=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9804
PULTE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2766606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
33 Bloomfield Hills Pkwy., Suite 200,
Bloomfield Hills, Michigan 48304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (248) 647-2750
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding twelve months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to the filing requirements for the past 90 days.
YES __X__ NO _____
Number of shares of common stock outstanding as of July 31, 1999: 43,247,780
Total pages: 40
Listing of exhibits: 39
PULTE CORPORATION
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets, June 30, 1999 and
December 31, 1998 .............................................. 3
Condensed Consolidated Statements of Income, Three and Six Months
Ended June 30, 1999 and 1998 ................................... 4
Condensed Consolidated Statement of Shareholders' Equity, Six
Months Ended June 30, 1999 ...................................... 5
Condensed Consolidated Statements of Cash Flows, Six Months Ended
June 30, 1999 and 1998 ......................................... 6
Notes to Condensed Consolidated Financial Statements ............. 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 23
Item 3 Quantitative and Qualitative Disclosures About Market Risk 37
PART II OTHER INFORMATION
Item 1 Legal Proceedings ........................................ 39
Item 4 Submission of Matters to a Vote of Security Holders ...... 39
Item 5 Other Information ........................................ 39
Item 6 Exhibits ................................................. 39
SIGNATURES ....................................................... 40
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PULTE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
($000's omitted)
ASSETS
June 30, December 31,
1999 1998
----------- -----------
(Unaudited) (Note)
Cash and equivalents ............................. $ 25,217 $ 125,198
Unfunded settlements ............................. 67,732 49,140
House and land inventories ....................... 1,723,814 1,455,208
Mortgage-backed and related securities ........... -- 29,290
Residential mortgage loans and other
securities available-for-sale .................. 159,981 234,974
Other assets ..................................... 400,521 367,351
Discontinued operations .......................... 90,367 88,678
---------- ----------
Total assets .................................. $2,467,632 $2,349,839
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities,
including book overdrafts of $115,791 and
$112,688 in 1999 and 1998, respectively .... $ 622,505 $ 575,373
Unsecured short-term borrowings ............... 112,800 --
Collateralized short-term debt, recourse
solely to applicable subsidiary assets ..... 146,625 217,060
Mortgage-backed bonds, recourse solely
to applicable subsidiary assets ............ -- 28,075
Income taxes .................................. 8,066 9,592
Subordinated debentures and senior notes ...... 540,944 542,039
Discontinued operations ....................... 56,501 56,258
---------- ----------
Total liabilities .......................... 1,487,441 1,428,397
Shareholders' equity .......................... 980,191 921,442
---------- ----------
Total liabilities and shareholder's equity .... $2,467,632 $2,349,839
========== ==========
Note: The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
3
<TABLE>
<CAPTION>
PULTE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(000's omitted, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Homebuilding...................................... $ 821,317 $ 663,554 $ 1,488,140 $ 1,172,189
Mortgage banking and financing, interest and other 12,423 11,377 27,169 19,736
Corporate ........................................ 412 4,766 1,310 8,343
---------- ---------- ----------- -----------
Total revenues.......................... 834,152 679,697 1,516,619 1,200,268
---------- ---------- ----------- -----------
Expenses:
Homebuilding, principally cost of sales........... 759,746 621,262 1,388,305 1,112,303
Mortgage banking and financing, interest and other 7,346 7,817 14,891 13,788
Corporate, net.................................... 9,323 12,170 17,957 20,042
---------- ---------- ----------- -----------
Total expenses.......................... 776,415 641,249 1,421,153 1,146,133
---------- ---------- ----------- -----------
Other income:
Equity in income of Pulte-affiliates.............. 297 248 2,160 2,413
---------- ---------- ----------- -----------
Income from continuing operations before income
taxes............................................. 58,034 38,696 97,626 56,548
Income taxes ........................................ 20,971 15,090 36,609 22,052
---------- ---------- ----------- -----------
Income from continuing operations.................... 37,063 23,606 61,017 34,496
Income from discontinued thrift operations,
net of income taxes............................... 53 238 429 609
---------- ---------- ----------- -----------
Net income ........................................ $ 37,116 $ 23,844 $ 61,446 $ 35,105
========== ========== =========== ===========
Per share data:
Basic:
Income from continuing operations............... $ .86 $ .55 $ 1.41 $ .81
Income from discontinued operations............. -- -- .01 .01
---------- ---------- ----------- -----------
Net income...................................... $ .86 $ .55 $ 1.42 $ .82
========== ========== =========== ===========
Assuming dilution:
Income from continuing operations............... $ .85 $ .54 $ 1.37 $ .79
Income from discontinued operations............. -- -- .01 .02
---------- ---------- ----------- -----------
Net income...................................... $ .85 $ .54 $ 1.38 $ .81
========== ========== =========== ===========
Cash dividends declared........................... $ .04 $ .04 $ .08 $ .07
========== ========== =========== ===========
Number of shares used in calculation:
Basic:
Weighted-average common shares outstanding... 43,245 43,039 43,239 42,815
Assuming dilution:
Effect of dilutive securities - stock options 593 913 1,376 793
---------- ---------- ----------- -----------
Adjusted weighted-average common shares
and effect of dilutive securities....... 43,838 43,952 44,615 43,608
========== ========== =========== ===========
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<TABLE>
<CAPTION>
PULTE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
($000's omitted)
(Unaudited)
Accumulated
Additional Other
Common Paid-in Comprehensive Retained
Stock Capital Income Earnings Total
------ ---------- ------------- -------- -----
<S> <C> <C> <C> <C> <C>
Shareholders' Equity, December 31, 1998 .... $ 432 $ 75,051 $ 1,130 $ 844,829 $ 921,442
Exercise of stock options .................. -- 1,659 -- -- 1,659
Cash dividends declared .................... -- -- -- (3,459) (3,459)
Comprehensive income:
Net income ............................. -- -- -- 61,446 61,446
Change in unrealized gains on securities
available-for-sale, net of
income taxes ......................... -- -- (1,130) -- (1,130)
Foreign currency translation
adjustments .......................... -- -- 233 -- 233
--------- --------- --------- --------- ---------
Shareholders' Equity, June 30, 1999 ........ $ 432 $ 76,710 $ 233 $ 902,816 $ 980,191
========= ========= ========= ========= =========
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
<TABLE>
<CAPTION>
PULTE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's omitted)
(Unaudited)
Six Months Ended
June 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Continuing operations:
Cash flows from operating activities:
Income from continuing operations .................................. $ 61,017 $ 34,496
Adjustments to reconcile income from continuing operations
to net cash flows provided by (used in) operating activities:
Amortization, depreciation and other ......................... 6,107 1,838
Deferred income taxes ........................................ (1,402) (5,908)
Gain on sale of securities ................................... (1,664) --
Increase (decrease) in cash due to:
Inventories .......................................... (268,606) 4,125
Residential mortgage loans available-for-sale ........ 73,508 20,588
Other assets ......................................... (64,341) 27,860
Accounts payable and accrued liabilities ............. 62,517 (12,318)
Income taxes ......................................... 5,732 13,335
--------- ---------
Net cash provided by (used in) operating activities .................... (127,132) 84,016
--------- ---------
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale ................ 27,886 --
Principal payments of mortgage-backed securities ................... 1,490 4,517
Cash paid for acquisitions, net of cash acquired ................... -- (43,969)
Other, net ......................................................... (567) (321)
--------- ---------
Net cash provided by (used in) investing activities .................... 28,809 (39,773)
--------- ---------
Cash flows from financing activities:
Payment of long-term debt and bonds ................................ (28,077) (4,982)
Proceeds from borrowings ........................................... 112,800 15,975
Repayment of borrowings ............................................ (84,558) (23,045)
Dividends paid...................................................... (3,459) (2,994)
Other, net ......................................................... 1,636 5,548
--------- ---------
Net cash used in financing activities .................................. (1,658) (9,498)
