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 (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 April 30, 2004: 126,774,314
Website Access to Company Reports, Codes and Charters
Our 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 and are available in print upon request.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Note: The condensed consolidated balance sheet at December 31, 2003, 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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1. Basis of presentation and significant accounting policies
The consolidated financial statements include the accounts of Pulte Homes, Inc. and all of its direct and indirect subsidiaries (the Company). The direct subsidiaries of Pulte Homes, Inc. include Pulte Diversified Companies, Inc., Del Webb Corporation (Del Webb) and other subsidiaries that are engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s operating subsidiaries include Pulte Home Corporation, Pulte International Corporation (International) and other subsidiaries that are engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s non-operating thrift subsidiary, First Heights Bank, fsb (First Heights), is classified as a discontinued operation. The Company also has a mortgage banking company, Pulte Mortgage LLC (Pulte Mortgage), which is a subsidiary of Pulte Home Corporation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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-month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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, 2003.
Certain amounts previously reported in the 2003 financial statements and notes thereto were reclassified to conform to the 2004 presentation. In addition, all share and per share amounts have been restated to reflect the Company’s two-for-one stock split effected January 2, 2004.
Allowance for warranties
Home purchasers are provided with warranties against certain building defects. The specific terms and conditions of those warranties vary geographically. Most warranties cover different aspects of the home’s construction and operating systems for a period of up to ten years. The Company estimates the costs to be incurred under these warranties and records a liability for the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Changes to the Company’s allowance for warranties are as follows ($000’s omitted):
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PULTE HOMES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)(Unaudited)
1. Basis of presentation and significant accounting policies (continued)
Stock-based compensation
The Company currently has several stock-based employee compensation plans. Effective January 1, 2003, the Company adopted the preferable fair value recognition provisions of SFAS No. 123, “Accounting for Stock Issued to Employees.” The Company selected the prospective method of adoption as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Under the prospective method, the Company 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 in those years had an exercise price equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share as if the fair value method had been applied to all outstanding stock options in each period. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.
The Company also recorded compensation expense for restricted stock awards, net of related tax effects, of $1.1 million and $1.2 million for the three months ended March 31, 2004 and 2003, respectively. These amounts have been excluded from the reconciliation above as they would have no impact on pro forma net income as presented.
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Land, not owned, under option agreements
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. FIN 46 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 is effective no later than the first interim period ending after December 31, 2003 for variable interest entities created prior to February 1, 2003.
In the ordinary course of business, the Company enters into land option agreements in order to procure land for the construction of houses in the future. Pursuant to these land option agreements, the Company 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, the Company’s deposit represents a variable interest in that entity. The Company does not guarantee the obligations or performance of the variable interest entity.
In applying the provisions of FIN 46, the Company evaluated all land option agreements (including those created prior to February 1, 2003) and determined that the Company was 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, the Company is required to consolidate the fair value of the variable interest entity. At March 31, 2004 and December 31, 2003, the Company classified $136.0 and $73.3 million, respectively, as Land, Not Owned, Under Option Agreements on the balance sheet, 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 the Company’s results of operations or cash flows.
New accounting pronouncements
In March 2004, the Securities and Exchange Commission (SEC) released SEC Staff Accounting Bulletin No. 105 (SAB 105), Application of Accounting Principles to Loan Commitments. SAB 105 provides the SEC staff position regarding the application of accounting principles generally accepted in the United States to loan commitments that relate to the origination of mortgage loans held for resale. SAB 105 contains specific guidance on the inputs to a valuation-recognition model to measure loan commitments accounted for at fair value. Current accounting guidance requires the commitment to be recognized on the balance sheet at fair value from its inception through its expiration or funding. SAB 105 requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. In addition, SAB 105 requires the disclosure of both the accounting policy for loan commitments including the methods and assumptions used to estimate the fair value of loan commitments and any associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. SAB 105 is not expected to have a material impact on the Company’s results of operations, financial condition, and cash flows.
