============================================================================= SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-9804 PULTE CORPORATION (Exact name of registrant as specified in its charter) MICHIGAN 38-2766606 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 33 Bloomfield Hills Pkwy., Suite 200, Bloomfield Hills, Michigan 48304 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (248) 647-2750 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. YES _X_ NO___ Number of shares of common stock outstanding as of October 31, 1999: 43,249,780 Total pages: 41 Listing of exhibits: 40 ============================================================================= PULTE CORPORATION INDEX Page No. -------- PART I FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited) Condensed Consolidated Balance Sheets, September 30, 1999 and December 31, 1998................................................. 3 Condensed Consolidated Statements of Income, Three and Nine Months Ended September 30, 1999 and 1998........................... 4 Condensed Consolidated Statement of Shareholders' Equity, Nine Months Ended September 30, 1999.................................... 5 Condensed Consolidated Statements of Cash Flows, Nine Months Ended September 30, 1999 and 1998................................. 6 Notes to Condensed Consolidated Financial Statements................ 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 23 Item 3 Quantitative and Qualitative Disclosures About Market Risk............................................. 38 PART II OTHER INFORMATION Item 1 Legal Proceedings....................................... 40 Item 5 Other Information....................................... 40 Item 6 Exhibits................................................ 40 SIGNATURES......................................................... 41 2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> PULTE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ($000's omitted) ASSETS September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) (Note) <S> <C> <C> Cash and equivalents .................................................. $ 30,587 $ 125,198 Unfunded settlements .................................................. 59,088 49,140 House and land inventories ............................................ 1,879,075 1,455,208 Mortgage-backed and related securities ................................ -- 29,290 Residential mortgage loans available-for-sale ......................... 149,854 234,974 Other assets .......................................................... 409,299 367,351 Discontinued operations ............................................... 91,197 88,678 ---------- ---------- Total assets ...................................................... $2,619,100 $2,349,839 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities, including book overdrafts of $152,138 and $112,688 in 1999 and 1998, respectively ........ $ 701,998 $ 575,373 Unsecured short-term borrowings ................................... 150,000 -- Collateralized short-term debt, recourse solely to applicable subsidiary assets .............................................. 163,579 217,060 Mortgage-backed bonds, recourse solely to applicable subsidiary assets ......................................................... -- 28,075 Income taxes ...................................................... 4,348 9,592 Subordinated debentures and senior notes .......................... 518,391 542,039 Discontinued operations ........................................... 56,684 56,258 ---------- ---------- Total liabilities .............................................. 1,595,000 1,428,397 Shareholders' equity .............................................. 1,024,100 921,442 ---------- ---------- Total liabilities and shareholders' equity ........................ $2,619,100 $2,349,839 ========== ========== <FN> Note: The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes to condensed consolidated financial statements. </TABLE> 3 <TABLE> <CAPTION> PULTE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (000's omitted, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ----------------- ------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Revenues: <S> <C> <C> <C> <C> Homebuilding .......................................... $961,740 $746,680 $2,449,880 $1,918,869 Mortgage banking and financing, interest and other .... 10,703 11,286 37,872 31,022 Corporate ............................................. 674 1,368 1,984 9,711 -------- -------- ---------- ---------- Total revenues ............................ 973,117 759,334 2,489,736 1,959,602 -------- -------- ---------- ---------- Expenses: Homebuilding, principally cost of sales ............... 880,243 696,587 2,268,548 1,808,890 Mortgage banking and financing, interest and other .... 7,164 6,386 22,055 20,174 Corporate, net ........................................ 10,365 6,676 28,322 26,718 -------- -------- ---------- ---------- Total expenses ............................ 897,772 709,649 2,318,925 1,855,782 -------- -------- ---------- ---------- Other income: Equity in income (loss) of Pulte-affiliates ........... 617 (3,021) 2,777 (608) -------- -------- ---------- ---------- Income from continuing operations before income taxes ................................................. 75,962 46,664 173,588 103,212 Income taxes ............................................. 28,485 18,199 65,094 40,251 -------- -------- ---------- ---------- Income from continuing operations ........................ 47,477 28,465 108,494 62,961 Income (loss) from discontinued thrift operations, net of income taxes ................................... (383) 91 46 700 -------- -------- ---------- ---------- Net income ............................................... $ 47,094 $ 28,556 $ 108,540 $ 63,661 ======== ======== ========== ========== Per share data: Basic: Income from continuing operations .................. $ 1.10 $ .66 $ 2.51 $ 1.47 Income (loss) from discontinued operations ......... (.01) -- -- .01 ------- -------- ---------- ---------- Net income ......................................... $ 1.09 $ .66 $ 2.51 $ 1.48 ======= ======== ========== ========== Assuming dilution: Income from continuing operations .................. $ 1.08 $ .64 $ 2.47 $ 1.44 Income (loss) from discontinued operations ......... (.01) -- -- .01 ------- -------- ---------- ---------- Net income ......................................... $ 1.07 $ .64 $ 2.47 $ 1.45 ======= ======== ========== ========== Cash dividends declared ............................... $ .08 $ .08 $ .16 $ .15 ======= ======== ========== ========== Number of shares used in calculation: Basic: Weighted-average common shares outstanding ...... 43,248 43,136 43,242 42,923 Assuming dilution: Effect of dilutive securities - stock options ... 585 1,144 671 925 ------- -------- ---------- ---------- Adjusted weighted-average common shares and effect of dilutive securities ......... 43,833 44,280 43,913 43,848 ======= ======== ========== ========== <FN> See accompanying notes to condensed consolidated financial statements. </TABLE> 4 <TABLE> <CAPTION> PULTE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY ($000's omitted) (Unaudited) Accumulated Additional Other Common Paid-in Comprehensive Retained Stock Capital Income Earnings Total ------ ------- ------ -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> Shareholders' Equity, December 31, 1998 ...... $ 432 $75,051 $ 1,130 $844,829 $ 921,442 Exercise of stock options .................... -- 1,695 -- -- 1,695 Cash dividends declared ...................... -- -- -- (6,919) (6,919) Comprehensive income: Net income ............................... -- -- -- 108,540 108,540 Change in unrealized gains on securities available-for-sale, net of income taxes. -- -- (1,130) -- (1,130) Foreign currency translation adjustments . -- -- 472 -- 472 ----- ------- ------- -------- ---------- Shareholders' Equity, September 30, 1999 ..... $ 432 $76,746 $ 472 $946,450 $1,024,100 ===== ======= ======= ======== ========== <FN> See accompanying notes to condensed consolidated financial statements. </TABLE> 5 <TABLE> <CAPTION> PULTE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($000's omitted) (Unaudited) Nine Months Ended September 30, ------------------ 1999 1998 ---- ---- <S> <C> <C> Continuing operations: Cash flows from operating activities: Income from continuing operations ......................... $ 108,494 $ 62,961 Adjustments to reconcile income from continuing operations to net cash flows provided by (used in) operating activities: Amortization, depreciation and other .............. 8,569 4,213 Deferred income taxes ............................. (1,915) (4,782) Gain on sale of securities ........................ (1,664) -- Increase (decrease) in cash due to: Inventories .................................... (344,538) (109,555) Residential mortgage loans available-for-sale .. 85,120 49,527 Other assets ................................... (90,009) 27,030 Accounts payable and accrued liabilities ....... 125,593 33,254 Income taxes ................................... 20,417 24,371 --------- --------- Net cash provided by (used in) operating activities ......... (89,933) 87,019 --------- --------- Cash flows from investing activities: Proceeds from sale of securities available-for-sale ....... 27,886 -- Principal payments of mortgage-backed securities .......... 1,490 7,196 Cash paid for acquisitions, net of cash acquired .......... (24,714) (158,832) Other, net ................................................ (1,579) (477) --------- --------- Net cash provided by (used in) investing activities ......... 3,083 (152,113) --------- --------- Cash flows from financing activities: Payment of long-term debt and bonds ....................... (50,187) (8,001) Proceeds from borrowings .................................. 150,960 31,969 Repayment of borrowings ................................... (103,459) (53,347) Dividends paid ............................................ (6,919) (4,727) Other, net ................................................ 1,844 8,282 --------- --------- Net cash used in financing activities ....................... (7,761) (25,824) --------- --------- Net decrease in cash and equivalents - continuing operations ................................................ $ (94,611) $ (90,918) --------- --------- </TABLE> 6 <TABLE> <CAPTION> PULTE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) ($000's omitted) (Unaudited) Nine Months Ended September 30, ----------------- 1999 1998 ---- ---- <S> <C> <C> Discontinued Operations: Cash flows from operating activities: Income from discontinued operations .................. $ 46 $ 700 Change in deferred taxes ............................. 25,621 17,738 Change in income taxes ............................... (25,661) (18,846) Other changes, net ................................... 2,663 7,781 Cash flows from investing activities: Purchase of securities available-for-sale ............ 216 (21,809) Principal payments of mortgage-backed securities ..... -- 21,900 Decrease (increase) in Covered Assets and FSLIC Resolution Fund (FRF) receivables ........... (2,926) 34,642 Cash flows from financing activities: Increase in deposit liabilities ...................... -- 8,312 Repayment of borrowings .............................. -- (31,560) Decrease in Federal Home Loan Bank (FHLB) advances ... -- (3,100) -------- -------- Net increase (decrease) in cash and equivalents- discontinued operations ............................... (41) 15,758 -------- -------- Net decrease in cash and equivalents ..................... (94,652) (75,160) Cash and equivalents at beginning of period .............. 125,329 247,308 -------- -------- Cash and equivalents at end of period .................... $ 30,677 $172,148 ======== ======== Cash - continuing operations ............................. $ 30,587 $154,238 Cash - discontinued operations ........................... 90 17,910 -------- -------- $ 30,677 $172,148 ======== ======== Supplemental disclosure of cash flow information- cash paid during the period for: Interest, net of amount capitalized: Continuing operations ............................ $ 14,173 $ 21,338 Discontinued operations .......................... -- 1,415 -------- -------- $ 14,173 $ 22,753 ======== ======== Income taxes ......................................... $ 44,875 $ 21,168 ======== ======== <FN> See accompanying notes to condensed consolidated financial statements. </TABLE> 7 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ($000's omitted) (Unaudited) 1. Basis of presentation and significant accounting policies The condensed consolidated financial statements include the accounts of Pulte Corporation (the Company), and all of its significant subsidiaries. The Company's direct subsidiaries include Pulte Financial Companies, Inc. (PFCI), Pulte Diversified Companies, Inc. (PDCI) and other subsidiaries which are engaged in the homebuilding business. PDCI's operating subsidiaries include Pulte Home Corporation (Pulte), 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), has been classified as a discontinued operation (See Note 2). The Company also has a mortgage banking company, Pulte Mortgage Company (PMC), which is a subsidiary of Pulte. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. These financial statements should be read in conjunction with the Company's consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. Certain 1998 classifications have been changed to conform with the 1999 presentation. International operations are conducted in Mexico and Puerto Rico. Mexico homebuilding operations comprise several equity investments which are accounted for under the equity method. Gains and losses resulting from the change in Mexican peso exchange rates are recognized in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. During 1998, the Mexican economy was considered hyper-inflationary; accordingly, SFAS 52 required that the U.S. dollar be the assumed functional currency of the Company's investments in Mexico. During 1998, the three-year cumulative rate of inflation in Mexico fell below 100%; resulting in the Mexican economy no longer being considered hyperinflationary. Effective January 1, 1999, the functional currency of the Company's investments in Mexico is the Mexican peso. The Company's comprehensive income other than net income consists of unrealized gains/(losses) on securities available-for-sale, net of tax and foreign currency translation adjustments. For the quarters ended September 30, 1999 and 1998, the Company's comprehensive income other than net income amounted to $239 and $(119), respectively, net of tax (benefit)/provision of $41 and $(76), respectively. For the nine months ended September 30, 1999 and 1998, the Company's comprehensive income other than net income amounted to $(658) and $(443), respectively, net of tax (benefit)/provision of $(681) and $(261), respectively. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, which is required to be adopted for years beginning after June 15, 2000, with earlier adoption encouraged. This Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Pulte Mortgage, in the normal course of business, uses derivative financial instruments to meet the financing needs of its customers and reduce its own exposure to fluctuations in interest rates. The Company plans to adopt this statement on January 1, 2001, but has not yet determined what effect Statement No. 133 will have on its earnings and financial position. 8 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 2. Discontinued operations During the first quarter of 1994, the Company adopted a plan of disposal for First Heights and announced its strategy to exit the thrift industry and increase its 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 the Company held brokered deposits which were not liquidated until the end of 1998. At the time, the Company expected to complete the plan of disposal within a reasonable period of time; however, contractual disputes with the FDIC prevented the prepayment of the FSLIC Resolution Fund (FRF) notes, thereby precluding the Company from completing the disposal in accordance with its 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 Federal Deposit Insurance Corporation (FDIC) acting in its capacity as manager of FRF. The LAN is collateralized by the FRF notes and bears interest at a rate indexed to the Texas Cost of Funds plus a spread. The LAN and the FRF notes matured in September 1998; however, payment of these obligations is being withheld by both parties pending resolution of all open matters with the FDIC. As discussed in Note 4, the Company is involved in litigation with the FDIC and as part of this litigation, the parties have asserted various claims with respect to obligations under the promissory notes issued by each of the parties in connection with the thrift acquisition and related activities. As of December 31, 1998, First Heights no longer held any deposits, nor did it maintain an investment portfolio. First Heights' day-to-day activities have been principally devoted to supporting residual regulatory compliance matters and the litigation with the FDIC; 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 being presented as discontinued. Revenues of the Company's discontinued thrift operations primarily represent interest income on the outstanding FRF notes and receivables, and for the three and nine months ended September 30, 1999 amounted to $968 and $3,053 respectively. Revenues for the comparable periods of 1998 were $1,565 and $5,131, respectively. For the three and nine months ended September 30, 1999, discontinued thrift operations provided after-tax income (loss) of $(383) and $46, respectively. After tax income for the comparable periods of 1998 were $91 and $700, respectively. 3. Segment information The Company has three reportable segments: Homebuilding, Financial Services and Corporate. The Company's Homebuilding segment consists of the following three business lines: o Domestic Homebuilding, the Company's core business, is engaged in the acquisition/development of land primarily for residential purposes within the continental United States and the construction of housing on such land targeted for the first-time, first and second move-up, and active adult buyer groups. o International Homebuilding is primarily engaged in the acquisition/development of land primarily for residential purposes, and the construction of housing on such land in Puerto Rico and Mexico. o Active Adult Homebuilding is engaged in the development of amenitized, age-targeted and age-restricted communities throughout the continental United States appealing to a growing demographic group in their pre-retirement/retirement years. The Company's Financial Services segment consists principally of mortgage banking operations conducted through PMC and other mortgage banking subsidiaries, and to a minor extent, the operations of PFCI, a financing subsidiary of the Company. 9 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 3. Segment information (continued) Corporate is a non-operating business segment whose primary purpose is to support the operations of the Company's 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 support functions to support the Company as a publicly traded entity. <TABLE> <CAPTION> Operating Data by Segment Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues: Homebuilding .......................... $961,740 $746,680 $2,449,880 $1,918,869 Financial Services .................... 10,703 11,286 37,872 31,022 Corporate ............................. 674 1,368 1,984 9,711 -------- -------- ---------- ---------- Total revenues .................. 973,117 759,334 2,489,736 1,959,602 -------- -------- ---------- ---------- Cost of sales: Homebuilding .......................... 791,862 627,449 2,027,770 1,617,505 Financial Services .................... -- -- -- -- Corporate ............................. -- -- -- -- -------- -------- ---------- ---------- Total cost of sales ............. 791,862 627,449 2,027,770 1,617,505 -------- -------- ---------- ---------- Selling, general and administrative: Homebuilding .......................... 81,672 63,763 222,299 175,674 Financial Services .................... 5,430 4,380 16,317 13,445 Corporate ............................. 2,084 1,492 5,512 5,325 -------- -------- ---------- ---------- Total selling, general and administrative ................ 89,186 69,635 244,128 194,444 -------- -------- ---------- ---------- Interest: Homebuilding .......................... 7,022 5,398 16,596 14,241 Financial Services .................... 1,734 2,006 5,488 6,529 Corporate ............................. 5,851 4,808 15,567 18,137 -------- -------- ---------- ---------- Total interest .................. 14,607 12,212 37,651 38,907 -------- -------- ---------- ---------- Other expense (income), net: Homebuilding .......................... (313) (23) 1,883 1,470 Financial Services .................... -- -- 250 200 Corporate ............................. 2,430 376 7,243 3,256 -------- -------- ---------- ---------- Total other expense, net ........ 2,117 353 9,376 4,926 -------- -------- ---------- ---------- Total costs and expenses ................. 897,772 709,649 2,318,925 1,855,782 -------- -------- ---------- ---------- Equity in income (loss) of joint ventures: Homebuilding .......................... 617 (3,021) 2,777 (608) Financial Services .................... -- -- -- -- Corporate ............................. -- -- -- -- -------- -------- ---------- ---------- Total equity in income (loss) of joint ventures ................ 617 (3,021) 2,777 (608) -------- -------- ---------- ---------- Income from continuing operations before income taxes .................. $ 75,962 $ 46,664 $ 173,588 $ 103,212 ======== ======== ========== ========== </TABLE> 10 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 3. Segment information (continued) <TABLE> <CAPTION> Asset Data by Segment Financial Homebuilding Services Corporate Total ------------ --------- --------- ----- <S> <C> <C> At September 30, 1999: House inventory......................... $ 622,626 -- -- $ 622,626 Land inventory.......................... 1,256,449 -- -- 1,256,449 ---------- -------- -------- ---------- Total Inventory.................... $1,879,075 $ -- $ -- $1,879,075 ========== ======== ======== ========== Identifiable assets..................... $2,272,641 $161,588 $ 93,674 $2,527,903 Assets of discontinued operations....... 91,197 ---------- Total assets............................ $2,619,100 ========== At December 31, 1998: House inventory......................... $ 403,443 $ -- $ -- $ 403,443 Land inventory.......................... 1,051,765 -- -- 1,051,765 ---------- -------- -------- --------- Total Inventory.................... $1,455,208 $ -- $ -- $1,455,208 ========== ======== ======== ========== Identifiable assets..................... $1,782,644 $274,488 $204,029 $2,261,161 Assets of discontinued operations....... 88,678 ---------- Total assets............................ $2,349,839 ========== </TABLE> 4. Commitments and contingencies The Company is involved in various litigation incidental to its continuing business operations. Management believes that none of this litigation will have a material adverse impact on the results of operations or financial position of the Company. First Heights-Related Litigation The Company is a party to two 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. In the District Court Case, the FDIC seeks a declaration of rights and other relief related to the assistance agreement entered into between First Heights and the FSLIC. The FDIC is the successor to FSLIC. The FDIC and the Pulte Parties disagree 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 includes 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 dispute the FDIC's claims and believe that a proper interpretation of the assistance agreement limits the FDIC's participation in tax benefits. The Pulte Parties filed an answer and a counterclaim, seeking, among other things, a declaration that the FDIC has 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. 11 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 4. Commitments and contingencies (continued) First Heights-Related Litigation (continued) The Court of Federal Claims Case contains similar claims as those that were voluntarily dismissed from the District Court Case. In their complaint, 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. 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 certain other claims concerning the contract, including claims that the United States (through the FDIC as receiver) has 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 they had contracted for, and that the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 breached the Government's obligation not to require contributions of capital greater than those required by the contract. The United States has filed a motion for summary judgment against the Company in the Court of Federal Claims Case, and the Company has filed its response in opposition to such motion. On March 5, 1999, the United States District Court (the Court), entered a "Final Judgment" against First Heights and PDCI (the Court had previously ruled that Pulte Corporation was not liable for monetary damages to the FDIC) resolving by summary judgment in favor of the FDIC most of the FDIC's claims against the Pulte Defendants. The Final Judgment requires PDCI and First Heights to pay the FDIC monetary damages totaling approximately $221.3 million, including interest and future tax sharing but excluding costs (such as attorneys fees) to be determined in the future by the District Court. However, the FDIC has acknowledged that it has already paid itself or withheld from assistance, including the FRF notes, its obligation to pay to First Heights approximately $105 million, excluding interest thereon. The Company believes that it is entitled to a credit or actual payment of such amount. The Final Judgment does not address this issue. Based upon the Company's review of the Final Judgment, the Company believes that, if the Final Judgment were to be upheld in its entirety on appeal, the potential after-tax charges against Discontinued Operations, after giving effect to interest owed by the FDIC to First Heights, will be approximately $88 million, plus post-judgment interest (currently 5% per year). The Company vigorously disagrees with the Court's rulings and has appealed to the Sixth Circuit Court of Appeals. The Company has posted a bond in the amount of $110 million pending resolution of the appeals process. The Company believes the District Court erred in granting summary judgment to the FDIC. Among other things, the Company believes the District Court improperly resolved highly disputed factual issues which should have been presented to a jury and, as a result, it improperly granted summary judgment accepting the FDIC's view of the facts on substantially all disputed issues and, therefore, that the Company has a strong basis for appeal of the District Court's decision and that an appellate court, properly applying the standards of review for this case, should reverse the District Court's decision and remand the case for trial, if not in its entirety, then at least in material respects. The Company does not believe that the claims in the Court of Federal Claims Case are in any way prejudiced by the rulings in the District Court Case. The Company is considering seeking relief in the Court of Federal Claims Case that would, if granted, recoup portions of the damages awarded in the District Court Case. 5. Acquisition Effective July 1, 1999, the Company and Blackstone Real Estate Advisors (BRE) closed an agreement for the Company's purchase of BRE's interest in the net assets of the Active Adult joint venture for an aggregate cash purchase price of $26 million, net of liabilities assumed. The purchase price was allocated to assets acquired and liabilities assumed using the purchase method of accounting. As a result of this purchase, Pulte owns 100% of the Active Adult operations, and effective July 1, 1999, the Active Adult operations are fully consolidated with the operating results of Pulte's other homebuilding operations. Prior to this purchase, and since March 25, 1998, Pulte's 50% interest in this joint venture was accounted for as an equity investment. The impact of this acquisition was immaterial to the Company's consolidated revenues, pre-tax income from operations, net income and earnings per share (both basic and diluted). 