--------- ---------
Net increase (decrease) in cash and equivalents - continuing operations $ (99,981) $ 34,745
--------- ---------
</TABLE>
6
<TABLE>
<CAPTION>
PULTE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($000's omitted)
(Unaudited)
Six Months Ended
June 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Discontinued Operations:
Cash flows from operating activities:
Income from discontinued operations .................. $ 429 $ 609
Change in deferred taxes ............................. 7,451 11,824
Change in income taxes ............................... (7,258) (12,583)
Other changes, net ................................... 1,217 6,548
Cash flows from investing activities:
Purchase of securities available-for-sale ............ 219 (21,809)
Principal payments of mortgage-backed securities ..... -- 17,384
Decrease (increase) in Covered Assets and
FSLIC Resolution Fund (FRF) receivables ............ (1,971) 29,741
Cash flows from financing activities:
Increase in deposit liabilities ...................... -- 25,367
Repayment of borrowings .............................. -- (31,560)
Decrease in Federal Home Loan Bank (FHLB) advances ... -- (3,100)
--------- ---------
Net increase in cash and equivalents
discontinued operations .............................. 87 22,421
--------- ---------
Net increase (decrease) in cash and equivalents .......... (99,894) 57,166
Cash and equivalents at beginning of period .............. 125,329 247,308
--------- ---------
Cash and equivalents at end of period .................... $ 25,435 $ 304,474
========= =========
Cash - continuing operations ............................. $ 25,217 $ 279,901
Cash - discontinued operations ........................... 218 24,573
--------- ---------
$ 25,435 $ 304,474
========= =========
Supplemental disclosure of cash flow information-
cash paid during the period for:
Interest, net of amount capitalized:
Continuing operations ............................. $ 6,360 $ 16,947
Discontinued operations ........................... -- 956
--------- ---------
$ 6,360 $ 17,903
========= =========
Income taxes ......................................... $ 30,956 $ 12,078
========= =========
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
7
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($000's omitted)
(Unaudited)
1. Basis of presentation and significant accounting policies
The condensed consolidated financial statements include the accounts of
Pulte Corporation (the Company), and all of its significant
subsidiaries. The Company's direct subsidiaries include Pulte Financial
Companies, Inc. (PFCI), Pulte Diversified Companies, Inc. (PDCI) and
other subsidiaries which are engaged in the homebuilding business.
PDCI's operating subsidiaries include Pulte Home Corporation (Pulte),
Pulte International Corporation (International) and other subsidiaries
which are engaged in the homebuilding business. PDCI's non-operating
thrift subsidiary, First Heights Bank, fsb (First Heights), has been
classified as a discontinued operation (See Note 2). The Company also
has a mortgage banking company, Pulte Mortgage Company (PMC), which is a
subsidiary of Pulte.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the six month period ended June 30, 1999
are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. These financial statements should be
read in conjunction with the Company's consolidated financial statements
and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1998.
Certain 1998 classifications have been changed to conform with the 1999
presentation.
International operations are conducted in Mexico and Puerto Rico. Mexico
homebuilding operations comprise several equity investments which are
accounted for under the equity method. Gains and losses resulting from
the change in Mexican peso exchange rates are recognized in accordance
with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign
Currency Translation. During 1998, the Mexican economy was considered
hyper-inflationary; accordingly, SFAS 52 required that the U.S. dollar
be the assumed functional currency of the Company's investments in
Mexico. During 1998, the three-year cumulative rate of inflation in
Mexico fell below 100%; resulting in the Mexican economy no longer being
considered hyperinflationary. Effective January 1, 1999, the functional
currency of the Company's investments in Mexico is the Mexican peso.
The Company's comprehensive income other than net income consists of
unrealized gains/(losses) on securities available-for-sale, net of tax
and foreign currency translation adjustments. For the quarters ended
June 30, 1999 and 1998, the Company's comprehensive income other than
net income amounted to $226 and $(127), respectively, net of tax
(benefit)/provision of $0 and $(123), respectively. For the six months
ended June 30, 1999 and 1998, the Company's comprehensive income other
than net income amounted to $(897) and $(324), respectively, net of tax
(benefit)/provision of $(772) and $(185), respectively.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be
adopted in years beginning after June 15, 2000, with earlier adoption
encouraged. This Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. Pulte Mortgage, in the normal course of
business, uses derivative financial instruments to meet the financing
needs of its customers and reduce its own exposure to fluctuations in
interest rates. The Company plans to adopt this statement on January 1,
2001, but has not yet determined what effect Statement No. 133 will have
on its earnings and financial position.
8
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
2. Discontinued operations
During the first quarter of 1994, the Company adopted a plan of disposal
for First Heights and announced its strategy to exit the thrift industry
and increase its focus on housing and related mortgage banking. First
Heights sold all but one of its 32 bank branches and related deposits to
two unrelated purchasers. The sale was substantially completed during
the fourth quarter of 1994, although the Company held brokered deposits
which were not liquidated until 1998.
At the time, the Company expected to complete the plan of disposal
within a reasonable period of time; however, contractual disputes with
the FDIC prevented the prepayment of the FSLIC Resolution Fund (FRF)
notes, thereby precluding the Company from completing the disposal in
accordance with its original plan. To provide liquidity for the sale,
First Heights liquidated its investment portfolios and its single-family
residential loan portfolio and, as provided in the Assistance Agreement,
entered into a Liquidity Assistance Note (LAN) with the Federal Deposit
Insurance Corporation (FDIC) acting in its capacity as manager of FRF.
The LAN is collateralized by the FRF notes and bears interest at a rate
indexed to the Texas Cost of Funds plus a spread. The LAN and the FRF
notes matured in September 1998; however, payment of these obligations
is being withheld by both parties pending resolution of all open matters
with the FDIC. As discussed in Note 4, the Company is involved in
litigation with the FDIC and as part of this litigation, the parties
have asserted various claims with respect to obligations under
promissory notes issued by each of the parties in connection with the
thrift acquisition and activities.
As of December 31, 1998, First Heights no longer held any deposits, nor
did it maintain an investment portfolio. First Heights' day-to-day
activities have been principally devoted to supporting residual
regulatory compliance matters and the litigation with the FDIC; and are
not reflective of the active operations of the former thrift, such as
maintaining traditional transaction accounts, (e.g., checking and
savings accounts) or making loans. Accordingly, such operations are
being presented as discontinued.
Revenues of the Company's discontinued thrift operations primarily
represent interest income on the outstanding FRF notes and receivables,
and for the three and six months ended June 30, 1999 amounted to $915
and $2,085 respectively. Revenues for the comparable periods of 1998
were $1,779 and $3,566, respectively. For the three and six months ended
June 30, 1999, discontinued thrift operations provided after-tax income
of $53 and $429, respectively. After tax income for the comparable
periods of 1998 were $238 and $609, respectively.
3. Segment information
The Company has three reportable segments: Homebuilding, Financial
Services and Corporate. The Company's Homebuilding segment consists of
the following three business lines:
o Domestic Homebuilding, the Company's core business, is engaged
in the acquisition/development of land primarily for residential
purposes within the continental United States and the construction
of housing on such land targeted for the first-time, move-up and
semi-custom home buyer groups.
o International Homebuilding is primarily engaged in the
acquisition/development of land primarily for residential purposes,
and the construction of housing on such land in Puerto Rico and
Mexico.
o Active Adult Homebuilding conducts its operations primarily
through a joint venture, and is engaged in the development of
amenitized, age-targeted and age-restricted communities throughout
the continental United States appealing to a growing demographic
group in their pre-retirement/retirement years.
The Company's Financial Services segment consists principally of mortgage
banking operations conducted through PMC and other mortgage banking
subsidiaries, and to a minor extent, the operations of PFCI, a financing
subsidiary of the Company.
