-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KQVMbrtzTi+G158zvmTSOfFeGXd2iPuaisTgKnassFy4xHzroDOQHs7qxajwSqgv q8lITvMxDezDwlR/Hqd6WQ== 0000889697-99-000038.txt : 19990315 0000889697-99-000038.hdr.sgml : 19990315 ACCESSION NUMBER: 0000889697-99-000038 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PULTE CORP CENTRAL INDEX KEY: 0000822416 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 382766606 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09804 FILM NUMBER: 99564375 BUSINESS ADDRESS: STREET 1: 33 BLOOMFIELD HILLS PKWY STE 200 CITY: BLOOMFIELD HILLS STATE: MI ZIP: 48304 BUSINESS PHONE: 2486472750 FORMER COMPANY: FORMER CONFORMED NAME: PHM CORP DATE OF NAME CHANGE: 19920703 10-K 1 ============================================================================= SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-9804 ---------------- PULTE CORPORATION (Exact name of registrant as specified in its charter) MICHIGAN 38-2766606 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 33 Bloomfield Hills Parkway, Suite 200 Bloomfield Hills, Michigan 48304 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (248) 647-2750 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, par value $.01 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. Aggregate market value of voting stock held by nonaffiliates of the registrant as of January 31, 1999: $991,097,795 Number of shares of common stock outstanding as of January 31, 1999: 43,218,180 Documents Incorporated by Reference Applicable portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form. ============================================================================= This page left blank intentionally. 2 PULTE CORPORATION TABLE OF CONTENTS Item Page No. No. - ---- ---- Part I 1 Business........................................................... 4 2 Properties......................................................... 10 3 Legal Proceedings.................................................. 11 4 Submission of Matters to a Vote of Security Holders................ 12 4A Executive Officers of the Registrant............................... 12 Part II 5 Market for the Registrant's Common Equity and Related Stockholder Matters............................................. 13 6 Selected Financial Data............................................ 13 7 Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 16 7A Quantitative and Qualitative Disclosures About Market Risk......... 30 8 Financial Statements and Supplementary Data........................ 33 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................ 73 Part III 10 Directors and Executive Officers of the Registrant................. 73 11 Executive Compensation............................................. 73 12 Security Ownership of Certain Beneficial Owners and Management..... 73 13 Certain Relationships and Related Transactions..................... 73 Part IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................................ 73 Signatures............................................................. 81 3 PART I ITEM 1. BUSINESS Pulte Corporation Pulte Corporation (the Company) is a publicly held holding company whose subsidiaries engage in the homebuilding and financial services businesses, and its assets consist principally of the capital stock of its subsidiaries, cash and investments. Its income primarily consists of dividends from its subsidiaries and interest on investments. The Company's significant subsidiaries include Pulte Financial Companies, Inc. (PFCI), Pulte Diversified Companies, Inc. (PDCI) and other subsidiaries which are engaged in the homebuilding business. PDCI's operating subsidiaries include Pulte Home Corporation (Pulte), Pulte International Corporation (International) and other subsidiaries which are engaged in the homebuilding business. PDCI's non-operating thrift subsidiary, First Heights Bank, fsb (First Heights), has been classified as a discontinued operation (See Note 4 of Notes to Consolidated Financial Statements). The Company also has a mortgage banking company, Pulte Mortgage Corporation (PMC), which is a subsidiary of Pulte. The Company has three reportable segments: Homebuilding, Financial Services and Corporate. The Company's Homebuilding segment consists of the following three business lines: o Domestic Homebuilding, the Company's core business, which is engaged in the acquisition and development of land primarily for residential purposes within the continental United States and the construction of housing on such land targeted for the first-time, move-up and semi-custom home buyer groups. o International Homebuilding, which is primarily engaged in the acquisition/development of land primarily for residential purposes, and the construction of housing on such land in Puerto Rico and Mexico. o Active Adult Homebuilding, which conducts its operations primarily through a joint venture with Blackstone Real Estate Advisors (BRE), an affiliate of the Blackstone Group, and is engaged in the development of amenitized, age-targeted and age-restricted communities throughout the continental United States appealing to a growing demographic group in their pre-retirement/retirement years. The Company's Financial Services segment consists principally of mortgage banking operations conducted through PMC and other mortgage banking subsidiaries and, to a minor extent, the operations of PFCI, a financing subsidiary of the Company. Corporate is a non-operating business segment whose primary purpose is to support the operations of the Company's subsidiaries as the internal source of financing and by implementing and maturing strategic initiatives centered on new business development and improving operating efficiencies. Financial information, including revenue, pre-tax income and identifiable assets of each of the Company's business segments is included in Note 1 of Notes to Consolidated Financial Statements. 4
Homebuilding Operations Year Ended December 31, ($000 omitted) -------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ----------- ---------- ----------- Pulte/Pulte-affiliate Homebuilding revenues: Domestic .................. $2,778,773 $2,407,104 $2,276,068 $1,911,209 $1,631,393 International ............. 64,590 41,196 16,163 6,869 6,347 Active Adult .............. 104,839 54,602 32,142 23,194 5,913 ---------- ---------- ---------- ---------- ---------- Total Homebuilding .............. $2,948,202 $2,502,902 $2,324,373 $1,941,272 $1,643,653 ========== ========== ========== ========== ========== Pulte/Pulte-affiliate settlements - units: Domestic .................. 15,897 14,691 14,202 12,293 11,085 International: Pulte ..................... 166 254 191 -- -- Pulte-affiliated entities . 3,682 1,651 415 651 313 ---------- ---------- ---------- ---------- ---------- Total International .... 3,848 1,905 606 651 313 ---------- ---------- ---------- ---------- ---------- Active Adult: Pulte ..................... 154 377 220 152 57 Pulte-affiliated entity ... 460 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total Active Adult ..... 614 377 220 152 57 ---------- ---------- ---------- ---------- ---------- Total Pulte/Pulte-affiliate settlements - units ........... 20,359 16,973 15,028 13,096 11,455 ========== ========== ========== ========== ==========
Unit sales (settlements) and net new orders in any year are strongly influenced by local, regional and national market economic conditions. Domestic Homebuilding: Pulte builds a wide variety of homes, including detached units, townhouses, condominium apartments and duplexes, with varying prices, models, options and lot sizes, all sold for use as principal residences. Since 1990, Pulte has more than tripled its annual unit closings, unit orders and unit backlog levels and has continued its distinction as the nation's largest homebuilder with 1998 sales of nearly 16,000 homes and over 200,000 homes since its inception. During 1998, the Company acquired two homebuilders: Florida-based DiVosta & Company in July 1998 and Tennessee-based Radnor Homes in May 1998. In accordance with its operational strategy, the Company will continue to evaluate available strategic acquisition opportunities which coincide with its long-range goals. As of December 31, 1998, Pulte's domestic homebuilding operations offered homes for sale in 399 communities at sales prices ranging from $46,000 to over $675,000. Sales prices of homes currently offered for sale in 69% of Pulte's communities fall within the range of $100,000 to $275,000 with a 1998 average unit selling price of $175,000. Sales of single-family detached homes, as a percentage of total unit sales, were 76%, 78% and 77% in 1998, 1997 and 1996, respectively. As of December 31, 1998, Pulte's domestic homebuilding business operated in 41 markets within the following geographic areas: 5 Pulte Home East: Mid-Atlantic Region Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New Hampshire, Pennsylvania, Rhode Island, Virginia Southeast Region Georgia, North Carolina, South Carolina, Tennessee Florida Region Florida Pulte Home Central: Great Lakes Region Indiana, Kansas, Michigan, Missouri, Ohio Midwest Region Illinois, Minnesota Texas Region Texas Pulte Home West: Southwest Region Arizona, Nevada Rocky Mountain Region Colorado, Utah California Region California International Homebuilding: International Homebuilding operations are primarily conducted through subsidiaries of Pulte International Corporation in Puerto Rico and Mexico. International Homebuilding product offerings focus on the demand for affordable housing of first time buyers, and social interest housing. In Mexico, the Company conducts business through five joint ventures with homebuilding operations principally in Ciudad Juarez, Chihuahua, Nuevo Laredo, Reynosa, Matamoros, Monterrey, Queretaro and Mexico City. In Puerto Rico, homebuilding operations are principally conducted in the greater metropolitan San Juan submarkets and several communities located in Arecibo, Mayaquez, Ponce and Vega Baja. Active Adult Homebuilding: Active Adult Homebuilding operations are primarily conducted through a joint venture which was formed in 1998 with Blackstone Real Estate Advisors (BRE), an affiliate of the Blackstone Group, for the purpose of acquiring and developing major Active Adult residential communities, highly amenitized age-targeted and age-restricted communities appealing to a growing demographic group in their pre-retirement and retirement years. The venture is presently headquartered in Phoenix, Arizona, and is developing four communities located in Arizona, California and New Jersey, with plans to build additional communities later in 1999. Springfield at Whitney Oaks, the venture's Active Adult Community in Northern California, recently received the Gold Achievement Award for the best seniors' housing development in the nation, as presented by the National Council on Seniors Housing. The Company and BRE each maintain a 50% ownership interest in the Active Adult joint venture. Land Acquisition and Development: Locations for development of Domestic Homebuilding and Active Adult communities are selected after completing extensive market research, enabling Pulte to match the location and product offering with its targeted consumer group. Factors considered include proximity to developed areas, population growth patterns and, if applicable, estimated development costs. Pulte has historically managed the risk of controlling its land positions through use of option contracts and outright acquisition. Due to the competitive market conditions of recent years, obtaining satisfactory option terms to allow Pulte to control what it believes are prime development locations in each of its respective markets has become increasingly more difficult. As a result, Pulte has utilized outright acquisition more frequently. Pulte typically controls land with the intent to complete sales of housing units within 24 months from the date of opening a community, except in the case of certain Active Adult developments for which the completion of housing unit sales may require as much as 60 months from the date of opening a community. As a result, land is generally controlled after it is properly zoned and developed or is ready for development. In addition, Pulte disposes of owned land not required in its business. Where Pulte develops land, it engages directly in many phases of the development process, including land and site planning, obtaining environmental and other regulatory approvals, and constructing roads, sewers, water and drainage facilities, and other amenities. Pulte uses its staff and the services of independent engineers and consultants in its land development activities. Land development work is performed primarily by subcontractors and local government authorities which construct sewer and water systems in some areas. At December 31, 1998, Pulte's domestic homebuilding operations owned approximately 40,300 lots in communities in which homes are being constructed and had approximately 24,600 lots under option. 6 Sales and Marketing Pulte is dedicated to improving the quality and value of its Domestic and Active Adult homes through innovative proprietary architectural and community designs and state-of-the-art customer marketing techniques. Analyzing various qualitative and quantitative data obtained through extensive market research, Pulte segments its potential customers into well-defined buyer profiles. Once the demands of potential buyers are understood, Pulte links its home design and community development efforts to the specific lifestyle of each targeted consumer group. To meet the demands of its various Domestic and Active Adult customer segments, Pulte has established a solid design expertise for a wide array of product lines. Pulte believes that it is an innovator in the design of its homes, and it views its design capacity as an integral aspect of its marketing strategy. Pulte's in-house architectural services teams and management, supplemented by outside consultants, have been successful in creating distinctive design features, both in exterior facades, and interior options and features. One of Pulte's strategies in certain markets has been to offer "the complete house" in which all features shown in the home are included in the sales price. Standard features typically offered include vaulted ceilings, appliances, and a selection of flooring and carpet which is chosen by the buyer. Typically, Pulte's own Domestic and Active Adult sales team, together with outside sales brokers, are responsible for managing the customer through the sales process. Fully furnished and landscaped model homes are used to showcase Pulte's homes and their distinctive design features. Pulte has great success with the first-time buyer in the low to moderate price range; in such cases, financing under United States Government-insured and guaranteed programs is often used and is facilitated through PMC. Pulte also enjoys strong sales to the move-up buyer and, in certain markets, offers semi-custom homes in higher price ranges. Pulte introduces its homes to prospective buyers through a variety of media advertising, illustrated brochures and other advertising displays. Customers are also obtained through referrals from other Pulte customers. Pulte maintains market and specific community information on its internet website which can be reached at http://www.pulte.com. Pulte's international sales and marketing efforts focus on the identification of regions throughout Mexico and Puerto Rico which are experiencing population and industrial growth. In these markets, the demand for affordable and social interest housing is strong. In Mexico, the Juarez-based joint venture has entered into two separate agreements to construct affordable social interest housing with Delphi Automotive Systems and Sony Magneticos de Mexico, S.A.de C.V., an affiliate of Sony Electronics, Inc. In Puerto Rico the strongest customer demand is for single-family detached homes (flats), but affordable alternative product offerings include two story attached units (townhomes) and three-story condominium units with exterior stairs (walk-ups). Construction The construction process for Pulte's domestic and active adult homes begins with the in-house design of the homes it sells and the building phase is conducted under the supervision of its on-site construction superintendents. The construction work is usually performed by subcontractors under contracts which, in many instances, cover both labor and materials on a fixed-price basis. Pulte believes that Pulte Preferred Partnerships (P3), an extension of its quality assurance program, is establishing new standards for contractor relations. Using a selective process, Pulte has teamed up with what it believes are premier contractors and suppliers to improve all aspects of the land development and house construction processes. Pulte maintains efficient construction operations by using standard materials and components from a variety of sources and, when feasible, by building on contiguous lots. To minimize the effects of changes in construction costs, the subcontracting and purchasing of building supplies and materials are generally negotiated at or near the time when related sales contracts are signed. In addition, Pulte utilizes the leverage its size affords by actively negotiating its materials needs on a national or regional basis to minimize component production cost. International housing in Puerto Rico and Mexico consists primarily of reinforced poured concrete and/or concrete block construction with flat roofs and public water, electric and sanitary system connections. Building materials, supplies and components are sourced locally and the construction work is performed by general contractors and/or subcontractors under contracts, which in many cases, includes both labor and materials. 7 Construction (continued) Pulte cannot determine the extent to which necessary building materials will be available at reasonable prices in the future and has, on occasion, experienced shortages of skilled labor in certain trades and of building materials in some markets. Competition and Other Factors Pulte's dedication to customer satisfaction is evidenced by its consumer and value-based brand approach to product development, and is something that the Company believes enables it to distinguish itself in the homebuilding industry and contributes to its long-term competitive advantage. However, the housing industry in the United States is highly competitive. In each of Pulte's market areas, there are numerous homebuilders with which it competes. Any provider of housing units, for-sale or to rent, including apartment builders, may be considered a competitor of Pulte. Conversion of apartments to condominiums further provides certain segments of the population an alternative to traditional housing, as does the emergence and acceptance of manufactured housing. Pulte competes primarily on the basis of reputation, price, location, design and quality of its homes. The housing industry is cyclical and is affected by a number of economic and other factors including: (1) significant national and world events which impact consumer confidence; (2) changes in interest rates; (3) changes in other costs associated with home ownership, such as property taxes and energy costs; (4) various demographic factors; (5) changes in federal income tax laws; and (6) changes in government mortgage financing programs. In addition to these factors, Pulte's business and operations could be affected by unanticipated shifts in demand for new homes. Pulte's operations are subject to building, environmental and other regulations of various state, local and foreign governing authorities. For its homes to qualify for Federal Housing Administration (FHA) or Veterans Administration (VA) mortgages, Pulte must satisfy valuation standards and site, material and construction requirements of those agencies. Compliance by Pulte with federal, state and local laws relating to protection of the environment has had, to date, no material effect upon capital expenditures, earnings or the competitive position of Pulte. More stringent requirements could be imposed in the future on homebuilders and developers, thereby increasing the cost of compliance. Financial Services Operations The Company's financial services operations are conducted by its mortgage banking and other financial subsidiaries. Mortgage Banking PMC is a mortgage bank which arranges financing through the origination of mortgage loans primarily for the benefit of buyers of Pulte's domestic homes, but also to the general public, and engages in the sale of such loans and the related servicing rights. PMC is a lender approved by the FHA and VA and is a seller/servicer approved by Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and other investors. In its conventional mortgage lending activities, PMC generally follows underwriting guidelines established by FNMA and FHLMC. During 1996, PMC reorganized its operations by centralizing its mortgage underwriting, processing and closing functions in Denver, Colorado, through the implementation of a mortgage operations center (MOC) concept. Additionally, during 1997, PMC began a centralized telephone loan officer concept which moved the loan officers from field branches to a mortgage application center (MAC) located in Denver, and resulted in Pulte's sales representatives becoming the principal field contacts for mortgage customers. Pulte sales representatives forward the loan applications to a MAC loan officer who calls the customer to complete the loan application and then forwards it to the MOC for processing. PMC believes both the MOC and the MAC will improve the speed and efficiency of its mortgage operations, thereby improving profitability and allowing PMC to focus on creating mortgage opportunities with Pulte customers. In originating mortgage loans, PMC initially uses its own funds and borrowings made available to it pursuant to various credit arrangements. Subsequently, PMC sells such mortgage loans and mortgage-backed securities to outside investors. 8 Mortgage Banking (continued) During the years ended December 31, 1998, 1997 and 1996, PMC originated mortgage loans for 51%, 50% and 49%, respectively, of the homes sold by Pulte. Such originations represented 73%, 81% and 73%, respectively, of PMC originations. In order to reduce the risks inherent in servicing, PMC sells its servicing rights on a flow basis through fixed price servicing sales contracts. This strategy results in PMC owning the servicing rights for only a short period of time, usually two to three months after the loan is originated and virtually eliminates impairment issues with respect to the fair value of these reported assets. The mortgage industry in the United States is highly competitive. PMC competes with other mortgage companies and financial institutions to provide attractive mortgage financing to both Pulte customers and the general public. PMC, in originating and servicing mortgage loans, is subject to rules and regulations of the FHA, VA, GNMA, FNMA, and FHLMC. Other Financial Subsidiaries Other financing activities are conducted by a limited purpose subsidiary of PFCI. This subsidiary previously engaged in the acquisition of mortgage loans and mortgage-backed securities from PMC and other unrelated parties, and using these assets as collateral, financed these acquisitions principally with long-term bonds. At December 31, 1998, one bond series with a principal amount of $28,075,000 remained outstanding. This bond is the obligation of the PFCI subsidiary (issuer), and is neither the obligation of, nor is guaranteed by, the Company, PDCI, Pulte, PMC or PFCI. (See Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Financial Subsidiaries and Note 6 of Notes to Consolidated Financial Statements). Discontinued Operations During the first quarter of 1994, the Company adopted a plan of disposal for First Heights and announced its strategy to exit the thrift industry and increase its focus on housing and related mortgage banking. First Heights sold all but one of its 32 bank branches and related deposits to two unrelated purchasers. The sale was substantially completed during the fourth quarter of 1994. Although the Company in 1994, expected to complete the plan of disposal within a reasonable period of time, contractual disputes with the FDIC prevented the prepayment of the FSLIC Resolution Fund (FRF) notes, thereby precluding the Company from completing the disposal in accordance with its original plan. To provide liquidity for the sale, First Heights liquidated its investment portfolios and its single-family residential loan portfolio and, as provided in the Assistance Agreement, entered into a Liquidity Assistance Note (LAN) with the Federal Deposit Insurance Corporation (FDIC) acting in its capacity as manager of FRF. The LAN is collateralized by the FRF notes and bears interest at a rate indexed to the Texas Cost of Funds plus a spread. The LAN matured in September 1998; however, payment of this liability is temporarily withheld by First Heights pending resolution of all open matters with the FDIC. As discussed in Note 11 of Notes to Consolidated Financial Statements, the Company is involved in litigation with the FDIC and as part of this litigation, the parties have asserted various claims with respect to obligations under promissory notes issued by each of the parties in connection with the thrift acquisition and activities. At December 31, 1998, First Heights no longer has any deposits; nor does it maintain an investment portfolio. First Heights' day-to-day activities have been principally devoted to supporting residual regulatory compliance matters and the litigation with the FDIC; and are not reflective of the active operations of the former thrift, such as maintaining traditional transaction accounts, (e.g., checking and savings accounts) or making loans. Accordingly, such operations are being presented as discontinued. 9 Corporate Corporate is a non-operating segment that is comprised of the Company and PDCI, both of which are holding companies. The primary purpose of Corporate is to support the operations of the Company's subsidiaries as the internal source of financing and by implementing and nurturing to maturity strategic initiatives centered around new business development and improving operating efficiencies. Recent business development activities include the pursuit of additional international opportunities, as well as research and development of innovative building components and processes. Corporate also includes the activities associated with supporting a publicly traded company listed on the New York Stock Exchange with the symbol PHM. Corporate assets include equity investments in its subsidiaries, short-term financial instruments and affiliate advances. Liabilities include senior and subordinated debt and income taxes. Corporate revenues consist primarily of investment earnings of excess funds, while its expenses include costs associated with supporting a publicly traded company and its subsidiaries' operations and investigating strategic initiatives. Organization/Employees All subsidiaries and operating units operate independently with respect to day-to-day operations. All homebuilding real estate purchases and other significant homebuilding, mortgage banking, financing activities and similar operating decisions must be approved by the business unit and/or corporate senior management. At December 31, 1998, the Company employed approximately 4,300 persons. Employees of the Company and its subsidiaries are not represented by any union. Subcontracted work, however, may be performed by union subcontractors. Homebuilding, mortgage banking and financing management personnel are paid performance bonuses based on individual performance and incentive compensation based on the performance of the applicable division or subsidiary. The Company's corporate management personnel are paid incentive compensation based on overall performance of the Company (see Note 7 of Notes to Consolidated Financial Statements). Each subsidiary is given autonomy regarding employment of personnel, although the Company's senior corporate management acts in an advisory capacity in the employment of subsidiary officers. The Company considers its employee and subcontractor relations to be satisfactory. ITEM 2. PROPERTIES The Company's and Pulte's homebuilding and corporate headquarters are located at 33 Bloomfield Hills Parkway, Suite 200, Bloomfield Hills, Michigan, 48304, where 34,559 square feet of office space is leased. The Company also leases 18,110 square feet of office space at 165 Kirts Boulevard, Troy, Michigan, 48084 for certain centralized business support services. PMC's and PFCI's corporate offices are located at 6061 South Willow Drive, Greenwood Village, Colorado, 80111. At this location, 52,300 square feet of office space is leased. Pulte homebuilding markets and PMC branch operations generally lease office space for their day-to-day operations. First Heights' administrative office is located in 1,869 square feet of leased space at 2050 North Loop West, Suite 201, Houston, Texas 77018. Because of the nature of Pulte's homebuilding operations, significant amounts of property are held as inventory in the ordinary course of its homebuilding business. Such properties are not included in response to this Item. 10 ITEM 3. LEGAL PROCEEDINGS The Company is involved in various litigation incidental to its business. In the opinion of management, none of this litigation will have a material adverse financial impact on the Company. First Heights-Related Litigation The Company is a party to two lawsuits relating to First Heights' 1988 acquisition from the Federal Savings and Loan Insurance Corporation (FSLIC), and First Heights' ownership of, five failed Texas thrifts. The first lawsuit (the "District Court Case") was filed on July 7, 1995 in the United States District Court, Eastern District of Michigan, by the Federal Deposit Insurance Corporation (FDIC) against the Company, PDCI and First Heights (collectively, the "Pulte Parties"). The second lawsuit (the "Court of Federal Claims Case") was filed on December 26, 1996 in the United States Court of Federal Claims (Washington, D.C.) by the Pulte Parties against the United States. In the District Court Case, the FDIC seeks a declaration of rights and other relief related to the assistance agreement entered into between First Heights and the FSLIC. The FDIC is the successor to FSLIC. The FDIC and the Pulte Parties disagree about the proper interpretation of provisions in the assistance agreement which provide for sharing of certain tax benefits achieved in connection with First Heights' 1988 acquisition and ownership of the five failed Texas thrifts. The District Court Case also includes certain other claims relating to the foregoing, including claims resulting from the Company's and First Heights' amendment of a tax sharing and allocation agreement between the Company and First Heights. The Pulte Parties dispute the FDIC's claims and believe that a proper interpretation of the assistance agreement limits the FDIC's participation in the tax benefits. The Pulte Parties filed an answer and a counterclaim, seeking, among other things, a declaration that the FDIC has breached the assistance agreement in numerous respects. On December 24, 1996, the Pulte Parties voluntarily dismissed without prejudice certain of their claims in the District Court Case and on December 26, 1996, initiated the Court of Federal Claims Case. The Court of Federal Claims Case contains similar claims as those that were voluntarily dismissed from the District Court Case. In their complaint, the Pulte Parties assert breaches of contract on the part of the United States in connection with the enactment of section 13224 of the Omnibus Budget Reconciliation Act of 1993. That provision repealed portions of the tax benefits that the Pulte Parties claim they were entitled to under the contract to acquire the failed Texas thrifts. The Pulte Parties also assert certain other claims concerning the contract, including claims that the United States (through the FDIC as receiver) has improperly attempted to amend the failed thrifts' pre-acquisition tax returns and that this attempt was made in an effort to deprive the Pulte Parties of tax benefits they had contracted for, and that the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 breached the Government's obligation not to require contributions of capital greater than those required by the contract. On March 5, 1999, the United States District Court (the Court), entered a "Final Judgment" against First Heights and PDCI (the Court had previously ruled that Pulte Corporation was not liable for monetary damages to the FDIC) resolving by summary judgment in favor of the FDIC most of the FDIC's claims against the Pulte Defendants. The Final Judgment requires PDCI and First Heights to pay the FDIC monetary damages totaling approximately $221.3 million, including interest but excluding costs (such as attorneys fees) to be determined in the future by the District Court. However, the FDIC has acknowledged that it has already paid itself or withheld from assistance its obligation to pay to First Heights approximately $105 million, excluding interest thereon. The Company believes that it is entitled to a credit or actual payment of such amount. The Final Judgment does not address this issue. Based upon the Company's review of the Final Judgment, the Company believes that, if the Final Judgment were to be upheld in its entirety on appeal, the potential after-tax charges against Discontinued Operations, after giving effect to interest owed by the FDIC to First Heights, will be approximately $88 million, plus post-judgment interest (currently 5% per year). The Company vigorously disagrees with the Court's rulings and will appeal. The Company believes that the District Court erred in granting summary judgment to the FDIC. Among other things, the Company believes that the District Court improperly resolved highly disputed factual issues which should have been presented to a jury and, as a result, it improperly granted summary judgment accepting the FDIC's view of the facts on substantially all disputed issues and, therefore, that the Company has a strong basis for appeal of the District Court's decision and that an appellate court, properly applying the standards of review for this case, should reverse the District Court's decision and remand the case for trial, if not in its entirety, then at least in material respects. The Company does not believe that the claims in the Court of Federal Claims Case are in any way prejudiced by the rulings in the District Court Case. The Company is considering seeking relief in the Court of Federal Claims Case that would, if granted, recoup portions of the damages awarded in the District Court Case. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS This Item is not applicable. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information with respect to all officers (including executive officers) of the Company as of December 31, 1998.
