EXHIBIT 99
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lennar Homes, Inc.:
We have audited the accompanying consolidated balance sheets of Lennar Homes,
Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar
Corporation, as of November 30, 2000 and 1999 and the related consolidated
statements of earnings, stockholder's equity and cash flows for each of the
three years in the period ended November 30, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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 the Company as of
November 30, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Miami, Florida
January 9, 2001
-1-
LENNAR HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2000 AND 1999 (Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
2000 1999
ASSETS
Cash $ 57,175 $ 62,064
Inventories 827,814 899,566
Investments in partnerships 49,427 50,976
Other assets 58,751 21,396
---------- ----------
$ 993,167 $1,034,002
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and other liabilities $ 183,910 $ 195,139
Mortgage notes payable 4,379 7,313
Due to affiliates 465,390 533,139
---------- ----------
Total liabilities 653,679 735,591
---------- ----------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 5,000 shares authorized,
issued and outstanding 5 5
Additional paid-in capital 10,256 10,256
Retained earnings 329,227 288,150
---------- ----------
Total stockholder's equity 339,488 298,411
---------- ----------
$ 993,167 $1,034,002
========== ==========
See accompanying notes to consolidated financial statements.
-2-
LENNAR HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
REVENUES:
Sales of homes $2,128,259 $1,848,428 $1,458,447
Sales of land and other revenues 114,705 48,617 46,503
---------- ---------- ----------
Total revenues 2,242,964 1,897,045 1,504,950
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of homes sold 1,707,859 1,499,497 1,170,926
Cost of land and other expenses 91,950 29,470 30,865
Selling, general and administrative 231,894 207,562 171,755
Licensing expense to affiliate 104,677 63,285 --
Interest 39,244 24,419 39,945
---------- ---------- ----------
Total costs and expenses 2,175,624 1,824,233 1,413,491
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 67,340 72,812 91,459
INCOME TAXES 26,263 28,761 36,584
---------- ---------- ----------
NET EARNINGS $ 41,077 $ 44,051 $ 54,875
========== ========== ==========
See accompanying notes to consolidated financial statements.
-3-
LENNAR HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
Balance, November 30, 1997 $ 5 $ 10,256 $189,224 $199,485
1998 net earnings -- -- 54,875 54,875
-------- -------- -------- --------
Balance, November 30, 1998 5 10,256 244,099 254,360
1999 net earnings -- -- 44,051 44,051
-------- -------- -------- --------
Balance, November 30, 1999 5 10,256 288,150 298,411
2000 net earnings -- -- 41,077 41,077
-------- -------- -------- --------
Balance, November 30, 2000 $ 5 $ 10,256 $329,227 $339,488
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
-4-
LENNAR HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 41,077 $ 44,051 $ 54,875
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 11,091 12,167 4,447
Equity in loss (earnings) from partnerships 1,056 (3,785) 1,065
Changes in assets and liabilities,
net of effects from acquisitions:
(Increase) decrease in inventories 66,963 (115,403) (18,429)
(Increase) decrease in other assets (38,407) 14,362 25,504
Increase (decrease) in accounts payable
and other liabilities (11,229) 26,871 63,032
--------- --------- ---------
Net cash provided by (used in)
operating activities 70,551 (21,737) 130,494
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in investments
in partnerships, net 493 (23,375) (24,881)
--------- --------- ---------
Net cash provided by (used in)
investing activities 493 (23,375) (24,881)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings -- 167 3,123
Principal payments on borrowings (8,184) (23,012) (1,100)
Increase (decrease) in amounts due to affiliates (67,749) 101,530 (82,959)
--------- --------- ---------
Net cash provided by (used in)
financing activities (75,933) 78,685 (80,936)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH (4,889) 33,573 24,677
CASH AT BEGINNING OF YEAR 62,064 28,491 3,814
--------- --------- ---------
CASH AT END OF YEAR $ 57,175 $ 62,064 $ 28,491
========= ========= =========
See Note 1 for supplemental disclosures of cash flow information related to
interest and income taxes paid.
Supplemental disclosures of non-cash investing and financing activities:
Purchases of inventory financed by sellers $ 5,250 $ 14,360 $ 14,223
Fair value of assets acquired in acquisitions $ -- $ -- $ 291,161
Liabilities assumed in acquisitions $ -- $ -- $ 13,388
See accompanying notes to consolidated financial statements.
-5-
LENNAR HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of Lennar Homes, Inc., a wholly-owned
subsidiary of Lennar Corporation, and all subsidiaries and partnerships 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 have been
eliminated.
The Company operates in one operating and reporting segment -
homebuilding. Homebuilding operations include the sale and construction of
single-family attached and detached homes. These activities also include
the purchase, development and sale of residential land by the Company and
through partnerships in which it has investments.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition - Revenue from sales of homes are recognized when the
sales are closed and title passes to the new homeowners. Revenues from
sales of other real estate, including the sale of land, are recognized
when a significant down payment is received, the earnings process is
complete and the collection of any remaining receivables is reasonably
assured.
Cash - The Company considers all highly liquid investments purchased with
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 as of November 30,
2000 and 1999 included $39.0 million and $32.7 million, respectively, of
cash held in escrow for periods of up to three days.
Inventories - Inventories are stated at cost unless the inventory within a
community is determined to be impaired, in which case the impaired
inventory is written down to fair value. The Company evaluates long-lived
assets for impairment based on the undiscounted future cash flows of the
assets. Write-downs to inventories deemed to be impaired are recorded as
adjustments to the cost basis of the respective inventories. No impairment
existed at November 30, 2000 or 1999.
Start-up costs, construction overhead and selling expenses are expensed as
incurred. Homes held for sale are classified as inventories until
delivered. Land, land development, amenities and other costs are
accumulated by specific area and allocated proportionately to homes within
the respective area.
Due to Affiliates - The Company has transactions in the normal course of
business with Lennar Corporation and/or affiliated companies.
-6-
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 costs relieved from inventories are included
in interest expense. Interest costs result from the interest related to
the Company's outstanding debt as disclosed in the consolidated balance
sheets as well as debt incurred by the Company's parent, Lennar
Corporation. Lennar Corporation allocates a portion of its interest to the
Company based on the Company's inventory levels during the year.
Operating Properties and Equipment - Operating properties and equipment
are recorded at cost. 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. Operating properties and
equipment are included in other assets in the consolidated balance sheets.
Income Taxes - The Company files a consolidated federal income tax return
with Lennar Corporation. Income taxes have been provided at the Company
level as if the Company filed an income tax return on a stand-alone basis.
Current taxes due are recorded as a payable to Lennar Corporation, and the
deferred portion is recorded as deferred taxes. Income taxes are accounted
for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and
are measured by using enacted tax rates expected to apply to taxable
income in the years in which those differences are expected to reverse.
Fair Value of Financial Instruments - The carrying amounts of cash,
accounts payable and mortgage notes payable approximate fair value.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which
is required to be adopted 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. The implementation of SFAS No. 133 will not have a
material impact on the Company's results of operations or financial
position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with
the SEC. SAB No. 101 is applicable for the Company beginning in the fourth
quarter of the year ending November 30, 2001. Management does not
currently believe that the implementation of SAB No. 101 will have a
material impact on the Company's results of operations or financial
position.
-7-
2. ACQUISITIONS
In 1998, the Company acquired Winncrest Homes, a California homebuilder,
and the properties of two other California homebuilders, ColRich
Communities and Polygon Communities. Lennar Corporation paid $184.0
million in cash and issued $94.1 million in Lennar Corporation common
stock. These amounts paid on the Company's behalf are included in due to
affiliates in the consolidated balance sheets. The Company acquired assets
(primarily inventories) with a fair value of $291.2 million and assumed
liabilities of $13.4 million. The acquisition of Winncrest Homes was
accounted for using the purchase method of accounting. The results of
Winncrest Homes are included in the Company's consolidated statements of
earnings since the acquisition date. The pro forma effect of the
acquisition of Winncrest Homes on the results of operations for 1998 is
not presented as it is not considered material.
3. MORTGAGE NOTES PAYABLE
At November 30, 2000 and 1999, the Company had mortgage notes on land with
fixed interest rates ranging from 5.4% to 12.0% due through 2008 with an
outstanding balance of $4.4 million and $7.3 million, respectively. These
borrowings are collateralized by land.
4. INCOME TAXES
The provision for income taxes consisted of the following:
Years Ended November 30,
(Dollars in thousands) 2000 1999 1998
---------------------------------------------------------------------
Current:
Federal $ 37,654 $ 19,527 $ 42,166
State 4,378 3,719 5,251
-------- -------- --------
42,032 23,246 47,417
-------- -------- --------
Deferred:
Federal (14,349) 4,789 (5,862)
State (1,420) 726 (4,971)
-------- -------- --------
(15,769) 5,515 (10,833)
-------- -------- --------
$ 26,263 $ 28,761 $ 36,584
======== ======== ========
The actual income tax expense differs from the "expected" tax expense for
the year (computed by applying the U.S. federal corporate rate of 35% to
earnings before income taxes) primarily due to the amount of state income
taxes, net of the related federal tax benefit.
-8-
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant temporary differences that give rise to the net
deferred tax asset are as follows:
November 30,
(Dollars in thousands) 2000 1999
-------------------------------------------------------------
Deferred tax assets:
Acquisition adjustments $ 1,729 $ 3,001
Reserves and accruals 12,347 10,381
Capitalized expenses 14,356 --
Investments in partnerships 2,527 3,335
Other 4,211 2,163
------- -------
Total deferred tax assets 35,170 18,880
------- -------
Deferred tax liabilities:
Capitalized expenses -- 8,378
Deferred gains -- 922
Installment sales 804 1,031
Other 10,048 --
------- -------
Total deferred tax liabilities 10,852 10,331
------- -------
Net deferred tax asset $24,318 $ 8,549
======= =======
The net deferred tax asset is included in other assets in the consolidated
balance sheets.
5. RELATED PARTY TRANSACTIONS
On April 1, 1999, Lennar Corporation entered into an agreement with
Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned subsidiary
of Lennar Corporation, whereby Greystone has granted to the Company the
right to use certain property for a fee. Unpaid fees bear interest at 9%
annually. The fee and its related interest comprise the classification
"licensing expense to affiliate" in the consolidated statements of
earnings. On a quarterly basis, these amounts are paid by Lennar
Corporation to Greystone. The amounts paid by Lennar Corporation on behalf
of the Company are included in due to affiliates in the Company's
consolidated balance sheets, and bear interest at 9% annually. The term of
the agreement ends on November 30, 2001, with automatic one year renewals
unless terminated earlier by three-months written notice by either party.
During 2000 and 1999, Lennar Corporation and its subsidiaries advanced
funds to the Company which had no stated repayment terms. At November 30,
2000 and 1999, the Company had a payable to affiliates of $465.4 million
and $533.1 million, respectively.
-9-
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain subsidiaries are parties to various claims, legal
actions and complaints arising in the ordinary course of business. In the
opinion of management, the disposition of these matters will not have a
material adverse effect on the financial condition 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: 2001 - $4.6 million; 2002 - $4.0
million; 2003 - $3.4 million; 2004 - $2.5 million; 2005 - $1.0 million and
thereafter - $2.6 million. Rental expense for the years ended November 30,
2000, 1999 and 1998 was $9.8 million, $8.0 million and $2.8 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 $52.2 million at November 30, 2000. The
Company also had outstanding performance and surety bonds with estimated
costs to complete of $343.4 million related principally to its obligations
for site improvements at various projects at November 30, 2000. The
Company does not believe that any such bonds are likely to be drawn upon.
The Company has guaranteed obligations of Lennar Corporation with
regard to certain issues of its outstanding debt, and the stock of the
Company has been pledged as collateral for Lennar Corporation's
obligations with regard to that debt. The Company knows of no event of
default which would require it to satisfy these guarantees and, therefore,
the fair value of these contingent liabilities is considered immaterial.
-10-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lennar Southwest Holding Corp.:
We have audited the accompanying consolidated balance sheets of Lennar Southwest
Holding Corp. and subsidiaries (the "Company"), a wholly-owned subsidiary of
Lennar Homes, Inc., as of November 30, 2000 and 1999 and the related
consolidated statements of earnings, stockholder's equity and cash flows for
each of the three years in the period ended November 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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 the Company as of
November 30, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Miami, Florida
January 9, 2001
-11-
LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2000 AND 1999 (Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
2000 1999
ASSETS
Cash $ 29,180 $ 25,965
Inventories 249,872 209,232
Other assets 17,723 8,299
-------- --------
$296,775 $243,496
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and other liabilities $ 22,440 $ 24,948
Due to affiliates 206,040 173,594
-------- --------
Total liabilities 228,480 198,542
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 5,000 shares authorized,
issued and outstanding 5 5
Additional paid-in capital 3,332 3,332
Retained earnings 64,958 41,617
-------- --------
Total stockholder's equity 68,295 44,954
-------- --------
$296,775 $243,496
======== ========
See accompanying notes to consolidated financial statements.
-12-
LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
REVENUES:
Sales of homes $718,959 $563,315 $427,009
Sales of land and other revenues 24,522 15,986 5,862
-------- -------- --------
Total revenues 743,481 579,301 432,871
-------- -------- --------
COSTS AND EXPENSES:
Cost of homes sold 582,555 457,306 338,361
Cost of land and other expenses 9,609 4,942 3,896
Selling, general and administrative 67,744 51,193 41,144
Licensing expense to affiliate 35,069 19,539 --
Interest 10,240 5,286 5,978
-------- -------- --------
Total costs and expenses 705,217 538,266 389,379
-------- -------- --------
EARNINGS BEFORE INCOME TAXES 38,264 41,035 43,492
INCOME TAXES 14,923 16,209 17,397
-------- -------- --------
NET EARNINGS $ 23,341 $ 24,826 $ 26,095
======== ======== ========
See accompanying notes to consolidated financial statements.