9
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
3. Segment information (continued)
Corporate is a non-operating business segment whose primary purpose is to
support the operations of the Company's subsidiaries as the internal
source of financing, to develop and implement strategic initiatives
centered on new business development and operating efficiencies, and to
provide the necessary administrative support functions to support the
Company as a publicly traded entity.
<TABLE>
<CAPTION>
Operating Data by Segment
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Homebuilding .................... $ 821,317 $ 663,554 $1,488,140 $1,172,189
Financial Services .............. 12,423 11,377 27,169 19,736
Corporate ....................... 412 4,766 1,310 8,343
---------- ---------- ---------- ----------
Total revenues ............. 834,152 679,697 1,516,619 1,200,268
---------- ---------- ---------- ----------
Cost of sales:
Homebuilding .................... 680,220 560,056 1,235,908 990,056
Financial Services .............. -- -- -- --
Corporate ....................... -- -- -- --
---------- ---------- ---------- ----------
Total cost of sales ........ 680,220 560,056 1,235,908 990,056
---------- ---------- ---------- ----------
Selling, general and administrative:
Homebuilding .................... 73,341 56,062 140,627 111,911
Financial Services .............. 5,481 4,901 10,887 9,065
Corporate ....................... 1,394 2,182 3,428 3,833
---------- ---------- ---------- ----------
Total selling, general and
administrative ........... 80,216 63,145 154,942 124,809
---------- ---------- ---------- ----------
Interest:
Homebuilding .................... 5,429 4,957 9,574 8,843
Financial Services .............. 1,715 2,916 3,754 4,523
Corporate ....................... 5,199 7,320 9,716 13,329
---------- ---------- ---------- ----------
Total interest ............. 12,343 15,193 23,044 26,695
---------- ---------- ---------- ----------
Other expense, net:
Homebuilding .................... 756 187 2,196 1,493
Financial Services .............. 150 -- 250 200
Corporate ....................... 2,730 2,668 4,813 2,880
---------- ---------- ---------- ----------
Total other expense, net ... 3,636 2,855 7,259 4,573
---------- ---------- ---------- ----------
Total costs and expenses ........... 776,415 641,249 1,421,153 1,146,133
---------- ---------- ---------- ----------
Equity in income of joint ventures:
Homebuilding .................... 297 248 2,160 2,413
Financial Services .............. -- -- -- --
Corporate ....................... -- -- -- --
---------- ---------- ---------- ----------
Total equity in income of
joint ventures ........... 297 248 2,160 2,413
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes ............ $ 58,034 $ 38,696 $ 97,626 $ 56,548
========== ========== ========== ==========
</TABLE>
10
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
3. Segment information (continued)
<TABLE>
<CAPTION>
Asset Data by Segment Financial
Homebuilding Services Corporate Total
------------ -------- --------- -----
<S> <C> <C> <C> <C>
At June 30, 1999:
House inventory ...................... $ 519,582 $ -- $ -- $ 519,582
Land inventory ....................... 1,204,232 -- -- 1,204,232
---------- ---------- ---------- ----------
Total Inventory ................. $1,723,814 $ -- $ -- $1,723,814
========== ========== ========== ==========
Identifiable assets .................. $2,086,201 $ 171,022 $ 120,042 $2,377,265
Assets of discontinued operations .... 90,367
----------
Total assets ......................... $2,467,632
==========
At December 31, 1998:
House inventory ...................... $ 403,443 $ -- $ -- $ 403,443
Land inventory ....................... 1,051,765 -- -- 1,051,765
---------- ---------- ---------- ----------
Total Inventory ................. $1,455,208 $ -- $ -- $1,455,208
========== ========== ========== ==========
Identifiable assets .................. $1,782,644 $ 274,488 $ 204,029 $2,261,161
Assets of discontinued operations .... 88,678
----------
Total assets ......................... $2,349,839
==========
</TABLE>
4. Commitments and contingencies
The Company is involved in various litigation incidental to its
continuing business operations. Management believes that none of this
litigation will have a material adverse impact on the results of
operations or financial position of the Company.
First Heights-Related Litigation
The Company is a party to two lawsuits relating to First Heights' 1988
acquisition from the Federal Savings and Loan Insurance Corporation
(FSLIC), and First Heights' ownership of five failed Texas thrifts. The
first lawsuit (the "District Court Case") was filed on July 7, 1995 in
the United States District Court, Eastern District of Michigan, by the
Federal Deposit Insurance Corporation (FDIC) against the Company, PDCI
and First Heights (collectively, the "Pulte Parties"). The second
lawsuit (the "Court of Federal Claims Case") was filed on December 26,
1996 in the United States Court of Federal Claims (Washington, D.C.) by
the Pulte Parties against the United States. In the District Court Case,
the FDIC seeks a declaration of rights and other relief related to the
assistance agreement entered into between First Heights and the FSLIC.
The FDIC is the successor to FSLIC. The FDIC and the Pulte Parties
disagree about the proper interpretation of provisions in the assistance
agreement which provide for sharing of certain tax benefits achieved in
connection with First Heights' 1988 acquisition and ownership of the
five failed Texas thrifts. The District Court Case also includes certain
other claims relating to the foregoing, including claims resulting from
the Company's and First Heights' amendment of a tax sharing and
allocation agreement between the Company and First Heights. The Pulte
Parties dispute the FDIC's claims and believe that a proper
interpretation of the assistance agreement limits the FDIC's
participation in the tax benefits. The Pulte Parties filed an answer and
a counterclaim, seeking, among other things, a declaration that the FDIC
has breached the assistance agreement in numerous respects. On December
24, 1996, the Pulte Parties voluntarily dismissed without prejudice
certain of their claims in the District Court Case and on December 26,
1996, initiated the Court of Federal Claims Case.
11
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
4. Commitments and contingencies (continued)
First Heights-Related Litigation (continued)
The Court of Federal Claims Case contains similar claims as those that
were voluntarily dismissed from the District Court Case. In their
complaint, the Pulte Parties assert breaches of contract on the part of
the United States in connection with the enactment of section 13224 of
the Omnibus Budget Reconciliation Act of 1993. That provision repealed
portions of the tax benefits that the Pulte Parties claim they were
entitled to under the contract to acquire the failed Texas thrifts. The
Pulte Parties also assert certain other claims concerning the contract,
including claims that the United States (through the FDIC as receiver)
has improperly attempted to amend the failed thrifts' pre-acquisition
tax returns and that this attempt was made in an effort to deprive the
Pulte Parties of tax benefits they had contracted for, and that the
enactment of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 breached the Government's obligation not to
require contributions of capital greater than those required by the
contract. The United States has filed a motion for summary judgment
against the Company in the Court of Federal Claims Case, and the
Company's opposition to the motion is presently due in October, 1999.
On March 5, 1999, the United States District Court (the Court), entered
a "Final Judgment" against First Heights and PDCI (the Court had
previously ruled that Pulte Corporation was not liable for monetary
damages to the FDIC) resolving by summary judgment in favor of the FDIC
most of the FDIC's claims against the Pulte Defendants. The Final
Judgment requires PDCI and First Heights to pay the FDIC monetary
damages totaling approximately $221.3 million, including interest and
future tax sharing but excluding costs (such as attorneys fees) to be
determined in the future by the District Court. However, the FDIC has
acknowledged that it has already paid itself or withheld from
assistance, including the FRF notes, its obligation to pay to First
Heights approximately $105 million, excluding interest thereon. The
Company believes that it is entitled to a credit or actual payment of
such amount. The Final Judgment does not address this issue. Based upon
the Company's review of the Final Judgment, the Company believes that,
if the Final Judgment were to be upheld in its entirety on appeal, the
potential after-tax charges against Discontinued Operations, after
giving effect to interest owed by the FDIC to First Heights, will be
approximately $88 million, plus post-judgment interest (currently 5% per
year). The Company vigorously disagrees with the Court's rulings and has
appealed to the Sixth Circuit Court of Appeals. The Company has posted a
bond in the amount of $110 million pending resolution of the appeals
process. The Company believes the District Court erred in granting
summary judgment to the FDIC. Among other things, the Company believes
the District Court improperly resolved highly disputed factual issues
which should have been presented to a jury and, as a result, it
improperly granted summary judgment accepting the FDIC's view of the
facts on substantially all disputed issues and, therefore, that the
Company has a strong basis for appeal of the District Court's decision
and that an appellate court, properly applying the standards of review
for this case, should reverse the District Court's decision and remand
the case for trial, if not in its entirety, then at least in material
respects.
