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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
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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.
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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