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, 2002
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)

100 Bloomfield Hills Parkway, Suite 300
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. YESü 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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ü

Aggregate market value of voting stock held by nonaffiliates of the registrant as of June 30, 2002: $2,911,780,282

Number of shares of common stock outstanding as of February 28, 2003: 61,159,084

Documents Incorporated by Reference

Applicable portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form.

Website Access to Company Reports, Codes and Charters

Pulte’s internet website address is www.pulte.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission. Our code of ethics for principal officers and the charters of the following committees of our Board of Directors: Audit, Compensation, and Nominating and Governance, are also posted to our website.

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) 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 (Del Webb) and other subsidiaries engaged in the homebuilding business. PDCI’s operating subsidiaries include Pulte Home Corporation (PHC), Pulte International Corporation (International) and other subsidiaries 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 (Pulte Mortgage), which is a subsidiary of PHC. Effective January 1, 2003, Pulte Mortgage changed its legal form of entity to a limited liability company under the name Pulte Mortgage, LLC.

     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 primarily of mortgage banking and title operations conducted through Pulte Mortgage and other 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 administrative support associated with being a publicly traded entity listed on the New York Stock Exchange.

     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 single family detached units, townhouses, condominiums and duplexes, with varying prices, models, options and lot sizes. Since 1990, we have more than quadrupled our annual unit closings, unit orders and unit backlog levels. Including 2002 sales of nearly 29,000 homes, we have closed more than 300,000 homes since our inception.

     On July 31, 2001, we merged with Del Webb in a tax-free stock-for-stock transaction. Del Webb was primarily a homebuilder with operations in seven 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 expanded and supported our leadership position. In particular, we believe the merger strengthened our position among active adult homebuyers, added important strategic land positions, provided operational savings from economies of scale, bolstered our purchasing leverage, and enhanced our overall competitive position. In accordance with our operational strategy, we will continue to evaluate available strategic acquisition opportunities that are consistent with our long-range goals.

     As of December 31, 2002, our Domestic Homebuilding operations offered homes for sale in 460 communities at sales prices ranging from $85,000 to $1,391,000. Sales prices of homes currently offered for sale in 73% of our communities fall within the range of $150,000 to $450,000 with a 2002 average unit selling price of $242,000. Sales of single-family detached homes, as a percentage of total unit sales, were 86% in 2002 and 82% in 2001 and 2000. Our Domestic Homebuilding operations are geographically diverse to better insulate us from demand changes in individual markets. As of December 31, 2002, our Domestic Homebuilding business operated in 44 markets spanning 25 states.

     As of December 31, 2002, our Domestic Homebuilding operations had 10,605 units in backlog valued at approximately $2.9 billion.

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Homebuilding Operations (continued)

International Homebuilding

     Our International Homebuilding operations are primarily conducted through subsidiaries of International in Mexico, Puerto Rico and Argentina. International Homebuilding product offerings focus on the demand of first-time buyers and middle-to-upper income consumer groups. We also have agreements in place with multi-national corporations to provide employee housing in Mexico.

     Mexico   Effective January 1, 2002, International reorganized its structure within Mexico to create a single company, Pulte Mexico S. de R.L. de C.V. (Pulte Mexico), which ranks as one of the largest builders in the country. Prior to the reorganization, these operations were conducted primarily through five joint ventures throughout Mexico. Under the new ownership structure, which combines the largest of these entities, we own 63.8% of Pulte Mexico and have consolidated Pulte Mexico into our financial statements. The new operating structure facilitates growth, enables operating leverage and improves efficiencies through standardized systems and procedures.

     Puerto Rico   Our operations in Puerto Rico are conducted through International’s 100%-owned subsidiary, Pulte International Caribbean Corporation and three joint ventures.

     Argentina   Our operations in Argentina, which are based in the greater Buenos Aires area, are conducted through Pulte SRL, International’s 100%-owned Argentine subsidiary.