The Company does not believe that the claims in the Court of Federal
Claims Case are in any way prejudiced by the rulings in the District
Court Case. The Company is considering seeking relief in the Court of
Federal Claims Case that would, if granted, recoup portions of the
damages awarded in the District Court Case.
5. Subsequent Event
On August 10, 1999, the Company and Blackstone Real Estate Advisors
(BRE) closed an agreement, effective July 1, 1999, for the Company's
purchase of BRE's interest in the net assets of the Active Adult joint
venture for an aggregate cash purchase price of $26 million, net of
liabilities assumed. Purchase price will be allocated based on the fair
market value of assets acquired and liabilities assumed using the
purchase method of accounting. As a result of this purchase, Pulte will
own 100% of the Active Adult operations, the results of which will be
consolidated with the operating results of Pulte's other homebuilding
operations. Prior to this purchase, and since March 25, 1998, Pulte's
50% interest in this joint venture was accounted for as an equity
investment.
12
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
6. Supplemental guarantor information
The Company has the following outstanding Senior Note obligations: (1)
$100,000, 7%, due 2003, (2) $115,000, 8.375%, due 2004, (3) $125,000,
7.3%, due 2005, and (4) $150,000, 7.625%, due 2017. Such obligations to
pay principal, premium, if any, and interest are guaranteed jointly and
severally on a senior basis by the Company's wholly-owned Domestic and
Active Adult homebuilding subsidiaries (collectively, the Guarantors).
Such guarantees are full and unconditional. The principal non-Guarantors
include PDCI, International, PMC, First Heights, and PFCI. See Note 1
for additional information on the Company's Guarantor and non-Guarantor
subsidiaries.
Supplemental consolidating financial information of the Company,
specifically including such information for the Guarantors, is presented
below. Investments in subsidiaries are presented using the equity method
of accounting. Separate financial statements of the Guarantors are not
provided as the consolidating financial information contained herein
provides a more meaningful disclosure to allow investors to determine
the nature of the assets held by and the operations of the combined
groups.
<TABLE>
<CAPTION>
CONSOLIDATING BALANCE SHEET
JUNE 30, 1999
Unconsolidated
----------------------------------------- Consolidated
Pulte Guarantor Non-Guarantor Eliminating Pulte
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and equivalents ......................... $ 27 $ 22,932 $ 2,258 $ -- $ 25,217
Unfunded settlements ......................... -- 76,100 (8,368) -- 67,732
House and land inventories ................... -- 1,699,886 23,928 -- 1,723,814
Residential mortgage loans and other
securities available-for-sale .............. -- -- 159,981 -- 159,981
Land held for sale and future development .... -- 57,138 -- -- 57,138
Other assets ................................. 15,422 191,630 61,995 -- 269,047
Deferred income taxes ........................ 74,336 -- -- -- 74,336
Discontinued operations ...................... -- -- 90,367 -- 90,367
Investment in subsidiaries ................... 1,138,519 15,340 1,138,928 (2,292,787) --
Advances receivable - subsidiaries ........... 454,524 489 47,340 (502,353) --
----------- ----------- ----------- ----------- -----------
$ 1,682,828 $ 2,063,515 $ 1,516,429 $(2,795,140) $ 2,467,632
=========== =========== =========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities ..... $ 65,194 $ 509,693 $ 47,618 $ -- $ 622,505
Unsecured short-term borrowings .............. 112,800 -- -- -- 112,800
Collateralized short-term debt, recourse
solely to applicable subsidiary assets ..... -- -- 146,625 -- 146,625
Income taxes ................................. 8,066 -- -- -- 8,066
Subordinated debentures and senior notes ..... 487,593 32,351 21,000 -- 540,944
Discontinued operations ...................... -- -- 56,501 -- 56,501
Advances payable - subsidiaries .............. 28,984 412,899 60,470 (502,353) --
----------- ----------- ----------- ----------- -----------
Total liabilities ...................... 702,637 954,943 332,214 (502,353) 1,487,441
Shareholders' equity ......................... 980,191 1,108,572 1,184,215 (2,292,787) 980,191
----------- ----------- ----------- ----------- -----------
$ 1,682,828 $ 2,063,515 $ 1,516,429 $(2,795,140) $ 2,467,632
=========== =========== =========== =========== ===========
</TABLE>
13
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
6. Supplemental guarantor information (continued)
<TABLE>
<CAPTION>
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
Unconsolidated
----------------------------------------- Consolidated
Pulte Guarantor Non-Guarantor Eliminating Pulte
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and equivalents ......................... $ 76,555 $ 46,109 $ 2,534 $ -- $ 125,198
Unfunded settlements ......................... -- 57,135 (7,995) -- 49,140
House and land inventories ................... -- 1,431,245 23,963 -- 1,455,208
Mortgage-backed and related securities ....... -- -- 29,290 -- 29,290
Residential mortgage loans and other
securities available-for-sale ............. -- -- 234,974 -- 234,974
Land held for sale and future development .... -- 35,977 -- -- 35,977
Other assets ................................. 17,949 178,020 55,742 -- 251,711
Deferred income taxes ........................ 80,385 -- (722) -- 79,663
Discontinued operations ...................... -- -- 88,678 -- 88,678
Investment in subsidiaries ................... 1,066,313 16,958 1,062,114 (2,145,385) --
Advances receivable - subsidiaries ........... 271,915 485 46,405 (318,805) --
----------- ----------- ----------- ----------- -----------
$ 1,513,117 $ 1,765,929 $ 1,534,983 $(2,464,190) $ 2,349,839
=========== =========== =========== =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued
liabilities ............................... $ 62,014 $ 461,766 $ 51,593 $ -- $ 575,373
Collateralized short-term debt, recourse
solely to applicable subsidiary assets .... -- -- 217,060 -- 217,060
Mortgage-backed bonds, recourse
solely to applicable subsidiary assets .... -- -- 28,075 -- 28,075
Income taxes ................................. 9,592 -- -- -- 9,592
Subordinated debentures and senior
notes ..................................... 487,496 33,543 21,000 -- 542,039
Discontinued operations ...................... -- -- 56,258 -- 56,258
Advances payable - subsidiaries .............. 32,573 230,491 55,741 (318,805) --
----------- ----------- ----------- ----------- -----------
Total liabilities ...................... 591,675 725,800 429,727 (318,805) 1,428,397
Shareholders' equity ......................... 921,442 1,040,129 1,105,256 (2,145,385) 921,442
----------- ----------- ----------- ----------- -----------
$ 1,513,117 $ 1,765,929 $ 1,534,983 $(2,464,190) $ 2,349,839
=========== =========== =========== =========== ===========
</TABLE>
14
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
6. Supplemental guarantor information (continued)
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF OPERATIONS
For the six months ended June 30, 1999
Unconsolidated
----------------------------------------- Consolidated
Pulte Guarantor Non-Guarantor Eliminating Pulte
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Homebuilding ............................... $ -- $ 1,473,624 $ 14,516 $ -- $ 1,488,140
Mortgage banking and financing,
interest and other ....................... -- -- 27,169 -- 27,169
Corporate .................................. 75 -- 1,235 -- 1,310
----------- ----------- ----------- ----------- -----------
Total revenues ............................... 75 1,473,624 42,920 -- 1,516,619
----------- ----------- ----------- ----------- -----------
Expenses:
Homebuilding:
Cost of sales .............................. -- 1,222,238 13,670 -- 1,235,908
Selling, general and administrative
and other expense ........................ 707 150,438 1,252 -- 152,397
Mortgage banking and financing,
interest and other ....................... -- -- 14,891 -- 14,891
Corporate, net ............................. 16,012 1,449 496 -- 17,957
----------- ----------- ----------- ----------- -----------
Total expenses ............................... 16,719 1,374,125 30,309 -- 1,421,153
----------- ----------- ----------- ----------- -----------
Other Income:
Equity in income of Pulte-affiliates ......... -- 816 1,344 -- 2,160
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes and equity in income
of subsidiaries .......................... (16,644) 100,315 13,955 -- 97,626
Income taxes (benefit) ....................... (7,972) 38,471 6,110 -- 36,609
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before equity in income of subsidiaries .... (8,672) 61,844 7,845 -- 61,017
