Exhibit 99
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lennar Homes, Inc.:
We have audited the accompanying consolidated balance sheets of Lennar Homes,
Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar
Corporation, as of November 30, 2001 and 2000 and the related consolidated
statements of earnings, stockholder's equity and cash flows for each of the
three years in the period ended November 30, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial position of the Company as of
November 30, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
January 9, 2002
1
LENNAR HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2001 AND 2000 (Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
2001 2000
ASSETS
Cash $ 55,901 $ 59,324
Inventories 969,421 935,491
Investments in unconsolidated partnerships 91,154 41,491
Other assets 81,202 75,085
---------- ----------
$1,197,678 $1,111,391
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and other liabilities $ 201,460 $ 199,175
Mortgage notes payable 8,993 5,439
Due to affiliates 594,745 575,215
---------- ----------
Total liabilities 805,198 779,829
---------- ----------
STOCKHOLDER'S EQUITY:
Common stock, $10 par value; 5,000 shares
authorized, issued and outstanding 50 50
Additional paid-in capital 16,175 16,175
Retained earnings 376,255 315,337
---------- ----------
Total stockholder's equity 392,480 331,562
---------- ----------
$1,197,678 $1,111,391
========== ==========
See accompanying notes to consolidated financial statements.
2
LENNAR HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
REVENUES:
Sales of homes $2,632,946 $2,247,227 $1,848,428
Sales of land and other revenues 89,867 119,453 48,617
---------- ---------- ----------
Total revenues 2,722,813 2,366,680 1,897,045
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of homes sold 2,063,181 1,808,564 1,499,497
Cost of land and other expenses 44,843 94,987 29,470
Selling, general and administrative 295,183 245,691 207,562
Licensing expense to affiliate 129,161 104,677 63,285
Minority interest 42,697 26,874 --
Interest 48,694 41,318 24,419
---------- ---------- ----------
Total costs and expenses 2,623,759 2,322,111 1,824,233
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 99,054 44,569 72,812
INCOME TAXES 38,136 17,382 28,761
---------- ---------- ----------
NET EARNINGS $ 60,918 $ 27,187 $ 44,051
========== ========== ==========
See accompanying notes to consolidated financial statements.
3
LENNAR HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
Balance, November 30, 1998 $ 50 $ 10,211 $244,099 $254,360
1999 net earnings -- 44,051 44,051
-------- -------- -------- --------
Balance, November 30, 1999 50 10,211 288,150 298,411
Contribution of capital from affiliate (see Note 1) -- 5,964 -- 5,964
2000 net earnings -- 27,187 27,187
-------- -------- -------- --------
Balance, November 30, 2000 50 16,175 315,337 331,562
2001 net earnings -- 60,918 60,918
-------- -------- -------- --------
Balance, November 30, 2001 $ 50 $ 16,175 $376,255 $392,480
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
LENNAR HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 60,918 $ 27,187 $ 44,051
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 12,501 11,803 12,167
Equity in (earnings) loss from unconsolidated partnerships (13,340) 851 (3,785)
Changes in assets and liabilities:
(Increase) decrease in inventories (39,614) 67,562 (115,403)
(Increase) decrease in other assets (7,086) (39,477) 14,362
Increase (decrease) in accounts
payable and other liabilities 2,285 (9,698) 26,871
--------- --------- ---------
Net cash provided by (used in) operating activities 15,664 58,228 (21,737)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in investments in unconsolidated
partnerships, net (36,323) 7,231 (23,375)
--------- --------- ---------
Net cash provided by (used in) investing activities (36,323) 7,231 (23,375)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings -- -- 167
Principal payments on borrowings (2,294) (9,548) (23,012)
Increase (decrease) in amounts due to affiliates 19,530 (58,651) 101,530
--------- --------- ---------
Net cash provided by (used in) financing activities 17,236 (68,199) 78,685
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH (3,423) (2,740) 33,573
CASH AT BEGINNING OF YEAR 59,324 62,064 28,491
--------- --------- ---------
CASH AT END OF YEAR $ 55,901 $ 59,324 $ 62,064
========= ========= =========
See Note 1 for supplemental disclosures of cash
flow information related to interest and income taxes paid.
Supplemental disclosures of non-cash investing and
financing activities:
Purchases of inventory financed by sellers $ 5,848 $ 5,250 $ 14,360
See accompanying notes to consolidated financial statements.
5
LENNAR HOMES, INC. and subsidiaries
(A Wholly-Owned Subsidiary of Lennar Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of Lennar Homes, Inc., a wholly-owned
subsidiary of Lennar Corporation, and all subsidiaries and partnerships
(and similar entities) in which a controlling interest is held (the
"Company"). The Company's investments in unconsolidated partnerships in
which a significant, but less than a controlling, interest is held are
accounted for by the equity method. Controlling interest is determined
based on a number of factors, which include the Company's ownership
interest and participation in the management of the partnership. All
significant intercompany transactions and balances have been
eliminated.
During 2001, U.S. Home Corporation, a wholly-owned subsidiary of Lennar
Corporation, made a tax-free contribution of real and personal property
and equity interests of its, and certain of its subsidiaries,
homebuilding business within the State of Texas (the "Texas
Operations"), to Lennar Homes of Texas Land & Construction, Ltd. (the
"Texas Partnership"), a majority-owned subsidiary of Lennar Southwest
Holding Corp., which is a wholly-owned subsidiary of Lennar Homes,
Inc., in exchange for a 40% limited partners' interest in the Texas
Partnership.
The transaction was accounted for as a reorganization of entities under
common control, which is similar to the pooling of interests method of
accounting for business combinations and, accordingly, all prior period
consolidated financial statements have been restated to consolidate the
carrying values of the net assets and historical operations of the
Texas Operations as if this transaction occurred on May 3, 2000, the
date of Lennar Corporation's acquisition of U.S. Home Corporation. At
the date of the acquisition, the Texas Operations had assets of $132.5
million and liabilities of $126.5 million. Minority interest is
classified in "due to affiliates" in the consolidated balance sheets.
The Company operates in one operating and reporting segment -
homebuilding. Homebuilding operations include the sale and construction
of single-family attached and detached homes. These activities also
include the purchase, development and sale of residential land by the
Company and unconsolidated partnerships in which it has investments.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America 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.
Revenue Recognition - Revenue from sales of homes are recognized when
the sales are closed and title passes to the new homeowners. Revenues
from sales of other real estate, including the sale of land, are
recognized when a significant down payment is received, the earnings
process is complete and the collection of any remaining receivables is
reasonably assured.
6
Cash - The Company considers all highly liquid investments purchased
with maturities of three months or less to be cash equivalents. Due to
the short maturity period of the cash equivalents, the carrying amount
of these instruments approximates their fair values. Cash as of
November 30, 2001 and 2000 included $20.1 million and $40.1 million,
respectively, of cash held in escrow for approximately three days.
Inventories - Inventories are stated at cost unless the inventory
within a community is determined to be impaired, in which case the
impaired inventory is written down to fair value. The Company evaluates
long-lived assets for impairment based on the undiscounted future cash
flows of the assets. Write-downs of inventories deemed to be impaired
are recorded as adjustments to the cost basis of the respective
inventories. No impairment existed during the years ended November 30,
2001, 2000 or 1999.
Start-up costs, construction overhead and selling expenses are expensed
as incurred. Homes held for sale are classified as inventories until
delivered. Land, land development, amenities and other costs are
accumulated by specific area and allocated proportionately to homes
within the respective area.
Due to Affiliates - Due to affiliates includes the Company's
transactions in the normal course of business with Lennar Corporation
and/or affiliated companies as well as minority interest.
Interest and Real Estate Taxes - Interest and real estate taxes
attributable to land, homes and operating properties are capitalized
while they are being actively developed. Interest costs relieved from
inventories are included in interest expense. Interest costs result
from the interest related to the Company's outstanding debt as
disclosed in the consolidated balance sheets, as well as debt incurred
by the Company's parent, Lennar Corporation. Lennar Corporation
allocates a portion of its interest to the Company based on the
Company's inventory levels during the year.
Operating Properties and Equipment - Operating properties and equipment
are recorded at cost. The assets are depreciated over their estimated
useful lives using the straight-line method. The estimated useful life
for operating properties is 30 years and for equipment is 2 to 10
years. At November 30, 2001 and 2000, operating properties and
equipment of $7.2 million and $2.1 million, respectively, was included
in other assets in the consolidated balance sheets.
Income Taxes - The Company files a consolidated federal income tax
return with Lennar Corporation. Income taxes have been provided at the
Company level as if the Company filed an income tax return on a
stand-alone basis. Current taxes due are recorded as a payable to
Lennar Corporation, and the deferred portion is recorded as deferred
taxes. Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities, and are measured by using enacted tax
rates expected to apply to taxable income in the years in which those
differences are expected to reverse.
Fair Value of Financial Instruments - The carrying amounts of cash,
accounts payable and mortgage notes payable approximate fair value.
New Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method and requires acquired
intangible assets to be recognized as
7
assets apart from goodwill if certain criteria are met. The Company
adopted SFAS No. 141 for all future acquisitions.
SFAS No. 142 no longer requires or permits the amortization of goodwill
and indefinite-lived assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment
in accordance with this statement. This impairment test uses a fair
value approach rather than the undiscounted cash flows approach
previously required by SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Company adopted SFAS No. 142 on December 1, 2001. Management does not
currently believe that the implementation of SFAS No. 142 will have a
material impact on the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides
accounting guidance for financial accounting and reporting for
impairment or disposal of long-lived assets. SFAS No. 144 supersedes
SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003.
Management does not currently believe that the implementation of SFAS
No. 144 will have a material impact on the Company's financial position
or results of operations.
Reclassification - Certain prior year amounts in the consolidated
financial statements have been reclassified to conform with the 2001
presentation.
2. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS
Summarized condensed financial information on a combined 100% basis
related to the Company's investments in unconsolidated partnerships and
other similar entities (collectively the "Partnerships") accounted for
by the equity method was as follows:
8
November 30,
(In thousands) 2001 2000
--------------------------------------------------------------------
Assets:
Cash $ 15,976 $ 6,586
Land under development 574,667 179,369
Other assets 17,286 18,492
-------- --------
$607,929 $204,447
======== ========
Liabilities and equity:
Accounts payable and other liabilities $ 42,979 $ 29,615
Notes and mortgages payable 339,040 75,265
Equity 225,910 99,567
-------- --------
$607,929 $204,447
======== ========
Years ended November 30, 2001, 2000 and 1999
(In thousands) 2001 2000 1999
--------------------------------------------------------------------------------------------
Revenues $429,834 $ 38,518 $30,210
Costs and expenses 364,209 40,731 28,470
-------- -------- -------
Net earnings (loss) of unconsolidated partnerships $ 65,625 $ (2,213) $ 1,740
======== ======== =======
At November 30, 2001, the Company's equity interest in each of these
Partnerships was 50% or less. The Company's partners generally are
third party homebuilders, land sellers seeking a share of the profits
from development of the land or real estate professionals who do not
have the capital and/or expertise to develop properties by themselves.
The Partnerships follow accounting principles generally accepted in the
United States of America. The Company shares in the profits and losses
of these Partnerships and, when appointed the manager of the
Partnerships, receives fees for the management of the assets. During
2001, 2000 and 1999, the Company received management fees and
reimbursement of expenses from the Partnerships totaling $4.3 million,
$2.1 million and $0.2 million, respectively. The Company does not
include in its income the pro rata Partnership earnings resulting from
land sales to the Company. These amounts are recorded as a reduction of
the cost of purchasing the land from the Partnerships which increases
profits when title passes to a third party homebuyer. Equity in
earnings from unconsolidated partnerships is included in sales of land
and other revenues in the consolidated statements of earnings.
The Company may obtain options or other arrangements under which the
Company can purchase portions of the land held by the Partnerships.
Option prices are generally negotiated prices that approximate fair
value when the Company receives the options. During 2001, 2000 and
1999, $83.6 million, $6.2 million and $1.9 million, respectively, of
the Partnerships' revenues were from land sales to the Company. In
some instances, Lennar Corporation and/or the Company's partners have
provided varying levels of guarantees on certain partnership debt. At
November 30, 2001, Lennar Corporation
9
provided guarantees on $205.9 million of unconsolidated partnership
debt, of which $44.2 million were limited maintenance guarantees.
3. MORTGAGE NOTES PAYABLE
At November 30, 2001 and 2000, the Company had mortgage notes on land
with fixed interest rates ranging from 5.4% to 10.0% due through 2008
with an outstanding balance of $9.0 million and $5.4 million,
respectively. These borrowings are collateralized by land.
4. INCOME TAXES
The provision for income taxes consisted of the following:
Years Ended November 30,
(Dollars in thousands) 2001 2000 1999
----------------------------------------------------------------------
Current:
Federal $ 42,730 $ 30,786 $ 19,527
State 6,151 3,579 3,719
-------- -------- --------
48,881 34,365 23,246
-------- -------- --------
Deferred:
Federal (10,208) (15,454) 4,789
State (537) (1,529) 726
-------- -------- --------
(10,745) (16,983) 5,515
-------- -------- --------
$ 38,136 $ 17,382 $ 28,761
======== ======== ========
The actual income tax expense differs from the "expected" tax expense
for the year (computed by applying the U.S. federal corporate rate of
35% to earnings before income taxes) primarily due to the amount of
state income taxes, net of the related federal tax benefit.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of the assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes.
10
The tax effects of significant temporary differences that give rise to
the net deferred tax asset are as follows:
November 30,
(Dollars in thousands) 2001 2000
----------------------------------------------------------------------
Deferred tax assets:
Acquisition adjustments $ 872 $ 1,729
Reserves and accruals 22,165 12,347
Capitalized expenses 17,021 15,571
Investments in unconsolidated partnerships 4,259 2,526
Other 5,239 4,211
------- -------
Total deferred tax assets 49,556 36,384
------- -------
Deferred tax liabilities:
Installment sales 28 804
Other 13,251 10,048
------- -------
Total deferred tax liabilities 13,279 10,852
------- -------
Net deferred tax asset $36,277 $25,532
======= =======
The net deferred tax asset is included in other assets in the
consolidated balance sheets.
5. RELATED PARTY TRANSACTIONS
On April 1, 1999, Lennar Corporation entered into an agreement with
Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned
subsidiary of Lennar Corporation, whereby Greystone has granted to the
Company the right to use certain property for a fee. Unpaid fees bear
interest at 9% annually. The fee and its related interest comprise the
classification "licensing expense to affiliate" in the consolidated
statements of earnings. On a quarterly basis, these amounts are paid by
Lennar Corporation to Greystone. The amounts paid by Lennar Corporation
on behalf of the Company are included in due to affiliates in the
Company's consolidated balance sheets, and bear interest at 9%
annually. The term of the agreement ends on November 30, 2002, with
automatic one-year renewals unless terminated earlier by three-months
written notice by either party.
During 2001 and 2000, Lennar Corporation and its subsidiaries advanced
funds to the Company which had no stated repayment terms. At November
30, 2001 and 2000, the Company had a payable to affiliates of $594.7
million and $575.2 million, respectively.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain subsidiaries are parties to various claims,
legal actions and complaints arising in the ordinary course of
business. In the opinion of management, the disposition of these
matters will not have a material adverse effect on the results of
operations and financial condition of the Company.
11
The Company is subject to the usual obligations associated with
entering into contracts for the purchase (including option contracts),
development and sale of real estate, which it does in the routine
conduct of its business. Option contracts for the purchase of land
permit the Company to acquire portions of properties when it is ready
to build homes on them. The use of option contracts allows the Company
to reduce the financial risk of adverse market conditions associated
with long-term land holdings. At November 30, 2001, the Company had
$19.6 million of primarily non-refundable option deposits and advanced
costs with entities including unconsolidated partnerships.
The Company has entered into agreements to lease certain office
facilities and equipment under operating leases. Future minimum
payments under the noncancelable leases are as follows: 2002 - $5.2
million; 2003 - $4.2 million; 2004 - $3.2 million; 2005 - $1.6 million;
2006 - $1.1 million and thereafter - $3.0 million. Rental expense for
the years ended November 30, 2001, 2000 and 1999 was $9.0 million,
$10.4 million and $8.0 million, respectively.
The Company is committed, under various letters of credit, to perform
certain development and construction activities and provide certain
guarantees in the normal course of business. Outstanding letters of
credit under these arrangements totaled $85.0 million at November 30,
2001. The Company also had outstanding performance and surety bonds
with estimated costs to complete of $422.0 million related principally
to its obligations for site improvements at various projects at
November 30, 2001. The Company does not believe that any such bonds are
likely to be drawn upon.
The Company has guaranteed obligations of Lennar Corporation with
regard to certain issues of its outstanding debt, and the stock of the
Company has been pledged as collateral for Lennar Corporation's
obligations with regard to that debt. The Company knows of no event of
default which would require it to satisfy these guarantees and,
therefore, the fair value of these contingent liabilities is considered
immaterial.