-13-
LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
-------- -------- -------- --------
Balance, November 30, 1997 $ 5 $ 3,332 $ (9,304) $ (5,967)
1998 net earnings -- -- 26,095 26,095
-------- -------- -------- --------
Balance, November 30, 1998 5 3,332 16,791 20,128
1999 net earnings -- -- 24,826 24,826
-------- -------- -------- --------
Balance, November 30, 1999 5 3,332 41,617 44,954
2000 net earnings -- -- 23,341 23,341
-------- -------- -------- --------
Balance, November 30, 2000 $ 5 $ 3,332 $ 64,958 $ 68,295
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
-14-
LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 23,341 $ 24,826 $ 26,095
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization 771 686 780
Changes in assets and liabilities:
Increase in inventories (41,217) (53,473) (45,983)
(Increase) decrease in other assets (9,618) (4,997) 6,942
Increase (decrease) in accounts payable
and other liabilities (2,508) 6,483 (1,134)
-------- -------- --------
Net cash used in operating activities (29,231) (26,475) (13,300)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in amounts due to affiliates 32,446 37,667 27,482
-------- -------- --------
Net cash provided by financing activities 32,446 37,667 27,482
-------- -------- --------
NET INCREASE IN CASH 3,215 11,192 14,182
CASH AT BEGINNING OF YEAR 25,965 14,773 591
-------- -------- --------
CASH AT END OF YEAR $ 29,180 $ 25,965 $ 14,773
======== ======== ========
See Note 1 for supplemental disclosures of cash flow information related to
interest and income taxes paid.
See accompanying notes to consolidated financial statements.
-15-
LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of Lennar Southwest Holding Corp. and all
subsidiaries and partnerships in which a controlling interest is held (the
"Company"). The Company is a wholly-owned subsidiary of Lennar Homes, Inc.
which is a wholly-owned subsidiary of Lennar Corporation. All significant
intercompany transactions have been eliminated.
The Company operates in one operating and reporting segment -
homebuilding. Homebuilding operations include the sale and construction of
single-family attached and detached homes. These activities also include
the purchase, development and sale of residential land by the Company and
through partnerships in which it has investments.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition - Revenue from sales of homes are recognized when the
sales are closed and title passes to the new homeowners. Revenues from
sales of other real estate including the sales of land are recognized when
a significant down payment is received, the earnings process is complete
and the collection of any remaining receivables is reasonably assured.
Cash - The Company considers all highly liquid investments purchased with
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 as of November 30,
2000 and 1999 included $13.2 million and $0.4 million, respectively, of
cash held in escrow for periods of up to three days.
Inventories - Inventories are stated at cost unless the inventory within a
community is determined to be impaired, in which case the impaired
inventory is written down to fair value. The Company evaluates long-lived
assets for impairment based on the undiscounted future cash flows of the
assets. Write-downs to inventories deemed to be impaired are recorded as
adjustments to the cost basis of the respective inventories. No impairment
existed at November 30, 2000 or 1999.
Start-up costs, construction overhead and selling expenses are expensed as
incurred. Homes held for sale are classified as inventories until
delivered. Land, land development, amenities and other costs are
accumulated by specific area and allocated proportionately to homes within
the respective area.
Due to Affiliates - The Company has transactions in the normal course of
business with Lennar Corporation and/or affiliated companies.
-16-
Interest and Real Estate Taxes - Interest and real estate taxes
attributable to land and homes are capitalized and added to the cost of
those properties as long as the properties are being actively developed.
Interest costs relieved from inventories are included in interest expense.
Interest costs result from the interest related to debt incurred by Lennar
Corporation. Lennar Corporation allocates a portion of its interest to the
Company based on the Company's inventory levels during the year.
Operating Equipment - Operating equipment is recorded at cost.
Depreciation is calculated to amortize the cost of depreciable assets over
their estimated useful lives using the straight-line method. The estimated
useful life is 2 to 5 years. Operating equipment is included in other
assets in the consolidated balance sheets.
Income Taxes - The Company files a consolidated federal income tax return
with Lennar Corporation. Income taxes have been provided at the Company
level as if the Company filed an income tax return on a stand-alone basis.
Current taxes due are recorded as a payable to Lennar Corporation, and the
deferred portion is recorded as deferred taxes. Income taxes are accounted
for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and
are measured by using enacted tax rates expected to apply to taxable
income in the years in which those differences are expected to reverse.
Fair Value of Financial Instruments - The carrying amounts of cash and
accounts payable approximate fair value.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which
is required to be adopted 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. The implementation of SFAS No. 133 will not have a
material impact on the Company's results of operations or financial
position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with
the SEC. SAB No. 101 is applicable for the Company beginning in the fourth
quarter of the year ending November 30, 2001. Management does not
currently believe that the implementation of SAB No. 101 will have a
material impact on the Company's results of operations or financial
position.
-17-
2. INCOME TAXES
The provision for income taxes consisted of the following:
Years Ended November 30,
(Dollars in thousands) 2000 1999 1998
----------------------------------------------------------------------
Current:
Federal $17,463 $12,172 $16,067
State 2,031 2,318 2,001
------- ------- -------
19,494 14,490 18,068
------- ------- -------
Deferred:
Federal (4,159) 1,493 (363)
State (412) 226 (308)
------- ------- -------
(4,571) 1,719 (671)
------- ------- -------
$14,923 $16,209 $17,397
======= ======= =======
The actual income tax expense differs from the "expected" tax expense for
the year (computed by applying the U.S. federal corporate rate of 35% to
earnings before income taxes) primarily due to the amount of state income
taxes, net of the related federal tax benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant temporary differences that give rise to the net
deferred tax asset (liability) are as follows:
November 30,
(Dollars in thousands) 2000 1999
------------------------------------------------------------------
Deferred tax assets:
Capitalized expenses $2,820 $ --
------ -------
Total deferred tax assets 2,820 --
------ -------
Deferred tax liabilities:
Capitalized expenses -- 3,156
Other 1,405 --
------ -------
Total deferred tax liabilities 1,405 3,156
------ -------
Net deferred tax asset (liability) $1,415 $(3,156)
====== =======
-18-
The net deferred tax asset of $1.4 million at November 30, 2000 is
included in other assets and the net deferred tax liability of $3.2
million at November 30, 1999 is included in accounts payable and other
liabilities in the consolidated balance sheets.
3. RELATED PARTY TRANSACTIONS
On April 1, 1999, Lennar Corporation entered into an agreement with
Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned subsidiary
of Lennar Corporation, whereby Greystone has granted to the Company the
right to use certain property for a fee. Unpaid fees bear interest at 9%
annually. The fee and its related interest comprise the classification
"licensing expense to affiliate" in the consolidated statements of
earnings. On a quarterly basis, these amounts are paid by Lennar
Corporation to Greystone. The amounts paid by Lennar Corporation on behalf
of the Company are included in due to affiliates in the Company's
consolidated balance sheets, and bear interest at 9% annually. The term of
the agreement ends on November 30, 2001, with automatic one year renewals
unless terminated earlier by three-months written notice by either party.
During 2000 and 1999, Lennar Corporation and its subsidiaries advanced
funds to the Company which had no stated repayment terms. At November 30,
2000 and 1999, the Company had a payable to affiliates of $206.0 million
and $173.6 million, respectively.
4. 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: 2001 - $0.9 million; 2002 - $0.9
million; 2003 - $0.8 million; 2004 - $0.7 million; 2005 - $0.6 million and
thereafter - $2.2 million. Rental expense for the years ended November 30,
2000, 1999 and 1998 was $0.9 million, $0.7 million and $0.5 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 $26.7 million at November 30, 2000. The
Company also had outstanding performance and surety bonds with estimated
costs to complete of $1.7 million related principally to its obligations
for site improvements at various projects at November 30, 2000. The
Company does not believe that any such bonds are likely to be drawn upon.
The Company has guaranteed obligations of Lennar Corporation with
regard to certain issues of its outstanding debt, and the stock of the
Company has been pledged as collateral for Lennar Corporation's
obligations with regard to that debt. The Company knows of no event of
default which would require it to satisfy these guarantees and, therefore,
the fair value of these contingent liabilities is considered immaterial.
-19-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lennar Homes of California, Inc.:
We have audited the accompanying consolidated balance sheets of Lennar Homes of
California, Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of
Lennar Homes, Inc., as of November 30, 2000 and 1999 and the related
consolidated statements of earnings, stockholder's equity and cash flows for
each of the three years in the period ended November 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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 the Company as of
November 30, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Miami, Florida
January 9, 2001
-20-
LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2000 AND 1999 (Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
2000 1999
ASSETS
Inventories $145,067 $217,594
Investments in partnerships 25,064 25,654
Other assets 3,010 3,481
-------- --------
$173,141 $246,729
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and other liabilities $ 33,902 $ 26,968
Mortgage note payable 2,000 2,200
Due to affiliates 87,486 175,548
-------- --------
Total liabilities 123,388 204,716
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 5,000 shares authorized,
issued and outstanding 5 5
Retained earnings 49,748 42,008
-------- --------
Total stockholder's equity 49,753 42,013
-------- --------
$173,141 $246,729
======== ========
See accompanying notes to consolidated financial statements.
-21-
LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
REVENUES:
Sales of homes $419,508 $348,084 $262,345
Sales of land and other revenues 16,606 520 12,415
-------- -------- --------
Total revenues 436,114 348,604 274,760
-------- -------- --------
COSTS AND EXPENSES:
Cost of homes sold 327,229 265,730 187,927
Cost of land and other expenses 18,702 3,588 10,923
Selling, general and administrative 44,918 38,946 25,135
Licensing expense to affiliate 20,696 11,039 --
Interest 11,880 7,555 12,219
-------- -------- --------
Total costs and expenses 423,425 326,858 236,204
-------- -------- --------
EARNINGS BEFORE INCOME TAXES 12,689 21,746 38,556
INCOME TAXES 4,949 8,590 15,423
-------- -------- --------
NET EARNINGS $ 7,740 $ 13,156 $ 23,133
======== ======== ========
See accompanying notes to consolidated financial statements.
-22-
LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
Common Retained
Stock Earnings Total
Balance, November 30, 1997 $ 5 $ 5,719 $ 5,724
1998 net earnings -- 23,133 23,133
------- ------- -------
Balance, November 30, 1998 5 28,852 28,857
1999 net earnings -- 13,156 13,156
------- ------- -------
Balance, November 30, 1999 5 42,008 42,013
2000 net earnings -- 7,740 7,740
------- ------- -------
Balance, November 30, 2000 $ 5 $49,748 $49,753
======= ======= =======
See accompanying notes to consolidated financial statements.
-23-
LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 7,740 $ 13,156 $ 23,133
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 3,166 5,215 660
Equity in loss from partnerships 3,783 247 422
Changes in assets and liabilities,
net of effects from acquisitions:
Decrease in inventories 69,468 1,635 85,265
Decrease in other assets 364 1,646 1,159
Increase in accounts payable and other liabilities 6,934 4,567 3,958
--------- --------- ---------
Net cash provided by operating activities 91,455 26,466 114,597
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investments in partnerships, net (3,193) (13,741) (12,582)
--------- --------- ---------
Net cash used in investing activities (3,193) (13,741) (12,582)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings -- 167 3,123
Principal payments on borrowings (200) (12,682) (790)
Decrease in amounts due to affiliates (88,062) (3,630) (101,310)
--------- --------- ---------
Net cash used in financing activities (88,262) (16,145) (98,977)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH -- (3,420) 3,038
CASH AT BEGINNING OF YEAR -- 3,420 382
--------- --------- ---------
CASH AT END OF YEAR $ -- $ -- $ 3,420
========= ========= =========
See Note 1 for supplemental disclosures of cash flow information related to
interest and income taxes paid.
Supplemental disclosures of non-cash investing and financing activities:
Purchases of inventory financed by sellers $ -- $ 11,680 $ 7,996
Fair value of assets acquired in acquisitions $ -- $ -- $ 216,408
Liabilities assumed in acquisitions $ -- $ -- $ 5,456
See accompanying notes to consolidated financial statements.
-24-
LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of Lennar Homes of California, Inc. and
all subsidiaries and partnerships in which a controlling interest is held
(the "Company"). The Company is a wholly-owned subsidiary of Lennar Homes,
Inc. which is a wholly-owned subsidiary of Lennar Corporation. The
Company's investments in 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 have
been eliminated.
The Company operates in one operating and reporting segment -
homebuilding. Homebuilding operations include the sale and construction of
single-family attached and detached homes. These activities also include
the purchase, development and sale of residential land by the Company and
through partnerships in which it has investments.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition - Revenue from sales of homes are recognized when the
sales are closed and title passes to the new homeowners. Revenues from
sales of other real estate, including the sale of land, are recognized
when a significant down payment is received, the earnings process is
complete and the collection of any remaining receivables is reasonably
assured.
Cash - The Company considers all highly liquid investments purchased with
a maturity of three months or less to be cash equivalents.
Inventories - Inventories are stated at cost unless the inventory within a
community is determined to be impaired, in which case the impaired
inventory is written down to fair value. The Company evaluates long-lived
assets for impairment based on the undiscounted future cash flows of the
assets. Write-downs to inventories deemed to be impaired are recorded as
adjustments to the cost basis of the respective inventories. No impairment
existed at November 30, 2000 or 1999.