Year Became Name Age Position An Officer - ---- --- -------- ------------ William J. Pulte 66 Chairman of Executive and Nominating Committees of the Board of Directors 1956 Robert K. Burgess 54 Chairman of the Board and Chief Executive Officer 1984 Mark J. O'Brien 55 President and Chief Operating Officer 1997 Roger A. Cregg 42 Senior Vice President and Chief Financial Officer 1997 Michael A. O'Brien 46 Senior Vice President - Corporate Development 1993 Vincent J. Frees 48 Vice President and Controller 1995 Gregory M. Nelson 43 Vice President and Assistant Secretary 1993 Bruce E. Robinson 37 Vice President and Treasurer 1998 John R. Stoller 50 Vice President, General Counsel and Secretary 1990
The following is a brief account of the business experience during the past five years through December 31, 1998 of each officer: Mr. Pulte was appointed Chairman of the Executive and Nominating Committees of the Board of Directors in December 1998. Previously, Mr. Pulte served as Chairman of the Board since 1991. Mr. Burgess was appointed Chairman of the Board in December 1998. Previously, Mr. Burgess served as President since October 1985, and had been appointed Chief Executive Officer in January 1993. Mr. Mark O'Brien was appointed President in December 1998. Prior to that date, he served as Executive Vice President and Chief Operating Officer since August 1997 and had served in various capacities with Company subsidiaries, most notably as President of Pulte Home East, an operating unit of Pulte. Mr. Cregg was appointed Senior Vice President in December 1997 and was named Chief Financial Officer effective January 31, 1998. Prior to joining the Company, Mr. Cregg was Executive Vice President and Chief Financial Officer of Zenith Electronics Corporation since 1996, and Vice President and Chief Financial Officer of Sweetheart Cup Company from 1990 to 1996. Mr. Michael O'Brien became Senior Vice President in December 1994. From December 1993 to November 1994, he was Vice President. Mr. Frees became Vice President and Controller in May 1995. Prior to joining the Company in April 1995, Mr. Frees served in various key financial capacities with American Cyanamid Company since 1982. Mr. Nelson has been Vice President since August 1993. Mr. Robinson was appointed Treasurer in July 1998 and was named Vice President and Treasurer effective January 20, 1999. Mr. Robinson has served in various capacities with the Company since 1988, most recently as Director of Research and Analysis. Mr. Stoller joined the Company in August 1990. In October 1990, he was appointed Vice President and General Counsel. There is no family relationship between any of the officers. Each officer serves at the pleasure of the Board of Directors. 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York Stock Exchange (Symbol: PHM). The table below sets forth, for the quarterly periods indicated, the range of high and low sales prices and cash dividends declared per share, adjusted for the effect of the Company's 2-for-1 stock split effective June 1, 1998. 1998 1997 ---------------------------- ----------------------------- Declared Declared High Low Dividends High Low Dividends ---- --- --------- ---- --- --------- 1st Quarter $23.25 $20.50 $.03 $17.31 $14.63 $.03 2nd Quarter 30.88 23.50 .04 17.50 13.81 .03 3rd Quarter 35.44 24.69 .04 20.41 17.16 .03 4th Quarter 29.75 20.00 .04 21.13 17.56 .03 At December 31, 1998, there were 663 shareholders of record. ITEM 6. SELECTED FINANCIAL DATA Set forth below is selected consolidated financial data for each of the past five fiscal years. The selected financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this report.
Year Ended December 31, ($000's omitted) -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- OPERATING DATA: Homebuilding: Sales (settlements)................. $2,810,151 $2,479,171 $2,319,734 $1,934,403 $1,637,306 ========== ========== ========== ========== ========== Income before income taxes and extraordinary item............... $ 173,346 $ 106,178(A) $ 106,391 $ 75,476 $ 90,935 ========== ========== ========== ========== ========== Financial services: Revenues............................ $ 43,678 $ 34,038 $ 50,197 $ 74,105 $ 107,799 ========== ========== ========== ========== ========== Income before income taxes and extraordinary item............... $ 15,194 $ 5,014(B) $ 13,941 $ 17,491 $ 19,870 ========== ========== ========== ========== ========== Corporate: Revenues............................ $ 12,692 $ 10,782 $ 14,352 $ 20,632 $ 10,808 ========== ========== ========== ========== ========== Loss before income taxes and extraordinary item............... $ (22,726) $ (30,217)(C) $ (17,869) $ (10,943) $ (7,217) ========== ========= ========== ========== ========== (A) Includes one-time restructuring charge of $14,800. (B) Includes one-time restructuring charge of $2,100. (C) Includes one-time restructuring charge of $3,100.
13 ITEM 6. SELECTED FINANCIAL DATA (continued)
Year Ended December 31, ($000's omitted) ----------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Consolidated results: Revenues ................................. $2,866,521 $2,523,991 $2,384,283 $2,029,140 $1,755,913 ========== ========== ========== ========== ========== Income from continuing operations before income taxes and extraordinary item ... 165,814 80,975(D) 102,463 82,024 103,588 Income taxes ............................. 64,666 31,175 39,252 33,185 41,219 ---------- ---------- ---------- ---------- ---------- Income from continuing operations before extraordinary item .................... 101,148 49,800 63,211 48,839 62,369 Income from discontinued operations ...... 1,035 2,961 116,432 9,507 102,988 ---------- ---------- ---------- ---------- ---------- Income before extraordinary item ......... 102,183 52,761 179,643 58,346 165,357 Extraordinary loss from early extinguishment of debt ................ -- -- -- -- (2,589) ---------- ---------- ---------- ---------- ---------- Net income ............................... $ 102,183 $ 52,761 $ 179,643 $ 58,346 $ 162,768 ========== ========== ========== ========== ========== (D) Includes one-time restructuring charge of $20,000. NOTE: Per share data reflect the effect of the Company's 2-for-1 stock split effective June 1, 1998, and amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings per Share. For further discussion of earnings per share and the impact of Statement No. 128, see Notes to Consolidated Financial Statements beginning on page 38. Year Ended December 31, ------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- PER SHARE DATA Earnings per share-basic: Income from continuing operations before extraordinary item................. $ 2.35 $ 1.14(A) $ 1.27 $ .90 $ 1.13 Income from discontinued operations.......... .03 .07 2.33 .18 1.87 ------- ------- ------- ------- ------- Income before extraordinary item............. 2.38 1.21(A) 3.60 1.08 3.00 Extraordinary item........................... -- -- -- -- (.05) ------- ------- ------- ------- ------- Net income................................... $ 2.38 $ 1.21(A) $ 3.60 $ 1.08 $ 2.95 ======= ======= ======= ======= ======= Weighted-average common shares outstanding (000's omitted)............... 42,984 43,510 49,852 54,148 55,112 ======= ======= ======= ======= ======= (A) Earnings per share amounts include $ .28 per share attributable to one-time restructuring charge, net of income taxes.
14 ITEM 6. SELECTED FINANCIAL DATA (continued)
Year Ended December 31, ----------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- PER SHARE DATA (continued) Earnings per share - assuming dilution: Income from continuing operations before extraordinary item................. $ 2.30 $ 1.13(A) $ 1.26 $ .89 $ 1.12 Income from discontinued operations.......... .03 .07 2.31 .17 1.85 ------- ------- ------- ------- ------- Income before extraordinary item............. 2.33 1.20(A) 3.57 1.06 2.97 Extraordinary item........................... -- -- -- -- (.05) ------- ------- ------- ------- ------- Net income................................... $ 2.33 $ 1.20(A) $ 3.57 $ 1.06 $ 2.92 ======= ======= ======= ======= ======= Weighted-average common shares outstanding and effect of dilutive securities (000's omitted)................ 43,884 43,908 50,304 54,844 55,708 ======= ======= ======= ======= ======= Shareholders' equity............................ $ 21.35 $ 19.10 $ 17.82 $ 14.08 $ 12.94 ======= ======= ======= ======= ======= Cash dividends declared......................... $ .15 $ .12 $ .12 $ .12 $ .12 ======= ======= ======= ======= ======= (A) Earnings per share amounts include $ .28 per share attributable to one-time restructuring charge, net of income taxes. December 31, ($000's omitted) -------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: House and land inventories ............ $1,455,208 $1,141,952 $1,017,262 $ 859,735 $ 752,369 Total assets .......................... 2,349,839 2,129,419 1,985,141 2,047,515 1,941,355 Total long-term indebtedness........... 570,114 584,313 436,587 589,229 563,781 Shareholders' equity .................. 921,442 812,837 829,273 761,003 710,589 Year Ended December 31, -------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- OTHER DATA: Domestic homebuilding operations: Total markets, at year end ................ 41 40 40 38 31 Total active communities, at year end ..... 399 385 382 346 293 Total settlements - units ................. 15,897 14,691 14,202 12,293 11,085 Total net new orders - units .............. 17,918 14,841 13,977 13,486 10,503 Backlog units, at year end ................ 5,414 3,393 3,243 3,468 2,275 Average unit selling price ................ $175,000 $164,000 $160,000 $155,000 $147,000 Gross profit margin % ..................... 16.1% 14.8% 14.8% 14.5% 15.4% Pulte and Pulte-affiliate settlements - units: Domestic .................................. 15,897 14,691 14,202 12,293 11,085 International ............................. 3,848 1,905 606 651 313 Active Adult .............................. 614 377 220 152 57 -------- -------- -------- -------- -------- Total Pulte and Pulte-affiliate settlements - units .................... 20,359 16,973 15,028 13,096 11,455 ======== ======== ======== ======== ========
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ($000's omitted, except per share data) Overview: A summary of the Company's operating results by business segment for the years ended December 31, 1998, 1997 and 1996 is as follows:
Year Ended December 31, ----------------------------------- 1998 1997 1996 --------- ---------- --------- Pre-tax income (loss), before restructuring costs: Homebuilding operations ..................... $ 173,346 $ 120,978 $ 106,391 Financial Services operations ............... 15,194 7,114 13,941 Corporate ................................... (22,726) (27,117) (17,869) --------- --------- --------- Income from continuing operations before income taxes and restructuring costs ..................... 165,814 100,975 102,463 Restructuring costs ............................. -- 20,000 -- --------- --------- --------- Income from continuing operations before income taxes ........................... 165,814 80,975 102,463 Income taxes .................................... 64,666 31,175 39,252 --------- --------- --------- Income from continuing operations ............... 101,148 49,800 63,211 Income from discontinued operations ............. 1,035 2,961 116,432 --------- --------- --------- Net income ...................................... $ 102,183 $ 52,761 $ 179,643 ========= ========= ========= Per share data - assuming dilution: Income from continuing operations before restructuring costs, net of income taxes ............... $ 2.30 $ 1.41 $ 1.26 Restructuring costs, net of income taxes .... -- (.28) -- --------- --------- --------- Income from continuing operations ........... $ 2.30 $ 1.13 $ 1.26 Income from discontinued operations ......... .03 .07 2.31 --------- --------- --------- Net income .................................. $ 2.33 $ 1.20 $ 3.57 ========= ========= =========
A comparison of pre-tax income (loss), before restructuring costs, for the years ended December 31, 1998, 1997 and 1996 is as follows: o Pre-tax income of the Company's homebuilding business segment increased 43% in 1998 and 14% in 1997. Compared to 1997, 1998 results primarily reflect an 8% increase in domestic homebuilding unit sales volume and a 130 basis point improvement in gross margins offset by decreases in other income resulting from the sale of Builders Supply & Lumber Co., Inc. (BSL) in March 1998. 1997 results, as compared with 1996, primarily reflect the combination of a $4,200 improvement in the operating results of BSL, approximately $2,900 of proceeds received from the settlement of certain litigation, and a $1,700 net increase in profits from land sales, reduced by nearly $6,700 in asset impairment adjustments taken on under-performing projects. o Pre-tax income of the Company's financial services business segment increased substantially in 1998 to nearly $15,200, a 114% increase as compared with 1997. This increase is attributable to the Company's mortgage banking operation which benefited from substantial increases in mortgage origination volume, origination and servicing fees, and pricing and marketing gains. Average operating costs per mortgage origination, excluding provision for foreclosure-related losses and restructuring costs, decreased by 16% in 1998 and 19% in 1997, reflecting improved leverage of loan origination volume. The decrease in pre-tax income in 1997, as compared with 1996, is attributable to an $11,446 decrease in financing activities, reflecting gains from the sale of collateral during 1996. No such sales occurred in 1997 or 1998. o Pre-tax loss of the Company's corporate business segment decreased $4,391 in 1998 and increased $9,248 in 1997. The decrease in pre-tax loss in 1998 primarily reflects the $5,000 gain recognized from the sale of the Company's interest in Expression Homes during the first quarter. 1997 pre-tax losses reflect higher net interest expense as compared with 1996. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations: During 1997, the Company reorganized its homebuilding operations into three distinct business lines; Domestic, International, and Active Adult. o Domestic Homebuilding operations are conducted in 41 markets, located throughout 27 states. Domestic Homebuilding offers a broad product line to meet the needs of the first-time, move-up and semi-custom home buyer. o International Homebuilding operations are conducted through subsidiaries of Pulte International Corporation in Puerto Rico and Mexico. International Homebuilding product offerings focus on the demand of first-time buyers, and social interest housing in Mexico. The Company has agreements in place with multi-national corporations to provide social interest and employee housing in Mexico. o Active Adult Homebuilding operations are primarily conducted through a joint venture which was formed in 1998 with Blackstone Real Estate Advisors (BRE), an affiliate of the Blackstone Group, for the purpose of acquiring and developing major Active Adult residential communities, amenitized age-targeted and age-restricted communities appealing to a growing demographic group in their pre-retirement and retirement years. The venture is currently developing four communities which it acquired from the Company earlier this year. The Company and BRE each maintain a 50% ownership interest in this venture. Certain operating data relating to the Company's joint ventures and homebuilding operations are as follows:
Year Ended December 31, -------------------------------------- 1998 1997 1996 ---------- ----------- ---------- Pulte/Pulte-affiliate Homebuilding revenues: Domestic ........................... $2,778,773 $2,407,104 $2,276,068 International ...................... 64,590 41,196 16,163 Active Adult ....................... 104,839 54,602 32,142 ---------- ---------- ---------- Total Homebuilding .................... $2,948,202 $2,502,902 $2,324,373 ========== ========== ========== Pulte/Pulte-affiliate Homebuilding pre-tax income (loss): Domestic (A) ....................... $ 179,052 $ 123,052 $ 109,911 International ...................... (5,034) (3,141) (2,479) Active Adult ....................... (672) 1,067 (1,041) ---------- ---------- ---------- Total Homebuilding .................... $ 173,346 $ 120,978 $ 106,391 ========== ========== ========== Pulte/Pulte-affiliate settlements - units: Domestic ........................... 15,897 14,691 14,202 ---------- ---------- ---------- International: Pulte ........................... 166 254 191 Pulte-affiliated entities ....... 3,682 1,651 415 ---------- ---------- ---------- Total International ............. 3,848 1,905 606 ---------- ---------- ---------- Active Adult: Pulte ........................... 154 377 220 Pulte-affiliated entity ......... 460 -- -- ---------- ---------- ---------- Total Active Adult ................. 614 377 220 ---------- ---------- ---------- Total Pulte/Pulte-affiliate settlements - units .................... 20,359 16,973 15,028 ========== ========== ========== (A) 1997 pre-tax income (loss) is before restructuring costs of $14,800. See page 25, "Restructuring".
17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations (continued): Domestic Homebuilding: The domestic homebuilding business line represents the Company's core business. Operations are conducted in 41 markets, located throughout 27 states, and are organized into nine regions as follows: Pulte Home East: Mid-Atlantic Region Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New Hampshire, Pennsylvania, Rhode Island, Virginia Southeast Region Georgia, North Carolina, South Carolina, Tennessee Florida Region Florida Pulte Home Central: Great Lakes Region Indiana, Michigan, Missouri, Ohio, Kansas Midwest Region Illinois, Minnesota Texas Region Texas Pulte Home West: Southwest Region Arizona, Nevada Rocky Mountain Region Colorado, Utah California Region California No one individual market within the 41 markets represented more than 10% of total domestic homebuilding net new orders, unit settlements or revenues during the three years ended December 31, 1998. The following table presents selected unit information for Pulte's domestic homebuilding operations: Year Ended December 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Unit settlements: Pulte Home East .............. 7,902 7,154 6,708 Pulte Home Central ........... 4,696 4,385 4,589 Pulte Home West .............. 3,299 3,152 2,905 ---------- ---------- ---------- 15,897 14,691 14,202 ========== ========== ========== Net new orders - units: Pulte Home East .............. 8,985 7,098 6,845 Pulte Home Central ........... 5,594 4,421 4,282 Pulte Home West .............. 3,339 3,322 2,850 ---------- ---------- ---------- 17,918 14,841 13,977 ========== ========== ========== Net new orders - dollars ........... $3,161,000 $2,450,000 $2,262,000 ========== ========== ========== Backlog at December 31 - units: Pulte Home East .............. 2,643 1,560 1,616 Pulte Home Central ........... 1,914 1,016 980 Pulte Home West .............. 857 817 647 ---------- ---------- ---------- 5,414 3,393 3,243 ========== ========== ========== Backlog at December 31 - dollars ... $ 999,000 $ 617,000 $ 574,000 ========== ========== ========== 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations (continued): Domestic Homebuilding (continued): Net new orders increased for the tenth consecutive year to an all-time company record of 17,918 units in 1998, a 21% increase over 1997 order levels. Contributing to this strong performance were markets in the Southeast, Mid-Atlantic, Great Lakes, Texas and Southwest Regions. 1998 results also reflect the results of Radnor Homes and DiVosta & Company (the "acquired operations") which were acquired in 1998 and contributed net new orders of 348 and 834, respectively. Order growth in the Southeast, Southwest, Texas and California regions contributed to the 6% increase in 1997 orders as compared with 1996. Unit settlements in 1998 also hit a record-setting high, increasing 8% to 15,897 units in 1998. These results reflect strong performance in the Southeast, Mid-Atlantic, Texas, California and Great Lakes Regions and the unit settlements provided by the acquired operations of 683 units. Overall, strong demand, supported by favorable economic conditions continued to drive increased order activity and record levels of backlog. These factors have contributed to the solid settlement activity during 1998. Unit settlement activity in 1997 increased 3% over 1996 levels. Significant increases in the Southeast, Southwest, California and Great Lakes in 1997 were offset by softer performance in the Mid-Atlantic, Midwest, and Florida Regions. The average home sales price increased from $160 in 1996 to $164 in 1997 and to $175 in the current year. Changes in average selling price reflect a number of factors, including the mix of product closed during a period. The strong order activity has fueled the growth in the Company's year-end backlog level to a record-setting 5,414 homes, or approximately $999,000, a 60% increase over prior year backlog levels of 3,393 homes. Backlog associated with acquired operations accounted for 499 units or $91,000 as of December 31, 1998. Unit backlog at December 31, 1997 was approximately 5% higher than that noted at the end of 1996. The following table presents a summary of pre-tax income for Pulte's domestic homebuilding operations: Year Ended December 31, ------------------------------------------ 1998 1997 1996 ----------- ----------- ------------ Revenues ....................... $ 2,778,773 $ 2,407,104 $ 2,276,068 Cost of sales .................. (2,331,517) (2,051,591) (1,938,772) Selling, general and administrative expenses ...... (244,025) (219,993) (213,076) Interest (a) ................... (20,164) (18,503) (17,216) Other income (expense), net .... (4,015) 6,035 2,907 ----------- ----------- ----------- Pre-tax income before restructuring costs .......... 179,052 123,052 109,911 Restructuring costs ............ -- (14,800) -- ----------- ----------- ----------- Pre-tax income ................. $ 179,052 $ 108,252 $ 109,911 =========== =========== =========== Average sales price ............ $ 175 $ 164 $ 160 =========== =========== =========== (a)The Company capitalizes interest cost into homebuilding inventories and charges the interest to homebuilding interest expense when the related inventories are closed. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations (continued): Domestic Homebuilding (continued): Gross profit margins in 1998 increased to 16.1%, up 130 basis points over 1997. Gross margins in 1997 of 14.8% were unchanged from 1996. Several factors have contributed to this favorable trend that has been experienced over the last eighteen months, including strong customer demand, positive home pricing conditions, the benefits of leverage-buy purchasing activities, effective production and inventory management, and the Company's P3 initiative (Pulte Preferred Partnerships) with contractors and suppliers. As a result, gross margins continue to improve on a sequential-period basis as evidenced by the 16.9% gross margin achieved during the fourth quarter 1998, the sixth consecutive quarter of achieving gross margin improvements. For the year ended December 31, 1998, selling, general and administrative expenses (SG&A), as a percentage of sales, declined to 8.8% from 9.1% in 1997 and 9.4% in 1996, reflecting the benefit savings from the restructuring plan effected in the last quarter of 1997, and the leverage of SG&A spending on higher unit sales volume. Other income, net, includes gains on land sales and other homebuilding-related expenses. Other income, net, has also historically included the net operating results of BSL prior to its sale on March 20, 1998. The decrease in other income, net, for the year ended December 31, 1998 is due to the sale of BSL in March 1998. The winding down of operations coupled with transaction costs incurred in connection with the sale resulted in a decrease of other income of $7,030. Also reflected in yearly results is a decrease in 1998 of approximately $2,900 resulting from an insurance litigation settlement received in the first quarter of 1997. For 1997, the increase in other income, net from 1996 was attributable to a $4,200 improvement in the operating results of BSL, approximately $2,900 of proceeds received from the settlement of certain litigation, and a $1,700 net increase in profits from land sales, reduced by nearly $6,700 relating to asset impairment adjustments taken on under-performing projects. Information related to interest in inventory is as follows: Year Ended December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Interest in inventory at beginning of year ........ $ 14,719 $ 12,846 $ 12,261 Interest capitalized ....... 21,801 20,376 17,801 Interest expensed .......... (20,164) (18,503) (17,216) -------- -------- -------- Interest in inventory at end of year .............. $ 16,356 $ 14,719 $ 12,846 ======== ======== ======== At December 31, 1998, Pulte's domestic homebuilding operations controlled approximately 64,900 lots, of which approximately 40,300 lots were owned and approximately 24,600 lots were controlled through option agreements. As a component of the Company's business strategies, the Company acquired all of the outstanding stock of Tennessee-based Radnor Homes on May 27, 1998 for an aggregate purchase price of approximately $58,000. Consideration for this acquisition included approximately $51,000 of cash paid, approximately $3,000 of assumed liabilities and the issuance of 153,570 shares of the Company's common stock. This transaction has been accounted for as a purchase, and as such, the operating results of Radnor since the acquisition date have been included in the Company's results of operations, and integrated into the Southeast Region. On July 1, 1998, the Company acquired the outstanding stock and membership interests in certain closely-held businesses of Florida-based DiVosta & Company for an aggregate purchase price of approximately $155,000. Consideration for this acquisition, which was recorded using the purchase method of accounting, included approximately $109,000 of cash paid, approximately $25,000 of liabilities assumed and $21,000 in the form of a seller-financed note. The purchase price has been allocated to the assets acquired and liabilities assumed based on relative fair value estimates. Goodwill of approximately $47,000 represents the excess of the purchase price over these fair value estimates and will be amortized using a straight-line method over a seven-year period. The Company has included the operating results of DiVosta & Company since the acquisition date in its consolidated results of operations. Goodwill amortization was $3,400 for the year ended December 31, 1998. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations (continued): International Homebuilding: International Homebuilding operations are primarily conducted through subsidiaries of Pulte International Corporation in Puerto Rico and Mexico. The Company's aggregate net investment in its five joint ventures located throughout Mexico approximated $28,200 at December 31, 1998. The largest of these ventures, Condak-Pulte S. De R.L. De C.V., is located in the city of Juarez. The Juarez-based venture is currently developing communities in Juarez, Chihuahua, Nuevo Laredo, Reynosa and Matamoros, under agreements with Delphi Automotive Systems and Sony Magneticos de Mexico, S.A. de C.V., an affiliate of Sony Electronics, Inc. As of December 31, 1998, the Company's net investment in the Juarez-based joint venture approximated $21,300. On June 22, 1998 Pulte formed a new Mexican joint venture with Desarrollos Residenciales Turisticos, S.A. de C.V. (DRT), to construct primarily social interest housing in Central Mexico. The venture is expected to build approximately 3,200 units over the next two years and supports Pulte's strategic growth initiative in the Mexican housing market. Current development plans for this venture call for eight new housing projects in the Bajio region surrounding Mexico City, targeting the cities of Puebla, Queretaro, San Jose du Iturbide, San Juan del Rio and Zamora. Prior to the formation of the joint venture, DRT had six of these projects under construction and had secured permitting for the two remaining projects. At December 31, 1998, the Company's net investment in this joint venture approximated $3,345. The following table presents selected financial data for Pulte's international homebuilding operations for the years ended December 31, 1998, 1997 and 1996. Year Ended December 31, ------------------------------- 1998 1997 1996 -------- -------- ------- Revenues ................................ $ 12,152 $ 17,465 $ 11,524 Cost of sales ........................... (12,000) (14,793) (9,528) Selling, general and administrative expense .............................. (4,639) (3,702) (2,475) Other expense, net ...................... (85) (71) (46) Equity in loss of Mexico operations ..... (462) (2,040) (1,954) -------- -------- -------- Pre-tax loss ............................ $ (5,034) $ (3,141) $ (2,479) ======== ======== ======== Unit settlements: Pulte ................................ 166 254 191 Pulte-affiliated entities ............ 3,682 1,651 415 -------- -------- -------- Total Pulte and Pulte-affiliates .. 3,848 1,905 606 ======== ======== ======== Pre-tax losses for the year ended December 31, 1998, from the Company's international operations increased by $1,893. These losses are primarily attributable to foreign currency losses of $2,800 in Mexico and operating losses of $3,800 in Puerto Rico. The foreign currency exchange losses are a result of the 20% decline in the value of the Mexican peso against the U.S. dollar. The operational losses in Puerto Rico reflect the rebuilding efforts associated with Hurricane Georges and the refocusing of land positions and product offerings by a new management team. Management expects that improvements in business operations will be realized in 1999. 1997 results, as compared with 1996, primarily reflect approximately $298 of operating losses in Puerto Rico and foreign currency losses of approximately $600 in Mexico, resulting from a 4% decline in the Mexican peso during 1997. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Homebuilding Operations (continued): Active Adult Homebuilding: Active Adult Homebuilding operations are primarily conducted through a joint venture which was formed in 1998 with Blackstone Real Estate Advisors (BRE), an affiliate of the Blackstone Group, for the purpose of acquiring and developing major Active Adult residential communities, highly amenitized age-targeted and age-restricted communities appealing to a growing demographic group in their pre-retirement and retirement years. The venture is presently headquartered in Phoenix, Arizona, and is developing four communities located in Arizona, California and New Jersey, with plans to build additional communities later in 1999. Springfield at Whitney Oaks, the Venture's Active Adult Community in Northern California, recently received the Gold Achievement Award for the best seniors' housing development in the nation, as presented by the National Council on Seniors Housing. The Company and BRE each maintain a 50% ownership interest in the Active Adult joint venture. The Company's initial investment in this joint venture amounted to approximately $32,000. Upon the venture's obtaining an outside credit facility, the Company received a return of capital of $15,000. At December 31, 1998, the Company's aggregate net investment in the Active Adult joint venture approximated $17,275. The following table presents selected financial data for Pulte's Active Adult homebuilding operations for the years ended December 31, 1998, 1997, and 1996. Such data includes the operating results of the Company's Active Adult subsidiaries from January 1, 1998, through March 25, 1998, and the equity in income (loss) of the joint venture entity from March 26, 1998 through December 31, 1998: Year Ended December 31, ------------------------------------ 1998 1997 1996 --------- --------- ---------- Revenues ............................ $ 19,226 $ 54,602 $ 32,142 Cost of sales ....................... (15,736) (44,148) (27,526) Selling, general and administrative expense ........................... (4,020) (8,997) (5,410) Other expense, net .................. (452) (390) (247) Equity in income of joint venture ... 310 -- -- --------- --------- --------- Pre-tax income (loss) ............... $ (672) $ 1,067 $ (1,041) ========= ========= ========= Pulte and Pulte-affiliate: Average sales price ................. $ 171 $ 145 $ 146 ========= ========= ========= Settlements - units ................. 614 377 220 ========= ========= ========= Settlements - dollars ............... $ 104,800 $ 54,600 $ 32,100 ========= ========= ========= Net new orders - units .............. 671 385 271 ========= ========= ========= Net new orders - dollars ............ $ 123,300 $ 57,600 $ 41,700 ========= ========= ========= Backlog at December 31 - units ...... 171 114 106 ========= ========= ========= Backlog at December 31 - dollars .... $ 37,200 $ 18,700 $ 15,700 ========= ========= ========= The decreases in revenues, cost of sales, selling, general and administrative and other expense in 1998 as compared with 1997 and 1996 reflect the formation of the Active Adult joint venture with BRE in March 1998, at which time all but one of Pulte's four Active Adult subsidiaries ceased to operate. Therefore, operating results for these subsidiaries reflect only three months of activity during 1998. Subsequent to the formation of this joint venture with BRE, Pulte began to account for its Active Adult operations as an equity investment, the pre-tax results of which reflect the start-up stage of this new operation. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Financial Services Operations: The Company conducts its financial services operations principally through Pulte Mortgage Corporation (PMC), the Company's mortgage banking subsidiary and, to a limited extent, through Pulte Financial Companies, Inc. (PFCI), the Company's financing subsidiary. Pre-tax income (loss) of the Company's financial services operations is as follows: Year Ended December 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Pre-tax income (loss): Mortgage banking ........... $ 15,268 $ 7,230 $ 2,611 Financing activities ....... (74) (116) 11,330 ----------- ----------- ----------- Pre-tax income before restructuring costs ...... 15,194 7,114 13,941 Restructuring costs ........ -- (2,100) -- ----------- ----------- ----------- Pre-tax income ................ $ 15,194 $ 5,014 $ 13,941 =========== =========== =========== Mortgage Banking: Year Ended December 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Total originations: Loans ..................... 12,772 10,167 10,709 =========== =========== =========== Principal ................. $ 1,687,000 $ 1,256,000 $ 1,278,000 =========== =========== =========== Originations for Pulte customers: Loans ..................... 9,295 8,271 7,848 =========== =========== =========== Principal ................. $ 1,265,000 $ 1,060,000 $ 988,000 =========== =========== =========== PMC sells its servicing rights on a flow basis through fixed price servicing sales contracts. Due to the short period of time the servicing rights are held, usually two to three months, the Company does not amortize the servicing asset. Since the servicing rights are recorded at the value in the servicing sales contracts, there are no impairment issues related to these assets. PMC also originates mortgage loans using its own funds or borrowings made available to it pursuant to various credit arrangements, and then sells such mortgage loans to outside investors. Mortgage origination volume for the year ended December 31, 1998 increased 34% over 1997 and was driven by increased volume in both unit sales realized in Pulte's homebuilding operations and unit sales realized from the retail sector. Although Pulte customers continue to account for the majority of total loan production at December 31, 1998, increased loan origination volume in the retail sector has contributed to improved leverage of loan origination costs. Refinancings represented less than 10% of total loan originations in 1998. Mortgage origination volume for 1997 was relatively flat compared with 1996. At December 31, 1998, loan application backlog increased 56% to $460,000 as compared to $294,000 at December 31, 1997 and $246,000 at December 31, 1996. Pulte continues to hedge its mortgage pipeline in the normal course of its business and there has been no change in PMC's strategy or use of derivative financial instruments in this regard. During 1998, origination fees increased by $1,149 or 31% over the prior year. The increase in origination fees is due to the overall increase in loan originations and an increase in non-funded, brokered loans. Mortgage origination fees increased $235 or 7% during 1997, as compared with 1996, as a result of increases in miscellaneous fees charged for originated loans. Pricing and marketing gains increased $7,586 or 42% from the same period in 1997, primarily as a result of increased funded mortgage originations and increased servicing retained loan production. During 1997, pricing and marketing gains decreased $107 compared to 1996, due to a lower volume of servicing retained originations. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Financial Services Operations (continued): Mortgage Banking (continued): Net interest income in 1998 decreased 18% from 1997 to $1,379. This decrease is attributable to reduced balances of equity capital coupled with a lower spread between short-term and long-term mortgage rates. As compared with 1996, net interest income decreased $1,274 during 1997 due to dividends in excess of current earnings paid by PMC to its parent, Pulte, and a flattening of the yield curve during the year. PMC operating expenses decreased $992 or 6% from 1997 on increased production of 34%. This improved cost leverage is a result of the mortgage operations center (MOC) and mortgage application center (MAC) initiatives implemented during 1997 which have expedited the loan approval process and lowered the total costs from application to closing, and the corporate restructuring. The centralization of the MOC and MAC also resulted in the improvement of 1997 operating expenses, excluding restructuring costs, which decreased 23% from 1996. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in years beginning after June 15, 1999, with earlier adoption encouraged. This Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. PMC, in the normal course of business, uses derivative financial instruments to meet the financing needs of its customers and reduce its own exposure to fluctuations in interest rates. The Company has not yet determined what effect SFAS No. 133 will have on its earnings and financial position. Financing Activities: The Company's secured financing operations are conducted by a limited-purpose subsidiary of Pulte Financial Companies, Inc. (PFCI). Such operations, which the Company is exiting, have engaged in the acquisition of mortgage loans and mortgage-backed securities financed principally through the issuance of long-term bonds secured by such mortgage loans and mortgage-backed securities. At December 31, 1998, one bond series with a principal amount of $28,075 and a stated interest rate of 9% was outstanding. Redemption notices for this bond were issued on January 31, 1999, and early retirement of this bond is expected to occur on March 1, 1999 with an estimated net realized gain on the sale of underlying collateral of approximately $1,700. PFCI had pre-tax operating losses of $74 in 1998 and $116 in 1997 and pre-tax income of $11,330 in 1996. In 1996, PFCI recognized gains on sales of collateral aggregating $11,069. No such sales occurred during 1998 or 1997. Corporate: Corporate is a non-operating business segment whose primary purpose is to support the operations of the Company's subsidiaries as the internal source of financing, to develop and implement strategic initiatives centered on new business development and operating efficiencies, and to provide the administrative support associated with being a publicly traded entity. The Company views this corporate function as a form of research and development, a prelude to adding these initiatives to existing business segments or necessitating the creation of new business segments. As a result, the corporate segment's operating results will vary from year to year as these strategic initiatives evolve. The following table presents corporate results of operations for the years ended December 31, 1998, 1997 and 1996: Year Ended December 31, ---------------------------- 1998 1997 1996 ------- ------- -------- Net interest expense .............. $14,269 $14,079 $ 6,055 Other corporate expenses, net ..... 8,457 13,038 11,814 ------- ------- ------- Loss before income taxes and restructuring costs ............. 22,726 27,117 17,869 Restructuring costs ............... -- 3,100 -- ------- ------- ------- Loss before income taxes .......... $22,726 $30,217 $17,869 ======= ======= ======= 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Corporate (continued): The decrease in pre-tax loss, before restructuring costs, of $4,391 in 1998, as compared with 1997 is due to the net of the following: o In order to refocus its efforts in its core homebuilding business, the Company sold its interest in Expression Homes, a manufactured housing joint venture with Fleetwood Homes. As a result of this sale, the Company recognized a one-time gain of $5,000 during the first quarter of 1998. o An increase in the net interest spread resulting from an increase of approximately $5,500 of interest income, offset by higher interest expense of $5,700 associated with the issuance of $150,000 of 7.62% Senior Notes, due 2017, during the fourth quarter of 1997. The increased loss, before restructuring costs, in 1997 as compared with 1996, is due primarily to increased net interest expense resulting from utilization of approximately $174,000 of available funds and, to a lesser extent, draws on the Company's unsecured revolving credit arrangement to reacquire 6.2 million shares of the Company's common stock during 1996 and the first four months of 1997. Restructuring: During the fourth quarter of 1997, a pre-tax charge of $20,000 was recorded in connection with the reorganization of the Company's operations. The 1997 restructuring charge included $11,787 of separation and other costs for approximately 150 employees, $7,000 of asset impairments and $1,213 of other costs, principally for office leases. The after-tax effect of this charge was $12,300 or $.28 per diluted share (adjusted for the effect of the Company's 2-for-1 stock split effective June 1, 1998). As of December 31, 1998, the Company has severed employment with approximately 150 employees. The Company's restructuring plan included right-sizing the workforce on a Company-wide basis. The Company's plan of restructuring included the following employee groups: approximately 100 construction and administrative support employees, 27 middle managers/supervisors and 23 members of senior management. This reorganization entailed the realignment of homebuilding operations into business lines which focus on specific customer segments; the creation of a mortgage applications center, which increased overhead leverage by moving PMC's loan officers from field branches to a central location in Denver, Colorado; and the evaluation and strategic deployment of inventory investment in the Company's homebuilding operations. As such, various homebuilding communities located primarily in Florida, North Carolina, South Carolina and Illinois with assets such as house and land inventory were affected by an exit plan to either sell such inventory or expedite the wind-down/withdrawal of homebuilding activities. The fair value of these assets was determined based on estimated selling price, less costs to complete, less direct selling and disposal costs. 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Restructuring (continued): The following tables display the status of liabilities accrued for the Company's restructuring from origination to December 31, 1998.
1997 Reserve Uses Balance at Original ------------------------ December 31, Type of Cost Reserve Cash Non-cash 1997 - ------------ --------- --------- -------- ------------ Homebuilding operations: Employee separation and other $ 6,900 $ (843) $ -- $ 6,057 Asset impairments ........... 7,000 -- (7,000) -- Other ....................... 900 -- -- 900 -------- -------- -------- -------- 14,800 (843) (7,000) 6,957 -------- -------- -------- -------- Mortgage Banking operations: Employee separation and other 1,787 (610) -- 1,177 Other ....................... 313 (33) -- 280 -------- -------- -------- -------- 2,100 (643) -- 1,457 -------- -------- -------- -------- Corporate: Employee separation and other 3,100 (74) (496) 2,530 -------- -------- -------- -------- $ 20,000 $ (1,560) $ (7,496) $ 10,944 ======== ======== ======== ======== Balance at 1998 Reserve Uses Balance at December 31, ----------------------- December 31, Type of Cost 1997 Cash Non-cash 1998 - ------------ ------------- -------- -------- ----------- Homebuilding operations: Employee separation and other $ 6,057 $ (4,555) $ -- $ 1,502 Asset impairments ........... -- -- -- -- Other ....................... 900 (645) -- 255 -------- -------- -------- -------- 6,957 (5,200) -- 1,757 -------- -------- -------- -------- Mortgage Banking operations: Employee separation and other 1,177 (840) -- 337 Other ....................... 280 (201) -- 79 -------- -------- -------- -------- 1,457 (1,041) -- 416 -------- -------- -------- -------- Corporate: Employee separation and other 2,530 (1,608) -- 922 -------- -------- -------- -------- $ 10,944 $ (7,849) $ -- $ 3,095 ======== ======== ======== ========
The remaining accrual for restructuring costs at December 31, 1998 primarily relates to longer term severance and deferred compensation liabilities which are expected to be fully paid by December 31, 2000. The Company believes that implementation of the restructuring plan resulted in annual cost savings of approximately $10,000 during 1998, as compared to 1997. 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Liquidity and Capital Resources : Continuing Operations: The Company's net cash used in operating activities increased from $35,174 in 1997 to $129,344 in 1998 due primarily to increases in inventory levels and PMC's holdings of residential mortgage loans available-for-sale, offset by an increase in net income and decreases in other assets and accounts payable. Net cash from investing activities decreased from a source of cash of $7,969 in 1997 to a use of cash of $44,674 in 1998 resulting primarily from the Company's acquisition of Radnor Homes and DiVosta & Company during 1998, net of the sale of BSL, and the sale of 50% of its interest in the Active Adult subsidiaries to BRE in March 1998. The Company's investment in the Active Adult joint venture after the sale to BRE approximated $32,000. The Company received a return of capital of $15,000 upon the venture's obtaining an outside credit facility. Net cash provided by financing activities decreased from $82,736 in 1997 to $54,060 in 1998. Prior year results primarily reflect the Company's issuance of $150,000 of unsecured Senior Notes during the fourth quarter of 1997. 1998 activity reflects proceeds from borrowings, primarily to finance the Company's acquisitions during 1998, repayment of other non-recourse debt of $26,054 and dividends paid of $6,456. The Company finances its land acquisitions, development and construction activities from internally generated funds and existing credit agreements. The Company had no borrowings under its $210,000 unsecured revolving credit facility at December 31, 1998. Pulte Mortgage provides mortgage financing for many of its home sales and uses its own funds and borrowings made available pursuant to various committed and uncommitted credit arrangements which, at December 31, 1998, amounted to $250,000, an amount deemed adequate to cover foreseeable needs. There were approximately $210,000 of borrowings outstanding under the $250,000 PMC arrangement at December 31, 1998. Mortgage loans originated by PMC are subsequently sold, principally to outside investors. The Company anticipates that there will be adequate mortgage financing available for purchasers of its homes. The Company's income tax liabilities are affected by a number of factors. In 1998, the Company's effective income tax rate increased .05%, primarily reflecting a shift in the sales mix to jurisdictions with higher tax rates. Management anticipates that the Company's effective tax rate for 1999 will range between 39% and 40%. At December 31, 1998, the Company had cash and equivalents of $125,198 and total indebtedness of $570,114. The Company's total long-term indebtedness includes $487,496 of unsecured senior notes, $22,405 unsecured senior subordinated debentures, a $21,000 unsecured promissory note, other Pulte limited recourse debt of $11,138 and $28,075 of mortgage-backed bonds payable for PFCI. The Company also has other non-recourse short-term notes payable of $59,466 and First Heights advances of $760. During 1999, the Company issued a redemption notice on the $28,075 of mortgage-backed bonds payable for PFCI and plans to early redeem this debt during the first quarter of 1999. The $22,405 unsecured senior subordinated debenture and the first $7,000 installment due under the $21,000 unsecured promissory note are also payable during 1999. Sources of the Company's working capital at December 31, 1998 include its cash and equivalents, its $210,000 committed unsecured revolving credit facility and its $10,000 uncommitted bank credit arrangement. During 1999, management anticipates utilizing additional financing resources, including securities offerings, to meet its projected homebuilding and corporate working capital requirements. As the Company continues to seek strategic acquisition opportunities, it will consider alternative financing sources, as needed, to fund such transactions. Discontinued Operations: Since the acquisition of First Heights, the Company's income taxes have been significantly impacted by its thrift operations, principally because payments received from the FSLIC Resolution Fund (FRF) are exempt from federal income taxes. The Company's thrift assets are subject to regulatory restrictions and a court order and thus are not available for general corporate purposes. The final liquidation of the Company's thrift operations is dependent on the final resolution of outstanding matters with the Federal Deposit Insurance Corporation (FDIC), manager of FRF. In order to expedite the wind-down of its thrift operations, the Company, with the approval of the OTS and FDIC, funded 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Liquidity and Capital Resources (continued): Discontinued Operations (continued): First Heights' repayment of its remaining certificates of deposit with a loan of approximately $17,000 during the fourth quarter of 1998. Repayment of such amount will be part of the final liquidation of First Heights. The Company's remaining investment in First Heights at December 31, 1998 approximated $27,000. Based upon the Company's assessment of its legal position in the District Court litigation with the FDIC (which is discussed in Note 11 of Notes to Consolidated Financial Statements), as well as the expected duration of the legal process in this case, the Company does not currently believe that the judgment ordered by the District Court against Pulte Diversified Companies, Inc. and First Heights will have a material impact on the Company's liquidity. Inflation The Company and the homebuilding industry in general, may be adversely affected during periods of high inflation, because of higher land and construction costs. Inflation also increases the Company's financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. The Company attempts to pass through to its customers any increases in its costs through increased sales prices and, to date, inflation has not had a material adverse effect on the Company's results of operations. However, there is no assurance that inflation will not have a material adverse impact on the Company's future results of operations. Information Technology and Year 2000 Compliance: An integral part of the Company's operating strategy is to provide Pulte management and employees the information systems needed to support the Company's current operations and future growth. Management believes that substantial progress has been made toward the goal of developing an integrated set of systems to support marketing, land and product development, home sales, construction, service, and comprehensive financial management. A critical component of this integrated systems effort involves replacement of the Company's existing accounting systems. This new system is designed to enhance access to and reporting of operating results and other financial measurements, as well as substantially resolve the Company's exposure to Year 2000 risk (the inability of certain computer software, hardware and other equipment with embedded computer chips to properly process two-digit year-date codes after 1999). To address the millennium date change issue, the Company's homebuilding and corporate operations performed risk assessments of information technology (IT), non-IT (embedded technology such as microprocessors in office equipment and facilities) and essential homebuilding supplier/contractor relationships. The Company's mortgage banking operation also completed a Year 2000 risk assessment for both internal information systems and external relationships. The Company's State of Readiness The chart illustrated below summarizes the Company's current major information systems and management's current assessment of the potential risk of Year 2000 issues. The status of each major information technology (IT) activity is reported by "phase" as defined below. Phase 1 Assessment Exposure (analysis and testing) Phase 2 Problem correction and validation Phase 3 Implementation/rollout of upgrades and corrections Phase 4 Communication with affected parties 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Information Technology and Year 2000 Compliance (continued): The Company's State of Readiness (continued)
1999 Expected Date of Completion IT related Systems IT Dependency Phase/Status (all Phases) - ------------------ ------------- ------------ ------------------ 1. Integrated Business Systems - Financial accounting High 3 September 30 - Sales & Construction support Medium 3 June 30 - Service management Low Complete Complete - Payroll and Benefits administration High Complete Complete 2. Datacenter Equipment & Operations High Complete Complete 3. Data and Voice Communications Networks High 3 September 30 4. Desktop PC's, incl. electronic mail Medium 3 September 30 5. Key suppliers - Banking and insurance providers Medium 2 June 30 - Field trade contractors and material suppliers Low 4 June 30
Non-IT Systems The Company does not own or operate any material "non-IT" systems, facilities, or industrial equipment that it believes might be adversely affected by the Year 2000 issue. All administrative office premises are leased, and are typically low-rise facilities in major metropolitan areas. All telephone systems and electronic office equipment are being assessed and corrected as part of Project 3 listed above. Supplier/Contractor Relationships Customer deliverables are not critically reliant on information technology. In markets where contracts and legal correspondence are computer generated, final documents are always printed in hard-copy form for signature. Should existing computerized sales systems be rendered inoperable for any reason, sales personnel are currently trained to prepare all required customer documentation manually. In addition, standard Pulte contract language does not permit customers to cancel purchases for nominal delays. The Company's trade contractors/suppliers in general are not highly reliant on information systems for delivery of service or materials to the job-site, as is the case for the majority of the homebuilding industry. Day-to-day business communication of printed schedules and home specification information typically occurs via fax or manual exchange in printed form (as opposed to electronically, e.g., via EDI data communications). Pulte will be providing Year 2000 risk assessment guidelines to its field operations and purchasing managers during the first quarter of 1999 to ensure that any predictable Year 2000-related issues can be identified and resolved, or alternative supplier relationships established with compliant service providers. Current Pulte operating policy normally requires that supply relationships be established locally with at least two alternative sources for all building tasks and materials 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Information Technology and Year 2000 Compliance (continued): The Company's State of Readiness (continued) supply. The Company has either already exchanged Year 2000 readiness information with all national contract suppliers, or will have completed this activity by the second quarter of 1999. Such Year 2000 readiness information has already been exchanged with all of the Company's major banks. In conjunction with the financial accounting systems replacement initiative, the Company is also currently upgrading its cash management system. Verification testing will be performed with each major bank to the extent possible, with full implementation scheduled for the second quarter of 1999. The Risks of the Company's Year 2000 Issues & The Company's Contingency Plans The major focus of the Company's information systems efforts in 1999 will be to complete the nationwide roll-out of its new financial accounting and operating systems. Management believes that this initiative is properly resourced and will be completed by the end of the third quarter of 1999. While management believes it unlikely, it is possible, on a worst-case-scenario basis, that some markets may not be completely transitioned by year end. Should this occur, the Company plans to resort to the use of manual business tracking processes which could delay normal day-to-day back office activities, but which would not interfere with the Company's ability to complete the construction of homes or close home sales. This worst-case scenario, is therefore, not expected to have a material adverse effect upon the Company's liquidity, financial position or results of operations. While there can be no assurance that no legal claims will arise due to perceived or real Year 2000 issues, the Company does not expect a material impact on its liquidity, financial position or results of operations caused by internal Year 2000 issues or by possible claims asserted by third parties. Costs Related to Year 2000 Cumulative spending for the Company's internally-developed business software was approximately $6,210 through December 31, 1998, and additional spending in 1999 of $4,000 is expected to complete the project. In addition to the software development costs, the Company expects to incur additional expenses to be Year 2000 compliant; however, the Company does not expect the cost for such compliance to have a material impact on its liquidity, financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to interest rate risk on its long term debt. Although no exposure exists with respect to the Company's variable rate revolving loan at December 31, 1998, the Company runs the risk of interest rate declines with respect to its fixed rate long term corporate debt instruments. The following table sets forth, as of December 31, 1998, the Company's long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value: 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
Fair There- Value 1999 2000 2001 2002 2003 after Total 12/31/98 -------- ------- ------ ----- -------- --------- -------- -------- Rate sensitive liabilities: Fixed interest rate debt: Pulte Corporation public debt instruments ........... $ -- -- -- -- $100,000 $390,000 $490,000 $502,574 Average interest rate ...... -- -- -- -- 7.00% 7.74% 7.61% -- Pulte Diversified Companies, Inc., unsecured promissory note ....................... $ 7,000 7,000 7,000 -- -- -- $ 21,000 $ 21,000 Average interest rate ...... 8.00% 8.00% 8.00% -- -- -- 8.00% -- Pulte Financial Companies, Inc., mortgage-backed bonds ...................... $28,075 -- -- -- -- -- $ 28,075 $ 29,290 Average interest rate ...... 9% -- -- -- -- -- 9% -- Pulte Home Corporation unsecured senior subordinated debentures ................. $22,405 -- -- -- -- -- $ 22,405 $ 22,900 Average interest rate ...... 10.13% -- -- -- -- -- 10.13% -- Pulte Home Corporation other non-recourse debt ....................... $ 6,766 1,920 1,920 532 -- -- $ 11,138 $ 11,138 Average interest rate ...... 10.34% 10.00% 10.00% 10.00% -- -- 10.21% --
PMC, operating as a mortgage banker, is also subject to interest rate risk. Interest rate risk begins when PMC commits to lend money to a customer at agreed upon terms, (i.e. commit to lend at a certain interest rate for a certain period of time). The interest rate risk continues through the loan closing and until the loan is sold to an investor. During 1998, this period of interest rate exposure averaged approximately 60 days. In periods of rising interest rates, the length of exposure will generally increase due to customers locking in an interest rate sooner as opposed to letting the interest rate float. In order to minimize the interest rate risk PMC does two things; it finances the loans via a variable rate borrowing agreement tied to the Federal Funds rate and it hedges its loan commitments and closed loans through derivative financial instruments with off-balance sheet risk. These financial instruments include cash forward placement contracts on mortgage-backed securities, whole loan investor commitments, options on treasury future contracts, and options on cash forward placement contracts on mortgage-backed securities. PMC does not use any derivative financial instruments for trading purposes. Hypothetical changes in the fair values of PMC's financial instruments arising from immediate parallel shifts in long-term mortgage rates of plus 50, 100 and 150 basis points would not be material to the Company's financial results. The Company's aggregate net investment in Mexico approximated $28,200 at December 31, 1998. This investment, which is exposed to foreign currency exchange risk, could devalue by as much as $2,400 in 1999, assuming a hypothetical monthly devaluation of the Mexican peso against the U.S. dollar of one percent in each month of 1999. During the second quarter of 1998, the three-year cumulative rate of inflation in Mexico fell below 100%. As a result, the Mexican economy will no longer be considered hyperinflationary effective Janauary 1, 1999. Based on this change in economic status and under current accounting rules, management expects that a majority of its translation adjustments in 1999 will not be included in the determination of net income for the Company's international operations, but rather will be reported separately and accumulated in a separate component of equity and included in the determination of other comprehensive income. 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ($000's omitted) Special Notes Concerning Forward-looking Statements As a cautionary note, except for the historical information contained herein, certain matters discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A, "Quantitative & Qualitative Disclosures About Market Risk", are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such matters involve risks and uncertainties, including: the Company's exposure to certain market risks, changes in economic conditions, tax and interest rates, increases in raw material and labor costs, weather conditions, and general competitive factors, that may cause actual results to differ materially; its ability to resolve all outstanding matters related to First Heights (including the outcome of the Company's appeal in the District Court litigation with the FDIC), its ability to correct all material applications addressing the Year 2000 problem; as well as, the ability of the Company's vendors to correct all material applications addressing the Year 2000 problem, and the Company's assessment of the Year 2000 problem's impact on its financial results and operations. 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PULTE CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 ($000's omitted, except share data) ASSETS 1998 1997 ---------- ---------- Cash and equivalents ...................................................... $ 125,198 $ 245,156 Unfunded settlements ...................................................... 49,140 54,158 House and land inventories ................................................ 1,455,208 1,141,952 Mortgage-backed and related securities .................................... 29,290 39,467 Residential mortgage loans and other securities available-for-sale ........ 234,974 185,018 Other assets .............................................................. 287,688 249,125 Deferred income taxes ..................................................... 79,663 103,603 Discontinued operations ................................................... 88,678 110,940 ---------- ---------- $2,349,839 $2,129,419 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities, including book overdrafts of $112,688 and $84,623 in 1998 and 1997, respectively ............. $ 575,373 $ 482,123 Collateralized short-term debt, recourse solely to applicable subsidiary assets .................................................. 217,060 162,707 Mortgage-backed bonds, recourse solely to applicable subsidiary assets ............................................................. 28,075 37,413 Income taxes .......................................................... 9,592 7,265 Subordinated debentures and senior notes .............................. 542,039 546,900 Discontinued operations ............................................... 56,258 80,174 ---------- ---------- Total liabilities .................................................. 1,428,397 1,316,582 ---------- ---------- Shareholders' Equity: Preferred stock, $.01 par value; 25,000,000 shares authorized, none issued Common stock, $.01 par value; 100,000,000 shares authorized, 43,167,180 and 42,545,060 shares issued and outstanding at December 31, 1998 and 1997, respectively ........................... 432 213 Additional paid-in capital ............................................ 75,051 61,835 Unrealized gains on securities available-for-sale, net of income taxes of $722 and $1,056 in 1998 and 1997, respectively ............ 1,130 1,687 Retained earnings ..................................................... 844,829 749,102 ---------- ---------- Total shareholders' equity ......................................... 921,442 812,837 ---------- ---------- $2,349,839 $2,129,419 ========== ========== See notes to Consolidated Financial Statements.