12
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lennar Southwest Holding Corp.:
We have audited the accompanying consolidated balance sheets of Lennar Southwest
Holding Corp. and subsidiaries (the "Company"), a wholly-owned subsidiary of
Lennar Homes, Inc., as of November 30, 2001 and 2000 and the related
consolidated statements of earnings, stockholder's equity and cash flows for
each of the three years in the period ended November 30, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial position of the Company as of
November 30, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
January 9, 2002
13
LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2001 AND 2000 (Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
2001 2000
ASSETS
Cash $ 43,379 $ 31,330
Inventories 398,779 357,549
Investments in unconsolidated partnerships 12,231 6,563
Other assets 32,370 22,174
-------- --------
$486,759 $417,616
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and other liabilities $ 53,043 $ 37,705
Mortgage note payable -- 1,061
Due to affiliates 352,806 318,481
-------- --------
Total liabilities 405,849 357,247
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 5,000 shares
authorized, issued and outstanding 5 5
Additional paid-in capital 9,296 9,296
Retained earnings 71,609 51,068
-------- --------
Total stockholder's equity 80,910 60,369
-------- --------
$486,759 $417,616
======== ========
See accompanying notes to consolidated financial statements.
14
LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
REVENUES:
Sales of homes $1,013,847 $ 837,927 $ 563,315
Sales of land and other revenues 35,221 29,270 15,986
---------- ---------- ----------
Total revenues 1,049,068 867,197 579,301
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of homes sold 788,978 683,260 457,306
Cost of land and other expenses 14,058 12,648 4,942
Selling, general and administrative 109,215 81,540 51,193
Licensing expense to affiliate 43,731 35,069 19,539
Minority interest 42,697 26,874 --
Interest 16,989 12,313 5,286
---------- ---------- ----------
Total costs and expenses 1,015,668 851,704 538,266
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 33,400 15,493 41,035
INCOME TAXES 12,859 6,042 16,209
---------- ---------- ----------
NET EARNINGS $ 20,541 $ 9,451 $ 24,826
========== ========== ==========
See accompanying notes to consolidated financial statements.
15
LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
Balance, November 30, 1998 $ 5 $ 3,332 $16,791 $20,128
1999 net earnings -- -- 24,826 24,826
------- ------- ------- -------
Balance, November 30, 1999 5 3,332 41,617 44,954
Contribution of capital from affiliate (see Note 1) -- 5,964 -- 5,964
2000 net earnings -- -- 9,451 9,451
------- ------- ------- -------
Balance, November 30, 2000 5 9,296 51,068 60,369
2001 net earnings -- -- 20,541 20,541
------- ------- ------- -------
Balance, November 30, 2001 $ 5 $ 9,296 $71,609 $80,910
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
16
LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 20,541 $ 9,451 $ 24,826
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 1,934 1,482 686
Equity in earnings from unconsolidated partnerships (4,688) (547) (759)
Changes in assets and liabilities:
Increase in inventories (42,936) (40,618) (53,473)
Increase in other assets (10,424) (2,434) (5,817)
Increase (decrease) in accounts payable and other liabilities 15,338 (977) 6,483
-------- -------- --------
Net cash used in operating activities (20,235) (33,643) (28,054)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in investments in unconsolidated partnerships, net (980) (3,789) 1,579
-------- -------- --------
Net cash provided by (used in) investing activities (980) (3,789) 1,579
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowing (1,061) (1,363) --
Increase in amounts due to affiliates 34,325 44,160 37,667
-------- -------- --------
Net cash provided by financing activities 33,264 42,797 37,667
-------- -------- --------
NET INCREASE IN CASH 12,049 5,365 11,192
CASH AT BEGINNING OF YEAR 31,330 25,965 14,773
-------- -------- --------
CASH AT END OF YEAR $ 43,379 $ 31,330 $ 25,965
======== ======== ========
See Note 1 for supplemental disclosures of cash flow information related to
interest and income taxes paid.
See accompanying notes to consolidated financial statements.
17
LENNAR SOUTHWEST HOLDING CORP. and subsidiaries
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of Lennar Southwest Holding Corp. and
all subsidiaries and partnerships (and similar entities) in which a
controlling interest is held (the "Company"). The Company's investments
in unconsolidated partnerships in which a significant, but less than a
controlling, interest is held are accounted for by the equity method.
Controlling interest is determined based on a number of factors, which
include the Company's ownership interest and participation in the
management of the partnership. All significant intercompany
transactions have been eliminated. The Company is a wholly-owned
subsidiary of Lennar Homes, Inc. which is a wholly-owned subsidiary of
Lennar Corporation.
During 2001, U.S. Home Corporation, a wholly-owned subsidiary of Lennar
Corporation, made a tax-free contribution of real and personal property
and equity interests of its, and certain of its subsidiaries,
homebuilding business within the State of Texas (the "Texas
Operations"), to Lennar Homes of Texas Land & Construction, Ltd. (the
"Texas Partnership"), a majority-owned subsidiary of Lennar Southwest
Holding Corp., in exchange for a 40% limited partners' interest in the
Texas Partnership.
The transaction was accounted for as a reorganization of entities under
common control, which is similar to the pooling of interests method of
accounting for business combinations and, accordingly, all prior period
consolidated financial statements have been restated to consolidate the
carrying values of the net assets and historical operations of the
Texas Operations as if this transaction occurred on May 3, 2000, the
date of Lennar Corporation's acquisition of U.S. Home Corporation. At
the date of the acquisition, the Texas Operations had assets of $132.5
million and liabilities of $126.5 million. Minority interest is
classified in "due to affiliates" in the consolidated balance sheets.
The Company operates in one operating and reporting segment -
homebuilding. Homebuilding operations include the sale and construction
of single-family attached and detached homes. These activities also
include the purchase, development and sale of residential land by the
Company and unconsolidated partnerships in which it has investments.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America 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.
Revenue Recognition - Revenue from sales of homes are recognized when
the sales are closed and title passes to the new homeowners. Revenues
from sales of other real estate including the sales of land are
recognized when a significant down payment is received, the earnings
process is complete and the collection of any remaining receivables is
reasonably assured.
Cash - The Company considers all highly liquid investments purchased
with maturities of three months or less to be cash equivalents. Due to
the short maturity period of the cash equivalents, the carrying amount
of these instruments approximates their fair values. Cash as of
November 30, 2001 and 2000
18
included $10.3 million and $14.3 million, respectively, of cash held in
escrow for approximately three days.
Inventories - Inventories are stated at cost unless the inventory
within a community is determined to be impaired, in which case the
impaired inventory is written down to fair value. The Company evaluates
long-lived assets for impairment based on the undiscounted future cash
flows of the assets. Write-downs of inventories deemed to be impaired
are recorded as adjustments to the cost basis of the respective
inventories. No impairment existed during the years ended November 30,
2001, 2000 or 1999.
Start-up costs, construction overhead and selling expenses are expensed
as incurred. Homes held for sale are classified as inventories until
delivered. Land, land development, amenities and other costs are
accumulated by specific area and allocated proportionately to homes
within the respective area.
Due to Affiliates - Due to affiliates includes the Company's
transactions in the normal course of business with Lennar Corporation
and/or affiliated companies as well as minority interest.
Interest and Real Estate Taxes - Interest and real estate taxes
attributable to land and homes are capitalized while they are being
actively developed. Interest costs relieved from inventories are
included in interest expense. Interest costs result from the interest
related to the Company's outstanding debt as disclosed in the
consolidated balance sheets, as well as debt incurred by Lennar
Corporation. Lennar Corporation allocates a portion of its interest to
the Company based on the Company's inventory levels during the year.
Operating Equipment - Operating equipment is recorded at cost. The
assets are depreciated over their estimated useful lives using the
straight-line method. The estimated useful life is 2 to 10 years. At
November 30, 2001 and 2000, operating equipment of $1.0 million and
$1.1 million, respectively, was included in other assets in the
consolidated balance sheets.
Income Taxes - The Company files a consolidated federal income tax
return with Lennar Corporation. Income taxes have been provided at the
Company level as if the Company filed an income tax return on a
stand-alone basis. Current taxes due are recorded as a payable to
Lennar Corporation, and the deferred portion is recorded as deferred
taxes. Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities, and are measured by using enacted tax
rates expected to apply to taxable income in the years in which those
differences are expected to reverse.
Fair Value of Financial Instruments - The carrying amounts of cash and
accounts payable approximate fair value.
New Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method and requires acquired
intangible assets to be recognized as assets apart from goodwill if
certain criteria are met. The Company adopted SFAS No. 141 for all
future acquisitions.
SFAS No. 142 no longer requires or permits the amortization of goodwill
and indefinite-lived assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment
in accordance with this statement. This impairment test uses a fair
value approach rather than the undiscounted cash flows approach
previously required by SFAS No. 121, Accounting for the
19
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. The Company adopted SFAS No. 142 on December 1, 2001.
Management does not currently believe that the implementation of SFAS
No. 142 will have a material impact on the Company's financial position
or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides
accounting guidance for financial accounting and reporting for
impairment or disposal of long-lived assets. SFAS No. 144 supersedes
SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003.
Management does not currently believe that the implementation of SFAS
No. 144 will have a material impact on the Company's financial position
or results of operations.
Reclassification - Certain prior year amounts in the consolidated
financial statements have been reclassified to conform with the 2001
presentation.
2. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS
Summarized condensed financial information on a combined 100% basis
related to the Company's investments in unconsolidated partnerships and
other similar entities (collectively the "Partnerships") accounted for
by the equity method was as follows:
November 30,
(In thousands) 2001 2000
---------------------------------------------------------------
Assets:
Cash $ 2,207 $ 1,617
Land under development 69,774 34,749
Other assets 294 5,288
------- -------
$72,275 $41,654
======= =======
Liabilities and equity:
Accounts payable and other liabilities $ 7,350 $ 5,897
Notes and mortgages payable 42,099 23,227
Equity 22,826 12,530
------- -------
$72,275 $41,654
======= =======
Years ended November 30, 2001, 2000 and 1999
(In thousands) 2001 2000 1999
---------------------------------------------------------------------------------
Revenues $ 26,568 $ 6,554 $ 7,131
Costs and expenses 18,147 6,517 6,659
-------- ------- -------
Net earnings of unconsolidated partnerships $ 8,421 $ 37 $ 472
======== ======= =======
20
At November 30, 2001, the Company's equity interest in each of these
Partnerships was 50% or less. The Company's partners generally are
third party homebuilders, land sellers seeking a share of the profits
from development of the land or real estate professionals who do not
have the capital and/or expertise to develop properties by themselves.
The Partnerships follow accounting principles generally accepted in the
United States of America. The Company shares in the profits and losses
of these Partnerships and, when appointed the manager of the
Partnerships, receives fees for the management of the assets. During
2001, 2000 and 1999, the Company received management fees and
reimbursement of expenses from the Partnerships totaling $0.5 million,
$0.3 million and $0.1 million, respectively. The Company does not
include in its income the pro rata Partnership earnings resulting from
land sales to the Company. These amounts are recorded as a reduction of
the cost of purchasing the land from the Partnerships which increases
profits when title passes to a third party homebuyer. Equity in
earnings from unconsolidated partnerships is included in sales of land
and other revenues in the consolidated statements of earnings.
The Company may obtain options or other arrangements under which the
Company can purchase portions of the land held by the Partnerships.
Option prices are generally negotiated prices that approximate fair
value when the Company receives the options. During 2001, 2000 and
1999, $11.5 million, $3.6 million, and $1.9 million, respectively, of
the Partnerships' revenues were from land sales to the Company.
3. INCOME TAXES
The provision for income taxes consisted of the following:
Years Ended November 30,
(Dollars in thousands) 2001 2000 1999
---------------------------------------------------------------------
Current:
Federal $ 12,909 $ 10,596 $ 12,172
State 1,858 1,232 2,318
-------- -------- --------
14,767 11,828 14,490
-------- -------- --------
Deferred:
Federal (1,813) (5,265) 1,493
State (95) (521) 226
-------- -------- --------
(1,908) (5,786) 1,719
-------- -------- --------
$ 12,859 $ 6,042 $ 16,209
======== ======== ========
The actual income tax expense differs from the "expected" tax expense
for the year (computed by applying the U.S. federal corporate rate of
35% to earnings before income taxes) primarily due to the amount of
state income taxes, net of the related federal tax benefit.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of the assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. The tax effects of significant temporary differences that
give rise to the net deferred tax asset are as follows:
21
November 30,
(Dollars in thousands) 2001 2000
---------------------------------------------------------------------
Deferred tax assets:
Capitalized expenses $5,166 $4,035
------ ------
Total deferred tax assets 5,166 4,035
------ ------
Deferred tax liabilities:
Other 628 1,405
------ ------
Total deferred tax liabilities 628 1,405
------ ------
Net deferred tax asset $4,538 $2,630
====== ======
The net deferred tax asset is included in other assets in the
consolidated balance sheets.
4. RELATED PARTY TRANSACTIONS
On April 1, 1999, Lennar Corporation entered into an agreement with
Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned
subsidiary of Lennar Corporation, whereby Greystone has granted to the
Company the right to use certain property for a fee. Unpaid fees bear
interest at 9% annually. The fee and its related interest comprise the
classification "licensing expense to affiliate" in the consolidated
statements of earnings. On a quarterly basis, these amounts are paid by
Lennar Corporation to Greystone. The amounts paid by Lennar Corporation
on behalf of the Company are included in due to affiliates in the
Company's consolidated balance sheets, and bear interest at 9%
annually. The term of the agreement ends on November 30, 2002, with
automatic one-year renewals unless terminated earlier by three-months
written notice by either party.
During 2001 and 2000, Lennar Corporation and its subsidiaries advanced
funds to the Company which had no stated repayment terms. At November
30, 2001 and 2000, the Company had a payable to affiliates of $352.8
million and $318.5 million, respectively.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain subsidiaries are parties to various claims,
legal actions and complaints arising in the ordinary course of
business. In the opinion of management, the disposition of these
matters will not have a material adverse effect on the financial
condition or results of operations of the Company.
The Company is subject to the usual obligations associated with
entering into contracts for the purchase (including option contracts),
development and sale of real estate, which it does in the routine
conduct of its business. Option contracts for the purchase of land
permit the Company to acquire portions of properties when it is ready
to build homes on them. The use of option contracts allows the Company
to reduce the financial risk of adverse market conditions associated
with long-term land holdings. At November 30, 2001, the Company had
$8.1 million of primarily non-refundable option deposits and advanced
costs with entities including unconsolidated partnerships.
The Company has entered into agreements to lease certain office
facilities and equipment under operating leases. Future minimum
payments under the noncancelable leases are as follows: 2002 - $1.3
million; 2003 - $1.2 million; 2004 - $1.1 million; 2005 - $1.0 million;
2006 - $1.0 million and
22
thereafter - $2.6 million. Rental expense for the years ended November
30, 2001, 2000, and 1999 was $2.0 million, $1.5 million, and $0.7
million, respectively.
The Company is committed, under various letters of credit, to perform
certain development and construction activities and provide certain
guarantees in the normal course of business. Outstanding letters of
credit under these arrangements totaled $18.5 million at November 30,
2001. The Company also had outstanding performance and surety bonds
with estimated costs to complete of $12.8 million related principally
to its obligations for site improvements at various projects at
November 30, 2001. The Company does not believe that any such bonds are
likely to be drawn upon.
The Company has guaranteed obligations of Lennar Corporation with
regard to certain issues of its outstanding debt, and the stock of the
Company has been pledged as collateral for Lennar Corporation's
obligations with regard to that debt. The Company knows of no event of
default which would require it to satisfy these guarantees and,
therefore, the fair value of these contingent liabilities is considered
immaterial.
23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lennar Homes of California, Inc.:
We have audited the accompanying consolidated balance sheets of Lennar Homes of
California, Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of
Lennar Homes, Inc., as of November 30, 2001 and 2000 and the related
consolidated statements of earnings, stockholder's equity and cash flows for
each of the three years in the period ended November 30, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial position of the Company as of
November 30, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
January 9, 2002
24
LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2001 AND 2000 (Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
2001 2000
ASSETS
Inventories $151,098 $145,067
Investments in unconsolidated partnerships 74,002 25,064
Other assets 2,932 3,010
-------- --------
$228,032 $173,141
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and other liabilities $ 32,267 $ 33,902
Mortgage note payable 1,800 2,000
Due to affiliates 132,652 87,486
-------- --------
Total liabilities 166,719 123,388
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 5,000 shares authorized,
issued and outstanding 5 5
Retained earnings 61,308 49,748
-------- --------
Total stockholder's equity 61,313 49,753
-------- --------
$228,032 $173,141
======== ========
See accompanying notes to consolidated financial statements.
25
LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
REVENUES:
Sales of homes $398,858 $419,508 $348,084
Sales of land and other revenues 24,484 16,606 520
-------- -------- --------
Total revenues 423,342 436,114 348,604
-------- -------- --------
COSTS AND EXPENSES:
Cost of homes sold 315,727 327,229 265,730
Cost of land and other expenses 13,093 18,702 3,588
Selling, general and administrative 45,135 44,918 38,946
Licensing expense to affiliate 21,114 20,696 11,039
Interest 9,477 11,880 7,555
-------- -------- --------
Total costs and expenses 404,546 423,425 326,858
-------- -------- --------
EARNINGS BEFORE INCOME TAXES 18,796 12,689 21,746
INCOME TAXES 7,236 4,949 8,590
-------- -------- --------
NET EARNINGS $ 11,560 $ 7,740 $ 13,156
======== ======== ========
See accompanying notes to consolidated financial statements.
26
LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
Common Retained
Stock Earnings Total
Balance, November 30, 1998 $ 5 $28,852 $28,857
1999 net earnings -- 13,156 13,156
------- ------- -------
Balance, November 30, 1999 5 42,008 42,013
2000 net earnings -- 7,740 7,740
------- ------- -------
Balance, November 30, 2000 5 49,748 49,753
2001 net earnings -- 11,560 11,560
------- ------- -------
Balance, November 30, 2001 $ 5 $61,308 $61,313
======= ======= =======
See accompanying notes to consolidated financial statements.