Start-up costs, construction overhead and selling expenses are expensed as
incurred. Homes held for sale are classified as inventories until
delivered. Land, land development, amenities and other costs are
accumulated by specific area and allocated proportionately to homes within
the respective area.
Due to Affiliates - The Company has transactions in the normal course of
business with Lennar Corporation and/or affiliated companies.
-25-
Interest and Real Estate Taxes - Interest and real estate taxes
attributable to land and homes are capitalized and added to the cost of
those properties as long as the properties are being actively developed.
Interest costs relieved from inventories are included in interest expense.
Interest costs result from the interest related to the Company's
outstanding debt as disclosed in the consolidated balance sheets as well
as debt incurred by Lennar Corporation. Lennar Corporation allocates a
portion of its interest to the Company based on the Company's inventory
levels during the year.
Operating Equipment - Operating equipment is recorded at cost.
Depreciation is calculated to amortize the cost of depreciable assets over
their estimated useful lives using the straight-line method. The estimated
useful life is 2 to 5 years. Operating equipment is included in other
assets in the consolidated balance sheets.
Income Taxes - The Company files a consolidated federal income tax return
with Lennar Corporation. Income taxes have been provided at the Company
level as if the Company filed an income tax return on a stand-alone basis.
Current taxes due are recorded as a payable to Lennar Corporation, and the
deferred portion is recorded as deferred taxes. Income taxes are accounted
for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and
are measured by using enacted tax rates expected to apply to taxable
income in the years in which those differences are expected to reverse.
Fair Value of Financial Instruments - The carrying amounts of accounts
payable and the mortgage note payable approximate fair value.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which
is required to be adopted 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. The implementation of SFAS No. 133 will not have a
material impact on the Company's results of operations or financial
position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with
the SEC. SAB No. 101 is applicable for the Company beginning in the fourth
quarter of the year ending November 30, 2001. Management does not
currently believe that the implementation of SAB No. 101 will have a
material impact on the Company's results of operations or financial
position.
-26-
2. ACQUISITIONS
In 1998, the Company acquired the properties of two California
homebuilders, ColRich Communities and Polygon Communities. Lennar
Corporation paid $126.2 million in cash and issued $85.1 million in Lennar
Corporation common stock. These amounts paid on the Company's behalf are
included in due to affiliates in the consolidated balance sheets. The
Company acquired assets (primarily inventories) with a fair value of
$216.4 million and assumed liabilities of $5.5 million.
3. MORTGAGE NOTE PAYABLE
At November 30, 2000 and 1999, the Company had a mortgage note on land
bearing interest at 10.0% maturing in 2008 with an outstanding balance of
$2.0 million and $2.2 million, respectively. This borrowing is
collateralized by land.
4. INCOME TAXES
The provision for income taxes consisted of the following:
Years Ended November 30,
(Dollars in thousands) 2000 1999 1998
-------------------------------------------------------------------
Current:
Federal $ 7,972 $ 4,095 $ 14,310
State 927 780 1,782
------- ------- --------
8,899 4,875 16,092
------- ------- --------
Deferred:
Federal (3,594) 3,226 (362)
State (356) 489 (307)
------- ------- --------
(3,950) 3,715 (669)
------- ------- --------
$ 4,949 $ 8,590 $ 15,423
======= ======= ========
The actual income tax expense differs from the "expected" tax expense for
the year (computed by applying the U.S. federal corporate rate of 35% to
earnings before income taxes) primarily due to the amount of state income
taxes, net of the related federal tax benefit.
-27-
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 (liability) are as follows:
November 30,
(Dollars in thousands) 2000 1999
------------------------------------------------------------
Deferred tax assets:
Acquisition adjustments $ -- $ 527
Capitalized expenses 1,637 --
Other 1,789 --
------- -------
Total deferred tax assets 3,426 527
------- -------
Deferred tax liabilities:
Capitalized expenses -- 3,282
Other 2,231 --
------- -------
Total deferred tax liabilities 2,231 3,282
------- -------
Net deferred tax asset (liability) $ 1,195 $(2,755)
======= =======
The net deferred tax asset of $1.2 million at November 30, 2000 is
included in other assets and the net deferred tax liability of $2.8
million at November 30, 1999 is included in accounts payable and other
liabilities in the consolidated balance sheets.
5. RELATED PARTY TRANSACTIONS
On April 1, 1999, Lennar Corporation entered into an agreement with
Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned subsidiary
of Lennar Corporation, whereby Greystone has granted to the Company the
right to use certain property for a fee. Unpaid fees bear interest at 9%
annually. The fee and its related interest comprise the classification
"licensing expense to affiliate" in the consolidated statements of
earnings. On a quarterly basis, these amounts are paid by Lennar
Corporation to Greystone. The amounts paid by Lennar Corporation on behalf
of the Company are included in due to affiliates in the Company's
consolidated balance sheets, and bear interest at 9% annually. The term of
the agreement ends on November 30, 2001, with automatic one year renewals
unless terminated earlier by three-months written notice by either party.
During 2000 and 1999, Lennar Corporation and its subsidiaries advanced
funds to the Company which had no stated repayment terms. At November 30,
2000 and 1999, the Company had a payable to affiliates of $87.5 million
and $175.5 million, respectively.
-28-
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain subsidiaries are parties to various claims, legal
actions and complaints arising in the ordinary course of business. In the
opinion of management, the disposition of these matters will not have a
material adverse effect on the financial condition 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: 2001 - $ 0.8 million; 2002 - $0.8
million; 2003 - $0.8 million; 2004 - $0.5 million and 2005 - $0.1 million.
Rental expense for the years ended November 30, 2000, 1999 and 1998 was
$1.7 million, $0.7 million and $0.3 million, respectively.
The Company is committed, under various letters of credit, to perform
certain development and construction activities and provide certain
guarantees in the normal course of business. Outstanding letters of credit
under these arrangements totaled $4.6 million at November 30, 2000. The
Company also had outstanding performance and surety bonds with estimated
costs to complete of $190.8 million related principally to its obligations
for site improvements at various projects at November 30, 2000. The
Company does not believe that any such bonds are likely to be drawn upon.
The Company has guaranteed obligations of Lennar Corporation with
regard to certain issues of its outstanding debt, and the stock of the
Company has been pledged as collateral for Lennar Corporation's
obligations with regard to that debt. The Company knows of no event of
default which would require it to satisfy these guarantees and, therefore,
the fair value of these contingent liabilities is considered immaterial.
-29-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Greystone Homes, Inc.:
We have audited the accompanying consolidated balance sheets of Greystone Homes,
Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar
Corporation, as of November 30, 2000 and 1999 and the related consolidated
statements of earnings, stockholder's equity and cash flows for each of the
three years in the period ended November 30, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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 the Company as of
November 30, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended November 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Miami, Florida
January 9, 2001
-30-
GREYSTONE HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2000 AND 1999 (Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
2000 1999
ASSETS
Inventories $313,613 $369,380
Goodwill, net 38,742 41,032
Other assets 31,209 29,918
Due from affiliates 118,656 --
-------- --------
$502,220 $440,330
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and other liabilities $ 51,262 $ 39,017
Mortgage notes payable 672 8,040
Due to affiliates -- 38,274
-------- --------
Total liabilities 51,934 85,331
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value; 1,000 shares authorized,
issued and outstanding -- --
Additional paid-in capital 216,073 216,073
Retained earnings 234,213 138,926
-------- --------
Total stockholder's equity 450,286 354,999
-------- --------
$502,220 $440,330
======== ========
See accompanying notes to consolidated financial statements.
-31-
GREYSTONE HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands)
- ---------------------------------------------------------------------
2000 1999 1998
REVENUES:
Sales of homes $646,206 $823,317 $621,309
Sales of land and other revenues 110,822 100,223 21,293
Licensing revenues from affiliates 104,677 63,285 --
-------- -------- --------
Total revenues 861,705 986,825 642,602
-------- -------- --------
COSTS AND EXPENSES:
Cost of homes sold 495,930 634,103 491,168
Cost of land and other expenses 99,606 91,876 13,198
Selling, general and administrative 89,017 86,023 69,903
Interest 20,944 23,159 9,684
-------- -------- --------
Total costs and expenses 705,497 835,161 583,953
-------- -------- --------
EARNINGS BEFORE INCOME TAXES 156,208 151,664 58,649
INCOME TAXES 60,921 59,907 23,459
-------- -------- --------
NET EARNINGS $ 95,287 $ 91,757 $ 35,190
======== ======== ========
See accompanying notes to consolidated financial statements.
-32-
GREYSTONE HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
Balance, November 30, 1997 $ -- $216,073 $ 11,979 $228,052
1998 net earnings -- -- 35,190 35,190
----- -------- -------- --------
Balance, November 30, 1998 -- 216,073 47,169 263,242
1999 net earnings -- -- 91,757 91,757
----- -------- -------- --------
Balance, November 30, 1999 -- 216,073 138,926 354,999
2000 net earnings -- -- 95,287 95,287
----- -------- -------- --------
Balance, November 30, 2000 $ -- $216,073 $234,213 $450,286
===== ======== ======== ========
See accompanying notes to consolidated financial statements.
-33-
GREYSTONE HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 95,287 $ 91,757 $ 35,190
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization, net 12,874 13,516 (564)
Changes in assets and liabilities:
(Increase) decrease in inventories 45,449 41,966 (93,765)
(Increase) decrease in other assets (1,557) 17,504 (15,039)
Increase (decrease) in accounts payable and other liabilities 12,245 (971) 16
--------- --------- ---------
Net cash provided by (used in) operating activities 164,298 163,772 (74,162)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings (7,368) (143,255) (4,579)
(Increase) decrease in amounts due from affiliates (118,656) -- 19,950
Increase (decrease) in amounts due to affiliates (38,274) (41,514) 79,788
--------- --------- ---------
Net cash provided by (used in) financing activities (164,298) (184,769) 95,159
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH -- (20,997) 20,997
CASH AT BEGINNING OF YEAR -- 20,997 --
--------- --------- ---------
CASH AT END OF YEAR $ -- $ -- $ 20,997
========= ========= =========
See Note 1 for supplemental disclosures of cash flow information related to
interest and income taxes paid.
Supplemental disclosures of non-cash investing and financing activities:
Purchases of inventory financed by sellers $ -- $ 6,505 $ 14,825
See accompanying notes to consolidated financial statements.
-34-
GREYSTONE HOMES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of Greystone Homes, Inc., a wholly-owned
subsidiary of Lennar Corporation, and all subsidiaries and partnerships in
which a controlling interest is held (the "Company"). All significant
intercompany transactions have been eliminated.
The Company operates in one operating and reporting segment -
homebuilding. Homebuilding operations include the sale and construction of
single-family attached and detached homes. These activities also include
the purchase, development and sale of residential land by the Company and
through partnerships in which it has investments.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition - Revenue from sales of homes are recognized when the
sales are closed and title passes to the new homeowners. Revenues from
sales of other real estate, including the sale of land, are recognized
when a significant down payment is received, the earnings process is
complete and the collection of any remaining receivables is reasonably
assured.
Cash - The Company considers all highly liquid investments purchased with
a maturity of three months or less to be cash equivalents.
Inventories - Inventories are stated at cost unless the inventory within a
community is determined to be impaired, in which case the impaired
inventory is written down to fair value. The Company evaluates long-lived
assets for impairment based on the undiscounted future cash flows of the
assets. Write-downs to inventories deemed to be impaired are recorded as
adjustments to the cost basis of the respective inventories. No impairment
existed at November 30, 2000 or 1999.
Start-up costs, construction overhead and selling expenses are expensed as
incurred. Homes held for sale are classified as inventories until
delivered. Land, land development, amenities and other costs are
accumulated by specific area and allocated proportionately to homes within
the respective area.
Due from/to Affiliates - The Company has transactions in the normal course
of business with Lennar Corporation and/or affiliated companies.
-35-
Interest and Real Estate Taxes - Interest and real estate taxes
attributable to land and homes are capitalized and added to the cost of
those properties as long as the properties are being actively developed.
Interest costs relieved from inventories are included in interest expense.
Interest costs result from the interest related to the Company's
outstanding debt as disclosed in the consolidated balance sheets as well
as debt incurred by the Company's parent, Lennar Corporation. Lennar
Corporation allocates a portion of its interest to the Company based on
the Company's inventory levels during the year.
Operating Equipment - Operating equipment is 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 is 2 to 5 years. Operating equipment is included in other
assets in the consolidated balance sheets.
Goodwill - Goodwill represents the excess of the purchase price over the
fair value of net assets acquired and is amortized by the Company on a
straight-line basis over 20 years. At November 30, 2000 and 1999, goodwill
was $38.7 million and $41.0 million, respectively (net of accumulated
amortization of $7.1 million and $4.8 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 would be compared to the carrying amount to
determine if a write-down to fair value based on discounted cash flows was
required. No impairment existed at November 30, 2000 or 1999.
Income Taxes - The Company files a consolidated federal income tax return
with Lennar Corporation. Income taxes have been provided at the Company
level as if the Company filed an income tax return on a stand-alone basis.
Current taxes due are recorded as a payable to Lennar Corporation, and the
deferred portion is recorded as deferred taxes. Income taxes are accounted
for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and
are measured by using enacted tax rates expected to apply to taxable
income in the years in which those differences are expected to reverse.