Land Acquisition and Development

     We select locations for development of homebuilding communities after completing extensive market research, enabling us to match the location and product offering with our targeted consumer group. We consider factors such as proximity to developed areas, population and job growth patterns and, if applicable, estimated development costs. We historically have 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 to 36 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 community build out requires a longer time period due to typically larger project sizes. 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 through sales to appropriate end users. 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 independent contractors and local government authorities which construct sewer and water systems in some areas. At December 31, 2002, we controlled approximately 176,800 lots, of which 84,300 were owned and 92,500 were under option agreements.

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.

     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. In certain markets our strategy 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 variety of available flooring and carpet.

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Homebuilding Operations (continued)

Sales and Marketing (continued)

     Typically, our domestic sales teams, together with outside sales brokers, are responsible for guiding the customer through the sales process. We are 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 2002, our Charlotte, Houston, Las Vegas, Minneapolis/St. Paul, Phoenix, San Francisco Bay Area and Southern California markets were recognized for ranking the highest in their markets in a national customer satisfaction study. The survey of sixteen 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 twelve of the sixteen 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 often 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 have been referred by a Pulte homeowner by ensuring a positive home buying and home owning experience. We introduce our homes to prospective buyers through a variety of media advertising, illustrated brochures, Internet listings and link placements, and other advertising displays. In addition, our newly redesigned website, www.pulte.com, provides tools to help users find a home that meets their needs, investigate financing alternatives, communicate moving plans, maintain a home, learn more about us and communicate directly with us. Approximately three million potential customers visited www.pulte.com during 2002.

     As a result of the Del Webb merger, 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 in 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, we have several agreements with large companies in Mexico, including Delphi Automotive Systems and Centrol Comerciales Soriana, S. A. de C.V., to construct affordable housing for their employees. In Puerto Rico, the strongest customer demand is for single-family detached homes, but affordable alternative product offerings also include two story attached units (townhomes). The market in Argentina offers low levels of competition and a large residential market in Buenos Aires.

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 independent contractors under contracts that, 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.

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Homebuilding Operations (continued)

Construction (continued)

     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 contracting and purchasing of building supplies and materials generally is 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 production component 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 housing product in Argentina 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 independent contractors, 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, location and quality of our homes. The housing industry 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 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.

Financial Services Operations

     We conduct our financial services business, which includes mortgage and title operations, through Pulte Mortgage and other subsidiaries.

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.

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Financial Services Operations (continued)

Mortgage Banking (continued)

     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 our 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, 2002, 2001 and 2000, we originated mortgage loans for approximately 68%, 67% and 56%, respectively, of the homes we sold. Such originations represented 85%, 81% and 83%, 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 homebuyers 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 11 of Notes to Consolidated Financial Statements, we settled the litigation with the FDIC in October 2001, and as part of that settlement all obligations under the LAN and FRF notes were extinguished.

     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.

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Corporate

     Corporate is a non-operating segment that is comprised primarily of Pulte 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, 2002, we employed approximately 9,200 persons. Our employees are not represented by any union. Contracted work, however, may be performed by union contractors. 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 business unit or subsidiary. Our corporate management personnel are paid incentive compensation based on overall performance of the Company (see Note 8 of Notes to Consolidated Financial Statements). Each subsidiary is given autonomy regarding employment of personnel, although our senior corporate management acts in an advisory capacity in the employment of subsidiary officers. We consider our employee and contractor relations to be satisfactory.

ITEM 2. PROPERTIES

     Our homebuilding and corporate headquarters are located at 100 Bloomfield Hills Parkway, Suite 300, Bloomfield Hills, Michigan 48304, where we lease 63,740 square feet of office space. We also lease 81,167 square feet of office space at 6001 North 24th Street, Phoenix, Arizona 85016 for certain corporate and business services. Pulte Mortgage’s offices are located at 7475 South Joliet Street, Englewood, Colorado 80112 and 99 Inverness Drive East, Englewood, Colorado 80112. We lease approximately 61,436 square feet and 18,000 square feet, respectively, of office space at these locations. 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.

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 Pulte, 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.

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ITEM 3. LEGAL PROCEEDINGS (continued)

First Heights-related litigation (continued)

     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.

     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 First Heights Assistance Agreement was terminated, except that 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.

     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 is proceeding 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.

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

     This Item is not applicable.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

     Set forth below is certain information with respect to our executive officers as of December 31, 2002.

