EXHIBIT 13
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
Lennar Corporation and Subsidiaries
At or for the Years Ended November 30,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 1996 1995
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RESULTS OF OPERATIONS:
Revenues:
Homebuilding $2,849,207 2,204,428 1,208,570 952,648 665,510
Financial services $ 269,307 212,437 94,512 89,013 65,476
Total revenues $3,118,514 2,416,865 1,303,082 1,041,661 730,986
Operating earnings - business segments:
Homebuilding $ 340,803 283,369 120,240 91,066 58,530
Financial services $ 31,096 33,335 35,545 28,650 19,015
Corporate general and administrative expenses $ 37,563 28,962 15,850 12,396 10,523
Earnings from continuing operations before income taxes $ 285,477 240,114 85,727 84,429 53,310
Earnings from continuing operations $ 172,714 144,068 50,605 51,502 32,519
Earnings from discontinued operations $ -- -- 33,826 36,484 37,908
Net earnings $ 172,714 144,068 84,431 87,986 70,427
Per share amounts (diluted):
Earnings from continuing operations $ 2.74 2.49 1.34 1.42 0.90
Earnings from discontinued operations $ -- -- 0.89 1.01 1.05
Net earnings per share $ 2.74 2.49 2.23 2.43 1.95
Cash dividends per share - common stock $ .05 .05 .088 .10 .10
Cash dividends per share - Class B common stock $ .045 .045 .079 .09 .09
FINANCIAL POSITION:
Total assets $2,057,647 1,917,834 1,343,284 1,589,593 1,341,065
Total debt $ 802,295 798,838 661,695 689,159 557,055
Stockholders' equity $ 881,499 715,665 438,999 695,456 607,794
Shares outstanding (000's) 57,917 58,151 53,160 35,928 35,864
Stockholders' equity per share $ 15.22 12.31 8.26 19.36 16.95
DELIVERY AND BACKLOG INFORMATION:
Number of homes delivered 12,589 10,777 6,702 5,968 4,680
Backlog of home sales contracts 2,891 4,100 3,318 1,929 1,802
Dollar value of backlog $ 652,000 840,000 665,000 312,000 255,000
As a result of the Company's spin-off of its commercial real estate
investment and management business, including the Investment Division business
segment, the selected financial data for 1996 and 1995 has been restated to
reflect the Company's Investment Division as a discontinued operation.
-1-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THE FOLLOWING MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE
"FORWARD-LOOKING STATEMENTS" AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. SUCH STATEMENTS INVOLVE RISKS, UNCERTAINTIES AND OTHER
FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE WHICH ARE
ANTICIPATED. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO, CHANGES IN GENERAL
ECONOMIC CONDITIONS, THE MARKET FOR HOMES GENERALLY AND IN AREAS WHERE THE
COMPANY HAS DEVELOPMENTS, THE AVAILABILITY AND COST OF LAND SUITABLE FOR
RESIDENTIAL DEVELOPMENT, MATERIALS PRICES, LABOR COSTS, INTEREST RATES, CONSUMER
CONFIDENCE, COMPETITION, ENVIRONMENTAL FACTORS AND GOVERNMENT REGULATIONS
AFFECTING THE COMPANY'S OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW
Lennar achieved record net earnings in 1999 of $172.7 million, or $2.74
per share diluted, compared to $144.1 million, or $2.49 per share diluted, in
1998. The increase in net earnings in 1999 primarily reflected the Company's
growth in California and a generally strong housing market in the first half of
the year. The Company achieved record earnings in 1999 while further
strengthening its balance sheet by reducing the ratio of homebuilding debt to
total capital to 37% at November 30, 1999, compared to 43% at November 30, 1998.
HOMEBUILDING
The Homebuilding Division sells and constructs single-family attached
and detached homes. These activities also include the purchase, development and
sale of residential land. The following tables set forth selected financial and
operational information for the periods indicated:
SELECTED HOMEBUILDING DIVISION FINANCIAL DATA
(DOLLARS IN THOUSANDS, Years Ended November 30,
EXCEPT AVERAGE SALES PRICES) 1999 1998 1997
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Revenues:
Sales of homes $ 2,671,744 2,089,762 1,130,989
Sales of land 150,315 77,185 63,797
Equity in earnings from
partnerships 19,482 30,908 4,024
Other 7,666 6,573 9,760
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Total revenues $ 2,849,207 2,204,428 1,208,570
Gross margin - home
sales ($) $ 566,322 448,021 223,298
Gross margin - home
sales (%) 21.2% 21.4% 19.7%
Gross margin - land
sales ($) $ 22,228 12,617 16,168
Selling, general &
administrative expenses ($) $ 272,550 210,039 130,006
Selling, general &
administrative expenses (%) 10.2% 10.1% 11.5%
Operating earnings ($) $ 340,803 283,369 120,240
Operating earnings (%) 12.0% 12.9% 10.0%
Average sales price $ 212,000 194,000 169,000
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-2-
SUMMARY OF HOME AND BACKLOG DATA
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DELIVERIES 1999 1998 1997
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Florida 4,241 3,761 3,367
California 3,731 3,029 587
Texas 3,107 2,484 2,075
Arizona/Nevada 1,510 1,503 673
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12,589 10,777 6,702
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NEW ORDERS
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Florida 3,788 4,010 3,457
California 3,362 2,851 758
Texas 3,056 2,519 2,305
Arizona/Nevada 1,174 1,636 592
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11,380 11,016 7,112
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BACKLOG - HOMES
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Florida 1,091 1,544 1,295
California 779 1,148 783
Texas 652 703 668
Arizona/Nevada 369 705 572
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2,891 4,100 3,318
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BACKLOG - DOLLAR VALUE
(IN THOUSANDS) $ 652,000 840,000 665,000
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Revenues from sales of homes increased 28% in 1999 and 85% in 1998
compared to the previous years, primarily as a result of increases in the number
of new home deliveries and the average sales price. The increase in deliveries
in 1999 reflected growth in California, where the Company made several
acquisitions in 1998, and generally favorable market conditions throughout the
Company's homebuilding markets in the first half of 1999. The primary increases
in 1998 occurred in California and Arizona/Nevada as a result of the merger with
Pacific Greystone in 1997, and additional acquisitions made in 1998. The higher
average sales price in 1999 reflected both price increases and a shift in
product mix in certain markets. The increase in the average sales price in 1998
was due primarily to a greater percentage of deliveries in the California
market, where average sales prices are higher.
Gross margin as a percentage of sales of homes decreased 20 basis
points in 1999 compared to 1998, and increased 170 basis points in 1998 compared
to 1997. The slight decrease in gross margin percentage in 1999 was due
primarily to the Company's recent expansion into inland areas of California
where gross margin percentages are lower than those in the other areas of
California in which the Company operates. The Company continues to generate its
highest overall gross margin percentages in the California market. The increase
in gross margin percentage in 1998 was primarily attributable to a greater
percentage of deliveries from the California market as a result of the merger
with Pacific Greystone and other acquisitions, and higher gross margin
percentages in the Company's Texas homebuilding market.
-3-
Gross margins from sales of land were higher in 1999 compared to 1998
due primarily to the increase in revenues from sales of land. Equity in earnings
from partnerships decreased in 1999 compared to 1998 due primarily to a lower
level of land sales by the Company's partnerships. The increase in equity in
earnings from partnerships in 1998 compared to 1997 reflected a full year of
earnings from Lennar Land Partners, which was formed on October 31, 1997.
Margins achieved on sales of land and equity in earnings from partnerships may
vary significantly from period to period depending on the timing of land sales
by the Company and its partnerships.
Selling, general and administrative expenses as a percentage of revenues
from sales of homes were nearly unchanged in 1999 compared to 1998, and were 140
basis points lower in 1998 compared to 1997. The decrease in 1998 compared to
1997 resulted primarily from the increase in revenues in 1998 as a result of the
Company's expansion.
New home orders increased 3% in 1999 and 55% in 1998 compared to the
previous years. The increase in 1999 reflected higher new orders in the first
half of 1999 due primarily to expansion in California and strong demand in
Texas. While new home orders rose in fiscal 1999, they were lower in the second
half of the fiscal year compared to the same period in 1998 due primarily to
lower new orders in Florida and Arizona/Nevada, where there were decreases in
the average number of communities and some softening in demand in certain
markets. The Company expects new home orders in early fiscal 2000 to be below
comparable 1999 levels. However, assuming there are no significant changes in
economic conditions or demand for new homes, new order trends are expected to
improve with the addition of new communities throughout the year. The growth in
new home orders in 1998 compared to 1997 was primarily attributable to the
Company's growth in California, where the Company made several acquisitions in
1997 and 1998. Backlog dollar value decreased 22% to $652.0 million at November
30, 1999, compared to $840.0 million at November 30, 1998, due primarily to an
improved backlog conversion rate of 86% in the fourth quarter of 1999 compared
to 67% in the fourth quarter of 1998.
FINANCIAL SERVICES
The Financial Services Division provides mortgage financing, title
insurance and closing services for Lennar homebuyers and others. The Division
also packages and resells residential mortgage loans and mortgage-backed
securities, performs mortgage loan servicing activities and provides cable
television and alarm monitoring services to residents of Lennar communities and
others. The following table sets forth selected financial and operational
information relating to the Financial Services Division:
Years Ended November 30,
(DOLLARS IN THOUSANDS) 1999 1998 1997
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REVENUES $ 269,307 212,437 94,512
COSTS AND EXPENSES 238,211 179,102 58,967
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OPERATING EARNINGS $ 31,096 33,335 35,545
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Dollar value of
mortgages originated $ 2,162,479 1,031,338 419,933
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Number of mortgages
originated 14,900 7,900 3,500
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Principal balance of
servicing portfolio $ 3,128,234 3,213,235 3,073,010
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Number of loans serviced 38,000 41,000 39,700
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Number of title
transactions 139,000 123,000 12,000
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-4-
The 27% increase in revenues from the Financial Services Division in
1999 compared to 1998 reflected higher mortgage services revenues as a result of
the growth in Lennar home deliveries, a higher capture rate of Lennar homebuyers
and acquisitions made by the Division in 1999, combined with higher title
services revenues which resulted from a higher number of title transactions in
the first half of 1999 and acquisitions made in 1998 and 1999. Operating
earnings from the Financial Services Division were lower in 1999 compared to
1998 primarily due to reduced earnings from title services as a result of a
lower level of refinance activity, and a highly competitive pricing environment
in the mortgage business.
Revenues and operating earnings from the Financial Services Division in
1998 included a significant contribution from North American Title, which was
acquired in January 1998. Additionally, the Division experienced improved
profits from mortgage services primarily due to increased homebuilding volume
and a greater capture rate of Lennar homebuyers and others. These improvements
in 1998 were offset by the absence of the portions of this Division previously
involved in commercial mortgage lending and investments, which were spun-off on
October 31, 1997.