Fair Value of Financial Instruments - The carrying amounts of accounts
payable and mortgage notes payable approximate fair value.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which
is required to be adopted 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. The implementation of SFAS No. 133 will not have a
material impact on the Company's results of operations or financial
position.
-36-
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with
the SEC. SAB No. 101 is applicable for the Company beginning in the fourth
quarter of the year ending November 30, 2001. Management does not
currently believe that the implementation of SAB No. 101 will have a
material impact on the Company's results of operations or financial
position.
2. MORTGAGE NOTES PAYABLE
At November 30, 2000 and 1999, the Company had mortgage notes on land with
fixed interest rates ranging from 9.0% to 10.0% due through 2001 with an
outstanding balance of $0.7 million and $8.0 million, respectively. These
borrowings are collateralized by land.
In 1999, Lennar Corporation redeemed all of the Company's outstanding 10
3/4% senior notes due 2004, 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.
3. INCOME TAXES
The provision for income taxes consisted of the following:
Years Ended November 30,
(Dollars in thousands) 2000 1999 1998
--------------------------------------------------------------
Current:
Federal $ 51,687 $ 45,105 $ 24,470
State 6,011 8,591 3,047
-------- -------- --------
57,698 53,696 27,517
-------- -------- --------
Deferred:
Federal 2,933 5,393 (2,196)
State 290 818 (1,862)
-------- -------- --------
3,223 6,211 (4,058)
-------- -------- --------
$ 60,921 $ 59,907 $ 23,459
======== ======== ========
The actual income tax expense differs from the "expected" tax expense for
the year (computed by applying the U.S. federal corporate rate of 35% to
earnings before income taxes) primarily due to the amount of state income
taxes, net of the related federal tax benefit.
-37-
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant temporary differences that give rise to the net
deferred tax asset are as follows:
November 30,
(Dollars in thousands) 2000 1999
---------------------------------------------------------------------
Deferred tax assets:
Acquisition adjustments $ 10,158 $ 12,992
Reserves and accruals 21,390 16,455
Net operating loss and capital loss
carryforwards, tax affected 4,466 5,788
Capitalized expenses 5,305 --
Deferred gains 1,959 --
Investments in partnerships 745 764
-------- --------
Deferred tax assets 44,023 35,999
Less: valuation allowance (7,117) (8,508)
-------- --------
Total deferred tax assets, net 36,906 27,491
-------- --------
Deferred tax liabilities:
Capitalized expenses -- 3,591
Deferred gains -- 158
Other 16,387 --
-------- --------
Total deferred tax liabilities 16,387 3,749
-------- --------
Net deferred tax asset $ 20,519 $ 23,742
======== ========
The net deferred tax asset is included in other assets in the consolidated
balance sheets. SFAS No. 109 requires the reduction of the deferred tax
assets by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that a portion or all of the deferred
tax asset will not be realized. At November 30, 2000 and 1999, the Company
had a valuation allowance of $7.1 million and $8.5 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.
4. RELATED PARTY TRANSACTIONS
On April 1, 1999, Lennar Corporation entered into an agreement with
Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned subsidiary
of Lennar Corporation, whereby Greystone has granted to affiliates of
Lennar Corporation the right to use certain property for a fee. Unpaid
fees bear interest at 9% annually. The classification "licensing revenues
from affiliates" in the consolidated statements of earnings is comprised
of the affiliates' fee and interest. On a quarterly basis, these amounts
are paid to Greystone by Lennar Corporation. The term of the agreement
ends on November 30, 2001, with automatic one year renewals unless
terminated earlier by three-months written notice by either party.
-38-
On April 1, 1999, Lennar Corporation entered into a financing arrangement
with Greystone which matures on December 31, 2001, whereby Lennar
Corporation may borrow up to $400 million from Greystone at an interest
rate of 9% payable quarterly. During 2000, Lennar Corporation borrowed
$178.4 million under this financing arrangement.
During 2000 and 1999, Lennar Corporation and its subsidiaries advanced and
borrowed funds to and from the Company which had no stated repayment
terms. At November 30, 2000, the Company had a $118.7 million receivable
from affiliates. At November 30, 1999, the Company had a $38.3 million
payable to affiliates.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain subsidiaries are parties to various claims, legal
actions and complaints arising in the ordinary course of business. In the
opinion of management, the disposition of these matters will not have a
material adverse effect on the financial condition 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: 2001 - $1.4 million; 2002 - $1.1
million; 2003 - $0.7 million; 2004 - $0.6 million and 2005 - $0.2 million.
Rental expense for the years ended November 30, 2000, 1999 and 1998 was
$2.2 million, $1.6 million and $1.8 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 $12.2 million at November 30, 2000. The
Company also had outstanding performance and surety bonds with estimated
costs to complete of $124.1 million related principally to its obligations
for site improvements at various projects at November 30, 2000. The
Company does not believe that any such bonds are likely to be drawn upon.
The Company has guaranteed obligations of Lennar Corporation with
regard to certain issues of its outstanding debt, and the stock of the
Company has been pledged as collateral for Lennar Corporation's
obligations with regard to that debt. The Company knows of no event of
default which would require it to satisfy these guarantees and, therefore,
the fair value of these contingent liabilities is considered immaterial.
-39-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
U.S. Home Corporation:
We have audited the accompanying consolidated balance sheet of U.S. Home
Corporation and subsidiaries (the "Company"), a wholly-owned subsidiary of
Lennar Corporation, as of November 30, 2000 and the related consolidated
statements of earnings, stockholder's equity and cash flows for the period from
inception (February 15, 2000) to November 30, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
November 30, 2000, and the results of its operations and its cash flows for the
period from inception (February 15, 2000) to November 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Miami, Florida
January 9, 2001
-40-
U.S. HOME CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 2000 (Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
ASSETS
Homebuilding:
Cash $ 56,084
Receivables, net 14,135
Inventories 1,180,130
Investments in partnerships 82,087
Goodwill, net 46,418
Other assets 105,493
----------
1,484,347
Financial services 148,870
----------
$1,633,217
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Homebuilding liabilities:
Accounts payable and other liabilities $ 290,065
Mortgage notes and other debts payable 32,897
Due to affiliates 595,987
----------
918,949
Financial services liabilities 143,976
Stockholder's equity:
Common stock, $0.10 par value; 5,000 shares authorized,
issued and outstanding 1
Additional paid-in capital 510,249
Retained earnings 60,042
----------
Total stockholder's equity 570,292
----------
$1,633,217
==========
See accompanying notes to consolidated financial statements
-41-
U.S. HOME CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENT OF EARNINGS
PERIOD FROM INCEPTION (FEBRUARY 15, 2000) TO NOVEMBER 30, 2000
(Dollars in thousands)
- --------------------------------------------------------------------------------
REVENUES:
Homebuilding $1,371,002
Financial services 26,418
----------
Total revenues 1,397,420
----------
COSTS AND EXPENSES:
Homebuilding 1,245,747
Financial services 14,370
General and administrative 2,594
Interest 36,279
----------
Total costs and expenses 1,298,990
----------
EARNINGS BEFORE INCOME TAXES 98,430
INCOME TAXES 38,388
----------
NET EARNINGS $ 60,042
==========
See accompanying notes to consolidated financial statements
-42-
U.S. HOME CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
PERIOD FROM INCEPTION (FEBRUARY 15, 2000) TO NOVEMBER 30, 2000
(Dollars in thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
Initial capitalization $ 1 $ -- $ -- $ 1
Contribution of capital to acquire
U.S. Home Corporation (see Note 2) -- 510,249 -- 510,249
Net earnings from February 15, 2000 to
November 30, 2000 -- -- 60,042 60,042
-------- -------- -------- --------
Balance, November 30, 2000 $ 1 $510,249 $ 60,042 $570,292
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
-43-
U.S. HOME CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM INCEPTION (FEBRUARY 15, 2000) TO NOVEMBER 30, 2000 (Dollars in
thousands)
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 60,042
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 8,328
Equity in earnings from partnerships (211)
Changes in assets and liabilities, net of effects from acquisition:
Increase in receivables (317)
Decrease in inventories 110,256
Increase in other assets (7,991)
Increase in financial services loans held for sale or disposition (27,919)
Decrease in accounts payable and other liabilities (65,351)
---------
Net cash provided by operating activities 76,837
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in operating properties and equipment, net 2,798
Increase in investments in partnerships, net (33,115)
Increase in financial services mortgage loans (12,656)
Acquisition of business - net of cash acquired (152,386)
---------
Net cash used in investing activities (195,359)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under financial services short-term debt 113,260
Payments for tender of senior notes (519,759)
Proceeds from borrowings 2,981
Principal payments on borrowings (253,286)
Contributed capital 243,383
Increase in amounts due to affiliates 595,987
---------
Net cash provided by financing activities 182,566
---------
CASH AT END OF PERIOD $ 64,044
=========
Summary of cash:
Homebuilding $ 56,084
Financial services 7,960
---------
$ 64,044
=========
See Note 1 for supplemental disclosures of cash flow information related to
interest and income taxes paid.
Supplemental disclosures of non-cash investing and financing activities:
Purchases of inventory financed by sellers $ 279
Fair value of assets acquired in U.S. Home acquisition,
inclusive of cash of $90,997 $1,654,444
Goodwill recorded $ 47,809
Liabilities assumed in U.S. Home acquisition $1,192,004
See accompanying notes to consolidated financial statements.
-44-
U.S. HOME CORPORATION AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM INCEPTION (FEBRUARY 15, 2000) TO NOVEMBER 30, 2000
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of U.S. Home Corporation, a wholly-owned
subsidiary of Lennar Corporation, and all subsidiaries and partnerships in
which a controlling interest is held (the "Company" or "U.S. Home"). 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 have
been eliminated.
U.S. Home was formerly known as LEN Acquisition Corporation. LEN
Acquisition Corporation was incorporated on February 15, 2000. In May
2000, U.S. Home Corporation was acquired by LEN Acquisition Corporation.
LEN Acquisition Corporation was subsequently renamed U.S. Home
Corporation. See Note 2.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition - Revenue from sales of homes are recognized when the
sales are closed and title passes to the new homeowners. Revenues from
sales of other real estate (including the sales of land and operating
properties) are recognized when a significant down payment is received,
the earnings process is complete and the collection of any remaining
receivables is reasonably assured.
Cash - 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 as of November 30,
2000 included $26.8 million of cash held in escrow for periods of up to
three days.
Inventories - Inventories are stated at cost unless the inventory within a
community is determined to be impaired, in which case the impaired
inventory is written down to fair value. The Company evaluates long-lived
assets for impairment based on the undiscounted future cash flows of the
assets. Write-downs to inventories deemed to be impaired are recorded as
adjustments to the cost basis of the respective inventories. No impairment
existed at November 30, 2000.
Start-up costs and selling expenses are expensed as incurred. Homes held
for sale are classified as inventories until delivered. Land, land
development, amenities and other costs are accumulated by specific area
and allocated proportionately to homes within the respective area.
Due to Affiliates - The Company has transactions in the normal course of
business with Lennar Corporation and/or affiliated companies.
-45-
Interest and Real Estate Taxes - Interest and real estate taxes
attributable to land and homes 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 costs result from
the interest related to the Company's outstanding debt as disclosed in the
consolidated balance sheet as well as debt incurred by the Company's
parent, Lennar Corporation. Lennar Corporation allocates a portion of its
interest to the Company based on the Company's inventory levels during the
year. Interest expense relating to the financial services operations is
included in its respective costs and expenses.
Operating Equipment - Operating equipment is recorded at cost.
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 equipment is 3 to 10 years. Operating equipment
is included in other assets in the consolidated balance sheet.
Derivative Financial Instruments - The Financial Services Division, in the
normal course of business, uses derivative financial instruments to reduce
its exposure to fluctuations in interest rates. The Division enters into
forward commitments and option contracts to protect the value of 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 8).
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 20 years. At November 30, 2000, goodwill was
$46.4 million (net of accumulated amortization of $1.4 million). 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 was required, the estimated future undiscounted cash flows
associated with the goodwill would be compared to the carrying amount to
determine if a write-down to fair value based on discounted cash flows was
required. No impairment existed at November 30, 2000.
Income Taxes - The Company files a consolidated federal income tax return
with Lennar Corporation. Income taxes have been provided at the Company
level as if the Company filed an income tax return on a stand-alone basis.
Current taxes due are recorded as a payable to Lennar Corporation, and the
deferred portion is recorded as deferred taxes. Income taxes are accounted
for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and
are measured by using enacted tax rates expected to apply to taxable
income in the years in which those differences are expected to reverse.
-46-
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 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 does not retain or service the mortgages that it
originates but, rather, sells the mortgages and related servicing rights
to investors.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS
No. 138, which is required to be adopted 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. The implementation of SFAS No. 133 will not have a
material impact on the Company's results of operations or financial
position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with
the SEC. SAB No. 101 is applicable for the Company beginning in the fourth
quarter of the year ending November 30, 2001. Management does not
currently believe that the implementation of SAB No. 101 will have a
material impact on the Company's results of operations or financial
position.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS
No. 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of
Financial Liabilities Assets and Extinguishments of Liabilities. SFAS No.
140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS No. 125's provisions without
reconsideration. SFAS No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March
31, 2001. Management does not currently believe that the implementation of
SFAS No. 140 will have a material impact on the Company's results of
operations or financial position.
2. ACQUISITION
On May 3, 2000, U.S. Home Corporation was acquired by LEN Acquisition
Corporation in a transaction in which U.S. Home stockholders received a
total of approximately $243 million in cash and 13 million shares of
Lennar Corporation common stock amounting to approximately $267 million.