     The following is a brief account of the business experience of each officer during the past five years through December 31, 2002:

     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. 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. Dugas was appointed Chief Operating Officer in May 2002 and Executive Vice President in December 2002. Since 1994, he has served in a variety of management positions at Pulte. Most recently, he was Coastal Region President with responsibility for the Company’s Georgia, North Carolina, South Carolina and Tennessee operations.

     Mr. Cregg was appointed Senior Vice President in December 1997 and was named Chief Financial Officer effective January 31, 1998.

     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, 2002, there were 1,597 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.

(a)  Del Webb operations were merged effective July 31, 2001.

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ITEM 6. SELECTED FINANCIAL DATA (continued)

(a)  Del Webb operations were merged effective July 31, 2001.

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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, 2002, 2001, and 2000 is as follows ($000’s omitted, except per share data):

     A comparison of pre-tax income (loss), for the years ended December 31, 2002, 2001, and 2000 is as follows:

     During the third quarter of 2002, we recorded an after-tax gain of approximately $10 million in discontinued operations. The gain related to the recognition of income tax benefits resulting from the favorable resolution of certain tax matters associated with the thrift operations we discontinued in 1994.

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

Homebuilding:

     Our Homebuilding segment consists of the following operations:

     Certain operating data relating to our homebuilding operations and Pulte-affiliated 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 (continued):

Domestic Homebuilding:

     The Domestic Homebuilding operations represent our core business. We conduct our operations in 44 markets, located throughout 25 states, and are presented geographically as follows:

     The greater Phoenix market accounted for 10% of Domestic Homebuilding settlement revenues, 11% of settlement units and 11% of net new orders in 2002. The metropolitan Atlanta market accounted for 10% of unit settlements in 2000. No other individual market represented more than 10% of total Domestic Homebuilding settlement revenues, settlement units or net new orders during the three years ended December 31, 2002.

     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 (continued):

Domestic Homebuilding (continued):

     Unit settlements in 2002 reached a record high, increasing 26% to 28,903 units. A full year of the Del Webb operations combined with strong sales in the Midwest drove the increase. 2001 unit settlements increased 16% to 22,915 units, principally from the addition of the Del Webb operations. The average selling price for our homes increased from $206,000 in 2000 to $225,000 in 2001 and to $242,000 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. Both 2002 and 2001 benefited from increased product prices, improved product mix and the inclusion of Del Webb product offerings, which had an average selling price higher than our traditional offerings.

     Ending backlog, which represents orders for homes that have not yet closed, climbed 22% to 10,605 homes. The dollar value of our ending backlog was up 35% to $2.9 billion at December 31, 2002. Unit and dollar backlog at December 31, 2001, increased 58% and 62%, respectively, to 8,678 homes valued at $2.1 billion. Overall, strong demand supported by a favorable interest rate environment and the addition of Del Webb 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):

     Gross profit margins from home sales in 2002 increased 30 basis points over 2001 to 20.1%, including the effect of purchase accounting associated with the Del Webb merger. Excluding the effect of purchase accounting adjustments in both years, gross margins would have been 20.1% in 2002 and 20.0% in 2001. Gross profit margins in 2001 increased 110 basis points to 19.8% including purchase accounting adjustments and 130 basis points excluding purchase accounting adjustments over 2000 gross margins. 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 in each of the prior three years, demonstrating our competency in purchasing, developing and entitling 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 such sales. We continue to rationalize certain existing land positions to ensure the most effective use of invested capital.

     For the year ended December 31, 2002, selling, general and administrative expenses, as a percentage of home settlement revenues, increased 13 basis points to 9.50% after increasing 42 basis points to 9.37% in 2001. Higher startup costs for new communities and increased compensation related costs partially offset by a reduction in costs associated with the Del Webb operations contributed to the change in 2002. The increase in 2001 reflects higher startup costs for new communities, increased compensation related costs, local market advertising expenses and the inclusion of Del Webb operations.

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

Homebuilding (continued):

Domestic Homebuilding (continued):

     Interest expense increased $12.7 million to $48.7 million in 2002 and $8.0 million to $36.0 million in 2001. The increases are a result of an increase in debt levels necessary to support the growth of the business.