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2. Segment information
We have two reportable business segments, Homebuilding and Financial Services, and one non-operating segment, Corporate.
The Homebuilding segment consists of the following operations:
The Financial Services segment consists principally of mortgage banking and title operations conducted through Pulte Mortgage and other subsidiaries.
Corporate is a non-operating segment that supports the operations of our subsidiaries by acting as the internal source of financing, developing and implementing strategic initiatives centered on new business development and operating efficiencies, and providing the administrative support associated with being a publicly traded entity listed on the New York Stock Exchange.
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2. Segment information (continued)
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3. Inventory
Major components of the Company’s inventory were as follows ($000’s omitted):
4. Investments in unconsolidated entities
In January 2004, the Company purchased a 50% ownership interest in an entity that supplies and installs basic building components and operating systems, with an option to purchase the remaining 50% interest in the entity in July 2006 or earlier under certain circumstances. The Company has certain commitments to the entity under operating and supply agreements, including: funding additional working capital, as determined by the entity’s operating committee on which the Company has 50% representation; and utilization of products and services of this entity for new homes built within certain markets in the western United States. This entity currently has no outstanding indebtedness.
The Company’s investments in unconsolidated entities totaled $110.9 million at March 31, 2004 and $69.4 million at December 31, 2003. All of these investments are accounted for under the equity method.
5. Senior notes and subordinated notes
In January 2004, the Company sold $500 million of 5.25% unsecured senior notes, callable prior to maturity and guaranteed by Pulte Homes, Inc. and certain of its 100%-owned subsidiaries. The notes are due 2014.
In December 2003, under the terms of Del Webb’s $150 million 10.25% senior subordinated notes due 2010, the company exercised its optional right to call for redemption the remaining outstanding principal balance of approximately $77 million. The notes were redeemed in February 2004 at a price equal to 105.125% of the principal amount.
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6. Shareholder’s equity
In October 2002, the Company’s Board of Directors authorized the repurchase of $100 million of Pulte Homes, Inc. common stock in open-market transactions or otherwise. At March 31, 2004, the Company had remaining authorization to purchase common stock aggregating $77.5 million.
On December 11, 2003 the Company announced a two-for-one stock split effected in the form of a 100 percent stock dividend. The distribution was made on January 2, 2004. All share and per share amounts have been restated to retroactively reflect the stock split.
Accumulated other comprehensive income (loss)
The accumulated balances related to each component of other comprehensive income (loss) are as follows ($000’s omitted):
7. Supplemental Guarantor information
At March 31, 2004, Pulte Homes, Inc. had the following outstanding senior note obligations: (1) $112 million, 8.375%, due 2004, (2) $125 million, 7.3%, due 2005, (3) $200 million, 8.125%, due 2011, (4) $499 million, 7.875%, due 2011, (5) $300 million, 6.25%, due 2013, (6) $500 million, 5.25%, due 2014, (7) $150 million, 7.625%, due 2017, (8) $300 million, 7.875%, due 2032, and (9) $400 million, 6.375%, due 2033. Such obligations to pay principal, premium, if any, and interest are guaranteed jointly and severally on a senior basis by Pulte Homes, Inc.’s 100%-owned Domestic Homebuilding subsidiaries (collectively, the Guarantors). Such guarantees are full and unconditional.
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.