CORPORATE GENERAL AND ADMINISTRATIVE
Corporate general and administrative expenses as a percentage of total
revenues were 1.2% in 1999, 1998 and 1997.
INTEREST
Interest expense was $48.9 million, or 1.6% of total revenues, in 1999,
$47.6 million, or 2.0% of total revenues, in 1998 and $25.0 million (for
continuing operations), or 1.9% of total revenues, in 1997. The decrease in
interest as a percentage of total revenues in 1999 was mainly due to a lower
average borrowing rate in the first nine months of 1999, primarily as a result
of the Company's issuance of $229 million of zero-coupon senior convertible debt
securities late in the third quarter of 1998. These notes have an effective
interest rate of 3 7/8%. Interest incurred was $54.6 million in 1999, $50.5
million in 1998 and $36.1 million (for continuing operations) in 1997. The 1999
increase was primarily due to an increase in average debt outstanding in 1999.
The increases in interest expense and interest incurred in 1998 compared to 1997
were primarily due to an increase in average debt outstanding as a result of the
Company's growth in 1998.
-5-
SPIN-OFF, FORMATION OF PARTNERSHIP AND MERGER
On June 10, 1997, the Company's Board of Directors approved a plan to
spin-off its commercial real estate investment and management business
consisting of the Investment Division (which is classified as a discontinued
operation in the accompanying consolidated statements of earnings and cash
flows), the portions of the Financial Services Division involved in commercial
mortgage lending and investments and certain assets of the Homebuilding Division
utilized in related businesses. The spin-off was conducted through a tax-free
distribution of the stock of LNR Property Corporation ("LNR") to the
stockholders of Lennar and was completed on October 31, 1997. The Investment
Division was involved in the development, management and leasing, as well as the
acquisition and sale of commercial and multi-family residential rental
properties and land. The Investment Division also was a participant and manager
in a number of partnerships which acquired portfolios of commercial mortgage
loans and real estate and acquired, at a discount, the unrated portions of debt
securities which were collateralized by commercial real estate loans. Operating
earnings from the discontinued Investment Division were $68.4 million in 1997.
At the time of the spin-off transaction, Lennar and LNR formed a
general partnership to acquire, develop and sell land. Lennar and LNR
contributed properties to the partnership in exchange for 50% general
partnership interests. In 1999, certain assets and liabilities of this
partnership were contributed at net book value to a second general partnership
and the Company and LNR each received 50% general partnership interests in the
second partnership. The two partnerships are collectively referred to as "Lennar
Land Partners".
In the fourth quarter of 1997, the Company recorded a restructuring
charge to continuing operations for the estimated costs of the spin-off of LNR
and formation of Lennar Land Partners. The restructuring charge was $29.2
million and consisted of professional fees, transaction costs, the write-off of
deferred loan costs on mortgages and notes which were paid off to effect the
spin-off and an impairment charge relating to the change in use of land that was
contributed to Lennar Land Partners. The liabilities recorded as part of the
restructuring charge had been paid as of November 30, 1999.
On October 31, 1997, the Company also completed a merger with Pacific
Greystone Corporation. The merger significantly expanded the Company's
operations in California and Arizona and provided the Company with operations in
Nevada.
FINANCIAL CONDITION AND CAPITAL RESOURCES
In 1999, $121.3 million in cash was provided by the Company's
operations, compared to $63.2 million in 1998. Cash flows from operations in
1999 consisted primarily of $172.7 million of net earnings. This generation of
cash was primarily offset by $77.4 million of cash used to increase inventories
through land purchases, land development and construction and $41.2 million of
cash used to reduce accounts payable and other liabilities. Cash flows from
operations in 1998 consisted primarily of $144.1 million of net earnings and an
increase in accounts payable and other liabilities of $130.5 million. This
generation of cash was primarily offset by $112.3 million of cash used to
increase inventories through land purchases, land development and construction
and $111.6 million of cash used to increase loans held for sale or disposition
by the Company's Financial Services Division.
In 1999, $28.5 million in cash was used in the Company's investing
activities compared to $209.8 million in 1998. Cash flows used in investing
activities in 1999 and 1998 included $19.7 million and $190.5 million,
respectively, of cash used for acquisitions.
The Company finances its land acquisition and development activities,
construction activities, financial services activities and general operating
needs primarily from cash generated from operations as well as from revolving
lines of credit, public debt and equity, financial institution borrowings and
purchase money notes. The Company also buys land under option agreements. Option
agreements permit the Company to acquire portions of properties when it is ready
to build homes on them. The financial risk of adverse market conditions
associated with longer-term land holdings is managed by prudent underwriting of
land purchases in areas that the Company views as desirable growth markets,
diversification of risk through partnerships with other entities and careful
management of the land development process. Based on its current financing
capabilities, the Company does not believe that its land holdings have a
significant adverse effect on its liquidity.
-6-
At November 30, 1999, the Company had unsecured revolving credit
facilities in the aggregate amount of $645 million, which may be used to
refinance existing indebtedness, for working capital, for acquisitions and for
general corporate purposes. At November 30, 1999, there were no amounts
outstanding under the Company's unsecured revolving credit facilities, compared
to $136.7 million outstanding at November 30, 1998. In February 1999, the
Company issued $282 million of 7 5/8% Senior Notes. The Senior Notes are due in
2009 and were issued for the purpose of reducing amounts outstanding under
revolving credit facilities and redeeming outstanding 10 3/4% notes. Proceeds
from the offering, after underwriting and market discounts, expenses and
settlement of a related interest rate hedge agreement were approximately $266
million. In March 1999, the Company redeemed all of the outstanding 10 3/4%
Senior Notes due 2004 of one of its subsidiaries, Greystone Homes, Inc., at a
price of 105.375% of the principal amount outstanding plus accrued interest.
Cash paid to redeem the notes was $132 million, which approximated their
carrying value.
In the third quarter of 1998, the Company issued, for $229 million,
zero-coupon senior convertible debentures due 2018 ("Debentures") with a face
amount at maturity of $493 million. The Debentures were issued at a price of
$464.13 per $1,000 face amount at maturity, which equates to a yield to maturity
over the life of the Debentures of 3 7/8%. Proceeds from the offering, after
underwriting discount and expenses, were approximately $223 million. The
Debentures are convertible at any time into the Company's common stock at the
rate of 12.3768 shares per $1,000 face amount at maturity. If the Debentures are
converted during the first five years, the Company may elect to pay cash equal
to the fair value of the common stock at the time of the conversion. Holders
have the option to require the Company to repurchase the Debentures on any of
the fifth, tenth or fifteenth anniversary dates from the issue date for the
initial issue price plus accrued original issue discount. The Company has the
option to satisfy the repurchases with any combination of cash and/or shares of
the Company's common stock. The Company will have the option to redeem the
Debentures, in cash, at any time after the fifth anniversary date for the
initial issue price plus accrued original issue discount. At November 30, 1999,
the amount outstanding, net of unamortized original issue discount, was $237.9
million.
The Company's ratio of homebuilding debt to total capital was 37% at
November 30, 1999, compared to 43% at November 30, 1998. In addition to the use
of capital in the Company's ordinary homebuilding and financial services
activities, the Company will continue to actively evaluate various other uses of
capital which fit into its homebuilding and financial services strategies and
meet its profitability and return on capital requirements. This may include
acquisitions of or investments in other entities and continued repurchases of
shares of the Company's outstanding common stock. These activities may be funded
through any combination of the Company's currently available credit facilities,
cash generated from operations, sales of assets or the issuance of public debt,
common stock or preferred stock under existing and future shelf registrations.
Lennar Financial Services finances its mortgage loans and servicing
activities by pledging them as collateral for borrowings under a line of credit
totaling $315 million. Total borrowings under the financial services line of
credit were $236.6 million and $196.7 million at November 30, 1999 and 1998,
respectively.
Limited-purpose finance subsidiaries of Lennar Financial Services have
placed mortgage loans and other receivables as collateral for various long-term
financings. These subsidiaries pay the debt service on the long-term borrowings
primarily from the cash flows generated by the related pledged collateral.
Therefore, the related interest income and interest expense substantially offset
one another in each of the years in the three-year period ended November 30,
1999. As part of the spin-off of the Company's commercial real estate investment
and management business, the Company transferred to LNR its interest in the
assets of the limited-purpose finance subsidiaries to the extent such assets
exceeded the related liabilities. The Company believes that the cash flows
generated by these subsidiaries will be adequate to meet the required debt
payment schedules.
-7-
The Company utilizes interest rate swap agreements to manage interest
costs and hedge against risks associated with changing interest rates. At
November 30, 1999, the Company had three interest rate swap agreements
outstanding with a total notional amount of $200 million, which will mature in
2002. These agreements fixed the LIBOR index (to which certain of the Company's
debt interest rates are tied) at approximately 6.1%. The Financial Services
Division, in the normal course of business, also uses derivative financial
instruments to meet the financing needs of its customers and reduce its own
exposure to fluctuations in interest rates. Counterparties to each of the above
agreements are major financial institutions. Credit loss from counterparty
non-performance is not anticipated.
In March 1999, the Company filed a shelf registration statement and
prospectus with the Securities and Exchange Commission to offer, from
time-to-time, its common stock, preferred stock, depositary shares, debt
securities or warrants at an aggregate initial offering price not to exceed $500
million. Proceeds can be used for repayment of debt, acquisitions and general
corporate purposes. As of November 30, 1999, no securities had been issued under
this registration statement.
In September 1999, the Company's Board of Directors approved the
repurchase of up to ten million shares of the Company's outstanding common
stock. The Company may repurchase shares, from time-to-time, subject to market
conditions. As of February 8, 2000, the Company had repurchased 9.7 million
shares of its outstanding common stock for an aggregate purchase price of
approximately $155.9 million (including approximately 442,000 shares for an
aggregate purchase price of approximately $6.0 million during fiscal 1999). On
February 8, 2000, the Company's Board of Directors authorized the repurchase of
an additional five million shares of the Company's outstanding common stock.
The Company has maintained excellent relationships with the financial
institutions participating in its financing arrangements and has no reason to
believe that such relationships will not continue in the future. Based on the
Company's current financial condition and credit relationships, Lennar believes
that its operations and borrowing resources will provide for its current and
long-term capital requirements at the Company's anticipated levels of growth.
PLAN AND AGREEMENT OF MERGER
In February 2000, the Company entered into a definitive agreement to
acquire U.S. Home Corporation through a merger in which the U.S. Home
stockholders will receive a total of approximately $476 million, of which
approximately one-half will be in cash and the remainder will be in common stock
of the Company (with the common stock portion, and therefore the total purchase
price, subject to adjustment if the price of the Company's stock is greater or
lower than specified levels) in exchange for their stock. U.S. Home will become
a wholly-owned subsidiary of the Company. When the acquisition takes place, U.S.
