UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2003OR( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9804
PULTE HOMES, INC.(Exact name of registrant as specified in its charter)
100 Bloomfield Hills Parkway, Suite 300Bloomfield 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 ü NO .
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Exchange Act).
YES ü NO
Number of shares of common stock outstanding as of July 31, 2003: 61,599,127
Website Access to Company Reports, Codes and Charters
Pulte’s internet website address is www.pulte.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission. Our code of ethics for principal officers, our corporate governance guidelines and the charters of the Audit, Compensation, and Nominating and Governance Committees of our Board of Directors, are also posted on our website.
1
TABLE OF CONTENTS
PULTE HOMES, INC.
INDEX
2
PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS
PULTE HOMES, INC.CONDENSED CONSOLIDATED BALANCE SHEETS($000’s omitted)
Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
See accompanying Notes to Condensed Consolidated Financial Statements.
3
PULTE HOMES, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(000’s omitted, except per share data)(Unaudited)
4
PULTE HOMES, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY($000’s omitted)(Unaudited)
5
PULTE HOMES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS($000’s omitted)(Unaudited)
6
PULTE HOMES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
7
PULTE HOMES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)(Unaudited)
8
9
10
11
12
CONDENSED CONSOLIDATING BALANCE SHEETJune 30, 2003($000’s omitted)
13
CONDENSED CONSOLIDATING BALANCE SHEETDecember 31, 2002($000’s omitted)
14
CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended June 30, 2003($000’s omitted)
15
CONSOLIDATING STATEMENT OF OPERATIONSFor the six months ended June 30, 2003($000’s omitted)
16
CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended June 30, 2002($000’s omitted)
17
CONSOLIDATING STATEMENT OF OPERATIONSFor the six months ended June 30, 2002($000’s omitted)
18
CONSOLIDATING STATEMENT OF CASH FLOWSFor the six months ended June 30, 2003($000’s omitted)
19
CONSOLIDATING STATEMENT OF CASH FLOWSFor the six months ended June 30, 2002($000’s omitted)
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview:
A summary of our operating results by business segment for the three and six-month periods ended June 30, 2003 and 2002 is as follows ($000’s omitted):
A comparison of pre-tax income (loss) for the three and six months ended June 30, 2003 and 2002 is as follows:
21
Homebuilding Operations:
Our Homebuilding segment consists of the following operations:
Certain operating data relating to our homebuilding operations and Pulte-affiliated joint ventures for the three and six months ended June 30, 2003 and 2002, are as follows ($000’s omitted):
22
Homebuilding Operations (continued):
Domestic Homebuilding:
The Domestic Homebuilding business unit represents our core business. Operations are conducted in 44 markets, located throughout 26 states, and are organized into five groups as follows:
Our metropolitan Phoenix operations accounted for 12% of Domestic Homebuilding unit net new orders and unit settlements, and 11% of Domestic Homebuilding settlement revenues for the three-month period ended June 30, 2003. Furthermore, our operations in Northern California and Southern California accounted for 11% and 10%, respectively, of Domestic Homebuilding settlement revenues for the same period. For the six-month period of 2003, our metropolitan Phoenix operations accounted for 12% of unit net new orders, 11% of unit settlements and 10% of settlement revenues, while our operations in Northern California accounted for 11% of settlement revenues. For the three-month period ended June 30, 2002, our metropolitan Phoenix operations accounted for 11% of Domestic Homebuilding unit net new orders and unit settlements, and 10% of Domestic Homebuilding settlement revenues. For the six-month period, the metropolitan Phoenix operations accounted for 11% of unit net new orders, 12% of unit settlements and 11% of settlement revenues. No other individual market represented more than 10% of total Domestic Homebuilding unit net new orders, unit settlements or revenues for the three and six-month periods ended June 30, 2003 or 2002.