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7. Supplemental Guarantor information (continued)
CONDENSED CONSOLIDATING BALANCE SHEETMarch 31, 2004($000’s omitted)
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CONDENSED CONSOLIDATING BALANCE SHEETDecember 31, 2003($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended March 31, 2004($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended March 31, 2003($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the three months ended March 31, 2004($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWS (continued)For the three months ended March 31, 2004($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the three months ended March 31, 2003($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWS (continued)For the three months ended March 31, 2003($000’s omitted)
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Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Overview:
A summary of our operating results by business segment for the three months ended March 31, 2004 and 2003 is as follows ($000’s omitted):
A comparison of pre-tax income (loss) for the three months ended March 31, 2004 and 2003 is as follows:
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Homebuilding Operations:
Our Homebuilding segment consists of the following operations:
Certain operating data relating to our homebuilding operations 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 27 states, presented geographically as follows:
The greater Phoenix market accounted for 15% of Domestic Homebuilding unit net new orders, 17% of unit settlements and 14% of Domestic Homebuilding settlement revenues for the three-month period ended March 31, 2004. The Las Vegas market accounted for 11% of unit net new orders, 11% of unit settlements, and 15% of settlement revenues for the same period. In the prior year period, the greater Phoenix market accounted for 12% of unit net new orders and 10% of unit settlements. No other individual market represented more than 10% of total Domestic Homebuilding unit net new orders, unit settlements or revenues for the three-month periods ended March 31, 2004 or 2003.
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, particularly in the West, was the primary driver for increases in net new orders and unit settlements. Net new orders increased 31% to a record 10,751 units for the three months ended March 31, 2004. Unit settlements also set a record for the quarter at 7,039 units, representing an increase of 22% over the same period in 2003. The average selling price for homes closed increased 10% to $276,000 for the three months ended March 31, 2004. Changes in average selling price reflect a number of factors, including changes in market selling prices, primarily in the West, 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 17,664 units. The dollar value of backlog was up 50% to $5.4 billion.
The following table presents a summary of pre-tax income for our Domestic Homebuilding operations for the three months ended March 31, 2004 and 2003 ($000’s omitted):
Homebuilding gross profit margins from home settlements increased to 21.9% for the three months ended March 31, 2004, compared with 20.2% for the same period in the prior year. This increase is primarily attributable to favorable home pricing and product and geographic mix.
We consider land acquisition one of our core competencies. We acquire land primarily for the construction of our houses for sale to homebuyers. We will often sell select parcels of land within or adjacent to our communities to retail and commercial establishments. We also will, on occasion, sell lots within our communities to other homebuilders. Contributions from land sales decreased 60% to $3.5 million when compared with 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 declined by approximately 100 basis points for the three months ended March 31, 2004 to 10.6%. This improvement can be attributed to greater leverage combined with a reduced level of weather-related additional expenses incurred during the first quarter of 2003 in the Northeast and Midwest.
Equity income for both periods was driven by earnings from two Nevada-based joint ventures related to the sale of commercial and residential properties.
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Other income (expense), net, which includes several miscellaneous items, was up slightly for the three-month period, primarily as a result of insurance-related expenses.
At March 31, 2004 and December 31, 2003, our Domestic Homebuilding operations controlled approximately 287,000 and 256,900 lots, respectively. Approximately 121,700 and 120,400 lots were owned, and approximately 94,000 and 66,000 lots were under option agreements approved for purchase at March 31, 2004 and December 31, 2003, respectively. In addition, there were approximately 71,300 and 70,500 lots under option agreements, pending approval, at March 31, 2004 and December 31, 2003, respectively.
The total purchase price applicable to approved land under option for use by our homebuilding operations at future dates approximated $2.9 billion at March 31, 2004. In addition, total purchase price applicable to land under option pending approval was valued at $2.4 billion at March 31, 2004. Land option agreements, which may be cancelled at our discretion, may extend over several years and are secured by cash deposits totaling $115.8 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. We continue to evaluate various long-term strategic alternatives with regard to our International operations.
The following table presents selected financial data for our International Homebuilding operations for the three months ended March 31, 2004 and 2003 ($000’s omitted):
Note: Homebuilding unit settlements of affiliates, not included in the table above, for the three months ended March 31, 2004 and 2003 were 36 and 48, respectively.
International revenues and unit settlements for the three months ended March 31, 2004 increased 10% and 34%, respectively, over the prior year period. These changes can be attributed primarily to our Mexico operations, which had revenues of $37.9 million and unit settlements of 1,532 for the three months ended March 31, 2004 compared with revenues of $29.4 million and unit settlements of 1,107 for the three months ended March 31, 2003. The operations in Mexico benefited from enhanced mortgage loan funding availability from its primary local lender during the first quarter of 2004.