Income (loss) from discontinued
operations ................................. (728) -- 1,157 -- 429
----------- ----------- ----------- ----------- -----------
Income (loss) before equity in income
of subsidiaries ............................ (9,400) 61,844 9,002 -- 61,446
----------- ----------- ----------- ----------- -----------
Equity in income of subsidiaries:
Continuing operations ...................... 69,689 6,578 63,570 (139,837) --
Discontinued operations .................... 1,157 -- -- (1,157) --
----------- ----------- ----------- ----------- -----------
70,846 6,578 63,570 (140,994) --
----------- ----------- ----------- ----------- -----------
Net income ................................... $ 61,446 $ 68,422 $ 72,572 $ (140,994) $ 61,446
=========== =========== =========== =========== ===========
</TABLE>
15
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
6. Supplemental guarantor information (continued)
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended June 30, 1999
Unconsolidated
----------------------------------------- Consolidated
Pulte Guarantor Non-Guarantor Eliminating Pulte
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Homebuilding ............................... $ -- $815,124 $ 6,193 $ -- $821,317
Mortgage banking and financing,
interest and other ....................... -- -- 12,423 -- 12,423
Corporate .................................. 2 -- 410 -- 412
-------- -------- -------- -------- --------
Total revenues ............................... 2 815,124 19,026 -- 834,152
-------- -------- -------- -------- --------
Expenses:
Homebuilding:
Cost of sales ............................ -- 674,479 5,741 -- 680,220
Selling, general and administrative
and other expense ...................... 432 79,201 (107) -- 79,526
Mortgage banking and financing, interest
and other ................................ -- -- 7,346 -- 7,346
Corporate, net ............................. 8,953 686 (316) -- 9,323
-------- -------- -------- -------- --------
Total expenses ............................... 9,385 754,366 12,664 -- 776,415
-------- -------- -------- -------- --------
Other Income:
Equity in income (loss) of Pulte-affiliates .. -- 560 (263) -- 297
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before income taxes and equity in income
of subsidiaries .......................... (9,383) 61,318 6,099 -- 58,034
Income taxes (benefit) ....................... (5,208) 23,547 2,632 -- 20,971
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before equity in income of subsidiaries .... (4,175) 37,771 3,467 -- 37,063
Income (loss) from discontinued operations ... (477) -- 530 -- 53
-------- -------- -------- -------- --------
Income (loss) before equity in income
of subsidiaries ............................ (4,652) 37,771 3,997 -- 37,116
-------- -------- -------- -------- --------
Equity in income of subsidiaries:
Continuing operations ...................... 41,238 3,130 38,517 (82,885) --
Discontinued operations .................... 530 -- -- (530) --
-------- -------- -------- -------- --------
41,768 3,130 38,517 (83,415) --
-------- -------- -------- -------- --------
Net income ................................... $ 37,116 $ 40,901 $ 42,514 $(83,415) $ 37,116
======== ======== ======== ======== ========
</TABLE>
16
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
6. Supplemental guarantor information (continued)
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF OPERATIONS
For the six months ended June 30, 1998
Unconsolidated
------------------------------------------ Consolidated
Pulte Guarantor Non-Guarantor Eliminating Pulte
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Homebuilding ............................... $ -- $ 1,165,695 $ 6,494 $ -- $ 1,172,189
Mortgage banking and financing,
interest and other ....................... -- -- 19,736 -- 19,736
Corporate .................................. 5,613 1,031 1,699 -- 8,343
----------- ----------- ----------- ----------- -----------
Total revenues ............................... 5,613 1,166,726 27,929 -- 1,200,268
----------- ----------- ----------- ----------- -----------
Expenses:
Homebuilding:
Cost of sales ............................ -- 984,336 5,720 -- 990,056
Selling, general and administrative and
other expense .......................... 558 119,655 2,034 -- 122,247
Mortgage banking and financing, interest
and other ................................ -- -- 13,788 -- 13,788
Corporate, net ............................. 20,013 (2,668) 2,697 -- 20,042
----------- ----------- ----------- ----------- -----------
Total expenses ............................... 20,571 1,101,323 24,239 -- 1,146,133
----------- ----------- ----------- ----------- -----------
Other Income:
Equity in income of Pulte-affiliates ......... -- 126 2,287 -- 2,413
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes and equity in income
of subsidiaries .......................... (14,958) 65,529 5,977 -- 56,548
Income taxes (benefit) ....................... (7,391) 26,234 3,209 -- 22,052
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before equity in income of subsidiaries .... (7,567) 39,295 2,768 -- 34,496
Income from discontinued operations ......... 182 -- 427 -- 609
----------- ----------- ----------- ----------- -----------
Income (loss) before equity in income
of subsidiaries ....................... (7,385) 39,295 3,195 -- 35,105
----------- ----------- ----------- ----------- -----------
Equity in income of subsidiaries:
Continuing operations ...................... 42,063 3,610 39,169 (84,842) --
Discontinued operations .................... 427 -- -- (427) --
----------- ----------- ----------- ----------- -----------
42,490 3,610 39,169 (85,269) --
----------- ----------- ----------- ----------- -----------
Net income ................................... $ 35,105 $ 42,905 $ 42,364 $ (85,269) $ 35,105
=========== =========== =========== =========== ===========
</TABLE>
17
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
6. Supplemental guarantor information (continued)
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF OPERATIONS
For the three months ended June 30, 1998
Unconsolidated
----------------------------------------- Consolidated
Pulte Guarantor Non-Guarantor Eliminating Pulte
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Homebuilding ............................... $ -- $ 661,176 $ 2,378 $ -- $ 663,554
Mortgage banking and financing,
interest and other ....................... -- -- 11,377 -- 11,377
Corporate .................................. 3,067 -- 1,699 -- 4,766
--------- --------- --------- --------- ---------
Total revenues ............................... 3,067 661,176 15,454 -- 679,697
--------- --------- --------- --------- ---------
Expenses:
Homebuilding:
Cost of sales ............................ -- 557,908 2,148 -- 560,056
Selling, general and administrative
and other expense ...................... 93 60,051 1,062 -- 61,206
Mortgage banking and financing, interest
and other ................................ -- -- 7,817 -- 7,817
Corporate, net ............................. 10,354 520 1,296 -- 12,170
--------- --------- --------- --------- ---------
Total expenses ............................... 10,447 618,479 12,323 -- 641,249
--------- --------- --------- --------- ---------
Other Income:
Equity in income (loss) of Pulte-affiliates .. -- (438) 686 -- 248
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes and equity in income
of subsidiaries .......................... (7,380) 42,259 3,817 -- 38,696
Income taxes (benefit) ....................... (3,919) 17,179 1,830 -- 15,090
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before equity in income of subsidiaries .... (3,461) 25,080 1,987 -- 23,606
Income (loss) from discontinued operations ... (123) -- 361 -- 238
--------- --------- --------- --------- ---------
Income (loss) before equity in income
of subsidiaries ............................ (3,584) 25,080 2,348 -- 23,844
--------- --------- --------- --------- ---------
Equity in income of subsidiaries:
Continuing operations ...................... 27,067 2,151 25,518 (54,736) --
Discontinued operations .................... 361 -- -- (361) --
--------- --------- --------- --------- ---------
27,428 2,151 25,518 (55,097) --
--------- --------- --------- --------- ---------
Net income ................................... $ 23,844 $ 27,231 $ 27,866 $ (55,097) $ 23,844
========= ========= ========= ========= =========
</TABLE>
18
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
6. Supplemental guarantor information (continued)
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 1999
Unconsolidated
----------------------------------------- Consolidated
Pulte Guarantor Non-Guarantor Eliminating Pulte
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Continuing operations:
Cash flows from operating activities:
Income from continuing operations ............. $ 61,017 $ 68,422 $ 71,415 $(139,837) $ 61,017
Adjustments to reconcile income from
continuing operations to net cash flows
provided by (used in) operating activities:
Equity in income of subsidiaries .......... (69,689) (6,578) (63,570) 139,837 --
Amortization, depreciation and other ...... 97 6,261 (251) -- 6,107
Deferred income taxes ..................... (1,402) -- -- -- (1,402)
Gain on sale of securities ................ -- -- (1,664) -- (1,664)
Increase (decrease) in cash due to:
Inventories ............................... -- (268,641) 35 -- (268,606)
Residential mortgage loans
available-for-sale ...................... -- -- 73,508 -- 73,508
Other assets .............................. 2,527 (59,865) (7,003) -- (64,341)
Accounts payable and accrued liabilities .. 2,598 55,637 4,282 -- 62,517
Income taxes .............................. (37,855) 42,573 1,014 -- 5,732
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities .................................... (42,707) (162,191) 77,766 -- (127,132)
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of securities
available-for-sale .......................... -- -- 27,886 -- 27,886
Principal payments of mortgage-backed
securities .................................. -- -- 1,490 -- 1,490
Dividends received from subsidiaries .......... 2,150 11,294 -- (13,444) --
Other, net .................................... -- -- (567) -- (567)
Investment in subsidiary ...................... (4,358) (5,725) -- 10,083 --
Advances to affiliates ........................ (139,022) (4) (551) 139,577 --
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities .................................... (141,230) 5,565 28,258 136,216 28,809
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Payment of long-term debt and bonds ........... -- -- (28,077) -- (28,077)
Proceeds from borrowings ...................... 112,800 -- -- -- 112,800
Repayment of borrowings ....................... -- (8,894) (75,664) -- (84,558)
Capital contributions from parent ............. -- 2,458 7,625 (10,083) --
Advances from affiliates ...................... (3,589) 139,835 3,331 (139,577) --
Dividends paid ................................ (3,459) -- (13,444) 13,444 (3,459)
Other, net .................................... 1,657 50 (71) -- 1,636
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities .......................... 107,409 133,449 (106,300) (136,216) (1,658)
--------- --------- --------- --------- ---------
Net decrease in cash and
equivalents - continuing operations ........... $ (76,528) $ (23,177) $ (276) $ -- $ (99,981)
--------- --------- --------- --------- ---------
</TABLE>
19
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
6. Supplemental guarantor information (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS (continued)
For the six months ended June 30, 1999
<TABLE>
<CAPTION>
Unconsolidated
----------------------------------------- Consolidated
Pulte Guarantor Non-Guarantor Eliminating Pulte
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Discontinued operations:
Cash flows from operating activities:
Income from discontinued
operations ............................ $ 429 $ -- $ 1,157 $ (1,157) $ 429
Change in deferred income taxes ............ 7,451 -- -- -- 7,451
Equity in income of subsidiaries ........... (1,157) -- -- 1,157 --
Change in income taxes ..................... (7,258) -- -- -- (7,258)
Other changes, net ......................... 535 -- 682 -- 1,217
Cash flows from investing activities:
Purchase of securities available-
for-sale ............................... -- -- 219 -- 219
Decrease in Covered Assets and FRF
receivables ............................ -- -- (1,971) -- (1,971)
--------- --------- --------- --------- ---------
Net increase in cash and equivalents-
discontinued operations .................... -- -- 87 -- 87
--------- --------- --------- --------- ---------
Net decrease in cash and
equivalents ................................ (76,528) (23,177) (189) -- (99,894)
Cash and equivalents at beginning of
period ..................................... 76,555 46,109 2,665 -- 125,329
--------- --------- --------- --------- ---------
Cash and equivalents at end of period ........ $ 27 $ 22,932 $ 2,476 $ -- $ 25,435
========= ========= ========= ========= =========
</TABLE>
20
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
6. Supplemental guarantor information (continued)
CONSOLIDATING STATEMENT OF CASH FLOWS
For the six months ended June 30, 1998
<TABLE>
<CAPTION>
Unconsolidated
----------------------------------------- Consolidated
Pulte Guarantor Non-Guarantor Eliminating Pulte
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Continuing operations:
Cash flows from operating activities:
Income from continuing operations ........... $ 34,496 $ 42,905 $ 41,937 $ (84,842) $ 34,496
Adjustments to reconcile income from
continuing operations to net cash flows
provided by (used in) operating activities:
Equity in income of subsidiaries ........ (42,063) (3,610) (39,169) 84,842 --
Amortization, depreciation and other .... 96 1,491 251 -- 1,838
Deferred income taxes ................... (5,908) -- -- -- (5,908)
Increase (decrease) in cash due to:
Inventories .............................. -- 2,958 1,167 -- 4,125
Residential mortgage loans available-
for-sale ............................... -- -- 20,588 -- 20,588
Other assets ............................. (4,853) 49,233 (16,520) -- 27,860
Accounts payable and accrued liabilities . (371) (27,684) 15,737 -- (12,318)
Income taxes .............................. (15,207) 28,612 (70) -- 13,335
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities .................................. (33,810) 93,905 23,921 -- 84,016
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Principal payments of mortgage backed
securities ................................ -- -- 4,517 -- 4,517
Dividends received from subsidiaries ........ 132,040 4,700 132,040 (268,780) --
Cash paid for acquisitions, net of cash
acquired .................................. -- (43,969) -- -- (43,969)
Investment in subsidiary .................... (32,040) (2,378) -- 34,418 --
Advances to affiliates ...................... (40,618) -- (881) 41,499 --
Other, net .................................. -- -- (321) -- (321)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities .................................. 59,382 (41,647) 135,355 (192,863) (39,773)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Payment of long-term debt and bonds ......... -- -- (4,982) -- (4,982)
Proceeds of borrowings ...................... -- 15,975 -- -- 15,975
Repayment of borrowings ..................... -- (7,495) (15,550) -- (23,045)
Capital contributions from parent ........... -- 32,040 2,378 (34,418) --
Advances from affiliates .................... 1,055 42,022 (1,578) (41,499) --
Dividends paid .............................. (2,994) (132,040) (136,740) 268,780 (2,994)
Other, net .................................. 6,127 66 (645) -- 5,548
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities ........................ 4,188 (49,432) (157,117) 192,863 (9,498)
--------- --------- --------- --------- ---------
Net increase in cash and
equivalents - continuing operations ......... $ 29,760 $ 2,826 $ 2,159 $ -- $ 34,745
--------- --------- --------- --------- ---------
</TABLE>
21
PULTE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
($000's omitted)
(Unaudited)
6. Supplemental guarantor information (continued)
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF CASH FLOWS (continued)
For the six months ended June 30, 1998
Unconsolidated
----------------------------------------- Consolidated
Pulte Guarantor Non-Guarantor Eliminating Pulte
Corporation Subsidiaries Subsidiaries Entries Corporation
----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Discontinued operations:
Cash flows from operating activities:
Income from discontinued
operations ............................ $ 609 $ -- $ 427 $ (427) $ 609
Change in deferred income taxes ............ 11,824 -- -- -- 11,824
Equity in income of subsidiaries ........... (427) -- -- 427 --
Change in income taxes ..................... (12,583) -- -- -- (12,583)
Other changes, net ......................... 577 -- 5,971 -- 6,548
Cash flows from investing activities:
Purchase of securities available-
for-sale ............................... -- -- (21,809) -- (21,809)
Principal payments of mortgage-backed
securities ............................. -- -- 17,384 -- 17,384
Decrease in Covered Assets and FRF
receivables ............................ -- -- 29,741 -- 29,741
Cash flows from financing activities:
Increase in deposit liabilities ............ -- -- 25,367 -- 25,367
Repayment of borrowings .................... -- -- (31,560) -- (31,560)
Decrease in FHLB advances .................. -- -- (3,100) -- (3,100)