Home's debt is expected to include bank debt and approximately $525 million of
publicly-held debt. The holders of the publicly-held debt have the right to
require U.S. Home to redeem such debt within 90 days of the completion of the
transaction. The Company has access to the resources required to close the
transaction and, if necessary, refinance U.S. Home's debt. The transaction is
subject to approval by the stockholders of both companies, as well as expiration
or termination of waiting periods under antitrust laws and other regulatory
matters. If the necessary stockholder and regulatory approvals are obtained, the
Company expects the transaction to close by the end of May 2000.
-8-
BACKLOG
Backlog represents the number of homes subject to pending sales
contracts. Homes are sold using sales contracts which are usually accompanied by
sales deposits. Before entering into sales contracts, the Company generally
prequalifies its customers. In some instances, purchasers are permitted to
cancel sales contracts if they are unable to close on the sale of their existing
home or fail to qualify for financing and under certain other circumstances. The
Company experienced a cancellation rate of 20% in 1999, 20% in 1998 and 19% in
1997. Although cancellations can delay the sales of the Company's homes, they
have not had a material impact on sales, operations or liquidity, because the
Company closely monitors the progress of prospective buyers in obtaining
financing and monitors and adjusts construction start plans to match the level
of demand for homes. The Company does not recognize revenue on homes covered by
pending sales contracts until the sales are closed and title passes to the new
homeowners.
SEASONALITY
The Company has historically experienced variability in results of
operations from quarter to quarter due to the seasonal nature of the
homebuilding business. The Company typically experiences the highest rate of
orders for new homes in the first half of the calendar year although the rate of
orders for new homes is highly dependent on the number of active communities and
the timing of new community openings. Because new home deliveries trail orders
for new homes by several months, the Company typically has a greater percentage
of new home deliveries in the second half of its fiscal year compared to the
first half. As a result, the Company's earnings from sales of homes are
generally higher in the second half of the fiscal year.
INTEREST RATES AND CHANGING PRICES
Inflation can have a long-term impact on the Company because increasing
costs of land, materials and labor result in a need to increase the sales prices
of homes. In addition, inflation is often accompanied by higher interest rates,
which can have a negative impact on housing demand and the costs of financing
land development activities and housing construction. Increased construction
costs, rising interest rates, as well as increased materials and labor costs,
may reduce gross margins. In recent years the increases in these costs have
followed the general rate of inflation and hence have not had a significant
adverse impact on the Company. In addition, deflation can impact the value of
real estate. There can be no assurance that changing prices will not have a
material adverse impact on the Company's future results of operations.
YEAR 2000
The "Year 2000 issue" relates to issues which may arise from the
inability of existing computer systems to properly recognize the year 2000. If
not corrected, computer systems may fail or miscalculate data.
The Company uses a variety of operating systems, computer software
applications, computer hardware equipment and other equipment in conjunction
with its homebuilding and financial services operations. In addition, the
Company uses other non-information technology internal office systems. The
Company converted the majority of its computer information systems to one
company-wide system which is Year 2000 compliant and made modifications to its
other computer information systems to make them Year 2000 compliant. The Company
is not currently aware of any issues which have arisen in any of its computer
systems or other non-information technology systems as a result of the Year 2000
issue. In addition, the Company has not experienced or been notified of any
significant Year 2000 issues relating to its significant vendors,
subcontractors, suppliers and others. The financial impact of becoming Year 2000
compliant has not been and is not expected to be material to the Company's
financial position or results of operations.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The effective date of this
statement, as amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 -
AN AMENDMENT OF FASB STATEMENT NO. 133, is for fiscal years beginning after June
15, 2000. SFAS No. 133 will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, a change in the fair value of the derivative will
either be offset against the change in the fair value of the hedged asset,
liability or firm commitment through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. Management
does not currently believe that the implementation of SFAS No. 133 will have a
material impact on the Company's results of operations or financial position.
-9-
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Lennar Corporation:
We have audited the accompanying consolidated balance sheets of Lennar
Corporation and subsidiaries (the "Company") as of November 30, 1999 and 1998,
and the related consolidated statements of earnings, cash flows and
stockholders' equity for each of the three years in the period ended November
30, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Lennar Corporation
and subsidiaries at November 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1999, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
December 1, 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
/s/ Deloitte & Touche LLP
Miami, Florida
January 11, 2000, except for Note 15, as to which the date is February 16, 2000
-10-
REPORT OF MANAGEMENT
The accompanying consolidated financial statements are the responsibility of
management. The statements have been prepared in accordance with generally
accepted accounting principles and include amounts that are based on
management's best judgments and estimates. Management relies on internal
accounting controls, among other things, to produce records suitable for the
preparation of financial statements. The Company employs internal auditors whose
work includes evaluating and testing internal accounting controls.
The responsibility of our independent auditors for the financial statements is
limited to their expressed opinion on the fairness of the consolidated financial
statements taken as a whole. Their examination is performed in accordance with
generally accepted auditing standards which include tests of our accounting
records and internal accounting controls and evaluation of estimates and
judgments used to prepare the financial statements.
An Audit Committee of outside members of the Board of Directors periodically
meets with management, the external auditors and internal auditors to evaluate
the scope of auditing activities and review results. Both the external and
internal auditors have full and free access to the Committee, without management
present, to discuss any appropriate matters.
/s/ Bruce E. Gross /s/ Diane J. Bessette
Bruce E. Gross Diane J. Bessette
Chief Financial Officer Controller
-11-
CONSOLIDATED BALANCE SHEETS
Lennar Corporation and Subsidiaries
November 30, 1999 and 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
- -------------------------------------------------------------------------------------------------------
ASSETS
HOMEBUILDING:
Cash and cash equivalents $ 83,256 34,677
Receivables, net 11,162 23,803
Inventories:
Construction in progress and model homes 1,234,213 1,131,540
Land held for development 40,338 67,013
--------------------------------
Total inventories 1,274,551 1,198,553
Investments in partnerships 173,310 156,536
Other assets 97,826 137,311
--------------------------------
1,640,105 1,550,880
FINANCIAL SERVICES ASSETS 417,542 366,954
--------------------------------
$ 2,057,647 1,917,834
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
HOMEBUILDING:
Accounts payable and other liabilities $ 333,532 355,707
Mortgage notes and other debts payable, net 523,661 530,630
--------------------------------
857,193 886,337
FINANCIAL SERVICES LIABILITIES 318,955 315,832
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock of $0.10 par value per share
Authorized 100,000 shares;
Issued: 1999 - 48,511; 1998 - 48,241 4,851 4,824
Class B common stock of $0.10 par value per share
Authorized 30,000 shares;
Issued: 1999 - 9,848; 1998 - 9,910 985 991
Additional paid-in capital 525,623 523,645
Retained earnings 356,058 186,205
Treasury stock, at cost; 442 shares of common stock (6,018) -
--------------------------------
881,499 715,665
--------------------------------
$ 2,057,647 1,917,834
================================
See accompanying notes to consolidated financial statements.
-12-
CONSOLIDATED STATEMENTS OF EARNINGS
Lennar Corporation and Subsidiaries
Years Ended November 30, 1999, 1998 and 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
REVENUES:
Homebuilding $ 2,849,207 2,204,428 1,208,570
Financial services 269,307 212,437 94,512
-------------------------------------------------
Total revenues 3,118,514 2,416,865 1,303,082
-------------------------------------------------
COSTS AND EXPENSES:
Homebuilding 2,508,404 1,921,059 1,088,330
Financial services 238,211 179,102 58,967
Corporate general and administrative 37,563 28,962 15,850
Interest 48,859 47,628 24,979
Restructuring charge - - 29,229
-------------------------------------------------
Total costs and expenses 2,833,037 2,176,751 1,217,355
-------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 285,477 240,114 85,727
Provision for income taxes 112,763 96,046 35,122
-------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS 172,714 144,068 50,605
EARNINGS FROM DISCONTINUED OPERATIONS
(net of income taxes of $21,166) - - 33,826
-------------------------------------------------
NET EARNINGS $ 172,714 144,068 84,431
=================================================
BASIC EARNINGS PER SHARE:
CONTINUING OPERATIONS $ 2.97 2.59 1.35
DISCONTINUED OPERATIONS - - 0.90
-------------------------------------------------
$ 2.97 2.59 2.25
=================================================
DILUTED EARNINGS PER SHARE:
CONTINUING OPERATIONS $ 2.74 2.49 1.34
DISCONTINUED OPERATIONS - - 0.89
-------------------------------------------------
$ 2.74 2.49 2.23
=================================================
See accompanying notes to consolidated financial statements.