The following table presents selected unit information for our Domestic Homebuilding operations:
23
Domestic Homebuilding (continued):
Continued strong demand for new housing was the primary driver for increases in net new orders and unit settlements. Net new orders increased 11% to a record 9,191 units for the three months ended June 30, 2003. Net new orders for the six months ended June 30, 2003 increased 6% to 17,424 units. Unit settlements also set a record for the quarter at 7,112 units, an increase of 8% over the same period in 2002. Unit settlements for the six months ended June 30, 2003 increased 7% to 12,897 units. The average selling price for homes closed increased 8% to $259,000 for the three months ended June 30, 2003, and 7% to $255,000 for the six months then ended. Changes in average selling price reflect a number of factors, including changes in market selling prices and the mix of product closed during each period. Ending backlog, which represents orders for homes that have not yet closed, grew to a record 15,199 units. The dollar value of backlog was up 30% to over $4.2 billion.
The following table presents a summary of pre-tax income for our Domestic Homebuilding operations for the three and six months ended June 30, 2003 and 2002 ($000’s omitted):
Homebuilding gross profit margins from home settlements increased to 21.8% and 21.4%, respectively, for the three and six months ended June 30, 2003, compared to 19.9% and 20.0%, respectively, for the same periods in the prior year. This increase is attributable to continued strong customer demand, positive home pricing and product and geographic mix. Purchase accounting adjustments associated with the merger with Del Webb reduced gross margin by 10 basis points for both the three and six months ended June 30, 2002.
We consider land development one of our core competencies. This includes the entitlement and development of certain land positions for sale primarily to other homebuilders, as well as to retail and commercial establishments. Contributions from land sales were relatively flat when compared to the prior year period. Revenues and their related gains/losses may vary significantly between periods, depending on the timing of land sales. We continue to rationalize certain existing land positions to ensure the most effective use of capital.
Selling, general and administrative expenses as a percentage of home settlement revenues were flat at 10.3% for the three months and increased 20 basis points to 10.8% for the six months ended June 30, 2003 when compared to the prior year period. Selling, general and administrative expenses in 2003 were negatively impacted by higher startup costs associated with an increased number of new communities and additional expenses incurred in the Northeast and Midwest due to prolonged periods of adverse weather conditions. Selling, general and administrative expenses, as a percentage of home settlement revenues, for 2002, included purchase accounting adjustments which added 20 basis points for both the three and six-month periods.
24
Interest expense increased $5.7 million and $8.6 million, respectively, over the three and six months ended June 30, 2003 as amounts previously capitalized into inventory are charged to interest expense. Interest capitalized into inventory has increased as a result of higher levels of inventory and indebtedness related to the merger with Del Webb and to support the continued growth of the business.
Equity income increased $1.6 million and $7.6 million, respectively, during the three and six-month periods ended June 30, 2003. The increase in both periods was driven by earnings from two Nevada-based joint ventures related to the sale of commercial and residential properties.
Other income (expense), net, totaled expense of $8.2 million and $5.8 million for the three months ended June 30, 2003 and 2002, respectively. The change is primarily due to an isolated construction service expense. Other income (expense), net, for the six-month period was relatively flat as construction service expenses in 2003 were comparable to the write-down of a land development investment and related receivable in 2002.
Domestic Homebuilding inventory at June 30, 2003, was approximately $4.7 billion, of which $3.6 billion related to land and land development. At June 30, 2002, inventory was approximately $4.0 billion, of which $3.1 billion related to land and land development. Other assets included approximately $237.7 million and $260.8 million in land held for disposition at June 30, 2003 and 2002, respectively.
At June 30, 2003 and 2002, our Domestic Homebuilding operations controlled approximately 212,700 and 144,700 lots, respectively. Approximately 94,600 and 83,700 lots were owned, and approximately 59,800 and 34,300 lots were under option agreements approved for purchase at June 30, 2003 and 2002, respectively. In addition, there were approximately 58,300 and 26,700 lots under option agreements, pending approval, at June 30, 2003 and 2002, respectively.
The total purchase price applicable to approved land under option for use by our homebuilding operations at future dates approximated $1.9 billion at June 30, 2003. In addition, the total purchase price applicable to land under option that is pending approval was valued at $1.3 billion at June 30, 2003. Land option agreements, which may be cancelled at our discretion, may extend over several years and are secured by deposits, which are generally non-refundable, totaling $93.9 million.
International Homebuilding:
Our International Homebuilding operations are primarily conducted through subsidiaries of International in Mexico, Puerto Rico and Argentina.