33
PULTE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME For the year ended December 31, 1998, 1997 and 1996 ($000's omitted, except per share data) 1998 1997 1996 ----------- ----------- ----------- Revenues: Homebuilding .................................................. $ 2,810,151 $ 2,479,171 $ 2,319,734 Mortgage banking and financing, interest and other ............ 43,678 34,038 50,197 Corporate ..................................................... 12,692 10,782 14,352 ----------- ----------- ----------- Total revenues ................................ 2,866,521 2,523,991 2,384,283 ----------- ----------- ----------- Expenses: Homebuilding, principally cost of sales ...................... 2,636,653 2,356,153 2,211,389 Mortgage banking and financing, principally interest and other 28,484 26,924 36,256 Corporate, net ............................................... 35,418 37,899 32,221 Restructuring costs .......................................... -- 20,000 -- ----------- ----------- ----------- Total expenses ................................ 2,700,555 2,440,976 2,279,866 ----------- ----------- ----------- Other expense: Equity in loss of Pulte-affiliates ........................... (152) (2,040) (1,954) ----------- ----------- ----------- Income from continuing operations before income taxes ............. 165,814 80,975 102,463 Income taxes ...................................................... 64,666 31,175 39,252 ----------- ----------- ----------- Income from continuing operations ................................. 101,148 49,800 63,211 Income from discontinued operations ............................... 1,035 2,961 116,432 ----------- ----------- ----------- Net income ........................................................ 102,183 52,761 179,643 ----------- ----------- ----------- Other comprehensive income: Unrealized gains (losses) on securities available-for-sale arising during the period, net of taxes of ($334), $74 and ($4,500), respectively ....................................... (557) 213 (6,749) ----------- ----------- ----------- Comprehensive income ......................................... $ 101,626 $ 52,974 $ 172,894 =========== =========== =========== Per share data: Basic: Income from continuing operations .......................... $ 2.35 $ 1.14 $ 1.27 Income from discontinued operations ........................ .03 0.07 2.33 ----------- ----------- ----------- Net income ................................................. $ 2.38 $ 1.21 $ 3.60 =========== =========== =========== Assuming dilution: Income from continuing operations .......................... $ 2.30 $ 1.13 $ 1.26 Income from discontinued operations ........................ .03 .07 2.31 ----------- ----------- ----------- Net income ................................................. $ 2.33 $ 1.20 $ 3.57 =========== =========== =========== Cash dividends declared ....................................... $ .15 $ .12 $ .12 =========== =========== =========== Number of shares used in calculation: Basic: Weighted-average common shares outstanding .............. 42,984 43,510 49,852 Assuming dilution: Effect of dilutive securities - stock options ........... 900 398 452 ----------- ----------- ----------- Adjusted weighted-average common shares and effect of dilutive securities .................... 43,884 43,908 50,304 =========== =========== =========== See notes to Consolidated Financial Statements.
34
PULTE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the year ended December 31, 1998, 1997 and 1996 ($000's omitted) Additional Common Paid-in Unrealized Retained Stock Capital Gains Earnings Total --------- --------- --------- --------- --------- Shareholders' Equity, January 1, 1996 .... $ 270 $ 65,934 $ 8,223 $ 686,576 $ 761,003 Exercise of stock options ................ 1 894 -- -- 895 Cash dividends declared .................. -- -- -- (5,958) (5,958) Stock repurchases ........................ (38) (9,312) -- (90,211) (99,561) Net income ............................... -- -- -- 179,643 179,643 Change in unrealized gains on securities available-for-sale, net of income taxes of $(4,500) ........................... -- -- (6,749) -- (6,749) --------- --------- --------- --------- --------- Shareholders' Equity, December 31, 1996 .. 233 57,516 1,474 770,050 829,273 Exercise of stock options ................ 4 10,412 -- -- 10,416 Cash dividends declared .................. -- -- (5,153) (5,153) Stock repurchases ........................ (24) (6,093) -- (68,556) (74,673) Net income ............................... -- -- -- 52,761 52,761 Change in unrealized gains on securities available-for-sale, net of income taxes of $74 ................................ -- -- 213 -- 213 --------- --------- --------- --------- --------- Shareholders' Equity, December 31, 1997 .. 213 61,835 1,687 749,102 812,837 Exercise of stock options ................ 4 9,162 -- -- 9,166 Cash dividends declared .................. -- -- -- (6,456) (6,456) Stock dividend declared .................. 214 (214) -- -- -- Shares issued in business acquisition .... 1 4,268 -- -- 4,269 Net income ............................... -- -- -- 102,183 102,183 Change in unrealized gains on securities available-for-sale, net of income taxes of $(334) ............................. -- -- (557) -- (557) --------- --------- --------- --------- --------- Shareholders' Equity, December 31, 1998 .. $ 432 $ 75,051 $ 1,130 $ 844,829 $ 921,442 ========= ========= ========= ========= ========= See notes to Consolidated Financial Statements.
35
PULTE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended December 31, 1998, 1997 and 1996 ($000's omitted) 1998 1997 1996 --------- --------- --------- Continuing operations: Cash flows from operating activities: Income from continuing operations ............................... $ 101,148 $ 49,800 $ 63,211 Adjustments to reconcile income from continuing operations to net cash flows used in operating activities: Amortization, depreciation and other ......................... 5,044 7,813 6,747 Deferred income taxes ........................................ (2,170) (14,222) (9,517) Gain on sale of securities ................................... -- -- (11,069) Increase (decrease) in cash due to: Inventories ................................................ (224,812) (124,690) (157,527) Residential mortgage loans available-for-sale .............. (49,956) (14,576) 7,859 Other assets ............................................... (28,116) (37,931) (64,626) Accounts payable and accrued liabilities ................... 37,147 60,580 59,158 Income taxes ............................................... 32,371 38,052 41,539 --------- --------- --------- Net cash used in operating activities ............................... (129,344) (35,174) (64,225) --------- --------- --------- Cash flows from investing activities: Proceeds from exchange of securities held-to-maturity ........... -- -- 12,282 Proceeds from sale of securities available-for-sale ............. -- -- 175,686 Principal payments on mortgage-backed securities ................ 9,287 7,933 19,892 Cash paid for acquisitions, net of cash acquired ................ (158,832) -- -- Proceeds from sale of business operations ....................... 90,602 -- -- Other, net ...................................................... 14,269 36 (278) --------- --------- --------- Net cash provided by (used in) investing activities ................. (44,674) 7,969 207,582 --------- --------- --------- Cash flows from financing activities: Payment of long-term debt and bonds ............................. (10,672) (9,106) (181,841) Proceeds from borrowings ........................................ 91,998 164,183 40,709 Repayment of borrowings ......................................... (26,054) -- -- Stock repurchases ............................................... -- (74,673) (99,561) Dividends paid .................................................. (6,456) (5,153) (5,958) Other, net ...................................................... 5,244 7,485 692 --------- --------- --------- Net cash provided by (used in) financing activities ................. 54,060 82,736 (245,959) --------- --------- --------- Net increase (decrease) in cash and equivalents-continuing operations ............................... $(119,958) $ 55,531 $(102,602) --------- --------- --------- See notes to Consolidated Financial Statements.
36
PULTE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) For the year ended December 31, 1998, 1997 and 1996 ($000's omitted) 1998 1997 1996 --------- --------- --------- Discontinued operations: Cash flows from operating activities: Income from discontinued operations ................................... $ 1,035 $ 2,961 $ 116,432 Change in deferred income taxes ....................................... 26,444 32,495 (38,321) Change in income taxes ................................................ (27,830) (34,851) (72,755) Other changes, net .................................................... 7,028 (10,257) (14,218) Cash flows from investing activities: Purchase of securities available-for-sale ............................. (21,809) (14,537) (42,209) Principal payments of mortgage-backed securities ...................... 23,180 34,257 43,735 Net proceeds from sale of investments and loans ....................... 11,276 3,211 4,514 Decrease in Covered Assets and FSLIC Resolution Fund (FRF) receivables ........................................................ 33,603 37,019 37,438 Increase in loans receivable .......................................... -- -- (419) Cash flows from financing activities: Increase (decrease) in deposit liabilities ............................ (37,462) (2,663) 3,404 Proceeds from borrowings .............................................. 17,174 -- -- Repayment of borrowings ............................................... (31,560) (31,560) (31,560) Increase (decrease) in FHLB advances .................................. (3,100) (16,500) (6,400) --------- --------- --------- Net decrease in cash and equivalents- discontinued operations ............................................... (2,021) (425) (359) --------- --------- --------- Net increase (decrease) in cash and equivalents ........................... (121,979) 55,106 (102,961) Cash and equivalents at beginning of year ................................. 247,308 192,202 295,163 --------- --------- --------- Cash and equivalents at end of year ....................................... $ 125,329 $ 247,308 $ 192,202 ========= ========= ========= Cash - continuing operations .............................................. $ 125,198 $ 245,156 $ 189,625 Cash - discontinued operations ............................................ 131 2,152 2,577 --------- --------- --------- $ 125,329 $ 247,308 $ 192,202 ========= ========= ========= Supplemental disclosure of cash flow information- cash paid during the year for: Interest, net of amount capitalized: Continuing operations ........................................... $ 28,141 $ 19,920 $ 25,312 Discontinued operations ......................................... 3,090 2,590 2,279 --------- --------- --------- $ 31,231 $ 22,510 $ 27,591 ========= ========= ========= Income taxes paid .................................................. $ 33,811 $ 5,821 $ 7,152 ========= ========= ========= Non-cash investing and financing activities: Issuance of common stock for business acquisition .................. $ 4,269 $ -- $ -- ========= ========= ========= See notes to Consolidated Financial Statements.
37 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($000's omitted) 1. Basis of presentation and segment information Basis of presentation The consolidated financial statements include the accounts of Pulte Corporation (the Company), and all of its significant subsidiaries. The Company's direct subsidiaries include Pulte Financial Companies, Inc. (PFCI), Pulte Diversified Companies, Inc. (PDCI) and other subsidiaries which are engaged in the homebuilding business. PDCI's operating subsidiaries include Pulte Home Corporation (Pulte), Pulte International Corporation (International) and other subsidiaries which are engaged in the homebuilding business. PDCI's non-operating thrift subsidiary, First Heights Bank, fsb (First Heights), has been classified as a discontinued operation (See Note 4). The Company also has a mortgage banking company, Pulte Mortgage Company (PMC), which is a subsidiary of Pulte. Certain 1997 and 1996 classifications have been changed to conform with the 1998 presentation. Segment information In June 1997, the Financial Accounting Standards Board issued Statement on Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, which the Company retroactively adopted effective January 1, 1998. SFAS 131 established the reporting standard for presentation of operating segment financial information by public business enterprises. In accordance with SFAS 131, the Company identified three reportable segments: Homebuilding, Financial Services and Corporate. The Company's Homebuilding segment consists of the following three business lines: o Domestic Homebuilding, the Company's core business, which is engaged in the acquisition/development of land primarily for residential purposes within the continental United States and the construction of housing on such land targeted for the first-time, move-up and semi-custom home buyer groups. o International Homebuilding, which is primarily engaged in the acquisition/development of land primarily for residential purposes, and the construction of housing on such land in Puerto Rico and Mexico. o Active Adult Homebuilding, which conducts its operations primarily through a joint venture with Blackstone Real Estate Advisors (BRE), an affiliate of the Blackstone Group, and is engaged in the development of amenitized, age-targeted and age-restricted communities throughout the continental United States appealing to a growing demographic group in their pre-retirement/retirement years. The Company's Financial Services segment consists principally of mortgage banking operations conducted through PMC and other mortgage banking subsidiaries, and to a minor extent, the operations of PFCI, a financing subsidiary of the Company. Corporate is a non-operating business segment whose primary purpose is to support the operations of the Company's subsidiaries as the internal source of financing and by implementing and maturing strategic initiatives centered on new business development and improving operating efficiencies. Corporate also includes the necessary administrative support functions to support the Company as a publicly traded entity. 38
PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) Segment information (continued) Operating Data by Segment Year Ended December 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Revenues: Homebuilding ................................ $ 2,810,151 $ 2,479,171 $ 2,319,734 Financial Services .......................... 43,678 34,038 50,197 Corporate ................................... 12,692 10,782 14,352 ----------- ----------- ----------- Total Revenues .......................... 2,866,521 2,523,991 2,384,283 Cost of sales: Homebuilding ................................ 2,359,253 2,110,532 1,975,826 Financial Services .......................... -- -- -- Corporate ................................... -- -- -- ----------- ----------- ----------- Total cost of sales ..................... 2,359,253 2,110,532 1,975,826 Selling, general and administrative: Homebuilding ................................ 252,684 232,692 220,961 Financial Services .......................... 19,241 17,832 23,811 Corporate ................................... 6,695 7,435 6,777 ----------- ----------- ----------- Total selling, general and administrative 278,620 257,959 251,549 Interest: Homebuilding ................................ 20,164 18,503 17,216 Financial Services .......................... 9,043 9,092 13,623 Corporate ................................... 21,910 16,133 13,679 ----------- ----------- ----------- Total interest .......................... 51,117 43,728 44,518 Other (income) expense, net: Homebuilding ................................ 4,552 (5,574) (2,614) Financial Services .......................... 200 -- (1,178) Corporate ................................... 6,813 14,331 11,765 ----------- ----------- ----------- Total other (income) expense, net ....... 11,565 8,757 7,973 Restructuring costs: Homebuilding ................................ -- 14,800 -- Financial Services .......................... -- 2,100 -- Corporate ................................... -- 3,100 -- ----------- ----------- ----------- Total restructuring costs ............... -- 20,000 -- Total costs and expenses ........................ 2,700,555 2,440,976 2,279,866 Equity in income (loss) of joint ventures: Homebuilding ................................ (152) (2,040) (1,954) Financial Services .......................... -- -- -- Corporate ................................... -- -- -- ----------- ----------- ----------- Total equity in loss of joint ventures .. (152) (2,040) (1,954) Income before income taxes ...................... $ 165,814 $ 80,975 $ 102,463 =========== =========== ===========
39
PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) Segment information (continued) Supplemental Operating Data by Geographic Region Year Ended December 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Revenues: Domestic United States ...................... $ 2,850,349 $ 2,504,980 $ 2,372,759 International ............................... 16,172 19,011 11,524 ----------- ----------- ----------- Total Revenues .......................... 2,866,521 2,523,991 2,384,283 Cost of sales: Domestic United States ...................... 2,347,253 2,095,739 1,966,298 International ............................... 12,000 14,793 9,528 ----------- ----------- ----------- Total cost of sales ..................... 2,359,253 2,110,532 1,975,826 Selling, general and administrative: Domestic United States ...................... 274,778 255,061 249,716 International ............................... 3,842 2,898 1,833 ----------- ----------- ----------- Total selling, general and administrative 278,620 257,959 251,549 Interest: Domestic United States ...................... 51,117 43,728 44,518 International ............................... -- -- -- ----------- ----------- ----------- Total interest .......................... 51,117 43,728 44,518 Other expense, net: Domestic United States ...................... 5,460 7,139 7,927 International ............................... 6,105 1,618 46 ----------- ----------- ----------- Total other expense, net ................ 11,565 8,757 7,973 Restructuring costs ............................. -- 20,000 -- Total costs and expenses ................ 2,700,555 2,440,976 2,279,866 Equity in loss of joint ventures ................ (152) (2,040) (1,954) Income before income taxes ...................... $ 165,814 $ 80,975 $ 102,463 =========== =========== ===========
40 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) Segment information (continued)
Asset Data by Segment Financial Homebuilding Services Corporate Total ------------ --------- --------- ----- At December 31, 1998: Inventory ....................... $1,455,208 $ -- $ -- $1,455,208 ---------- Identifiable assets ............. 1,782,644 274,488 204,029 2,261,161 Assets of discontinued operations 88,678 ---------- Total assets .................... $2,349,839 ========== At December 31, 1997: Inventory ....................... $1,141,952 $ -- $ -- $1,141,952 ---------- Identifiable assets ............. 1,446,340 224,624 347,515 2,018,479 Assets of discontinued operations 110,940 ---------- Total assets .................... $2,129,419 ========== At December 31, 1996: Inventory ....................... $1,017,262 $ -- $ -- $1,017,262 ---------- Identifiable assets ............. $1,348,075 $ 234,658 $ 258,332 1,841,065 Assets of discontinued operations 144,076 ---------- Total assets .................... $1,985,141 ========== Supplemental Asset Data by Geographic Region Domestic United States International Total ------------- ------------- ---------- At December 31, 1998: Inventory ....................... $1,431,245 $ 23,963 $1,455,208 ---------- Identifiable assets ............. 2,199,727 61,434 2,261,161 Assets of discontinued operations 88,678 88,678 ---------- Total assets .................... $2,349,839 ========== At December 31, 1997: Inventory ....................... $1,129,239 $ 12,713 $1,141,952 ---------- Identifiable assets ............. 1,979,358 39,121 2,018,479 Assets of discontinued operations 110,940 110,940 ---------- Total assets .................... $2,129,419 ========== At December 31, 1996: Inventory ....................... $1,006,297 $ 10,965 $1,017,262 ---------- Identifiable assets ............. 1,821,452 19,613 1,841,065 Assets of discontinued operations 144,076 144,076 ---------- Total assets .................... $1,985,141 ==========
41 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 2. Significant accounting policies Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and equivalents For purposes of the Statements of Cash Flows, commercial paper and time deposits with a maturity of three months or less when acquired are classified as cash equivalents. Stock based compensation The Company grants stock options to key employees for a fixed number of shares with an exercise price not less than the fair value of the shares at the date of grant. The Company accounts for the stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. No compensation expense is recognized because all stock options granted have exercise prices equal to the market value of the Company's stock on the date of the grant. The pro forma disclosures required by SFAS No. 123, Accounting for Stock-Based Compensation, are included in Note 7. Foreign investments The Company has investments in Mexico which are accounted for using the equity method. These investments primarily include the 50%-owned joint ventures of Condak-Pulte S. De R.L. De C.V. and Desarrollos Residenciales Turisticos, S.A. de C.V., the net investments of which comprise $21,300 and $3,345, respectively at December 31, 1998. To support homebuilding activities in Mexico, the Company also purchased a minority ownership interest (approximately 23.4%) in a Mexican mortgage banking company, the balance of which approximated $2,170 at December 31, 1998. Effective for periods ended after October 1, 1996 through December 31, 1998, the Company, in accordance with accounting standards for foreign currency translations in hyper-inflating economies, has assumed the functional currency of these investments to be the U.S. dollar. Foreign currency losses aggregated $2,800, $600 and $100 for the years ended December 31, 1998, 1997 and 1996, respectively. During 1998, the Company recorded a loss of $462 related to its Mexico operations, as compared with losses of $2,040 and $1,954 in 1997 and 1996, respectively. The Company's aggregate net investment in Mexico is approximately $28,200 as of December 31, 1998. Income per share In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, Earnings Per Share which replaced the calculation of primary and fully-diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. The Company adopted SFAS No. 128 effective for its year ended December 31, 1997. Earnings per share amounts, both basic and diluted, are disclosed for all periods presented, reflect the impact of the Company's 2-for-1 stock split effective June 1, 1998 and, where appropriate, have been restated to conform to the SFAS No. 128 requirements. Fair values of financial instruments The estimated fair values of financial instruments were determined by management using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. 42 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 2. Significant accounting policies (continued) Fair values of financial instruments(continued) The carrying amounts of cash and cash equivalents approximate their fair values due to their short-term nature. The carrying amounts of mortgage-backed bonds approximate their fair values. The bonds are expected to be redeemed during 1999. The fair value of investment, mortgage-backed and related securities are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments and other valuation techniques. The fair values of subordinated debentures and senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues. Disclosures about fair value of financial instruments are based on pertinent information available to management as of December 31, 1998. Although management is not aware of any factors that would significantly affect the reasonableness of the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein. Advertising cost The Company expenses advertising costs as they are incurred. For the years ended December 31, 1998, 1997 and 1996, the Company incurred advertising costs of approximately $25,300, $24,700 and $21,900, respectively. Employee benefits The Company maintains the Pulte Home Corporation Investment Savings Plus (the "Plan") which covers substantially all of the Company's employees. Company contributions to the Plan are expensed as paid and are based on the employees' years of service. The total Company contributions pursuant to the Plan were approximately $2,000, $2,200 and $2,300 for the years ended December 31, 1998, 1997 and 1996, respectively. Long-lived assets Impairment of long-lived assets is reviewed annually or when events and circumstances warrant an earlier review. In accordance with SFAS No. 121, impairment is determined when estimated future undiscounted cash flows associated with the asset are less than the asset's carrying value. Internally Developed Software In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1 (SOP), "Accounting for the Costs of Software Developed or Obtained for Internal Use". This SOP requires internal costs (i.e., salaries and related benefits and interest cost) to be capitalized during the application development stage for internal-use software. The Company has adopted, on a prospective basis, the provisions of SOP 98-1 effective January 1, 1998 and, accordingly, has capitalized $6,210 of such costs during the year ended December 31, 1998. The Company had historically expensed similar costs to operations when they were incurred. 