-13-
CONSOLIDATED STATEMENTS OF CASH FLOWS
Lennar Corporation and Subsidiaries
Years Ended November 30, 1999, 1998 and 1997
(IN THOUSANDS) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings from continuing operations $ 172,714 144,068 50,605
Earnings from discontinued operations -- -- 33,826
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 38,956 25,264 9,352
Amortization of discount/premium on debt, net 8,774 (885) (313)
Equity in earnings from partnerships (19,482) (30,908) (32,947)
Investment Division gain on sales of other real estate -- -- (25,401)
Restructuring charge -- -- 29,229
Increase (decrease) in deferred income taxes 28,125 12,469 (30,086)
Changes in assets and liabilities, net of effects
from acquisitions:
(Increase) decrease in receivables 8,173 8,636 (22,468)
Increase in inventories (77,428) (112,347) (106,995)
(Increase) decrease in other assets (3,639) (1,970) 5,194
(Increase) decrease in financial services
loans held for sale or disposition 6,293 (111,582) (32,358)
Increase (decrease) in accounts payable and other
liabilities (41,196) 130,451 31,297
---------------------------------------
Net cash provided by (used in) operating activities 121,290 63,196 (91,065)
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Operating properties and equipment:
Additions (15,328) (13,233) (70,773)
Sales -- 51 48,178
Sales of land held for investment -- -- 6,253
(Increase) decrease in investments in partnerships, net 6,524 (6,724) 131,777
Decrease in financial services mortgage loans 1,587 136 745
Purchases of investment securities (13,119) (3,361) (113,011)
Receipts from investment securities 11,600 3,733 158,053
Acquisitions of properties and businesses, net of cash acquired (19,747) (190,524) --
Acquisition of Pacific Greystone Corporation - cash acquired -- -- 7,764
Other, net (39) 150 2,279
---------------------------------------
Net cash provided by (used in) investing activities (28,522) (209,772) 171,265
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving
credit facilities (136,650) (239,850) 7,600
Net borrowings (repayments) under financial services
short-term debt (856) 136,205 30,641
Net proceeds from issuance of senior notes 266,153 -- --
Net proceeds from issuance of zero-coupon senior
convertible debentures -- 222,960 --
Proceeds from other borrowings 1,856 114,581 164,873
Principal payments on other borrowings (160,570) (127,571) (212,206)
Limited-purpose finance subsidiaries, net 769 727 304
-14-
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Spin-off transaction - assets distributed, cash -- -- (69,035)
Common stock:
Issuance 3,251 41,251 2,829
Payment made under acquisition agreement (1,252) -- --
Repurchases of common stock (6,018) -- --
Dividends (2,861) (2,749) (3,277)
----------------------------------------
Net cash provided by (used in) financing activities (36,178) 145,554 (78,271)
----------------------------------------
Net increase (decrease) in cash and cash equivalents 56,590 (1,022) 1,929
Cash and cash equivalents at beginning of year 61,577 62,599 60,670
----------------------------------------
Cash and cash equivalents at end of year $ 118,167 61,577 62,599
----------------------------------------
Summary of cash and cash equivalent balances:
Homebuilding $ 83,256 34,677 52,926
Financial services 34,911 26,900 9,673
----------------------------------------
$ 118,167 61,577 62,599
========================================
Supplemental disclosures of cash flow information:
Cash paid for interest, net of amounts capitalized $ 9,647 15,254 27,511
Cash paid for income taxes $ 108,845 60,157 86,796
Supplemental disclosures of non-cash investing and
financing activities:
Purchases of investment securities financed by sellers $ -- -- 23,366
Assumption of mortgages related to acquisitions of
properties $ 29,342 28,913 25,348
Exchange transactions - like kind tax deferred $ -- -- 46,000
Contribution to Lennar Land Partners $ -- -- 146,803
Common stock issued in 1998 acquisitions $ -- 94,096 --
Acquisition of Pacific Greystone Corporation:
Fair value of assets acquired, inclusive of
cash of $7,764 $ -- -- 394,786
Goodwill recorded -- -- 45,803
Liabilities assumed -- -- (224,516)
----------------------------------------
Common stock issued $ -- -- 216,073
----------------------------------------
Spin-off of commercial real estate investment and
management business:
Assets distributed, non-cash $ -- -- (959,752)
Assets distributed, cash -- -- (69,035)
Liabilities distributed -- -- 461,400
Net unrealized gain on securities
available-for-sale distributed -- -- 18,774
----------------------------------------
Distribution $ -- -- (548,613)
========================================
See accompanying notes to consolidated financial statements.
-15-
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Lennar Corporation and Subsidiaries
Years Ended November 30, 1999, 1998 and 1997
(IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
COMMON STOCK:
Beginning balance $ 4,824 4,322 2,594
Shares issued - merger with Pacific Greystone Corporation -- -- 1,703
Shares issued - acquisitions -- 350 --
Shares issued - equity draw-down agreement -- 114 --
Shares issued - employee stock plans 21 35 20
Conversion of Class B common stock 6 3 5
----------------------------------------
Balance at November 30 4,851 4,824 4,322
----------------------------------------
CLASS B COMMON STOCK:
Beginning balance 991 994 999
Conversion to common stock (6) (3) (5)
----------------------------------------
Balance at November 30 985 991 994
----------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Beginning balance 523,645 388,797 171,618
Shares issued - merger with Pacific Greystone Corporation -- -- 214,370
Shares issued - acquisitions -- 93,746 --
Payment made under acquisition agreement (1,252) -- --
Shares issued - equity draw-down agreement -- 35,957 --
Shares issued - employee stock plans 3,230 5,145 2,809
----------------------------------------
Balance at November 30 525,623 523,645 388,797
----------------------------------------
RETAINED EARNINGS:
Beginning balance 186,205 44,886 512,345
Net earnings 172,714 144,068 84,431
Spin-off of commercial real estate investment and
management business -- -- (548,613)
Cash dividends - common stock (2,418) (2,302) (2,493)
Cash dividends - Class B common stock (443) (447) (784)
----------------------------------------
Balance at November 30 356,058 186,205 44,886
----------------------------------------
TREASURY STOCK:
Beginning balance -- -- --
Repurchases of common stock (6,018) -- --
----------------------------------------
Balance at November 30 (6,018) -- --
----------------------------------------
UNREALIZED GAIN ON SECURITIES AVAILABLE-FOR-SALE, NET:
Beginning balance -- -- 7,900
Net unrealized gains for the year -- -- 10,874
Spin-off of commercial real estate investment and
management business -- -- (18,774)
----------------------------------------
Balance at November 30 -- -- --
----------------------------------------
Total stockholders' equity $ 881,499 715,665 438,999
========================================
See accompanying notes to consolidated financial statements.
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lennar Corporation and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Lennar Corporation and all subsidiaries and partnerships in which a controlling
interest is held (the "Company"). The Company's investments in partnerships (and
similar entities) in which a significant, but less than a controlling, interest
is held are accounted for by the equity method. All significant intercompany
transactions and balances have been eliminated.
As a result of the Company's spin-off of its commercial real estate
investment and management business, including the Investment Division business
segment, the accompanying 1997 financial statements have been restated to
reflect the Investment Division as a discontinued operation (see Note 2).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity 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 and cash equivalents as of
November 30, 1999 and 1998 included $33.5 million and $15.0 million,
respectively, of cash held in escrow for periods of up to three days and $1.7
million and $1.6 million at November 30, 1999 and 1998, respectively, of
restricted deposits.
INVENTORIES
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, in the first quarter of 1997. Under this standard,
inventories to be held and used 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. SFAS No. 121 requires companies to evaluate
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. The Company's
adoption of SFAS No. 121 in the first quarter of 1997 had no effect on the
Company's financial position or results of operations.
Start-up costs, construction overhead and selling expenses are expensed as
incurred. Homes held for sale are classified as construction in progress until
delivered. Land, land development, amenities and other costs are accumulated by
specific area and allocated proportionately to homes within the respective area.
INTEREST AND REAL ESTATE TAXES
Interest and real estate taxes attributable to land, homes and operating
properties are capitalized and added to the cost of those properties as long as
the properties are being actively developed. Interest related to homebuilding,
including interest costs relieved from inventories, is included in interest
expense. Interest expense relating to the financial services operations is
included in its respective costs and expenses.
-17-
During 1999, 1998 and 1997, interest costs of $62.9 million, $55.7 million
and $62.8 million, respectively (excluding the limited-purpose finance
subsidiaries), were incurred and $54.8 million, $45.9 million and $33.5 million,
respectively, were capitalized by the Company's homebuilding and discontinued
investment operations. Capitalized interest charged to expense, including
amounts charged to discontinued investment operations, in 1999, 1998 and 1997
was $49.0 million, $43.1 million and $25.7 million, respectively.
OPERATING PROPERTIES AND EQUIPMENT
Operating properties and equipment are recorded at cost. Depreciation is
calculated to amortize the cost of depreciable assets 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 5 years.
INVESTMENT SECURITIES
Investment securities are accounted for in accordance with SFAS No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under SFAS No.
115, debt and equity 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 stockholders' equity, net of tax effects, until realized.
Historically, the majority of investment securities were held by the
commercial real estate investment and management business, which was spun-off in
1997. At November 30, 1999 and 1998, investment securities classified as
held-to-maturity totaled $8.9 million and $5.2 million, respectively, and were
included in other assets of the Financial Services Division. There were no other
investment securities at November 30, 1999 or 1998.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes interest rate swaps and other agreements to manage
interest costs and hedge against risks associated with changing interest rates.
The Company designates interest rate swaps and other agreements as hedges of
specific debt instruments or anticipated transactions. Interest differentials on
interest rate swaps are recognized as adjustments to interest incurred on the
related debt instruments. The related amounts payable to or receivable from
counterparties are included in other liabilities or other assets in the
consolidated balance sheets. The fair values of the interest rate swap
agreements are not recognized in the financial statements. Gains or losses on
interest rate hedges on anticipated debt issuances are recorded at the time the
debt is issued as part of the carrying value of the debt and recognized over the
life of the debt as an adjustment to interest incurred.
The Financial Services Division, in the normal course of business, uses
derivative financial instruments to meet the financing needs of its customers
and reduce its own exposure to fluctuations in interest rates. The Division
enters into forward commitments and option contracts to protect the value of
loans held for sale or disposition from increases in market interest rates.
Adjustments are made to the carrying values of these loans based on changes in
the market value of these hedging contracts (see Note 13).
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
net assets acquired and is amortized by the Company on a straight-line basis
over periods ranging from 15 to 20 years. At November 30, 1999 and 1998,
goodwill was $61.2 million and $50.7 million, respectively (net of accumulated
amortization of $6.4 million and $3.1 million, respectively). In the event that
facts and circumstances indicate that the carrying value of goodwill may be
impaired, an evaluation of recoverability is performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the
goodwill are compared to the carrying amount to determine if a write-down to
fair value based on discounted cash flows is required. No impairment existed at
November 30, 1999 or 1998. Goodwill is included in other assets of the
Homebuilding Division and the assets of the Financial Services Division in the
consolidated balance sheets.
INCOME 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.
-18-
STOCK-BASED COMPENSATION
The Company grants stock options to certain employees for a fixed number of
shares with an exercise price not less than the fair value of the shares at the
date of grant. The Company accounts for the stock option grants in accordance
with Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES. No compensation expense is recognized because all stock
options granted have exercise prices not less than the market value of the
Company's stock on the date of the grant. The impact of the pro forma
disclosures required by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
is included in Note 12.
EARNINGS PER SHARE
In 1998, the Company adopted SFAS No. 128, EARNINGS PER SHARE, which
requires a dual presentation of basic and diluted earnings per share on the face
of the statement of earnings. Basic earnings per share is computed by dividing
earnings attributable to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the Company.
Earnings per share for 1997 has been restated to conform with SFAS No. 128 (see
Note 11).
FINANCIAL SERVICES
Mortgage loans held for sale or disposition by the Financial Services
Division are recorded at the lower of cost or market, 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 or mortgage-backed securities 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 or the
securities. Loan origination fees, net of direct origination costs, are deferred
and recognized as a component of the gain or loss when loans are sold. The
Division either retains the servicing on the loans and mortgage-backed
securities it sells and recognizes servicing fee income as those services are
performed or sells the servicing rights on the loans or mortgage-backed
securities it originates on a flow basis.
On December 1, 1996, the Company adopted SFAS No. 122, ACCOUNTING FOR
MORTGAGE SERVICING RIGHTS. On January 1, 1997, the Company adopted SFAS No. 125,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES, which superceded SFAS No. 122, and requires, among other things,
that the book value of loans be allocated between the mortgage servicing right
and the related loan at the time of sale or securitization, if servicing is
retained. The adoption of both SFAS No. 122 and SFAS No. 125 resulted in an
increase of $1.5 million in after-tax net earnings in the year ended November
30, 1997.