LEN Acquisition Corporation was subsequently renamed U.S. Home
Corporation.
-47-
The acquisition was accounted for using the purchase method of accounting.
In connection with the transaction, the Company acquired assets with a
fair value of $1.7 billion, assumed liabilities with a fair value of $1.2
billion and recorded goodwill of $48 million. Goodwill is being amortized
on a straight-line basis over 20 years. The results of U.S. Home are
included in the Company's consolidated statement of earnings since the
acquisition date. Revenues and net earnings on an unaudited pro forma
basis would have been $2.2 billion and $101.8 million, respectively, for
the year ended November 30, 2000 had the acquisition occurred on December
1, 1999. The pro forma information gives effect to actual operating
results prior to the acquisition, adjusted for the pro forma effect of
interest expense, amortization of goodwill, and certain other adjustments,
together with their related income tax effect. The pro forma information
does not purport to be indicative of the results of operations which would
have actually been reported had the acquisition occurred on December 1,
1999.
3. OPERATING AND REPORTING SEGMENTS
The Company has two operating and reporting segments: Homebuilding and
Financial Services. The Company's reportable segments are strategic
business units that offer different products and services. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies in Note 1.
Homebuilding
Homebuilding operations include the sale and construction of single-family
attached and detached homes. These activities also include the purchase,
development and sale of residential land by the Company and through
partnerships in which it has investments. The following table sets forth
financial information relating to the homebuilding operations:
Period from inception (February 15, 2000) to November 30, 2000
(Dollars in thousands)
--------------------------------------------------------------------------
Revenues:
Sales of homes $1,344,084
Sales of land and other revenues 26,707
Equity in earnings from partnerships 211
----------
Total revenues 1,371,002
----------
Costs and expenses:
Cost of homes sold 1,101,223
Cost of land and other expenses 21,381
Selling, general and administrative 123,143
----------
Total costs and expenses 1,245,747
----------
Operating earnings $ 125,255
==========
Depreciation and amortization $ 8,147
==========
Additions to operating equipment $ 2,487
==========
-48-
Financial Services
The Company's Financial Services Division provides mortgage financing for
U.S. Home homebuyers and others. The Division also packages and resells
residential mortgage loans. The following table sets forth financial
information relating to the financial services operations:
Period from inception (February 15, 2000) to November 30, 2000
(Dollars in thousands)
--------------------------------------------------------------------------
Revenues $26,418
Costs and expenses 14,370
-------
Operating earnings $12,048
=======
Depreciation and amortization $ 181
=======
Interest income, net $ 3,051
=======
Additions to operating equipment $ 235
=======
4. RECEIVABLES
(Dollars in thousands) November 30, 2000
--------------------------------------------------------------------------
Accounts receivable $ 8,239
Mortgages and notes receivable 5,977
-------
14,216
Allowance for doubtful accounts (81)
-------
$14,135
=======
5. MORTGAGE NOTES AND OTHER DEBTS PAYABLE
(Dollars in thousands) November 30, 2000
--------------------------------------------------------------------------
7.95% senior notes due 2001 $ 3,467
8.25% senior notes due 2004 980
7.75% senior notes due 2005 2,279
8.88% senior subordinated notes due 2007 4,800
8.875% senior subordinated notes due 2009 1,387
Mortgage notes on land with fixed interest rates from
6.0% to 10.0% due through 2009 19,984
-------
$32,897
=======
-49-
As a result of LEN Acquisition Corporation's acquisition of U.S. Home,
holders of U.S. Home's publicly-held notes totaling $525 million were
entitled to require U.S. Home to repurchase the notes for 101% of their
principal amount within 90 days after the transaction was completed.
Independent of that requirement, in April 2000, Lennar Corporation made a
tender offer for all of the notes and a solicitation of consents to modify
provisions of the indentures relating to the notes. As a result of the
tender offer and required repurchases after the acquisition, Lennar
Corporation paid approximately $520 million, which includes tender and
consent fees, for $508 million of U.S. Home's notes. These amounts paid on
the Company's behalf are included in due to affiliates in the consolidated
balance sheet.
The minimum aggregate principal maturities of mortgage notes and other
debts payable during the five years subsequent to November 30, 2000 are as
follows: 2001 - $7.1 million; 2002 - $15.4 million; 2004 - $1.3 million;
2005 - $2.5 million and $6.6 million thereafter. All of the notes secured
by land contain collateral release provisions for accelerated payment
which may be made as necessary to maintain construction schedules.
6. FINANCIAL SERVICES
The assets and liabilities related to the Company's financial services
operations (as described in Note 3) were as follows:
(Dollars in thousands) November 30, 2000
--------------------------------------------------------------------------
Assets:
Cash and receivables, net $ 26,814
Mortgage loans held for sale or disposition, net 100,459
Mortgage loans, net 19,421
Other 2,176
---------
$ 148,870
=========
Liabilities:
Revolving credit facilities $ 123,724
Other 20,252
---------
$ 143,976
=========
At November 30, 2000, the Financial Services Division had two revolving
credit facilities of $90 million and $10 million. At November 30, 2000,
the commitment amount for the $90 million facility was temporarily
increased to $120 million for a thirty-day period ending December 30,
2000. Borrowings under both of these facilities were $123.7 million at
November 30, 2000, and were primarily collateralized by mortgage loans
with outstanding principal balances of $114.8 million. There are several
interest rate pricing options which fluctuate with market rates. The
borrowing rates have been reduced to the extent that custodial escrow
balances exceeded required compensating balance levels. The effective
interest rates on the $90 million facility and the $10 million facility at
November 30, 2000 were 7.7% and 8.6%, respectively. The $90 million
facility and the $10 million facility mature in November 2002 and May
2001, respectively.
-50-
7. INCOME TAXES
The provision for income taxes consisted of the following:
Period from inception (February 15, 2000) to November 30, 2000
(Dollars in thousands)
--------------------------------------------------------------------------
Current:
Federal $ 31,465
State 3,659
--------
35,124
--------
Deferred:
Federal 2,970
State 294
--------
3,264
--------
$ 38,388
========
The actual income tax expense differs from the "expected" tax expense for
the year (computed by applying the U.S. federal corporate rate of 35% to
earnings before income taxes) primarily due to the amount of state income
taxes, net of the related federal tax benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant temporary differences that give rise to the net
deferred tax asset are as follows:
(Dollars in thousands) November 30, 2000
---------------------------------------------------------------
Deferred tax assets:
Acquisition adjustments $ 61,891
Reserves and accruals 24,158
Investments in partnerships 114
Other 2,281
--------
Total deferred tax assets 88,444
--------
Deferred tax liabilities:
Capitalized expenses 31,161
Deferred gains 75
Other 4,491
--------
Total deferred tax liabilities 35,727
--------
Net deferred tax asset $ 52,717
========
The net deferred tax asset is included in other assets in the consolidated
balance sheet.
-51-
8. FINANCIAL INSTRUMENTS
The Company estimates the fair value of its financial instruments using
available market information and appropriate valuation methodologies.
Considerable judgment is required in interpreting market data to develop
the estimates of fair value. Accordingly, the estimated fair values are
not necessarily indicative of the amounts that the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts. At November 30, 2000, the Company believes
that the fair value of cash, accounts receivable and accounts payable and
other liabilities approximates their carrying value because of their
typically liquid, short-term nature and market rate terms.
At November 30, 2000, the Homebuilding Division's mortgage notes and other
debts payable consisted of fixed rate debt. The carrying value of the
fixed rate debt approximates fair value based on quoted market prices.
At November 30, 2000, the fair value of the Financial Services Division's
mortgage loans approximate their carrying value based on interest rates on
the loans compared to the current market rates and the collectibility,
term and type of loans. The fair value of the Financial Services
Division's notes and other debts payable approximate their carrying value
because these variable rate borrowings are tied to market indices.
At November 30, 2000, the fair value of commitments to purchase loans was
not material based upon the difference between the current value of
similar loans and the price at which the Company has committed to
originate the loans. The fair value of commitments to sell loan contracts
was not material based on the estimated amount that the Company would
receive or pay to terminate the commitments at the reporting date based on
market prices for similar financial instruments.
At November 30, 2000, the Financial Services Division's pipeline of loans
in process totaled approximately $538.0 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 $40.5 million as of November 30, 2000. Substantially all of
these commitments are for periods of 60 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, 2000,
the Company had open commitments amounting to $64.0 million to sell MBS
with varying settlement dates through January 2001.
-52-
9. RELATED PARTY TRANSACTIONS
During 2000, Lennar Corporation and its subsidiaries advanced funds to the
Company which had no stated repayment terms. At November 30, 2000, the
Company had a payable to affiliates of $596.0 million.
10. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain subsidiaries are parties to various claims, legal
actions and complaints arising in the ordinary course of business. In the
opinion of management, the disposition of these matters will not have a
material adverse effect on the financial condition 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: 2001 - $6.4 million; 2002 - $3.7
million; 2003 - $2.6 million; 2004 - $1.3 million; 2005 - $1.0 million and
thereafter - $5.8 million. Rental expense for the period from inception
(February 15, 2000) to November 30, 2000 was $8.5 million.
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 $23.4 million at November 30, 2000. The
Company also had outstanding performance and surety bonds with estimated
costs to complete of $125.4 million related principally to its obligations
for site improvements at various projects at November 30, 2000. The
Company does not believe that any such bonds are likely to be drawn upon.
The Company has guaranteed obligations of Lennar Corporation with regard
to certain issues of its outstanding debt, and the stock of the Company
has been pledged as collateral for Lennar Corporation's obligations with
regard to that debt. The Company knows of no event of default which would
require it to satisfy these guarantees and, therefore, the fair value of
these contingent liabilities is considered immaterial.
-53-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lennar Land Partners Sub II, Inc.:
We have audited the accompanying consolidated balance sheets of Lennar Land
Partners Sub II, Inc. and subsidiaries (the "Company"), a wholly-owned
subsidiary of Lennar Corporation, as of November 30, 2000 and 1999 and the
related consolidated statements of earnings, stockholder's equity and cash flows
for the year ended November 30, 2000 and the period from inception (June 21,
1999) to November 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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 the Company as of
November 30, 2000 and 1999, and the results of its operations and its cash flows
for the year ended November 30, 2000 and the period from inception (June 21,
1999) to November 30, 1999, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Miami, Florida
January 9, 2001
-54-
LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2000 AND 1999 (Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
2000 1999
ASSETS
Cash $ -- $ 78
Land held for development and sale 2,221 17,113
Investment in partnership 56,669 87,206
Other assets 100 75
Due from affiliates 82,793 3,450
-------- --------
$141,783 $107,922
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and other liabilities $ 4,763 $ 2,744
-------- --------
Total liabilities 4,763 2,744
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 5,000 shares authorized,
100 shares issued and outstanding -- --
Additional paid-in capital 92,420 92,420
Retained earnings 44,600 12,758
-------- --------
Total stockholder's equity 137,020 105,178
-------- --------
$141,783 $107,922
======== ========
See accompanying notes to consolidated financial statements.
-55-
LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED NOVEMBER 30, 2000 AND THE PERIOD FROM INCEPTION
(JUNE 21, 1999) TO NOVEMBER 30, 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
2000 1999
REVENUES:
Land sales $52,423 $15,839
Equity in earnings from partnership 21,845 9,213
Other 262 1,116
------- -------
Total revenues 74,530 26,168
------- -------
COSTS AND EXPENSES:
Cost of land sales 21,951 4,878
General and administrative 379 202
------- -------
Total costs and expenses 22,330 5,080
------- -------
EARNINGS BEFORE INCOME TAXES 52,200 21,088
INCOME TAXES 20,358 8,330
------- -------
NET EARNINGS $31,842 $12,758
======= =======
See accompanying notes to consolidated financial statements
-56-
LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEAR ENDED NOVEMBER 30, 2000 AND THE PERIOD FROM INCEPTION
(JUNE 21, 1999) TO NOVEMBER 30, 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
Initial capitalization (June 21, 1999) $ -- $ 92,420 $ -- $ 92,420
Net earnings from June 21, 1999 to
November 30, 1999 -- -- 12,758 12,758
------- -------- -------- --------
Balance, November 30, 1999 -- 92,420 12,758 105,178
2000 net earnings -- -- 31,842 31,842
------- -------- -------- --------
Balance, November 30, 2000 $ -- $ 92,420 $ 44,600 $137,020
======= ======== ======== ========
See accompanying notes to consolidated financial statements.
-57-
LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 30, 2000 AND THE PERIOD FROM INCEPTION
(JUNE 21, 1999) TO NOVEMBER 30, 1999 (Dollars in thousands)
- --------------------------------------------------------------------------------
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 31,842 $ 12,758
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Equity in earnings from partnership (21,845) (9,213)
Changes in assets and liabilities:
Decrease in land held for development and sale 14,892 563
(Increase) decrease in other assets (25) 12
Increase (decrease) in accounts payable and other liabilities 2,019 (7,596)
-------- --------
Net cash provided by (used in) operating activities 26,883 (3,476)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investment in partnership, net 52,382 3,105
-------- --------
Net cash provided by investing activities 52,382 3,105
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in amounts due from affiliates (79,343) 449
-------- --------
Net cash provided by (used in) financing activities (79,343) 449
-------- --------
NET INCREASE (DECREASE) IN CASH (78) 78
CASH AT BEGINNING OF PERIOD 78 --
-------- --------
CASH AT END OF PERIOD $ -- $ 78
======== ========
See Note 1 for supplemental disclosures of cash flow information related to
interest and income taxes paid
See accompanying notes to consolidated financial statements
-58-
LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED NOVEMBER 30, 2000 AND THE PERIOD FROM INCEPTION
(JUNE 21, 1999) TO NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The accompanying consolidated financial
statements include the accounts of Lennar Land Partners Sub II, Inc., its
subsidiaries and a partnership in which an interest is held (the
"Company"). The Company is a wholly-owned subsidiary of Lennar Corporation
and was formed on June 21, 1999 by the contribution of an investment in
partnership. The investment in partnership was recorded at Lennar
Corporation's historical carrying value. The Company's investment in
partnership is accounted for by the equity method. All significant
intercompany transactions have been eliminated.