43 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 2. Significant accounting policies (continued) Comprehensive Income In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". This standard is effective for fiscal years beginning after December 15, 1997, and requires that all items recognized under accounting standards as components of comprehensive income be reported in an annual financial statement that is displayed with the same prominence as other financial statements. The Company's comprehensive income other than net income consists solely of unrealized gains/(losses) on securities available-for-sale, net of tax. Derivative Instruments and Hedging Activities In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in years beginning after June 15, 1999, with earlier adoption encouraged. This Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. PMC, in the normal course of business, uses derivative financial instruments to meet the financing needs of its customers and reduce its own exposure to fluctuations in interest rates. The Company has not yet determined what effect SFAS No. 133 will have on its earnings and financial position. Homebuilding: Allowance for warranties Home purchasers are provided with warranties against certain building defects. Estimated warranty cost is provided in the period in which the sale is recorded. Start-up costs Costs and expenses associated with entry into new homebuilding markets and opening new communities in existing markets are expensed when incurred. Revenues Homebuilding revenues are recorded when the sales of homes are completed and ownership has transferred to the customer. Unfunded settlements are deposits in transit on homes for which the sale has been completed. Inventories Finished inventories are stated at the lower of accumulated cost or fair value less costs to sell. Inventories under development or held for development are stated at accumulated cost, unless such cost would not be recovered from the cash flows generated by future disposition. In this instance, such inventories are measured at fair value. Sold units are expensed on a specific identification basis as cost of sales. Included in inventories is related interest and property taxes. The Company capitalized interest in the amount of $21,801, $20,376 and $17,801 and expensed to homebuilding interest expense of $20,164, $18,503 and $17,216 in 1998, 1997 and 1996, respectively. 44 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) Financial Services: Mortgage servicing rights The Company sells its servicing rights on a flow basis through fixed price servicing sales contracts. Due to the short period of time the servicing rights are held, usually two to three months, the Company does not amortize the servicing asset. Since the servicing rights are recorded at the value in the servicing sales contracts, there are no impairment issues related to these assets. The Company could be required to repurchase loans found to be defective. Reserves for such future repurchases or indemnifications have been reflected in accounts payable and accrued liabilities. During 1998 and 1997, total servicing rights recognized were $35,995 and $21,933, respectively. Residential Mortgage loans held for sale Residential mortgage loans held-for-sale are stated at the lower of aggregate cost or market value. Unamortized net mortgage discounts totaled $800 and $1,382 at December 31, 1998 and 1997, respectively. Gains and losses from sales of mortgage loans are recognized when the loans are sold. The Company hedges its residential mortgage loans held-for-sale (see Note 12). Gains and losses from closed commitments and futures contracts are matched against the related gains and losses on the sale of mortgage loans. Mortgage servicing, origination and commitment fees Mortgage servicing fees represent fees earned for servicing loans for various investors, including affiliates. Servicing fees are based on a contractual percentage of the outstanding principal balance and are credited to income when the related mortgage payments are received. Loan origination fees, commitment fees and certain direct loan origination costs are deferred as an adjustment to the cost of the related mortgage loan until such loan is sold. 3. Acquisitions On May 27, 1998, the Company acquired all of the outstanding stock of Tennessee-based Radnor Homes for an aggregate purchase price of approximately $58,000. Consideration for this acquisition, which was recorded using the purchase method of accounting, included $51,000 of cash paid, approximately $3,000 of liabilities assumed and the issuance of 153,570 shares of the Company's common stock. The purchase price has been allocated to the tangible assets acquired and liabilities assumed based on relative fair value estimates. The Company has included the operating results of Radnor Homes since the acquisition in its consolidated results of operations. On July 1, 1998, the Company acquired the outstanding stock and membership interests in certain closely-held business of Florida-based, DiVosta & Company for an aggregate purchase price of approximately $155,000. Consideration for this acquisition, which was recorded using the purchase method of accounting, included approximately $109,000 of cash paid, approximately $25,000 of liabilities assumed and $21,000 in the form of a seller-financed note. The purchase price has been allocated to the assets acquired and liabilities assumed based on relative fair value estimates. Goodwill of approximately $47,000 represents the excess of the purchase price over these fair value estimates and will be amortized using a straight-line method over a seven-year period. The Company has included the operating results of DiVosta & Company since the acquisition date in its consolidated results of operations. Goodwill amortization was $3,400 for the year ended December 31, 1998. 45 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted, except per share data) 3. Acquisitions (continued) The following unaudited pro forma information presents a summary of the consolidated results of operations of the Company as if the acquisitions had occurred on January 1, 1997, with pro forma adjustments to give effect to amortization of goodwill, interest expense on acquisition debt and certain other adjustments, together with related income tax effects: (Unaudited) Year Ended December 31, ----------------------- 1998 1997 ---------- ---------- Total revenues ................................ $2,959,656 $2,729,344 Total pre-tax income from continuing operations 178,574 97,164 Net Income .................................... 112,171 61,842 Per share data: Basic .................................... $ 2.61 $ 1.42 Diluted .................................. $ 2.56 $ 1.40 The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of January 1, 1997, nor are they necessarily indicative of future operating results. 4. Discontinued operations In September 1988, substantially all of the assets, business operations and certain liabilities of five Texas-based insolvent thrifts were acquired by First Heights. Assistance in connection with each acquisition was provided by the Federal Savings and Loan Insurance Corporation (FSLIC) pursuant to an Assistance Agreement. FSLIC issued promissory notes representing the estimated negative net worth of the acquired associations at the date of acquisition, the balances of which, including accrued interest, were $74,403 and $103,010 at December 31, 1998 and 1997, respectively. The notes had a weighted average interest rate of 5.5% and 5.4% at December 31, 1998 and 1997, respectively. The notes, bearing interest at rates indexed to the Texas Cost of Funds plus a spread, were due in September 1998; notwithstanding this maturity, the FDIC has chosen to temporarily withhold payment. The notes were subject to annual prepayments, which are limited to 10% of the total original note balances. The FSLIC Resolution Fund (FRF) exercised its right to prepay the notes by $31,560 in each year from 1992 through 1998. The FRF is entitled to payments of up to 25% of certain tax benefits which may be derived as a result of the assistance transactions. During the first quarter of 1994, the Company adopted a plan of disposal for First Heights and announced its strategy to exit the thrift industry and increase its focus on housing and related mortgage banking. First Heights sold all but one of its 32 bank branches and related deposits to two unrelated purchasers. The sale was substantially completed during the fourth quarter of 1994, although the Company held brokered deposits which were not liquidated until 1998. Although the Company in 1994, expected to complete the plan of disposal within a reasonable period of time, contractual disputes with the FDIC prevented the prepayment of the FSLIC Resolution Fund (FRF) notes, thereby precluding the Company from completing the disposal in accordance with its original plan. To provide liquidity for the sale, First Heights liquidated its investment portfolios and its single-family residential loan portfolio and, as provided in the Assistance Agreement, entered into a Liquidity Assistance Note (LAN) with the Federal Deposit Insurance Corporation (FDIC) acting in its capacity as manager of FRF. The LAN is collateralized by the FRF notes and bears interest at a rate indexed to the Texas Cost of Funds plus a spread. The LAN matured in September 1998; however, payment of this liability is also temporarily witheld by First Heights pending resolution of all open matters 46 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted, except per share data) 4. Discontinued operations (continued) with the FDIC. As discussed in Note 11, the Company is involved in litigation with the FDIC and as part of this litigation, the parties have asserted various claims with respect to obligations under promissory notes issued by each of the parties in connection with the thrift acquisition and activities. At December 31, 1998, First Heights no longer has any deposits, nor does it maintain an investment portfolio. First Heights' day-to-day activities have been principally devoted to supporting residual regulatory compliance matters and the litigation with the FDIC; and are not reflective of the active operations of the former thrift, such as maintaining traditional transaction accounts, (e.g., checking and savings accounts) or making loans. Accordingly, such operations are being presented as discontinued. Assets and liabilities of discontinued operations were as follows:
At December 31, ------------------- 1998 1997 -------- -------- Assets: Cash and equivalents ........................................... $ 131 $ 2,152 Mortgage-backed and related securities ......................... -- 18,620 Accounts and notes receivable-FRF, less LAN of $760 and $32,320 at December 31, 1998 and 1997, respectively .................. 87,879 89,922 Other assets ................................................... 668 246 -------- -------- $ 88,678 $110,940 ======== ======== Liabilities: Deposits, with interest rates ranging from 4% to 6% in 1997 .... $ -- $ 37,462 Accrued expenses and other liabilities ......................... 39,084 39,612 Due affiliate .................................................. 17,174 -- FHLB advances .................................................. -- 3,100 -------- -------- $ 56,258 $ 80,174 ======== ========
Income from the Company's discontinued thrift operations for the years ended December 31, 1998, 1997 and 1996 is summarized as follows:
Year Ended December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Discontinued thrift operations .... $ 1,035 $ 2,961 $ 6,432 Tax benefit of net operating losses -- -- 110,000 -------- -------- -------- $ 1,035 $ 2,961 $116,432 ======== ======== ========
Revenues of discontinued operations were $6,412, $5,077 and $12,164 for the years ended December 31, 1998, 1997 and 1996, respectively. For the years ended December 31, 1998, 1997 and 1996, discontinued thrift operations resulted in income of $1,035 (including income tax benefit of $1,386), $2,961 (including income tax benefit of $2,356) and $6,432 (net of income taxes of $1,076), respectively. During 1996, the Company recognized, as part of discontinued thrift operations, after-tax income of approximately $110,000. Such income relates to tax benefits associated with net operating losses (NOLS). Although the Company has computed its NOLs and reported them to the Internal Revenue Service (the "IRS") in a manner that it believes will comply with applicable law and that indicates that they generally are available to be used to offset the Company's taxable income, there can be no assurance that the IRS will agree with the Company's determination of the amount of NOLs, in which case, if the IRS were to prevail, the use of a portion or all of the Company's NOLs could be disallowed. 47 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 5. Short-term credit arrangements Short-term financing for the Company on an operating segment basis is as follows: Corporate/Homebuilding At December 31, 1998, the Company, PDCI and Pulte jointly have a $210,000 unsecured revolving bank credit arrangement under which a variety of interest rates are available to the Company. The credit arrangement expires January 5, 2002. The Company also has one $10,000 uncommitted bank credit arrangement. The bank credit agreements each contain certain restrictions, including the maintenance of levels of equity. Under the most restrictive of the agreements, the Company, PDCI and Pulte jointly are required to maintain a minimum tangible net worth of $550,000 plus 50% of consolidated net income earned subsequent to December 31, 1994. The following is aggregate borrowing information:
1998 1997 1996 -------- -------- -------- Unused credit lines at year-end .................. $220,000 $260,000 $260,000 Maximum amount outstanding at the end of any month $ -- $126,000 $ -- Average monthly indebtedness ..................... $ 202 $ 7,642 $ -- Range of interest rates during the year .......... 5.00 to 5.49 to -- 8.50% 8.50% Weighted average daily interest rate ............. 5.12% 6.41% --
Financial Services Notes payable to banks (collateralized short-term debt) are secured by residential mortgage loans available-for-sale. The carrying amounts of such borrowings approximate fair values. At December 31, 1998, PMC had committed bank credit lines of $150,000 and discretionary credit lines of $100,000. The bank credit agreements require PMC to pay a fee for the committed credit lines. During 1998, 1997 and 1996, PMC provided compensating balances, in the form of escrows and other custodial funds, in order to further reduce interest rates. The bank credit agreements each contain certain restrictions, including the maintenance of levels of equity. Under the most restrictive of the agreements, PMC is required to maintain a minimum tangible net worth of $10,000.
The following is aggregate borrowing information: 1998 1997 1996 ----------- ----------- ----------- Unused credit lines at year-end .................. $ 40,000 $ 121,830 $ 153,966 Maximum amount outstanding at the end of any month $ 210,000 $ 153,170 $ 121,034 Average monthly indebtedness ..................... $ 113,972 $ 90,158 $ 93,881 Range of interest rates during the year .......... 6.00 to 6.00 to 6.25 to 7.67% 7.55% 7.68% Weighted average daily interest rate ............. 5.92% 5.99% 5.97% Weighted average rate at year-end ................ 5.51% 6.48% 6.25%
48 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 6. Long-term debt
Long-term debt is summarized as follows: At December 31, ----------------------------- 1998 1997 ----------- ----------- Corporate 7% unsecured Senior Notes, issued by Pulte Corporation, due 2003, not redeemable prior to maturity, guaranteed on a senior basis by Pulte and certain wholly-owned subsidiaries of Pulte. See Note 13............... $ 99,800 $ 99,760 8.375% unsecured Senior Notes, issued by Pulte Corporation, due 2004, not redeemable prior to maturity, guaranteed on a senior basis by Pulte and certain wholly-owned subsidiaries of Pulte. See Note 13.......................... 114,808 114,774 7.3% unsecured Senior Notes, issued by Pulte Corporation, due 2005, not redeemable prior to maturity, guaranteed on a senior basis by Pulte and certain wholly-owned subsidiaries of Pulte. See Note 13.......................... 124,927 124,917 7.625% unsecured Senior Notes, issued by Pulte Corporation, due 2017, not redeemable prior to maturity, guaranteed on a senior basis by Pulte and certain wholly-owned subsidiaries of Pulte. See Note 13.......................... 147,961 147,852 8% unsecured promissory note, issued by Pulte Diversified Companies, Inc., due 2001, unconditionally guaranteed by Pulte..................................... 21,000 - Homebuilding 10.125% unsecured senior subordinated debentures, issued by Pulte, due 1999.......................................................................... 22,405 22,405 Other non-recourse debt, minimum annual principal payments required, maturing at various times through 2002, interest rates ranging from 6% to 11%.................................................................... 11,138 37,192 ----------- ----------- $ 542,039 $ 546,900 =========== =========== Estimated fair value.................................................................. $ 557,612 $ 572,280 =========== ===========
Total Corporate and Homebuilding long-term debt maturities and mandatory annual sinking fund payments during the five years subsequent to 1998 are as follows: 1999 - $36,171; 2000 - $8,920; 2001 - $8,920; 2002 - $532; 2003 - $99,800 and thereafter $387,696. Financing Bonds payable at December 31, 1998 and 1997 consist of one bond issue with a stated interest rate of 9%. The bond series is secured by separate pools of mortgage-backed securities. Redemption notices for this bond were issued on January 31, 1999, and early retirement of this bond is expected to occur during the first quarter of 1999, with an estimated net realized gain on the sale of underlying collateral of approximately $1,700. Under provision of this bond indenture, funds held by the trustees are restricted so as to assure the payment of principal and interest on the bonds to the extent of such funds. This long-term borrowing is the obligation of the applicable PFCI issuer subsidiary and is neither the obligation of, nor is guaranteed by, the Company, PDCI, Pulte, PMC or PFCI. 49 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (000's omitted, except per share data) 7. Stock compensation plans and management incentive compensation The Company has three fixed stock option plans. All three plans provide for the grant of options (both non-qualified options and incentive stock options as defined in each respective plan), stock appreciation rights and restricted stock to key employees of the Company or its subsidiaries (as determined by the Compensation Committee of the Board of Directors) for periods not exceeding 10 years. The following is a brief description of each plan: o The Pulte Corporation 1995 Stock Incentive Plan for Key Employees (1995 Plan) authorized the issuance of up to 4,000 shares of common stock. On December 13, 1995, grants of 3,374 fixed stock options were awarded at prices not less than the fair market value at the time of the grant. The first 50% of these stock options vested on January 1, 1998, with 25% of the stock options vesting on each of January 1, 1999 and January 1, 2000. As of December 31, 1998, 1,336 stock options remain available for grant. o The Pulte Corporation 1994 Stock Incentive Plan for Key Employees (1994 Plan) authorized the issuance of up to 2,000 shares of common stock. On January 20, 1998, grants of 164 stock options with an exercise price of $22 per share were awarded. The first 50% of these stock options vest on January 20, 2000, with 25% of the stock options vesting on each of January 20, 2001 and January 20, 2002. On January 21, 1997, grants of 100 stock options with an exercise price of $15 per share were awarded, of which 14 stock options were subsequently canceled during 1997. On October 31, 1997, an additional 180 stock options were granted with an exercise price of $18 per share. All stock options granted during 1997 vest annually in 25% increments beginning two years from the date of the respective grant. On May 10, 1996, grants of 60 stock options with an exercise price of $14 per share were awarded. These options also vest annually in 25% increments beginning May 10, 1998. On January 17, 1995, grants of 500 stock options with an exercise price of $13 per share were awarded. These stock options also vest annually in 25% increments beginning January 17, 1997. As of December 31, 1998, 931 stock options remain available for grant. o The Pulte Corporation 1990 Stock Incentive Plan for Key Employees (1990 Plan) authorized the issuance of up to 1,600 shares of common stock. On January 20, 1998, grants of 30 stock options with an exercise price of $22 per share were awarded. The first 50% of these stock options vest on January 20, 2000, with 25% of the stock options vesting on each of January 20, 2001 and January 20, 2002. On July 15, 1998, an additional 5 stock options were granted with an exercise price of $33 per share. The first 50% of these stock options vest on July 15, 2000, with 25% of the stock options vesting on each of July 15, 2001 and July 15, 2002. On October 31, 1997, grants of 108 stock options with an exercise price of $18 per share were awarded. These stock options vest annually in 25% increments beginning October 31, 1999. On January 16, 1996, grants of 94 stock options with an exercise price of $16 per share were awarded. These stock options also vest annually in 25% increments beginning January 16, 1998. Additionally, on January 17, 1995, grants of 42 stock options with an exercise price of $13 per share were awarded. These stock options also vest annually in 25% increments beginning January 17, 1997. As of December 31, 1998, 62 stock options remain available for grant. 50 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (000's omitted, except per share data) 7. Stock compensation plans and management incentive compensation (continued) A summary of the status of the Company's three fixed stock option plans as of December 31, 1998, 1997 and 1996 and changes during the years ending on those dates is presented below:
1998 1997 1996 -------------------------- ------------------------- ----------------------- Weighted- Weighted- Weighted- Average Average Average Per Share Per Share Per Share Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Outstanding, beginning of year........ 5,086 $ 17 6,150 $ 16 6,084 $ 16 Granted............................... 199 22 378 18 154 15 Exercised............................. (461) 15 (770) 9 (88) 7 Forfeited............................. (424) 17 (672) 18 - - -------- ------- ------- Outstanding, end of year.............. 4,400 $ 18 5,086 $ 17 6,150 $ 16 ======== ======= ======= Options exercisable at year-end 898 954 1,090 === === ======= Weighted-average per share fair value of options granted during the year........... $ 8.52 $ 7.39 $ 5.56 ======== ======= =======
The following table summarizes information about fixed stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ---------------------------------------------------- ------------------------------- Weighted- Weighted- Weighted- Range of Number Average Average Number Average Per Share Outstanding at Remaining Per Share Exercisable at Per Share Exercise Prices December 31 Contract Life Exercise Price December 31 Exercise Price --------------- -------------- ------------- -------------- -------------- -------------- $ 8 80 2.3 years $ 8 80 $ 8 $ 13 to 16 759 5.2 $ 15 514 $ 15 $ 17 to 33 3,561 7 $ 19 304 $ 21
The Company applies APB Opinion No. 25 and related Interpretations in accounting for its three fixed stock option plans. No compensation expense is recognized because all stock options granted have exercise prices equal to the market value of the Company's stock on the date of the grant. Under SFAS No. 123, compensation cost for the Company's three stock-based compensation plans would be determined based on the fair value at the grant dates for awards under those plans. Accordingly, for the years ended December 31, 1998, 1997 and 1996, the Company's income from continuing operations, net income and earnings per share would have been reduced to the pro forma amounts indicated below: 51 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) (000's omitted, except per share data) 7. Stock compensation plans and management incentive compensation (continued)
1998 1997 1996 -------------- -------------- ------------- Income from continuing operations: As reported .................... $ 101,148 $ 49,800 $ 63,211 ============== ============== ============= Pro forma ...................... $ 99,655 $ 45,455 $ 57,771 ============== ============== ============= Net income: As reported .................... $ 102,183 $ 52,761 $ 179,643 ============== ============== ============= Pro forma ...................... $ 100,690 $ 48,416 $ 174,203 ============== ============== ============= Per share data: Basic: Income from continuing operations: As reported .................... $ 2.35 $ 1.14 $ 1.27 ============== ============== ============= Pro forma ...................... $ 2.32 $ 1.04 $ 1.16 ============== ============== ============= Net income: As reported ................... $ 2.38 $ 1.21 $ 3.60 ============== ============== ============= Pro forma ..................... $ 2.34 $ 1.11 $ 3.49 ============== ============== ============= Assuming dilution: Income from continuing operations: As reported .................... $ 2.30 $ 1.13 $ 1.26 ============== ============== ============= Pro forma ...................... $ 2.27 $ 1.04 $ 1.15 ============== ============== ============= Net income: As reported ................... $ 2.33 $ 1.20 $ 3.57 ============== ============== ============= Pro forma ..................... $ 2.29 $ 1.10 $ 3.46 ============== ============== =============
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1998, 1997 and 1996, respectively: weighted-average dividend yields of .68%, .46% and .80%, expected volatility of 29.8%, 29.44% and 29.85%, weighted-average risk-free interest rates of 5.57%, 5.88% and 5.87%, and weighted-average expected lives of 6.75 years, 6.5 years and 6.5 years. Based upon stock options outstanding at December 31, 1998, the estimated compensation expense, after income taxes, to be recognized in pro forma income from continuing operations and net income for the years ending December 31, 1999, 2000 and 2001 is $1,507, $461 and $234, respectively. Homebuilding operating management personnel are paid current cash incentive compensation based on operating performance. Mortgage banking, financing and thrift management personnel are paid current cash incentive compensation substantially based on the performance of the applicable subsidiary. The Company's corporate management personnel are paid current cash incentive compensation based on overall performance of the Company. For the years ended December 31, 1998, 1997 and 1996, the Company's total current cash incentive compensation was $25,500, $17,500 and $17,900, respectively. In addition, commencing January 1, 1996, the Company adopted a long-term cash incentive plan as a means of compensating key operating employees for long-term performance and contributions to the growth of the Company. Amounts accrued over the period from January 1, 1996, through December 31, 1999, are payable subsequent to December 31, 1999. For the years ended December 31, 1998, 1997 and 1996 the Company accrued $4,600, $3,900 and $3,300, respectively, relating to this plan. 52 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 8. Income taxes The Company's net deferred tax asset (liability) is as follows:
At December 31, ---------------------- 1998 1997 --------- --------- Deferred tax liabilities: Continuing operations: Capitalized items deducted for tax, net .. $ (9,203) $ (6,658) Discontinued operations: Market losses deducted for tax, and other (533) (512) Equity adjustment: Unrealized gains on securities ........... (722) (1,056) --------- --------- (10,458) (8,226) --------- --------- Deferred tax assets: Continuing operations: Non-deductible reserves and other ........ 53,580 49,901 Net operating loss carryforwards - foreign 1,036 -- Discontinued operations: Net operating loss carryforwards ......... 2,257 37,476 AMT credit carryforwards ................. 30,262 15,642 Acquired tax loss carryforwards .......... -- 5,524 Non-deductible reserves and other ........ 2,986 3,286 --------- --------- 90,121 111,829 --------- --------- Net deferred tax asset ................... $ 79,663 $ 103,603 ========= =========
Net operating loss carryforwards expire in 2006. Foreign net operating loss carryforwards expire in the year 2005 through 2007. Subject to these limitations, the NOLs generally are available to offset a taxpayer's taxable income in future years. Components of current and deferred income tax expense (benefit) of continuing operations are as follows:
Current Deferred Total -------- -------- -------- Year ended December 31, 1998 Federal ................ $ 60,052 $ (1,274) $ 58,778 State and other ........ 6,784 (896) 5,888 -------- -------- -------- $ 66,836 $ (2,170) $ 64,666 ======== ======== ======== Year ended December 31, 1997 Federal ................ $ 40,586 $(11,977) $ 28,609 State and other ........ 4,811 (2,245) 2,566 -------- -------- -------- $ 45,397 $(14,222) $ 31,175 ======== ======== ======== Year ended December 31, 1996 Federal ................ $ 43,319 $ (8,627) $ 34,692 State and other ........ 5,450 (890) 4,560 -------- -------- -------- $ 48,769 $ (9,517) $ 39,252 ======== ======== ========
The following table reconciles the statutory federal income tax rate to the effective income tax rate for continuing operations:
1998 1997 1996 ---- ---- ---- Income taxes at federal statutory rate ................... 35.0% 35.0% 35.0% Effect of state and local income taxes, net of federal tax 4.2 5.0 5.0 Settlement of state tax issues and other ................. (.2) (1.5) (1.7) ---- ---- ---- Effective rate ........................................... 39.0% 38.5% 38.3% ==== ==== ====
53 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 9. Leases The Company leases certain property and equipment under non-cancelable leases. The office and equipment leases are generally for terms of three to five years and generally provide renewal options for terms of up to an additional three years. Model home leases are generally for shorter terms approximating one year with renewal options on a month-to-month basis. In most cases, management expects that in the normal course of business, leases that expire will be renewed or replaced by other leases. The future minimum lease payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year are as follows: Year Ending December 31, ------------------------ 1999..................................... $ 11,945 2000..................................... 9,178 2001..................................... 7,010 2002..................................... 3,896 2003..................................... 2,629 After 2003............................... 7,629 ------------- Total minimum lease payments $ 42,287 ============= Net rental expense for the years ended December 31, 1998, 1997 and 1996, was $15,273, $17,617 and $16,539, respectively. Certain leases contain purchase options and generally provide that the Company shall pay for insurance, taxes and maintenance. 10. Restructuring During the fourth quarter of 1997, a pre-tax charge of $20,000 was recorded in connection with the reorganization of the Company's operations. The 1997 restructuring charge included $11,787 of separation and other costs for approximately 150 employees, $7,000 of asset impairments and $1,213 of other costs, principally for office leases. The after-tax effect of this charge was $12,300 or $.28 per diluted share (adjusted for the effect of the Company's 2-for-1 stock split effective June 1, 1998). As of December 31, 1998, the Company has severed employment with approximately 150 employees. The Company's restructuring plan included right-sizing the workforce on a company-wide basis. The Company's plan of restructuring included the following employee groups: approximately 100 construction and administrative support employees, 27 middle managers/supervisors and 23 members of senior management. This reorganization entailed the realignment of homebuilding operations into business lines which focus on specific customer segments; the creation of a mortgage applications center, which increased overhead leverage by moving PMC's loan officers from field branches to a central location in Denver, Colorado; and the evaluation and strategic deployment of inventory investment in the Company's homebuilding operations. As such, various homebuilding communities located primarily in Florida, North Carolina, South Carolina and Illinois with assets such as house and land inventory were affected by an exit plan to either sell such inventory or expedite the wind-down/withdrawal of homebuilding activities. The fair value of these assets was determined based on estimated selling price, less costs to complete, less direct selling and disposal costs. 54 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 10. Restructuring (continued) The following tables display the status of liabilities accrued for the company's restructuring from origination to December 31, 1998:
1997 Reserve Uses Original ---------------------- Balance at Type of Cost Reserve Cash Non-cash December 31,1997 - ------------ ------- ---- -------- ---------------- Homebuilding operations: Employee separation and other $ 6,900 $ (843) $ -- $ 6,057 Asset impairments 7,000 -- (7,000) -- Other 900 -- -- 900 -------- -------- -------- -------- 14,800 (843) (7,000) 6,957 -------- -------- -------- -------- Mortgage Banking operations: Employee separation and other 1,787 (610) -- 1,177 Other 313 (33) -- 280 -------- -------- -------- -------- 2,100 (643) -- 1,457 -------- -------- -------- -------- Corporate: Employee separation and other 3,100 (74) (496) 2,530 -------- -------- -------- -------- $ 20,000 $ (1,560) $ (7,496) $ 10,944 ======== ======== ======== ======== 1998 Reserve Uses Balance at ---------------------- Balance at Type of Cost December 31,1997 Cash Non-cash December 31,1998 - ------------ ---------------- ---- -------- ---------------- Homebuilding operations: Employee separation and other $ 6,057 $ (4,555) -- $ 1,502 Asset impairments -- -- -- -- Other 900 (645) -- 255 -------- -------- -------- -------- 6,957 (5,200) -- 1,757 -------- -------- -------- -------- Mortgage Banking operations: Employee separation and other 1,177 (840) -- 337 Other 280 (201) -- 79 -------- -------- -------- -------- 1,457 (1,041) -- 416 -------- -------- -------- -------- Corporate: Employee separation and other 2,530 (1,608) -- 922 -------- -------- -------- -------- $ 10,944 $ (7,849) $ -- $ 3,095 ======== ======== ======== ========
The remaining accrual for restructuring costs at December 31, 1998 primarily relates to longer term severance agreement and deferred compensation liabilities which are expected to be fully paid by December 31, 2000. 11. Commitments and contingencies In the normal course of business, Pulte acquires rights under options or option-type agreements to purchase land to be used in homebuilding operations at future dates. The total purchase price applicable to land under option at December 31, 1998 and 1997 approximated $757,500 and $562,000, respectively. At December 31, 1998, Pulte, in the normal course of business, had outstanding letters of credit and performance bonds of $166,336 and $167,940, respectively. In addition, PMC and PFCI had outstanding letters of credit on Pulte's behalf aggregating $1,464. The Company is involved in various litigation incidental to its continuing business operations. Management believes that none of this litigation will have a material adverse impact on the results of operations or financial position of the Company. 55 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 11. Commitments and contingencies (continued) First Heights-Related Litigation The Company is a party to two lawsuits relating to First Heights' 1988 acquisition from the Federal Savings and Loan Insurance Corporation (FSLIC), and First Heights' ownership of, five failed Texas thrifts. The first lawsuit (the "District Court Case") was filed on July 7, 1995 in the United States District Court, Eastern District of Michigan, by the Federal Deposit Insurance Corporation (FDIC) against the Company, PDCI and First Heights (collectively, the "Pulte Parties"). The second lawsuit (the "Court of Federal Claims Case") was filed on December 26, 1996 in the United States Court of Federal Claims (Washington, D.C.) by the Pulte Parties against the United States. In the District Court Case, the FDIC seeks a declaration of rights and other relief related to the assistance agreement entered into between First Heights and the FSLIC. The FDIC is the successor to FSLIC. The FDIC and the Pulte Parties disagree about the proper interpretation of provisions in the assistance agreement which provide for sharing of certain tax benefits achieved in connection with First Heights' 1988 acquisition and ownership of the five failed Texas thrifts. The District Court Case also includes certain other claims relating to the foregoing, including claims resulting from the Company's and First Heights' amendment of a tax sharing and allocation agreement between the Company and First Heights. The Pulte Parties dispute the FDIC's claims and believe that a proper interpretation of the assistance agreement limits the FDIC's participation in the tax benefits. The Pulte Parties filed an answer and a counterclaim, seeking, among other things, a declaration that the FDIC has breached the assistance agreement in numerous respects. On December 24, 1996, the Pulte Parties voluntarily dismissed without prejudice certain of their claims in the District Court Case and on December 26, 1996, initiated the Court of Federal Claims Case. The Court of Federal Claims Case contains similar claims as those that were voluntarily dismissed from the District Court Case. In their complaint, the Pulte Parties assert breaches of contract on the part of the United States in connection with the enactment of section 13224 of the Omnibus Budget Reconciliation Act of 1993. That provision repealed portions of the tax benefits that the Pulte Parties claim they were entitled to under the contract to acquire the failed Texas thrifts. The Pulte Parties also assert certain other claims concerning the contract, including claims that the United States (through the FDIC as receiver) has improperly attempted to amend the failed thrifts' pre-acquisition tax returns and that this attempt was made in an effort to deprive the Pulte Parties of tax benefits they had contracted for, and that the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 breached the Government's obligation not to require contributions of capital greater than those required by the contract. On March 5, 1999, the United States District Court (the Court), entered a "Final Judgment" against First Heights and PDCI (the Court had previously ruled that Pulte Corporation was not liable for monetary damages to the FDIC) resolving by summary judgment in favor of the FDIC most of the FDIC's claims against the Pulte Defendants. The Final Judgment requires PDCI and First Heights to pay the FDIC monetary damages totaling approximately $221.3 million, including interest but excluding costs (such as attorneys fees) to be determined in the future by the District Court. However, the FDIC has acknowledged that it has already paid itself or withheld from assistance its obligation to pay to First Heights approximately $105 million, excluding interest thereon. The Company believes that it is entitled to a credit or actual payment of such amount. The Final Judgment does not address this issue. Based upon the Company's review of the Final Judgment, the Company believes that, if the Final Judgment were to be upheld in its entirety on appeal, the potential after-tax charges against Discontinued Operations, after giving effect to interest owed by the FDIC to First Heights, will be approximately $88 million, plus post-judgment interest (currently 5% per year). The Company vigorously disagrees with the Court's rulings and will appeal. The Company believes that the District Court erred in granting summary judgment to the FDIC. Among other things, the Company believes that the District Court improperly resolved highly disputed factual issues which should have been presented to a jury and, as a result, it improperly granted summary judgment accepting the FDIC's view of the facts on substantially all disputed issues and, therefore, that the Company has a strong basis for appeal of the District Court's decision and that an appellate court, properly applying the standards of review for this case, should reverse the District Court's decision and remand the case for trial, if not in its entirety, then at least in material respects. The Company does not believe that the claims in the Court of Federal Claims Case are in any way prejudiced by the rulings in the District Court Case. The Company is considering seeking relief in the Court of Federal Claims Case that would, if granted, recoup portions of the damages awarded in the District Court Case. 56 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 12. Financial instruments, including those with off-balance sheet risk Market risks arise from movements in interest rates and canceled or modified commitments to lend. In order to reduce these risks, the Company uses derivative financial instruments with off-balance sheet risk. These financial instruments include cash forward placement contracts on mortgage-backed securities, whole loan investor commitments, options on treasury futures contracts, and options on cash forward placement contracts on mortgage-backed securities. The Company does not use any derivative financial instruments for trading purposes. Cash forward placement contracts on mortgage-backed securities are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price and may be settled in cash by offsetting the position, or through the delivery of the financial instrument. Whole loan investor commitments are obligations of the investor to buy loans at a specified price within a specified time period. Options on treasury future contracts and options on mortgage-backed securities grant the purchaser, for a premium payment, the right to either purchase or sell a specified treasury futures contract or a specified mortgage-backed security, respectively, for a specified price within a specified period of time or on a specified date from or to the writer of the option. Mandatory cash forward contracts on mortgage-backed securities are the predominant derivative financial instruments used to minimize the market risk during the period from when the Company extends an interest rate lock to a loan applicant until the time the loan is sold to an investor. Options on cash forward contracts on mortgage-backed securities are used in the same manner as mandatory cash forward contracts, but provide protection from interest rates rising, while still allowing an opportunity for profit if interest rates fall. Options on the treasury futures contracts are used as cross hedges on various loan product types and to protect the Company in a volatile interest rate environment from unexpected increases, cancellations or modifications in lending commitments. Since PMC can terminate a loan commitment if the borrower does not comply with the terms of the contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarily represent future cash requirements of PMC. PMC evaluates the creditworthiness of these transactions through its normal credit policies. The following are PMC's loan commitments:
Fair Commitment Market Interest Expiration Amount Value Rates Dates ---------- ------- -------- ------------- At December 31, 1998: Loan commitments to borrowers $67,925 $68,091 5.50 to January 1999- 9.75% July 1999 At December 31, 1997: Loan commitments to borrowers $45,661 $45,763 5.0 to January 1998- 8.38% May 1998
PMC has credit risk to the extent that the counterparties to the derivative financial instruments do not perform their obligation under the agreements. If one of the counterparties does not perform, PMC would not receive the cash to which it would otherwise be entitled under the conditions of the agreement. PMC manages credit risk by entering into agreements with only large national investment bankers with primary dealer status and with permanent investors, all of whom meet PMC's established credit underwriting standards. Management does not anticipate any material losses as a result of its agreements and does not consider them to represent an undue level of credit, interest or liquidity risk for PMC. 57 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 12. Financial instruments, including those with off-balance sheet risk (continued) The table below summarizes, by class, the contractual amounts of PMC's derivative financial instruments.
Fair Contract Market Interest Expiration Amount Value Rates Dates -------- -------- -------- ------------- At December 31, 1998: Sell Securities................ $268,773 $268,191 5.50 to January 1999- 6.50% February 1999 At December 31, 1997: Sell Securities................ $190,250 $189,004 5.0 to January 1998- 7.5% March 1998
Realized gains or losses on derivative financial instruments are recognized in net gain from sale of mortgages in the period settlement occurs. 13. Supplemental Guarantor Information The Company has the following outstanding Senior Note obligations: (1) $100,000, 7%, due 2003, (2) $115,000, 8.375%, due 2004, (3) $125,000, 7.3%, due 2005, and (4) $150,000, 7.625%, due 2017. Such obligations to pay principal, premium, if any, and interest are guaranteed jointly and severally on a senior basis by the Company's wholly-owned domestic and active adult homebuilding subsidiaries (collectively, the Guarantors). Such guarantees are full and unconditional. The principal non-Guarantors include PDCI, Pulte International, PMC, First Heights, and PFCI. See Note 1 for additional information on the Company's Guarantor and non-Guarantor subsidiaries. Supplemental consolidating financial information of the Company, specifically including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of the Guarantors are not provided, as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of assets held and the operations of the combined groups. 58 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 13. Supplemental Guarantor Information (continued)
CONSOLIDATING BALANCE SHEET DECEMBER 31, 1998 Unconsolidated --------------------------------------------- Pulte Guarantor Non-Guarantor Eliminating Consolidated Corporation Subsidiaries Subsidiaries Entries Pulte Corporation ----------- ------------ ------------- ----------- ----------------- ASSETS Cash and equivalents .................... $ 76,555 $ 46,109 $ 2,534 $ -- $ 125,198 Unfunded settlements .................... -- 57,135 (7,995) -- 49,140 House and land inventories .............. -- 1,431,245 23,963 -- 1,455,208 Mortgage-backed and related securities .. -- -- 29,290 -- 29,290 Residential mortgage loans and other securities available-for-sale ........ -- -- 234,974 -- 234,974 Land held for sale and future development -- 35,977 -- -- 35,977 Other assets ............................ 17,949 178,020 55,742 -- 251,711 Deferred income taxes ................... 80,385 -- (722) -- 79,663 Discontinued operations ................. -- -- 88,678 -- 88,678 Investment in subsidiaries .............. 1,066,313 16,958 1,062,114 (2,145,385) -- Advances receivable - subsidiaries ...... 271,915 485 46,405 (318,805) -- ----------- ----------- ----------- ----------- ----------- $ 1,513,117 $ 1,765,929 $ 1,534,983 $(2,464,190) $ 2,349,839 =========== =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities .......................... $ 62,014 $ 461,766 $ 51,593 $ -- $ 575,373 Collateralized short-term debt, recourse solely to applicable subsidiary assets -- -- 217,060 -- 217,060 Mortgage-backed bonds, recourse solely to applicable subsidiary assets -- -- 28,075 -- 28,075 Income taxes ............................ 9,592 -- -- -- 9,592 Subordinated debentures and senior notes ................................ 487,496 33,543 21,000 -- 542,039 Discontinued operations ................. -- -- 56,258 -- 56,258 Advances payable - subsidiaries ......... 32,573 230,491 55,741 (318,805) -- ----------- ----------- ----------- ----------- ----------- Total liabilities ................ 591,675 725,800 429,727 (318,805) 1,428,397 ----------- ----------- ----------- ----------- ----------- Shareholders' Equity: Common stock ............................ 432 -- 7,806 (7,806) 432 Additional paid-in capital .............. 75,051 479,920 645,540 (1,125,460) 75,051 Unrealized gains on securities available-for-sale ................... 1,130 -- 1,130 (1,130) 1,130 Retained earnings ....................... 844,829 560,209 450,780 (1,010,989) 844,829 ----------- ----------- ----------- ----------- ----------- Total shareholders' equity ....... 921,442 1,040,129 1,105,256 (2,145,385) 921,442 ----------- ----------- ----------- ----------- ----------- $ 1,513,117 $ 1,765,929 $ 1,534,983 $(2,464,190) $ 2,349,839 =========== =========== =========== =========== ===========
59 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 13. Supplemental Guarantor Information (continued)
CONSOLIDATING BALANCE SHEET DECEMBER 31, 1997 Unconsolidated --------------------------------------------- Pulte Guarantor Non-Guarantor Eliminating Consolidated Corporation Subsidiaries Subsidiaries Entries Pulte Corporation ----------- ------------ ------------- ----------- ----------------- ASSETS Cash and equivalents .................... $ 195,946 $ 46,466 $ 2,744 $ -- $ 245,156 Unfunded settlements .................... -- 69,768 (15,610) -- 54,158 House and land inventories .............. -- 1,141,952 -- -- 1,141,952 Mortgage-backed and related securities .. -- -- 39,467 -- 39,467 Residential mortgage loans and other securities available-for-sale ........ -- -- 185,018 -- 185,018 Land held for sale and future development -- 24,984 -- -- 24,984 Other assets ............................ 18,305 164,032 41,804 -- 224,141 Deferred income taxes ................... 104,659 -- (1,056) -- 103,603 Discontinued operations ................. -- -- 110,940 -- 110,940 Investment in subsidiaries .............. 970,897 11,890 995,248 (1,978,035) -- Advances receivable - subsidiaries ...... 100,663 -- 20,517 (121,180) -- ----------- ----------- ----------- ----------- ----------- $ 1,390,470 $ 1,459,092 $ 1,379,072 $(2,099,215) $ 2,129,419 =========== =========== =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities .......................... $ 58,470 $ 390,397 $ 33,256 $ -- $ 482,123 Collateralized short-term debt, recourse solely to applicable subsidiary assets -- -- 162,707 -- 162,707 Mortgage-backed bonds, recourse solely to applicable subsidiary assets -- -- 37,413 -- 37,413 Income taxes ............................ 7,265 -- -- -- 7,265 Subordinated debentures and senior notes ................................ 487,303 59,597 -- -- 546,900 Discontinued operations ................. -- -- 80,174 -- 80,174 Advances payable - subsidiaries ......... 24,595 61,994 34,591 (121,180) -- ----------- ----------- ----------- ----------- ----------- Total liabilities ................ 577,633 511,988 348,141 (121,180) 1,316,582 ----------- ----------- ----------- ----------- ----------- Shareholders' Equity: Common stock ............................ 213 -- 7,805 (7,805) 213 Additional paid-in capital .............. 61,835 364,945 543,434 (908,379) 61,835 Unrealized gains on securities available-for-sale ................... 1,687 -- 1,687 (1,687) 1,687 Retained earnings ....................... 749,102 582,159 478,005 (1,060,164) 749,102 ----------- ----------- ----------- ----------- ----------- Total shareholders' equity ....... 812,837 947,104 1,030,931 (1,978,035) 812,837 ----------- ----------- ----------- ----------- ----------- $ 1,390,470 $ 1,459,092 $ 1,379,072 $(2,099,215) $ 2,129,419 =========== =========== =========== =========== ===========
60 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 13. Supplemental Guarantor Information (continued)
CONSOLIDATING STATEMENT OF OPERATIONS For the year ended December 31, 1998 Unconsolidated ---------------------------------------------- Pulte Guarantor Non-Guarantor Eliminating Consolidated Corporation Subsidiaries Subsidiaries Entries Pulte Corporation ----------- ------------ ------------- ----------- ----------------- Revenues: Homebuilding ........................... $ -- $ 2,797,999 $ 12,152 $ -- $ 2,810,151 Mortgage banking and financing, interest and other .................. -- -- 43,678 -- 43,678 Corporate .............................. 7,641 1,031 4,020 -- 12,692 ----------- ----------- ----------- ----------- ----------- Total revenues .................... 7,641 2,799,030 59,850 -- 2,866,521 ----------- ----------- ----------- ----------- ----------- Expenses: Homebuilding: Cost of sales ....................... -- 2,347,253 12,000 -- 2,359,253 Selling, general and administrative and other expense ................... 953 272,520 3,927 -- 277,400 Mortgage banking and financing, principally interest ................ -- -- 28,484 -- 28,484 Corporate, net ......................... 32,107 (1,785) 5,096 -- 35,418 ----------- ----------- ----------- ----------- ----------- Total expenses .................... 33,060 2,617,988 49,507 -- 2,700,555 ----------- ----------- ----------- ----------- ----------- Other Income: Equity in income (loss) of Pulte-affiliates -- 310 (462) -- (152) ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes and equity in net income of subsidiaries ................. (25,419) 181,352 9,881 -- 165,814 Income taxes (benefit) .................... (14,006) 72,663 6,009 -- 64,666 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before equity in net income of subsidiaries ........................... (11,413) 108,689 3,872 -- 101,148 Income (loss) from discontinued operations (301) -- 1,336 -- 1,035 ----------- ----------- ----------- ----------- ----------- Income (loss) before equity in net income of subsidiaries ........................ (11,714) 108,689 5,208 -- 102,183 ----------- ----------- ----------- ----------- ----------- Equity in net income of subsidiaries: Continuing operations .................. 112,561 9,094 112,232 (233,887) -- Discontinued operations ................ 1,336 -- -- (1,336) -- ----------- ----------- ----------- ----------- ----------- 113,897 9,094 112,232 (235,223) -- ----------- ----------- ----------- ----------- ----------- Net income ........................ $ 102,183 $ 117,783 $ 117,440 $ (235,223) $ 102,183 =========== =========== =========== =========== ===========
61 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 13. Supplemental Guarantor Information (continued)