     Other expense, net increased to $23.0 million in 2002 primarily as a result of income from certain non-operating investments recorded in 2001. The increase from 2000 to 2001 represents an increase in land inventory valuation reserves for certain land positions and amortization of tradenames and trademarks acquired in the merger with Del Webb.

     At December 31, 2002 and 2001, our Domestic Homebuilding operations controlled approximately 176,800 and 141,100 lots, respectively. Approximately 84,300 and 81,200 lots were owned, and approximately 43,800 and 34,800 lots under option agreements approved for purchase at December 31, 2002 and 2001, respectively. In addition, there were approximately 48,700 lots under option agreements at December 31, 2002, pending approval, that are under review and evaluation for future use by our Domestic Homebuilding operations. This compared to 25,100 lots at December 31, 2001.

     Domestic Homebuilding inventory at December 31, 2002, was approximately $4.1 billion, of which $3.2 billion related to land and land development. At December 31, 2001, inventory was approximately $3.8 billion, of which $2.8 billion related to land and land development. Included in other assets is approximately $218.8 million in land held for disposition as of December 31, 2002, as compared to $223.5 million in the prior year.

International Homebuilding:

     Our International Homebuilding operations are primarily conducted through subsidiaries of International in Mexico, Puerto Rico and Argentina.

     Mexico Effective January 1, 2002, International reorganized its structure within Mexico to create a single company, Pulte Mexico S. de R.L. de C.V. (Pulte Mexico), which ranks as one of the largest builders in the country. Prior to the reorganization, these operations were conducted primarily through five joint ventures throughout Mexico. Under the new ownership structure, which combines the largest of these entities, we own 63.8% of Pulte Mexico and have consolidated Pulte Mexico into our financial statements. The new operating structure facilitates growth, enables operating leverage and improves efficiencies through standardized systems and procedures.

     Puerto Rico Operations in Puerto Rico are conducted through International’s 100%-owned subsidiary, Pulte International Caribbean Corporation and three joint ventures.

     Argentina Operations in Argentina, which are based in the greater Buenos Aires area, are conducted through Pulte SRL, International’s 100%-owned Argentine subsidiary.

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

Homebuilding (continued):

International Homebuilding (continued):

     The following table presents selected financial data for our International Homebuilding operations for the years ended December 31, 2002, 2001 and 2000 ($000’s omitted):

     Unit settlements for Pulte and Pulte-affiliated entities in 2002 were relatively flat as compared to 2001 and down in 2001 when compared to 2000, as declines in Puerto Rico and Mexico were only partially offset by settlements in Argentina, which approached 200 in 2002. Settlements in Mexico were 7,166 in 2002 compared to 7,158 in 2001 and 7,718 in 2000. Activity in Mexico continues to be slowed by the impact of changes made in 2001 and 2002 to local lending practices and the lack of alternative funding sources.

     Increased revenues in 2002 are due to consolidation of the operations in Mexico for eleven months of 2002, a full year of operations in Argentina, which had only begun recognizing its first closings in June of 2001, partially offset by a decline in Puerto Rico. Revenues from our operations in Mexico were $158.1 million in 2002. Our operations in Argentina contributed $25.9 million compared to $9.5 million in the prior year. Revenues in Puerto Rico were down to $12.1 million from $25.5 million.

     The consolidation of Mexico also had a positive effect on gross margins, which rose to 19.9% in 2002 from 12.0% in 2001 and 9.4% in 2000. Selling, general and administrative expenses as a percent of revenues declined as a result of a reduction in start-up costs associated with our operations in Argentina. Equity in income of joint ventures in 2002 represents one month of the joint venture operations in Mexico and our joint venture located in Canovanas, Puerto Rico, which had its first closings during the third quarter of 2001.