The Company operates in one operating and reporting segment - land. The
activities in this segment include the purchase, development and sale of
residential land by the Company and its partnership.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition - Revenues from land sales are recognized when a
significant down payment is received, the earnings process is complete and
the collection of any remaining receivables is reasonably assured.
Cash - The Company considers all highly liquid investments purchased with
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.
Land Held for Development and Sale - The cost of land held for development
and sale includes direct and indirect costs, capitalized interest and
property taxes. The cost of land, major infrastructure, amenities and
other common costs are apportioned among the parcels within a real estate
community using the area or relative sales value methods, as appropriate.
Land is carried at cost, unless the land within a community is determined
to be impaired, in which case the impaired land will be written down to
fair value. The Company evaluates long-lived assets for impairment based
on undiscounted future cash flows of the assets. Write-downs of land
deemed to be impaired will be recorded as adjustments to the cost basis of
the respective land. No impairment existed at November 30, 2000 or 1999.
Due from Affiliates - The Company has transactions in the normal course of
business with Lennar Corporation and/or affiliated companies.
-59-
Interest and Real Estate Taxes - Interest and real estate taxes
attributable to land are capitalized and added to the cost of those
properties as long as the properties are being actively developed.
Interest costs relieved from inventories are included in "cost of land
sales" in the consolidated statements of earnings. Interest costs result
from the interest related to debt incurred by the Company's parent, Lennar
Corporation. Lennar Corporation allocates a portion of its interest to the
Company based on the Company's inventory levels during the year.
Income Taxes - The Company files a consolidated federal income tax return
with Lennar Corporation. Income taxes have been provided at the Company
level as if the Company filed an income tax return on a stand-alone basis.
Current taxes due are recorded as a payable to Lennar Corporation, and the
deferred portion is recorded as deferred taxes. Income taxes are accounted
for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and
are measured by using enacted tax rates expected to apply to taxable
income in the years in which those differences are expected to reverse.
Fair Value of Financial Instruments - The carrying amounts of cash and
accounts payable approximate fair value.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which
is required to be adopted 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. The implementation of SFAS No. 133 will not have a
material impact on the Company's results of operations or financial
position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with
the SEC. SAB No. 101 is applicable for the Company beginning in the fourth
quarter of the year ending November 30, 2001. Management does not
currently believe that the implementation of SAB No. 101 will have a
material impact on the Company's results of operations or financial
position.
-60-
2. INVESTMENT IN PARTNERSHIP
At November 30, 2000, the Company had a 50% equity interest in a
partnership. Financial information related to this partnership accounted
for by the equity method was as follows:
November 30,
(Dollars in thousands) 2000 1999
------------------------------------------------------------
Assets:
Cash $ 17,912 $ 20,085
Land held for development and sale 150,150 201,787
Other assets 90,167 28,866
-------- --------
$258,229 $250,738
======== ========
Liabilities and equity:
Accounts payable and other liabilities $ 38,566 $ 14,880
Mortgage notes and other debts payable 106,325 61,446
Equity of:
The Company 56,669 87,206
Other 56,669 87,206
-------- --------
$258,229 $250,738
======== ========
Year ended November 30, 2000 and the period from inception
(June 21, 1999) to November 30, 1999
(Dollars in thousands) 2000 1999
------------------------------------------------------------
Revenues $172,432 $ 73,139
Costs and expenses 128,742 54,713
-------- --------
Net earnings from partnership $ 43,690 $ 18,426
======== ========
Company share of net earnings $ 21,845 $ 9,213
======== ========
-61-
3. INCOME TAXES
The provision for income taxes consisted of the following:
Year ended November 30, 2000 and the period from
inception (June 21, 1999) to November 30, 1999
(Dollars in thousands) 2000 1999
-------------------------------------------------------------------------
Current:
Federal $ 18,491 $ 6,780
State 2,150 1,292
-------- -------
20,641 8,072
-------- -------
Deferred:
Federal (258) 224
State (25) 34
-------- -------
(283) 258
-------- -------
$ 20,358 $ 8,330
======== =======
The actual income tax expense differs from the "expected" tax expense for
the year (computed by applying the U.S. federal corporate rate of 35% to
earnings before income taxes) primarily due to the amount of state income
taxes, net of the related federal tax benefit.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant temporary differences that give rise to the
deferred tax assets (liabilities) are as follows:
November 30,
(Dollars in thousands) 2000 1999
-------------------------------------------------------------------------
Deferred tax assets (liabilities):
Capitalized expenses $ 25 $ (258)
===== ======
The deferred tax assets at November 30, 2000 are included in other assets
and the deferred tax liabilities at November 30, 1999 are included in
accounts payable and other liabilities in the consolidated balance sheets.
-62-
4. RELATED PARTY TRANSACTIONS
The Company and its partnership, in the ordinary course of business, sell
land to Lennar Corporation. During 2000, these land sales amounted to
$106.9 million and generated gains of $47.9 million. During the period
from inception (June 21, 1999) to November 30, 1999, these land sales
amounted to $16.7 million and generated gains of $6.3 million. The Company
believes amounts received from Lennar Corporation approximate amounts that
would have been received from independent third parties.
During 2000 and 1999, Lennar Corporation and its subsidiaries advanced and
borrowed funds to and from the Company which had no stated repayment
terms. At November 30, 2000 and 1999, the Company had a receivable from
affiliates of $82.8 million and $3.5 million, respectively.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain subsidiaries are parties to various claims, legal
actions and complaints arising in the ordinary course of business. In the
opinion of management, the disposition of these matters will not have a
material adverse effect on the financial condition 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.
The Company has guaranteed obligations of Lennar Corporation with
regard to certain issues of its outstanding debt, and the stock of the
Company has been pledged as collateral for Lennar Corporation's
obligations with regard to that debt. The Company knows of no event of
default which would require it to satisfy these guarantees and, therefore,
the fair value of these contingent liabilities is considered immaterial.
-63-
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lennar Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of Lennar Financial
Services, Inc. and subsidiaries ("LFS"), a wholly-owned subsidiary of Lennar
Corporation, as of November 30, 2000 and 1999 and the related consolidated
statements of earnings, stockholder's equity and cash flows for each of the
three years in the period ended November 30, 2000. These financial statements
are the responsibility of LFS' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LFS as of November
30, 2000 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended November 30, 2000, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Miami, Florida
January 9, 2001
64
LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2000 AND 1999 (Dollars in Thousands, Except Par Value)
- --------------------------------------------------------------------------------
ASSETS 2000 1999
Cash $ 38,288 $ 34,911
Assets held for sale or disposition:
Mortgage loans 258,363 207,641
Foreclosure-related assets 17,630 21,401
Investments:
Loans held for investment 23,083 22,562
Collateral for bonds and notes payable 20,740 24,067
Investments 12,488 8,902
Due from affiliates 19,591 --
Title plants 15,530 14,587
Mortgage servicing rights, net 11,653 15,564
Goodwill, net 25,199 20,070
Operating properties and equipment, net 17,710 21,378
Other assets 20,325 26,768
-------- --------
$480,600 $417,851
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 17,372 $ 12,378
Borrowings under credit agreements 305,242 253,010
Bonds and notes payable 18,278 24,067
Other liabilities 33,408 29,032
Due to affiliates -- 11,939
-------- --------
Total liabilities 374,300 330,426
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 5,000 shares authorized,
issued and outstanding 5 5
Additional paid-in capital 16,969 16,969
Retained earnings 89,326 70,451
-------- --------
Total stockholder's equity 106,300 87,425
-------- --------
$480,600 $417,851
======== ========
See accompanying notes to consolidated financial statements.
65
LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in Thousands)
- --------------------------------------------------------------------------------
2000 1999 1998
REVENUES:
Title and escrow activities $179,444 $181,941 $150,333
Interest income 23,917 22,682 19,463
Loan origination and sales activities 62,033 44,650 24,959
Mortgage servicing activities 9,830 12,006 12,070
Other 16,808 8,028 5,611
-------- -------- --------
Total revenues 292,032 269,307 212,436
-------- -------- --------
OPERATING EXPENSES:
Payroll and benefits 142,243 139,688 98,578
Other administrative expenses 64,886 57,286 48,319
Occupancy 19,579 17,474 11,573
Data processing 1,845 2,050 1,738
Provision for losses 9,410 1,592 5,771
Depreciation and amortization 10,228 9,740 4,763
Interest 11,763 10,718 8,289
-------- -------- --------
Total operating expenses 259,954 238,548 179,031
-------- -------- --------
EARNINGS BEFORE INCOME TAXES 32,078 30,759 33,405
INCOME TAXES 13,203 13,130 13,355
-------- -------- --------
NET EARNINGS $ 18,875 $ 17,629 $ 20,050
======== ======== ========
See accompanying notes to consolidated financial statements.
66
LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in Thousands)
- --------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings Total
BALANCE, NOVEMBER 30, 1997 $ 5 $ 16,969 $ 32,772 $ 49,746
Net earnings -- -- 20,050 20,050
-------- -------- -------- --------
BALANCE, NOVEMBER 30, 1998 5 16,969 52,822 69,796
Net earnings -- -- 17,629 17,629
-------- -------- -------- --------
BALANCE, NOVEMBER 30, 1999 5 16,969 70,451 87,425
Net earnings -- -- 18,875 18,875
-------- -------- -------- --------
BALANCE, NOVEMBER 30, 2000 $ 5 $ 16,969 $ 89,326 $106,300
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
67
LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 18,875 $ 17,629 $ 20,050
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 10,228 9,740 4,763
Amortization of mortgage loan discounts (541) (431) (262)
Origination and acquisition of mortgage loans (2,112,393) (2,043,571) (931,062)
Proceeds on sales of mortgage loans 2,061,931 2,047,714 819,480
Net decrease in foreclosure-related assets 2,509 2,150 2,845
Net (increase) decrease in other assets 9,632 (4,824) 4,828
Net increase (decrease) in accounts payable and accrued expenses 9,647 (6,428) 7,634
----------- ----------- -----------
Net cash provided by (used in) operating activities (112) 21,979 (71,724)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to loans and mortgage-backed securities held for investment (2,189) (3,328) (7,172)
Sales and principal reductions of loans and mortgage-backed
securities held for investment 3,011 3,015 7,309
Purchases of investment securities (18,112) (13,119) --
Maturities of investment securities 14,946 11,600 --
Principal reductions of collateral for bonds and notes payable 5,864 10,226 11,934
Originations (sales) of mortgage servicing rights, net 1,315 (8,317) (10,426)
Additions to property and equipment (10,008) (13,045) (7,429)
Acquisition of North American Asset Development
Corporation and subsidiaries, net of cash acquired (2,050) (1,915) (10,441)
Acquisition of Southwest Land Title, net of cash acquired -- (6,631) --
Acquisition of Eagle Home Mortgage, Inc., net of cash acquired (2,255) (5,874) --
Acquisition of North American Title Insurance Company -- (4,049) --
Acquisition of North American Title Guaranty, net of cash acquired -- (508) --
Acquisition of Texas Professional Title (1,666) -- --
----------- ----------- -----------
Net cash used in investing activities (11,144) (31,945) (16,225)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in borrowings under credit agreements 52,192 (3,168) 134,268
Repayment of bonds and notes payable (5,789) (9,457) (11,683)
Increase (decrease) in amounts due to/from affiliates (31,770) 30,603 (17,410)
----------- ----------- -----------
Net cash provided by financing activities 14,633 17,978 105,175
----------- ----------- -----------
NET INCREASE IN CASH 3,377 8,012 17,226
CASH AT BEGINNING OF YEAR 34,911 26,899 9,673
----------- ----------- -----------
CASH AT END OF YEAR $ 38,288 $ 34,911 $ 26,899
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 12,133 $ 10,982 $ 8,150
=========== =========== ===========
(Continued)
68
LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998 (Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
ACQUISITION OF TEXAS PROFESSIONAL TITLE:
Fair value of assets (inclusive of cash of $ - ) $ 1,002
Goodwill recorded 2,411
Liabilities assumed (1,747)
-----------
Cash paid $ 1,666
===========
ACQUISITION OF SOUTHWEST LAND TITLE:
Fair value of assets (inclusive of cash of $209) $ 2,544
Goodwill recorded 5,389
Liabilities assumed (1,093)
-----------
Cash paid $ 6,840
===========
ACQUISITION OF EAGLE HOME MORTGAGE, INC.:
Fair value of assets (inclusive of cash of $1,705) $ 28,465
Goodwill recorded 4,910
Liabilities assumed (25,796)
-----------
Cash paid $ 7,579
===========
ACQUISITION OF NORTH AMERICAN TITLE INSURANCE COMPANY:
Fair value of assets (inclusive of cash of $ - ) $ 8,058
Goodwill recorded 125
Liabilities assumed (4,134)
-----------
Cash paid $ 4,049
===========
ACQUISITION OF NORTH AMERICAN TITLE GUARANTY:
Fair value of assets (inclusive of cash of $742) $ 1,415
Goodwill recorded 1,005
Liabilities assumed (1,170)
-----------
Cash paid $ 1,250
===========
ACQUISITION OF NORTH AMERICAN ASSET DEVELOPMENT
CORPORATION AND SUBSIDIARIES:
Fair value of assets (inclusive of cash of $8,938) $ 41,185
Goodwill recorded 7,845
Liabilities assumed (29,651)
-----------
Cash paid $ 19,379
===========
See accompanying notes to consolidated financial statements. (Concluded)
69
LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES
(A Wholly-Owned Subsidiary of Lennar Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Lennar Financial Services, Inc., a wholly-owned
subsidiary of Lennar Corporation ("Lennar"), was formed to serve as a
holding company for the entities which form the financial services
division of Lennar. Financial services activities are primarily conducted
through Lennar Financial Services, Inc. and nine of its subsidiaries
(collectively "LFS"): Universal American Mortgage Company, Eagle Home
Mortgage, Inc., Strategic Technologies, Inc., Universal Title Insurors,
Inc., Regency Title Company, TitleAmerica Insurance Corporation, Southwest
Land Title, Inc., Texas Professional Title, and North American Asset
Development Corporation. These entities arrange mortgage financing, title
insurance, and closing services for Lennar homebuyers and others, package
and resell residential mortgage loans, perform mortgage loan servicing
activities and provide high speed Internet access, cable television and
home monitoring services to residents of Lennar communities and others.