CONSOLIDATING STATEMENT OF OPERATIONS For the year ended December 31, 1997 Unconsolidated Unconsolidated --------------------------------------------- Pulte Guarantor Non-Guarantor Eliminating Consolidated Corporation Subsidiaries Subsidiaries Entries Pulte Corporation ----------- ------------ ------------- ----------- ----------------- Revenues: Homebuilding ........................... $ -- $ 2,479,171 $ -- $ -- $ 2,479,171 Mortgage banking and financing, interest and other .................. -- -- 34,038 -- 34,038 Corporate .............................. 2,054 7,182 1,546 -- 10,782 ----------- ----------- ----------- ----------- ----------- Total revenues .................... 2,054 2,486,353 35,584 -- 2,523,991 ----------- ----------- ----------- ----------- ----------- Expenses: Homebuilding: Cost of sales ....................... -- 2,110,532 -- -- 2,110,532 Selling, general and administrative and other expense ................... 803 244,818 -- -- 245,621 Mortgage banking and financing, principally interest ................ -- -- 26,924 -- 26,924 Corporate, net ......................... 31,653 6,256 (10) -- 37,899 Restructuring costs .................... 3,100 14,800 2,100 -- 20,000 ----------- ----------- ----------- ----------- ----------- Total expenses .................... 35,556 2,376,406 29,014 -- 2,440,976 ----------- ----------- ----------- ----------- ----------- Other Income: Equity in income (loss) of Pulte-affiliates -- -- (2,040) -- (2,040) ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes and equity in net income of subsidiaries ................. (33,502) 109,947 4,530 -- 80,975 Income taxes (benefit) .................... (15,255) 43,668 2,762 -- 31,175 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before equity in net income of subsidiaries ........................... (18,247) 66,279 1,768 -- 49,800 Income (loss) from discontinued operations 6,620 -- (3,659) -- 2,961 ----------- ----------- ----------- ----------- ----------- Income (loss) before equity in net income of subsidiaries ........................ (11,627) 66,279 (1,891) -- 52,761 ----------- ----------- ----------- ----------- ----------- Equity in net income of subsidiaries: Continuing operations .................. 68,047 2,943 66,279 (137,269) -- Discontinued operations ................ (3,659) -- -- 3,659 -- ----------- ----------- ----------- ----------- ----------- 64,388 2,943 66,279 (133,610) -- ----------- ----------- ----------- ----------- ----------- Net income ........................ $ 52,761 $ 69,222 $ 64,388 $ (133,610) $ 52,761 =========== =========== =========== =========== ===========
62 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 13. Supplemental Guarantor Information (continued)
CONSOLIDATING STATEMENT OF OPERATIONS For the year ended December 31, 1996 Unconsolidated -------------------------------------------- Pulte Guarantor Non-Guarantor Eliminating Consolidated Corporation Subsidiaries Subsidiaries Entries Pulte Corporation ----------- ------------ ------------- ----------- ----------------- Revenues: Homebuilding ........................... $ -- $ 2,319,734 $ -- $ -- $ 2,319,734 Mortgage banking and financing, interest and other .................. -- -- 50,197 -- 50,197 Corporate, principally interest ........ 6,724 6,728 900 -- 14,352 ----------- ----------- ----------- ----------- ----------- Total revenues .................... 6,724 2,326,462 51,097 -- 2,384,283 ----------- ----------- ----------- ----------- ----------- Expenses: Homebuilding: Cost of sales ....................... -- 1,975,826 -- -- 1,975,826 Selling, general and administrative and other expense ................... 642 234,921 -- -- 235,563 Mortgage banking and financing, principally interest ................ -- -- 36,256 -- 36,256 Corporate, net ......................... 25,289 6,143 789 -- 32,221 ----------- ----------- ----------- ----------- ----------- Total expenses .................... 25,931 2,216,890 37,045 -- 2,279,866 ----------- ----------- ----------- ----------- ----------- Other Income: Equity in income (loss) of Pulte-affiliates -- -- (1,954) -- (1,954) ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income taxes and equity in net income of subsidiaries ................. (19,207) 109,572 12,098 -- 102,463 Income taxes (benefit) .................... (10,234) 43,485 6,001 -- 39,252 ----------- ----------- ----------- ----------- ----------- Income (loss) from continuing operations before equity in net income of subsidiaries ........................... (8,973) 66,087 6,097 -- 63,211 Income from discontinued operations ....... 106,120 -- 10,312 -- 116,432 ----------- ----------- ----------- ----------- ----------- Income before equity in net income of subsidiaries ........................ 97,147 66,087 16,409 -- 179,643 ----------- ----------- ----------- ----------- ----------- Equity in net income of subsidiaries: Continuing operations .................. 72,184 1,267 66,087 (139,538) -- Discontinued operations ................ 10,312 -- -- (10,312) -- ----------- ----------- ----------- ----------- ----------- 82,496 1,267 66,087 (149,850) -- ----------- ----------- ----------- ----------- ----------- Net income ........................ $ 179,643 $ 67,354 $ 82,496 $ (149,850) $ 179,643 =========== =========== =========== =========== ===========
63 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 13. Supplemental Guarantor Information (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS For the year ended December 31, 1998 Unconsolidated ----------------------------------------- Pulte Guarantor Non-Guarantor Eliminating Consolidated Corporation Subsidiaries Subsidiaries Entries Pulte Corporation ----------- ------------ ------------- ----------- ----------------- Continuing operations: Cash flows from operating activities: Income from continuing operations ............ $ 101,148 $ 117,783 $ 116,104 $(233,887) $ 101,148 Adjustments to reconcile income from continuing operations to net cash flows provided by (used in) operating activities: Equity in income of subsidiaries ..... (112,561) (9,094) (112,232) 233,887 -- Amortization, depreciation and other .............................. 193 5,096 (245) -- 5,044 Deferred income taxes ................ (2,170) -- -- -- (2,170) Increase (decrease) in cash due to: Inventories ........................ -- (213,562) (11,250) -- (224,812) Residential mortgage loans available-for-sale .............. -- -- (49,956) -- (49,956) Other assets ....................... 356 (17,076) (11,396) -- (28,116) Accounts payable and accrued liabilities ..................... 1,138 32,666 3,343 -- 37,147 Income taxes ....................... (45,645) 72,663 5,353 -- 32,371 --------- --------- --------- --------- --------- Net cash used in operating activities ........... (57,541) (11,524) (60,279) -- (129,344) --------- --------- --------- --------- --------- Cash flows from investing activities: Principal payments of mortgage-backed securities................................. -- 9,287 -- 9,287 Cash paid for acquisitions, net of cash accquired ................................. (158,832) -- -- (158,832) Proceeds from sale of businesses operations................................. 90,602 -- -- 90,602 Dividends received from subsidiaries ......... 132,040 12,900 132,040 (276,980) -- Investment in subsidiaries ................... (48,981) -- -- 48,981 -- Advances to affiliates ....................... (172,652) (485) (26,518) 199,655 -- Other, net ................................... 15,000 -- (731) -- 14,269 --------- --------- --------- --------- --------- Net cash provided by (used in) investing activities ................................... $ (74,593) $ (55,815) $ 114,078 $ (28,344) $ (44,674) --------- --------- --------- --------- ---------
64 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) 13. Supplemental Guarantor Information (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS (continued) For the year ended December 31, 1998 Unconsolidated -------------------------------------------- Pulte Guarantor Non-Guarantor Eliminating Consolidated Corporation Subsidiaries Subsidiaries Entries Pulte Corporation ----------- ------------ ------------- ----------- ----------------- Cash flows from financing activities: Payment of long-term debt and bonds ..... $ -- $ -- $ (10,672) $ -- $ (10,672) Proceeds from borrowings ................ -- 29,039 62,959 -- 91,998 Repayment of borrowings ................. -- (26,054) -- -- (26,054) Capital contributions from parent ....... -- 48,731 250 (48,981) -- Advances from affiliates ................ 12,247 147,306 40,102 (199,655) -- Dividends paid .......................... (6,456) (132,040) (144,940) 276,980 (6,456) Other, net .............................. 6,952 -- (1,708) -- 5,244 --------- --------- --------- --------- --------- Net cash provided by financing activities .. 12,743 66,982 (54,009) 28,344 54,060 --------- --------- --------- --------- --------- Net decrease in cash and equivalents - continuing operations ..... (119,391) (357) (210) -- (119,958) --------- --------- --------- --------- --------- Discontinued operations: Cash flows from operating activities: Income from discontinued operations ..... 1,035 -- 1,336 (1,336) 1,035 Change in deferred income taxes ......... 26,444 -- -- -- 26,444 Equity in income of subsidiaries ........ (1,336) -- 1,336 -- Change in income taxes .................. (27,830) -- -- -- (27,830) Other changes, net ...................... 1,687 -- 5,341 -- 7,028 Cash flows from investing activities: Purchase of securities available-for-sale -- -- (21,809) -- (21,809) Principal payments of mortgage-backed securities ........................... -- -- 23,180 -- 23,180 Net proceeds from sale of investments ... -- -- 11,276 -- 11,276 Increase in Covered Assets and FRF receivables .......................... -- -- 33,603 -- 33,603 Cash flows from financing activities: Decrease in deposit liabilities ......... -- -- (37,462) -- (37,462) Proceeds from borrowings ................ -- -- 17,174 -- 17,174 Repayment of borrowings ................. -- -- (31,560) -- (31,560) Decrease in FHLB advances ............... -- -- (3,100) -- (3,100) --------- --------- --------- --------- --------- Net decrease in cash and equivalents- discontinued operations ................. -- -- (2,021) -- (2,021) --------- --------- --------- --------- --------- Net decrease in cash and equivalents ....... (119,391) (357) (2,231) -- (121,979) Cash and equivalents at beginning of year .. 195,946 46,466 4,896 -- 247,308 --------- --------- --------- --------- --------- Cash and equivalents at end of year ........ $ 76,555 $ 46,109 $ 2,665 $ -- $ 125,329 ========= ========= ========= ========= =========
65 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 13. Supplemental Guarantor Information (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS For the year ended December 31, 1997 Unconsolidated ----------------------------------------- Pulte Guarantor Non-Guarantor Eliminating Consolidated Corporation Subsidiaries Subsidiaries Entries Pulte Corporation ----------- ------------ ------------- ----------- ----------------- Continuing operations: Cash flows from operating activities: Income from continuing operations ............ $ 49,800 $ 69,222 $ 68,047 $(137,269) $ 49,800 Adjustments to reconcile income from continuing operations to net cash flows provided by (used in) operating activities: Equity in income of subsidiaries ..... (68,047) (2,943) (66,279) 137,269 -- Amortization, depreciation and other .............................. 113 7,247 453 -- 7,813 Deferred income taxes ................ (14,222) -- -- -- (14,222) Increase (decrease) in cash due to: Inventories ........................ -- (124,690) -- -- (124,690) Residential mortgage loans available-for-sale .............. -- -- (14,576) -- (14,576) Other assets ....................... (5,445) (13,992) (18,494) -- (37,931) Accounts payable and accrued liabilities ..................... 7,001 32,198 21,381 -- 60,580 Income taxes ....................... (8,453) 43,668 2,837 -- 38,052 --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities ......................... (39,253) 10,710 (6,631) -- (35,174) --------- --------- --------- --------- --------- Cash flows from investing activities: Principal payments of mortgage-backed securities................................. -- 7,933 -- 7,933 Dividends received from subsidiaries ......... -- 17,000 -- (17,000) -- Advances to affiliates ....................... 38,688 827 (3,020) (36,495) -- Other, net ................................... -- -- 36 -- 36 --------- --------- --------- --------- --------- Net cash provided by investing activities ....... $ 38,688 $ 17,827 $ 4,949 $ (53,495) $ 7,969 --------- --------- --------- --------- ---------
66 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) 13. Supplemental Guarantor Information (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS (continued) For the year ended December 31, 1997 Unconsolidated ------------------------------------------ Pulte Guarantor Non-Guarantor Eliminating Consolidated Corporation Subsidiaries Subsidiaries Entries Pulte Corporation ----------- ------------ ------------- ----------- ----------------- Cash flows from financing activities: Payment of long-term debt and bonds ..... $ -- $ -- $ (9,106) $ -- $ (9,106) Proceeds from borrowings ................ 147,825 7,787 8,571 -- 164,183 Advances from affiliates ................ 6,566 (61,457) 18,396 36,495 -- Stock repurchases ....................... (74,673) -- -- -- (74,673) Dividends paid .......................... (5,153) -- (17,000) 17,000 (5,153) Other, net .............................. 7,361 -- 124 -- 7,485 --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities .................... 81,926 (53,670) 985 53,495 82,736 --------- --------- --------- --------- --------- Net increase (decrease) in cash and equivalents - continuing operations ..... 81,361 (25,133) (697) -- 55,531 --------- --------- --------- --------- --------- Discontinued operations: Cash flows from operating activities: Income from discontinued operations ..... 2,961 -- (3,659) 3,659 2,961 Change in deferred income taxes ......... 32,495 -- -- -- 32,495 Equity in income of subsidiaries ........ 3,659 -- -- (3,659) -- Change in income taxes .................. (34,851) -- -- -- (34,851) Other changes, net ...................... (4,264) -- (5,993) -- (10,257) Cash flows from investing activities: Purchase of securities available-for-sale -- -- (14,537) -- (14,537) Principal payments of mortgage-backed securities ........................... -- -- 34,257 -- 34,257 Net proceeds from sale of investments ... -- -- 3,211 -- 3,211 Increase in Covered Assets and FRF receivables .......................... -- -- 37,019 -- 37,019 Cash flows from financing activities: Decrease in deposit liabilities ......... -- -- (2,663) -- (2,663) Repayment of borrowings ................. -- -- (31,560) -- (31,560) Decrease in FHLB advances ............... -- -- (16,500) -- (16,500) --------- --------- --------- --------- --------- Net decrease in cash and equivalents- discontinued operations ................. -- -- (425) -- (425) --------- --------- --------- --------- --------- Net increase (decrease) in cash and equivalents ............................. 81,361 (25,133) (1,122) -- 55,106 Cash and equivalents at beginning of year .. 114,585 71,599 6,018 -- 192,202 --------- --------- --------- --------- --------- Cash and equivalents at end of year ........ $ 195,946 $ 46,466 $ 4,896 $ -- $ 247,308 ========= ========= ========= ========= =========
67 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued) ($000's omitted) 13. Supplemental Guarantor Information (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS For the year ended December 31, 1996 Unconsolidated ----------------------------------------- Pulte Guarantor Non-Guarantor Eliminating Consolidated Corporation Subsidiaries Subsidiaries Entries Pulte Corporation ----------- ------------ ------------- ----------- ----------------- Continuing operations: Cash flows from operating activities: Income from continuing operations ............ $ 63,211 $ 67,354 $ 72,184 $(139,538) $ 63,211 Adjustments to reconcile income from continuing operations to net cash flows provided by (used in) operating activities: Equity in income of subsidiaries ..... (72,184) (1,267) (66,087) 139,538 -- Amortization, depreciation and other .............................. 85 6,107 555 -- 6,747 Deferred income taxes ................ (9,517) -- -- -- (9,517) Gain on sale of securities ........... -- -- (11,069) -- (11,069) Increase (decrease) in cash due to: Inventories ........................ -- (157,527) -- -- (157,527) Residential mortgage loans available-for-sale .............. -- -- 7,859 -- 7,859 Other assets ....................... (7,963) (64,806) 8,143 -- (64,626) Accounts payable and accrued liabilities ..................... 6,534 55,500 (2,876) -- 59,158 Income taxes ....................... (7,868) 43,485 5,922 -- 41,539 --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities ......................... (27,702) (51,154) 14,631 -- (64,225) --------- --------- --------- --------- --------- Cash flows from investing activities: Proceeds from exchange of securities held-to-maturity .......................... -- -- 12,282 -- 12,282 Proceeds from sale of securities available- for-sale .................................. -- -- 175,686 -- 175,686 Principal payments of mortgage-backed securities................................. -- 19,892 -- 19,892 Dividends received from subsidiaries ......... 30,000 22,000 -- (52,000) -- Investment in subsidiaries ................... (1,524) -- -- 1,524 -- Advances to affiliates ....................... (2,054) 2,608 (2,782) 2,228 -- Other, net ................................... -- -- (278) -- (278) --------- --------- --------- --------- --------- Net cash provided by investing activities ....... $ 26,422 $ 24,608 $ 204,800 $ (48,248) $ 207,582 --------- --------- --------- --------- ---------
68 PULTE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) ($000's omitted) 13. Supplemental Guarantor Information (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS (continued) For the year ended December 31, 1996 Unconsolidated ---------------------------------------- Pulte Guarantor Non-Guarantor Eliminating Consolidated Corporation Subsidiaries Subsidiaries Entries Pulte Corporation ----------- ------------ ------------- ----------- ----------------- Cash flows from financing activities: Payment of long-term debt and bonds ..... $ -- $ -- $(181,841) $ -- $(181,841) Proceeds from borrowings ................ -- 27,133 13,576 -- 40,709 Capital contributions from parent ....... -- -- 1,524 (1,524) -- Advances from affiliates ................ -- -- 2,228 (2,228) -- Stock repurchases ....................... (99,561) -- -- -- (99,561) Dividends paid .......................... (5,958) -- (52,000) 52,000 (5,958) Other, net .............................. 602 -- 90 -- 692 --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities .............................. (104,917) 27,133 (216,423) 48,248 (245,959) --------- --------- --------- --------- --------- Net increase (decrease) in cash and equivalents - continuing operations ..... (106,197) 587 3,008 -- (102,602) --------- --------- --------- --------- --------- Discontinued operations: Cash flows from operating activities: Income from discontinued operations ..... 116,432 -- 10,312 (10,312) 116,432 Change in deferred income taxes ......... (38,321) -- -- -- (38,321) Equity in income of subsidiaries ........ (10,312) -- -- 10,312 -- Changes in income taxes ................. (72,755) -- -- -- (72,755) Other changes, net ...................... 4,956 -- (19,174) -- (14,218) Cash flows from investing activities: Purchase of securities available-for-sale -- -- (42,209) -- (42,209) Principal payments of mortgage-backed securities ........................... -- -- 43,735 -- 43,735 Net proceeds from sale of investments ... -- -- 4,514 -- 4,514 Decrease in Covered Assets and FRF receivables .......................... -- -- 37,438 -- 37,438 Decrease in loans receivable ............ -- -- (419) -- (419) Cash flows from financing activities: Increase in deposit liabilities ......... -- -- 3,404 -- 3,404 Repayment of borrowings ................. -- -- (31,560) -- (31,560) Decrease in FHLB advances ............... -- -- (6,400) -- (6,400) --------- --------- --------- --------- --------- Net decrease in cash and equivalents- discontinued operations ................. -- -- (359) -- (359) --------- --------- --------- --------- --------- Net increase (decrease) in cash and equivalents ............................. (106,197) 587 2,649 -- (102,961) Cash and equivalents at beginning of year .. 220,782 71,012 3,369 -- 295,163 --------- --------- --------- --------- --------- Cash and equivalents at end of year ........ $ 114,585 $ 71,599 $ 6,018 $ -- $ 192,202 ========= ========= ========= ========= =========
69 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Pulte Corporation We have audited the accompanying consolidated balance sheets of Pulte Corporation as of December 31, 1998 and 1997 and the related consolidated statements of operations and comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pulte Corporation at December 31, 1998 and 1997 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Detroit, Michigan January 20, 1999, except for the last two paragraphs of Note 11 as to which the date is March 10, 1999. 70
PULTE CORPORATION UNAUDITED QUARTERLY INFORMATION ($000's omitted, except per share data) 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- 1998 Homebuilding operations: Sales (settlements) ............................ $ 508,635 $ 663,554 $ 746,680 $ 891,282 $ 2,810,151 Cost of sales .................................. 430,000 560,056 627,449 741,748 2,359,253 Income before income taxes ..................... 19,759 42,540 47,072 63,975 173,346 Financial services operations: Revenues ....................................... $ 8,359 $ 11,377 $ 11,286 $ 12,656 $ 43,678 Income before income taxes ..................... 2,388 3,560 4,900 4,346 15,194 Corporate: Revenues ....................................... $ 3,577 $ 4,766 $ 1,368 $ 2,981 $ 12,692 Loss before income taxes ....................... (4,295) (7,404) (5,308) (5,719) (22,726) Consolidated results: Revenues ....................................... $ 520,571 $ 679,697 $ 759,334 $ 906,919 $ 2,866,521 Income from continuing operations before income taxes ........................... 17,852 38,696 46,664 62,602 165,814 Income taxes ................................... 6,962 15,090 18,199 24,415 64,666 Income from continuing operations .............. 10,890 23,606 28,465 38,187 101,148 Income from discontinued operations ............ 371 238 91 335 1,035 Net income ..................................... 11,261 23,844 28,556 38,522 102,183 Per share data: Basic: Income from continuing operations ........ $ .25 $ .55 $ .66 $ .88 $ 2.35 Income from discontinued operations ...... $ 01 $ -- $ -- $ .01 $ .03 Net income ............................... $ .26 $ .55 $ .66 $ .89 $ 2.38 Weighted average common shares outstanding ..................... 42,588 43,039 43,136 43,166 42,984 Assuming dilution: Income from continuing operations ........ $ .25 $ .54 $ .64 $ .87 $ 2.30 Income from discontinued operations ...... $ .01 $ -- $ -- $ .01 $ .03 Net income ............................... $ .26 $ .54 $ .64 $ .88 $ 2.33 Adjusted weighted average common shares and effect of dilutive securities 43,248 43,952 44,280 44,002 43,884
71
PULTE CORPORATION UNAUDITED QUARTERLY INFORMATION ($000's omitted, except per share data) 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- 1997 Homebuilding operations: Sales (settlements) ............................ $ 423,215 $ 567,135 $ 657,265 $ 831,556 $2,479,171 Cost of sales .................................. 360,005 484,509 559,061 706,957 2,110,532 Income before income taxes ..................... 7,915 26,377 34,616 37,270(A) 106,178(A) Financial services operations: Revenues ....................................... $ 6,727 $ 6,925 $ 9,808 $ 10,578 $ 34,038 Income before income taxes ..................... 78 351 2,958 1,627(B) 5,014(B) Corporate: Revenues ....................................... $ 1,758 $ 2,255 $ 2,818 $ 3,951 $ 10,782 Loss before income taxes ....................... (5,986) (6,124) (7,386) (10,721)(C) (30,217)(C) Consolidated results: Revenues ....................................... $ 431,700 $ 576,315 $ 669,891 $ 846,085 $2,523,991 Income from continuing operations before income taxes ........................... 2,007 20,604 30,188 28,176(D) 80,975(D) Income taxes ................................... 773 7,932 11,623 10,847 31,175 Income from continuing operations .............. 1,234 12,672 18,565 17,329 49,800 Income (loss) from discontinued operations ..... 1,003 1,201 1,145 (388) 2,961 Net income ..................................... 2,237 13,873 19,710 16,941 52,761 Per share data: Basic: Income from continuing operations ........ $ .03 $ .30 $ .44 $ .41(E) $ 1.14(F) Income (loss) from discontinued operations $ .02 $ .02 $ .03 $ (.01) $ .07 Net income ............................... $ .05 $ .32 $ .47 $ .40(E) $ 1.21(F) Weighted average common shares outstanding ..................... 46,592 42,764 42,273 42,474 43,510 Assuming dilution: Income from continuing operations ........ $ .03 $ .29 $ .43 $ .40(E) $ 1.13(F) Income (loss) from discontinued operations $ .02 $ .03 $ .03 $ (.01) $ .07 Net income ............................... $ .05 $ .32 $ .46 $ .39(E) $ 1.20(F) Adjusted weighted average common shares and effect of dilutive securities 46,936 43,016 42,740 42,944 43,908 (A) Includes one-time restructuring charge of $14,800 (B) Includes one-time restructuring charge of $2,100 (B) Includes one-time restructuring charge of $3,100 (D) Includes one-time restructuring charge of $20,000 (E) Earnings per share amounts are after $.29 per share attributable to one-time restructuring charge, net of income taxes (F) Earnings per share amounts are after $.28 per share attributable to one-time restructuring charge, net of income taxes
72 PART III ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE This Item is not applicable. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item with respect to executive officers of the Company is set forth in Item 4A. Information required by this Item with respect to members of the Board of Directors of the Company is contained in the Proxy Statement for the 1999 Annual Meeting of Shareholders (1999 Proxy Statement) under the caption "Election of Directors," incorporated herein by this reference. Additionally, information required by this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is contained in the 1999 Proxy Statement under the caption "Beneficial Ownership Reporting Compliance". ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is contained in the 1999 Proxy Statement under the caption "Remuneration of Directors and Executive Officers" and under the caption "Stock Options Granted to Officers by the Company," incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item is contained in the 1999 Proxy Statement under the caption "Election of Directors," incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item is contained in the 1999 Proxy Statement under the caption "Remuneration of Directors and Executive Officers," incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this Annual Report on Form 10-K.