27
LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 11,560 $ 7,740 $ 13,156
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,103 3,166 5,215
Equity in (earnings) loss from unconsolidated partnerships (8,044) 3,783 247
Changes in assets and liabilities:
(Increase) decrease in inventories (8,886) 69,468 1,635
(Increase) decrease in other assets (170) 364 1,646
Increase (decrease) in accounts payable and other liabilities (1,635) 6,934 4,567
-------- -------- --------
Net cash provided by (used in) operating activities (4,072) 91,455 26,466
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investments in unconsolidated partnerships, net (40,894) (3,193) (13,741)
-------- -------- --------
Net cash used in investing activities (40,894) (3,193) (13,741)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings -- -- 167
Principal payments on borrowings (200) (200) (12,682)
Increase (decrease) in amounts due to affiliates 45,166 (88,062) (3,630)
-------- -------- --------
Net cash provided by (used in) financing activities 44,966 (88,262) (16,145)
-------- -------- --------
NET DECREASE IN CASH -- -- (3,420)
CASH AT BEGINNING OF YEAR -- -- 3,420
-------- -------- --------
CASH AT END OF YEAR $ -- $ -- $ --
======== ======== ========
See Note 1 for supplemental disclosures of cash flow information related to
interest and income taxes paid
Supplemental disclosures of non-cash investing and financing activities:
Purchases of inventory financed by sellers $ -- $ -- $ 11,680
See accompanying notes to consolidated financial statements.
28
LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of Lennar Homes of California, Inc. and
all subsidiaries and partnerships (and similar entities) in which a
controlling interest is held (the "Company"). The Company is a
wholly-owned subsidiary of Lennar Homes, Inc. which is a wholly-owned
subsidiary of Lennar Corporation. The Company's investments in
unconsolidated partnerships in which a significant, but less than a
controlling, interest is held are accounted for by the equity method.
Controlling interest is determined based on a number of factors, which
include the Company's ownership interest and participation in the
management of the partnership. All significant intercompany
transactions and balances have been eliminated.
The Company operates in one operating and reporting segment -
homebuilding. Homebuilding operations include the sale and construction
of single-family attached and detached homes. These activities also
include the purchase, development and sale of residential land by the
Company and unconsolidated partnerships in which it has investments.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America 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.
Revenue Recognition - Revenue from sales of homes are recognized when
the sales are closed and title passes to the new homeowners. Revenues
from sales of other real estate, including the sale of land, are
recognized when a significant down payment is received, the earnings
process is complete and the collection of any remaining receivables is
reasonably assured.
Cash - The Company considers all highly liquid investments purchased
with maturities of three months or less to be cash equivalents.
Inventories - Inventories are stated at cost unless the inventory
within a community is determined to be impaired, in which case the
impaired inventory is written down to fair value. The Company evaluates
long-lived assets for impairment based on the undiscounted future cash
flows of the assets. Write-downs to inventories deemed to be impaired
are recorded as adjustments to the cost basis of the respective
inventories. No impairment existed during the years ended November 30,
2001, 2000 or 1999.
Start-up costs, construction overhead and selling expenses are expensed
as incurred. Homes held for sale are classified as inventories until
delivered. Land, land development, amenities and other costs are
accumulated by specific area and allocated proportionately to homes
within the respective area.
Due to Affiliates - The Company has transactions in the normal course
of business with Lennar Corporation and/or affiliated companies.
29
Interest and Real Estate Taxes - Interest and real estate taxes
attributable to land and homes are capitalized while they are being
actively developed. Interest costs relieved from inventories are
included in interest expense. Interest costs result from the interest
related to the Company's outstanding debt as disclosed in the
consolidated balance sheets as well as debt incurred by Lennar
Corporation. Lennar Corporation allocates a portion of its interest to
the Company based on the Company's inventory levels during the year.
Operating Equipment - Operating equipment is recorded at cost. The
assets are depreciated over their estimated useful lives using the
straight-line method. The estimated useful life is 2 to 10 years. At
November 30, 2001 and 2000, operating equipment of $0.4 million and
$0.5 million, respectively, was included in other assets in the
consolidated balance sheets.
Income Taxes - The Company files a consolidated federal income tax
return with Lennar Corporation. Income taxes have been provided at the
Company level as if the Company filed an income tax return on a
stand-alone basis. Current taxes due are recorded as a payable to
Lennar Corporation, and the deferred portion is recorded as deferred
taxes. Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities, and are measured by using enacted tax
rates expected to apply to taxable income in the years in which those
differences are expected to reverse.
Fair Value of Financial Instruments - The carrying amounts of accounts
payable and the mortgage note payable approximate fair value.
New Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method and requires acquired
intangible assets to be recognized as assets apart from goodwill if
certain criteria are met. The Company adopted SFAS No. 141 for all
future acquisitions.
SFAS No. 142 no longer requires or permits the amortization of goodwill
and indefinite-lived assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment
in accordance with this statement. This impairment test uses a fair
value approach rather than the undiscounted cash flows approach
previously required by SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Company adopted SFAS No. 142 on December 1, 2001. Management does not
currently believe that the implementation of SFAS No. 142 will have a
material impact on the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides
accounting guidance for financial accounting and reporting for
impairment or disposal of long-lived assets. SFAS No. 144 supersedes
SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003.
Management does not currently believe that the implementation of SFAS
No. 144 will have a material impact on the Company's financial position
or results of operations.
Reclassification - Certain prior year amounts in the consolidated
financial statements have been reclassified to conform with the 2001
presentation.
30
2. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS
Summarized condensed financial information on a combined 100% basis
related to the Company's investments in unconsolidated partnerships and
other similar entities (collectively the "Partnerships") accounted for
by the equity method was as follows:
November 30,
(In thousands) 2001 2000
-----------------------------------------------------------------------
Assets:
Cash $ 13,566 $ 2,531
Land under development 500,429 119,609
Other assets 13,943 10,618
-------- --------
$527,938 $132,758
======== ========
Liabilities and equity:
Accounts payable and other liabilities $ 34,661 $ 21,683
Notes and mortgages payable 295,020 45,742
Equity 198,257 65,333
-------- --------
$527,938 $132,758
======== ========
Years ended November 30, 2001, 2000 and 1999
(In thousands) 2001 2000 1999
---------------------------------------------- -------------------------------
Revenues $403,255 $ 26,334 $ 23,064
Costs and expenses 345,493 30,400 21,610
-------- -------- ---------
Net earnings (loss) of unconsolidated
partnerships $ 57,762 $ (4,066) $ 1,454
======== ======== ========
At November 30, 2001, the Company's equity interest in each of these
Partnerships was 50% or less. The Company's partners generally are
third party homebuilders, land sellers seeking a share of the profits
from development of the land or real estate professionals who do not
have the capital and/or expertise to develop properties by themselves.
The Partnerships follow accounting principles generally accepted in the
United States of America. The Company shares in the profits and losses
of these Partnerships and, when appointed the manager of the
Partnerships, receives fees for the management of the assets. During
2001 and 2000, the Company received management fees and reimbursement
of expenses from the Partnerships totaling $3.8 million and $1.6
million, respectively. The Company does not include in its income the
pro rata Partnership earnings resulting from land sales to the Company.
These amounts are recorded as a reduction of the cost of purchasing the
land from the Partnerships which increases profits when title passes to
a third party homebuyer. Equity in earnings from unconsolidated
partnerships is included in sales of land and other revenues in the
consolidated statements of earnings.
31
The Company may obtain options or other arrangements under which the
Company can purchase portions of the land held by the Partnerships.
Option prices are generally negotiated prices that approximate fair
value when the Company receives the options. During 2001, $72.1 million
of the Partnerships' revenues were from land sales to the Company. In
some instances, Lennar Corporation and/or the Company's partners have
provided varying levels of guarantees on certain partnership debt. At
November 30, 2001, Lennar Corporation provided guarantees on $205.9
million of unconsolidated partnership debt, of which $44.2 million were
limited maintenance guarantees.
3. MORTGAGE NOTE PAYABLE
At November 30, 2001 and 2000, the Company had a mortgage note on land
bearing interest at 10.0% maturing in 2008 with an outstanding balance
of $1.8 million and $2.0 million, respectively. This borrowing is
collateralized by land.
4. INCOME TAXES
The provision for income taxes consisted of the following:
Years Ended November 30,
(Dollars in thousands) 2001 2000 1999
-----------------------------------------------------------------------
Current:
Federal $ 6,603 $ 7,972 $ 4,095
State 950 927 780
------- ------- -------
7,553 8,899 4,875
------- ------- -------
Deferred:
Federal (301) (3,594) 3,226
State (16) (356) 489
------- ------- -------
(317) (3,950) 3,715
------- ------- -------
$ 7,236 $ 4,949 $ 8,590
======= ======= =======
The actual income tax expense differs from the "expected" tax expense
for the year (computed by applying the U.S. federal corporate rate of
35% to earnings before income taxes) primarily due to the amount of
state income taxes, net of the related federal tax benefit.
32
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of the assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. The tax effects of significant temporary differences that
give rise to the net deferred tax asset are as follows:
November 30,
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------------
Deferred tax assets:
Capitalized expenses $1,958 $1,637
Other 1,789 1,789
------ ------
Total deferred tax assets 3,747 3,426
------ ------
Deferred tax liabilities:
Other 2,235 2,231
------ ------
Total deferred tax liabilities 2,235 2,231
------ ------
Net deferred tax asset $1,512 $1,195
====== ======
The net deferred tax asset is included in other assets in the
consolidated balance sheets.
5. RELATED PARTY TRANSACTIONS
On April 1, 1999, Lennar Corporation entered into an agreement with
Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned
subsidiary of Lennar Corporation, whereby Greystone has granted to the
Company the right to use certain property for a fee. Unpaid fees bear
interest at 9% annually. The fee and its related interest comprise the
classification "licensing expense to affiliate" in the consolidated
statements of earnings. On a quarterly basis, these amounts are paid by
Lennar Corporation to Greystone. The amounts paid by Lennar Corporation
on behalf of the Company are included in due to affiliates in the
Company's consolidated balance sheets, and bear interest at 9%
annually. The term of the agreement ends on November 30, 2002, with
automatic one-year renewals unless terminated earlier by three-months
written notice by either party.
During 2001 and 2000, Lennar Corporation and its subsidiaries advanced
funds to the Company which had no stated repayment terms. At November
30, 2001 and 2000, the Company had a payable to affiliates of
$132.7 million and $87.5 million, respectively.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain subsidiaries are parties to various claims,
legal actions and complaints arising in the ordinary course of
business. In the opinion of management, the disposition of these
matters will not have a material adverse effect on the financial
condition or results of operations of the Company.
The Company is subject to the usual obligations associated with
entering into contracts for the purchase (including option contracts),
development and sale of real estate, which it does in the routine
conduct of its business. Option contracts for the purchase of land
permit the Company to acquire portions of properties when it is ready
to build homes on them. The use of option contracts allows the Company
to
33
reduce the financial risk of adverse market conditions associated with
long-term land holdings. At November 30, 2001, the Company had $4.3
million of primarily non-refundable option deposits and advanced costs
with entities including unconsolidated partnerships.
The Company has entered into agreements to lease certain office
facilities and equipment under operating leases. Future minimum
payments under the noncancelable leases are as follows: 2002 -
$1.0 million; 2003 - $0.8 million; 2004 - $0.5 million and 2005 -
$0.1 million. Rental expense for the years ended November 30, 2001,
2000 and 1999 was $1.4 million, $1.7 million and $0.7 million,
respectively.
The Company is committed, under various letters of credit, to perform
certain development and construction activities and provide certain
guarantees in the normal course of business. Outstanding letters of
credit under these arrangements totaled $24.8 million at November 30,
2001. The Company also had outstanding performance and surety bonds
with estimated costs to complete of $182.6 million related principally
to its obligations for site improvements at various projects at
November 30, 2001. The Company does not believe that any such bonds are
likely to be drawn upon.
The Company has guaranteed obligations of Lennar Corporation with
regard to certain issues of its outstanding debt, and the stock of the
Company has been pledged as collateral for Lennar Corporation's
obligations with regard to that debt. The Company knows of no event of
default which would require it to satisfy these guarantees and,
therefore, the fair value of these contingent liabilities is considered
immaterial.
34
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Greystone Homes, Inc.:
We have audited the accompanying consolidated balance sheets of Greystone Homes,
Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of U.S. Home
Corporation, as of November 30, 2001 and 2000 and the related consolidated
statements of earnings, stockholder's equity and cash flows for each of the
three years in the period ended November 30, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial position of the Company as of
November 30, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
January 9, 2002
35
GREYSTONE HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of U.S. Home Corporation)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2001 AND 2000 (Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
2001 2000
ASSETS
Inventories $302,569 $313,613
Goodwill, net 36,451 38,742
Investments in unconsolidated partnerships 15,202 1,707
Other assets 26,032 29,502
Due from affiliates 241,713 118,656
-------- --------
$621,967 $502,220
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and other liabilities $ 52,166 $ 51,262
Mortgage note payable -- 672
-------- --------
Total liabilities 52,166 51,934
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value; 1,000 shares authorized,
issued and outstanding -- --
Additional paid-in capital 216,073 216,073
Retained earnings 353,728 234,213
-------- --------
Total stockholder's equity 569,801 450,286
-------- --------
$621,967 $502,220
======== ========
See accompanying notes to consolidated financial statements.
36
GREYSTONE HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of U.S. Home Corporation)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
REVENUES:
Sales of homes $789,141 $646,206 $823,317
Sales of land and other revenues 22,504 110,822 100,223
Licensing revenues from affiliates 129,161 104,677 63,285
-------- -------- --------
Total revenues 940,806 861,705 986,825
-------- -------- --------
COSTS AND EXPENSES:
Cost of homes sold 602,462 495,930 634,103
Cost of land and other expenses 22,693 99,606 91,876
Selling, general and administrative 99,536 89,017 86,023
Interest 21,782 20,944 23,159
-------- -------- --------
Total costs and expenses 746,473 705,497 835,161
-------- -------- --------
EARNINGS BEFORE INCOME TAXES 194,333 156,208 151,664
INCOME TAXES 74,818 60,921 59,907
-------- -------- --------
NET EARNINGS $119,515 $ 95,287 $ 91,757
======== ======== ========
See accompanying notes to consolidated financial statements.
37
GREYSTONE HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of U.S. Home Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
Balance, November 30, 1998 $-- $216,073 $ 47,169 $263,242
1999 net earnings -- -- 91,757 91,757
--- -------- -------- --------
Balance, November 30, 1999 -- 216,073 138,926 354,999
2000 net earnings -- -- 95,287 95,287
--- -------- -------- --------
Balance, November 30, 2000 -- 216,073 234,213 450,286
2001 net earnings -- -- 119,515 119,515
--- -------- -------- --------
Balance, November 30, 2001 $-- $216,073 $353,728 $569,801
=== ======== ======== ========
See accompanying notes to consolidated financial statements.
38
GREYSTONE HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of U.S. Home Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 119,515 $ 95,287 $ 91,757
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization, net 9,984 12,874 13,516
Equity in (earnings) loss from unconsolidated partnerships (6) (8) 112
Changes in assets and liabilities:
Decrease in inventories 3,605 45,449 41,966
(Increase) decrease in other assets 3,216 (1,388) 18,953
Increase (decrease) in accounts payable and other liabilities 904 12,245 (971)
--------- --------- ---------
Net cash provided by operating activities 137,218 164,459 165,333
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investments in unconsolidated partnerships, net (13,489) (161) (1,561)
--------- --------- ---------
Net cash used in investing activities (13,489) (161) (1,561)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings (672) (7,368) (143,255)
Increase in amounts due from affiliates (123,057) (118,656) --
Decrease in amounts due to affiliates -- (38,274) (41,514)
--------- --------- ---------
Net cash used in financing activities (123,729) (164,298) (184,769)
--------- --------- ---------
NET DECREASE IN CASH -- -- (20,997)
CASH AT BEGINNING OF YEAR -- -- 20,997
--------- --------- ---------
CASH AT END OF YEAR $ -- $ -- $ --
========= ========= =========
See Note 1 for supplemental disclosures of cash flow information
related to interest and income taxes paid
Supplemental disclosures of non-cash investing and financing activities:
Purchases of inventory financed by sellers $ -- $ -- $ 6,505
See accompanying notes to consolidated financial statements.
39
GREYSTONE HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of U.S. Home Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of Greystone Homes, Inc., and all
subsidiaries and partnerships (and similar entities) in which a
controlling interest is held (the "Company"). The Company's investments
in unconsolidated partnerships in which a significant, but less than
controlling, interest is held are accounted for by the equity method.
Controlling interest is determined based on a number of factors, which
include the Company's ownership interest and participation in the
management of the partnership. All significant intercompany
transactions and balances have been eliminated. During 2001, the
Company became a wholly-owned subsidiary of U.S. Home Corporation,
which is a wholly-owned subsidiary of Lennar Corporation.
The Company operates in one operating and reporting segment -
homebuilding. Homebuilding operations include the sale and construction
of single-family attached and detached homes. These activities also
include the purchase, development and sale of residential land by the
Company and unconsolidated partnerships in which it has investments.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America 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.
Revenue Recognition - Revenue from sales of homes are recognized when
the sales are closed and title passes to the new homeowners. Revenues
from sales of other real estate, including the sale of land, are
recognized when a significant down payment is received, the earnings
process is complete and the collection of any remaining receivables is
reasonably assured.
