The Final Judgment required PDCI and First Heights to pay the FDIC monetary damages totaling approximately $221.3 million, including interest but excluding costs (such as attorneys fees) to be determined in the future by the District Court and post-judgment interest. However, the FDIC acknowledged that it had already paid itself or withheld from assistance its obligation to pay to First Heights approximately $105 million, excluding interest thereon. We believed that we were entitled to a credit or actual payment of such amount plus interest. The Final Judgment did not address this issue. We disagreed with the District Court’s rulings and appealed the decision to the Sixth Circuit Court of Appeals.

     On October 12, 2000, the Sixth Circuit Court of Appeals rendered its opinion in which it affirmed in part, reversed in part and remanded the case to the District Court for further proceedings. The Sixth Circuit affirmed most of the District Court’s adverse liability rulings, including as to the sharing of certain tax benefits achieved in connection with First Heights’ 1988 acquisition and ownership of the five failed Texas thrifts and regarding the Company’s and First Heights’ amendment of a tax sharing and allocation agreement and rescission of a warrant assumption agreement between PDCI and First Heights. The Sixth Circuit, however, vacated the District Court’s damage calculations as to a number of issues, vacated the District Court’s pre-judgment interest award, and remanded to the District Court for a proper recalculation of all such amounts. Although the Sixth Circuit opinion left certain significant issues to be resolved through further Court proceedings, based upon its reading of the Sixth Circuit opinion, we determined that an after-tax charge of $30 million to Discontinued Operations was appropriate in 2000.

     In October 2001, the FDIC and the Pulte Parties settled the District Court Case, the related appeal to the Sixth Circuit Court of Appeals and the third lawsuit. As part of this settlement (the “Settlement”), the Pulte Parties agreed to pay to the FDIC $41.5 million, and the FDIC was permitted to retain all amounts previously withheld from First Heights including the FRF notes (see Note 4 of Notes to Consolidated Financial Statements). In addition, the First Heights Assistance Agreement was terminated, except certain tax benefit sharing provisions will continue in effect, and the warrants issued by First Heights to the FDIC were extinguished. We do not believe that the claims in the Court of Federal Claims Case are in any way prejudiced by the Settlement.

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ITEM 3. LEGAL PROCEEDINGS (continued)

First Heights-related litigation (continued)

     In the Court of Federal Claims Case, the Pulte Parties assert breaches of contract on the part of the United States in connection with the enactment of Section 13224 of the Omnibus Budget Reconciliation Act of 1993 (“OBRA”). That provision repealed portions of the tax benefits that the Pulte Parties claim they were entitled to under the contract to acquire the failed Texas thrifts. The Pulte Parties also assert another claim concerning the contract that the United States (through the FDIC as receiver) improperly attempted to amend the failed thrifts’ pre-acquisition tax returns and that this attempt was made in an effort to deprive the Pulte Parties of tax benefits for which they had contracted.

     On August 17, 2001, the United States Court of Federal Claims ruled that the United States government is liable to the Company for breach of contract by enacting Section 13224 of OBRA. The Court will now proceed to determine the amount of damages to which the Pulte Parties are entitled. While it is unclear at this time what amount the Court will award, the Pulte Parties are currently seeking approximately $80 million in after tax damages for the United States government’s breach of contract.

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

     This Item is not applicable.

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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

     Set forth below is certain information with respect to our executive officers as of December 31, 2001.

     The following is a brief account of the business experience of each officer during the past five years through December 31, 2001:

     Mr. Pulte was appointed Chairman of the Board in December 2001. He has also served as Chairman of the Executive Committee of the Board of Directors since January 1999. Prior to that date, he served as Chairman of the Board since January 1991.

     Mr. Mark O’Brien was appointed Chief Executive Officer in December 2001. He was appointed President in December 1998. Prior to that date, he served as Executive Vice President and Chief Operating Officer since August 1997 and had served in various capacities with our subsidiaries since 1980, most notably as President of Pulte Homes East, an operating unit of Pulte.

     Mr. Cregg was appointed Senior Vice President in December 1997 and was named Chief Financial Officer effective January 31, 1998. Before joining the Company, Mr. Cregg was Executive Vice President and Chief Financial Officer of Zenith Electronics Corporation since 1996.

