UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9804
PULTE HOMES, INC.
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 (X) NO ( )
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Exchange Act). YES (X) NO ( )
Number of shares of common stock outstanding as of October 31, 2003: 62,050,647
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.
TABLE OF CONTENTS
INDEX
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PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS
PULTE HOMES, INC.CONDENSED CONSOLIDATED BALANCE SHEETS($000’s omitted)
Note: The condensed consolidated 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.
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PULTE HOMES, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(000’s omitted, except per share data)(Unaudited)
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PULTE HOMES, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY($000’s omitted)(Unaudited)
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PULTE HOMES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS($000’s omitted)(Unaudited)
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PULTE HOMES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
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PULTE HOMES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)(Unaudited)
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2. Segment information (continued)
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3. Senior notes and subordinated notes
4. Other financing arrangements
5. Shareholder’s equity
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6. Discontinued operations
7. Supplemental Guarantor information ($000’s omitted)
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7. Supplemental Guarantor information (continued)
CONDENSED CONSOLIDATING BALANCE SHEETSeptember 30, 2003($000’s omitted)
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CONDENSED CONSOLIDATING BALANCE SHEETDecember 31, 2002($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended September 30, 2003($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the nine months ended September 30, 2003($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended September 30, 2002($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the nine months ended September 30, 2002($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the nine months ended September 30, 2003($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the nine months ended September 30, 2002($000’s omitted)
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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 nine-month periods ended September 30, 2003 and 2002 is as follows ($000’s omitted):
A comparison of pre-tax income (loss) for the three and nine months ended September 30, 2003 and 2002 is as follows:
During the third quarter of 2003 and 2002, we recorded non-cash, after-tax gains of $7.9 million and $10.0 million, respectively, related to the favorable resolution of certain tax matters relating to our thrift operation, which we discontinued in 1994.
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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 nine months ended September 30, 2003 and 2002, are as follows ($000’s omitted):
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Homebuilding Operations (continued):
Domestic Homebuilding:
The Domestic Homebuilding business unit represents our core business. Our operations are conducted in 44 markets located throughout 26 states within the following geographic regions:
The metropolitan Phoenix market 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 September 30, 2003. Furthermore, the metropolitan Las Vegas market accounted for 12% of unit net new orders and 10% of settlement revenues for the same period. For the nine-month period of 2003, the metropolitan Phoenix market accounted for 12% of unit net new orders and unit settlements and 10% of settlement revenues, while the metropolitan Las Vegas market accounted for 10% of unit net new orders. In the prior year, the metropolitan Phoenix market accounted for 11% of unit net new orders and unit settlements and 10% of settlement revenues for the three and nine months ended September 30, 2002. No other individual market represented more than 10% of total Domestic Homebuilding unit net new orders, unit settlements or revenues for the three or nine-month periods ended September 30, 2003 or 2002.
The following table presents selected unit information for our Domestic Homebuilding operations:
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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 14% to a record 9,100 units for the three months ended September 30, 2003. Net new orders for the nine months ended September 30, 2003 increased 9%. Unit settlements also set a record for the quarter at 8,637 units, representing an increase of 19% over the same period in 2002. Unit settlements for the nine months ended September 30, 2003 increased 11%. The average selling price for homes closed increased 9% to $263,000 for the three months ended September 30, 2003, and 8% to $258,000 for the nine 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 16,646 units. The dollar value of backlog was up 32% to $4.7 billion.
The following table presents a summary of pre-tax income for our Domestic Homebuilding operations for the three and nine months ended September 30, 2003 and 2002 ($000’s omitted):
Homebuilding gross profit margins from home settlements increased to 21.4% for both the three and nine months ended September 30, 2003, compared to 20.2% and 20.0%, respectively, for the same periods in the prior year. This increase is primarily attributable to continued strong customer demand, positive home pricing and product and geographic mix.
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 increased 10 basis points for both the three and nine months ended September 30, 2003 to 9.3% and 10.2%, respectively. Selling, general and administrative expenses were negatively impacted by higher startup costs associated with an increased number of new communities and additional expenses incurred in the Northeast, Southeast and Midwest due to prolonged periods of adverse weather conditions.
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Interest expense increased $8.9 million and $17.6 million, respectively, over the three and nine months ended September 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 to support the continued growth of the business.
Equity income increased $9.4 million and $16.9 million, respectively, during the three and nine-month periods ended September 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, which was relatively flat for both the three and nine-month period, includes several miscellaneous items including amortization of intangible assets.