Cash - The Company considers all highly liquid investments purchased
with maturities of three months or less to be cash equivalents.
Inventories - Inventories are stated at cost unless the inventory
within a community is determined to be impaired, in which case the
impaired inventory is written down to fair value. The Company evaluates
long-lived assets for impairment based on the undiscounted future cash
flows of the assets. Write-downs of inventories deemed to be impaired
are recorded as adjustments to the cost basis of the respective
inventories. No impairment existed during the years ended November 30,
2001, 2000 or 1999.
Start-up costs, construction overhead and selling expenses are expensed
as incurred. Homes held for sale are classified as inventories until
delivered. Land, land development, amenities and other costs are
accumulated by specific area and allocated proportionately to homes
within the respective area.
Due from Affiliates - The Company has transactions in the normal course
of business with Lennar Corporation and/or affiliated companies.
40
Interest and Real Estate Taxes - Interest and real estate taxes
attributable to land and homes are capitalized while they are being
actively developed. Interest costs relieved from inventories are
included in interest expense. Interest costs result from the interest
related to the Company's outstanding debt as disclosed in the
consolidated balance sheets, as well as debt incurred by Lennar
Corporation. Lennar Corporation allocates a portion of its interest to
the Company based on the Company's inventory levels during the year.
Operating Equipment - Operating equipment is recorded at cost. The
assets are depreciated over their estimated useful lives using the
straight-line method. The estimated useful life is 2 to 10 years. At
November 30, 2001 and 2000, operating equipment of $0.5 million and
$0.4 million, respectively, was included in other assets in the
consolidated balance sheets.
Goodwill - Goodwill represents the excess of the purchase price over
the fair value of net assets acquired and was amortized by the Company
on a straight-line basis over 20 years. At November 30, 2001 and 2000,
goodwill was $36.5 million and $38.7 million, respectively (net of
accumulated amortization of $9.4 million and $7.1 million,
respectively). In the event that facts and circumstances indicate that
the carrying value of goodwill might be impaired, an evaluation of
recoverability is performed. If an evaluation was required, the
estimated future undiscounted cash flows associated with the goodwill
would be compared to the carrying amount to determine if a write-down
to fair value based on discounted cash flows was required. No
impairment existed during the years ended November 30, 2001, 2000 or
1999. Subsequent to the Company's adoption of Statement of Financial
Accounting Standards ("SFAS") No. 141 and SFAS No. 142, goodwill and
its amortization will be accounted for in accordance with the standards
they prescribe which will discontinue the Company's amortization of
goodwill. See the New Accounting Pronouncements section of Note 1.
Income Taxes - The Company files a consolidated federal income tax
return with Lennar Corporation. Income taxes have been provided at the
Company level as if the Company filed an income tax return on a
stand-alone basis. Current taxes due are recorded as a payable to
Lennar Corporation, and the deferred portion is recorded as deferred
taxes. Income taxes are accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets
and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured by
using enacted tax rates expected to apply to taxable income in the
years in which those differences are expected to reverse.
Fair Value of Financial Instruments - The carrying amount of accounts
payable approximates fair value.
New Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method and requires acquired
intangible assets to be recognized as assets apart from goodwill if
certain criteria are met. The Company adopted SFAS No. 141 for all
future acquisitions.
SFAS No. 142 no longer requires or permits the amortization of goodwill
and indefinite-lived assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment
in accordance with this statement. This impairment test uses a fair
value approach rather than the undiscounted cash flows approach
previously required by SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Company adopted SFAS No. 142 on December 1, 2001. Because of that,
amortization of goodwill of approximately $2 million per year will not
be incurred in the future. Management does not currently believe that
the
41
implementation of SFAS No. 142 will have a material impact on the
Company's financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides
accounting guidance for financial accounting and reporting for
impairment or disposal of long-lived assets. SFAS No. 144 supersedes
SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003.
Management does not currently believe that the implementation of SFAS
No. 144 will have a material impact on the Company's financial
condition or results of operations.
Reclassification - Certain prior year amounts in the consolidated
financial statements have been reclassified to conform with the 2001
presentation.
2. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS
Summarized condensed financial information on a combined 100% basis
related to the Company's investments in unconsolidated partnerships and
other similar entities (collectively the "Partnerships") accounted for
by the equity method was as follows:
November 30,
(In thousands) 2001 2000
-----------------------------------------------------------------------
Assets:
Cash $ 1,236 $ 716
Land under development 71,961 6,503
Other assets 26 2
------- -------
$73,223 $ 7,221
======= =======
Liabilities and equity:
Accounts payable and other liabilities 3,912 501
Notes and mortgages payable 30,836 5,013
Equity 38,475 1,707
------- -------
$73,223 $ 7,221
======= =======
Years ended November 30, 2001, 2000 and 1999
(In thousands) 2001 2000 1999
-----------------------------------------------------------------------
Revenues $ 32 $ 31 $ 25
Costs and expenses 2,905 284 --
------- ------- -------
Net earnings (loss) of unconsolidated
partnerships $(2,873) $ (253) $ 25
======= ======= =======
42
At November 30, 2001, the Company's equity interest in each of these
Partnerships was 50% or less. The Company's partners generally are
third party homebuilders, land sellers seeking a share of the profits
from development of the land or real estate professionals who do not
have the capital and/or expertise to develop properties by themselves.
The Partnerships follow accounting principles generally accepted in the
United States of America. The Company shares in the profits and losses
of these Partnerships and, when appointed the manager of the
Partnerships, receives fees for the management of the assets. The
Company does not include in its income the pro rata Partnership
earnings resulting from land sales to the Company. These amounts are
recorded as a reduction of the cost of purchasing the land from the
Partnerships which increases profits when title passes to a third party
homebuyer. Equity in earnings from unconsolidated partnerships is
included in sales of land and other revenues in the consolidated
statements of earnings.
3. INCOME TAXES
The provision for income taxes consisted of the following:
Years Ended November 30,
(Dollars in thousands) 2001 2000 1999
-------------------------------------------------------------
Current:
Federal $61,692 $51,687 $45,105
State 8,880 6,011 8,591
------- ------- -------
70,572 57,698 53,696
------- ------- -------
Deferred:
Federal 4,034 2,933 5,393
State 212 290 818
------- ------- -------
4,246 3,223 6,211
------- ------- -------
$74,818 $60,921 $59,907
======= ======= =======
The actual income tax expense differs from the "expected" tax expense
for the year (computed by applying the U.S. federal corporate rate of
35% to earnings before income taxes) primarily due to the amount of
state income taxes, net of the related federal tax benefit, and the
amortization of goodwill.
43
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of the assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. The tax effects of significant temporary differences that
give rise to the net deferred tax asset are as follows:
November 30,
(Dollars in thousands) 2001 2000
-------------------------------------------------------------------
Deferred tax assets:
Acquisition adjustments $ 10,158 $ 10,158
Reserves and accruals 23,516 21,390
Net operating loss and capital loss
carryforwards, tax affected 4,466 4,466
Capitalized expenses 5,685 5,305
Deferred gains -- 1,959
Investments in unconsolidated partnerships 745 745
-------- --------
Deferred tax assets 44,570 44,023
Less: valuation allowance (7,117) (7,117)
-------- --------
Total deferred tax assets, net 37,453 36,906
-------- --------
Deferred tax liabilities:
Deferred gains 55 --
Other 21,126 16,387
-------- --------
Total deferred tax liabilities 21,181 16,387
-------- --------
Net deferred tax asset $ 16,272 $ 20,519
======== ========
The net deferred tax asset is included in other assets in the
consolidated balance sheets. SFAS No. 109 requires the reduction of
deferred tax assets by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that a portion or all of
the deferred tax asset will not be realized. At both November 30, 2001
and 2000, the Company had a valuation allowance of $7.1 million for net
operating loss and capital loss carryforwards and certain acquisition
adjustments which currently are not expected to be realized. Based on
management's assessment, it is more likely than not that the net
deferred tax asset will be realized through future taxable earnings.
4. RELATED PARTY TRANSACTIONS
On April 1, 1999, Lennar Corporation entered into an agreement with
Greystone Homes of Nevada, Inc. ("Greystone"), a majority-owned
subsidiary of Greystone Homes, Inc., which is a wholly-owned subsidiary
of Lennar Corporation, whereby Greystone has granted to affiliates of
Lennar Corporation the right to use certain property for a fee. Unpaid
fees bear interest at 9% annually. The classification "licensing
revenues from affiliates" in the consolidated statements of earnings is
comprised of the affiliates' fee and interest. On a quarterly basis,
these amounts are paid to Greystone by Lennar
44
Corporation. The term of the agreement ends on November 30, 2002, with
automatic one-year renewals unless terminated earlier by three-months
written notice by either party.
On April 1, 1999, Lennar Corporation entered into a financing
arrangement with Greystone which matured on December 31, 2001 and was
extended through December 31, 2007, whereby Lennar Corporation may
borrow up to $950 million, from Greystone at an interest rate of 9%
payable quarterly. As of November 30, 2001 and 2000, Lennar Corporation
had borrowed $333.3 million and $178.4 million under this financing
arrangement.
During 2001 and 2000, Lennar Corporation and its subsidiaries advanced
and borrowed funds to and from the Company which had no stated
repayment terms, other than the financing arrangement discussed above.
At November 30, 2001 and 2000, the Company had a receivable from
affiliates of $241.7 million and $118.7 million, respectively.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain subsidiaries are parties to various claims,
legal actions and complaints arising in the ordinary course of
business. In the opinion of management, the disposition of these
matters will not have a material adverse effect on the financial
condition or results of operations of the Company.
The Company is subject to the usual obligations associated with
entering into contracts for the purchase (including option contracts),
development and sale of real estate, which it does in the routine
conduct of its business. Option contracts for the purchase of land
permit the Company to acquire portions of properties when it is ready
to build homes on them. The use of option contracts allows the Company
to reduce the financial risk of adverse market conditions associated
with long-term land holdings. At November 30, 2001, the Company had
$12.8 million of primarily non-refundable option deposits and advanced
costs with entities including unconsolidated partnerships.
The Company has entered into agreements to lease certain office
facilities and equipment under operating leases. Future minimum
payments under the noncancelable leases are as follows: 2002 - $1.6
million; 2003 - $1.1 million; 2004 - $1.0 million and 2005 - $0.2
million. Rental expense for the years ended November 30, 2001, 2000 and
1999 was $2.0 million, $2.2 million and $1.6 million, respectively.
The Company is committed, under various letters of credit, to perform
certain development and construction activities and provide certain
guarantees in the normal course of business. Outstanding letters of
credit under these arrangements totaled $10.2 million at November 30,
2001. The Company also had outstanding performance and surety bonds
with estimated costs to complete of $158.7 million related principally
to its obligations for site improvements at various projects at
November 30, 2001. The Company does not believe that any such bonds are
likely to be drawn upon.
The Company has guaranteed obligations of Lennar Corporation with
regard to certain issues of its outstanding debt, and the stock of the
Company has been pledged as collateral for Lennar Corporation's
obligations with regard to that debt. The Company knows of no event of
default which would require it to satisfy these guarantees and,
therefore, the fair value of these contingent liabilities is considered
immaterial.
45
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
U.S. Home Corporation:
We have audited the accompanying consolidated balance sheets of U.S. Home
Corporation and subsidiaries (the "Company"), a wholly-owned subsidiary of
Lennar Corporation, as of November 30, 2001 and 2000 and the related
consolidated statements of earnings, stockholder's equity and cash flows for
each of the three years in the period ended November 30, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial position of the Company as of
November 30, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
January 9, 2002
46
U.S. HOME CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2001 AND 2000 (Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
ASSETS 2001 2000
Homebuilding:
Cash $ 98,127 $ 53,934
Inventories 1,459,909 1,386,066
Investments in unconsolidated partnerships 121,467 80,881
Goodwill, net 77,655 82,009
Other assets 151,675 163,208
---------- ----------
1,908,833 1,766,098
Financial services 887,659 599,053
---------- ----------
$2,796,492 $2,365,151
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Homebuilding:
Accounts payable and other liabilities $ 254,069 $ 326,062
Senior notes and other debts payable 35,652 32,508
Due to affiliates 232,531 360,908
---------- ----------
Total liabilities 522,252 719,478
---------- ----------
Financial services 788,258 511,846
---------- ----------
Stockholder's equity:
Common stock, $0.10 par value; 5,000 shares
authorized, issued and outstanding 1 1
Additional paid-in capital 737,331 737,331
Retained earnings 748,650 396,495
---------- ----------
Total stockholder's equity 1,485,982 1,133,827
---------- ----------
$2,796,492 $2,365,151
========== ==========
See accompanying notes to consolidated financial statements.
47
U.S. HOME CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
REVENUES:
Homebuilding $2,928,380 $2,031,190 $ 923,540
Financial services 424,554 315,301 269,307
Licensing revenues from affiliates 129,161 104,677 63,285
---------- ---------- ----------
Total revenues 3,482,095 2,451,168 1,256,132
---------- ---------- ----------
COSTS AND EXPENSES:
Homebuilding 2,187,404 1,614,398 725,979
Financial services 333,657 272,774 238,548
Selling, general and administrative 320,105 200,958 86,023
Interest 70,490 55,152 23,159
---------- ---------- ----------
Total costs and expenses 2,911,656 2,143,282 1,073,709
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 570,439 307,886 182,423
INCOME TAXES 218,284 120,768 73,037
---------- ---------- ----------
NET EARNINGS $ 352,155 $ 187,118 $ 109,386
========== ========== ==========
See accompanying notes to consolidated financial statements.
48
U.S. HOME CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED NOVEMBER 30, 2001, 2000 and 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
Balance, November 30, 1998 $ 1 $ 233,046 $ 99,991 $ 333,038
1999 net earnings -- -- 109,386 109,386
-------- --------- --------- -----------
Balance, November 30, 1999 1 233,046 209,377 442,424
Contribution of capital to acquire
U.S. Home Corporation (see Note 2) -- 510,249 -- 510,249
Distribution of capital to affiliate (see Note 1) -- (5,964) -- (5,964)
2000 net earnings -- -- 187,118 187,118
-------- --------- --------- -----------
Balance, November 30, 2000 1 737,331 396,495 1,133,827
2001 net earnings -- -- 352,155 352,155
-------- --------- --------- -----------
Balance, November 30, 2001 $ 1 $ 737,331 $ 748,650 $ 1,485,982
======== ========= ========= ===========
See accompanying notes to consolidated financial statements.
49
U.S. HOME CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 352,155 $ 187,118 $ 109,386
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization, net 30,470 30,290 22,825
Equity in (earnings) loss from unconsolidated partnerships (1,473) 58 112
Changes in assets and liabilities, net of effects from acquisitions:
(Increase) decrease in inventories (70,266) 156,363 41,966
Increase in other assets (81,856) (29,050) (7,988)
(Increase) decrease in financial services loans held for sale or
disposition (206,461) (75,872) 6,293
Decrease in accounts payable and other liabilities (60,995) (43,459) (7,578)
----------- ----------- -----------
Net cash provided by (used in) operating activities (38,426) 225,448 165,016
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investments in unconsolidated partnerships, net (39,113) (33,553) (1,561)
(Increase) decrease in financial services mortgage loans 3,910 (11,834) 1,548
Purchases of investment securities (18,143) (18,112) (13,119)
Receipts from investment securities 17,700 14,946 11,600
Decrease in financial services mortgage servicing rights 10,812 1,315 --
Acquisition of businesses - net of cash acquired (1,630) (158,357) (19,747)
----------- ----------- -----------
Net cash used in investing activities (26,464) (205,595) (21,279)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under financial services debt 264,996 165,452 (3,168)
Payments for tender of senior notes -- (519,759) --
Proceeds from borrowings -- 2,981 2,578
Principal payments on borrowings (20,419) (260,654) (146,756)
Contributed capital -- 243,383 --
Increase (decrease) in amounts due to affiliates (128,377) 407,287 (9,376)
----------- ----------- -----------
Net cash provided by (used in) financing activities 116,200 38,690 (156,722)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 51,310 58,543 (12,985)
CASH AT BEGINNING OF YEAR 93,454 34,911 47,896
----------- ----------- -----------
CASH AT END OF YEAR $ 144,764 $ 93,454 $ 34,911
=========== =========== ===========
Summary of cash:
Homebuilding $ 98,127 $ 53,934 $ --
Financial services 46,637 39,520 34,911
----------- ----------- -----------
$ 144,764 $ 93,454 $ 34,911
=========== =========== ===========
See Note 1 for supplemental disclosures of cash flow information related to
interest and income taxes paid
Supplemental disclosures of non-cash investing and financing activities:
Purchases of inventory financed by sellers $ 17,897 $ -- $ 6,505
Fair value of assets acquired in U.S. Home acquisition,
inclusive of cash of $90,997 $ -- $ 1,654,444 $ --
Goodwill recorded from U.S. Home acquisition $ -- $ 47,809 $ --
Liabilities assumed in U.S. Home acquisition $ -- $ 1,192,004 $ --
See accompanying notes to consolidated financial statements.
50
U.S. HOME CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of U.S. Home Corporation, a
wholly-owned subsidiary of Lennar Corporation, and all subsidiaries and
partnerships (and similar entities) in which a controlling interest is
held (the "Company" or "U.S. Home"). The Company's investments in
unconsolidated partnerships in which a significant, but less than a
controlling, interest is held are accounted for by the equity method.
Controlling interest is determined based on a number of factors, which
include the Company's ownership interest and participation in the
management of the partnership. All significant intercompany
transactions and balances have been eliminated.