     Mr. Michael O’Brien became Senior Vice President in December 1994.

     Mr. Stoller was appointed Senior Vice President in September 1999. Prior to that date, he served as Vice President and General Counsel since October 1990.

     Mr. Frees has been Vice President and Controller since May 1995.

     Mr. Nelson has been Vice President since August 1993.

     Mr. Robinson was appointed Treasurer in July 1998 and was named Vice President and Treasurer effective January 20, 1999. Mr. Robinson has served in various capacities with the Company since 1988 and held the position of Director of Research and Analysis prior to becoming Treasurer.

     There is no family relationship between any of the officers. Each officer serves at the pleasure of the Board of Directors.

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PART II

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

     Our common stock is listed on the New York Stock Exchange (Symbol: PHM). The table below sets forth, for the quarterly periods indicated, the range of high and low closing prices and cash dividends declared per share.

     At December 31, 2001, there were 1,684 shareholders of record.

ITEM 6. SELECTED FINANCIAL DATA

     Set forth below is selected consolidated financial data for each of the past five fiscal years. The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and Notes thereto included elsewhere in this report.

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ITEM 6. SELECTED FINANCIAL DATA (continued)

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

Overview:

     A summary of our operating results by business segment for the years ended December 31, 2001, 2000 and 1999 is as follows ($000’s omitted, except per share data):

     A comparison of pre-tax income (loss), for the years ended December 31, 2001, 2000 and 1999 is as follows:

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

Homebuilding Operations:

     Our homebuilding operations are organized into two distinct business units: Domestic and International.

     Certain operating data relating to our homebuilding operations and our joint ventures are as follows ($000’s omitted):

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

Homebuilding Operations (continued):

Domestic Homebuilding:

     The Domestic Homebuilding business unit represents our core business. Operations are conducted in 43 markets, located throughout 25 states, and are organized into five groups as follows:

     The metropolitan Atlanta market accounted for 10% of the total unit settlements in 2000. No other individual market represented more than 10% of total Domestic Homebuilding net new orders, unit settlements or revenues during the three years ended December 31, 2001.

     The following table presents selected unit information for our Domestic Homebuilding operations:

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

Homebuilding Operations (continued):

Domestic Homebuilding (continued):

     Net new orders increased for the thirteenth consecutive year to an all-time record of 26,116 units in 2001, a 32% increase over 2000 order levels. This increase is primarily due to the inclusion of Del Webb’s operations, which contributed 5,968 units, including an acquired backlog of 3,823 units. Order growth in the Central and West groups offset by softer performance in the Northeast and Midwest groups contributed to a 2% increase in 2000 orders over 1999 levels.

     Unit settlements in 2001 also hit a record-setting high, to 22,915 units with the majority of the increase due to the inclusion of Del Webb’s operations, which contributed 2,797 units. Unit settlement activity in 2000 increased 1% over 1999 levels reflecting strong performance in the Southeast, Central and West groups offset by a decline in the Northeast. The average home sales price increased from $187,000 in 1999 to $206,000 in 2000 and to $225,000 in the current year. Changes in average selling price reflect a number of factors, including price increases, the mix of product closed during a period and the number of options purchased by customers. 2001 benefited from increased product prices, improved product mix and the inclusion of Del Webb product offerings, which had an average selling price of $264,000.

     Ending backlog, which represents orders for homes that have not yet closed, jumped 58% to 8,678 homes, including 3,171 Del Webb units, while the dollar value was up 62% to $2.1 billion at December 31, 2001. Unit backlog at December 31, 2000, was slightly higher than that noted at the end of 1999 while the dollar value was up 11%. Overall, strong demand supported by a favorable interest rate environment and the addition of Del Webb’s operations drove increased order activity and record levels of backlog.

     The following table presents a summary of pre-tax income for our Domestic Homebuilding operations ($000’s omitted):

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

Homebuilding Operations (continued):

Domestic Homebuilding (continued):

     Gross profit margins in 2001 increased 120 basis points over 2000 to 20.0%, including the effect of purchase accounting associated with the Del Webb merger. Excluding the effect of purchase accounting, gross margins in 2001 would have been 20.2%. Gross profit margins in 2000 increased to 18.8%, up 100 basis points over 1999. Factors that contributed to this favorable trend include strong customer demand, positive home pricing, the benefits of leverage-buy purchasing activities and effective production and inventory management.