Mexico Effective January 1, 2002, International reorganized its structure within Mexico to create a single company, Pulte Mexico S. de R.L. de C.V. (Pulte Mexico), which ranks as one of the largest builders in the country. Prior to the reorganization, these operations were conducted primarily through five joint ventures throughout Mexico. Under the new ownership structure, which combines the largest of these entities, we own 63.8% of Pulte Mexico and have consolidated Pulte Mexico into our financial statements. The new operating structure facilitates growth, enables operating leverage and improves efficiencies through standardized systems and procedures.
Puerto Rico Operations in Puerto Rico are conducted through International’s 100%-owned subsidiary, Pulte International Caribbean Corporation, and three joint ventures.
Argentina Operations in Argentina, which are based in the greater Buenos Aires area, are conducted through Pulte SRL, International’s 100%-owned Argentine subsidiary.
25
International Homebuilding (continued):
The following table presents selected financial data for our International Homebuilding operations for the three and six months ended June 30, 2003 and 2002 ($000’s omitted):
Unit settlements for Pulte and Pulte-affiliated entities were down 15% and 20%, respectively, for the three and six months ended June 30, 2003, as increases in Puerto Rico were negated by a decline in Mexico. Settlements for Pulte and Pulte-affiliated entities in Mexico were 1,403 and 2,510 for the three and six months ended June 30, 2003 compared to 1,679 and 3,260 in 2002. Activity in Mexico continues to be slowed by the impact of changes made to local lending practices and the lack of alternative funding sources for homebuyers.
Revenues for the three months ended June 30, 2003 declined with the reduction in settlements. Increased revenues for the six-month period are due to consolidation of the operations in Mexico for a full six months in 2003 versus five months in 2002, aided by increased closings in Puerto Rico. Revenues from our operations in Mexico were $37.7 million and $67.0 million, respectively, for the three and six months ended June 30, 2003, compared to $43.8 million and $62.2 million in 2002. Argentina contributed revenues of $7.8 million and $14.6 million for the three and six months ended June 30, 2003 compared to $6.2 million and $10.2 million in 2002. Revenues in Puerto Rico were $3.4 million and $10.6 million, respectively, for the three and six-month periods in 2003 versus $1.2 million for both periods in 2002. Our consolidated operations in Puerto Rico did not have any closings during the first five months of 2002 as various factors delayed the opening of replacement communities.
The decline of sales activity, combined with product mix shifts, had a negative impact on gross margins and selling, general and administrative expenses as a percent of revenues for International. Gross margins declined 10 basis points to 21.7% for the three months ended June 30, 2003 and 160 basis points to 19.8% for the six-month period. Selling, general and administrative expenses as a percent of revenues increased to 20.7% from 18.2% for the three-month period. Selling, general and administrative expenses as a percent of revenues were relatively flat for the six-month period.
Our operations in Argentina recorded transaction losses of $187,000 and $361,000, respectively, for the three and six months ended June 30, 2003, despite a slight recovery by the Argentine peso to U.S. dollar exchange. Foreign currency transaction gains of $94,000 and $75,000 were recorded in the three and six months ended June 30, 2002, respectively. We also recorded a foreign currency translation gain of $2.6 million, as a component of cumulative other comprehensive income during the six months ended June 30, 2003. It remains unclear at this time how the financial and currency markets in Argentina will be impacted through the remainder of 2003 or how the current economic situation may affect customer home buying attitudes and the homebuilding business in general. At June 30, 2003, our investment in Argentina, net of cumulative foreign currency translation adjustments, approximated $15.1 million. Our operations in Mexico have been affected by a fluctuating dollar to Mexican peso exchange where transaction gains and losses were relatively flat for the three-month period. During the six months ended June 30, 2003, our operations in Mexico recorded transaction gains of $186,000 compared to losses of $373,000 in the prior year period. Furthermore, we recorded a foreign currency translation loss of $148,000, as a component of cumulative other comprehensive income during the six months ended June 30, 2003. At June 30, 2003, our investment in Mexico, net of cumulative foreign currency translation adjustments, approximated $66.5 million.
26
Financial Services Operations:
We conduct our financial services operations principally through Pulte Mortgage LLC (Pulte Mortgage), our mortgage banking subsidiary. Pre-tax income of our financial services operations for the three and six-month periods ended June 30, 2003, was $20.9 million and $38.0 million, respectively, compared to $16.2 million and $28.4 million for the prior year periods. This increase was due to higher production volume and favorable interest rates.