Product mix shifts had a positive impact on gross margins. Gross margins increased approximately 120 basis points to 18.8% for the three months ended March 31, 2004. Selling, general and administrative expenses as a percent of revenues declined to 17.5% from 24.1% for the three-month period as the operations in Mexico began to see the benefits of restructuring actions taken during 2003.
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International Homebuilding (continued):
Our operations in Argentina and Mexico are affected by fluctuations in currency rates for those countries. Transaction gains and losses for the three months ended March 31, 2004 and 2003, included in other income (expense), net, were not significant. During the three months ended March 31, 2004, we recorded foreign currency translation gains of $0.4 million for Argentina and $1.6 million for Mexico, as a component of accumulated other comprehensive income on the balance sheet. At March 31, 2004, our investments in Argentina and Mexico, net of accumulated foreign currency translation adjustments, approximated $13.3 million and $70.1 million, respectively.
Financial Services Operations:
We conduct our financial services business, which includes mortgage and title operations, through Pulte Mortgage and other subsidiaries. Pre-tax income of our financial services operations for the three months ended March 31, 2004 and 2003 was $10.1 million and $17.1 million, respectively. The decrease in pretax income for the three months was primarily the result of a less favorable interest rate environment during the quarter, product mix shifts, and higher operating expenses incurred in anticipation of the continued growth of the business.
The following table presents mortgage origination data for our Financial Services operations:
Mortgage origination unit and principal volume for the three months ended March 31, 2004 increased 18% and 33%, respectively, over 2003. The growth is attributable to an increase in the capture rate from 81% to 86% for the three-month period combined with the volume increases experienced in our homebuilding business and an increase in the average loan size. Our Domestic Homebuilding customers continue to account for the majority of total loan production, representing 89% of total Pulte Mortgage unit production for the three months ended March 31, 2004, compared with 80% in 2003. Refinancings accounted for approximately 4% of total unit originations for the three months ended March 31, 2004, compared with 12% in the prior year period. Adjustable rate mortgages (ARMs) represented 31% of origination dollars for the three months ended March 31, 2004, compared with 16% in the prior year period. At March 31, 2004, loan application backlog increased to $2.9 billion as compared with $1.7 billion at March 31, 2003.
Income from our title operations increased to $3.2 million for the three months ended March 31, 2004, from $2.1 million in 2003. Our minority interest in Su Casita, a Mexican mortgage banking company, contributed income of $0.8 million for the three months ended March 31, 2004, compared with $1.2 million in 2003.
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 segment that supports the operations of our subsidiaries by acting as the internal source of financing, developing and implementing strategic initiatives centered on new business development and operating efficiencies, and providing 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 months ended March 31, 2004 and 2003 ($000’s omitted):
Interest expense, net of interest capitalized into inventory, increased $2.6 million in the three months ended March 31, 2004. This is a result of the continued increase in debt levels necessary to support our growth. Interest incurred for the three months ended March 31, 2004 and 2003, excluding interest incurred by our financial services operations, was approximately $48.8 and $44.2 million, respectively.
The increase in other corporate expenses, net for the three months ended March 31, 2004 is due to higher stock-based compensation expense as a result of the adoption of the preferable fair value recognition provisions of SFAS 123, effective January 1, 2003.
Interest capitalized into inventory is charged to home cost of sales based on the cyclical timing of our unit settlements over a period that approximates the average life cycle of our communities. Interest in inventory has increased primarily as a result of higher levels of indebtedness and the addition of the Del Webb properties which have a longer life cycle. Information related to Corporate interest capitalized into inventory is as follows ($000’s omitted):
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Liquidity and Capital Resources:
Our net cash used in operating activities amounted to $119.0 million compared with net cash used in operating activities of $154.0 million in the prior year period. Cash provided by earnings and from the sale of residential mortgage loans was offset by additional land investments. The investment in land is also funded through proceeds from debt offerings. The change in net cash used in investing activities can be attributed to additional investments in unconsolidated entities. Net cash provided by financing activities of $212.9 million for the three months ended March 31, 2004 primarily represents proceeds from our $500 million senior notes issued in January 2004 largely offset by the repayment of Pulte Mortgage’s revolving credit facilities and redemption of the remaining Del Webb 10.25% senior subordinated notes.