12 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 6. Supplemental guarantor information The Company has the following outstanding Senior Note obligations: (1) $100,000, 7%, due 2003, (2) $115,000, 8.375%, due 2004, (3) $125,000, 7.3%, due 2005, and (4) $150,000, 7.625%, due 2017. Such obligations to pay principal, premium, if any, and interest are guaranteed jointly and severally on a senior basis by the Company's wholly-owned Domestic and Active Adult homebuilding subsidiaries (collectively, the Guarantors). Such guarantees are full and unconditional. The principal non-Guarantors include PDCI, International, PMC, First Heights, and PFCI. See Note 1 for additional information on the Company's Guarantor and non-Guarantor subsidiaries. Supplemental consolidating financial information of the Company, specifically including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by and the operations of the combined groups. <TABLE> <CAPTION> CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 1999 Unconsolidated ----------------------------------------- Consolidated Pulte Guarantor Non-Guarantor Eliminating Pulte Corporation Subsidiaries Subsidiaries Entries Corporation ----------- ------------ ------------- ----------- ------------ <S> <C> <C> <C> <C> <C> ASSETS Cash and equivalents ......................... $ 24 $ 27,810 $ 2,753 $ -- $ 30,587 Unfunded settlements ......................... -- 67,667 (8,579) -- 59,088 House and land inventories ................... -- 1,849,460 29,615 -- 1,879,075 Residential mortgage loans available-for-sale ......................... -- -- 149,854 -- 149,854 Land held for sale and future development .... -- 58,706 -- -- 58,706 Other assets ................................. 16,430 215,902 61,582 -- 293,914 Deferred income taxes ........................ 56,679 -- -- -- 56,679 Discontinued operations ...................... -- -- 91,197 -- 91,197 Investment in subsidiaries ................... 1,215,280 16,149 1,222,892 (2,454,321) -- Advances receivable - subsidiaries ........... 481,412 519 32,064 (513,995) -- ----------- ----------- ----------- ----------- ----------- $ 1,769,825 $ 2,236,213 $ 1,581,378 $(2,968,316) $ 2,619,100 =========== =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities ..... $ 67,988 $ 588,111 $ 45,899 $ -- $ 701,998 Unsecured short-term borrowings .............. 150,000 -- -- -- 150,000 Collateralized short-term debt, recourse solely to applicable subsidiary assets ..... -- 27,779 135,800 -- 163,579 Income taxes ................................. 4,348 -- -- -- 4,348 Subordinated debentures and senior notes ..... 487,642 9,749 21,000 -- 518,391 Discontinued operations ...................... -- -- 56,684 -- 56,684 Advances payable - subsidiaries .............. 35,747 391,630 86,618 (513,995) -- ----------- ----------- ----------- ----------- ----------- Total liabilities ..................... 745,725 1,017,269 346,001 (513,995) 1,595,000 Shareholders' equity ......................... 1,024,100 1,218,944 1,235,377 (2,454,321) 1,024,100 ----------- ----------- ----------- ----------- ----------- $ 1,769,825 $ 2,236,213 $ 1,581,378 $(2,968,316) $ 2,619,100 =========== =========== =========== =========== =========== </TABLE> 13 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 6. Supplemental guarantor information (continued) <TABLE> <CAPTION> CONSOLIDATING BALANCE SHEET DECEMBER 31, 1998 Unconsolidated ----------------------------------------- Consolidated Pulte Guarantor Non-Guarantor Eliminating Pulte Corporation Subsidiaries Subsidiaries Entries Corporation ----------- ------------ ------------- ----------- ------------ <S> <C> <C> <C> <C> <C> ASSETS Cash and equivalents ......................... $ 76,555 $ 46,109 $ 2,534 $ -- $ 125,198 Unfunded settlements ......................... -- 57,135 (7,995) -- 49,140 House and land inventories ................... -- 1,431,245 23,963 -- 1,455,208 Mortgage-backed and related securities ....... -- -- 29,290 -- 29,290 Residential mortgage loans available-for-sale ........................ -- -- 234,974 -- 234,974 Land held for sale and future development .... -- 35,977 -- -- 35,977 Other assets ................................. 17,949 178,020 55,742 -- 251,711 Deferred income taxes ........................ 80,385 -- (722) -- 79,663 Discontinued operations ...................... -- -- 88,678 -- 88,678 Investment in subsidiaries ................... 1,066,313 16,958 1,062,114 (2,145,385) -- Advances receivable - subsidiaries ........... 271,915 485 46,405 (318,805) -- ----------- ----------- ----------- ----------- ----------- $ 1,513,117 $ 1,765,929 $ 1,534,983 $(2,464,190) $ 2,349,839 =========== =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities ............................... $ 62,014 $ 461,766 $ 51,593 $ -- $ 575,373 Collateralized short-term debt, recourse solely to applicable subsidiary assets .... -- -- 217,060 -- 217,060 Mortgage-backed bonds, recourse solely to applicable subsidiary assets .... -- -- 28,075 -- 28,075 Income taxes ................................. 9,592 -- -- -- 9,592 Subordinated debentures and senior notes ..................................... 487,496 33,543 21,000 -- 542,039 Discontinued operations ...................... -- -- 56,258 -- 56,258 Advances payable - subsidiaries .............. 32,573 230,491 55,741 (318,805) -- ----------- ----------- ----------- ----------- ----------- Total liabilities ..................... 591,675 725,800 429,727 (318,805) 1,428,397 Shareholders' equity ......................... 921,442 1,040,129 1,105,256 (2,145,385) 921,442 ----------- ----------- ----------- ----------- ----------- $ 1,513,117 $ 1,765,929 $ 1,534,983 $(2,464,190) $ 2,349,839 =========== =========== =========== =========== =========== </TABLE> 14 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 6. Supplemental guarantor information (continued) <TABLE> <CAPTION> CONSOLIDATING STATEMENT OF OPERATIONS For the nine months ended September 30, 1999 Unconsolidated ----------------------------------------- Consolidated Pulte Guarantor Non-Guarantor Eliminating Pulte Corporation Subsidiaries Subsidiaries Entries Corporation ----------- ------------ ------------- ---------- ------------ <S> <C> <C> <C> <C> <C> Revenues: Homebuilding ............................... $ -- $ 2,431,148 $ 18,732 $ -- $ 2,449,880 Mortgage banking and financing, interest and other .................... -- -- 37,872 37,872 Corporate .................................. 636 -- 1,348 -- 1,984 ----------- ----------- ----------- ----------- ----------- Total revenues ............................... 636 2,431,148 57,952 -- 2,489,736 ----------- ----------- ----------- ----------- ----------- Expenses: Homebuilding: Cost of sales ......................... -- 2,010,370 17,400 2,027,770 Selling, general and administrative and other expense .................... 833 237,626 2,319 240,778 Mortgage banking and financing, interest and other ............................. -- -- 22,055 22,055 Corporate, net ............................. 24,895 2,198 1,229 -- 28,322 ----------- ----------- ----------- ----------- ----------- Total expenses ............................... 25,728 2,250,194 43,003 -- 2,318,925 ----------- ----------- ----------- ----------- ----------- Other Income: Equity in income of Pulte-affiliates ......... -- 816 1,961 -- 2,777 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes and equity in income of subsidiaries ....................... (25,092) 181,770 16,910 173,588 Income taxes (benefit) ....................... (12,494) 70,308 7,280 -- 65,094 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before equity in income of subsidiaries .... (12,598) 111,462 9,630 108,494 Income (loss) from discontinued operations .. (1,630) -- 1,676 -- 46 ----------- ----------- ----------- ----------- ----------- Income (loss) before equity in income of subsidiaries ....................... (14,228) 111,462 11,306 -- 108,540 ----------- ----------- ----------- ----------- ----------- Equity in income of subsidiaries: Continuing operations ...................... 121,092 8,651 115,055 (244,798) Discontinued operations .................... 1,676 -- -- (1,676) -- ----------- ----------- ----------- ----------- ----------- 122,768 8,651 115,055 (246,474) -- ----------- ----------- ----------- ----------- ----------- Net income ................................... $ 108,540 $ 120,113 $ 126,361 $ (246,474) $ 108,540 =========== =========== =========== =========== =========== </TABLE> 15 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 6. Supplemental guarantor information (continued) <TABLE> <CAPTION> CONSOLIDATING STATEMENT OF OPERATIONS For the three months ended September 30, 1999 Unconsolidated ----------------------------------------- Consolidated Pulte Guarantor Non-Guarantor Eliminating Pulte Corporation Subsidiaries Subsidiaries Entries Corporation ----------- ------------ ------------- ----------- ------------ <S> <C> <C> <C> <C> <C> Revenues: Homebuilding ............................... $ -- $ 957,524 $ 4,216 $ -- $ 961,740 Mortgage banking and financing, interest and other .................... -- -- 10,703 -- 10,703 Corporate .................................. 561 -- 113 -- 674 --------- --------- --------- --------- --------- Total revenues ............................... 561 957,524 15,032 -- 973,117 --------- --------- --------- --------- --------- Expenses: Homebuilding: Cost of sales ......................... -- 788,132 3,730 -- 791,862 Selling, general and administrative and other expense ................... 126 87,188 1,067 -- 88,381 Mortgage banking and financing, interest and other ............................. -- -- 7,164 -- 7,164 Corporate, net ............................. 8,883 749 733 -- 10,365 --------- --------- --------- --------- --------- Total expenses ............................... 9,009 876,069 12,694 -- 897,772 --------- --------- --------- --------- --------- Other Income: Equity in income of Pulte-affiliates ......... -- -- 617 -- 617 --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes and equity in income of subsidiaries ....................... (8,448) 81,455 2,955 -- 75,962 Income taxes (benefit) ....................... (4,522) 31,837 1,170 -- 28,485 --------- --------- --------- --------- --------- Income (loss) from continuing operations before equity in income of subsidiaries .... (3,926) 49,618 1,785 -- 47,477 Income (loss) from discontinued operations ... (902) -- 519 -- (383) --------- --------- --------- --------- --------- Income (loss) before equity in income of subsidiaries ...................... (4,828) 49,618 2,304 -- 47,094 --------- --------- --------- --------- --------- Equity in income of subsidiaries: Continuing operations ...................... 51,403 2,073 51,485 (104,961) -- Discontinued operations .................... 519 -- -- (519) -- --------- --------- --------- --------- --------- 51,922 2,073 51,485 (105,480) -- --------- --------- --------- --------- --------- Net income ................................... $ 47,094 $ 51,691 $ 53,789 $(105,480) $ 47,094 ========= ========= ========= ========= ========= </TABLE> 16 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 6. Supplemental guarantor information (continued) <TABLE> <CAPTION> CONSOLIDATING STATEMENT OF OPERATIONS For the nine months ended September 30,1998 Unconsolidated ----------------------------------------- Consolidated Pulte Guarantor Non-Guarantor Eliminating Pulte Corporation Subsidiaries Subsidiaries Entries Corporation ----------- ------------ ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> Revenues: Homebuilding ............................... $ -- $ 1,911,031 $ 7,838 $ -- $ 1,918,869 Mortgage banking and financing, interest and other .................... -- -- 31,022 -- 31,022 Corporate .................................. 6,981 1,031 1,699 -- 9,711 ----------- ----------- ----------- ----------- ----------- Total revenues ............................... 6,981 1,912,062 40,559 -- 1,959,602 ----------- ----------- ----------- ----------- ----------- Expenses: Homebuilding: Cost of sales ......................... -- 1,610,397 7,108 -- 1,617,505 Selling, general and administrative and other expense ................... 837 187,690 2,858 -- 191,385 Mortgage banking and financing, interest and other ............................. -- -- 20,174 -- 20,174 Corporate, net ............................. 26,775 (2,371) 2,314 -- 26,718 ----------- ----------- ----------- ----------- ----------- Total expenses ............................... 27,612 1,795,716 32,454 -- 1,855,782 ----------- ----------- ----------- ----------- ----------- Other Income: Equity in income (loss) of Pulte-affiliates .. -- 485 (1,093) -- (608) ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes and equity in income of subsidiaries ....................... (20,631) 116,831 7,012 -- 103,212 Income taxes (benefit) ....................... (10,722) 46,675 4,298 -- 40,251 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before equity in income of subsidiaries .... (9,909) 70,156 2,714 -- 62,961 Income from discontinued operations .......... (209) -- 909 -- 700 ----------- ----------- ----------- ----------- ----------- Income (loss) before equity in income of subsidiaries ....................... (10,118) 70,156 3,623 -- 63,661 ----------- ----------- ----------- ----------- ----------- Equity in income of subsidiaries: Continuing operations ...................... 