Mortgage servicing rights are periodically evaluated for impairment based
on the fair value of these rights. The fair value of mortgage servicing rights
is determined by discounting the estimated future cash flows using a discount
rate commensurate with the risks involved. This method of valuation incorporates
assumptions that market participants would use in their estimates of future
servicing income and expense, including assumptions about prepayment, default
and interest rates. For purposes of measuring impairment, the loans underlying
the mortgage servicing rights are stratified on the basis of interest rate and
type. The amount of impairment is the amount by which the mortgage servicing
rights, net of accumulated amortization, exceed their fair value by strata.
Impairment, if any, is recognized through a valuation allowance and a charge to
current operations. The book value and fair value of mortgage servicing rights
was $15.6 million and $23.1 million, respectively, at November 30, 1999 and
$11.1 million and $14.8 million, respectively, at November 30, 1998. A valuation
allowance related to mortgage servicing rights was not required at or for the
years ended November 30, 1999 and 1998.
Mortgage servicing rights are amortized in proportion to, and over the
period of, the estimated net servicing income of the underlying mortgages.
-19-
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The
effective date of this statement, as amended by SFAS No. 137, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE
OF FASB STATEMENT NO. 133 - AN AMENDMENT OF FASB STATEMENT NO. 133, is for
fiscal years beginning after June 15, 2000. SFAS No. 133 will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, a change in
the fair value of the derivative will either be offset against the change in the
fair value of the hedged asset, liability or firm commitment through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. Management does not currently believe that the implementation of SFAS
No. 133 will have a material impact on the Company's results of operations or
financial position.
RECLASSIFICATION
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform with the 1999 presentation.
2. SPIN-OFF OF COMMERCIAL REAL ESTATE INVESTMENT AND MANAGEMENT BUSINESS AND
FORMATION OF LENNAR LAND PARTNERS
On June 10, 1997, the Company's Board of Directors approved a plan to
spin-off the commercial real estate investment and management business
consisting of the Investment Division, the portions of the Financial Services
Division involved in commercial mortgage lending and investments and certain
assets of the Company's Homebuilding Division utilized in related businesses.
The spin-off was conducted through a distribution of the stock of LNR Property
Corporation ("LNR") to the stockholders of Lennar pursuant to a separation and
distribution agreement that provided that for each existing share of the
Company, the shareholders received one share of common stock of LNR, with the
right during a limited period after the spin-off to exchange that common stock
for Class B common stock of LNR. The spin-off, in the form of a tax-free
distribution, was completed on October 31, 1997 and was recorded as an
adjustment to stockholders' equity.
On October 31, 1997, the Company and LNR formed a general partnership to
acquire, develop and sell land. The Company and LNR contributed properties to
the partnership in exchange for 50% general partnership interests. In 1999,
certain assets and liabilities of this partnership were contributed at net book
value to a second general partnership and the Company and LNR each received 50%
general partnership interests in the second partnership. The two partnerships
are collectively referred to as "Lennar Land Partners". Pursuant to management
agreements, the Company manages the day-to-day operations of Lennar Land
Partners and receives a management fee. The partnership agreements for Lennar
Land Partners permit the Company and LNR to (i) engage in business activities
which conflict with or are in direct competition with Lennar Land Partners and
(ii) acquire properties from, or sell properties to, Lennar Land Partners. The
Company has options to purchase a portion of the assets originally contributed
to Lennar Land Partners and may be granted options to purchase all or portions
of properties which subsequently are acquired by Lennar Land Partners.
-20-
The Company's 1997 consolidated financial statements were restated to
reflect the Investment Division business segment as a discontinued operation.
Accordingly, the revenues and expenses have been excluded from the respective
captions in the consolidated statements of earnings, and have been reported
through the date of disposition as "earnings from discontinued operations".
The components of earnings from discontinued operations were as follows:
Year Ended
November 30,
(IN THOUSANDS) 1997
- ---------------------------------------------------------------
REVENUES:
Rental income $ 51,254
Equity in earnings from partnerships 21,071
Management fees 13,343
Gain on sales of real estate, net 20,401
Other 18,418
---------------
Total revenues 124,487
COSTS AND EXPENSES 56,099
---------------
OPERATING EARNINGS 68,388
Interest 13,396
---------------
EARNINGS FROM DISCONTINUED OPERATIONS
BEFORE INCOME TAXES 54,992
Income taxes 21,166
---------------
EARNINGS FROM DISCONTINUED OPERATIONS $ 33,826
===============
Earnings from discontinued operations include the results of operations
through October 31, 1997, the measurement and disposal date. Accordingly, the
Company did not recognize a loss on disposal of the discontinued Investment
Division. During the fourth quarter of 1997, the Company recorded a
restructuring charge to continuing operations for the estimated costs of the
spin-off and formation of Lennar Land Partners. The restructuring charge was
$29.2 million and consisted of professional fees, transaction costs, the
write-off of deferred loan costs on mortgages and notes which were paid off to
effect the spin-off and an impairment charge of $13.7 million relating to the
change in use of land that was contributed to Lennar Land Partners. The
liabilities recorded as part of the restructuring charge had been paid as of
November 30, 1999.
In addition to the Investment Division business segment, assets and
liabilities of the Homebuilding and Financial Services Divisions utilized in the
commercial real estate investment and management business were distributed in
the spin-off of LNR. For the year ended November 30, 1997, revenues of $39.9
million and expenses of $15.5 million were associated with the assets and
liabilities of the Financial Services Division distributed in the spin-off of
LNR. The revenues and expenses associated with the assets and liabilities of the
Homebuilding Division distributed in the spin-off of LNR were not significant
for the year ended November 30, 1997.
3. ACQUISITIONS
During the third quarter of 1998, the Company acquired the properties of
two California homebuilders, ColRich Communities and Polygon Communities. During
the first quarter of 1998, the Company acquired a Northern California
homebuilder, Winncrest Homes, and the North American Asset Development Group of
companies ("NAADC"), which provide title and escrow services in California,
Arizona and Colorado. In September 1998, NAADC acquired a small escrow company
in California. In connection with these transactions, the Company paid $202
million in cash (inclusive of cash acquired of $12 million) and issued $94
million in common stock (3.5 million shares). The cash portion of these
transactions was funded primarily from the Company's revolving credit facilities
and issuance of zero-coupon senior convertible debentures. The Company received
assets with a fair value of $335 million and assumed liabilities totaling $47
million in connection with these transactions. In addition, the Company recorded
goodwill of $8 million relating to the acquisitions of NAADC, Winncrest and the
escrow company. Goodwill is being amortized on a straight-line basis over 20
years. The acquisitions were accounted for using the purchase method of
accounting. In 1999, the Company paid $1.3 million to the sellers of one of the
properties acquired, under an agreement which set a floor on the value of a
portion of the shares of common stock given to the sellers as part of the
consideration for the acquisition. The agreement allowed the Company to settle
the floor in cash or stock. As a result, the payment was recorded as a reduction
in stockholders' equity in 1999. The results of each acquired entity are
included in the Company's consolidated statements of earnings since the
respective acquisition dates. The pro forma effect of the acquisitions on the
results of operations are not presented as they are not considered material.
-21-
On June 10, 1997, the Company's Board of Directors approved a plan to
acquire Pacific Greystone Corporation ("Greystone") through a merger in which
the shareholders of the Company received one share of common stock or Class B
common stock of the corporation which survived the merger for each share of
common stock or Class B common stock of the Company held by them, and the
shareholders of Greystone received 1.138 shares of common stock of the surviving
corporation for each outstanding share of Greystone common stock. The surviving
corporation was renamed Lennar Corporation. This merger resulted in the
Company's shareholders owning approximately 68% of the surviving corporation and
Greystone shareholders owning the remaining 32% of that corporation. The merger
became effective after the distribution of the stock of LNR to which the Company
transferred its commercial real estate investment and management business and
the Greystone shareholders did not receive any interest in LNR. The merger was
conditioned upon the distribution taking place. Such merger became effective on
October 31, 1997. Total consideration for this acquisition was $216.1 million,
of which $45.8 million was assigned to the excess of the purchase price over the
fair value of net assets acquired and recorded as goodwill. Goodwill is being
amortized on a straight-line basis over 20 years. The consideration consisted of
$213.7 million (17 million shares) for newly issued common stock and $2.4
million for Greystone stock options which vested at the acquisition date.
The Company accounted for the merger using the purchase method of
accounting and the results of Greystone's operations have been included in the
Company's consolidated statements of earnings since November 1, 1997. Revenues
and net earnings on an unaudited pro forma basis would have increased by $580.6
million and $28.5 million, respectively, during 1997 had the acquisition
occurred on December 1, 1996. The pro forma earnings per share would have been
$2.13 per share diluted ($2.16 per share basic) in 1997.
4. OPERATING SEGMENTS
In 1999, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which establishes new standards for the way
that public enterprises report information about operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The implementation of SFAS No. 131 did not
have a significant impact on the Company's definition of operating segments and
related disclosures.