     Land sales increased over each of the prior three years representing our land development core competency which includes development and entitlement of certain land positions for sale primarily to other homebuilders, as well as to retail and commercial establishments. Revenues and their related gains/losses may vary significantly between periods, depending on the timing of future land sales. We continue to rationalize certain existing land positions to ensure the most effective use of invested capital.

     For the year ended December 31, 2001, selling, general and administrative expenses (SG&A), as a percentage of home settlement revenues, increased 42 basis points to 9.37% after increasing 35 basis points to 8.95% in 2000. Higher startup costs for new communities, increased compensation related costs, local market advertising expenses and the inclusion of Del Webb’s operations are the primary reasons for the increase in 2001. The increase in 2000 reflects higher sales and marketing expenses, and startup costs associated with the opening of new communities.

     Other expense, net increased to $16,851,000 in 2001 as a result of increased land inventory valuation reserves for certain land positions and amortization of tradenames and trademarks acquired in the merger with Del Webb. The increase from 1999 to 2000 represents an increase in various market level non-operational expenditures.

     Our Domestic Homebuilding operations controlled approximately 116,000 and 74,900 lots, of which approximately 81,200 and 40,800 lots were owned, and approximately 34,800 and 34,100 lots were controlled through option agreements at December 31, 2001 and 2000, respectively. Domestic Homebuilding inventory at December 31, 2001, was approximately $3.7 billion of which $2.8 billion is related to land and land development. At December 31, 2000, inventory was approximately $1.8 billion of which $1.3 billion was related to land and land development. Included in other assets is approximately $223.5 million in land held for disposition as of December 31, 2001, as compared to $88.3 million in the prior year.

International Homebuilding:

     International Homebuilding operations are primarily conducted through subsidiaries of Pulte International Corporation (International) in Mexico, Puerto Rico and Argentina.

     Mexico    International’s 100%-owned subsidiary, Pulte International-Mexico, Inc., conducts its operations primarily through five joint ventures located throughout Mexico. Its net investment in these joint ventures approximated $47.7 million at December 31, 2001. The largest of these ventures, Condak-Pulte S. De R.L. De C.V. (Condak-Pulte), is based in Cuidad Juarez. Condak-Pulte is currently developing communities in Juarez, Chihuahua, Nuevo Laredo, Monterrey, Reynosa, Saltillo and Matamoros, under agreements with Delphi Automotive Systems, Gigante, S.A. de C.V. and Centro Comerciales Soriana, S.A. De C. V. As of December 31, 2001, International’s net investment in Condak-Pulte approximated $38.9 million.

     Desarrollos Residenciales Turisticos, S.A. de C.V., another of its joint ventures in Mexico, is constructing primarily social interest housing in Central Mexico. Current development plans for this venture include housing projects in the Bajio region surrounding Mexico City, targeting the cities of Celaya, Leon, Puebla, Queretaro, San Jose du Iturbide and San Juan del Rio. At December 31, 2001, International’s net investment in this joint venture approximated $7.2 million.

     Effective January 1, 2002, Pulte International reorganized its structure within Mexico to create a single company, Pulte Mexico, which ranks as one of the largest builders in the country. The new operating structure will facilitate growth, enable operating leverage and improve efficiencies through standardized systems and procedures. The new company, which combines several entities, including Condak-Pulte and DRT, will be consolidated into our financial statements.

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

Homebuilding Operations (continued):

International Homebuilding (continued):

     Puerto Rico    Operations in Puerto Rico are primarily conducted through International’s 100%-owned subsidiary, Pulte International Caribbean Corporation. Desarrolladores Urbanos (Canovanas), S.E., its Puerto Rican joint venture, is developing 121 acres located in Metropolitan San Juan. At December 31, 2001, its net investment in this joint venture approximated $3.8 million.