72,870 6,477 72,197 (151,544) -- Discontinued operations .................... 909 -- -- (909) -- ----------- ----------- ----------- ----------- ----------- 73,779 6,477 72,197 (152,453) -- ----------- ----------- ----------- ----------- ----------- Net income ................................... $ 63,661 $ 76,633 $ 75,820 $ (152,453) $ 63,661 =========== =========== =========== =========== =========== </TABLE> 17 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 6. Supplemental guarantor information (continued) <TABLE> <CAPTION> CONSOLIDATING STATEMENT OF OPERATIONS For the three months ended September 30,1998 Unconsolidated ----------------------------------------- Consolidated Pulte Guarantor Non-Guarantor Eliminating Pulte Corporation Subsidiaries Subsidiaries Entries Corporation ----------- ------------ ------------- ----------- ------------ <S> <C> <C> <C> <C> <C> Revenues: Homebuilding ............................... $ -- $ 745,336 $ 1,344 $ -- $ 746,680 Mortgage banking and financing, interest and other .................... -- -- 11,286 -- 11,286 Corporate .................................. 1,368 -- -- -- 1,368 --------- --------- --------- --------- --------- Total revenues ............................... 1,368 745,336 12,630 -- 759,334 --------- --------- --------- --------- --------- Expenses: Homebuilding: Cost of sales ......................... -- 626,061 1,388 -- 627,449 Selling, general and administrative and other expense .................. 279 68,035 824 -- 69,138 Mortgage banking and financing, interest and other ............................. -- -- 6,386 -- 6,386 Corporate, net ............................. 6,762 297 (383) -- 6,676 --------- --------- --------- --------- --------- Total expenses ............................... 7,041 694,393 8,215 -- 709,649 --------- --------- --------- --------- --------- Other Income: Equity in income (loss) of Pulte-affiliates .. -- 359 (3,380) -- (3,021) --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes and equity in income of subsidiaries ....................... (5,673) 51,302 1,035 -- 46,664 Income taxes (benefit) ....................... (3,331) 20,441 1,089 -- 18,199 --------- --------- --------- --------- --------- Income (loss) from continuing operations before equity in income of subsidiaries .... (2,342) 30,861 (54) -- 28,465 Income (loss) from discontinued operations ... (391) -- 482 -- 91 --------- --------- --------- --------- --------- Income (loss) before equity in income of subsidiaries ....................... (2,733) 30,861 428 -- 28,556 --------- --------- --------- --------- --------- Equity in income of subsidiaries: Continuing operations ...................... 30,807 2,866 32,377 (66,050) -- Discontinued operations .................... 482 -- -- (482) -- --------- --------- --------- --------- --------- 31,289 2,866 32,377 (66,532) -- --------- --------- --------- --------- --------- Net income ................................... $ 28,556 $ 33,727 $ 32,805 $ (66,532) $ 28,556 ========= ========= ========= ========= ========= </TABLE> 18 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 6. Supplemental guarantor information (continued) <TABLE> <CAPTION> CONSOLIDATING STATEMENT OF CASH FLOWS For the nine months ended September 30, 1999 Unconsolidated ----------------------------------------- Consolidated Pulte Guarantor Non-Guarantor Eliminating Pulte Corporation Subsidiaries Subsidiaries Entries Corporation ----------- ------------ ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> Continuing operations: Cash flows from operating activities: Income from continuing operations .......... $ 108,494 $ 120,113 $ 124,685 $(244,798) $ 108,494 Adjustments to reconcile income from continuing operations to net cash flows provided by (used in) operating activities: Equity in income of subsidiaries ......... (121,092) (8,651) (115,055) 244,798 -- Amortization, depreciation and other ..... 146 9,405 (982) -- 8,569 Deferred income taxes .................... (1,915) -- -- -- (1,915) Gain on sale of securities ............... -- -- (1,664) -- (1,664) Increase (decrease) in cash due to: Inventories .............................. -- (338,886) (5,652) -- (344,538) Residential mortgage loans available-for-sale ................... -- -- 85,120 -- 85,120 Other assets ............................. 1,519 (85,802) (5,726) -- (90,009) Accounts payable and accrued liabilities . 4,257 119,111 2,225 -- 125,593 Income taxes ............................. (55,789) 75,702 504 -- 20,417 --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities ................................. (64,380) (109,008) 83,455 -- (89,933) --------- --------- --------- --------- --------- Cash flows from investing activities: Proceeds from sale of securities available- for-sale ................................. -- -- 27,886 -- 27,886 Principal payments of mortgage-backed securities ............................... -- -- 1,490 -- 1,490 Cash paid for acquisition, net of cash acquired ................................ -- (24,714) -- -- (24,714) Dividends received from subsidiaries ....... 3,550 13,994 -- (17,544) -- Other, net ................................. -- -- (1,579) -- (1,579) Investment in subsidiary ................... (30,358) (7,097) -- 37,455 -- Advances to affiliates ..................... (97,935) (34) (7,126) 105,095 -- --------- --------- --------- --------- --------- Net cash provided by (used in) investing activities ................................. (124,743) (17,851) 20,671 125,006 3,083 --------- --------- --------- --------- --------- </TABLE> 19 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 6. Supplemental guarantor information (continued) <TABLE> <CAPTION> CONSOLIDATING STATEMENT OF CASH FLOWS (continued) For the nine months ended September 30, 1999 Unconsolidated ----------------------------------------- Consolidated Pulte Guarantor Non-Guarantor Eliminating Pulte Corporation Subsidiaries Subsidiaries Entries Corporation ----------- ------------ ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> Continuing operations (continued): Cash flows from financing activities: Payment of long-term debt and bonds ........ -- (22,405) (27,782) -- (50,187) Proceeds from borrowings ................... 150,000 960 -- -- 150,960 Repayment of borrowings .................... -- (15,796) (87,663) -- (103,459) Capital contributions from parent .......... -- 29,853 7,602 (37,455) -- Advances from affiliates ................... (32,182) 115,900 21,377 (105,095) -- Dividends paid ............................. (6,919) -- (17,544) 17,544 (6,919) Other, net ................................. 1,693 48 103 -- 1,844 --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities ....................... 112,592 108,560 (103,907) (125,006) (7,761) --------- --------- --------- --------- --------- Net increase (decrease) in cash and equivalents - continuing operations ........ $ (76,531) $ (18,299) $ 219 $ -- $ (94,611) --------- --------- --------- --------- --------- Discontinued operations: Cash flows from operating activities: Income from discontinued operations ........................... $ 46 $ -- $ 1,676 $ (1,676) $ 46 Change in deferred income taxes ............ 25,621 -- -- -- 25,621 Equity in income of subsidiaries ........... (1,676) -- -- 1,676 -- Change in income taxes ..................... (25,661) -- -- -- (25,661) Other changes, net ......................... 1,670 -- 993 -- 2,663 Cash flows from investing activities: Purchase of securities available- for-sale .............................. -- -- 216 -- 216 Decrease in Covered Assets and FRF receivables ........................... -- -- (2,926) -- (2,926) --------- --------- --------- --------- --------- Net decrease in cash and equivalents- discontinued operations .................... -- -- (41) -- (41) --------- --------- --------- --------- --------- Net increase (decrease) in cash and equivalents ................................ (76,531) (18,299) 178 -- (94,652) Cash and equivalents at beginning of period ..................................... 76,555 46,109 2,665 -- 125,329 --------- --------- --------- --------- --------- Cash and equivalents at end of period ........ $ 24 $ 27,810 $ 2,843 $ -- $ 30,677 ========= ========= ========= ========= ========= </TABLE> 20 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 6. Supplemental guarantor information (continued) <TABLE> <CAPTION> CONSOLIDATING STATEMENT OF CASH FLOWS For the nine months ended September 30,1998 Unconsolidated ----------------------------------------- Consolidated Pulte Guarantor Non-Guarantor Eliminating Pulte Corporation Subsidiaries Subsidiaries Entries Corporation ----------- ------------ ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> Continuing operations: Cash flows from operating activities: Income from continuing operations .......... $ 62,961 $ 76,633 $ 74,911 $(151,544) $ 62,961 Adjustments to reconcile income from continuing operations to net cash flows provided by (used in) operating activities: Equity in income of subsidiaries ......... (72,870) (6,477) (72,197) 151,544 -- Amortization, depreciation and other ..... 145 3,918 150 -- 4,213 Deferred income taxes .................... (4,782) -- -- -- (4,782) Increase (decrease) in cash due to: Inventories .............................. -- (107,596) (1,959) -- (109,555) Residential mortgage loans held for sale ........................ -- -- 49,527 -- 49,527 Other assets ............................. (3,577) 54,167 (23,560) -- 27,030 Accounts payable and accrued liabilities.. 4,041 11,953 17,260 -- 33,254 Income taxes ............................. (27,105) 50,946 530 -- 24,371 --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities ................................. (41,187) 83,544 44,662 -- 87,019 --------- --------- --------- --------- --------- Cash flows from investing activities: Principal payments of mortgage backed securities ............................ -- -- 7,196 -- 7,196 Dividends received from subsidiaries ....... 132,040 8,900 132,040 (272,980) -- Cash paid for acquisitions, net of cash acquired .............................. -- (158,832) -- -- (158,832) Investment in subsidiary ................... (32,040) (4,271) -- 36,311 -- Advances to affiliates ..................... (154,455) (644) (5,810) 160,909 -- Other, net ................................. -- -- (477) -- (477) --------- --------- --------- --------- --------- Net cash provided by (used in) investing activities ................................. (54,455) (154,847) 132,949 (75,760) (152,113) --------- --------- --------- --------- --------- Cash flows from financing activities: Payment of long-term debt and bonds ........ -- -- (8,001) -- (8,001) Proceeds of borrowings ..................... -- 31,969 -- -- 31,969 Repayment of borrowings .................... -- (8,101) (45,246) -- (53,347) Capital contributions from parent .......... -- 32,040 4,271 (36,311) -- Advances from affiliates ................... 5,824 142,752 12,333 (160,909) -- Dividends paid ............................. (4,727) (132,040) (140,940) 272,980 (4,727) Other, net ................................. 6,920 28 1,334 -- 8,282 --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities ....................... 8,017 66,648 (176,249) 75,760 (25,824) --------- --------- --------- --------- --------- Net (decrease) increase in cash and equivalents - continuing operations ........ $ (87,625) $ (4,655) $ 1,362 $ -- $ (90,918) --------- --------- --------- --------- --------- 21 PULTE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) (Unaudited) 6. Supplemental guarantor information (continued) <CAPTION> CONSOLIDATING STATEMENT OF CASH FLOWS (continued) For the nine months ended September 30,1998 Unconsolidated ----------------------------------------- Consolidated Pulte Guarantor Non-Guarantor Eliminating Pulte Corporation Subsidiaries Subsidiaries Entries Corporation ----------- ------------ ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> Discontinued operations: Cash flows from operating activities: Income from discontinued operations ........ $ 700 $ -- $ 909 $ (909) $ 700 Change in deferred income taxes ............ 17,738 -- -- -- 17,738 Equity in income of subsidiaries ........... (909) -- -- 909 -- Change in income taxes ..................... (18,846) -- -- -- (18,846) Other changes, net ......................... 1,317 -- 6,464 -- 7,781 Cash flows from investing activities: Purchase of securities available- for-sale .............................. -- -- (21,809) -- (21,809) Principal payments of mortgage-backed securities ............................ -- -- 21,900 -- 21,900 Decrease in Covered Assets and FRF receivables ........................... -- -- 34,642 -- 34,642 Cash flows from financing activities: Increase in deposit liabilities ............ -- -- 8,312 -- 8,312 Repayment of borrowings .................... -- -- (31,560) -- (31,560) Decrease in FHLB advances .................. -- -- (3,100) -- (3,100) --------- --------- --------- --------- --------- Net increase in cash and equivalents- discontinued operations .................... -- -- 15,758 -- 15,758 --------- --------- --------- --------- --------- Net (decrease) increase in cash and equivalents ................................ (87,625) (4,655) 17,120 -- (75,160) Cash and equivalents at beginning of period ..................................... 195,946 46,466 4,896 -- 247,308 --------- --------- --------- --------- --------- Cash and equivalents at end of period ........ $ 108,321 $ 41,811 $ 22,016 $ -- $ 172,148 ========= ========= ========= ========= ========= </TABLE> 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ($000's omitted, except per share data) Overview: A summary of the Company's operating results by business segment for the three and nine month periods ended September 30, 1999 and 1998 is as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Pre-tax income (loss): Homebuilding operations ..................... $ 82,114 $ 47,072 $ 184,109 $ 109,371 Financial Services operations ............... 3,539 4,900 15,817 10,848 Corporate ................................... (9,691) (5,308) (26,338) (17,007) --------- --------- --------- --------- Pre-tax income from continuing operations ...... 75,962 46,664 173,588 103,212 Income taxes ................................... (28,485) (18,199) (65,094) (40,251) --------- --------- --------- --------- Income from continuing operations .............. 47,477 28,465 108,494 62,961 Income (loss) from discontinued operations ..... (383) 91 46 700 --------- --------- --------- --------- Net income ..................................... $ 47,094 $ 28,556 $ 108,540 $ 63,661 ========= ========= ========= ========= Per share data - assuming dilution: Income from continuing operations ........... $ 1.08 $ .64 $ 2.47 $ 1.44 Income (loss) from discontinued operations .. (.01) -- -- .01 --------- --------- --------- --------- Net income .................................. $ 1.07 $ .64 $ 2.47 $ 1.45 ========= ========= ========= ========= </TABLE> A comparison of pre-tax income (loss) for the three and nine month periods ended September 30, 1999 and 1998 is as follows: o Pre-tax income of the Company's homebuilding business segment increased 74% and 68%, respectively, due primarily to the improvement in domestic homebuilding operations where pre-tax income increased 63% and 61%, respectively. Domestic unit settlements increased 18% and 20%, respectively; domestic gross margins improved 190 and 170 basis points, respectively; and domestic unit selling price increased by approximately 7% and 5%, respectively. o Pre-tax income of the Company's financial services segment decreased 28% for the quarter primarily due to increasingly competitive market conditions in the mortgage banking industry as a result of rising mortgage interest rates. For the nine months ended September 30, 1999, pre-tax income increased 46% over the prior year period, primarily reflecting the Company's mortgage banking operations which benefited from substantial increases in mortgage origination volume, origination fees, and pricing and marketing gains. Nine month results also reflect a net gain of approximately $1,700 from the redemption of mortgage-backed bonds by Pulte Financial Companies, Inc. (PFCI), a subsidiary of the Company. o Pre-tax loss of the Company's corporate business segment increased $4,383 and $9,331, respectively, from the three and nine month periods ended September 30,1998. The increase in pre-tax loss for the quarter primarily reflects an increase of approximately $1,850 in the corporate net interest spread and an increase in other corporate expenses, net, of approximately $2,500. Year-to-date results reflect an increase of approximately $3,800 in the corporate net interest spread, and an increase in other corporate expenses, net, of approximately $5,500. Increases in the corporate net interest spread are attributed to increased borrowings for additional capital investment, primarily in the domestic homebuilding operations. Other corporate expenses, net, in 1998 were reduced by the net of one-time events, including a gain of approximately $5,000 on the sale of Expression Homes, partially offset by provisions of $3,500 for the write down of certain projects and R&D investments. 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations: The Company's Homebuilding segment consists of the following business lines: o Domestic Homebuilding operations are conducted in 41 markets, located throughout 27 states. Domestic Homebuilding offers a broad product line to meet the needs of the first-time, first and second move-up, and active adult home buyer. During 1998, the Company acquired two homebuilders, Tennessee-based Radnor Homes on May 27, 1998 and Florida-based DiVosta & Company on July 1, 1998 (the "acquired operations"). o International Homebuilding operations are conducted through subsidiaries of Pulte International Corporation in Puerto Rico and Mexico. International Homebuilding product offerings focus on the demand of first-time buyers, and social interest housing in Mexico and Puerto Rico. The Company has agreements in place with multi-national corporations to provide social interest housing in Mexico. o Active Adult operations acquire and develop major Active Adult residential communities, amenitized age-targeted and age-restricted communities appealing to a growing demographic group in their pre-retirement and retirement years. Prior to July 1, 1999 Active Adult Homebuilding operations were conducted through a joint venture with Blackstone Real Estate Advisors (BRE), an affiliate of the Blackstone Group. Effective July 1, 1999, the Company and BRE closed an agreement for the Company's purchase of BRE's interest in the net assets of the Active Adult joint venture for an aggregate cash purchase price of $26 million, net of liabilities assumed. As a result of this purchase, Pulte owns 100% of the Active Adult operations, and effective July 1, 1999, the Active Adult operations are fully consolidated with the operating results of Pulte's other homebuilding operations. Prior to this purchase, and since March 25, 1998, Pulte's 50% interest in this joint venture was accounted for as an equity investment. Certain operating data relating to the Company's joint ventures and homebuilding operations for the three and nine months ended September 30, 1999 and 1998, are as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Pulte/Pulte-affiliate homebuilding revenues: Domestic .................................. $929,833 $741,114 $2,403,353 $1,894,636 International ............................. 20,571 4,907 75,009 43,938 Active Adult .............................. 27,691 30,139 85,352 61,911 -------- -------- ---------- ---------- Total homebuilding ........................... $978,095 $776,160 $2,563,714 $2,000,485 ======== ======== ========== ========== Pre-tax income (loss): Domestic ............................ $ 82,686 $ 50,708 $ 183,510 $ 114,144 International ....................... (90) (4,527) 141 (3,902) Active Adult ........................ (482) 891 458 (871) -------- -------- ---------- ---------- Total Homebuilding operations .......... $ 82,114 $ 47,072 $ 184,109 $ 109,371 ======== ======== ========== ========== Pulte and Pulte-affiliate settlements - units: Domestic .................................. 4,874 4,134 13,101 10,899 International: Pulte ............................... 50 22 224 106 Pulte-affiliated entities ........... 1,018 250 3,734 2,491 -------- -------- ---------- ---------- Total International ................. 1,068 272 3,958 2,597 -------- -------- ---------- ---------- Active Adult: Pulte ............................... 132 37 133 128 Pulte-affiliated entity ............. -- 143 279 252 -------- -------- ---------- ---------- Total Active Adult .................. 132 180 412 380 -------- -------- ---------- ---------- Total Pulte and Pulte-affiliate settlements - units ..................................... 6,074 4,586 17,471 13,876 ======== ======== ========== ========== </TABLE> 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations (continued): Domestic Homebuilding: The domestic homebuilding business line represents the Company's core business. Operations are conducted in 41 markets, located throughout 27 states, and are organized into nine regions as follows: Pulte Home East: - ----------------------- Mid-Atlantic Region Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New Hampshire, Pennsylvania, Rhode Island, Virginia Southeast Region Georgia, North Carolina, South Carolina, Tennessee Florida Region Florida Pulte Home Central: - ----------------------- Great Lakes Region Indiana, Kansas, Michigan, Missouri, Ohio Midwest Region Illinois, Minnesota Texas Region Texas Pulte Home West: - ----------------------- Southwest Region Arizona, Nevada Rocky Mountain Region Colorado, Utah California Region California No one individual market within the 41 markets represented more than 10% of total domestic homebuilding net new orders, unit settlements or revenues during the three and nine month period ended September 30, 1999. The following table presents selected unit information for Pulte's domestic homebuilding operations for the three and nine months ended September 30, 1999 and 1998. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Unit settlements: Pulte Home East...................... 2,528 2,048 6,839 5,234 Pulte Home Central................... 1,560 1,273 3,944 3,281 Pulte Home West...................... 786 813 2,318 2,384 -------- -------- ---------- ---------- 4,874 4,134 13,101 10,899 ======== ======== ========== ========== Net new orders - units: Pulte Home East...................... 2,405 2,529 8,276 6,890 Pulte Home Central................... 1,274 1,293 4,559 4,526 Pulte Home West...................... 680 706 2,474 2,636 -------- -------- ---------- ---------- 4,359 4,528 15,309 14,052 ======== ======== ========== ========== Net new orders - dollars $958,000 $796,000 $3,023,000 $2,457,000 ======== ======== ========== ========== Backlog at September 30 - units: Pulte Home East...................... 4,080 3,216 Pulte Home Central................... 2,529 2,261 Pulte Home West...................... 1,013 1,069 ---------- ---------- 7,622 6,546 ========== ========== Backlog at September 30 - dollars....... $1,543,000 $1,179,700 ========== ========== </TABLE> 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations (continued): Domestic Homebuilding (continued): During the three months ended September 30, 1999, the Company reported net new orders of 4,359, a decrease of 4% from the comparable period of the prior year. Prior year results include 346 backlog units acquired with the acquisition of DiVosta & Company. Excluding these units, net new orders increased 4% over 1998. For the nine months ended September 30, 1999, net new orders of 15,309, which include the 346 acquired backlog units, were a 9% increase over the prior year. The year-to- date results reflect strong performance in the Southeast, Florida, Great Lakes, Midwest and Mid-Atlantic Regions. Net new orders provided by the acquired operations in 1999 amounted to 352 units for the quarter and 1,250 units year-to-date, compared with 651 and 862 units, respectively, for the same periods in 1998. Unit settlements increased 18% for the quarter and 20% year-to-date, reflecting strong activity in the Southeast, Florida, Texas, and Great Lakes Regions. Strong demand, supported by favorable economic conditions, continued to drive order activity, resulting in record levels of backlog. These factors have contributed to the solid settlement activity during 1999. Settlements provided by the acquired operations in 1999 amounted to 355 units for the quarter and 1,059 units year-to-date, compared with 379 and 413 units, respectively, for the same periods in 1998. The Company's backlog at September 30, 1999 was 7,622 units, or approximately $1.5 billion. Unit backlog at September 30, 1999, was approximately 16% higher than September 30, 1998 and 41% higher than December 31, 1998. Backlog at September 30, 1999 associated with acquired operations amounted to 690 units or $137,000, compared with 449 units or $86,000 at September 30, 1998. The following table presents a summary of pre-tax income for Pulte's domestic homebuilding operations for the three and nine months ended September 30, 1999 and 1998: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues ................................. $ 929,833 $ 741,114 $ 2,403,353 $ 1,894,636 Cost of sales ............................ (763,848) (622,549) (1,986,025) (1,597,070) Selling, general and administrative expense ................................ (77,947) (62,497) (216,232) (168,181) Interest (a) ............................. (6,579) (5,398) (16,153) (14,241) Other income (expense), net .............. 1,227 38 (1,433) (1,000) --------- --------- ----------- ----------- Pre-tax income ........................... $ 82,686 $ 50,708 $ 183,510 $ 114,144 ========= ========= =========== =========== Average sales price ...................... $ 191 $ 179 $ 183 $ 174 ========= ========= =========== =========== <FN> (a) The Company capitalizes interest cost into homebuilding inventories and charges the interest to homebuilding interest expense when the related inventories are closed. </TABLE> 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations (continued): Domestic Homebuilding (continued): Gross profit margins were 17.9% and 17.4% for the three and nine month periods ended September 30, 1999, respectively, compared to 16.0% and 15.7 %, respectively, for the same periods of the prior year. Several factors contributed to this favorable trend including continued strong customer demand, positive home pricing, the benefits of leverage-buy purchasing activities, effective production and inventory management, and the Company's P3 initiative (Pulte Preferred Partnerships) with contractors and suppliers. As a percentage of total revenues, selling, general and administrative expenses (SG&A) were 8.4% for each of the quarters ending September 30, 1999 and 1998. For the nine months ended September 30, 1999, SG&A expenses were 9% of revenue, a 10 basis point increase from the same period in 1998. The increase in SG&A spending is attributed to higher sales and marketing expenses and increased field expenses, partly resulting from continued implementation of the Company's financial and operating systems, as well as, increased construction expenses associated with the build out of almost 10,000 homes under construction at September 30, 1999. Other income (expense) net, includes gains on land sales and other homebuilding-related expenses, and has also historically included the net operating results of Pulte's Builder's Supply & Lumber (BSL) subsidiary prior to its sale on March 20, 1998. The increase in other income, net, for the third quarter is a result of increased gains on land sales. For the nine months ended September 30, 1999, increased gains on land sales were offset by amortization of goodwill associated with the Company's 1998 homebuilding acquisitions. The average selling price for the three and nine month periods ended September 30, 1999 were $191 and $183, respectively, an increase from the average selling price of $179 and $174 in the comparable periods of the prior year. Changes in average selling price reflect a number of factors, including changes in market selling prices and the mix of product closed during a period. Information related to interest in inventory is as follows: Three Months Ended Nine Months Ended September 30, September 30 ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Interest in inventory at beginning of period ..... $ 20,471 $ 14,379 $ 16,356 $ 14,719 Interest capitalized ...... 