During 2001, the Company made a tax-free contribution of real and
personal property and equity interests of its, and certain of its
subsidiaries, homebuilding business within the State of Texas (the
"Texas Operations"), to Lennar Homes of Texas Land & Construction, Ltd.
(the "Texas Partnership"), a majority-owned subsidiary of Lennar
Southwest Holding Corp., in exchange for a 40% limited partners'
interest in the Texas Partnership. This transaction was accounted for
as a reorganization of entities under common control, which is similar
to the pooling of interests method of accounting for business
combinations and accordingly, all prior period consolidated financial
statements have been restated as if this transaction occurred on May 3,
2000, the date of Lennar Corporation's acquisition of U.S. Home.
During 2001, Lennar Corporation contributed to the Company, as a
tax-free contribution, all of the issued and outstanding shares of the
common stock of Greystone Homes, Inc. and Lennar Financial Services,
Inc., both of which were wholly-owned subsidiaries of Lennar
Corporation. These transactions were accounted for as a reorganization
of entities under common control, which is similar to the pooling of
interests method of accounting for business combinations and
accordingly, all prior period consolidated financial statements have
been restated as if this transaction occurred on November 30, 1998.
LEN Acquisition Corporation, a wholly-owned subsidiary of Lennar
Corporation, was incorporated on February 15, 2000. In May 2000, U.S.
Home Corporation was acquired by LEN Acquisition Corporation. LEN
Acquisition Corporation was subsequently renamed U.S. Home Corporation.
See Note 2.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America 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.
Revenue Recognition - Revenue from sales of homes are recognized when
the sales are closed and title passes to the new homeowners. Revenues
from sales of other real estate (including the sales of land and
operating properties) are recognized when a significant down payment is
received, the earnings process is complete and the collection of any
remaining receivables is reasonably assured.
51
Cash - The Company considers all highly liquid investments purchased
with maturities of three months or less to be cash equivalents. Due to
the short maturity period of the cash equivalents, the carrying amount
of these instruments approximates their fair values. Cash as of
November 30, 2001 and 2000 included $42.9 million and $25.8 million,
respectively, of cash held in escrow for approximately three days.
Inventories - Inventories are stated at cost unless the inventory
within a community is determined to be impaired, in which case the
impaired inventory is written down to fair value. The Company evaluates
long-lived assets for impairment based on the undiscounted future cash
flows of the assets. Write-downs to inventories deemed to be impaired
are recorded as adjustments to the cost basis of the respective
inventories. No impairment existed during the years ended November 30,
2001, 2000 and 1999.
Start-up costs, construction overhead and selling expenses are expensed
as incurred. Homes held for sale are classified as inventories until
delivered. Land, land development, amenities and other costs are
accumulated by specific area and allocated proportionately to homes
within the respective area.
Due to Affiliates - Due to affiliates includes the Company's
transactions in the normal course of business with Lennar Corporation
and/or affiliated companies as well as minority interest.
Interest and Real Estate Taxes - Interest and real estate taxes
attributable to land and homes are capitalized while they are being
actively developed. Interest related to homebuilding, including
interest costs relieved from inventories, is included in interest
expense. Interest costs result from the interest related to the
Company's outstanding debt as disclosed in the consolidated balance
sheets as well as debt incurred by the Company's parent, Lennar
Corporation. Lennar Corporation allocates a portion of its interest to
the Company based on the Company's inventory levels during the year.
Interest expense relating to the financial services operations is
included in its respective costs and expenses.
Operating Equipment - Operating equipment is recorded at cost. The
assets are depreciated over their estimated useful lives using the
straight-line method. The estimated useful life for operating equipment
is 2 to 10 years. At November 30, 2001 and 2000, operating equipment of
$9.3 million and $13.2 million, respectively, was included in other
assets in the consolidated balance sheets.
Investment Securities - Investment securities that have determinable
fair values are classified as available-for-sale unless they are
classified as held-to-maturity. Securities classified as
held-to-maturity are carried at amortized cost because they are
purchased with the intent and ability to hold to maturity.
Available-for-sale securities are recorded at fair value. Any
unrealized holding gains or losses on available-for-sale securities are
reported in a separate component of stockholder's equity, net of tax
effects, until realized.
At November 30, 2001 and 2000, investment securities classified as
held-to-maturity totaled $13.2 million and $12.5 million, respectively,
and were included in other assets of the Financial Services Division.
There were no other investment securities at November 30, 2001 or 2000.
Derivative Financial Instruments - Effective December 1, 2000, the
Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities by requiring that
all derivatives be recognized in the balance sheet and measured at fair
value. Gains or losses resulting from changes in the fair value of
derivatives are recognized in earnings or recorded in other
comprehensive income and recognized in the statement of
52
earnings when the hedged item affects earnings, depending on the
purpose of the derivatives and whether they qualify for hedge
accounting treatment.
The Financial Services Division, in the normal course of business, uses
derivative financial instruments to reduce its exposure to fluctuations
in interest rates. The Division enters into forward commitments and
option contracts to protect the value of fixed rate locked loan
commitments and loans held for sale or disposition from fluctuations in
market interest rates. These derivative financial instruments are
designated as fair value hedges, and, accordingly, for all qualifying
and highly effective fair value hedges, the changes in the fair value
of the derivative and the loss or gain on the hedged asset relating to
the risk being hedged are recorded currently in earnings. The effect of
the implementation of SFAS No. 133 on the Financial Services Division's
operating earnings was not significant.
Goodwill - Goodwill represents the excess of the purchase price over
the fair value of net assets acquired and was amortized by the Company
on a straight-line basis over periods ranging from 15 to 20 years. At
November 30, 2001 and 2000, goodwill was $102.8 million and $107.2
million, respectively (net of accumulated amortization of $17.7 million
and $11.5 million, respectively). In the event that facts and
circumstances indicated that the carrying value of goodwill might be
impaired, an evaluation of recoverability is performed. If an
evaluation was required, the estimated future undiscounted cash flows
associated with the goodwill would be compared to the carrying amount
to determine if a write-down to fair value based on discounted cash
flows was required. No impairment existed during the years ended
November 30, 2001, 2000 or 1999. The Homebuilding Division's goodwill
was $77.7 million and $82.0 million at November 30, 2001 and 2000,
respectively, and the Financial Services Division's goodwill was $25.2
million at both November 30, 2001 and 2000. Subsequent to the Company's
adoption of SFAS No. 141 and SFAS No. 142, goodwill and its
amortization will be accounted for in accordance with those standards
they prescribe which will discontinue the Company's amortization of
goodwill. See the New Accounting Pronouncements section of Note 1.
Income Taxes - The Company files a consolidated federal income tax
return with Lennar Corporation. Income taxes have been provided at the
Company level as if the Company filed an income tax return on a
stand-alone basis. Current taxes due are recorded as a payable to
Lennar Corporation, and the deferred portion is recorded as deferred
taxes. Income taxes are accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets
and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured by
using enacted tax rates expected to apply to taxable income in the
years in which those differences are expected to reverse.
Financial Services - Mortgage loans held for sale or disposition by the
Financial Services Division are carried at market value, as determined
on an aggregate basis. Premiums and discounts recorded on these loans
are presented as an adjustment to the carrying amount of the loans and
are not amortized.
When the Division sells loans into the secondary market, a gain or loss
is recognized to the extent that the sales proceeds exceed, or are less
than, the book value of the loans. Loan origination fees, net of direct
origination costs, are deferred and recognized as a component of the
gain or loss when loans are sold. In prior years, the Division retained
servicing rights from some of the loans it originated and maintained a
portfolio of mortgage servicing rights. During 2001, the Division sold
substantially all of its existing portfolio of mortgage servicing
rights and realized a pretax profit of approximately $13 million from
the sale of the servicing rights. Subsequent to the sale, the Division
has sold the servicing rights together with the loans it originated.
Prior to the sale of the mortgage servicing rights portfolio, the book
value of each mortgage loan the Division sold was allocated partly to
the mortgage servicing right and partly to the loan (separately from
the mortgage servicing right) based on their estimated relative fair
values at the time the loan was sold and the servicing rights retained.
The fair value of
53
mortgage servicing rights was determined by discounting the estimated
future cash flows using a discount rate commensurate with the risks
involved. This method of valuation incorporated assumptions that market
participants would use in their estimates of future servicing income
and expense, including assumptions about prepayment, default and
interest rates. Impairment, if any, was recognized through a valuation
allowance and a charge to current operations. Mortgage servicing rights
were amortized in proportion to, and over the period of, the estimated
net servicing income of the underlying mortgages. The book value and
estimated fair value of mortgage servicing rights was $11.7 million and
$13.4 million, respectively, at November 30, 2000. A valuation
allowance related to mortgage servicing rights was not required at or
for the year ended November 30, 2000.
New Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method and requires acquired
intangible assets to be recognized as assets apart from goodwill if
certain criteria are met. The Company adopted SFAS No. 141 for all
future acquisitions.
SFAS No. 142 no longer requires or permits the amortization of goodwill
and indefinite-lived assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment
in accordance with this statement. This impairment test uses a fair
value approach rather than the undiscounted cash flows approach
previously required by SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Company adopted SFAS No. 142 on December 1, 2001. Because of that,
amortization of goodwill of approximately $6 million per year will not
be incurred in the future. Management does not currently believe that
the implementation of SFAS No. 142 will have a material impact on the
Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides
accounting guidance for financial accounting and reporting for
impairment or disposal of long-lived assets. SFAS No. 144 supersedes
SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003.
Management does not currently believe that the implementation of SFAS
No. 144 will have a material impact on the Company's financial position
or results of operations.
Reclassification - Certain prior year amounts in the consolidated
financial statements have been reclassified to conform with the 2001
presentation.
2. ACQUISITIONS
On May 3, 2000, U.S. Home Corporation was acquired by LEN Acquisition
Corporation in a transaction in which U.S. Home stockholders received a
total of approximately $243 million in cash and 13 million shares of
Lennar Corporation common stock with a value of approximately $267
million. LEN Acquisition Corporation was subsequently renamed U.S. Home
Corporation.
The acquisition was accounted for using the purchase method of
accounting. In connection with the transaction, the Company acquired
assets with a fair value of $1.7 billion, assumed liabilities with a
fair value of $1.2 billion and recorded goodwill of $48 million.
Goodwill was being amortized on a straight-line basis over 20 years.
The results of U.S. Home are included in the Company's consolidated
statements of earnings since the acquisition date. Revenues and net
earnings on an unaudited pro forma basis would have been $2.2 billion
and $101.8 million, respectively, for the year ended November 30, 2000
had the acquisition occurred on December 1, 1999. The pro forma
information gives effect to
54
actual operating results prior to the acquisition, adjusted for the pro
forma effect of interest expense, amortization of goodwill, and certain
other adjustments, together with their related income tax effect.
During 2000, the Company acquired a title company for $1.7 million in
cash and acquired assets with a fair value of $1.0 million, assumed
liabilities of $1.7 million and recorded goodwill of $2.4 million.
During 1999, the Company acquired a mortgage company and several title
companies for $19.7 million in cash and acquired assets with a fair
value of $40.5 million, assumed liabilities of $32.2 million and
recorded goodwill of $11.4 million. The acquisitions were accounted for
using the purchase method of accounting. Goodwill was being amortized
on a straight-line basis over 15 to 20 years. The results of these
companies are included in the Company's consolidated statements of
earnings since their acquisition dates.
3. OPERATING AND REPORTING SEGMENTS
The Company has two operating and reporting segments: Homebuilding and
Financial Services. The Company's reportable segments are strategic
business units that offer different products and services. The
accounting policies of the segments are the same as those described in
the summary of significant accounting policies in Note 1.
Homebuilding - Homebuilding operations include the sale and
construction of single-family attached and detached homes. These
activities also include the purchase, development and sale of
residential land by the Company and unconsolidated partnerships in
which it has investments. The following table sets forth financial
information relating to the homebuilding operations:
Years Ended November 30,
2001, 2000 and 1999
(Dollars in thousands) 2001 2000 1999
-----------------------------------------------------------------------
Revenues:
Sales of homes $2,834,602 $1,871,322 $ 823,317
Sales of land and other revenues 93,778 159,868 100,223
---------- ---------- ----------
Total revenues 2,928,380 2,031,190 923,540
---------- ---------- ----------
Costs and expenses:
Cost of homes sold 2,144,718 1,496,448 634,103
Cost of land and other expenses 42,686 117,950 91,876
---------- ---------- ----------
Total costs and expenses 2,187,404 1,614,398 725,979
---------- ---------- ----------
$ 740,976 $ 416,792 $ 197,561
========== ========== ==========
Depreciation and amortization $ 20,983 $ 20,310 $ 13,516
========== ========== ==========
55
Financial Services - The Financial Services Division provides mortgage
financing, title insurance and closing services for both the Company's
homebuyers and others. The Division resells the residential mortgage
loans it originates in the secondary mortgage market and also provides
high-speed Internet access, cable television, and alarm monitoring
services for both the Company's homebuyers and other customers. The
following table sets forth financial information relating to the
financial services operations:
Years Ended November 30,
2001, 2000 and 1999
(Dollars in thousands) 2001 2000 1999
----------------------------------------------------------------
Revenues $424,554 $315,301 $269,307
Costs and expenses 333,657 272,774 238,548
-------- -------- --------
$ 90,897 $ 42,527 $ 30,759
======== ======== ========
Depreciation and amortization $ 9,487 $ 9,980 $ 9,309
======== ======== ========
Interest income, net $ 24,139 $ 15,066 $ 11,964
======== ======== ========
56
4. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS
Summarized condensed financial information on a combined 100% basis
related to the Company's investments in unconsolidated partnerships and
other similar entities (collectively the "Partnerships") accounted for
by the equity method was as follows:
November 30,
(In thousands) 2001 2000
------------------------------------------------------------------------------
Assets:
Cash $ 9,323 $ 7,456
Land under development 415,930 255,776
Other assets 22,950 30,035
-------- --------
$448,203 $293,267
======== ========
Liabilities and equity:
Accounts payable and other liabilities $ 56,847 $ 38,966
Notes and mortgages payable 185,679 135,917
Equity 205,677 118,384
-------- --------
$448,203 $293,267
======== ========
Years ended November 30, 2001, 2000 and 1999
(In thousands) 2001 2000 1999
----------------------------------------------------------------------------
Revenues $158,619 $ 65,069 $ 25
Costs and expenses 157,702 63,450 --
-------- -------- --------
Net earnings of unconsolidated
partnerships $ 917 $ 1,619 $ 25
======== ======== ========
At November 30, 2001, the Company's equity interest in each of these
Partnerships was 50% or less. The Company's partners generally are
third party homebuilders, land sellers seeking a share of the profits
from development of the land or real estate professionals who do not
have the capital and/or expertise to develop properties by themselves.
The Partnerships follow accounting principles generally accepted in the
United States of America. The Company shares in the profits and losses
of these Partnerships and, when appointed the manager of the
Partnerships, receives fees for the management of the assets. During
2001 and 2000, the Company received management fees and reimbursement
of expenses from the Partnerships totaling $15.9 million and $1.1
million, respectively. The Company does not include in its income the
pro rata Partnership earnings resulting from land sales to the Company.
These amounts are recorded as a reduction of the cost of purchasing the
land from the Partnerships which increases profits when title passes to
a third party homebuyer. Equity in earnings from unconsolidated
partnerships is included in homebuilding revenues in the consolidated
statements of earnings.
57
The Company may obtain options or other arrangements under which the
Company can purchase portions of the land held by the Partnerships.
Option prices are generally negotiated prices that approximate fair
value when the Company receives the options. During 2001 and 2000,
$44.6 million and $16.1 million, respectively, of the Partnerships'
revenues were from land sales to the Company. In some instances, Lennar
Corporation, the Company and/or the Company's partners have provided
varying levels of guarantees on certain partnership debt. At November
30, 2001, Lennar Corporation and/or the Company provided guarantees on
$84.6 million of unconsolidated partnership debt, of which $62.7
million were limited maintenance guarantees.
5. SENIOR NOTES AND OTHER DEBTS PAYABLE
November 30,
(Dollars in thousands) 2001 2000
---------------------------------------------------------------------
7.95% senior notes paid in 2001 $ -- $ 3,467
8.25% senior notes due 2004 980 980
7.75% senior notes due 2005 2,279 2,279
8.88% senior subordinated notes due 2007 4,800 4,800
8.875% senior subordinated notes due 2009 1,387 1,387
Mortgage notes on land with fixed interest rates
from 5.5% to 10.0% due through 2009 26,206 19,595
------- -------
$35,652 $32,508
======= =======
As a result of LEN Acquisition Corporation's acquisition of U.S. Home,
holders of U.S. Home's publicly-held notes totaling $525 million were
entitled to require U.S. Home to repurchase the notes for 101% of their
principal amount within 90 days after the transaction was completed.
Independent of that requirement, in April 2000, Lennar Corporation made
a tender offer for all of the notes and a solicitation of consents to
modify provisions of the indentures relating to the notes. As a result
of the tender offer and required repurchases after the acquisition,
Lennar Corporation paid approximately $520 million in 2000, which
includes tender and consent fees, for $508 million of U.S. Home's
notes. These amounts paid on the Company's behalf are included in due
to affiliates in the consolidated balance sheets.
The minimum aggregate principal maturities of senior notes and other
debts payable during the five years subsequent to November 30, 2001 are
as follows: 2002 - $8.0 million; 2004 - $18.9 million; 2005 - $2.3
million and $6.5 million thereafter.