The Company has two operating 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. The following table sets forth
financial information relating to the homebuilding operations:
Years Ended November 30,
(IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------------------
REVENUES:
Sales of homes $2,671,744 2,089,762 1,130,989
Sales of land and other revenues 157,981 83,758 73,557
Equity in earnings from partnerships 19,482 30,908 4,024
----------------------------------------
Total revenues 2,849,207 2,204,428 1,208,570
COSTS AND EXPENSES:
Cost of homes sold 2,105,422 1,641,741 907,691
Cost of land and other expenses 130,432 69,279 50,633
Selling, general and administrative 272,550 210,039 130,006
----------------------------------------
Total costs and expenses 2,508,404 1,921,059 1,088,330
----------------------------------------
OPERATING EARNINGS $ 340,803 283,369 120,240
========================================
Depreciation and amortization $ 29,505 20,762 2,085
----------------------------------------
Additions to operating properties and equipment $ 2,283 5,987 1,579
========================================
-22-
FINANCIAL SERVICES
Lennar Financial Services provides mortgage financing, title insurance and
closing services for Lennar homebuyers and others. The Division also packages
and resells residential mortgage loans and mortgage-backed securities, performs
mortgage loan servicing activities and provides cable television and alarm
monitoring services to residents of Lennar communities and others. The following
table sets forth financial information relating to the financial services
operations:
Years Ended November 30,
(IN THOUSANDS) 1999 1998 1997
- --------------------------------------------------------------------------------------------
REVENUES $269,307 212,437 94,512
COSTS AND EXPENSES 238,211 179,102 58,967
----------------------------------
OPERATING EARNINGS $ 31,096 33,335 35,545
==================================
Depreciation and amortization $ 9,451 4,502 594
----------------------------------
Interest income, net $ 12,301 10,878 24,935
----------------------------------
Additions to operating properties and equipment $ 13,045 7,246 2,598
==================================
5. RECEIVABLES
November 30,
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------
Accounts receivable $ 10,826 9,374
Mortgages and notes receivable 2,444 17,962
----------------------
13,270 27,336
Allowance for doubtful accounts (2,108) (3,533)
----------------------
$ 11,162 23,803
======================
6. PARTNERSHIPS
Summarized financial information on a combined 100% basis related to the
Company's significant partnerships and other similar entities (collectively the
"Partnerships") accounted for by the equity method was as follows:
November 30,
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------
ASSETS:
Cash $143,257 16,880
Land under development 389,974 353,850
Other assets 117,939 105,154
---------------------
$651,170 475,884
=====================
LIABILITIES AND EQUITY:
Accounts payable and other liabilities $ 47,118 43,867
Notes and mortgages payable 227,271 143,286
Equity of:
The Company 171,960 154,544
Others 204,821 134,187
---------------------
$651,170 475,884
=====================
Years Ended November 30,
(IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------------------------
Revenues $283,979 277,544 227,517
Costs and expenses 219,100 192,130 173,951
----------------------------------
Pre-tax earnings of partnerships $ 64,879 85,414 53,566
----------------------------------
Company share of pre-tax earnings $ 19,482 30,908 11,876
==================================
-23-
At November 30, 1999, the Company's equity interest in each of these
Partnerships ranged from 15% to 50%. At November 30, 1999, these Partnerships
were primarily involved in the acquisition and development of residential land.
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. In most cases, when the Company is involved in a partnership, it is
through a subsidiary which is the general partner and whose only asset is its
interest in the partnership. Certain of the Partnerships have partnership
interests in other partnerships. The outstanding debt of one of the Company's
Partnerships and one second-tier partnership, amounting to $192.5 million at
November 30, 1999, is guaranteed by the Company.
As manager of Lennar Land Partners, the Company is entitled to
reimbursement for all out-of-pocket expenses directly incurred in its capacity
as manager (the "Direct Expenses") including but not limited to costs and
expenses of employees (salary, bonus and benefits), contractors, agents,
professional fees, telephone, travel, productions and reproductions of documents
and postage. In addition to the Direct Expenses, the Company shares some of its
employees, contractors, agents, facilities and equipment and other expenses with
Lennar Land Partners (the "Indirect Expenses"). The reimbursement for the
Indirect Expenses is $0.5 million per month. In 1999 and 1998, Lennar Land
Partners reimbursed the Company $1.5 million and $1.7 million, respectively, of
Direct Expenses and $6.0 million of Indirect Expenses in both 1999 and 1998. The
Company, in the ordinary course of business, purchases developed land from
Lennar Land Partners for use in its homebuilding activities. In 1999 and 1998,
these land purchases amounted to $109.3 million and $90.7 million, respectively.
The Company believes amounts paid to Lennar Land Partners for land purchases
approximate amounts that would have been paid to independent third parties.
7. OPERATING PROPERTIES AND EQUIPMENT
November 30,
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------
Furniture, fixtures and equipment $ 16,351 17,996
Community recreational facilities 3,564 7,905
----------------------
19,915 25,901
Accumulated depreciation (14,010) (11,300)
----------------------
$ 5,905 14,601
======================
Operating properties and equipment are included in other assets in the
consolidated balance sheets.
8. MORTGAGE NOTES AND OTHER DEBTS PAYABLE
November 30,
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------
Unsecured:
Zero-coupon senior convertible debentures
due 2018 $237,897 231,897
7 5/8% senior notes due 2009 269,548 --
Revolving credit facilities with floating
interest rates -- 136,650
10 3/4% senior notes -- 133,812
Mortgage notes on land with fixed interest
rates from 6.0% to 10.0% due through
2001 - no recourse to the Company 16,216 28,271
---------------------
$523,661 530,630
=====================
In February 1999, the Company issued $282 million of 7 5/8% Senior Notes
due 2009 for the purpose of reducing amounts outstanding under revolving credit
facilities and redeeming outstanding 10 3/4% Senior Notes. Proceeds from the
offering, after underwriting and market discounts, expenses and settlement of a
related interest rate hedge agreement, were approximately $266 million. In March
1999, the Company redeemed all of the outstanding 10 3/4% Senior Notes due 2004
of one of its subsidiaries, Greystone Homes, Inc., at a price of 105.375% of the
principal amount outstanding plus accrued interest. Cash paid to redeem the
notes was $132 million, which approximated their carrying value.
-24-
In July 1998, the Company issued, for $229 million, zero-coupon senior
convertible debentures due 2018 ("Debentures") with a face amount at maturity of
$493 million. The Debentures were issued at a price of $464.13 per $1,000 face
amount at maturity, which equates to a yield to maturity over the life of the
Debentures of 3 7/8%. Proceeds from the offering, after underwriting discount
and expenses, were approximately $223 million. The Debentures are convertible at
any time into the Company's common stock at the rate of 12.3768 shares per
$1,000 face amount at maturity. If the Debentures are converted during the first
five years, the Company may elect to pay cash equal to the fair value of the
common stock at the time of the conversion. Holders have the option to require
the Company to repurchase the Debentures on any of the fifth, tenth, or
fifteenth anniversary dates from the issue date for the initial issue price plus
accrued original issue discount. The Company has the option to satisfy the
repurchases with any combination of cash and/or shares of the Company's common
stock. The Company will have the option to redeem the Debentures, in cash, at
any time after the fifth anniversary date for the initial issue price plus
accrued original issue discount.
At November 30, 1999, the Company had unsecured revolving credit facilities
(together the "Facilities") in the aggregate amount of $645 million, which may
be used to refinance existing indebtedness, for working capital, for
acquisitions and for general corporate purposes. The Facilities agreement is
with 16 financial institutions. Of the total Facilities, $500 million is
structured as a five-year revolving credit facility maturing June 30, 2002. The
second facility (up to $145 million) is structured as a revolving credit
facility, maturing October 27, 2000. The Company may elect, at the maturity of
the second facility, to convert borrowings under that facility to a term loan
which amortizes in equal quarterly amounts and matures on June 30, 2002. Certain
Financial Services Division subsidiaries are co-borrowers under this facility.
At November 30, 1999 and 1998, no borrowings were allocated to this Division. No
amounts were outstanding under the Facilities at November 30, 1999. The weighted
average interest rate of the Facilities at November 30, 1998 was 6.4%. The
Company utilizes interest rate swap agreements to manage interest costs and
hedge against risks associated with changing interest rates.
The minimum aggregate principal maturities of mortgage notes and other
debts payable during the five years subsequent to November 30, 1999 are as
follows: 2000 - $11.3 million and 2001 - $4.9 million. The remaining principal
obligations are due subsequent to November 30, 2004. All of the notes secured by
land contain collateral release provisions for accelerated payment which may be
made as necessary to maintain construction schedules.
9. FINANCIAL SERVICES
The assets and liabilities related to the Company's financial services
operations (as described in Note 4) were as follows:
November 30,
(IN THOUSANDS) 1999 1998
- --------------------------------------------------------------------------
ASSETS:
Cash and receivables, net $ 54,031 40,479
Mortgage loans held for sale or disposition, net 229,042 214,954
Mortgage loans, net 22,562 21,370
Mortgage servicing rights, net 15,564 11,080
Operating properties and equipment, net 21,378 11,165
Title plants 14,587 16,104
Goodwill, net 20,070 7,935
Other 14,684 8,975
Limited-purpose finance subsidiaries 25,624 34,892
---------------------
$417,542 366,954
=====================
LIABILITIES:
Notes and other debts payable $253,010 233,316
Other 40,321 47,624
Limited-purpose finance subsidiaries 25,624 34,892
---------------------
$318,955 315,832
=====================
A $315 million warehouse line of credit is used to fund the Division's
mortgage loans and servicing activities. Borrowings under this agreement were
$236.6 million and $196.7 million at November 30, 1999 and 1998, respectively,
and were collateralized by mortgage loans with outstanding principal balances of
$221.7 million and $196.9 million, respectively, and by servicing rights
relating to approximately $2.5 billion and $2.7 billion of loans, respectively.
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 agreement at November 30, 1999 and 1998 was 4.5% and 5.1%,
respectively. The warehouse line of credit facility matures April 28, 2000 at
which time the Company expects this facility to be renewed.
-25-
Certain of the Division's servicing agreements require it to pass through
payments on loans even though it is unable to collect such payments and, in
certain instances, be responsible for losses incurred through foreclosure.
Exposure to this credit risk is minimized through geographical diversification
and review of the mortgage loan servicing created or purchased. Management
believes that it has provided adequate reserves for expected losses based on the
fair value of the underlying collateral. Provisions for these losses have not
been material to the Company.
In prior years, limited-purpose finance subsidiaries of the Financial
Services Division placed mortgages and other receivables as collateral for
various long-term financings. These limited-purpose finance subsidiaries pay the
principal of, and interest on, these financings primarily from the cash flows
generated by the related pledged collateral, which includes a combination of
mortgage notes, mortgage-backed securities and funds held by a trustee.
At November 30, 1999 and 1998, the balances outstanding for the bonds and
notes payable were $25.6 million and $34.9 million, respectively. The borrowings
mature in years 2013 through 2018 and carry interest rates ranging from 6.1% to
13.4%. The annual principal repayments are dependent upon collections on the
underlying mortgages, including prepayments, and cannot be reasonably
determined. As part of the spin-off of the Company's commercial real estate
investment and management business in 1997, LNR received an interest in the
assets of the limited-purpose finance subsidiaries to the extent such assets
exceeded the related liabilities. This interest amounted to $3.0 million at the
date of the spin-off.
10. INCOME TAXES
The provision for income taxes, including the provision relating to
discontinued operations in 1997, consisted of the following:
Years Ended November 30,
(IN THOUSANDS) 1999 1998 1997
- ------------------------------------------------------
CURRENT:
Federal $ 71,091 74,739 75,769
State 13,547 9,308 7,239
-----------------------------------
84,638 84,047 83,008
-----------------------------------
DEFERRED:
Federal 24,422 6,493 (26,043)
State 3,703 5,506 (677)
-----------------------------------
28,125 11,999 (26,720)
-----------------------------------
$112,763 96,046 56,288
===================================
-26-
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,
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------
DEFERRED TAX ASSETS:
Acquisition adjustments $ 13,900 24,630
Reserves and accruals 37,557 41,722
Net operating loss and capital loss
carryforwards, tax affected 5,788 6,340
Investments in partnerships 4,099 4,943
Other 2,923 3,229
----------------------
Deferred tax assets 64,267 80,864
Less: valuation allowance (8,508) (7,659)
----------------------
Total deferred tax assets, net 55,759 73,205
----------------------
DEFERRED TAX LIABILITIES:
Capitalized expenses 14,538 5,538
Deferred gains 1,065 1,203
Installment sales 2,547 2,386
Other 4,634 2,978
----------------------
Total deferred tax liabilities 22,784 12,105
----------------------
Net deferred tax asset $ 32,975 61,100
======================
The Homebuilding Division's net deferred tax asset amounting to $33.3
million and $57.5 million at November 30, 1999 and 1998, respectively, is
included in other assets in the consolidated balance sheets.