     Our operations in Argentina recorded transaction losses of $208,000 and $463,000 for the years ended December 31, 2002 and 2001, respectively, as the value of the Argentine peso continued to fluctuate following the Argentine government’s decision to de-link its valuation from the U.S. Dollar. We also recorded a foreign currency translation loss of $12.8 million, as a component of cumulative other comprehensive income during 2002. It remains unclear at this time how the financial and currency markets in Argentina will be impacted in 2003 or how the current economic situation may affect customer home buying attitudes and the homebuilding business in general. At December 31, 2002, our investment, net of cumulative foreign currency translation adjustments, in Argentina approximated $13.1 million. Our operations in Mexico have also been affected by a strengthening dollar to the Mexican peso where transaction losses of $483,000, $378,000 and $78,000 were recorded in 2002, 2001 and 2000, respectively. At December 31, 2002, our investment, net of cumulative foreign currency translation adjustments, in Mexico approximated $61.1 million.

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

Financial Services:

     We conduct our financial services business, which includes mortgage and title operations, through Pulte Mortgage and other subsidiaries.

     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.

     The following table presents mortgage origination data for our Financial Services operations:

     Mortgage origination unit and principal volume for the year ended December 31, 2002, increased 21% and 28%, respectively, over 2001. This growth can be attributed to an increase in the capture rate of 390 basis points to 77.6% and the inclusion of Del Webb mortgage operations for a full year. Our capture rate represents loan originations from our homebuilding business as a percent of total loan opportunities, excluding cash settlements, from our homebuilding business. Mortgage origination principal volume in 2001 increased 50% over 2000, due to an increase in the capture rate of 950 basis points to 73.7%, an increased average loan size and the inclusion of Del Webb mortgage operations, which accounted for approximately 13% of the increase. Origination unit volume increased 42% due to the same factors. Our home buying customers continue to account for the majority of total loan production, representing 85% of total Pulte Mortgage unit production for 2002, compared with 81% in 2001 and 83% in 2000. Refinancings represented 8% of total loan production in 2002, compared with 10% in 2001 and 2% during 2000. At December 31, 2002, loan application backlog increased 66% to $1.4 billion as compared to $827 million and $536 million at December 31, 2001 and 2000, respectively.

     Pre-tax income for the year ended December 31, 2002, increased 81% to $66.7 million, as a result of increased volume, a favorable interest rate environment, effective leverage of overhead costs and the inclusion of Del Webb mortgage operations for a full year. Gains from the sale of mortgages increased $20.4 million, or 49%, from the same period in 2001. As compared with 2001, net interest income increased $6.3 million to $11.3 million during 2002 due to increased production and a steeper yield curve as a result of the drop in interest rates during 2002. Title income grew 42% contributing $12.2 million to pre-tax income for the year.

     Pre-tax income for the year ended December 31, 2001, increased 49% to $36.9 million, due to increases in volume, capture rate and secondary marketing gains. The addition of Del Webb 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. Income from our title operations increased 48% to $8.6 million in 2001, further fueling the growth in our financial services business.

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

Financial Services (continued):

     We hedge portions of our forecasted cash flow from sales of closed mortgage loans with derivative financial instruments. For the year ended December 31, 2002, 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 2002, for cash flow hedges that were discontinued because it is probable that the original forecasted transaction will not occur. At December 31, 2002, we expect to reclassify $1.3 million, 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.

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):

     Interest expense, net of interest capitalized into inventory, increased 12% to $38.2 million in 2002 and 18% to $34.3 million in 2001. This trend is a result of an increase in debt levels necessary to support our growth. Interest incurred for the years ended December 31, 2002, 2001, and 2000, excluding interest incurred by our financial services operations, was approximately $162.5, $116.9 and $62.8 million, respectively.

     Other corporate expense, net over the two-year period ended December 31, 2002, was relatively flat, as higher compensation related costs were offset by income from the sale and adjustment to fair value of various non-operating parcels of commercial land held for sale. The decrease in other corporate expenses, net in 2001 when compared to 2000 is primarily due to the write-down of commercial land held for sale in 2000.

     Interest capitalized into inventory is charged to homebuilding interest expense over a period that approximates the average life cycle of our communities. Interest in inventory at December 31, 2002, 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:

     Our net cash provided by operating activities for the year ended December 31, 2002, amounted to $162.2 million. The increase in net income was aided by the realization of certain tax benefits and an increase in accrued liabilities, while inventories continued to build to support the growth of the business. Net cash provided by investing activities was $4.6 million for 2002. Net cash provided by financing activities for the year ended December 31, 2002, was $374.2 million, reflecting proceeds from the $300 million senior notes issued in June 2002, proceeds from borrowings under our various credit facilities and proceeds from employee stock option exercises, offset by the repayment of debt, dividends paid and stock repurchases.