58
6. FINANCIAL SERVICES
The assets and liabilities related to the Company's financial services
operations were as follows:
November 30,
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------------
Assets:
Cash $ 46,637 $ 39,520
Receivables 105,024 27,450
Mortgage loans held for sale or disposition, net 587,694 376,452
Mortgage loans, net 41,590 42,504
Title plants 15,530 15,530
Goodwill, net 25,158 25,199
Collateral for bonds and notes payable 12,398 20,740
Other 53,628 51,658
-------- --------
$887,659 $599,053
======== ========
Liabilities:
Notes and other debts payable $693,931 $428,966
Bonds and notes payable 11,680 18,278
Other 82,647 64,602
-------- --------
$788,258 $511,846
======== ========
At November 30, 2001, the Division had a $500 million warehouse line of
credit which included a $145 million 30-day increase which expired in
December 2001 to fund the Division's mortgage loan activities.
Borrowings under this facility were $483.2 million and $339.4 million
at November 30, 2001 and 2000, respectively, and were collateralized
primarily by mortgage loans with outstanding principal balances of
$518.8 million and $297.2 million, respectively, and in 2000, by
servicing rights relating to approximately $1.8 billion of loans. There
are several interest rate pricing options which fluctuate with market
rates. The borrowing rate has been reduced to the extent that custodial
escrow balances exceeded required compensating balance levels. The
effective interest rate on this facility at November 30, 2001 and 2000
was 3.1% and 6.4%, respectively. The warehouse line of credit matures
in June 2003, at which time the Company expects the facility to be
renewed. At November 30, 2001 and 2000, the Division had advances under
conduit funding agreements with certain major financial institutions
amounting to $190.6 million and $58.8 million, respectively. Borrowings
under this agreement are collateralized by mortgage loans and had an
effective interest rate of 3.0% and 7.5% at November 30, 2001 and 2000,
respectively. The Division also had a $20 million revolving line of
credit with a bank, collateralized by certain assets of the Division
and stock of certain title insurance subsidiaries. Borrowings under the
line of credit were $20 million at both November 30, 2001 and 2000 and
had an effective interest rate of 3.1% and 7.8% at November 30, 2001
and 2000, respectively. At November 30, 2001 and 2000, bonds and notes
payable had an outstanding balance of $11.7 million and $18.3 million,
respectively. The borrowings mature in years 2013 through 2018 and
carry interest rates ranging from 8.6% to 11.6%.
59
The minimum aggregate principal maturities of the Financial Services
Division's notes and other debts payable during the five years
subsequent to November 30, 2001 are as follows: 2002 - $343.5 million
and 2003 - $350.4 million.
7. INCOME TAXES
The provision for income taxes consisted of the following:
Years Ended November 30,
2001, 2000 and 1999
(Dollars in thousands) 2001 2000 1999
----------------------------------------------------------------
Current:
Federal $ 182,425 $ 104,391 $ 52,321
State 24,141 14,666 11,354
--------- --------- ---------
206,566 119,057 63,675
--------- --------- ---------
Deferred:
Federal 11,468 2,000 7,672
State 250 (289) 1,690
--------- --------- ---------
11,718 1,711 9,362
--------- --------- ---------
$ 218,284 $ 120,768 $ 73,037
========= ========= =========
The actual income tax expense differs from the "expected" tax expense
for the year (computed by applying the U.S. federal corporate rate of
35% to earnings before income taxes) primarily due to the amount of
state income taxes, net of the related federal tax benefit, and the
amortization of goodwill.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of the assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. The tax effects of significant temporary differences that
give rise to the net deferred tax asset are as follows:
60
November 30,
(Dollars in thousands) 2001 2000
--------------------------------------------------------------------
Deferred tax assets:
Acquisition adjustments $ 48,239 $ 72,049
Reserves and accruals 67,680 55,096
Net operating loss and capital loss
carryforwards, tax affected 4,466 4,466
Capitalized expenses 5,685 5,305
Deferred gains -- 1,959
Investments in unconsolidated partnerships 745 859
Other 5,290 3,640
--------- ---------
Deferred tax assets 132,105 143,374
Less: valuation allowance (7,117) (7,117)
--------- ---------
Total deferred tax assets, net 124,988 136,257
--------- ---------
Deferred tax liabilities:
Capitalized expenses 23,542 32,376
Deferred gains 130 75
Investments in unconsolidated partnerships 167 --
Other 39,292 28,843
--------- ---------
Total deferred tax liabilities 63,131 61,294
--------- ---------
Net deferred tax asset $ 61,857 $ 74,963
========= =========
The net deferred tax asset is included in other assets of the
Homebuilding Division and the assets of the Financial Services Division
in the consolidated balance sheets. SFAS No. 109 requires the reduction
of deferred tax assets by a valuation allowance if, based on the weight
of available evidence, it is more likely than not that a portion or all
of the deferred tax asset will not be realized. At both November 30,
2001 and 2000, the Company had a valuation allowance of $7.1 million
for net operating loss and capital loss carryforwards and certain
acquisition adjustments which currently are not expected to be
realized. Based on management's assessment, it is more likely than
not that the net deferred tax asset will be realized through future
taxable earnings.
8. FINANCIAL INSTRUMENTS
The Company estimates the fair value of its financial instruments using
available market information and appropriate valuation methodologies.
Considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimated fair
values are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies might have a material
effect on the estimated fair value amounts. At November 30, 2001, the
Company believes that the fair value of cash
61
and accounts payable approximates their carrying value because of their
typically liquid, short-term nature and market rate terms.
At November 30, 2001, the Homebuilding Division's senior notes and
other debts payable consisted of fixed rate debt. The carrying value of
the fixed rate debt approximates fair value based on quoted market
prices.
At November 30, 2001, the fair value of the Financial Services
Division's mortgage loans approximate their carrying value based on
interest rates on the loans compared to the current market rates and
the collectibility, term and type of loans. The fair value of the
Financial Services Division's notes and other debts payable approximate
their carrying value because these variable rate borrowings are tied to
market indices.
At November 30, 2001, the fair value of commitments to purchase loans
was not material based upon the difference between the current value of
similar loans and the price at which the Company has committed to
originate the loans. The fair value of commitments to sell loan
contracts was not material based on the estimated amount that the
Company would receive or pay to terminate the commitments at the
reporting date based on market prices for similar financial
instruments.
As of November 30, 2001, the Financial Services Division's pipeline of
loans in process totaled approximately $1.7 billion. To minimize credit
risk, the Division uses the same credit policies in the approval of the
commitments as are applied to all lending activities. Since a portion
of these commitments is expected to expire without being exercised by
the borrowers, the total commitments do not necessarily represent
future cash requirements. Loans in the pipeline of loans in process for
which interest rates were committed to the borrower totaled
approximately $235.0 million as of November 30, 2001. Substantially all
of these commitments were for periods of 30 days or less.
Mandatory mortgage-backed securities ("MBS") forward commitments are
used by the Company to hedge its interest rate exposure during the
period from when the Company makes an interest rate commitment to a
loan applicant until the time at which the loan is sold to an investor.
These instruments involve, to varying degrees, elements of credit and
interest rate risk. Credit risk is managed by entering into agreements
with investment bankers with primary dealer status and with permanent
investors meeting the credit standards of the Company. At any time, the
risk to the Company, in the event of default by the purchaser, is the
difference between the contract price and current market value. At
November 30, 2001, the Company had open commitments amounting to $291.0
million to sell MBS with varying settlement dates through January 2002.
9. RELATED PARTY TRANSACTIONS
On April 1, 1999, Lennar Corporation entered into an agreement with
Greystone Homes of Nevada, Inc. ("Greystone"), a majority-owned
subsidiary of Greystone Homes, Inc. and U.S. Home, which are both
wholly-owned subsidiaries of Lennar Corporation, whereby Greystone has
granted to affiliates of Lennar Corporation the right to use certain
property for a fee. Unpaid fees bear interest at 9% annually. The
classification "licensing revenues from affiliates" in the consolidated
statements of earnings is comprised of the affiliates' fee and
interest. On a quarterly basis, these amounts are paid to Greystone by
Lennar Corporation. The term of the agreement ends on November 30,
2002, with automatic one-year renewals unless terminated earlier by
three-months written notice by either party.
On April 1, 1999, Lennar Corporation entered into a financing
arrangement with Greystone which matured on December 31, 2001 and was
extended through December 31, 2007, whereby Lennar Corporation may
borrow up to $950 million from Greystone at an interest rate of 9%
payable quarterly. As of November 30, 2001 and 2000, Lennar Corporation
had borrowed $333.3 million and $178.4 million under this financing
arrangement.
During 2001 and 2000, Lennar Corporation and its subsidiaries advanced
and borrowed funds to and from the Company which had no stated
repayment terms, other than the financing arrangement discussed above.
At November 30, 2001 and 2000, the Company had a payable to affiliates
of $232.5 million and $360.9 million, respectively.
62
10. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain subsidiaries are parties to various claims,
legal actions and complaints arising in the ordinary course of
business. In the opinion of management, the disposition of these
matters will not have a material adverse effect on the financial
condition or results of operations of the Company.
The Company is subject to the usual obligations associated with
entering into contracts for the purchase (including option contracts),
development and sale of real estate, which it does in the routine
conduct of its business. Option contracts for the purchase of land
permit the Company to acquire portions of properties when it is ready
to build homes on them. The use of option contracts allows the Company
to reduce the financial risk of adverse market conditions associated
with long-term land holdings. At November 30, 2001, the Company had
$154.6 million of primarily non-refundable option deposits and advanced
costs with entities including unconsolidated partnerships.
The Company has entered into agreements to lease certain office
facilities and equipment under operating leases. Future minimum
payments under the noncancelable leases are as follows: 2002 - $23.7
million; 2003 - $19.6 million; 2004 - $15.4 million; 2005 - $11.7
million; 2006 - $8.7 million and thereafter - $16.5 million. Rental
expense for the years ended November 30, 2001, 2000 and 1999 was $33.4
million, $25.9 million and $15.3 million, respectively.
The Company is committed, under various letters of credit, to perform
certain development and construction activities and provide certain
guarantees in the normal course of business. Outstanding letters of
credit under these arrangements totaled $57.0 million at November 30,
2001. The Company also had outstanding performance and surety bonds
with estimated costs to complete of $328.3 million related principally
to its obligations for site improvements at various projects at
November 30, 2001. The Company does not believe that any such bonds are
likely to be drawn upon.
The Company has guaranteed obligations of Lennar Corporation with
regard to certain issues of its outstanding debt, and the stock of the
Company has been pledged as collateral for Lennar Corporation's
obligations with regard to that debt. The Company knows of no event of
default which would require it to satisfy these guarantees and,
therefore, the fair value of these contingent liabilities is considered
immaterial.
63
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lennar Land Partners Sub II, Inc.:
We have audited the accompanying consolidated balance sheets of Lennar Land
Partners Sub II, Inc. and subsidiaries (the "Company"), a wholly-owned
subsidiary of Lennar Corporation, as of November 30, 2001 and 2000 and the
related consolidated statements of earnings, stockholder's equity and cash flows
for the years ended November 30, 2001 and 2000 and the period from inception
(June 21, 1999) to November 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial position of the Company as of
November 30, 2001 and 2000, and the results of its operations and its cash flows
for the years ended November 30, 2001 and 2000 and the period from inception
(June 21, 1999) to November 30, 1999, in conformity with accounting principles
generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
January 9, 2002
64
LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2001 AND 2000 (Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
2001 2000
ASSETS
Cash $ 236 $ --
Land held for development and sale 3,212 2,221
Investment in unconsolidated partnership 44,843 56,669
Other assets 52 100
Due from affiliates 128,518 82,793
-------- --------
$176,861 $141,783
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and other liabilities $ 15,438 $ 4,763
-------- --------
Total liabilities 15,438 4,763
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 5,000 shares authorized,
100 shares issued and outstanding -- --
Additional paid-in capital 92,420 92,420
Retained earnings 69,003 44,600
-------- --------
Total stockholder's equity 161,423 137,020
-------- --------
$176,861 $141,783
======== ========
See accompanying notes to consolidated financial statements.
65
LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 2001 AND 2000 AND THE PERIOD
FROM INCEPTION (JUNE 21, 1999) TO NOVEMBER 30, 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
REVENUES:
Land sales $37,270 $52,423 $15,839
Equity in earnings from unconsolidated
partnership 16,386 21,845 9,213
Other 425 262 1,116
------- ------- -------
Total revenues 54,081 74,530 26,168
------- ------- -------
COSTS AND EXPENSES:
Cost of land sales 14,111 21,951 4,878
General and administrative 291 379 202
------- ------- -------
Total costs and expenses 14,402 22,330 5,080
------- ------- -------
EARNINGS BEFORE INCOME TAXES 39,679 52,200 21,088
INCOME TAXES 15,276 20,358 8,330
------- ------- -------
NET EARNINGS $24,403 $31,842 $12,758
======= ======= =======
See accompanying notes to consolidated financial statements.
66
LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED NOVEMBER 30, 2001 AND 2000 AND THE PERIOD
FROM INCEPTION (JUNE 21, 1999) TO NOVEMBER 30, 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
Initial capitalization (June 21, 1999) $-- $ 92,420 $ -- $ 92,420
Net earnings from June 21, 1999 to
November 30, 1999 -- -- 12,758 12,758
--- -------- -------- --------
Balance, November 30, 1999 -- 92,420 12,758 105,178
2000 net earnings -- -- 31,842 31,842
--- -------- -------- --------
Balance, November 30, 2000 -- 92,420 44,600 137,020
2001 net earnings -- -- 24,403 24,403
--- -------- -------- --------
Balance, November 30, 2001 $-- $ 92,420 $ 69,003 $161,423
=== ======== ======== ========
See accompanying notes to consolidated financial statements.
67
LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2001 AND 2000 AND THE PERIOD
FROM INCEPTION (JUNE 21, 1999) TO NOVEMBER 30, 1999
(Dollars in thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 24,403 $ 31,842 $ 12,758
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Equity in earnings from unconsolidated partnership (16,386) (21,845) (9,213)
Changes in assets and liabilities:
(Increase) decrease in land held for development and sale (991) 14,892 563
(Increase) decrease in other assets 48 (25) 12
Increase (decrease) in accounts payable and other liabilities 10,675 2,019 (7,596)
-------- -------- --------
Net cash provided by (used in) operating activities 17,749 26,883 (3,476)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investment in unconsolidated partnership, net 28,212 52,382 3,105
-------- -------- --------
Net cash provided by investing activities 28,212 52,382 3,105
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in amounts due from affiliates (45,725) (79,343) 449
-------- -------- --------
Net cash provided by (used in) financing activities (45,725) (79,343) 449
-------- -------- --------
NET INCREASE (DECREASE) IN CASH 236 (78) 78
CASH AT BEGINNING OF PERIOD -- 78 --
-------- -------- --------
CASH AT END OF PERIOD $ 236 $ -- $ 78
======== ======== ========
See Note 1 for supplemental disclosures of cash flow information related to
interest and income taxes paid.
See accompanying notes to consolidated financial statements.
68
LENNAR LAND PARTNERS SUB II, INC. and subsidiaries
(A Wholly-Owned Subsidiary of Lennar Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001 AND 2000 AND THE PERIOD
FROM INCEPTION (JUNE 21, 1999) TO NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of Lennar Land Partners Sub II, Inc.,
its subsidiaries and an unconsolidated partnership in which a
significant, but less than a controlling, interest is held (the
"Company"). Controlling interest is determined based on a number of
factors, which include the Company's ownership interest and
participation in the management of the partnership. The Company is a
wholly-owned subsidiary of Lennar Corporation and was formed on June
21, 1999 by the contribution of an investment in an unconsolidated
partnership. The investment in the unconsolidated partnership was
recorded at Lennar Corporation's historical carrying value. All
significant intercompany transactions and balances have been
eliminated.
The Company operates in one operating and reporting segment. The
activities in this segment include the purchase, development and sale
of residential land by the Company and its unconsolidated partnership.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America 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.
Revenue Recognition - Revenues from land sales are recognized when a
significant down payment is received, the earnings process is complete
and the collection of any remaining receivables is reasonably assured.
Cash - The Company considers all highly liquid investments purchased
with maturities of three months or less to be cash equivalents. Due to
the short maturity period of the cash equivalents, the carrying amount
of these instruments approximates their fair values.
Land Held for Development and Sale - The cost of land held for
development and sale includes direct and indirect costs, capitalized
interest and property taxes. The cost of land, major infrastructure,
amenities and other common costs are apportioned among the parcels
within a real estate community. Land is carried at cost, unless the
land within a community is determined to be impaired, in which case the
impaired land will be written down to fair value. The Company evaluates
long-lived assets for impairment based on undiscounted future cash
flows of the assets. Write-downs of land deemed to be impaired will be
recorded as adjustments to the cost basis of the respective land. No
impairment existed during the years ended November 30, 2001 and 2000
and the period from inception (June 21, 1999) to November 30, 1999.
Due from Affiliates - The Company has transactions in the normal course
of business with Lennar Corporation and/or affiliated companies.
Interest and Real Estate Taxes - Interest and real estate taxes
attributable to land are capitalized while the properties are being
actively developed. Interest costs relieved from inventories are
included in
69
"cost of land sales" in the consolidated statements of earnings.
Interest costs result from the interest related to debt incurred by the
Company's parent, Lennar Corporation. Lennar Corporation allocates a
portion of its interest to the Company based on the Company's inventory
levels during the year.