We finance our homebuilding land acquisitions, development and construction activities from internally generated funds and existing credit agreements. We had no borrowings under our $850 million unsecured revolving credit facility at March 31, 2004.
Pulte Mortgage provides mortgage financing for many of our home sales and uses its own funds and borrowings made available pursuant to various committed and uncommitted credit arrangements. Pulte Mortgage has committed credit arrangements of $860 million comprised of a $310 million bank revolving credit facility and a $550 million annual asset-backed commercial paper program. There were approximately $255.7 million of borrowings outstanding under existing Pulte Mortgage arrangements at March 31, 2004. 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 January 2004, we sold $500 million of 5.25% senior notes, due 2014. Proceeds from the sale were used to retire the $77 million outstanding Del Webb 10.25% senior subordinated notes and for general corporate purposes including continued investment in our business.
At March 31, 2004, we had remaining authorization to purchase common stock aggregating $77.5 million, pursuant to our $100 million share repurchase program.
We anticipate that our effective tax rate for 2004 will approximate 38%, the same as our 2003 effective tax rate.
At March 31, 2004, we had cash and equivalents of $464.4 million and $2.6 billion of senior notes. Other financing included limited recourse collateralized financing totaling $82.7 million. Sources of our working capital include our cash and equivalents, our $850 million committed unsecured revolving credit facility and Pulte Mortgage’s $860 million revolving credit facilities. Our debt-to-total capitalization, excluding our collateralized debt, was approximately 42% at March 31, 2004, and approximately 37% net of cash and equivalents. We expect to maintain our net debt-to-total capitalization at approximately the 40% level. We routinely monitor current operational requirements and financial market conditions to evaluate the use of available financing sources, including securities offerings. At March 31, 2004, we had $1.0 billion remaining under our current mixed security shelf registration.
Inflation
We, and the homebuilding industry in general, may be adversely affected during periods of high inflation because of higher land and construction costs. Inflation also increases our financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. We attempt to pass to our customers any increases in our costs through increased sales prices. To date, inflation has not had a material adverse effect on our results of operations. However, there is no assurance that inflation will not have a material adverse impact on our future results of operations.
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New Accounting Pronouncements:
In March 2004, the Securities and Exchange Commission (“SEC”) released SEC Staff Accounting Bulletin (“SAB”) 105, Application of Accounting Principles to Loan Commitments. SAB 105 provides the SEC staff position regarding the application of accounting principles generally accepted in the United States to loan commitments that relate to the origination of mortgage loans held for resale. SAB 105 contains specific guidance on the inputs to a valuation-recognition model to measure loan commitments accounted for at fair value. Current accounting guidance requires the commitment to be recognized on the balance sheet at fair value from its inception through its expiration or funding. SAB 105 requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. In addition, SAB 105 requires the disclosure of both the accounting policy for loan commitments including the methods and assumptions used to estimate the fair value of loan commitments and any associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. SAB 105 is not expected to have a material impact on our results of operations, financial condition, and cash flows.
Critical Accounting Policies and Estimates:
There have been no significant changes to our critical accounting policies and estimates during the three months ended March 31, 2004 compared with 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, 2003.
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 March 31, 2004, 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, 2003, 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 March 31, 2004. 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 March 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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
On February 26, 2004, we filed a Current Report on Form 8-K, which included a press release dated the same day, providing presentation materials from an investor conference to discuss the Company’s business opportunities.
On April 26, 2004, we filed a Current Report on Form 8-K, reporting the information required by Item 12 in connection with our press release dated April 26, 2004, announcing our earnings for the three months ended March 31, 2004. 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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Exhibit Index
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