     Argentina    Operations in Argentina are conducted through Pulte SRL, International’s 100%-owned Argentine subsidiary which recorded its first closings during the second quarter of 2001.

     The following table presents selected financial data for Pulte’s International Homebuilding operations for the years ended December 31, 2001, 2000 and 1999 ($000’s omitted):

     Increased revenues in 2001 are due to the opening of operations in Argentina and a higher average selling price for our Puerto Rican operations. The higher average selling price in Puerto Rico, which results from concentrating more in middle-market housing than in social interest housing, was offset by a decrease in closings from 264 in 2000 to 176 in 2001. Increased revenues in 2000 from 1999 are also attributable to this shift in focus. Results in 1999 benefited from a $2,400,000 land sale gain. SG&A expense increased $6,199,000 in 2001 as a result of the start-up of the Argentine operations. The Argentine operations recorded a $463,000 foreign currency transaction loss in 2001 as a result of the Argentine government’s decision to de-link the valuation of the Argentine peso from the U. S. dollar. We also recorded a foreign currency translation loss of $14,110,000, net of income taxes of $8,833,000, as a component of other comprehensive income in 2001. It is unclear at this time how the Argentine financial and currency markets will be affected in 2002. It is also unclear how the current economic situation may affect customer homebuying attitudes and the homebuilding business in general.

     In 2001, the Mexican operations were affected by changes in government lending practices, which slowed mortgage funding, resulting in lower closings than in 2000. It is anticipated that the rate of mortgage funding in Mexico will accelerate in 2002, which should increase the pace of closings over what was experienced in 2001. Our Mexican joint venture operations recorded 7,718 closings in 2000, representing a 19% increase over comparable 1999 results. Our share of pre-tax income of $5,455,000 for 2000 for the Mexican joint ventures was slightly lower than the $6,000,000 recorded in 1999 as earnings in 1999 included currency gains of $1,702,000 versus currency losses of $78,000 for 2000. Currency losses in Mexico amounted to $378,000 in 2001. Eliminating the impact of the currency gains and losses, operating income for our Mexican operations increased by approximately 29% in 2000.

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

Financial Services Operations:

     We conduct our financial services operations principally through Pulte Mortgage Corporation (PMC), our mortgage banking subsidiary and during 1999, through Pulte Financial Companies, Inc. (PFCI). Pre-tax income of our financial services operations is as follows ($000’s omitted):

Mortgage Banking:

     We sell our servicing rights on a flow basis through fixed price servicing sales contracts. Due to the short period of time the servicing rights are held, usually three to four months, we do not amortize the servicing asset. Since the servicing rights are recorded at the value in the servicing sales contracts, there are no impairment issues related to these assets. We also originate mortgage loans using our own funds or borrowings made available through various credit arrangements, and then sell such mortgage loans to outside investors.

     Mortgage origination principal volume for the year ended December 31, 2001, increased 50% over 2000, which benefited from an increase in the capture rate of 400 basis points to 60%, an increased average loan size and the inclusion of Del Webb’s mortgage operations, which accounted for approximately 13% of the increase. Origination unit volume increased 42% due to the same factors. Mortgage origination principal volume in 2000 increased 3% over 1999, due to increases in year-to-date unit sales and higher average selling prices realized in our Domestic Homebuilding operations. However, the number of loans for 2000 was down 2% from 1999 levels due to competitive market conditions and rising mortgage interest rates during the last six months of 1999 and first three quarters of 2000. Our home buying customers continue to account for the majority of total loan production, representing 79% of total PMC unit production for 2001, compared with 83% in 2000 and 79% in 1999. Refinancings represented 10% of total loan production in 2001, compared with 2% in 2000 and 4% during 1999. At December 31, 2001, loan application backlog increased 54% to $827 million as compared to $536 million and $499 million at December 31, 2000 and 1999, respectively.

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

Financial Services Operations (continued):

Mortgage Banking (continued):

     Pre-tax income for the year ended December 31, 2001, increased 49% to $28.3 million, due to increases in volume, capture rate and secondary marketing gains. The addition of Del Webb’s mortgage operations for the last five months of 2001 contributed approximately 8% of this increase. Pricing and marketing gains increased $17.4 million, or 71%, from the same period in 2000, primarily due to a consistent drop in interest rates throughout 2001. As compared with 2000, net interest income increased $3.1 million to $5.0 million during 2001 due to increased production and a steeper yield curve as a result of the drop in interest rates during 2001. Offsetting these gains was an increase in SG&A expenses of $10 million as a result of increased headcount and other related costs due to the increase in volume during 2001.