     Our net cash used in operating activities for the year ended December 31, 2001, was $418.8 million 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 $297.1 million 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 higher-rate debt acquired from Del Webb.

     We finance our homebuilding land acquisitions, development and construction activities from internally generated funds and existing credit agreements. We had no borrowings under our $570 million unsecured revolving credit facility at December 31, 2002.

     Pulte Mortgage provides mortgage financing for many of our home sales and uses its own funds and borrowings made available pursuant to various committed and uncommitted credit arrangements totaling $600 million, an amount deemed adequate to cover foreseeable needs. There were approximately $560 million of borrowings outstanding at December 31, 2002 under the $600 million Pulte Mortgage arrangements. Mortgage loans originated by Pulte Mortgage are subsequently sold to outside investors. We anticipate that there will be adequate mortgage financing available for purchasers of our homes.

     In June 2002, we sold $300 million of 7.875% senior notes, due 2032, from our $1 billion shelf registration. Cash provided by operations, combined with the net proceeds from this sale of senior notes, were used to call, redeem and repurchase approximately $103 million of Del Webb senior subordinated notes and to repay short-term borrowings under our revolving bank credit arrangements.

     In October 2002, our operating entity in Argentina entered into a $3 million revolving credit facility in order to provide an additional financial resource to support the operations. Pulte Homes, Inc has guaranteed the credit facility. There were no borrowings outstanding under this facility at December 31, 2002.

     In October 2002, the Company’s Board of Directors approved a stock repurchase plan of up to $100 million. Shares will be purchased from time-to-time on the open market, depending on market conditions. During the year ended December 31, 2002, we repurchased 100,000 shares for approximately $4.3 million.

     Our income tax liabilities are affected by a number of factors. In 2002, our effective tax rate was 39.0% compared to 38.5% in 2001 and 2000. We anticipate that our effective tax rate for 2003 will be approximately 39.0%.

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

Liquidity and Capital Resources (continued):

     At December 31, 2002, we had cash and equivalents of $613.2 million, $1.7 billion of unsecured senior notes and $260.7 million of unsecured senior subordinated notes. Other financing includes limited recourse collateralized financing totaling $145.5 million.

     The following table summarizes our payments under contractual obligations as of December 31, 2002:

     The following table summarizes our other commercial commitments as of December 31, 2002:

     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 $954 million at December 31, 2002, 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 $1.5 billion at December 31, 2002, which represented approximately 43,800 lots. In addition, there were approximately 48,700 lots valued at $982 million under option at December 31, 2002 pending approval, that are under review and evaluation for future use by our homebuilding operations.

     Sources of our working capital at December 31, 2002, include cash and equivalents, our $570 million committed unsecured revolving credit facility and Pulte Mortgage’s $600 million revolving credit. Our debt-to-total capitalization, excluding our collateralized debt, was approximately 41% as of December 31, 2002, and approximately 32% net of cash and equivalents. We expect to maintain our net debt-to-total capitalization at or below the 40% level.

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

Liquidity and Capital Resources (continued):

     In February 2003, we sold $300 million of 6.25% senior notes, due 2013, from the Company’s current shelf registration. Proceeds from the sale will be used to retire certain debt coming due or called in 2003. Subsequent to this issuance, we had $400 million remaining available under the current mixed securities shelf registration.

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 to 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 and Estimates:

     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. The development and selection of the following critical accounting policies and estimates have been discussed with the Audit Committee of the Board of Directors.

Revenue recognition:

     Homebuilding — Homebuilding revenues are recorded when the sales of homes are completed and ownership has transferred to the customer. Unfunded settlements are deposits in transit on homes for which the sale was completed. We do not engage in arrangements whereby we have ongoing relationships with our homebuyers that require us to repurchase our homes or provide homebuyers with the right of return.