6,587 6,093 20,276 14,596 Interest expensed ......... (6,579) (5,398) (16,153) (14,241) -------- -------- -------- -------- Interest in inventory at end of period ........... $ 20,479 $ 15,074 $ 20,479 $ 15,074 ======== ======== ======== ======== At September 30, 1999, Pulte's domestic homebuilding operations controlled approximately 66,200 lots, of which approximately 40,900 lots were owned and approximately 25,300 lots were controlled through option agreements. 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations (continued): International Homebuilding: International Homebuilding operations are primarily conducted through subsidiaries of Pulte International Corporation in Puerto Rico and Mexico. The following table presents selected financial data for Pulte's international homebuilding operations for the three and nine month periods ended September 30, 1999 and 1998. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30 ------------------ ------------------ 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues ................................. $ 4,216 $ 1,344 $ 18,732 $ 7,838 Cost of sales ............................ (3,730) (1,388) (17,400) (7,108) Selling, general and administrative expense ................. (1,019) (1,085) (3,376) (3,534) Other income, net ........................ (174) (18) 224 (5) Equity in income of Mexico operations .... 617 (3,380) 1,961 (1,093) ------- ------- -------- -------- Pre-tax income (loss) .................... $ (90) $(4,527) $ 141 $ (3,902) ======= ======= ======== ======== Unit settlements: Pulte ................................. 50 22 224 106 Pulte-affiliated entities ............. 1,018 250 3,734 2,491 ------- ------- -------- -------- Total Pulte and Pulte-affiliates ... 1,068 272 3,958 2,597 ======= ======= ======== ======== </TABLE> Pre-tax income for the three and nine month periods ended September 30, 1999, from the Company's international operations reflect improved operating results in Puerto Rico, offset by increased overhead costs associated with expansion in Mexico. Foreign currency exchange gains in Mexico amounted to $1,157 for the quarter and $1,571 year-to-date, reflecting a 5% year-to-date increase in the value of the Mexican peso against the U.S. dollar. The Company's aggregate net investment in its five joint ventures located throughout Mexico approximated $39,700 at September 30, 1999. The largest of these ventures, Condak-Pulte S. De R.L. De C.V., is located in the city of Juarez. The Juarez-based venture is currently developing communities in Juarez, Chihuahua, Nuevo Laredo, Reynosa and Matamoros, under agreements with Delphi Automotive Systems and Sony Magneticos de Mexico, S.A. de C.V., an affiliate of Sony Electronics, Inc. As of September 30, 1999, the Company's net investment in the Juarez-based joint venture approximated $25,800. Desarrollos Residenciales Turisticos, S.A. de C.V. (DRT), another of the Company's joint ventures in Mexico, is constructing primarily social interest housing in the Bajio region surrounding Mexico City, targeting the cities of Puebla, Queretaro, San Jose de Iturbide, San Juan del Rio and Zamora. The Company's net investment in this joint venture at September 30, 1999 approximated $5,500. In September, the Company entered into a joint venture agreement with Desarrolladores Urbanos (Canovanas), S. E., an established Puerto Rican special partnership created for the acquisition and development of 121 acres located in the municipality of Canovanas, Puerto Rico. The Company's initial investment for a 50% ownership interest in this project amounted to $2,780, an amount which represents the net investment balance for this venture at September 30, 1999. This investment is accounted for using the equity method. 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations (continued): Active Adult Homebuilding: Prior to July 1, 1999, Active Adult Homebuilding operations were conducted through a joint venture with Blackstone Real Estate Advisors (BRE), an affiliate of the Blackstone Group. Effective July 1, 1999, the Company and BRE closed an agreement for the Company's purchase of BRE's interest in the net assets of the Active Adult joint venture for an aggregate cash purchase price of $26 million, net of liabilities assumed. The purchase price was allocated to assets acquired and liabilities assumed using the purchase method of accounting. As a result of this purchase, Pulte owns 100% of the Active Adult operations, and effective July 1, 1999, the Active Adult operations are fully consolidated with the operating results of Pulte's other homebuilding operations. Prior to this purchase, and since March 25, 1998, Pulte's 50% interest in this joint venture was accounted for as an equity investment. The impact of this acquisition was immaterial to the Company's consolidated revenues, pre-tax income from operations, net income and earnings per share (both basic and diluted). Active Adult operations acquire and develop major active adult residential communities, highly amenitized age-targeted and age-restricted communities appealing to a growing demographic group in their pre-retirement and retirement years. These operations, headquartered in Phoenix, Arizona, at September 30, 1999 include three communities located in Arizona and California. Springfield at Whitney Oaks, the Venture's Active Adult Community in Northern California, recently received the Gold Achievement Award for the best seniors' housing development in the nation, as presented by the National Council on Seniors Housing. The following table presents selected financial data for Pulte's Active Adult homebuilding operations for the three and nine month period ended September 30, 1999 and 1998. Prior year data includes the operating results of the Company's Active Adult subsidiaries from January 1, 1998, through March 25, 1998, the date upon which the formation of the joint venture occurred, and the equity in income of the joint venture from that date forward. 1999 data reflect the equity in income of the joint venture entity through June 30, 1999 and the operating results of the Company's Active Adult subsidiaries from July 1, 1999 forward. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues.......................................... $ 27,691 $ 4,222 $ 27,795 $ 16,395 Cost of sales..................................... (24,284) (3,512) (24,345) (13,327) Selling, general and administrative expense....... (3,348) (181) (3,332) (3,959) Interest (a)...................................... (443) - (443) - Other income (expense), net....................... (98) 3 (33) (465) Equity in income of joint venture................. - 359 816 485 ----------- ------------ ------------- ------------- Pre-tax income (loss)............................. $ (482) $ 891 $ 458 $ (871) =========== ============ ============= ============= Pulte and Pulte-affiliate: Average sales price............................... $ 210 $ 167 $ 207 $ 163 =========== ============ ============= ============= Unit settlements.................................. 132 180 412 380 =========== ============ ============= ============= Net new orders - units............................ 103 149 431 581 =========== ============ ============= ============= Net new orders - dollars.......................... $ 53,700 $ 28,600 $ 95,900 $ 107,300 =========== ============ ============= ============= Backlog at September 30 - units................... 190 315 ============= ============= Backlog at September 30 - dollars................. $ 47,800 $ 64,100 ============= ============= <FN> (a) The Company capitalizes interest cost into homebuilding inventories and charges the interest to homebuilding interest expense when the related inventories are closed. </TABLE> 29 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations (continued): Active Adult Homebuilding (continued): The following additional pro-forma information presents selected financial data for Pulte's wholly-owned and joint venture Active Adult operations as if they had been consolidated for the periods presented. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Pro-forma financial summary: Revenues.......................................... $ 27,691 $ 30,139 $ 85,352 $ 61,911 Cost of sales..................................... (24,284) (24,659) (71,342) (49,881) Selling, general and administrative expense....... (3,348) (3,579) (11,068) (10,865) Interest.......................................... (443) (17) (1,378) (17) Other income (expense), net....................... (98) (458) (60) (1,114) ----------- ------------ ------------- ------------- Pro-forma pre-tax income (loss)................... $ (482) $ 1,426 $ 1,504 $ 34 =========== ============ ============= ============= </TABLE> For the quarter ended September 30, 1999, net new orders, unit settlements and revenue decreased primarily related to the completion and close-out of two Active Adult communities. For the nine months, net new orders also decreased due to the completion and close-out of two communities. Unit settlements and revenues increased for the nine months ended September 30, 1999, compared with the same period in 1998, due to activity in newer communities which began closing units in the second and third quarters of 1998. In addition, higher average selling prices as a result of strong demand for housing and product mix contributed to increased revenue. Gross profit margins were 12.3% and 16.4% for the three and nine months ended September 30, 1999, respectively, compared with 18.2% and 19.4%, respectively, for the same periods of the prior year. The decrease was primarily due to acquisition accounting adjustments related to the Company's purchase of BRE's 50% interest in the joint venture operations effective July 1, 1999. Excluding the impact of acquisition accounting, gross profit margins for the third quarter and nine months ended September 30, 1999 would have been 19.0% and 18.6%, respectively. The Company anticipates that gross profit margins will continue to be adversely impacted by acquisition accounting adjustments through the first half of 2000. Since March 25, 1998, the Active Adult operations have incurred interest costs on funds borrowed to finance their development and construction activities. The interest cost is capitalized into inventory and charged to interest expense when the related inventories are closed. Other expense, net for the third quarter of 1998 includes write-off of pre-acquisition land costs. For the nine months ended September 30, 1998, other expense, net also includes transaction costs related to the sale of 50% of the Company's Active Adult operations to BRE in the first quarter of 1998. At September 30, 1999, Pulte's Active Adult homebuilding operations controlled approximately 1,230 lots, of which approximately 900 lots were owned and approximately 330 lots were controlled through option agreements. 30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Financial Services Operations: The Company conducts its financial services operations principally through Pulte Mortgage Corporation (PMC), the Company's mortgage banking subsidiary, and to a limited extent through Pulte Financial Companies, Inc. (PFCI), the Company's financing subsidiary, which completed the early redemption of its remaining mortgage-backed bond portfolio during the first quarter of 1999. Pre-tax income (loss) of the Company's financial services operations for the three and nine month periods ended September 30, 1999 and 1998, is as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Pre-tax income (loss): Mortgage banking.............. $ 3,364 $ 4,920 $ 14,009 $ 10,908 Financing activities.......... 175 (20) 1,808 (60) ----------- ------------ ------------- ------------- Pre-tax income............ $ 3,539 $ 4,900 $ 15,817 $ 10,848 =========== ============ ============= ============= </TABLE> Mortgage Banking: The following table presents mortgage origination data for Pulte Mortgage: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Total originations: Loans................................ 3,241 3,194 9,773 8,752 =========== ============ ============= ============= Principal............................ $ 455,800 $ 429,700 $ 1,352,300 $ 1,151,500 =========== ============ ============= ============= Originations for Pulte customers: Loans................................ 2,616 2,258 7,406 6,350 =========== ============ ============= ============= Principal............................ $ 377,800 $ 312,700 $ 1,057,400 $ 858,800 =========== ============ ============= ============= </TABLE> Mortgage origination unit volume for the three and nine month periods ended September 30, 1999, increased 1% and 12%, respectively, over the comparable 1998 periods, driven primarily by a 20% increase in year-to-date unit sales realized in Pulte's domestic homebuilding operations. The lower rate of increase for the quarter is the result of competitive market conditions due to rising mortgage interest rates, which decreased non-Pulte originations during the quarter. Year-to-date, Pulte originations now comprise 76% of total production versus 73% in the same period in 1998, while for the third quarter Pulte originations were 81% in 1999 and 71% in 1998. Refinancings approximated 5% of total loan originations for the nine month period ended September 30, 1999, compared to 9% for the same period in 1998. At September 30, 1999, loan application backlog increased 23% to $662,700 as compared with $537,900 at September 30, 1998. Pulte continues to hedge its mortgage pipeline in the normal course of its business and there has been no change in Pulte Mortgage's strategy or use of derivative financial instruments in this regard. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, which is required to be adopted for years beginning after June 15, 2000, with earlier adoption encouraged. This Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Pulte Mortgage, in the normal course of business, uses derivative financial instruments to meet the financing needs of its customers and reduce its own exposure to fluctuations in interest rates. The Company plans to adopt this statement on January 1, 2001, but has not yet determined what effect Statement No. 133 will have on its earnings and financial position. 31 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Financial Services Operations (continued): During the three and nine month periods ended September 30, 1999, origination fees increased 29% and 49%, respectively. This increase is attributable to higher revenues per loan and an increase in non-funded (brokered) loans. Pricing and marketing gains for the three months ended September 30, 1999 decreased 20% due to increasingly competitive market conditions. For the nine months ended September 30, 1999, a 12% increase was primarily the result of increased funded mortgage originations. Net interest income increased 83% and 67%, respectively, due to higher funded production and a widening of the yield curve. General and administrative expenses for the third quarter and nine months ended September 30, 1999 were 24% and 21% higher than 1998, respectively, due to higher loan production and costs related to year 2000 compliance efforts. Financing Activities: The Company's secured financing operations, which had been conducted by the limited-purpose subsidiaries of Pulte Financial Companies, Inc. (PFCI), included the acquisition of mortgage loans and mortgage-backed securities financed principally through the issuance of long-term bonds secured by such mortgage loans and mortgage-backed securities. During the first quarter of this year, PFCI recognized a net gain of approximately $1,700 in connection with the early redemption of its remaining mortgage-backed bond portfolio. Corporate: Corporate is a non-operating business segment whose primary purpose is to support the operations of the Company's 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. The Company views the corporate function as a form of research and development, by exploring and nurturing strategic initiatives centered on new business and product development. As a result, the corporate segment's operating results will vary from quarter to quarter as these strategic initiatives evolve. The following table presents corporate results of operations for the three and nine months ended September 30, 1999 and 1998: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net interest expense................. $ 5,290 $ 3,440 $ 14,931 $ 11,156 Other corporate expenses, net........ 4,401 1,868 11,407 5,851 ----------- ------------ ------------- ------------- Loss before income taxes............. $ 9,691 $ 5,308 $ 26,338 $ 17,007 =========== ============ ============= ============= </TABLE> 32 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Corporate (continued): Pre-tax loss of the Company's corporate business segment increased $4,383 and $9,331, respectively, from the three and nine month periods ended September 30,1998. The increase in pre-tax loss for the quarter primarily reflects an increase of approximately $1,850 in the corporate net interest spread and an increase in other corporate expenses, net of approximately $2,500. Year-to-date results reflect an increase of approximately $3,800 in the corporate net interest spread, and an increase in other corporate expenses, net, of approximately $5,500. Increases in the corporate net interest spread are attributed to increased borrowings for additional capital investment, primarily in the domestic homebuilding operations. Other corporate expenses, net in 1998 were reduced by the net of one-time events, including a gain of approximately $5,000 on the sale of Expression Homes, partially offset by provisions of $3,500 for the write down of certain projects and R&D investments. Restructuring: During the fourth quarter of 1997, a pre-tax charge of $20,000 was recorded in connection with the reorganization of the Company's operations. This reorganization entailed: o the realignment of homebuilding operations into business lines which focus on specific customer segments; o the creation of a mortgage applications center, which increased overhead leverage by moving Pulte Mortgage's loan officers from field branches to a central location in Denver, Colorado; and o the right-sizing of its workforce on a company-wide basis. The 1997 restructuring charge included $11,787 of separation and other costs for approximately 150 employees, $7,000 of asset impairments and $1,213 of other costs, principally for office leases. The after-tax effect of this charge was $12,300 or $.28 per diluted share (adjusted for the effect of the Company's 2-for-1 stock split effective June 1, 1998). As of September 30, 1999, the Company has severed employment with approximately 150 employees. The following table displays a rollforward of the liabilities accrued for the Company's restructuring from December 31, 1998 to September 30, 1999: <TABLE> <CAPTION> Balance at 1999 Balance at December 31, Reserve September 30, Type of Cost 1998 Uses 1999 - ------------ ---------------- ---------------- ---------------- <S> <C> <C> <C> Homebuilding operations: Employee separation and other $ 1,502 $ (600) $ 902 Other 255 (125) 130 ---------------- ---------------- ---------------- 1,757 (725) 1,032 ---------------- ---------------- ---------------- Mortgage Banking operations: Employee separation and other 337 (150) 187 Other 79 (77) 2 ---------------- ---------------- ---------------- 416 (227) 189 ---------------- ---------------- ---------------- Corporate: Employee separation and other 922 (343) 579 ---------------- ---------------- ---------------- $ 3,095 $ (1,295) $ 1,800 ================ ================ ================ </TABLE> The remaining accrual for restructuring costs at September 30, 1999 primarily relates to longer term severance agreements and deferred compensation liabilities which are expected to be fully utilized by December 31, 1999. 33 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Liquidity and Capital Resources: Continuing Operations: The Company's net cash used in operating activities amounted to $89,933, reflecting an increase in the use of operating funds as compared with the same period last year. This increase is primarily attributable to increases in inventory levels resulting from land purchases and increases in other assets, partially offset by a decrease in PMC's portfolio of residential mortgage loans available-for-sale, and increases in net income and accounts payable. Net cash provided by investing activities increased to $3,083 reflecting the sale of the underlying collateral of PFCI's mortgage-backed bond portfolio which was redeemed during the first quarter of this year, offset by the purchase of BRE's interest in the net assets of the Company's Active Adult joint venture. Cash used in 1998 investing activity primarily reflects the Company's purchase of Radnor Homes and DiVosta & Company. Net cash used in financing activities decreased to $7,761 in 1999, which uses reflect PFCI's redemption of its remaining mortgage-backed bond portfolio, payments on collateralized short-term debt related to PMC's residential mortgage loan portfolio, repayment of unsecured senior subordinated debentues and other debt, offset by increased borrowings under the Company's revolving credit facility. The Company finances its land acquisitions, development and construction activities from internally generated funds and existing credit agreements. The Company had $150,000 of borrowings under its $415,000 unsecured revolving credit facilities and approximately $28,000 of borrowings under its $60,000 secured credit line at September 30, 1999. PMC provides mortgage financing for many of its home sales and uses its own funds and borrowings made available pursuant to various committed and uncommitted credit arrangements which, at September 30, 1999, amounted to $275,000. PMC has received a conditional commitment of an additional $70,000, which will be effective in December, 1999, for anticipated year end mortgage origination volume. There were approximately $136,000 of borrowings outstanding under the $275,000 PMC arrangement at September 30, 1999. Mortgage loans originated by PMC are subsequently sold to outside investors. The Company anticipates that there will be adequate mortgage financing available for purchasers of its homes. The Company's income tax liabilities are affected by a number of factors. During the second quarter, the Company revised its estimate of the effective tax rate for 1999 to 37.5% from a previously reported estimate of between 39% and 40%. The reduced income tax rate primarily relates to a lower effective state tax rate and the favorable resolution of various state income tax matters, including the utilization of certain state net operating loss carry-forwards. The Company expects its effective tax rate to increase to 38.5% in 2000. At September 30, 1999, the Company had cash and equivalents of $30,587 and total long-term indebtedness of $518,391. Long-term indebtedness includes $487,642 of unsecured senior notes, a $21,000 unsecured promissory note and other Pulte limited recourse debt of $9,749. During the third quarter of 1999, the Company redeemed the remaining $22,405, 10.125% unsecured senior subordinated debentures due July, 1999. Included in discontinued operations is First Heights advances of $760. The Company also has other non-recourse short-term notes payable of $51,725. Sources of the Company's working capital at September 30, 1999 include its cash and equivalents, its $210,000 committed unsecured revolving credit facility, and an additional $205,000 committed unsecured revolving credit facility which closed in September, 1999. The Company's Active Adult operation finances its development and construction activities through a $60,000 line of credit secured by its inventory. The Company anticipates paying off this line during the fourth quarter, and funding these operations through its unsecured revolving credit facilities. During the remainder of 1999, management anticipates projected homebuilding and corporate working capital requirements will be principally funded with internally generated funds and the previously mentioned credit facilities. The Company routinely monitors current operational requirements and financial market conditions to evaluate the utilization of available financing sources, including securities offerings. 34 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Liquidity and Capital Resources (continued): Discontinued Operations: The Company's remaining investment in First Heights at September 30, 1999 approximated $29,000. Since the acquisition of First Heights, the Company's income taxes have been significantly impacted by its thrift operations, principally because payments received from the FSLIC Resolution Fund (FRF) were exempt from federal income taxes. The Company's thrift assets are subject to regulatory restrictions and a court order and thus are not available for general corporate purposes. The final liquidation of the Company's thrift operations is dependent on the final resolution of outstanding matters with the Federal Deposit Insurance Corporation (FDIC), manager of FRF. As discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, the Company vigorously disagrees with the Final Judgment entered by the United States District Court and has appealed to the Sixth Circuit Court of Appeals. The Company has posted bonds in the amount of $117 million. Based upon the Company's assessment of its legal position in the District Court litigation with the FDIC, as well as the expected duration of the legal process in this case, the Company does not currently believe that the judgment ordered by the District Court against Pulte Diversified Companies, Inc. and First Heights will have a material impact on the Company's liquidity. Inflation The Company 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 the Company's financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. The Company attempts to pass through to its customers any increases in its costs through increased sales prices and, to date, inflation has not had a material adverse effect on the Company's results of operations. However, there is no assurance that inflation will not have a material adverse impact on the Company's future results of operations. Information Technology and Year 2000 Compliance: An integral part of the Company's operating strategy is to provide Pulte management and employees the information systems needed to support the Company's current operations and future growth, a strategy supported by Pulte's investment in technology, which in 1998, and forecasted for 1999, will exceed $15,000 in annual spending. Management believes that substantial progress has been made toward the goal of developing an integrated set of systems to support marketing, land and product development, home sales, construction, service, and comprehensive financial management. A critical component of this integrated systems effort involves replacement of the Company's existing accounting systems. This new system is designed to enhance access to and reporting of operating results and other financial measurements, as well as substantially resolve the Company's exposure to Year 2000 risk (the inability of certain computer software, hardware and other equipment with embedded computer chips to properly process two-digit year-date codes after 1999). To address the millennium date change issue, the Company's homebuilding and corporate operations performed risk assessments of information technology (IT), non-IT (embedded technology such as microprocessors in office equipment and facilities) and essential homebuilding supplier/contractor relationships. The Company's mortgage banking operation also completed a Year 2000 risk assessment for both internal information systems and external relationships. 