The following table presents mortgage origination data for Pulte Mortgage:
Mortgage origination unit and principal volume for the three months ended June 30, 2003, increased 36% and 44%, respectively, and 29% and 37% for the six-month period, respectively. The growth can be attributed to an increase in the capture rate from 77% to 83% for the three-month period and 76% to 82% for the six-month period and an increase in the average loan size over both periods. Our Domestic Homebuilding customers continue to account for the majority of total loan production, representing 80% of total Pulte Mortgage unit production for the three and six months ended June 30, 2003, compared with 88% and 86%, respectively, in 2002. Refinancings accounted for approximately 11% of total originations for the three months ended June 30, 2003, compared to 3% in the prior year. For the six months ended June 30, refinancings represented 11% of total originations in 2003 compared to 5% in 2002. Adjustable rate mortgages (ARMs) represented 15% of total originations for the three months ended June 30, 2003, compared to 11% in the prior year. ARMs represented 14% and 10% of total originations for the six months ended June 30, 2003 and 2002, respectively. At June 30, 2003, loan application backlog doubled to $2.4 billion as compared with $1.2 billion at June 30, 2002.
Income from our title operations increased to $3.0 million for the three months ended June 30, 2003, from $2.7 million in 2002, and to $5.1 million for the six months ended, from $4.9 million in 2002. Our minority interest in Su Casita, a Mexican mortgage banking company, contributed income of $1.1 million for the three months ended June 30, 2003, compared to $1.2 million in 2002, and $2.3 million for the six months ended June 30, 2003 compared to $2.1 million in 2002.
We hedge portions of our forecasted cash flow from sales of closed mortgage loans with derivative financial instruments to minimize the impact of changes in interest rates. We do not use derivative financial instruments for trading purposes.
27
Corporate:
Corporate is a non-operating business segment whose primary purpose is to support the operations of our subsidiaries as the internal source of financing, to develop and implement strategic initiatives centered on new business development and operating efficiencies, and to provide the administrative support associated with being a publicly traded entity listed on the New York Stock Exchange. As a result, the corporate segment’s operating results will vary from quarter to quarter as these strategic initiatives evolve.
The following table presents results of operations for this segment for the three and six-month periods ended June 30, 2003 and 2002 ($000’s omitted):
The increase in other corporate expenses, net for both the three and six months ended June 30, 2003 can be attributed to stock compensation expense and an increase in other performance based compensation expenses, partially offset by income recognized from the sale and adjustment to fair value of various non-operating parcels of commercial land held for sale.
Net interest expense for the three and six months ended June 30, 2003 was down slightly from the prior year amounts due to interest income earned on large cash balances held during the first six months of 2003.
Corporate net interest expense is net of amounts capitalized into homebuilding inventories. Capitalized interest is amortized to homebuilding interest expense over a period that approximates the average life cycle of our communities. Interest in inventory at June 30, 2003, increased primarily as a result of higher levels of inventory and indebtedness compounded by an increase in the average life cycle. Information related to Corporate interest capitalized into inventory is as follows ($000’s omitted):
Interest incurred for the three and six-month periods ended June 30, 2003 and 2002, excluding interest incurred by our financial services operations, was approximately $43.0 and $87.2 million and $40.1 and $79.2 million, respectively.
Discontinued Operations:
In July 2003, the United States Court of Federal Claims issued an opinion finding that we had been damaged by approximately $48.7 million as a result of the United States government’s breach of contract with us. The opinion follows the Court’s August 17, 2001 ruling that held that the United States breached the contract related to our 1988 acquisition of five savings and loan associations by enacting Section 13224 of the Omnibus Budget Reconciliation Act of 1993. Final judgment is expected in the near future, but is subject to appeal. Accordingly, any gain from this litigation will be recognized only upon final resolution.