The financial statements of LFS include the accounts of LFS and its
wholly-owned subsidiaries. All intercompany transactions and balances have
been eliminated in consolidation.
Mortgage Loans Held for Sale - Loans held for sale are carried at the
lower of cost or market determined on an aggregate basis. Discounts
recorded on loans held for sale are presented as a reduction of the
carrying amount of the loans and are not amortized.
LFS enters into forward sales contracts for the purpose of protecting the
value of its inventory of loans held for sale and pipeline of loan
applications in process against increases in market interest rates. The
cost of mortgage loans is adjusted by gains and losses generated from the
corresponding hedging transactions. LFS allocates hedging gains and losses
between mortgage loans held for sale at the end of the year and mortgage
loans sold during the year. Hedging gains and losses realized during the
commitment and warehousing period related to the pipeline and mortgage
loans held for sale are deferred. Hedging losses are recognized currently
if deferring such losses would result in mortgage loans held for sale and
mortgage loans in the pipeline being valued in excess of their estimated
fair value.
Loans Held for Investment - Loans for which LFS has the positive intent
and ability to hold to maturity consist of mortgage loans carried at cost
net of unamortized discounts. Discounts are amortized over the estimated
lives of the loans using the interest method.
Collateral for Bonds and Notes Payable - Collateral for bonds and notes
payable consists of mortgage loans, mortgage-backed securities, and funds
held by the trustee. Mortgage loans and mortgage-backed securities are
carried net of unamortized discounts. Discounts are amortized over the
estimated lives of the assets using the interest method. An unaffiliated
company holds an interest in the collateral for bonds and notes payable to
the extent such assets exceed the related liabilities.
70
Allowance for Loan Losses - The allowance for loan losses is established
by charges to income through the provision for loan losses. Loans or
portions thereof which are considered by management to be uncollectible
are charged to the allowance and recoveries of amounts previously charged
off are credited to the allowance. The allowance represents the amount
which, in management's judgment, is adequate to absorb the estimated
losses on existing loans which will become uncollectible. The adequacy of
the allowance is determined by management's continuing evaluation of the
loan portfolio in light of past loan loss experience, regulatory
examinations, present economic conditions, and other factors considered
relevant by management. Anticipated changes in economic factors which may
influence the level of the allowance are considered in the evaluation by
management when the likelihood of the changes can be reasonably
determined. While management uses the best information available to make
such evaluations, future adjustments to the allowance may be necessary as
a result of future economic and other conditions that may be beyond
management's control.
Impaired Loans - Individually identified impaired loans are measured based
on the present value of payments expected to be received, using the
historical effective loan rate as the discount rate. Alternatively,
measurement may also be based on observable market prices or, for loans
that are solely dependent on the collateral for repayment, measurement may
be based on the fair value of the collateral. Loans that are to be
foreclosed are measured based on the fair value of the collateral. If the
recorded investment in the impaired loan exceeds the measure of fair
value, a valuation is required as a component of the allowance for loan
losses. Changes to the valuation allowance are recorded as a component of
the provision for loan losses.
Real Estate Owned - Real estate acquired through actual foreclosure or
deed in lieu of foreclosure is carried at the lower of fair value minus
estimated costs to sell or at cost. Any deficiency of the fair value of
the asset minus the estimated costs to sell when compared to the carrying
value of the asset is recognized as a valuation allowance. The estimates
of fair value are susceptible to changes that could result in an
adjustment to results of operations. Costs relating to the development and
improvement of the property are capitalized, whereas those relating to
holding the property are charged to expense in the period incurred.
Mortgage Servicing Rights - Upon the sale of a mortgage loan, the book
value of the mortgage loan is allocated to the mortgage servicing right
and to the loan (without the mortgage servicing right) based on the
estimated relative fair values. 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. Mortgage servicing rights are
amortized in proportion to, and over the period of, the estimated net
servicing income of the underlying mortgages.
71
Loan Origination and Sales - Loan origination fees received at the time
loans are originated, net of direct loan origination costs, are deferred.
These deferred amounts are recognized as a component of the gain or loss
on loans sold and as a yield adjustment on loans held for investment.
Gains and losses on loan sales are recognized at the time of sale and are
determined by the difference between the net carrying value of the loans
sold, including deferred origination fees and allocated hedging costs, and
the sales price of the loans.
Loan Servicing Revenue - Loan servicing revenue represents fees earned for
servicing loans owned by others, generally calculated as a percentage of
outstanding principal balance, as well as late charges and other ancillary
revenues resulting from servicing activities.
Sale of Servicing Rights - LFS recognizes gains and losses on the sales of
servicing rights when all risks and rewards of ownership of the servicing
rights have irrevocably passed to the purchaser and there are no
significant unresolved contingencies.
Income Taxes - LFS files a consolidated federal income tax return with
Lennar. Income taxes have been provided at LFS' level as if LFS filed an
income tax return on a stand-alone basis. Current taxes due are recorded
as a payable to Lennar, and the deferred portion is recorded as deferred
taxes. Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities, and are measured by using enacted tax rates
expected to apply to taxable income in the years in which those
differences are expected to reverse.
Title Plants - Title plants, which are comprised of indexed and cataloged
information concerning titles to real property, are recorded at cost. Such
costs are not amortized because there is no indication of reduction of
plant values. Costs of maintaining and operating title plants are charged
to operations in the period in which they are incurred.
LFS owns title plants in four states. In other locations, LFS purchases
access to title plant information for a fee based on the revenues.
Goodwill - Goodwill represents the excess of the purchase price over the
fair value of net assets acquired and is amortized by charges to income on
a straight-line basis over 15 - 20 years. LFS amortized $1,387,000,
$959,000 and $358,000 of goodwill for the years ended November 30, 2000,
1999 and 1998, respectively, which is included in depreciation and
amortization expenses in the consolidated statements of earnings.
Property and Equipment - Property and equipment is stated at cost.
Property and equipment is reviewed for impairment and a provision is
recorded, if necessary, whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. Depreciation of
property and equipment is computed using the straight-line method or an
accelerated method based on the estimated useful lives of the assets.
Amortization of leasehold improvements is computed on the straight-line
method over the estimated useful lives of the improvements or the term of
the lease, whichever is shorter.
72
Escrow Funds Held in Trust - At November 30, 2000 and 1999, LFS held
approximately $365,749,000 and $340,762,000, respectively, in trust for
others, pending completion of real estate transactions. These funds are
not included in LFS' consolidated balance sheets.
The primary depositories provide LFS with certain bank-related escrow
accounting services at no charge and favorable interest charges on
borrowings.
Title and Escrow Revenue - Premiums from title insurance policies are
recognized as revenue on the effective date of the policy. Escrow fees are
recognized at the time the related real estate transactions are completed,
usually upon the close of escrow.
Title and Escrow Losses - LFS provides an allowance for estimated title
and escrow losses based upon management's evaluation of claims presented
and estimates for any incurred but not reported claims. The allowance is
established at a level that management estimates to be sufficient to
satisfy those claims where a loss is determined to be probable and the
amount of such loss can be reasonably estimated. The allowance for title
and escrow losses for both known and incurred but not reported claims is
considered by management of LFS to be adequate for such purposes.
Depending on the underwriting agreement, LFS is responsible for a $2,500,
$5,000 or $7,500 deductible per covered title claim.
New Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB delayed the
effective date of SFAS No. 133 to all years beginning after June 15, 2000.
SFAS No. 133 will require LFS to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings.
Management does not anticipate that the adoption of SFAS No. 133 will have
a material impact on LFS' earnings or financial position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with
the SEC. SAB No. 101 is applicable for LFS beginning in the fourth quarter
of the year ending November 30, 2001. Management does not anticipate that
the adoption of SAB No. 101 will have a material impact on LFS' earnings
or financial position.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. This
Statement replaces SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 140 revises
the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it
carries over most of SFAS No. 125's provisions without reconsideration.
SFAS No. 140 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001.
Management does not anticipate that the adoption of SFAS No. 140 will have
a material effect on LFS' earnings or financial position.
Financial Statement Presentation - LFS prepares its financial statements
using an unclassified balance sheet presentation as is customary in the
financial services industry. A classified balance sheet
73
presentation would have aggregated current assets, current liabilities,
and net working capital at November 30, 2000 and 1999 as follows:
2000 1999
Current assets $ 330,116,000 $ 262,694,000
Current liabilities 293,976,000 244,516,000
------------- -------------
Net working capital $ 36,140,000 $ 18,178,000
============= =============
Reclassifications - Certain prior year balances have been reclassified to
conform with current period financial statement presentation.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. FORECLOSURE-RELATED ASSETS
Foreclosure-related assets at November 30, 2000 and 1999 consisted of the
following:
2000 1999
Loans repurchased from mortgage-backed securities $ 18,529,000 $ 20,697,000
Loans purchased from third parties (net of acquisition
discounts of $1,017,000 and $2,209,000 at
November 30, 2000 and 1999, respectively) 1,685,000 3,020,000
Real estate owned 629,000 767,000
Claims receivable 444,000 695,000
Allowance for credit losses (3,657,000) (3,778,000)
------------- -------------
$ 17,630,000 $ 21,401,000
============= =============
LFS periodically elects (but is not required) to repurchase delinquent
loans from certain mortgage-backed securities in instances where the loan
is fully insured or guaranteed and where the interest to be recovered upon
receipt of related claim proceeds substantially exceeds its cost of funds.
LFS purchased a large number of loans in 2000 and 1999 in order to earn
the spread between interest rates receivable from the loans or related
claims and its short-term borrowing rate. Loans repurchased are carried at
LFS' cost to acquire the loan from the mortgage-backed security. LFS also
acquires distressed loans from third parties at substantially discounted
prices. LFS performs all of the activities necessary to resolve the
delinquency or complete the foreclosure process, files claims and/or
markets the related real estate assets. These loans are carried net of
discount. The discounts are not amortized but are recognized as a
component of the gain or loss at the time of final disposition of the loan
or related property.
Claims receivable represent final claim proceeds due from the mortgage
loan insurer or guarantor and are generally received within forty-five to
ninety days after filing.
74
LFS provides for estimated credit losses based upon the terms of its
servicing contracts with its investors, the quality of the underlying
collateral and its experience with loans of similar quality. Management
believes that it has provided an adequate allowance for expected losses.
All foreclosure-related assets are carried at the lower of cost or fair
value less estimated costs to sell.
3. LOANS HELD FOR INVESTMENT
LFS periodically acquires loans which it holds for investment. Loans held
for investment are carried at cost and discounts attributable to such
loans are amortized into income over the estimated lives of the loans. At
November 30, 2000 and 1999, unamortized net discounts attributable to
loans held for investment were $58,000 and $94,000, respectively.
4. COLLATERAL FOR BONDS AND NOTES PAYABLE
Collateral for bonds and notes payable (the "Collateral") consists of
fixed and adjustable rate mortgage loans and fixed-rate mortgage-backed
securities guaranteed by U.S. government agencies. All collateral is
pledged to secure repayment of the bonds and notes payable. All principal
and interest on the Collateral is remitted directly to a trustee and,
together with any reinvestment income earned thereon, is available for
payment on the bonds and notes payable.