Income Taxes - The Company files a consolidated federal income tax
return with Lennar Corporation. Income taxes have been provided at the
Company level as if the Company filed an income tax return on a
stand-alone basis. Current taxes due are recorded as a payable to
Lennar Corporation, and the deferred portion is recorded as deferred
taxes. Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax
bases of assets and liabilities, and are measured by using enacted tax
rates expected to apply to taxable income in the years in which those
differences are expected to reverse.
Fair Value of Financial Instruments - The carrying amounts of cash and
accounts payable approximate fair value.
New Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method and requires acquired
intangible assets to be recognized as assets apart from goodwill if
certain criteria are met. The Company adopted SFAS No. 141 for all
future acquisitions.
SFAS No. 142 no longer requires or permits the amortization of goodwill
and indefinite-lived assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment
in accordance with this statement. This impairment test uses a fair
value approach rather than the undiscounted cash flows approach
previously required by SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Company adopted SFAS No. 142 on December 1, 2001. Management does not
currently believe that the implementation of SFAS No. 142 will have a
material impact on the Company's financial position or results of
operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides
accounting guidance for financial accounting and reporting for
impairment or disposal of long-lived assets. SFAS No. 144 supersedes
SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003.
Management does not currently believe that the implementation of SFAS
No. 144 will have a material impact on the Company's financial position
or results of operations.
Reclassification - Certain prior year amounts in the consolidated
financial statements have been reclassified to conform with the 2001
presentation.
70
2. INVESTMENT IN UNCONSOLIDATED PARTNERSHIP
At November 30, 2001, the Company had a 50% equity interest in an
unconsolidated partnership with a related party. The Company accounts
for the unconsolidated partnership by the equity method of accounting.
The unconsolidated partnership follows accounting principles generally
accepted in the United States of America. Financial information related
to this unconsolidated partnership was as follows:
November 30,
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------
Assets:
Cash $ 10,004 $ 17,912
Land held for development and sale 115,231 150,150
Other assets 64,167 90,167
-------- --------
$189,402 $258,229
======== ========
Liabilities and equity:
Accounts payable and other liabilities $ 36,349 $ 38,566
Mortgage notes and other debts payable 63,367 106,325
Equity 89,686 113,338
-------- --------
$189,402 $258,229
======== ========
Years ended November 30, 2001 and 2000 and the period
from inception (June 21, 1999) to November 30, 1999
(Dollars in thousands) 2001 2000 1999
---------------------------------------------------------------------
Revenues $130,002 $172,432 $ 73,139
Costs and expenses 97,230 128,742 54,713
-------- -------- --------
Net earnings of unconsolidated
partnership $ 32,772 $ 43,690 $ 18,426
======== ======== ========
In some instances, Lennar Corporation and/or the Company's partner have
provided varying levels of guarantees on certain of the partnership's
debt. At November 30, 2001, Lennar Corporation provided guarantees on
$49.6 million of unconsolidated partnership debt, including a
second-tier partnership, of which $44.1 million were limited
maintenance guarantees.
71
3. INCOME TAXES
The provision for income taxes consisted of the following:
Years ended November 30, 2001 and 2000 and the period
from inception (June 21, 1999) to November 30, 1999
(Dollars in thousands) 2001 2000 1999
-----------------------------------------------------------
Current:
Federal $ 13,369 $ 18,491 $ 6,780
State 1,924 2,150 1,292
-------- -------- --------
15,293 20,641 8,072
-------- -------- --------
Deferred:
Federal (16) (258) 224
State (1) (25) 34
-------- -------- --------
(17) (283) 258
-------- -------- --------
$ 15,276 $ 20,358 $ 8,330
======== ======== ========
The actual income tax expense differs from the "expected" tax expense
for the year (computed by applying the U.S. federal corporate rate of
35% to earnings before income taxes) primarily due to the amount of
state income taxes, net of the related federal tax benefit.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of the assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. The tax effects of significant temporary differences that
give rise to the deferred tax assets are as follows:
November 30,
(Dollars in thousands) 2001 2000
-----------------------------------------------------------
Deferred tax assets:
Capitalized expenses $ 42 $ 25
===== ====
The deferred tax assets are included in other assets in the
consolidated balance sheets.
72
4. RELATED PARTY TRANSACTIONS
The Company and its unconsolidated partnership, in the ordinary course
of business, sell land to affiliates of Lennar Corporation. During
2001, 2000 and the period from inception (June 21, 1999) to November
30, 1999, these land sales amounted to $88.7 million, $106.9 million,
and $16.7 million, respectively, and generated gains of $39.4 million,
$47.9 million and $6.3 million respectively. The Company believes
amounts received from affiliates of Lennar Corporation approximate
amounts that would have been received from independent third parties.
During 2001 and 2000, Lennar Corporation and its subsidiaries advanced
and borrowed funds to and from the Company which had no stated
repayment terms. At November 30, 2001 and 2000, the Company had a
receivable from affiliates of $128.5 million and $82.8 million,
respectively.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain subsidiaries are parties to various claims,
legal actions and complaints arising in the ordinary course of
business. In the opinion of management, the disposition of these
matters will not have a material adverse effect on the financial
condition or results of operations of the Company.
The Company has guaranteed obligations of Lennar Corporation with
regard to certain issues of its outstanding debt, and the stock of the
Company has been pledged as collateral for Lennar Corporation's
obligations with regard to that debt. The Company knows of no event of
default which would require it to satisfy these guarantees and,
therefore, the fair value of these contingent liabilities is considered
immaterial.
73
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lennar Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of Lennar Financial
Services, Inc. and subsidiaries ("LFS"), a wholly-owned subsidiary of U.S. Home
Corporation, as of November 30, 2001 and 2000 and the related consolidated
statements of earnings, stockholder's equity and cash flows for each of the
three years in the period ended November 30, 2001. These financial statements
are the responsibility of LFS' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 financial position of LFS as of November
30, 2001 and 2000, and the results of its operations and its cash flows for each
of the three years in the period ended November 30, 2001, in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
January 9, 2002
74
LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of U.S. Home Corporation)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2001 AND 2000 (Dollars in Thousands, Except Par Value)
- --------------------------------------------------------------------------------
ASSETS 2001 2000
Cash $ 46,293 $ 39,321
Receivables 105,024 27,450
Loans held for sale, net 587,694 376,452
Loans held for investment and performance notes, net 41,590 42,504
Collateral for bonds and notes payable 12,398 20,740
Due from affiliates 110,037 63,648
Title plants 15,530 15,530
Goodwill, net 25,158 25,199
Other assets 50,974 50,723
-------- --------
TOTAL $994,698 $661,567
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 30,307 $ 28,186
Borrowings under credit agreements 693,931 428,966
Bonds and notes payable 11,680 18,278
Other liabilities 52,320 36,316
-------- --------
Total liabilities 788,238 511,746
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 5,000 shares authorized,
issued and outstanding 5 5
Additional paid-in capital 16,979 16,979
Retained earnings 189,476 132,837
-------- --------
Total stockholder's equity 206,460 149,821
-------- --------
TOTAL $994,698 $661,567
======== ========
See accompanying notes to consolidated financial statements.
75
LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of U.S. Home Corporation)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in Thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
REVENUES:
Title and escrow activities $232,294 $179,444 $181,941
Loan origination and sales activities 136,164 79,715 44,650
Interest income 37,410 28,862 22,682
Mortgage servicing activities 3,889 9,838 12,006
Other 13,738 16,849 8,028
-------- -------- --------
Total revenues 423,495 314,708 269,307
-------- -------- --------
OPERATING EXPENSES:
Payroll and benefits 185,747 150,056 139,688
Other administrative expenses 88,843 66,062 57,286
Occupancy 24,853 20,653 17,474
Data processing 2,456 2,183 2,050
Provision for losses 8,591 9,448 1,592
Depreciation and amortization 9,809 10,521 9,740
Interest 13,271 13,796 10,718
-------- -------- --------
Total operating expenses 333,570 272,719 238,548
-------- -------- --------
EARNINGS BEFORE INCOME TAXES 89,925 41,989 30,759
INCOME TAXES 33,286 17,068 13,130
-------- -------- --------
NET EARNINGS $ 56,639 $ 24,921 $ 17,629
======== ======== ========
See accompanying notes to consolidated financial statements.
76
LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of U.S. Home Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED NOVEMBER 30, 2001, 2000, AND 1999 (Dollars in Thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
BALANCE, NOVEMBER 30, 1998 $ 5 $ 16,969 $ 52,822 $ 69,796
Net earnings -- 17,629 17,629
-------- -------- -------- --------
BALANCE, NOVEMBER 30, 1999 5 16,969 70,451 87,425
Reorganization (see Note 1) -- 10 37,465 37,475
Net earnings -- 24,921 24,921
-------- -------- -------- --------
BALANCE, NOVEMBER 30, 2000 5 16,979 132,837 149,821
Net earnings -- 56,639 56,639
-------- -------- -------- --------
BALANCE, NOVEMBER 30, 2001 $ 5 $ 16,979 $189,476 $206,460
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
77
LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of U.S. Home Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in Thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 56,639 $ 24,921 $ 17,629
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 9,809 10,521 9,740
Amortization of loan discounts (322) (541) (431)
Origination and acquisition of loans (5,135,877) (2,140,310) (2,043,571)
Proceeds on sales of loans 4,929,416 2,064,439 2,047,714
Net (increase) decrease in receivables (77,814) (8,697) 2,150
Net (increase) decrease in other assets (4,665) 9,532 (4,824)
Net increase (decrease) in accounts payable and accrued expenses 10,998 (13,841) (6,428)
----------- ----------- -----------
Net cash (used in) provided by operating activities (211,816) (53,976) 21,979
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to loans and mortgage-backed securities held for investment (16,705) (26,754) (3,328)
Sales and principal reductions of loans and mortgage-backed
securities held for investment 20,615 14,920 3,015
Purchases of investments (18,143) (18,112) (13,119)
Maturities of investments 17,700 14,946 11,600
Principal reductions of collateral for bonds and notes payable -- 5,864 10,226
Originations (sales) of mortgage servicing rights, net 10,802 1,315 (8,317)
Additions to operating properties and equipment (6,875) (10,229) (13,045)
Acquisition of North American Asset Development
Corporation and subsidiaries, net of cash acquired (1,581) (2,050) (1,915)
Acquisition of Southwest Land Title, net of cash acquired -- -- (6,631)
Acquisition of Eagle Home Mortgage, Inc., net of cash acquired -- (2,255) (5,874)
Acquisition of North American Title Insurance Company -- -- (4,049)
Acquisition of North American Title Guaranty, net of cash acquired -- -- (508)
Acquisition of Texas Professional Title (49) (1,666) --
Reorganization of U.S. Home Mortgage -- 1,019 --
Investment in USH Funding -- 1,000 --
----------- ----------- -----------
Net cash provided by (used in) investing activities 5,764 (22,002) (31,945)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in borrowings under credit agreements 264,996 165,452 (3,168)
Repayment of bonds and notes payable (5,666) (5,789) (9,457)
(Decrease) increase in amounts due to/from affiliates (46,306) (79,275) 30,603
----------- ----------- -----------
Net cash provided by financing activities 213,024 80,388 17,978
----------- ----------- -----------
NET INCREASE IN CASH 6,972 4,410 8,012
CASH AT BEGINNING OF YEAR 39,321 34,911 26,899
----------- ----------- -----------
CASH AT END OF YEAR $ 46,293 $ 39,321 $ 34,911
=========== =========== ===========
(Continued)
78
LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of U.S. Home Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in Thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 13,981 $ 12,942 $ 10,982
=========== =========== ===========
ACQUISITION OF TEXAS PROFESSIONAL TITLE:
Fair value of assets (inclusive of cash of $ - ) $ 1,002
Goodwill recorded 2,411
Liabilities assumed (1,747)
-----------
Cash paid $ 1,666
===========
ACQUISITION OF SOUTHWEST LAND TITLE,
EAGLE HOME MORTGAGE, INC., NORTH AMERICAN TITLE
INSURANCE COMPANY, AND NORTH AMERICAN TITLE
GUARANTY:
Fair value of assets (inclusive of cash of $2,656) $ 40,482
Goodwill recorded 11,429
Liabilities assumed (32,193)
-----------
Cash paid $ 19,718
===========
(Concluded)
See accompanying notes to consolidated financial statements.
79
LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of U.S. Home Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Lennar Financial Services, Inc. and
Subsidiaries ("LFS"), a wholly-owned subsidiary of U.S. Home
Corporation ("U.S. Home"), which is a wholly-owned subsidiary of Lennar
Corporation ("Lennar"), is the holding company for the entities which
form the Financial Services Division (the "Division") of Lennar. The
Division's operations include mortgage financing, title insurance and
closing services, high-speed Internet access, cable television and
alarm monitoring services all of which are available to residents of
Lennar communities and others. These services are conducted by the
Division's subsidiaries: Universal American Mortgage Company ("UAMC"),
North American Title Group, Inc., Strategic Technologies, Inc. and
their related subsidiaries. The Division's investments in
unconsolidated limited liability corporations in which a significant,
but less than a controlling interest is held, are accounted for by the
equity method. Controlling interest is determined based on a number of
factors, which include the Division's ownership interest and
participation in the management of the partnership.
On May 3, 2000, Lennar acquired U.S. Home. In June 2001, the ownership
structure of LFS was reorganized whereby LFS became a subsidiary of
U.S. Home. U.S. Home Mortgage Corporation (formerly a subsidiary of
U.S. Home) became a subsidiary of LFS and U.S. Home Mortgage
Corporation was then merged into LFS's subsidiary UAMC, with UAMC being
the surviving entity. These transactions were accounted for as a
reorganization of entities under common control which is similar to the
pooling of interests method of accounting for business combinations
and, accordingly, all prior period consolidated financial statements
have been restated at historical carrying values as if this transaction
occurred on May 3, 2000.
The financial statements of Lennar Financial Services, Inc. include the
accounts of LFS and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
Loans Held for Sale - Loans held for sale consist of residential
mortgage loans. Effective December 1, 2000, loans held for sale that
are designated as hedged assets are carried at market value, as the
effect of changes in fair value are reflected in the carrying amount of
the loans and in earnings. Premiums and discounts recorded on loans
held for sale are presented as an adjustment of the carrying amount of
the loans and are not amortized.
Effective December 1, 2000, LFS adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities by requiring that all
derivatives be recognized in the balance sheet and measured at fair
value. Gains or losses resulting from changes in the fair value of
derivatives are recognized in earnings or recorded in other
comprehensive income and recognized in the statement of earnings when
the hedged item affects earnings, depending on the purpose of the
derivatives and whether they qualify for hedge accounting treatment.
80
The Division's policy is to designate at a derivative's inception the
specific assets, liabilities, or future commitments being hedged and
monitor the derivative to determine if it remains an effective hedge.
The effectiveness of a derivative as a hedge is based on high
correlation between changes in its value and changes in the value of
the underlying hedged item. LFS does not enter into or hold derivatives
for trading or speculative purposes.
The Division originates residential mortgage loans, which it sells to
investors on a servicing released non-recourse basis. The Division has
a risk management policy which governs its secondary marketing and
hedging practices. Pursuant to the requirements of this policy, LFS
uses derivative financial instruments to reduce its exposure to
fluctuations in interest rates. LFS enters into forward commitments and
option contracts to protect the value of fixed rate locked loan
commitments and loans held for sale or disposition from fluctuations in
market interest rates. These derivative financial instruments are
designated as fair value hedges under SFAS No. 133 and, accordingly,
for all qualifying and highly effective fair value hedges, the changes
in the fair value of the derivative and the loss or gain on the hedged
asset relating to the risk being hedged are recorded currently in
earnings. The effect of the implementation of SFAS No. 133 on LFS'
operating earnings was not significant.
Loans Held for Investment - Loans for which LFS has the positive intent
and ability to hold to maturity consist of mortgage loans carried at
cost net of unamortized discounts. Discounts are amortized over the
estimated lives of the loans using the interest method.
Collateral for Bonds and Notes Payable - Collateral for bonds and notes
payable consists of mortgage loans, mortgage-backed securities, and
funds held by the trustee. Mortgage loans and mortgage-backed
securities are carried net of unamortized discounts. Discounts are
amortized over the estimated lives of the assets using the interest
method. An unaffiliated company holds an interest in the collateral for
bonds and notes payable to the extent such assets exceed the related
liabilities.
Mortgage Servicing Rights - Historically, LFS retained servicing rights
when it sold certain of the loans it originated. During 2001, LFS sold
substantially all of its existing portfolio of mortgage servicing
rights, realizing a pretax profit from the sale of approximately $13
million. LFS currently sells all of its loans on a servicing released
nonrecourse basis. Mortgage servicing rights of $11,653,000 as of
November 30, 2000 are included in other assets in the accompanying
consolidated balance sheets. Loan servicing revenue represents fees
earned by LFS for servicing loans for investors prior to the sale of
its servicing portfolio.
Loan Servicing Revenue - Loan servicing revenue represents fees earned
for servicing loans owned by others, generally calculated as a
percentage of outstanding principal balance, as well as late charges
and other ancillary revenues resulting from servicing activities.
Income Taxes - LFS files a consolidated federal income tax return with
Lennar. Income taxes have been provided at the LFS level as if LFS
filed an income tax return on a stand-alone basis. Current taxes due
are recorded as a payable to Lennar, and the deferred portion is
recorded as deferred taxes. Income taxes are accounted for in
accordance with SFAS No. 109, Accounting for Income Taxes.