28
Liquidity and Capital Resources:
Our net cash used in operating activities amounted to $319.0 million compared to cash provided by operating activities of $96.7 million in the prior year. This change was primarily driven by an increase in inventories. Net cash used in investing activities of $16.7 million was comparable to last year’s $9.4 million. Net cash provided by financing activities of $112.9 million in 2003 primarily represents proceeds from our $300 million senior notes issued in February 2003 and our $400 million senior notes issued in May 2003 largely offset by the repayment of Pulte Mortgage’s revolving credit facilities, our $175 million 9.5% senior notes and the remaining $155 million of Del Webb’s 9.375% subordinated notes. Net cash used in financing activities was $56.1 million in 2002, as proceeds from the issuance of $300 million senior notes were used for the repayment of certain Del Webb debt and our revolving credit facility.
We finance our homebuilding land acquisitions, development and construction activities from internally generated funds and existing credit agreements. We had no borrowings under our $570 million unsecured revolving credit facility at June 30, 2003.
Pulte Mortgage provides mortgage financing for many of our home sales and uses its own funds and borrowings made available pursuant to various credit arrangements. At June 30, 2003, Pulte Mortgage has committed credit arrangements of $500 million comprised of a $175 million bank revolving credit facility and a $325 million annual asset-backed commercial paper program. We are currently evaluating this facility in light of our increasing needs. During the first quarter of 2003, the $175 million bank revolving credit facility expired and was replaced with a new $175 million revolving credit facility with substantially the same terms which expire in March 2005. There were approximately $381 million of borrowings outstanding under the $500 million Pulte Mortgage arrangements at June 30, 2003. Mortgage loans originated by Pulte Mortgage are subsequently sold to outside investors. We anticipate that there will be adequate mortgage financing available for purchasers of our homes.
In February 2003, we sold $300 million of 6.25% unsecured senior notes, due in 2013. Proceeds from this issuance were used to retire our $175 million 9.5% senior notes which matured on April 1, 2003 and redeem the remaining outstanding principal balance of approximately $155 million of Del Webb’s $200 million 9.375% senior subordinated notes due 2009 which were called for redemption in March at a price equal to 104.688% of the principal amount.
In May 2003, we sold $400 million of 6.375% unsecured senior notes, due in 2033, in anticipation of the scheduled retirement of approximately $200 million principal outstanding of senior and subordinates notes coming due and callable in the fourth quarter of 2003 and the first quarter of 2004. The balance of this issuance will be used for general corporate purposes to include continued investment in the business.
Pursuant to our $100 million share repurchase program, we repurchased 395,400 common shares at an aggregate cost of approximately $18.2 million during the first six months of 2003. At June 30, 2003, we had remaining authorization to purchase common stock aggregating $77.5 million.
We anticipate that our effective tax rate for 2003 will approximate 38%, a decrease from the 2002 effective tax rate of 39%. Our income tax liability and related effective tax rate are affected by a number of factors. The reduction in the effective tax rate for 2003 is principally due to a lower expected effective state income tax rate for 2003 and the shareholders’ approval of our new Senior Management Annual Incentive Plan, which will allow for full tax deductibility of Plan payments under section 162(m) of the Internal Revenue Service Code.
At June 30, 2003, we had cash and equivalents of $391.1 million and $2.3 billion of senior notes and senior subordinated notes. Other financing included limited recourse collateralized financing totaling $125.0 million. Sources of our working capital at June 30, 2003, include our cash and equivalents, our $570 million committed unsecured revolving credit facility and remaining availability under Pulte Mortgage’s $500 million revolving credit facilities. Our debt-to-total capitalization, excluding our collateralized debt, was approximately 43% at June 30, 2003, and approximately 39% net of cash and equivalents. We expect to maintain our net debt-to-total capitalization at or below the 40% level. It is our intent to exercise the early call provision of the senior subordinated notes issued by Del Webb, as allowed under these notes. We routinely monitor current operational requirements and financial market conditions to evaluate the use of available financing sources, including securities offerings. At June 30, 2003, we had fully utilized our current mixed securities shelf registration. We intend to initiate a new shelf registration in the near term.
29
Inflation:
We, and the homebuilding industry in general, may be adversely affected during periods of high inflation, because of higher land and construction costs. Inflation also increases our financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. We attempt to pass through to our customers any increases in our costs through increased sales prices and, to date, inflation has not had a material adverse effect on our results of operations. However, there is no assurance that inflation will not have a material adverse impact on our future results of operations.