35 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Information Technology and Year 2000 Compliance (continued): The Company's State of Readiness The chart illustrated below summarizes the Company's current major information systems and management's current assessment of the potential risk of Year 2000 issues. The status of each major information technology (IT) activity is reported by "phase" as defined below. Phase 1 Assessment Exposure (analysis and testing) Phase 2 Problem correction and validation Phase 3 Implementation/rollout of upgrades and corrections Phase 4 Communication with affected parties <TABLE> <CAPTION> 1999 Expected Date of Completion IT related Systems IT Dependency Phase/Status (all Phases) - ------------------ ------------- ------------ ------------------ <S> <C> <C> <C> 1. Integrated Business Systems - Financial accounting High 3 November 30 - Sales & Construction support Medium Complete Complete - Service management Low Complete Complete - Payroll and Benefits administration High Complete Complete 2. Datacenter Equipment & Operations High Complete Complete 3. Data and Voice Communications Networks High Complete Complete 4. Desktop PC's, incl. electronic mail, except leased Medium Complete Complete equipment 5. Key suppliers - Banking providers Medium Complete Complete - Field trade contractors and material suppliers Low Complete Complete </TABLE> Non-IT Systems The Company does not own or operate any material "non-IT" systems, facilities, or industrial equipment that it believes might be adversely affected by the Year 2000 issue. All administrative office premises are leased, and are typically low-rise facilities in major metropolitan areas. All telephone systems and electronic office equipment have been assessed and corrected as part of Project 3 listed above. Customer and Supplier/Contractor Relationships Customer deliverables are not critically reliant on information technology. In markets where contracts and legal correspondence are computer generated, final documents are always printed in hard-copy form for signature. Should existing computerized sales systems be rendered inoperable for any reason, sales personnel are currently trained to prepare all required customer documentation manually. In addition, standard Pulte contract language does not permit customers to cancel purchases for nominal delays. The Company's trade contractors/suppliers in general are not highly reliant on information systems for delivery of service or materials to the job-site, as is the case for the majority of the homebuilding industry. Day-to-day business communication of printed schedules and home specification information typically occurs via fax or manual exchange in printed form (as opposed to electronically, e.g., via EDI data communications). Pulte has provided Year 2000 risk assessment guidelines to its field operations and purchasing managers during the year to ensure that any predictable Year 2000-related issues can be identified and resolved, or alternative supplier relationships 36 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Information Technology and Year 2000 Compliance (continued): established with compliant service providers. Current Pulte operating policy normally requires that supply relationships be established locally with at least two alternative sources for all building tasks and materials supply. The Company has exchanged Year 2000 readiness information with all national contract suppliers. Such Year 2000 readiness information has already been exchanged with all of the Company's major banks. Verification testing has been performed with each major bank to demonstrate the ability to exchange data after December 31, 1999. The Risks of the Company's Year 2000 Issues and The Company's Contingency Plans The major focus of the Company's information systems efforts in 1999 will be to complete the nationwide roll-out of its new financial accounting and operating systems. Management believes that this initiative is substantially complete and is on schedule with the roll-out to be completed by November 30, 1999. While these systems have been tested for functionality after December 31, should an unlikely, unforeseen issue occur, the Company plans to resort to the use of manual business tracking processes which could delay normal day-to-day back office activities, but which would not interfere with the Company's ability to complete the construction of homes or close home sales. A plan for monitoring year-end events and communications within the organization to ensure continuity of business operations is being implemented. While it is believed that disruptions to external environmentals (electric utility, long distance phone carriers, etc.) are unlikely and will be of limited occurrence and short duration, an emergency management process will be in place to communicate, manage, and resolve or implement contingencies for these potential service disruptions. Staffing plans for monitoring and managing key business information systems are in place to provide for rapid response to any unplanned event. While there can be no assurance that no legal claims will arise due to perceived or real Year 2000 issues, the Company does not expect a material impact on its liquidity, financial position or results of operations caused by internal Year 2000 issues or by possible claims asserted by third parties. Costs Related to Year 2000 The cumulative portion of total IT spending which has been capitalized for the Company's internally-developed business software, a project which comprises the majority of the Year 2000 effort, approximated $6,800 at September 30, 1999. The Company anticipates spending an additional $1,000 this year to complete the project. In addition to the software development costs, the Company expects to incur additional expenses to be Year 2000 compliant; however, the Company does not expect the cost for such compliance to have a material impact on its liquidity, financial position or results of operations. 37 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to interest rate risk on its long term debt. The Company seeks to minimize its interest rate exposure by using variable rate financing; however, the Company runs the risk of interest rate declines with respect to its fixed rate long term corporate debt instruments. The following table sets forth, as of September 30, 1999, the Company's long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value: <TABLE> <CAPTION> ($000's omitted) Fair There- Value 1999 2000 2001 2002 2003 after Total 9/30/99 -------- -------- ------- -------- -------- ----- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive liabilities: Fixed interest rate debt: Pulte Corporation public debt instruments ........... $ -- -- -- -- 100,000 390,000 $ 490,000 $ 468,666 Average interest rate ...... -- -- -- -- 7.00% 7.74% 7.61% -- Pulte Diversified Companies, Inc., unsecured promissory note ....................... $ -- 14,000 7,000 -- -- -- $ 21,000 $ 21,000 Average interest rate ...... -- 8.00% 8.00% -- -- -- 8.00% -- Pulte Home Corporation other non-recourse debt ....................... $ 3,911 5,377 -- 461 -- -- $ 9,749 $ 9,749 Average interest rate ...... 9.17% 10.23% -- 8.25% -- -- 9.77% -- </TABLE> PMC, operating as a mortgage banker, is also subject to interest rate risk. Interest rate risk begins when PMC commits to lend money to a customer at agreed upon terms (i.e. commit to lend at a certain interest rate for a certain period of time). The interest rate risk continues through the loan closing and until the loan is sold to an investor. During 1999, this period of interest rate exposure averaged approximately 60 days. In periods of rising interest rates, the length of exposure will generally increase due to customers locking in an interest rate sooner as opposed to letting the interest rate float. In order to minimize its interest rate risk, PMC does two things; it finances the loans via a variable rate borrowing agreement tied to the Federal Funds rate and it hedges its loan commitments and closed loans through derivative financial instruments with off-balance sheet risk. These financial instruments include cash forward placement contracts on mortgage-backed securities, whole loan investor commitments, options on treasury future contracts, and options on cash forward placement contracts on mortgage-backed securities. PMC does not use any derivative financial instruments for trading purposes. Hypothetical changes in the fair values of PMC's financial instruments arising from immediate parallel shifts in long-term mortgage rates of plus 50, 100 and 150 basis points would not be material to the Company's financial results. The Company's aggregate net investment in Mexico approximated $39,700 at September 30, 1999. The Company estimates that this investment, which is exposed to foreign currency exchange risk, could devalue by as much as $1,200 during the remainder of 1999, assuming a hypothetical monthly devaluation of the Mexican peso against the U.S. dollar of one percent in each month of 1999. 38 PART 1. FINANCIAL INFORMATION (continued) PULTE CORPORATION Forward-Looking Statements: As a cautionary note, except for the historical information contained herein, certain matters discussed in Item 2., "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 3., "Quantitative and Qualitative Disclosures About Market Risk", are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such matters involve risks and uncertainties, including: the Company's exposure to certain market risks, changes in economic conditions, tax and interest rates, increases in raw material and labor costs, weather conditions, and general competitive factors, that may cause actual results to differ materially; its ability to resolve all outstanding matters related to First Heights (including the outcome of the Company's appeal in the District Court litigation with the FDIC), its ability to correct all material applications addressing the Year 2000 problem; as well as, the ability of the Company's vendors to correct all material applications addressing the Year 2000 problem, and the Company's assessment of the Year 2000 problem's impact on its financial results and operations. 39 PART II. OTHER INFORMATION Item 1. Legal Proceedings First Heights Related Litigation: Update on Lawsuit Filed on July 7, 1995 in the United States District Court, Eastern District of Michigan (the "Court"), by the Federal Deposit Insurance Corporation ("FDIC") against the Company, Pulte Diversified Companies, Inc. and First Heights Bank (collectively, "the Pulte Parties") (the "District Court Case"). See Note 4, Notes to Condensed Consolidated Financial Statements, which is contained in Part I, Item 1, of this Quarterly Report on Form 10-Q and which is incorporated by reference into this response. Item 5. Other Information The Company must receive notice of any proposals of shareholders that are intended to be presented at the Company's 2000 Annual Meeting of Shareholders, but that are not intended to be considered for inclusion in the Company's Proxy Statement and Proxy related to that meeting, no later than February 15, 2000 to be considered timely. Such proposals should be sent to the Company's Secretary at the Company's offices, 33 Bloomfield Hills Parkway, Suite 200, Bloomfield Hills, MI 48304 by certified mail, return receipt requested. If the Company does not have notice of the matter by that date, the Company's form of proxy in connection with that meeting may confer discretionary authority to vote on that matter, and the persons named in the Company's form of proxy will vote the shares represented by such proxies in accordance with their best judgment. Item 6. Exhibits Page herein or incorporated Exhibit number and description by reference from - ------------------------------ --------------------------- (10) 364-Day Credit Agreement among Pulte Corporation as Borrower, the Material Subsidiaries of Pulte Corporation as Guarantors, the Lenders Identified herein, and Bank of America, N.A., as Administrative Agent, dated as of September 15, 1999. (27) Financial Data Schedule All other exhibits are omitted from this report because they are not applicable. 40 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PULTE CORPORATION /s/ Roger A. Cregg ----------------------------- Roger A. Cregg Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Vincent J. Frees ----------------------------- Vincent J. Frees Vice President and Controller (Principal Accounting Officer) Date: November 12, 1999 41