     Pre-tax income for the year ended December 31, 2000, was unchanged from 1999, as increases in origination fees and other income were offset by decreases in pricing and marketing gains and net interest income. During 2000, origination fees increased $1.6 million, or 23%, over the prior year due primarily to an increase in brokered loans. Pricing and marketing gains decreased $3.6 million, or 13%, from the same period in 1999, primarily due to competitive market conditions for much of 2000. As compared with 1999, net interest income decreased 17% to $1.8 million during 2000 as a result of a drop in funded production and a higher cost of funds due to a new warehouse line that became effective March 31, 2000. During 2000, we recognized increased equity income from our minority interest in a Mexican mortgage banking company, and also recognized income from mortgage reinsurance operations.

     Financial Accounting Standards Board Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by Financial Accounting Standards Board Statement No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge or a cash flow hedge.

     We hedge portions of our forecasted cash flow from sales of closed mortgage loans with derivative financial instruments. For the year ended December 31, 2001, we did not recognize any net gains or losses related to the ineffective portion of the hedging instrument excluded from the assessment of hedge effectiveness. We also did not recognize any gains or losses during 2001, for cash flow hedges that were discontinued because it is probable that the original forecasted transaction will not occur. At December 31, 2001, we expect to reclassify $592,000, net of taxes, of net losses on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months from sales of closed mortgage loans.

Financing Activities:

     Our secured financing operations, which were conducted by a limited-purpose subsidiary of PFCI, ceased operations during 1999. During the first quarter of 1999, we recognized a net gain of approximately $1.7 million in connection with the sale of its remaining mortgage-backed securities portfolio.

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

Corporate:

     Corporate is a non-operating business segment whose primary purpose is to support the operations of our subsidiaries as the internal source of financing, to develop and implement strategic initiatives centered on new business development and operating efficiencies, and to provide the administrative support associated with being a publicly traded entity. As a result, the corporate segment’s operating results will vary from year to year as these strategic initiatives evolve.

     The following table presents this segment’s results of operations ($000’s omitted):

     An increase in net interest expense offset by a decrease in other corporate expenses, net, resulted in a 2% increase in the net loss for the Corporate segment. The increase in the corporate net interest spread, which is net of interest capitalized into inventory, is attributable to a higher debt balance as a result of the Del Webb merger and the issuance in February 2001 of $200 million and in August 2001 of $500 million in Senior Notes, primarily for use in repaying certain indebtedness acquired from Del Webb (see “Del Webb Merger”). The decrease in other corporate expenses, net in 2001 is primarily due to the effect of the write-down of a commercial land position in 2000. The increase in 2000 of the pre-tax loss to $56.3 million was primarily a result of an increase in net interest expense. Increases in net interest expense were attributed to higher average use of our unsecured revolving credit facility in addition to the April 2000 issuance of $175 million Senior Notes. Interest incurred for the years ended December 31, 2001, 2000, and 1999, excluding interest incurred by our financial services operations, was approximately $116.9, $62.8 and $49.5 million, respectively.

     Corporate net interest expense is net of amounts capitalized into homebuilding inventories. Interest is amortized to homebuilding interest expense over a period that approximates the average life cycle of our communities. Interest in inventory at December 31, 2001, increased primarily as a result of higher levels of indebtedness and the addition of the Del Webb properties, which have a longer life cycle. Information related to Corporate interest capitalized into inventory is as follows ($000’s omitted):

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

Liquidity and Capital Resources:

Continuing Operations:

     Our net cash used in operating activities for the year ended December 31, 2001, was $418,796,000 as higher net income was offset by increases in inventory and residential mortgage loans available-for-sale over 2000 and the resolution of the First Heights litigation. Net cash provided by investing activities in 2001 increased primarily due to the net cash acquired from Del Webb. Net cash provided by financing activities in 2001 was $297,131,000 as proceeds from the issuance of Senior Notes of $200 million and $500 million, and increased borrowings under the revolving credit arrangements, were offset by the repayment of debt acquired from Del Webb (see “Del Webb Merger”).