--------- --------- --------- --------- ---------
Net increase in cash and equivalents-
discontinued operations .................... -- -- 22,421 -- 22,421
--------- --------- --------- --------- ---------
Net increase in cash and
equivalents ................................ 29,760 2,826 24,580 -- 57,166
Cash and equivalents at beginning of
period ..................................... 195,946 46,466 4,896 -- 247,308
--------- --------- --------- --------- ---------
Cash and equivalents at end of period ........ $ 225,706 $ 49,292 $ 29,476 $ -- $ 304,474
========= ========= ========= ========= =========
</TABLE>
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
($000's omitted, except per share data)
Overview:
A summary of the Company's operating results by business segment for the
three and six month periods ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- -----
<S> <C> <C> <C> <C>
Pre-tax income (loss):
Homebuilding operations .................. $ 61,868 $ 42,540 $ 101,995 $ 62,299
Financial Services operations ............ 5,077 3,560 12,278 5,948
Corporate ................................ (8,911) (7,404) (16,647) (11,699)
--------- --------- --------- ---------
Pre-tax income from continuing operations ... 58,034 38,696 97,626 56,548
Income taxes ................................ (20,971) (15,090) (36,609) (22,052)
--------- --------- --------- ---------
Income from continuing operations ........... 37,063 23,606 61,017 34,496
Income from discontinued operations ......... 53 238 429 609
--------- --------- --------- ---------
Net income .................................. $ 37,116 $ 23,844 $ 61,446 $ 35,105
========= ========= ========= =========
Per share data - assuming dilution:
Income from continuing operations ........ $ .85 $ .54 $ 1.37 $ .79
Income from discontinued operations ...... -- -- .01 .02
--------- --------- --------- ---------
Net income ............................... $ .85 $ .54 $ 1.38 $ .81
========= ========= ========= =========
</TABLE>
A comparison of pre-tax income (loss) for the three and six month periods
ended June 30, 1999 and 1998 is as follows:
o Pre-tax income of the Company's homebuilding business segment increased
45% and 64%, respectively, due primarily to the improvement in domestic
homebuilding operations where pre-tax income increased 44% and 59%,
respectively. Domestic unit settlements increased 17% and 22%,
respectively; domestic gross margins improved 170 and 160 basis points
respectively; and domestic unit selling price increased by approximately
6% and 5%, respectively.
o Pre-tax income of the Company's financial services business segment
increased substantially, primarily reflecting the Company's mortgage
banking operations which benefited from substantial increases in
mortgage origination volume, origination and servicing fees, as well as
pricing and marketing gains. Six month results reflect a net gain of
approximately $1,700 from the redemption of mortgage-backed bonds by
Pulte Financial Companies, Inc. (PFCI), a subsidiary of the Company.
o Pre-tax loss of the Company's corporate business segment increased
$1,507 and $4,948, respectively, from the three and six month periods
ended June 30, 1998. The increase in pre-tax loss for the quarter
primarily reflects an increase of approximately $1,000 in the corporate
net interest spread. Year-to-date results reflect an increase of
approximately $2,000 in the corporate net interest spread, and an
increase in other corporate expenses, net, of approximately $3,000.
Increases in the corporate net interest spread are attributed to
increased borrowings for additional capital investment, primarily in the
domestic homebuilding operations. Other corporate expenses, net in 1998
were reduced by the net of one-time events, including a gain of
approximately $5,000 on the sale of Expression Homes, partially offset
by provisions of $3,500 for the write down of certain projects and R&D
investments.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Homebuilding Operations:
The Company's Homebuilding segment consists of the following business lines:
o Domestic Homebuilding operations are conducted in 41 markets, located
throughout 27 states. Domestic Homebuilding offers a broad product line
to meet the needs of the first-time, move-up and semi-custom home buyer.
During 1998, the Company acquired two homebuilders, Tennessee-based
Radnor Homes on May 27, 1998 and Florida-based DiVosta & Company on July
1, 1998 (the "acquired operations").
o International Homebuilding operations are conducted through subsidiaries
of Pulte International Corporation in Puerto Rico and Mexico.
International Homebuilding product offerings focus on the demand of
first-time buyers, and social interest housing in Mexico. The Company
has agreements in place with multi-national corporations to provide
social interest and employee housing in Mexico.
o Active Adult Homebuilding operations are conducted through a joint
venture with Blackstone Real Estate Advisors (BRE), an affiliate of the
Blackstone Group. Active Adult operations acquire and develop major
Active Adult residential communities, amenitized age-targeted and
age-restricted communities appealing to a growing demographic group in
their pre-retirement and retirement years. On August 10, 1999, the
Company and Blackstone Real Estate Advisors (BRE) closed an agreement,
effective July 1, 1999, for the Company's purchase of BRE's interest in
the net assets of the Active Adult joint venture for an aggregate cash
purchase price of $26.0 million, net of liabilities assumed. As a result
of this purchase, Pulte will own 100% of the Active Adult operations,
the results of which will be consolidated with the operating results of
Pulte's other homebuilding operations. Prior to this purchase, and since
March 25, 1998, Pulte's 50% interest in this joint venture was accounted
for as an equity investment.
Certain operating data relating to the Company's joint ventures and
homebuilding operations for the three and six months ended June 30, 1999 and
1998, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pulte/Pulte-affiliate homebuilding revenues:
Domestic.......................................... $ 815,124 $ 658,155 $ 1,473,520 $ 1,153,522
International..................................... 19,127 14,618 54,438 39,031
Active Adult...................................... 31,500 18,069 57,661 31,772
---------- ---------- ----------- -----------
Total homebuilding................................... $ 865,751 $ 690,842 $ 1,585,619 $ 1,224,325
========== ========== =========== ===========
Pre-tax income (loss):
Domestic..................................... $ 61,823 $ 43,081 $ 100,824 $ 63,436
International................................ (609) (239) 231 625
Active Adult................................. 654 (302) 940 (1,762)
---------- ---------- ----------- -----------
Total Homebuilding operations................... $ 61,868 $ 42,540 $ 101,995 $ 62,299
========== ========== =========== ===========
Pulte and Pulte-affiliate settlements - units:
Domestic.......................................... 4,439 3,785 8,227 6,765
International:
Pulte ...................................... 73 32 174 84
Pulte-affiliated entities.................... 849 831 2,716 2,241
---------- ---------- ----------- -----------
Total International.......................... 922 863 2,890 2,325
---------- ---------- ----------- -----------
Active Adult:
Pulte........................................ 0 27 1 91
Pulte-affiliated entity...................... 152 93 279 109
---------- ---------- ----------- -----------
Total Active Adult........................... 152 120 280 200
---------- ---------- ----------- -----------
Total Pulte and Pulte-affiliate settlements - units.. 5,513 4,768 11,397 9,290
========== ========== =========== ===========
</TABLE>
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Homebuilding Operations (continued):
Domestic Homebuilding:
The domestic homebuilding business line represents the Company's core
business. Operations are conducted in 41 markets, located throughout 27
states, and are organized into nine regions as follows:
Pulte Home East:
Mid-Atlantic Region Connecticut, Delaware, Maryland, Massachusetts,
New Jersey, New Hampshire, Pennsylvania, Rhode
Island, Virginia
Southeast Region Georgia, North Carolina, South Carolina,
Tennessee
Florida Region Florida
Pulte Home Central:
Great Lakes Region Indiana, Kansas, Michigan, Missouri, Ohio
Midwest Region Illinois, Minnesota
Texas Region Texas
Pulte Home West:
Southwest Region Arizona, Nevada
Rocky Mountain Region Colorado, Utah
California Region California
No one individual market within the 41 markets represented more than 10% of
total domestic homebuilding net new orders, unit settlements or revenues
during the three and six month period ended June 30, 1999.