New Accounting Pronouncements:
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” Until this interpretation was issued, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. The interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the expected losses from the variable interest entity’s activities or is entitled to receive a majority of the entity’s expected residual returns. FIN 46 applied immediately to all variable interest entities created after January 31, 2003 and effective no later than the beginning of the first interim period that starts after June 15, 2003 for variable interest entities created prior to February 1, 2003.
In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of houses in the future. Pursuant to these land option agreements, we will provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Under FIN 46, if the entity holding the land under option is a variable interest entity, our deposit represents a variable interest in that entity. We do not guarantee the obligations or performance of the variable interest entity.
In applying the provisions of FIN 46, we evaluated all post-January 31, 2003 land option agreements and determined that we are subject to a majority of the expected losses or entitled to receive a majority of the expected residual returns under a limited number of these agreements. As the primary beneficiary under these agreements, we are required to consolidate the fair value of the variable interest entity. At June 30, 2003, we classified $60 million as Land, Not Owned, Under Option Agreements, representing the fair value of land under contract including deposits. The corresponding liability has been classified as Accounts Payable, Accrued and Other Liabilities on the balance sheet. The adoption of FIN 46 has had no impact on our results of operations or cash flows.
We are in the process of evaluating our land option agreements and joint venture agreements entered into prior to February 1, 2003. Depending on the terms and conditions of these agreements, we may be required to consolidate other variable interest entities. This evaluation will be completed by September 30, 2003.
30
Critical Accounting Policies and Estimates:
There have been no significant changes to our critical accounting policies and estimates during the six months ended June 30, 2003 compared to those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2002, except for the following:
Stock-based compensation:
We currently have several stock-based employee compensation plans. Effective January 1, 2003 we adopted the preferable fair value recognition provisions of SFAS No. 123, “Accounting for Stock Issued to Employees.” We selected the prospective method of adoption as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Under the prospective method, we will recognize compensation expense based on the fair value provisions of SFAS No. 123 for all new stock option grants effective January 1, 2003. Grants made prior to January 1, 2003 will continue to be accounted for under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. With the exception of certain variable stock option grants, no stock-based employee compensation cost is reflected in net income for grants made prior to January 1, 2003, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
We use the Black-Scholes option-pricing model to determine the fair value of each option grant. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, risk-free interest rates and expected lives. These assumptions reflect management’s best estimates, but these items involve inherent uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used, stock-based compensation expense could have been materially impacted. Furthermore, if management uses different assumptions in future periods, stock-based compensation expense could be materially impacted in future periods.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative disclosure:
We are subject to interest rate risk on our rate-sensitive financing to the extent long-term rates decline. The following table sets forth, as of June 30, 2003, our rate-sensitive financing obligations principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair market values ($000’s omitted).
Qualitative disclosure:
This information can be found in Item 7A., Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002, and is incorporated herein by reference.
31
Special Notes Concerning 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 forward-looking statements involve known risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (1) general economic and business conditions; (2) interest rate changes and the availability of mortgage financing; (3) the relative stability of debt and equity markets; (4) competition; (5) the availability and cost of land and other raw materials used by our homebuilding operations; (6) the availability and cost of insurance covering risks associated with our business; (7) shortages and the cost of labor; (8) weather related slowdowns; (9) slow growth initiatives and/or local building moratoria; (10) governmental regulation, including the interpretation of tax, labor and environmental laws; (11) changes in consumer confidence and preferences; (12) required accounting changes; (13) terrorist acts and other acts of war; and (14) other factors over which we have little or no control.
Item 4. Controls and Procedures
Management, including our President & Chief Executive Officer and Executive Vice President & Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2003. Based upon, and as of the date of that evaluation, the President & Chief Executive Officer and Executive Vice President & Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.
There has been no change in our internal control over financial reporting during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
32
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on May 15, 2003. The following matters were considered and acted upon, with the results indicated below.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number and Description
(b) Reports on Form 8-K
On May 13, 2003, we filed a Current Report on Form 8-K, which included two press releases dated the same day, announcing certain executive management changes.
On July 24, 2003, we filed a Current Report on Form 8-K, which included a press release dated the same day, announcing our earnings for the three and six months ended June 30, 2003.
33
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.
34
10-Q EXHIBIT INDEX
39