     Net cash provided by operating activities for the year ended December 31, 2000, amounted to $23,322,000. Increases in inventory, other assets, accounts payable and accrued liabilities during 2000 were less than during 1999, and were offset by a larger increase in residential mortgage loans available-for-sale. Net cash used in investing activities was $5,185,000 for 2000. The effects of PFCI’s sale of the underlying collateral of its mortgage-backed securities portfolio and the purchase of BRE’s interest in the net assets of our active adult joint venture are reflected in 1999. Net cash provided by financing activities for the year ended December 31, 2000, was $114,051,000, as compared to a use of cash of $87,642,000 in 1999. These increased cash flows primarily reflect our issuance of $175 million Senior Notes in April 2000 and issuance of common stock pursuant to our employee stock option plans, offset by stock repurchases.

     We finance homebuilding land acquisition, development and construction activities from internally generated funds and existing credit agreements. We had $110 million outstanding under our $560 million unsecured revolving credit facilities at December 31, 2001. PMC provides mortgage financing for many of our home sales and uses its own funds and borrowings made available through various committed and uncommitted credit arrangements which, at December 31, 2001, amounted to $450 million, an amount deemed adequate to cover foreseeable needs. There were approximately $410 million of borrowings outstanding under the PMC arrangements at December 31, 2001. Mortgage loans originated by PMC are subsequently sold. We anticipate that there will be adequate mortgage financing available for purchasers of our homes.

     In February 2001, we sold $200 million of 8 1/8% Senior Notes, due 2011 from an active $500 million shelf registration. The net proceeds from the sale of the Senior Notes were used to repay short-term borrowings under our revolving bank credit arrangements and for general corporate purposes.

     In August 2001, we sold in a private placement, $500 million of 7 7/8% Senior Notes due in 2011 and subsequently filed an S-4 Registration Statement with the Securities and Exchange Commission, in December 2001. Net proceeds received from the sale were used to repay certain indebtedness acquired in the Del Webb transaction, to pay certain expenses associated with that transaction and for general corporate purposes.

     Our income tax liabilities are affected by a number of factors. In 2001, our effective tax rate was 38.50% compared to 38.50% in 2000 and 37.75% in 1999. Our lower effective income tax rate in 1999 resulted from a lower effective state tax rate and the favorable resolution of various state income tax matters. We anticipate that our effective tax rate for 2002 will be approximately 39%.

     At December 31, 2001, we had cash and equivalents of $72.1 million and total long-term indebtedness of $1.7 billion. Our total long-term indebtedness includes $1.4 billion of unsecured Senior Notes, $368.6 million of unsecured Senior Subordinated Notes, other limited recourse debt of $15 million and other non-recourse short-term notes payable of $60.7 million.

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

Liquidity and Capital Resources (continued):

Continuing Operations (continued):

     The following table summarizes our payments under contractual obligations as of December 31, 2001:

     The following table summarizes our other commercial commitments as of December 31, 2001:

     Standby letters of credit and performance bonds are used to guarantee our performance under various contracts, principally in connection with the development of our projects. The expiration dates of the letter of credit contracts coincide with the expected completion date of the related project. If the obligations related to the project are ongoing, annual extensions are granted on a year-to-year basis. Performance bonds do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $775 million at December 31, 2001, are typically outstanding over a period that approximates 3-5 years.

     In the normal course of business, we acquire rights under options or option-type agreements to purchase land to be used in homebuilding operations at future dates. These rights, which may be cancelled at our discretion, may extend over several years and are typically secured by small deposits. Further, these rights are frequently extended or renegotiated to better match the needs of our homebuilding operations. The total purchase price applicable to approved land under option for use by our homebuilding operations at future dates approximated $1.1 billion at December 31, 2001, which represented approximately 35,000 lots. In addition, there were approximately 25,000 lots valued at $644 million under option at December 31, 2001, pending approval, that are under review and evaluation for future use by our homebuilding operations.