     Financial Services — Mortgage servicing fees represent fees earned for servicing loans for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance and are credited to income when the related mortgage payments are received. Loan origination fees, commitment fees and certain direct loan origination costs are deferred as an adjustment to the cost of the related mortgage loan until such loan is sold. Gains and losses from sales of mortgage loans are recognized when the loans are sold.

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. Under the specific identification basis, cost of sales includes the construction cost of the home, an average lot cost by project based on land acquisition and development costs, and closing costs and commissions. Construction cost of the home includes amounts paid through the closing date of the home, plus an accrual for costs incurred but not yet paid, based on an analysis of budgeted construction cost. This accrual is reviewed for accuracy based on actual payments made after closing compared to the amount accrued, and adjustments are made if needed. Total project land acquisition and development costs are based on an analysis of budgeted costs compared to actual costs incurred to date and estimates to complete. Adjustments to estimated total project land acquisition and development costs for the project affect the amount of future lots costed.

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

Critical Accounting Policies and Estimates (continued):

Residential mortgage loans available-for-sale:

     Residential mortgage loans available-for-sale are stated at the lower of aggregate cost or market value. Gains and losses from sales of mortgage loans are recognized when the loans are sold. We hedge our residential mortgage loans available-for-sale. Gains and losses from closed commitments and futures contracts are matched against the related gains and losses on the sale of mortgage loans.

Goodwill and intangible assets:

     We have identified significant intangible assets and generated significant goodwill, most recently as a result of the Del Webb merger in 2001. Intangible assets, primarily trademarks and tradenames, were valued by independent appraisers and advisors using proven valuation procedures and are amortized over their estimated useful life. Goodwill is subject to annual impairment testing. The carrying value and ultimate realization of these assets is dependent upon estimates of future earnings and benefits that we expect to generate from their use. If our expectations of future results and cash flows decrease significantly, intangible assets and goodwill may be impaired and the resulting charge to operations may be material. If we determine that the carrying value of intangible assets, long-lived assets and goodwill may not be recoverable based upon the existence of one or more indicators of impairment, we measure impairment based on one of two methods. For assets related to ongoing operations we plan to continue, we use a projected undiscounted cash flow method to determine if impairment exists and then measure impairment using discounted cash flows. For assets to be disposed of, we assess the fair value of the asset based on current market conditions for similar assets. For goodwill, we assess fair value by measuring discounted cash flows of our reporting units and measure impairment as the difference between the resulting implied fair value of goodwill and the recorded book value.

     The estimates of useful lives and expected cash flows require us to make significant judgments regarding future periods that are subject to some factors outside of our control. Changes in these estimates could result in significant revisions to the carrying value of these assets and material charges to the results of operations.

Investments in unconsolidated entities:

     We participate in a number of joint ventures with independent third parties in which we have less than a controlling interest. These joint ventures purchase, develop and/or sell land and homes in the United States, Mexico and Puerto Rico. We recognize our share of profits from the sale of lots and homes to other buyers. We do not recognize profits from lots we purchase, but instead defer those profits until the related homes are sold. At December 31, 2002, we had approximately $49.0 million invested in these joint ventures. Under certain arrangements, future capital contributions may be necessary to maintain our ownership in the joint venture. We have not guaranteed any of the outstanding debt of the joint ventures at December 31, 2002, which approximated $103.2 million.

     We also own 22.2% of the capital stock of a mortgage banking company in Mexico. At December 31, 2002, our investment in this entity was approximately $15.8 million. We do not have any purchase or investment commitments to this entity. Furthermore, we have not guaranteed any of the indebtedness of this entity, which approximated $1.2 billion at December 31, 2002.

     These investments are accounted for on the equity method.

Allowance for warranties:

     Home purchasers are provided with warranties against certain building defects. The specific terms and conditions of those warranties vary geographically. Most warranties cover different aspects of the home’s construction and operating systems for a period of up to ten years. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. We periodically assesses the adequacy of recorded warranty liabilities and adjust the amounts as necessary. Although we have not made significant adjustments to the accrual in the past, actual warranty cost in the future could differ from our current estimate.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are subject to interest rate risk on our rate-sensitive financing to the extent long-term rates decline. The following tables set forth, as of December 31, 2002 and 2001, our rate-sensitive financing obligations, principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair market value ($000’s omitted).