Domestic Homebuilding inventory at September 30, 2003, was approximately $5.1 billion, of which $3.9 billion related to land and land development. At September 30, 2002, inventory was approximately $4.2 billion, of which $3.1 billion related to land and land development. Other assets included approximately $293.2 million and $247.3 million in land held for disposition at September 30, 2003 and 2002, respectively.
At September 30, 2003 and 2002, our Domestic Homebuilding operations controlled approximately 239,500 and 158,300 lots, respectively. Approximately 103,300 and 84,400 lots were owned, and approximately 82,800 and 34,100 lots were under option agreements approved for purchase at September 30, 2003 and 2002, respectively. In addition, there were approximately 53,400 and 39,800 lots under option agreements, pending approval, at September 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 $2.4 billion at September 30, 2003. In addition, total purchase price applicable to land under option pending approval was valued at $1.5 billion at September 30, 2003. Land option agreements, which may be cancelled at our discretion, may extend over several years and are secured by deposits totaling $106.9 million, which are generally non-refundable.
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 the structure of its operations 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.
Modest gains in our International Homebuilding operations for the third quarter of 2003 compared with the prior year reflect actions we have taken to drive performance, rationalize land investments and enhance current returns. We are also in the process of evaluating various long-term strategic alternatives with regard to our International operations.
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International Homebuilding (continued):
The following table presents selected financial data for our International Homebuilding operations for the three and nine months ended September 30, 2003 and 2002 ($000’s omitted):
Unit settlements for Pulte and Pulte-affiliated entities were down 1% and 13%, respectively, for the three and nine months ended September 30, 2003, as slight increases in Puerto Rico and Argentina were negated by a decline in Mexico. Settlements for Pulte and Pulte-affiliated entities in Mexico were 1,852 and 4,362 for the three and nine months ended September 30, 2003 compared to 1,915 and 5,175 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 September 30, 2003 increased 19% as a result of higher selling prices realized in Mexico and Argentina. Increased revenues for the nine-month period are due to consolidation of the operations in Mexico for a full nine months in 2003 versus eight months in 2002, aided by higher selling prices in Mexico and Argentina. Revenues from our operations in Mexico were $48.5 million and $115.6 million, respectively, for the three and nine months ended September 30, 2003, compared to $44.9 million and $107.1 million in 2002. Argentina contributed revenues of $8.6 million and $23.1 million for the three and nine months ended September 30, 2003 compared to $3.6 million and $13.8 million in 2002. Revenues in Puerto Rico were $3.3 million and $13.9 million, respectively, for the three and nine-month periods in 2003 versus $2.1 million and $3.3 million 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 during that time period.
Higher selling prices and product mix shifts had a positive impact on gross margins. Gross margins increased 280 basis points to 20.7% for the three months ended September 30, 2003 and 30 basis points to 20.2% for the nine-month period.
Selling, general and administrative expenses as a percent of revenues increased to 17.9% from 16.7% for the three-month period and 20.6% from 20.0% for the nine month period. This increase in selling, general and administrative expenses as a percent of revenue for both periods was driven by restructuring expenses incurred in an effort to enhance the overall performance of our operations in Mexico.
Our operations in Argentina and Mexico are affected by fluctuations in currency rates for those countries. Transaction gains and losses for the three and nine months ended September 30, 2003 and 2002, classified as other income (expense), net, were not significant. During the nine months ended September 30, 2003, we recorded a foreign currency translation gain of $2.0 million for Argentina and a translation loss of $4.5 million for Mexico, as a component of accumulated other comprehensive income on the balance sheet. At September 30, 2003, our investment in Argentina and Mexico, net of accumulated foreign currency translation adjustments, approximated $14.0 million and $66.1 million, respectively.
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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 nine-month periods ended September 30, 2003, was $13.4 million and $51.4 million, respectively, compared to $19.2 million and $47.6 million for the prior year periods. The decrease in pretax income for the three months was primarily the result of a less favorable interest rate environment during the quarter and an increase in selling, general and administrative expenses necessary to support higher production levels. The increase in pretax income for the nine months was due to higher production volume and more favorable interest rates experienced in the first six months of the year.
The following table presents mortgage origination data for Pulte Mortgage:
Mortgage origination unit and principal volume for the three months ended September 30, 2003, increased 33% and 42%, respectively, and 31% and 39% for the nine-month period, respectively. The growth is attributable to an increase in the capture rate from 78% to 83% for the three-month period and 77% to 83% for the nine-month period combined with the volume increases experienced in our homebuilding business 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 82% and 81% of total Pulte Mortgage unit production for the three and nine months ended September 30, 2003, respectively, compared with 84% and 85%, respectively, in 2002. Refinancings accounted for approximately 9% of total originations for the three months ended September 30, 2003, compared to 8% in the prior year. For the nine months ended September 30, 2003, refinancings represented 10% of total originations, compared to 8% in 2002. Adjustable rate mortgages (ARMs) represented 24% of total originations for the three months ended September 30, 2003, compared to 14% in the prior year. ARMs represented 19% and 12% of total originations for the nine months ended September 30, 2003 and 2002, respectively. At September 30, 2003, loan application backlog more than doubled to $2.7 billion as compared with $1.3 billion at September 30, 2002.