     Sources of our working capital at December 31, 2001, include our cash and equivalents, our $560 million committed unsecured revolving credit facilities and PMC’s $450 million revolving credit facilities. Our debt-to-total capitalization, excluding our non-guarantor asset secured borrowings, was 44.8% as of December 31, 2001. We expect to manage our debt-to-total capitalization to the 40% level by the end of 2002. It is our intent to exercise, over time, the early call provisions of the Senior Subordinated Notes issued by Del Webb, as allowed under these notes. We routinely monitor current operational requirements and financial market conditions to evaluate the use of available financial sources, including securities offerings.

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

Liquidity and Capital Resources (continued):

Del Webb Merger:

     On July 31, 2001, we merged with Del Webb Corporation as discussed in Note 3 to the Notes to Consolidated Financial Statements. At closing, we paid off and cancelled Del Webb’s revolving credit facility, which had a balance outstanding of approximately $300 million at closing. Under the terms of Del Webb’s $100 million, 9 3/4%, due 2003, Senior Subordinated Notes, we exercised our option to redeem the entire bond issuance at par during the third quarter of 2001. Under the terms of Del Webb’s other Senior Subordinated Notes, we were required, as a result of the change in control, to offer to purchase four series of its Senior Subordinated Notes. As of December 31, 2001, we had repurchased, through tender offers and open-market purchases, $127 million of these Notes. Under the terms of Del Webb’s $150 million 9 3/4%, due 2008, Senior Subordinated Notes, we exercised our optional right to redeem the remaining outstanding balance of $122 million at the price stipulated in the indenture by placing with the trustee as of December 31, 2001, sufficient proceeds to satisfy a January 15, 2002, final payoff.

Inflation:

     We, and the homebuilding industry in general, may be adversely affected during periods of high inflation because of higher land and construction costs. Inflation also increases our financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. We attempt to pass our customers any increases in our costs through increased sales prices. To date, inflation has not had a material adverse effect on our results of operations. However, there is no assurance that inflation will not have a material adverse impact on our future results of operations.

Critical Accounting Policies:

     The accompanying consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or the method of its application, is generally accepted, we select the principle or method that is appropriate in our specific circumstances (see Note 1 of Notes to Consolidated Financial Statements). Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these financial statements, we have made our best estimates and judgments of the amounts and disclosures included in the financial statements, giving due regard to materiality.

Inventory valuation:

     Our finished inventories are stated at the lower of accumulated cost or net realizable value. Included in inventories are all direct development costs. We capitalize interest cost into homebuilding inventories and charge the interest to homebuilding interest expense over a period that approximates the average life cycle of our communities. This period increased in 2001 due to the addition of the Del Webb properties, which have a longer life cycle. Inventories under development or held for development are stated at accumulated cost, unless they are determined to be impaired, in which case these inventories are measured at fair value. If actual market conditions are less favorable than those projected by management, additional inventory adjustments may be required.

     Sold units are expensed on a specific identification basis or on a relative sales value basis as cost of sales. Under the specific identification basis, units are assigned an average cost by project based on actual costs-to-date plus the estimated cost of completion. Units costed using the relative sales value basis are assigned cost based on the sales value of the unit in relation to the total estimated sales value of the project.

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

Critical Accounting Policies (continued):

Goodwill and Intangible Assets:

     Goodwill and intangible assets are reviewed by management for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Goodwill and other intangible assets totaled $467 million at the end of 2001, which represented 8% of total assets. The majority of these assets resulted from the acquisition of Del Webb in 2001. Del Webb has a long history of operating success and profitability, has well recognized brand names and holds a significant position in the active adult market which should continue in the future. The integration of Del Webb should enable the combined businesses to accelerate the pace of land absorptions, enhance the visibility of the “Del Webb” and “Sun City” brand names and obtain the synergies of enhanced purchasing leverage, complementary product offerings and combined operations in the future. Changes in strategy and/or market conditions could impact these judgments and require adjustments to recorded asset balances.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are subject to interest rate risk on our long-term debt to the extent long-term rates decline. The following tables set forth, as of December 31, 2001 and 2000, our long-term debt obligations, principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair market value ($000’s omitted).