The components of the Collateral at November 30, 2000 and 1999 are as
follows:
2000 1999
Mortgage-backed securities held to maturity $11,328,000 $11,953,000
Mortgage loans 8,492,000 10,948,000
Funds held by trustee 920,000 1,166,000
----------- -----------
$20,740,000 $24,067,000
=========== ===========
75
5. INVESTMENTS
The amortized cost, unrealized gains, unrealized losses and fair values
for held to maturity securities by type as of November 30, 2000 and 1999
are as follows:
2000
------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities $ 1,829,000 $ 21,000 $ (1,000) $ 1,849,000
U.S. government agency obligations 5,861,000 -- (1,000) 5,860,000
Certificates of deposit 4,798,000 -- -- 4,798,000
----------- ----------- ------------ -----------
Total $12,488,000 $ 21,000 $ (2,000) $12,507,000
=========== =========== ============ ===========
1999
------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities $ 842,000 $ 11,000 $ -- $ 853,000
U.S. government agency obligations 8,060,000 5,000 (14,000) 8,051,000
----------- ----------- ------------ -----------
Total $ 8,902,000 $ 16,000 $ (14,000) $ 8,904,000
=========== =========== ============ ===========
The amortized cost and estimated fair value of securities held to maturity
at November 30, 2000 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
Due in one year or less $11,631,000 $11,630,000
Due after one year through five years 603,000 614,000
Due after five years through ten years 254,000 263,000
----------- -----------
Total $12,488,000 $12,507,000
=========== ===========
76
6. MORTGAGE SERVICING RIGHTS
Changes in originated mortgage servicing rights during 2000 and 1999 were
as follows:
Balance at November 30, 1998 $ 11,080,000
Originations 13,508,000
Sales (5,192,000)
Amortization (3,832,000)
------------
Balance at November 30, 1999 15,564,000
Originations 170,000
Sales (1,485,000)
Amortization (2,596,000)
------------
Balance at November 30, 2000 $ 11,653,000
============
At November 30, 2000, the fair value of originated mortgage servicing
rights was $13,379,000. A valuation allowance related to LFS' mortgage
servicing rights was not required at or for the year ended November 30,
2000.
7. OTHER ASSETS
Other assets consisted of the following at November 30, 2000 and 1999:
2000 1999
Servicing advances and other receivables $13,874,000 $20,142,000
Other 6,451,000 6,626,000
----------- -----------
$20,325,000 $26,768,000
=========== ===========
77
8. INVESTMENT IN AFFILIATES
LFS has investments in two affiliates that are accounted for using the
equity method of accounting. LFS has a 50% ownership in both Northwest
Mortgage Alliance LLC ("Northwest") and Equity Home Mortgage LLC
("Equity"), whose principal business activities are the origination of
mortgage loans in the state of Washington and Oregon, respectively.
The condensed financial statements of Northwest as of and for the year
ended November 30, 2000 are presented below:
BALANCE SHEET
ASSETS:
Cash $ 98,000
Due from affiliates 19,000
Operating properties and equipment 7,000
Accounts receivable 2,000
Prepaid expenses 1,000
----------
Total $ 127,000
==========
LIABILITIES AND MEMBERS' EQUITY:
Liabilities $ 18,000
Members' equity 109,000
----------
Total $ 127,000
==========
STATEMENT OF EARNINGS
Revenues $ 813,000
Expenses 607,000
----------
Net earnings $ 206,000
==========
The condensed financial statements of Equity as of and for the year ended
November 30, 2000 are presented below:
BALANCE SHEET
ASSETS:
Cash $ 175,000
Due from affiliates 285,000
Operating properties and equipment 54,000
Accounts receivable 4,000
Prepaid expenses 3,000
----------
Total $ 521,000
==========
LIABILITIES AND MEMBERS' EQUITY:
Liabilities $ 114,000
Members' equity 407,000
----------
Total $ 521,000
==========
STATEMENT OF EARNINGS
Revenues $3,681,000
Expenses 2,744,000
----------
Net earnings $ 937,000
==========
78
At November 30, 2000, the investment in Northwest and Equity was $54,000
and $204,000, respectively, and is included in other assets.
9. BORROWINGS UNDER CREDIT AGREEMENTS
2000 1999
Warehouse line of credit with banks totaling $240 million,
variable interest rate (approximately 5.79% at
November 30, 2000); secured by loans held for sale,
foreclosure-related assets and servicing rights,
maturing April 27, 2001 $225,553,000 $236,601,000
Advances under Paine Webber Real Estate Securities
Whole Loan Finance Program, variable interest rate
(approximately 7.70% at November 30, 2000); secured
by mortgage loans held for sale 6,952,000 7,893,000
Advances under Greenwich Capital repurchase
agreement, variable interest rate (approximately
7.47% at November 30, 2000); secured by mortgage
loans held for sale 51,885,000 --
Note payable to bank; interest payable quarterly,
principal due at maturity on September 27, 2001;
interest at the bank's prime rate (7.76% at
November 30, 2000); secured by stock --
of two subsidiaries 20,000,000
Note payable to bank paid in 2000 -- 3,905,000
Line of credit from a bank -- 2,935,000
Other borrowings 852,000 1,676,000
------------ ------------
Total $305,242,000 $253,010,000
============ ============
The warehouse line of credit is subject to restrictive covenants relating
to certain financial ratios as to net worth and debt.
10. BONDS AND NOTES PAYABLE
At November 30, 2000 and 1999, bonds and notes payable had an outstanding
balance of $18,278,000 and $24,067,000, respectively. The borrowings
mature in years 2013 through 2018 and carry interest rates ranging from
4.9% to 13.2%. The annual principal repayments are dependent upon
collections on the Collateral, including prepayments, and, as a result,
the actual maturity is likely to occur earlier than its stated maturity.
79
11. INCOME TAXES
Income tax expense (benefit) for the years ended November 30, 2000, 1999
and 1998 consists of:
2000 1999 1998
Current $ 17,142,000 $ 9,979,000 $ 10,074,000
Deferred (3,939,000) 3,151,000 3,281,000
------------ ------------ ------------
$ 13,203,000 $ 13,130,000 $ 13,355,000
============ ============ ============
The actual income tax differs from the "expected" tax expense for the year
(computed by applying the U.S. federal corporate rate of 35% to earnings
before income taxes) primarily due to the amount of state income taxes,
net of the related federal tax benefit.
At November 30, 2000 and 1999, the tax effects of temporary differences
that give rise to significant portions of deferred tax assets and deferred
tax liabilities are as follows:
2000 1999
Deferred tax assets:
Loss reserves $ 4,731,000 $ 5,444,000
Property and equipment 823,000 868,000
Accruals not currently deductible 1,022,000 292,000
Deferred hedging transactions -- 401,000
Other 953,000 1,031,000
----------- -----------
7,529,000 8,036,000
Valuation allowance (579,000) (579,000)
----------- -----------
6,950,000 7,457,000
Deferred tax liabilities:
Intangible assets 1,418,000 1,418,000
Amortization of servicing acquisition costs 4,603,000 6,148,000
Other 1,084,000 620,000
----------- -----------
7,105,000 8,186,000
Net deferred tax liability $ (155,000) $ (729,000)
=========== ===========
The net deferred tax liability is included in other liabilities.
12. LOAN SERVICING
As of November 30, 2000 and 1999, LFS was servicing approximately 29,000
and 40,000 loans, respectively, with unpaid principal balances aggregating
$2,313,000,000 and $3,128,000,000, respectively, for others. Loans
serviced for others and related escrow funds of approximately $11,427,000
and $16,233,000 on deposit in custodial bank accounts at November 30, 2000
and 1999, respectively, are not included in the accompanying consolidated
balance sheets.
In connection with its loan servicing activities, LFS makes certain
payments of property taxes and insurance premiums in advance of collecting
them from specific mortgagors and makes certain
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payments of attorneys' fees and other costs related to loans in
foreclosure. In addition, LFS is a party to certain standard industry
servicing agreements (principally agreements with Government National
Mortgage Association, Federal National Mortgage Association, and the
Federal Home Loan Mortgage Corporation) under which the servicer is
required to pass through principal and interest payments on loans prior to
their collection from specific mortgagors. These advance amounts are
included in Other Assets in the accompanying consolidated balance sheets.
Exposure to this credit risk is minimized through geographic
diversification and careful review of the mortgage loan servicing created
or purchased by LFS.
LFS has errors and omissions and fidelity bond insurance policies, both in
the amount of $5,000,000.
13. MORTGAGE LOAN PIPELINE, HEDGES, AND RELATED OFF-BALANCE SHEET RISK
LFS enters into derivative financial instruments with off-balance sheet
risk in the normal course of business through the origination and sale of
mortgage loans and the management of the related loss exposure caused by
fluctuations in interest rates. These financial instruments include
commitments to extend credit (e.g., the mortgage loan pipeline), forward
contracts for the delivery of mortgage-backed securities ("MBS"), and
other hedging instruments. These instruments involve, to varying degrees,
elements of credit and market risk. All of LFS' derivative financial
instruments are held or issued for purposes other than trading.
As of November 30, 2000 and 1999, LFS' pipeline of loans in process
totaled approximately $689,249,000 and $371,848,000, respectively. There
is no exposure to credit risk in this type of commitment until the loans
are funded; however, LFS uses the same credit policies in the approval of
the commitments as are applied to all lending activities. There is no
exposure to market risk until a rate commitment is extended by LFS to a
borrower. Loans in process for which interest rates were committed to the
borrower totaled approximately $65,543,000 and $79,408,000 as of November
30, 2000 and 1999, respectively. Substantially all of these commitments
are for periods of 30 days or less. Since a portion of these commitments
are expected to expire without being exercised by the borrower, the total
commitments do not necessarily represent future cash requirements.
For loans in process for which interest rates are committed to borrowers,
LFS determines daily what portion of those loans to hedge. This
determination is based on numerous factors, including the composition of
the pipeline, the portion of such pipeline likely to close, the timing of
such closings, and anticipated changes in interest rates. LFS is exposed
to market risk to the extent that the portion of the pipeline that
actually closes at the committed price is greater than or less than the
portion expected to close.
Mandatory MBS forward commitments are used by LFS to hedge its interest
rate exposure during the period from when LFS extends an interest rate
lock to a loan applicant until the time in which the loan is sold to an
investor. These instruments involve, to varying degrees, elements of
credit and interest rate risk. Credit risk is managed by LFS by entering
into agreements only with investment bankers with primary dealer status
and with permanent investors meeting the credit standards of LFS. At any
time, the risk to LFS, in the event of default by the purchaser, is the
difference between the contract price and current market value, which is a
percentage of the outstanding commitment. At November 30, 2000, LFS had
open commitments amounting to $296,150,000 to sell MBSs with varying
settlement dates through February 2001.
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14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Values of Financial Instruments,
requires the disclosure of information about certain financial
instruments. The estimated fair values have been determined by LFS using
available market information and appropriate valuation methodologies. The
fair values are significantly affected by the assumptions used.
Accordingly, the use of different assumptions may have a material effect
on the fair values. The estimated fair values presented herein are not
necessarily indicative of the amounts that LFS could realize in a current
market exchange nor of the aggregate underlying value of LFS itself.
The following describes the methods and assumptions used by LFS in
estimating fair values:
Cash - The carrying amounts reported in the consolidated balance sheets
approximate fair values as maturities are less than 90 days.
Mortgage Loans - Fair value is based on quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics.
Loans Held for Investment - Fair value is based on discounting estimated
cash flows through the estimated maturity, adjusted for approximate
prepayments, using appropriate market discount rates, or quoted market
prices.
Collateral for Bonds and Notes Payable - Fair value is based on quoted
market prices for securities backed by similar loans, adjusted for
differences in loan characteristics.
Investments - Fair value is based on quoted market prices.
Borrowings under Credit Agreements - Fair value approximates carrying
value due to variable interest rate pricing terms and the short-term
nature of the borrowings.
Bonds and Notes Payable - Fair value is based on quoted market prices
for securities backed by similar loans, adjusted for differences in loan
characteristics.
Commitments to Originate and to Sell Loans - Fair value of commitments
to purchase loans is based upon the difference between the current value
of similar loans and the price at which LFS has committed to originate
the loans. The fair value of commitments to sell loan contracts is the
estimated amount that LFS would receive or pay to terminate the
commitments at the reporting date based on market prices for similar
financial instruments.
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The estimated fair value of LFS' on-balance sheet and off-balance sheet
financial instruments was as follows at November 30, 2000 and 1999,
respectively (in thousands of dollars):
2000 1999
Carrying Fair Carrying Fair
Value Value Value Value
On-balance sheet:
Financial assets:
Cash $ 38,288 $ 38,288 $ 34,911 $ 34,911
Mortgage loans 258,363 261,410 207,641 209,715
Loans held for investment 23,083 22,593 22,562 22,112
Collateral for bonds and notes payable 20,740 21,166 24,067 27,200
Investment securities 12,488 12,507 8,902 8,904
Financial liabilities:
Borrowings under credit agreements 305,242 305,242 253,010 252,865
Bonds and notes payable 18,278 18,553 24,067 25,081
Off-balance sheet:
Commitments to originate loans -- 445 -- (197)
Commitments to sell loans -- (119) -- 434
15. RELATED PARTIES
During 2000 and 1999, Lennar has periodically advanced and borrowed funds
to and from LFS which bear interest at a rate tied to Lennar's short-term
borrowing rate. At November 30, 2000, Lennar had borrowed $19,591,000 from
LFS; at November 30, 1999, LFS had borrowed $11,939,000 from Lennar. LFS
recorded net interest income related to these advances of $762,000 in 2000
and net interest expense of $337,000 and $324,000 in 1999 and 1998,
respectively.
At November 30, 2000 and 1999, LFS had issued and outstanding $3,375,000
and $5,960,000, respectively, of letters of credit to the benefit of
Lennar.
16. COMMITMENTS AND CONTINGENCIES
Because of the nature of its activities, LFS is at times subject to
threatened legal actions which arise out of the normal course of business.
In the opinion of management, there is no pending or threatened litigation
which will have a material effect on LFS' financial position or results of
operations.
LFS has guaranteed obligations of Lennar with regard to certain issues of
its outstanding debt, and the stock of LFS has been pledged as collateral
for Lennar's obligations with regard to that debt. LFS knows of no event
of default which would require it to satisfy these guarantees and,
therefore, the fair value of these contingent liabilities is considered
immaterial.
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