Income from our title operations increased to $3.7 million for the three months ended September 30, 2003, from $3.1 million in 2002, and to $8.8 million for the nine-month period, from $8.0 million in 2002. Our minority interest in Su Casita, a Mexican mortgage banking company, contributed income of $768,000 for the three months ended September 30, 2003, compared to $876,000 in 2002, and $3.1 million for the nine months ended September 30, 2003 compared to $2.8 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.
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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 nine-month periods ended September 30, 2003 and 2002 ($000’s omitted):
The increase in other corporate expenses, net for both the three and nine months ended September 30, 2003 can be attributed to income recognized in the prior year periods from the sale and adjustment to fair value of various non-operating parcels of commercial land held for sale.
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 September 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 nine-month periods ended September 30, 2003 and 2002, excluding interest incurred by our financial services operations, was approximately $44.2 and $131.4 million and $40.1 and $119.3 million, respectively.
Discontinued Operations:
In September 2003, the United States Court of Federal Claims issued final judgment that we have been damaged by approximately $48.7 million as a result of the United States government’s breach of contract with us. The final judgment follows the Court’s August 17, 2001 ruling 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. The United States government and we recently filed Notices of Appeal with the United States Court of Appeals for the Federal Circuit. Accordingly, any gain related to this litigation will be recognized only upon final resolution.
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Liquidity and Capital Resources:
Our net cash used in operating activities amounted to $433.3 million compared to cash provided by operating activities of $93.7 million in the prior year. This change was primarily driven by an increase in inventories. Net cash used in and provided by investing activities primarily represents proceeds from the sale and purchase of property and equipment. Net cash provided by financing activities of $164.4 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 provided by financing activities was $38.8 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. Effective October 1, 2003, we replaced our $570 million revolving credit facility with an $850 million facility that includes the capacity to issue letters of credit up to $500 million. This new credit facility expires October 1, 2008. We had no borrowings under our unsecured revolving credit facility at September 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. Pulte Mortgage has committed credit arrangements of $825 million comprised of a $275 million bank revolving credit facility and a $550 million annual asset-backed commercial paper program. There were approximately $468.1 million of borrowings outstanding under existing Pulte Mortgage arrangements at September 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 2013. Proceeds from this issuance were used to retire our $175 million 9.5% senior notes that 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 that 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 2033, in anticipation of the scheduled retirement of approximately $180 million principal outstanding of senior and subordinated 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 including continued investment in our 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 nine months of 2003. At September 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 September 30, 2003, we had cash and equivalents of $312.2 million and $2.3 billion of senior notes and senior subordinated notes. Other financing included limited recourse collateralized financing totaling $106.4 million. Sources of our working capital include our cash and equivalents, our $850 million committed unsecured revolving credit facility and Pulte Mortgage’s $825 million revolving credit facilities. Our debt-to-total capitalization, excluding our collateralized debt, was approximately 42% at September 30, 2003, and approximately 38% 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.
In September 2003, we filed a mixed-security shelf registration statement with the Securities and Exchange Commission pursuant to which we may issue up to a combined $1.5 billion of debt and equity securities.
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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 for 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 risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns. FIN 46 applied immediately to all variable interest entities created after January 31, 2003 and is effective no later than the first interim or annual period ending after December 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 $62.3 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 December 31, 2003.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. With the exception of certain measurement criteria deferred indefinitely by the FASB, SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The implementation of SFAS No. 150 is not expected to have a material impact on our results of operations, financial condition or cash flows.
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Critical Accounting Policies and Estimates:
There have been no significant changes to our critical accounting policies and estimates during the nine months ended September 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 Disclosure 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 September 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.
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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 in 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 September 30, 2003. Based upon, and as of the date of that evaluation, our 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 September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number and Description
(b) Reports on Form 8-K
No reports on Form 8-K were filed by us during the quarter for which this report is filed. We furnished a Current Report on Form 8-K on October 23, 2003, reporting the information required by Item 12 in connection with our press release dated October 22, 2003, announcing our earnings for the three and nine months ended September 30, 2003. No financial statements were filed, although we furnished the financial information included in the press release with the Form 8-K.
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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.
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10-Q EXHIBIT INDEX