Title Plants - Title plants, which are comprised of indexed and
cataloged information concerning titles to real property, are recorded
at cost. Such costs are not amortized because there is no indication of
reduction of plant values. Costs of maintaining and operating title
plants are charged to operations in the period in which they are
incurred. LFS owns title plants in four states. In other locations, LFS
purchases access to title plant information for a fee based on the
revenues.
81
Goodwill - Goodwill represents the excess of the purchase price over
the fair value of net assets acquired and was amortized on a
straight-line basis over periods ranging from 15 to 20 years. At
November 30, 2001 and 2000, goodwill was $25.2 million and $25.2
million, respectively (net of accumulated amortization of $4.4 million
and $2.8 million, respectively). In the event that facts and
circumstances indicate that the carrying value of goodwill might be
impaired, an evaluation of recoverability is performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the goodwill would be compared to the carrying amount
to determine if a write-down to fair value based on discounted cash
flows is necessary. No impairment existed during the years ended
November 30, 2001, 2000 or 1999. Subsequent to the Division's adoption
of SFAS No. 141 and SFAS No. 142, goodwill and its amortization will be
accounted for in accordance with the standards they prescribe, which
will discontinue the amortization of goodwill. See the New Accounting
Pronouncements section of Note 1.
Operating Properties and Equipment - Operating properties and equipment
are recorded at cost and are included in other assets in the
accompanying consolidated balance sheets. The assets are depreciated
over their estimated useful lives using the straight-line method. The
estimated useful life for operating properties is 30 years and for
equipment is 2 to 10 years.
Escrow Funds Held in Trust - At November 30, 2001 and 2000, LFS held
approximately $358,736,000 and $365,749,000, respectively, in trust for
others, pending completion of real estate transactions. These funds are
not included in LFS' consolidated balance sheets.
Title and Escrow Revenue - Premiums from title insurance policies are
recognized as revenue over the lives of the policies, beginning on the
effective date of the policy. Escrow fees are recognized at the time
the related real estate transactions are completed, usually upon the
close of escrow.
Provision for Losses - LFS provides an allowance for estimated title
and escrow losses based upon management's evaluation of claims
presented and estimates for any incurred but not reported claims. The
allowance is established at a level that management estimates to be
sufficient to satisfy those claims where a loss is determined to be
probable and the amount of such loss can be reasonably estimated. The
allowance for title and escrow losses for both known and incurred but
not reported claims is considered by management of LFS to be adequate
for such purposes.
LFS also provides allowances for loan losses when and if management
determines that loans or portions thereof are uncollectible. The
provision recorded and the adequacy of the related allowance is
determined by management's continuing evaluation of the loan portfolio
in light of past loan loss experience, regulatory examinations, present
economic conditions and other factors considered relevant by
management. Anticipated changes in economic factors which may influence
the level of the allowance are considered in the evaluation by
management when the likelihood of the changes can be reasonably
determined. While management uses the best information available to
make such evaluations, future adjustments to the allowance may be
necessary as a result of future economic and other conditions that may
be beyond management's control.
New Accounting Pronouncements - In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method and requires acquired
intangible assets to be recognized as assets apart from goodwill if
certain criteria are met. The Division adopted SFAS No. 141 for all
future acquisitions.
82
SFAS No. 142 no longer requires or permits the amortization of goodwill
and indefinite-lived assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment
in accordance with this statement. This impairment test uses a fair
value approach rather than the undiscounted cash flows approach
previously required by SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
Division adopted SFAS No. 142 on December 1, 2001. Because of that,
amortization of goodwill of approximately $1.7 million per year will
not be incurred in the future. Management does not currently believe
that the implementation of SFAS No. 142 will have a material impact on
the Division's financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides
accounting guidance for financial accounting and reporting for
impairment or disposal of long-lived assets. SFAS No. 144 supersedes
SFAS No. 121. SFAS 144 is effective for the Division in fiscal 2003.
Management does not currently believe that the implementation of SFAS
No. 144 will have a material impact on the Division's financial
condition or results of operations.
Financial Statement Presentation - LFS prepares its financial
statements using an unclassified balance sheet presentation as is
customary in the financial services industry. A classified balance
sheet presentation would have aggregated current assets, current
liabilities, and net working capital at November 30, 2001 and 2000 as
follows:
2001 2000
Current assets $836,653,000 $489,241,000
Current liabilities 736,419,000 414,187,000
------------ ------------
Net working capital $100,234,000 $ 75,054,000
============ ============
Reclassifications - Certain prior year amounts in the consolidated
financial statements have been reclassified to conform with the 2001
presentation.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America 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.
2. LOANS HELD FOR INVESTMENT AND PERFORMANCE NOTES
LFS periodically acquires loans collateralized by residential and other
real property which it holds for investment. At November 30, 2001 and
2000, these loans totaling $38,791,000 and $40,094,000, respectively,
carried interest rates ranging from 6.5% to 16.2% per annum (weighted
average interest rate of 10.3% at November 30, 2001). At November 30,
2001, mortgage notes receivable of $39,301,000 were pledged as
collateral for short-term debt.
At November 30, 2001, LFS estimates that the fair value of its
investments in residential mortgage loans and mortgage notes receivable
approximate their recorded amount based on the interest rates on the
loans compared to the current market rates, the collectibility, term
and type of loans, the value of the underlying properties and the
remaining available mortgage loan insurance coverage.
During the years ended November 30, 2001 and 2000, LFS purchased
subordinated performance notes issued by affiliates of two mortgage
insurance companies in which the interest earned on each note is
83
variable depending on, among other things, the default experience and
related losses from mortgage insurance claims on a specific pool of
mortgage loans originated by LFS. At November 30, 2001 and 2000, the
performance notes of $2,799,000 and $2,410,000, respectively, earned
interest at an average rate of 24.4% and 29.5% per annum, respectively.
At November 30, 2001, LFS estimates that the fair value of its
investments in performance notes approximates their recorded amount
based on the Division's history of originating high quality loans with
related low delinquency and default rates, and its option to redeem at
par certain of the performance notes (representing a majority of such
notes) having an acceptable underlying loan loss experience.
3. COLLATERAL FOR BONDS AND NOTES PAYABLE
Collateral for bonds and notes payable (the "Collateral") consists of
fixed and adjustable rate mortgage loans and fixed-rate mortgage-backed
securities guaranteed by U.S. government agencies. All collateral is
pledged to secure repayment of the bonds and notes payable. All
principal and interest on the Collateral is remitted directly to a
trustee and, together with any reinvestment income earned thereon, is
available for payment on the bonds and notes payable.
The components of the collateral at November 30, 2001 and 2000 are as
follows:
2001 2000
Mortgage-backed securities held-to-maturity $ 9,232,000 $11,328,000
Mortgage loans 2,813,000 8,492,000
Funds held by trustee 353,000 920,000
----------- -----------
$12,398,000 $20,740,000
=========== ===========
84
4. INVESTMENTS
The amortized cost, unrealized gains, unrealized losses and fair values
for held-to-maturity securities by type as of November 30, 2001 and
2000 are as follows:
2001
-------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities $ 7,841,000 $ 49,000 $ -- $ 7,890,000
U.S. government agency obligations -- -- -- --
Certificates of deposit 5,394,000 -- -- 5,394,000
----------- ----------- ----------- -----------
Total $13,235,000 $ 49,000 $ -- $13,284,000
=========== =========== =========== ===========
2000
-------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities $ 1,829,000 $ 21,000 $ (1,000) $ 1,849,000
U.S. government agency obligations 5,861,000 -- (1,000) 5,860,000
Certificates of deposit 4,798,000 -- -- 4,798,000
----------- ----------- ----------- -----------
Total $12,488,000 $ 21,000 $ (2,000) $12,507,000
=========== =========== =========== ===========
Investments are included in other assets in the accompanying
consolidated balance sheets.
The amortized cost and estimated fair value of securities
held-to-maturity at November 30, 2001 by contractual maturity are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Amortized Fair
Cost Value
Due in one year or less $12,386,000 $12,388,000
Due after one year through five years 649,000 689,000
Due after five years through ten years 200,000 207,000
----------- -----------
Total $13,235,000 $13,284,000
=========== ===========
85
5. OTHER ASSETS
Other assets consist of the following at November 30, 2001 and 2000:
2001 2000
Operating properties and equipment (net of accumulated
depreciation of $18,080,000 and $14,623,000 for
2001 and 2000, respectively) $18,592,000 $18,869,000
Investments 13,235,000 12,488,000
Mortgage servicing rights -- 11,653,000
Other 19,147,000 7,713,000
----------- -----------
$50,974,000 $50,723,000
=========== ===========
6. BORROWINGS UNDER CREDIT AGREEMENTS
2001 2000
Warehouse line of credit with banks totaling $500 million, ($240
million at November 30, 2000) including a $145 million 30-day
increase expiring on December 15, 2001, variable interest rate
(approximately 3.1% and 6.4% at November 30, 2001 and 2000,
respectively); secured by receivables on loans sold not yet funded,
mortgage loans and, at November 30, 2000, by servicing rights;
maturing June 24, 2003 $ 483,209,000 $ 339,376,000
Advances under conduit funding lines with certain major financial
institutions, variable interest rates (approximately 3.0% and 7.5% at
November 30, 2001 and 2000, respectively); secured by mortgage loans 190,577,000 58,837,000
Line of credit with a bank totaling $20 million expiring on March 31,
2002; variable interest rate (approximately 3.1% and 7.8% at November
30, 2001 and 2000, respectively); secured by substantially all of the
assets and common stock of North American Asset Development
Corporation and the common stock of North American Title Insurance
Company (both are subsidiaries of North American Title Group, Inc.) 20,000,000 20,000,000
Unsecured revolving credit agreement totaling $10 million, variable
interest rate (approximately 8.7% at November 30, 2000); paid in 2001 -- 9,900,000
Other borrowings 145,000 853,000
------------- -------------
Total $ 693,931,000 $ 428,966,000
============= =============
The warehouse lines of credit are subject to restrictive covenants
relating to certain financial ratios as to net worth and debt.
86
7. BONDS AND NOTES PAYABLE
At November 30, 2001 and 2000, bonds and notes payable had an
outstanding balance of $11,680,000 and $18,278,000, respectively. The
borrowings mature in years 2013 through 2018 and carry interest rates
ranging from 8.5% to 11.7%. The annual principal repayments are
dependent upon collections on the Collateral, including prepayments,
and, as a result, the actual maturity may occur earlier than its stated
maturity.
8. INCOME TAXES
Income tax expense (benefit) for the years ended November 30, 2001,
2000 and 1999 consists of:
2001 2000 1999
Current $ 43,386,000 $ 20,652,000 $ 9,979,000
Deferred (10,100,000) (3,584,000) 3,151,000
------------ ------------ ------------
$ 33,286,000 $ 17,068,000 $ 13,130,000
============ ============ ============
The actual income tax differs from the "expected" tax expense for the
year (computed by applying the U.S. federal corporate rate of 35% to
earnings before income taxes) primarily due to the amount of state
income taxes, net of the related federal tax benefit.
At November 30, 2001 and 2000, the tax effects of temporary differences
that give rise to significant portions of deferred tax assets and
deferred tax liabilities are as follows:
2001 2000
Deferred tax assets:
Loss reserves $ 10,741,000 $ 7,321,000
Accruals not currently deductible 2,977,000 2,227,000
Other 3,311,000 1,722,000
------------ ------------
17,029,000 11,270,000
Valuation allowance (318,000) (363,000)
------------ ------------
16,711,000 10,907,000
------------ ------------
Deferred tax liabilities:
Intangible assets 1,659,000 1,668,000
Other 3,397,000 6,297,000
------------ ------------
5,056,000 7,965,000
------------ ------------
Net deferred tax asset $ 11,655,000 $ 2,942,000
============ ============
The net deferred tax asset is included in other assets in the
accompanying balance sheets.
87
9. LOAN SERVICING
As of November 30, 2000, LFS was servicing approximately 29,000 loans
with an unpaid principal balance aggregating $2,313,000,000 for
investors. Related escrow funds of approximately $11,427,000 on deposit
in custodial bank accounts at November 30, 2000 are not included in the
accompanying consolidated balance sheets.
LFS has errors and omissions and fidelity bond insurance policies, both
in the amount of $1,600,000.
10. FINANCIAL INSTRUMENTS
Discussion of Credit and Interest Rate Risk Management
LFS enters into derivative financial instruments in the normal course
of business through the origination and sale of mortgage loans and the
management of the related loss exposure caused by fluctuations in
interest rates. These financial instruments include commitments to
extend credit (e.g., the mortgage loan pipeline), forward contracts for
the delivery of mortgage-backed securities ("MBS"), and other hedging
instruments. These instruments involve, to varying degrees, elements of
credit and market risk. All of LFS' derivative financial instruments
are held or issued for purposes other than trading.
As of November 30, 2001, the Division's pipeline of loans in process
totaled approximately $1,691,387,000. Loans in process for which
interest rates were committed to the borrower totaled approximately
$235,049,000 as of November 30, 2001. Substantially all of these
commitments were for periods of 30 days or less. To minimize credit
risk, LFS uses the same credit policies in the approval of the
commitments as are applied to all lending activities. Since a portion
of these commitments are expected to expire without being exercised by
the borrowers, the total commitments do not necessarily represent
future cash requirements.
Mandatory MBS forward commitments and MBS option contracts are used by
LFS to hedge its interest rate exposure during the period from when LFS
extends an interest rate lock to a loan applicant until the time in
which the loan is sold to an investor. These instruments involve, to
varying degrees, elements of credit and interest rate risk. Credit risk
is managed by LFS by entering into agreements only with investment
bankers with primary dealer status and with permanent investors meeting
the credit standards of LFS. At any time, the risk to LFS, in the event
of default by the purchaser, is the difference between the contract
price and current market value. At November 30, 2001, LFS had open
commitments amounting to $291,000,000 to sell MBSs with varying
settlement dates through January 2002.
Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Values of Financial Instruments,
requires the disclosure of information about certain financial
instruments. The estimated fair values have been determined by LFS
using available market information and appropriate valuation
methodologies. The fair values are significantly affected by the
assumptions used. Accordingly, the use of different assumptions and/or
estimation methodologies may have a material effect on the estimated
fair values. The estimated fair values presented herein are not
necessarily indicative of the amounts that LFS could realize in a
current market exchange.
88
The following describes the methods and assumptions used by LFS in
estimating fair values:
Cash - The carrying amounts reported in the consolidated
balance sheets approximate fair values, as original maturities
are less than 90 days.
Loans Held for Sale - Fair value is based on quoted market
prices for securities backed by similar loans, adjusted for
differences in loan characteristics.
Loans Held for Investment - Fair value is based on discounting
estimated cash flows through the estimated maturity, adjusted
for approximate prepayments, using appropriate market discount
rates, or quoted market prices.
Collateral for Bonds and Notes Payable - Fair value is based
on quoted market prices for securities backed by similar
loans, adjusted for differences in loan characteristics.
Investment Securities - Fair value is based on quoted market
prices.
Borrowings under Credit Agreements - Fair value approximates
carrying value due to variable interest rate pricing terms and
the short-term nature of the borrowings.
Bonds and Notes Payable - Fair value is based on quoted market
prices for securities backed by similar loans, adjusted for
differences in loan characteristics.
Commitments to Originate and to Sell Loans - Fair value of
commitments to purchase loans is based upon the difference
between the current value of similar loans and the price at
which LFS has committed to originate the loans. The fair value
of commitments to sell loan contracts is the estimated amount
that LFS would receive or pay to terminate the commitments at
the reporting date based on market prices for similar
financial instruments.
The estimated fair value of the Division's financial instruments was as
follows (in thousands of dollars):
NOVEMBER 30,
2001 2000
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Cash $ 46,293 $ 46,293 $ 39,321 $ 39,321
Loans held for sale, net 587,694 587,916 376,452 379,499
Loans held for investment and
performance notes, net 41,590 40,886 42,504 42,014
Collateral for bonds and notes payable 12,398 12,982 20,740 21,166
Investment securities 13,235 13,284 12,488 12,507
Financial liabilities:
Borrowings under credit agreements 693,931 693,931 428,966 428,966
Bonds and notes payable 11,680 12,216 18,278 18,553
Other instruments:
Commitments to originate loans (1,085) (1,085) -- 445
Commitments to sell loans
and option contracts 2,351 2,351 -- (119)
89
11. RELATED PARTIES
During 2001 and 2000, Lennar has periodically advanced and borrowed
funds to and from LFS, which bear interest at a rate tied to Lennar's
short-term borrowing rate. At November 30, 2001 and 2000, Lennar had
borrowed $109,537,000 and $63,148,000, respectively, from LFS. LFS
recorded net interest income related to these advances of $3,130,037
and $18,000 in 2001 and 2000, respectively.
At November 30, 2001 and 2000, LFS had issued and outstanding
$2,205,000 and $3,375,000, respectively, of letters of credit for the
benefit of Lennar.
12. COMMITMENTS AND CONTINGENCIES
Because of the nature of its activities, LFS is at times subject to
threatened legal actions which arise out of the normal course of
business. In the opinion of management, there is no pending or
threatened litigation which will have a material effect on the
Division's financial position or results of operations.
LFS has guaranteed obligations of Lennar with regard to certain issues
of its outstanding debt, and the stock of LFS has been pledged as
collateral for Lennar's obligations with regard to that debt. LFS knows
of no event of default which would require it to satisfy these
guarantees and, therefore, the fair value of these contingent
liabilities is considered immaterial.
90