At November 30, 1999 and 1998, the Financial Services Division had a net
deferred tax liability of $0.3 million and a net deferred tax asset of $3.6
million, respectively.
SFAS No. 109 requires the reduction of the deferred tax asset 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 November 30, 1999 and 1998, the Company had a valuation allowance
of $8.5 million and $7.7 million, respectively, 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.
A reconciliation of the statutory rate and the effective tax rate follows:
% of Pre-tax Income
----------------------------
1999 1998 1997
----------------------------
Statutory rate 35.0 35.0 35.0
State income taxes, net of federal income
tax benefit 3.9 4.0 4.0
Other 0.6 1.0 1.0
----------------------------
Effective rate 39.5 40.0 40.0
============================
-27-
11. EARNINGS PER SHARE
The Company adopted SFAS No. 128 in the first quarter of 1998. Earnings per
share for 1997 has been restated to conform with SFAS No. 128. Basic and diluted
earnings per share for the years ended November 30, 1999, 1998 and 1997 were
calculated as follows:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
----------------------------------
NUMERATOR:
Numerator for basic earnings per share -
net earnings $172,714 144,068 84,431
Interest on zero-coupon convertible
debentures, net of tax 5,538 1,732 --
----------------------------------
Numerator for diluted earnings per share $178,252 145,800 84,431
==================================
DENOMINATOR:
Denominator for basic earnings per share -
weighted average shares 58,246 55,660 37,473
Effect of dilutive securities:
Employee stock options 684 945 410
Zero-coupon convertible debentures 6,105 2,019 --
----------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 65,035 58,624 37,883
==================================
Basic earnings per share $ 2.97 2.59 2.25
==================================
Diluted earnings per share $ 2.74 2.49 2.23
==================================
12. CAPITAL STOCK
PREFERRED STOCK
The Company is authorized to issue 500,000 shares of preferred stock with a
par value of $10 per share and 100 million shares of participating preferred
stock with a par value of $0.10 per share. No shares of preferred stock have
been issued as of November 30, 1999.
COMMON STOCK
The Company has two classes of common stock. The common stockholders have
one vote for each share owned in matters requiring stockholder approval and
during both 1999 and 1998 received quarterly dividends of $0.0125 per share. The
Class B common stockholders have ten votes for each share of stock owned and
during both 1999 and 1998 received quarterly dividends of $0.01125 per share. As
of November 30, 1999, Mr. Leonard Miller, Chairman of the Board of the Company,
owned or controlled 9.8 million shares of common stock and Class B common stock,
which represented approximately 67% voting control of the Company.
In September 1999, the Company's Board of Directors approved the repurchase
of up to ten million shares of the Company's outstanding common stock. The
Company may repurchase shares, from time-to-time, subject to market conditions.
During fiscal 1999, the Company repurchased approximately 442,000 shares of its
outstanding common stock for an aggregate purchase price of approximately $6.0
million.
-28-
In March 1999, the Company filed a shelf registration statement and
prospectus with the Securities and Exchange Commission to offer, from
time-to-time, its common stock, preferred stock, depositary shares, debt
securities or warrants at an aggregate initial offering price not to exceed $500
million. Proceeds can be used for repayment of debt, acquisitions and general
corporate purposes. As of November 30, 1999, no securities had been issued under
this registration statement.
In March 1998, the Company entered into an equity draw-down agreement with
a major international banking firm (the "Firm") under which the Company has the
option to sell common stock, up to proceeds of $120 million, to the Firm in
increments of up to $15 million (or such higher amount as may be agreed to by
the parties) per month. In the event the Company elects to sell common stock,
the sales price is equal to 98% of the average of the daily high and low stock
price from time-to-time. As of November 30, 1999, the Company had issued 1.1
million shares under the agreement resulting in proceeds to the Company of $36
million, all of which occurred in fiscal 1998.
RESTRICTIONS ON PAYMENT OF DIVIDENDS
Other than as required to maintain the financial ratios and net worth
requirements under the revolving credit facilities, there are no restrictions on
the payment of dividends on common stock by the Company. The cash dividends paid
with regard to a share of Class B common stock in a calendar year may not be
more than 90% of the cash dividends paid with regard to a share of common stock
in that calendar year. Furthermore, there are no agreements which restrict the
payment of dividends by subsidiaries of the Company.
STOCK OPTION PLANS
The Lennar Corporation 1991 Stock Option Plan (the "1991 Plan") provided
for the granting of options to certain key employees of the Company to purchase
shares at prices not less than market value as of the date of the grant. No
options granted under the 1991 Plan may be exercisable until at least six months
after the date of the grant. Thereafter, exercises are permitted in varying
installments, on a cumulative basis. Each stock option granted will expire on a
date determined at the time of the grant, but not more than 10 years after the
date of the grant.
The Lennar Corporation 1997 Stock Option Plan (the "1997 Plan") provides
for the granting of options or stock appreciation rights to certain key
employees of the Company to purchase shares at prices not less than market value
as of the date of the grant. No options granted under the 1997 Plan may be
exercisable until at least six months after the date of the grant. Thereafter,
exercises are permitted in varying installments, on a cumulative basis. Each
stock option and stock appreciation right granted will expire on a date
determined at the time of the grant, but not more than 10 years after the date
of the grant.
-29-
A summary of the Company's stock option activity for the years ended
November 30, 1999, 1998 and 1997 was as follows:
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
STOCK EXERCISE Stock Exercise Stock Exercise
OPTIONS PRICE Options Price Options Price
- ------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 3,679,256 $ 15.52 2,815,880 $ 10.60 1,056,350 $ 12.65
Granted 211,000 $ 23.95 1,372,500 $ 24.12 972,500 $ 19.52
Forfeited:
Terminations (235,108) $ 19.83 (201,498) $ 16.60 (13,900) $ 19.47
Spin-off transaction -- -- -- -- (249,150) $ 12.55
Exercised (209,918) $ 10.05 (307,626) $ 8.41 (173,850) $ 11.17
Spin-off adjustment -- -- -- -- 459,030 $ (11.45)
Greystone options assumed -- -- -- -- 764,900 $ 11.58
-------------------------------------------------------------------------------
Outstanding, end of year 3,445,230 $ 16.20 3,679,256 $ 15.52 2,815,880 $ 10.60
-------------------------------------------------------------------------------
Exercisable, end of year 1,299,743 $ 11.87 1,142,616 $ 10.69 1,012,946 $ 10.24
-------------------------------------------------------------------------------
Available for grant, end of year 1,310,072 1,334,622 2,611,122
---------- ---------- ----------
Weighted average fair value per
share of options granted
during the year under SFAS
No. 123 $ 9.40 $ 9.03 $ 7.96
- ------------------------------------------------------------------------------------------------------------------
The following table summarizes information about fixed stock options
outstanding at November 30, 1999:
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------
Number Weighted Weighted Number Weighted
Outstanding at Average Average Per Outstanding at Average Per
Range of Per Share November 30, Remaining Share November 30, Share
Exercise Prices 1999 Contractual Life Exercise Price 1999 Exercise Price
- ----------------------------------------------------------------------------------------------------------
$ 2.56 - $ 4.56 347,586 1.7 years $ 3.47 135,843 $ 3.23
$ 6.66 - $ 9.97 469,270 3.2 years $ 9.22 310,362 $ 9.61
$10.14 - $18.16 1,343,494 6.8 years $14.02 745,658 $12.55
$19.47 - $34.13 1,284,880 4.7 years $24.46 107,880 $24.54
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its fixed stock option plans. No compensation expense is
recognized because all stock options granted have exercise prices not less than
the market value of the Company's stock on the date of the grant. Under SFAS No.
123, compensation cost for the Company's stock-based compensation plans would be
determined based on the fair value at the grant dates for awards under those
plans. Had the Company adopted SFAS No. 123 in accounting for fixed stock option
plans, the pro forma effect would not be material to the Company's reported
earnings from continuing operations, net earnings and earnings per share for the
years ended November 30, 1999, 1998 and 1997.
-30-
The fair value of each option grant was estimated on the grant date using
the Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997
- ----------------------------------------------------------------------------
Dividend yield 0.2% - 0.3% 0.1% - 0.3% 0.3% - 0.4%
Volatility rate 40% - 42% 32% - 39% 25% - 28%
Risk-free interest rate 4.8% - 6.1% 4.7% - 6.0% 5.8% - 6.1%
Expected option life (years) 3.9 - 7.7 3.9 - 7.7 3.9 - 8.6
EMPLOYEE STOCK OWNERSHIP/401(k) PLAN
Prior to 1998, the Employee Stock Ownership/401(k) Plan (the "Plan")
provided shares of stock to employees who had completed one year of continuous
service with the Company. During 1998, the Plan was amended to exclude any new
shares from being provided to employees. All prior year contributions to
employees actively employed on or after October 1, 1998 vest at a rate of 20%
per year over a five year period. All active participants in the plan whose
employment terminated prior to October 1, 1998 vested based upon the plan that
was active prior to their termination of employment. Under the 401(k) portion of
the Plan, contributions made by employees can be invested in a variety of mutual
funds, and the Company may also make contributions for the benefit of employees.
The Company records as compensation expense an amount which approximates the
vesting of the contributions to the Employee Stock Ownership portion of the
Plan, as well as the Company's contribution to the 401(k) portion of the Plan.
This amount was $3.1 million in 1999, $2.9 million in 1998 and $1.7 million in
1997. In 1997, 34,469 shares of Lennar common stock were contributed to
participants' accounts.
13. FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of financial instruments held by the Company at November 30, 1999 and 1998,
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 estimates presented herein 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 may have a material effect on the estimated fair value
amounts. The table excludes cash and cash equivalents, receivables and accounts
payable, which had fair values approximating their carrying values.