(a) Financial Statements and Schedules (1) Financial Statements Page Herein ----------- Consolidated Balance Sheets at December 31, 1998 and 1997............. 33 Consolidated Statements of Operations and Other Comprehensive Income for the years ended December 31, 1998, 1997 and 1996...... 34 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996..................... 35 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................. 36 Notes to Consolidated Financial Statements............................ 38 (2) Financial Statement Schedules I -Condensed Financial Information of Registrant...................... 78
All other schedules have been omitted since the required information is not present, is not present in amounts sufficient to require submission of the schedule or because the required information is included in the financial statements or notes thereto. 73
(3) Exhibits Index Page Herein or Incorporated Exhibit Number and Description by Reference From - ------------------------------ --------------------------- (2) and (10) (a) Assistance Agreement, dated Filed as Exhibit 2 and 10(a) September 9, 1988, by and to Pulte Corporation's Annual among The Federal Savings Report on Form 10-K for the and Loan Insurance Corporation year ended December 31, 1988. (FSLIC), First Heights, FSA, Heights of Texas, FSB (Heights of Texas) and Pulte Diversified Companies, Inc. (PDCI). (b) Amendment to Assistance Agreement, Filed as Exhibit 2 and 10(b) to dated September 23, 1988, among Pulte Corporation's Annual Report the FSLIC, First Heights, FSA, on Form 10-K for the year ended Heights of Texas and PDCI. December 31, 1988. (c) Promissory Notes (1) Promissory Note No. 1, dated Filed as Exhibit 2 and 10(c) to September 9, 1988, in the Pulte Corporation's Annual Report amount of $139,400,000 from on Form 10-K for the year ended the FSLIC to First Heights. December 31, 1988. (2) Promissory Note No. 2, dated Filed as Exhibit 2 and 10(c) to September 9, 1988, in the Pulte Corporation's Annual Report amount of $172,365,000 from on Form 10-K for the year ended the FSLIC to First Heights. December 31, 1988. (3) Receiver's Note No. 3, dated Filed as Exhibit 2 and 10(c) to September 23, 1988, in the Pulte Corporation's Annual Report amount of $152,169,750 from on Form 10-K for the year ended the FSLIC to the FSLIC as December 31, 1988. receiver for Champion Savings Association (Champion). (4) Receiver's Note No. 4, dated Filed as Exhibit 2 and 10(c) to September 23, 1988, in the Pulte Corporation's Annual Report amount of $48,527,250 from the on Form 10-K for the year ended FSLIC to the FSLIC as receiver December 31, 1988. for Champion. (d) Regulatory Capital Maintenance Filed as Exhibit 2 and 10(d) to Agreement, dated September 9, 1988, Pulte Corporation's Annual Report by and among, Pulte Corporation, on Form 10-K for the year ended PDCI, First Heights, Heights of Texas December 31, 1988. and the FSLIC. 74 EXHIBITS Page Herein or Incorporated Exhibit Number and Description by Reference From - ------------------------------ --------------------------- (e) Amendment to Regulatory Capital Filed as Exhibit 2 and Maintenance Agreement, dated Pulte Corporation's Annual Report September 23, 1988, among Pulte on Form 10-K for the year ended Corporation, PDCI, First Heights, December 31, 1988. Heights of Texas and the FSLIC. (f) Warranty Agreement, dated as of Filed as Exhibit 2 and 10(f) to September 9, 1988, between Pulte Corporation's Annual Report First Heights and the FSLIC. on Form 10-K for the year ended December 31, 1988. (g) Receiver's Note Agreement, dated Filed as Exhibit 2 and 10(g) to September 23, 1988, between the Pulte Corporation's Annual Report FSLIC, as receiver for Champion on Form 10-K for the year ended and the FSLIC. December 31, 1988. (3) (a) Articles of Incorporation, as amended. Filed as Exhibit 19(a) to Pulte Corporation's Form 10-Q for the quarter ended June 30, 1988. (b) By-laws Filed as Exhibit 3(b) to the Registrant's Registration Statement on Form S-4 (Registration Statement No. 33-17223). (4) (a) Senior Note Indenture among Pulte Filed as Exhibit 4.1 to the Corporation, certain of its subsidiaries, Registrant's Registration Statement as Guarantors, and NationsBank of on Form S-3 (Registration Statement Georgia, National Association, as Trustee, No. 33-71742). including Form of Senior Guarantee, covering Pulte Corporation's 8.375% unsecured Senior Notes due 2004 ($115,000,000 aggregate principal amount outstanding) and 7% unsecured Senior Notes due 2003 ($100,000,000 aggregate principal amount outstanding) (b) Senior Note Indenture among Pulte Corporation, Filed as Exhibit (c) 1 to the certain of its subsidiaries, as Guarantors, Registrant's Current Report on Form 8-K and The First National Bank of Chicago, dated October 20, 1995. as Trustee, covering Pulte Corporation's 7.3% unsecured Senior Notes due 2005 ($125,000,000 aggregate principal amount outstanding) and 7.625% unsecured Senior Notes due 2017 ($150,000,000 aggregate principal amount outstanding). 75 EXHIBITS Page Herein or Incorporated Exhibit Number and Description by Reference From - ------------------------------ --------------------------- (10) Material Contracts (a) 1983 Key Employees' Stock Filed as Exhibit 10(a) to Pulte Home Option Plan. Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1983. (1983 Annual Report) (b) First Amendment to 1983 Key Filed as Exhibit 10(b) to the Employees' Stock Option Plan Registrant's Registration Statement on Form S-8 (Registration Statement No. 33-20052). (c) 1977 Key Employees' Stock Filed as Exhibit 1(a) to Pulte Home Option Plan Corporation's Registration Statement on Form S-8 (Registration No. 2-59802). (d) First Amendment to 1977 Key Filed as Exhibit III to Pulte Home Employees' Stock Option Plan Corporation's Annual Report on Form 10-K for the year ended December 31, 1981. (e) Second Amendment to 1977 Key Filed as Exhibit 10(e) to the Employees' Stock Option Plan Registrant's Registration Statement on Form S-8 (Registration Statement No. 33-20052). (f) James Grosfeld Consulting Filed as Exhibit 10(g) to Pulte Agreement April 30, 1990 Corporation's Annual Report on Form 10-K for the year ended December 31, 1990. (g) James Grosfeld Agreement Filed as Exhibit 10(h) to Pulte November 16, 1990 Corporation's Annual Report on Form 10-K for the year ended December 31, 1990. (h) 1990 Stock Incentive Plan for Filed with the Proxy Statement dated Key Employees April 3, 1990 and as an exhibit to the Registrant's Registration Statement on Form S-8 (Registration Statement No. 33-40102). 76 EXHIBITS Page Herein or Incorporated Exhibit Number and Description by Reference From - ------------------------------ --------------------------- (i) James Grosfeld Agreement Filed as Exhibit 10(a) to the Pulte Corporation April 16, 1997 Report on Form 10-Q for the quarter ended March 31, 1997. (j) James Grosfeld Stock Sale Agreement Filed as Exhibit 10(b) to the Pulte Corporation April 16, 1997 Report on Form 10-Q for the quarter ended March 31, 1997. (k) 1994 Stock Incentive Plan for Filed with the Proxy Statement dated Key Employees March 31, 1994 and as an exhibit to the Registrant's Registration Statement on Form S-8 (Registration Statement No. 33-98944). (l) Credit Agreement, dated Filed as Exhibit 10(l) to Pulte January 5, 1995, among Pulte Corporation's Annual Report on Form 10-K Corporation, NationsBank, N.A. for the year ended December 31, 1994. (Carolinas) as Agent for certain lenders (m) Fourth Amendment to Credit Agreement, Filed as Exhibit 10(n) to Pulte dated December 30, 1997, among Pulte Corporation's Annual Report on Form 10-K Corporation and NationsBank, N.A., for the year ended December 31, 1997. as Agent for certain lenders. (n) 1995 Stock Incentive Plan for Filed with the Proxy Statement dated Key Employees March 31, 1995 and as an exhibit to the Registrant's Registration Statement on Form S-8 (Registration Statement No 33-99218). (o) 1997 Stock Plan for Nonemployee Directors Filed with Proxy Statement on March 27, 1998 and as Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 (Registration Statement No. 33-51019 filed on May 7, 1998). (11) Statement Regarding Computation of Per Share Earnings 82 (21) Subsidiaries of the Registrant 83 (23) Consent of Independent Auditors 87 (27) Financial Data Schedule 88
77 PULTE CORPORATION SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT Pulte Corporation (the Registrant) is a holding company. The accompanying financial statements are not the primary consolidated financial statements since these financial statements present only the accounts of Pulte Corporation which include its investment in subsidiaries on the equity method. The primary financial statements of the Company are its consolidated financial statements. The net assets of Pulte Home Corporation, Pulte Mortgage Corporation and First Heights Bank, a federal savings bank, all of which are indirectly wholly-owned subsidiaries of the registrant are subject to certain restrictions (see Notes to Consolidated Financial Statements). Pulte Corporation Balance Sheets December 31, 1998 and 1997 ($000's omitted) 1998 1997 ---------- ---------- Assets: Cash and equivalents ........................... $ 76,555 $ 195,946 Investment in subsidiaries, on the equity method 1,066,313 970,897 Advances receivable - subsidiaries ............. 271,915 100,663 Deferred income taxes .......................... 80,385 104,659 Other accounts receivable ...................... 17,949 18,305 ---------- ---------- $1,513,117 $1,390,470 ========== ========== Liabilities and shareholders' equity: Advances payable - subsidiaries ................ $ 32,573 $ 24,595 Income taxes ................................... 9,592 7,265 Accrued liabilities ............................ 62,014 58,470 Senior notes ................................... 487,496 487,303 ---------- ---------- Total liabilities .................. 591,675 577,633 Shareholders' equity ........................... 921,442 812,837 ---------- ---------- $1,513,117 $1,390,470 ========== ========== 78 PULTE CORPORATION SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (continued)
Pulte Corporation Statements of Income For the years ended December 31, 1998, 1997 and 1996 ($000's omitted) 1998 1997 1996 --------- --------- --------- Revenues - Interest income ......................... $ 7,641 $ 2,054 $ 6,724 --------- --------- --------- Expenses - General and administrative .............. 9,095 15,125 13,761 Interest ................................ 22,750 17,501 12,045 Restructuring costs ..................... -- 3,100 -- --------- --------- --------- 31,845 35,726 25,806 --------- --------- --------- Expenses in excess of revenues ..................... (24,204) (33,672) (19,082) Other income (expense) ............................. (1,215) 170 (125) --------- --------- --------- Loss from continuing operations before income taxes and equity in net income of subsidiaries ........ (25,419) (33,502) (19,207) Income tax (benefit) ............................... (14,006) (15,255) (10,234) --------- --------- --------- Loss from continuing operations before equity in net income of subsidiaries .......................... (11,413) (18,247) (8,973) Income (loss) from discontinued operations ......... (301) 6,620 106,120 --------- --------- --------- Equity in net income of subsidiaries Continuing operations ........................... 112,561 68,047 72,184 Discontinued operations ......................... 1,336 (3,659) 10,312 --------- --------- --------- 113,897 64,388 82,496 --------- --------- --------- Net income ......................................... $ 102,183 $ 52,761 $ 179,643 ========= ========= =========
79 PULTE CORPORATION SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (continued)
Pulte Corporation Statements of Cash Flows For the years ended December 31, 1998, 1997 and 1996 ($000's omitted) 1998 1997 1996 --------- --------- --------- Continuing operations Cash flows from operating activities: Income from continuing operations ........................ $ 101,148 $ 49,800 $ 63,211 Adjustments to reconcile income from continuing operations to net cash used in operating activities: Equity in income of subsidiaries .................... (112,561) (68,047) (72,184) Amortization ........................................ 193 113 85 Deferred income taxes ............................... (2,170) (14,222) (9,517) Changes in cash due to: Accounts receivable and other assets ............. 356 (5,445) (7,963) Income taxes ..................................... (45,645) (8,453) (7,868) Accrued liabilities .............................. 1,138 7,001 6,534 --------- --------- --------- Net cash used in operating activities ....................... (57,541) (39,253) (27,702) --------- --------- --------- Cash flows provided by investing activities: Investment in subsidiaries ............................... (48,981) -- (1,524) Dividends received from subsidiaries ..................... 132,040 -- 30,000 Advances to (from) affiliates ............................ (172,652) 38,688 (2,054) Other, net ............................................... 15,000 -- -- --------- --------- --------- Net cash provided by (used in) investing activities ......... (74,593) 38,688 26,422 --------- --------- --------- Cash flows from financing activities: Dividends paid ........................................... (6,456) (5,153) (5,958) Advances from affiliates ................................. 12,247 6,566 -- Stock repurchases ........................................ -- (74,673) (99,561) Proceeds from issuance of senior notes ................... -- 147,825 -- Other .................................................... 6,952 7,361 602 --------- --------- --------- Net cash provided by (used in) financing activities ......... 12,743 81,926 (104,917) --------- --------- --------- Net increase (decrease) in cash and equivalents - continuing operations .................................... (119,391) 81,361 (106,197) --------- --------- --------- Discontinued operations: Cash flows from operating activities: Income from discontinued operations ...................... 1,035 2,961 116,432 Change in deferred income taxes .......................... 26,444 32,495 (38,321) Equity in income of subsidiaries ......................... (1,336) 3,659 (10,312) Amortization and other ................................... 1,687 (4,264) 4,956 Change in income taxes ................................... (27,830) (34,851) (72,755) --------- --------- --------- Net cash provided by operating activities ................ -- -- -- --------- --------- --------- Net increase (decrease) in cash equivalents ................. (119,391) 81,361 (106,197) Cash and equivalents at beginning of year ................... 195,946 114,585 220,782 --------- --------- --------- Cash and equivalents at end of year ......................... $ 76,555 $ 195,946 $ 114,585 ========= ========= =========
80
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PULTE CORPORATION (Registrant) March 12, 1999 /s/ Roger A. Cregg /s/ Vincent J. Frees ----------------------------- ------------------------------ Roger A. Cregg Vincent J. Frees Senior Vice President Vice President and Controller and Chief Financial Officer (Principal Accounting Officer) (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capabilities and on the dates indicated: Signature Title Date --------- ----- ---- /s/ William J. Pulte Member of Board of Directors March 12, 1999 - -------------------------- William J. Pulte /s/ Robert K. Burgess Chairman of the Board, Chief Executive March 12, 1999 - -------------------------- Officer and Member of Board of Directors Robert K. Burgess /s/ Debra Kelly-Ennis Member of Board of Directors March 12, 1999 - -------------------------- Debra Kelly-Ennis /s/ David N. McCammon Member of Board of Directors March 12, 1999 - -------------------------- David N. McCammon /s/ Ralph L. Schlosstein Member of Board of Directors March 12, 1999 - -------------------------- Ralph L. Schlosstein /s/ Alan E. Schwartz Member of Board of Directors March 12, 1999 - -------------------------- Alan E. Schwartz /s/ Francis J. Sehn Member of Board of Directors March 12, 1999 - -------------------------- Francis J. Sehn /s/ John J. Shea Member of Board of Directors March 12, 1999 - -------------------------- John J. Shea
81 EX-11 2
PULTE CORPORATION EXHIBIT 11 - STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS (000's omitted, except per share data) Year ended December 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- --------- --------- -------- -------- Basic: Numerator: Net income .................................. $102,183 $ 52,761 $179,643 $ 58,346 $162,768 ======== ======== ======== ======== ======== Denominator: Weighted average common shares outstanding .. 42,984 43,510 49,852 54,148 55,112 ======== ======== ======== ======== ======== Net income per share ........................ $ 2.38 $ 1.21 $ 3.60 $ 1.08 $ 2.95 ======== ======== ======== ======== ======== Assuming dilution: Numerator: Net income .................................. $102,183 $ 52,761 $179,643 $ 58,346 $162,768 ======== ======== ======== ======== ======== Denominator: Weighted average common shares outstanding .. 42,984 43,510 49,852 54,148 55,112 Effect of dilutive securities - stock options 900 398 452 696 596 -------- -------- -------- -------- -------- Total ..................................... 43,884 43,908 50,304 54,844 55,708 ======== ======== ======== ======== ======== Net income per share ........................ $ 2.33 $ 1.20 $ 3.57 $ 1.06 $ 2.92 ======== ======== ======== ======== ========
82 EX-21 3 PULTE CORPORATION EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT Pulte Corporation (the Company) owns 100% of the capital stock of Pulte Diversified Companies, Inc. (PDCI), Pulte Financial Companies, Inc. (PFCI), PCIC Corporation and Radnor Homes, Inc., all Michigan corporations, and 100% of the capital stock of PB Venture LLC, a Michigan limited liability company, North American Builders Indemnity Company, a Colorado corporation, Marquette Title Insurance Company, a Vermont corporation and RN Acquisition 2 Corp., a Nevada corporation. The Company is a member of the following limited liability companies: Entity Name Place of Formation Percentage Ownership - ----------- ------------------ -------------------- Grayhaven Estates Limited, L.L.C. Michigan 49% City Homes Development, L.L.C. Michigan 50% Shorepointe Village Homes, L.L.C. Michigan 31.5% PDCI owns 100% of the capital stock of Pulte International Corporation, Pulte Home Corporation (Pulte), American Title of the Palm Beaches Acquisition Corp., Home Mortgage Company of the Palm Beaches Corp. and Riverwalk Commerce Acquisition Corp., all Michigan corporations, First Heights Bank, a federal savings bank, and DiVosta and Company, Inc., a Florida corporation. PDCI owns 96% of the capital stock of American Title of the Palm Beaches, Ltd., a Florida limited partnership. Pulte International Corporation owns 100% of the capital stock of Pulte International Mexico, Inc., Pulte International Caribbean Corp., Pulte Chile Corporation and Pulte SA Corporation, all Michigan corporations. Pulte International Mexico, Inc. and Pulte own 99.99% and .01%, respectively, of the capital stock of Controladora PHC, S.A. De C.V. (Controladora), a Mexican corporation. Pulte owns .7% of Nantar, S. De R.L. De C.V., a Mexican limited liability company. Controladora owns 99.3% of Nantar, S. De R.L. De C.V., a Mexican limited liability company, and 50% of Condak-Pulte S. De R.L. De C.V., 50% of CIV-Pulte S. De R.L. De C.V., 50% of Sand-Pulte S. De R.L. De C.V and 50% of DRT-Pulte, all Mexican joint ventures. Pulte Chile Corporation owns 99% and Pulte SA Corporation owns 1% of Pulte de Chile Limitada, a Chilean limited partnership. Pulte Chile Corporation owns 1% and Pulte de Chile Limitada owns 99% of Residencias del Norte Limitada, a Chilean limited liability company. DiVosta and Company, Inc. owns 100% of the capital stock of Abacoa Homes, Inc., DiVosta Homes, Inc., Florida Building Products, Inc., Florida Club Homes, Inc., Hammock Reserve Development Company, Island Walk Development Company, RiverWalk of the Palm Beaches Development Company, Inc., Sunco Building Corporation and Village Walk Development Company, Inc., all Florida corporations. PFCI owns 100% of the capital stock of Guaranteed Mortgage Corporation III, a Michigan corporation. PB Venture L.L.C. owns 50% of the capital stock of PC/BRE Venture L.L.C., a Delaware limited liability company. PC/BRE Venture L.L.C. owns 100% of the capital stock of PC/BRE Development L.L.C., PC/BRE Whitney Oaks L.L.C., PC/BRE Winfield L.L.C. and PC/BRE Springfield L.L.C., all Delaware limited liability companies, 100% of the capital stock of Springfield Golf Club, Inc., and 40% of the capital stock of Springfield Realty Corporation, both Michigan corporations. PC/BRE Springfield L.L.C. own 88% of Springfield Golf Resort, L.L.C., an Arizona limited liability company. Radnor Homes, Inc. owns 25.6% and RN Acquisition 2 Corp. owns 74.4% of Pulte Homes Tennessee Limited Partnership, a Nevada limited partnership. 83 PULTE CORPORATION EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT Pulte owns 100% of the capital stock of the following subsidiaries: Place of Company Name Incorporation ------------ ------------- Pulte Mortgage Corporation (1) .................. Delaware Pulte Homes of Michigan Corporation (2) ......... Michigan Palmville Development Corp. ..................... Michigan Ceiba Homes Inc. ................................ Michigan Gurabo Homes, Inc. .............................. Michigan Salinas Homes, Inc. ............................. Michigan Salinas Builders, Inc. .......................... Michigan Dean Realty Company (3) ......................... Michigan Pulte Development Corporation ................... Michigan PHM Realty, Inc. ................................ Florida Preserve I, Inc. (4) ............................ Michigan Preserve II, Inc. (4) ........................... Michigan Pulte Homes of Minnesota Corporation ............ Minnesota PBW Corporation (9) ............................. Michigan Wil Corporation (9) ............................. Michigan Canterbury Liquidation Corporation (5) .......... Michigan Pulte Home Corporation of The Delaware Valley (8) Michigan Pulte Homes of South Carolina, Inc. (6) ......... Michigan Pulte Lifestyle Communities, Inc. ............... Michigan Pulte Payroll Corporation ....................... Michigan PHC Title Corporation (10) ...................... Michigan PQL Realty Corporation .......................... Michigan Pulte Land Development Corporation .............. Michigan TVM Corporation (7) ............................. Michigan James T. Lynch, Inc. ............................ Texas Pulte Homes of Greater Kansas City, Inc. ........ Michigan PN I, Inc. (11) ................................. Nevada PN II, Inc. (11) ................................ Nevada PHT Title Corporation (13) ...................... Michigan Residential Shell Contracting LLC ............... Michigan Frederick Holding Corp. ......................... Michigan Pulte Home Corporation of New England (12) ...... Michigan 84 PULTE CORPORATION EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT (continued) 1) Pulte Mortgage Corporation owns 100% of the capital stock of ICM Mortgage Corporation, a Michigan corporation and 23.42% of the capital stock of Hipotecaria Su Casita, S.A. de C.V., a Mexican corporation. 2) Pulte Homes of Michigan Corporation owns 100% of the capital stock of Gulf Partners, Inc., Sean/Christopher Homes, Inc., and Pulte-IN Corporation, all Michigan corporations, 100% of the capital stock of Pulte Homes of Ohio Corporation, an Ohio corporation and 1% of the capital stock of Haggerty Hills Limited Partnership, a Michigan limited partnership. Sean/Christopher Homes, Inc. and Pulte-IN Corporation each own 50% of the capital stock of Sean/Christopher Homes, LLC, an Indiana limited liability company. Gulf Partners, Inc. owns 99% of the capital stock of Haggerty Hills Limited Partnership, a Michigan limited partnership. 3) Dean Realty Company owns 100% of the capital stock of Pulte Real Estate Company, a Florida corporation. 4) Preserve I, Inc. owns 99% and Preserve II, Inc. owns 1% of The Preserve Limited Partnership, a Maryland limited partnership. 5) Canterbury Liquidation Corporation owns 100% of the capital stock of Canterbury Diversified Building Corporation, a Michigan corporation. 6) Pulte Homes of South Carolina, Inc. owns 100% of the capital stock of Great American Homes, Inc. and SC Warranty Corporation, both Michigan corporations. 7) TVM Corporation owns 63% of PHM Title Agency L.L.C., a Delaware limited liability company. 8) Pulte Home Corporation of The Delaware Valley owns 50% of P&H Clinton Partnership. 9) PBW Corporation owns 1% and Wil Corporation owns 99% of Wilben II Limited Partnership, a Maryland limited partnership. PBW Corporation and Wil Corporation each own 50% of One Willowbrook L.L.C., a Maryland limited liability company. 10) PHC Title Corporation owns 80% of Pulte Title Agency of Minnesota, L.L.C., a Minnesota limited liability company and 99% of PHT Title Agency, L.P., a Texas limited partnership. 11) PN I, Inc., owns .1% and PN II, Inc. owns 99.9% of Pulte Homes of Texas, L.P., a Texas limited partnership, and Devtex Land, L.P. , a Texas limited partnership. 12) Pulte Home Corporation of New England owns 99% of Willow Brook Associates Limited Partnership, a Massachusetts limited partnership. 13) PHT Title Corporation owns 1% of PHT Title Agency, L.P., a Texas limited partnership. 85 PULTE CORPORATION EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT (Continued) Pulte is a member of the following entities: Place of Percentage Entity Name Formation Ownership - ----------- --------- ---------- Ashgrove Plantation L.L.C..................... Virginia 34.44% Buildinvest Limited Partnership............... Maryland 33.33% Crosland/Piper Glen Ltd. Partnership.......... N. Carolina 31.37% Crosland/Wynfield Forest Limited Partnership.. N. Carolina 28.60% Quantrell Mews, L.L.C......................... Virginia 20.00% Springfield Realty Corporation................ Michigan 60.00% 86 EX-23 4 PULTE CORPORATION EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-20052, Form S-8 No. 2-59802, Form S-8 No. 33-40102, Form S-8 No. 33-98944 and Form S-8 No. 33-99218) and the related Prospectuses of Pulte Corporation for the registration of shares of its common stock of our report dated January 20, 1999, except for the last two paragraphs of Note 11 as to which the date is March 10, 1999, with respect to the consolidated financial statements and schedule of Pulte Corporation included in this Annual Report on Form 10-K for the year ended December 31, 1998 filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Detroit, Michigan March 10, 1999 87 EX-27 5
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 125,198 0 49,140 0 1,455,208 0 0 0 2,349,839 0 542,039 432 0 0 921,010 2,349,839 2,810,151 2,866,521 2,359,253 2,700,555 0 0 51,117 165,814 64,666 101,148 1,035 0 0 102,183 2.38 2.33 Bonds are comprised of subordinated debentures and senior notes. Relates to homebuilding operations. 88
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