-31-
November 30,
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------
ASSETS
FINANCIAL SERVICES:
Mortgage loans held for sale or disposition, net $229,042 231,116 214,954 219,395
Mortgage loans, net 22,562 22,112 21,370 21,100
Investments held-to-maturity 8,902 8,904 5,240 5,297
Limited-purpose finance subsidiaries -
collateral for bonds and notes payable 25,624 26,499 34,892 38,221
LIABILITIES
HOMEBUILDING:
Mortgage notes and other debts payable $523,661 466,311 530,630 511,019
FINANCIAL SERVICES:
Notes and other debts payable $253,010 252,865 233,316 233,188
Limited-purpose finance subsidiaries -
bonds and notes payable 25,624 26,638 34,892 35,591
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
HOMEBUILDING:
Interest rate swap agreements $ -- 1,724 -- (6,423)
Interest rate hedge agreement -- -- -- (15,578)
FINANCIAL SERVICES:
Commitments to originate loans $ -- (197) -- 18
Forward commitments to sell loans -- 434 -- (539)
- ------------------------------------------------------------------------------------------------------------
The following methods and assumptions are used by the Company in estimating
fair values:
Mortgage notes and other debts payable: The fair value of fixed rate
borrowings is based on quoted market prices. Variable rate borrowings are tied
to market indices and thereby approximate fair value.
Financial services assets, liabilities and off-balance sheet financial
instruments: The fair values are based on quoted market prices, if available.
The fair values for instruments which do not have quoted market prices are
estimated by the Company on the basis of discounted cash flows or other
financial information.
Interest rate swap and hedge agreements: The fair value is based on dealer
quotations and generally represents an estimate of the amount the Company would
pay or receive to terminate the agreement at the reporting date.
During 1997, proceeds from the sale of available-for-sale securities
amounted to $122.5 million and resulted in gross realized gains of $2.9 million.
In 1997, available-for-sale securities were held by the commercial real estate
investment and management business, which was spun-off in 1997.
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The Company utilizes interest rate swap agreements to manage interest costs
and hedge against risks associated with changing interest rates. Counterparties
to these agreements are major financial institutions. Credit loss from
counterparty non-performance is not anticipated. A majority of the Company's
available variable rate borrowings are based on the London Interbank Offered
Rate ("LIBOR") index. At November 30, 1999, Lennar had three interest rate swap
agreements outstanding with a total notional amount of $200 million, which will
mature in 2002. These agreements fixed the LIBOR index at approximately 6.1%.
The effect of the interest rate swap agreements on interest incurred and on the
average cost of borrowing was an increase of $1.8 million and 0.22%, $0.8
million and 0.11% and $0.8 million and 0.17% for the years ended November 30,
1999, 1998 and 1997, respectively. During 1998, the Company entered into a
contract to hedge the interest rate risk associated with the anticipated
issuance of $200 million of 10-year senior notes. The contract fixed the yield
on the 10-year U.S. Treasury Note (which was used as a basis for determining the
interest rate on the Company's issuance of the senior notes) at 5.8%. In
February 1999, the Company issued $282 million of 10-year Senior Notes (see Note
8). The payment made to the counterparty to this agreement at the time the
Senior Notes were issued was $11.2 million. Such amount was recorded as a
reduction of the carrying value of the Senior Notes and will be amortized as an
adjustment to interest incurred over the life of the Senior Notes.
As of November 30, 1999, the Financial Services Division's pipeline of
loans in process totaled approximately $371.8 million. There is no exposure to
credit risk in this type of commitment until the loans are funded. However, 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 borrower, the total
commitments do not necessarily represent future cash requirements. There is no
exposure to market risk until a rate commitment is extended by the Company to a
borrower. Loans in the pipeline of loans in process for which interest rates
were committed to the borrower totaled approximately $79.4 million as of
November 30, 1999. Substantially all of these commitments are 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 extends an interest rate lock 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
the Company 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, 1999, the Company had open commitments amounting to
$235.5 million to sell MBS with varying settlement dates through January 2000.
The mortgage loan inventory and pipeline will be used to form the MBS that will
fill the forward delivery contracts.
14. 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 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 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 manage the financial risk of adverse market conditions associated
with longer-term land holdings.
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: 2000 - $18.9 million; 2001 - $15.6 million;
2002 - $11.8 million; 2003 - $7.6 million; 2004 - $5.0 million and thereafter -
$9.5 million. Rental expense for the years ended November 30, 1999, 1998 and
1997 was $24.3 million, $14.3 million and $2.5 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 $85.1 million at November 30, 1999. The Company also had
outstanding performance and surety bonds with estimated costs to complete of
$361.3 million related principally to its obligations for site improvements at
various projects at November 30, 1999. The Company does not believe that any
such bonds are likely to be drawn upon.
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15. SUBSEQUENT EVENT
In February 2000, the Company entered into a definitive agreement to
acquire U.S. Home Corporation through a merger in which the U.S. Home
stockholders will receive a total of approximately $476 million, of which
approximately one-half will be in cash and the remainder will be in common stock
of the Company (with the common stock portion, and therefore the total purchase
price, subject to adjustment if the price of the Company's stock is greater or
lower than specified levels) in exchange for their stock. U.S. Home will become
a wholly-owned subsidiary of the Company. When the acquisition takes place, U.S.
Home's debt is expected to include bank debt and approximately $525 million of
publicly-held debt. The holders of the publicly-held debt have the right to
require U.S. Home to redeem such debt within 90 days of the completion of the
transaction. The Company has access to the resources required to close the
transaction and, if necessary, refinance U.S. Home's debt. The transaction is
subject to approval by the stockholders of both companies, as well as expiration
or termination of waiting periods under antitrust laws and other regulatory
matters. If the necessary stockholder and regulatory approvals are obtained, the
Company expects the transaction to close by the end of May 2000.
16. QUARTERLY DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) First Second Third Fourth
- -------------------------------------------------------------------------------------------
1999
Revenues $590,599 738,357 819,497 970,061
Earnings before income taxes $ 46,053 65,440 75,162 98,822
Net earnings $ 27,862 39,591 45,473 59,788
Earnings per share:
Basic $ 0.48 0.68 0.78 1.03
Diluted $ 0.45 0.63 0.72 0.95
===============================================
1998
Revenues $440,712 532,106 620,935 823,112
Earnings before income taxes $ 27,005 42,677 58,441 111,991
Net earnings $ 16,203 25,606 35,065 67,194
Earnings per share:
Basic $ 0.30 0.48 0.61 1.16
Diluted $ 0.30 0.47 0.59 1.06
===============================================
Quarterly and year-to-date computations of per share amounts are made
independently. Therefore, the sum of per share amounts for the quarters may not
agree with per share amounts for the year.
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SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
On June 10, 1997, the Company's Board of Directors approved a plan to
spin-off its commercial real estate investment and management business through
the distribution of the stock of LNR. The spin-off, in the form of a tax-free
distribution, was completed effective October 31, 1997. Following the spin-off
transaction, the Company and LNR formed Lennar Land Partners to acquire, develop
and sell land. The Company and LNR contributed properties to Lennar Land
Partners in exchange for 50% general partnership interests in Lennar Land
Partners. The formation of Lennar Land Partners was effective as of October 31,
1997. On June 10, 1997, the Company's Board of Directors also approved a plan to
acquire Pacific Greystone Corporation. The merger became effective after the
spin-off of the commercial real estate investment and management business. Such
merger became effective on October 31, 1997.
The following pro forma information for 1997 is presented to report results
on a more comparable basis to 1999 and 1998. Results for 1997 have been adjusted
to give pro forma effect to these transactions as if such transactions had been
completed as of the beginning of 1997. The pro forma results for Lennar were
derived from the 12 months ended November 30, 1997 and the pro forma results for
Greystone were derived from the 12 months ended December 31, 1997. The following
pro forma financial information does not purport to be indicative of the results
of operations which would actually have been reported if the transactions had
occurred on the date or for the period indicated:
Pro Forma
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997
- ------------------------------------------------------------------------------------------
REVENUES:
Homebuilding $2,849,207 2,204,428 1,692,083
Financial services 269,307 212,437 57,448
----------------------------------------
Total revenues $3,118,514 2,416,865 1,749,531
----------------------------------------
OPERATING EARNINGS:
Homebuilding $ 340,803 283,369 172,141
Financial services 31,096 33,335 11,655
----------------------------------------
Total operating earnings 371,899 316,704 183,796
----------------------------------------
Corporate general and administrative expenses 37,563 28,962 23,212
Interest expense 48,859 47,628 30,657
----------------------------------------
EARNINGS BEFORE INCOME TAXES 285,477 240,114 129,927
Provision for income taxes 112,763 96,046 52,646
----------------------------------------
NET EARNINGS $ 172,714 144,068 77,281
----------------------------------------
BASIC EARNINGS PER SHARE $ 2.97 2.59 1.46
========================================
DILUTED EARNINGS PER SHARE $ 2.74 2.49 1.44
========================================
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SHAREHOLDER INFORMATION
Lennar Corporation and Subsidiaries
ANNUAL MEETING INDEPENDENT AUDITORS
The Annual Stockholders' Meeting Deloitte & Touche LLP
will be held at 11:00 a.m. on 200 South Biscayne Boulevard,
April 4, 2000 at the Doral Park Suite 400
Golf and Country Club, Miami, Florida 33131
5001 N.W. 104th Avenue
Miami, Florida 33178 FORM 10-K AVAILABLE
A copy of the Company's Annual
REGISTRAR AND TRANSFER AGENT Report on Form 10-K as filed with
BankBoston, N.A. the Securities and Exchange
EquiServe L.P. Commission is available without
150 Royall Street charge to any stockholder upon
Canton, Massachusetts 02021 written request to:
Investor Relations
LISTING Lennar Corporation
New York Stock Exchange (LEN) 700 N.W. 107th Avenue
Miami, Florida 33172
CORPORATE COUNSEL Telephone: (305) 559-4000
Clifford Chance Rogers & Wells LLP
200 Park Avenue
New York, New York 10166
COMPARATIVE COMMON STOCK DATA
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCK PRICES CASH DIVIDENDS
NEW YORK STOCK EXCHANGE PER SHARE
- ------------------------------------------------------------------------------------------------------------------
FISCAL HIGH/LOW PRICE COMMON STOCK CLASS B
QUARTER 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
First $27.88 - 21.63 28.75 - 19.00 1 1/4 /cents/ 1 1/4 /cents/ 1 1/8 /cents/ 1 1/8 /cents/
Second 27.81 - 20.50 36.19 - 24.19 1 1/4 /cents/ 1 1/4 /cents/ 1 1/8 /cents/ 1 1/8 /cents/
Third 24.94 - 17.50 34.38 - 18.13 1 1/4 /cents/ 1 1/4 /cents/ 1 1/8 /cents/ 1 1/8 /cents/
Fourth 19.44 - 13.06 24.38 - 14.88 1 1/4 /cents/ 1 1/4 /cents/ 1 1/8 /cents/ 1 1/8 /cents/
==================================================================================================================
As of November 30, 1999, there were approximately 800 holders of record of the
Company's common stock.
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