The following table presents selected unit information for Pulte's domestic
homebuilding operations for the three and six months ended June 30, 1999 and
1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Unit settlements:
Pulte Home East.............. 2,335 1,758 4,311 3,186
Pulte Home Central........... 1,374 1,195 2,384 2,008
Pulte Home West.............. 730 832 1,532 1,571
---------- ---------- ----------- -----------
4,439 3,785 8,227 6,765
========== ========== =========== ===========
Net new orders - units:
Pulte Home East.............. 2,785 2,152 5,871 4,361
Pulte Home Central........... 1,630 1,515 3,285 3,233
Pulte Home West.............. 808 924 1,794 1,930
---------- ---------- ----------- -----------
5,223 4,591 10,950 9,524
========== ========== =========== ===========
Net new orders - dollars $ 995,000 $ 804,000 $ 2,065,000 $ 1,661,000
========== ========== =========== ===========
Backlog at June 30 - units:
Pulte Home East.............. 4,203 2,735
Pulte Home Central........... 2,815 2,241
Pulte Home West.............. 1,119 1,176
----------- -----------
8,137 6,152
=========== ===========
Backlog at June 30 - dollars.... $ 1,591,000 $ 1,125,000
=========== ===========
</TABLE>
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Homebuilding Operations (continued):
Domestic Homebuilding (continued):
During the three and six months ended June 30, 1999, the Company reported net
new orders of 5,223 and 10,950, respectively, an increase of 14% and 15%,
respectively, over the comparable period of the prior year. These results
reflect strong performance in the Southeast, Florida, Great Lakes, Midwest
and Mid-Atlantic Regions. Net new orders provided by the acquired operations
amounted to 424 units for the quarter and 898 units year-to-date.
Unit settlements increased 17% for the quarter and 22% year-to-date,
reflecting strong activity in the Southeast, Florida, Texas, and Great Lakes
Regions. Strong demand, supported by favorable economic conditions, continued
to drive increased order activity and record levels of backlog. These factors
have contributed to the solid settlement activity during 1999. Settlements
provided by the acquired operations amounted to 353 units for the quarter and
704 units year-to-date.
The Company's backlog at June 30, 1999 grew to an all-time record level of
8,137 units, or approximately $1.6 billion, breaking the previous company
record of 7,353 units set in March 1999. Unit backlog at June 30, 1999, was
approximately 11%, 50% and 24% higher than that noted at March 31, 1999,
December 31, 1998, and September 30, 1998, respectively. Backlog at June 30,
1999 associated with acquired operations amounted to 693 units or $139,000.
The following table presents a summary of pre-tax income for Pulte's domestic
homebuilding operations for the three and six months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues....................... $ 815,124 $ 658,155 $ 1,473,520 $1,153,522
Cost of sales.................. (674,495) (555,404) (1,222,177) (974,521)
Selling, general and
administrative expense....... (72,186) (54,726) (138,285) (105,684)
Interest (a) .................. (5,429) (4,957) (9,574) (8,843)
Other income (expense), net.... (1,191) 13 (2,660) (1,038)
--------- --------- ----------- ----------
Pre-tax income................. $ 61,823 $ 43,081 $ 100,824 $ 63,436
========= ========= =========== ==========
Average sales price............ $ 184 $ 174 $ 179 $ 171
========= ========= =========== ==========
</FN>
(a) The Company capitalizes interest cost into homebuilding
inventories and charges the interest to homebuilding interest
expense when the related inventories are closed.
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Homebuilding Operations (continued):
Domestic Homebuilding (continued):
Gross profit margins were 17.3% and 17.1% for the three and six month periods
ended June 30, 1999, respectively, compared to 15.6% and 15.5 %,
respectively, for the same periods of the prior year. Several factors
contributed to this favorable trend including continued strong customer
demand, positive home pricing, the benefits of leverage-buy purchasing
activities, effective production and inventory management, and the Company's
P3 initiative (Pulte Preferred Partnerships) with contractors and suppliers.
As a percentage of total revenues, selling, general and administrative
expenses (SG&A) increased 60 basis points for the quarter to 8.9%, and
increased 20 basis points year-to-date to 9.4%. The increase in SG&A spending
is attributed to higher sales and marketing expenses and increased field
expenses, partly resulting from continued implementation of the Company's
financial and operating systems, as well as, increased construction expenses
associated with the build out of approximately 8,500 homes under construction
at June 30, 1999.
Other expense, net, includes gains on land sales and other
homebuilding-related expenses. Other expense, net, has also historically
included the net operating results of Pulte's Builder's Supply & Lumber (BSL)
subsidiary prior to its sale on March 20, 1998. For the quarter and
year-to-date other expense, net, increased $1,204 and $1,622, respectively.
These increases primarily reflect amortization of goodwill associated with
homebuilding acquisitions and other expenses, offset by gains on land sales.
The average selling price for the three and six month periods ended June 30,
1999 were $184 and $179, respectively, an increase from the average selling
price of $174 and $171 in the comparable periods of the prior year. Changes
in average selling price reflect a number of factors, including changes in
market selling prices and the mix of product closed during a period.
Information related to interest in inventory is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Interest in inventory at
beginning of period ..... $18,534 $15,882 $16,356 $14,719
Interest capitalized ...... 7,366 3,454 13,689 8,503
Interest expensed ......... (5,429) (4,957) (9,574) (8,843)
------- ------- ------- -------
Interest in inventory
at end of period ........ $20,471 $14,379 $20,471 $14,379
======= ======= ======= =======
At June 30, 1999, Pulte's domestic homebuilding operations controlled
approximately 63,300 lots, of which approximately 39,800 lots were owned and
approximately 23,500 lots were controlled through option agreements.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Homebuilding Operations (continued):
International Homebuilding:
International Homebuilding operations are primarily conducted through
subsidiaries of Pulte International Corporation in Puerto Rico and Mexico.
The following table presents selected financial data for Pulte's
international homebuilding operations for the three and six month periods
ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pre-tax income (loss):
Revenues........................................ $ 6,193 $ 2,378 $ 14,516 $ 6,494
Cost of sales................................... (5,741) (2,148) (13,670) (5,720)
Selling, general and administrative expense..... (1,170) (1,156) (2,357) (2,449)
Other income, net............................... 372 1 398 13
Equity in income of Mexico operations........... (263) 686 1,344 2,287
------- ------- -------- -------
Pre-tax income (loss)........................... $ (609) $ (239) $ 231 $ 625
======= ======= ======== =======
Unit settlements:
Pulte........................................ 73 32 174 84
Pulte-affiliated entities.................... 849 831 2,716 2,241
------- ------- -------- -------
Total Pulte and Pulte-affiliates........... 922 863 2,890 2,325
======= ======= ======== =======
</TABLE>
Pre-tax income for the three and six month periods ended June 30, 1999, from
the Company's international operations reflect improved operating results in
Puerto Rico, offset by increased overhead costs associated with expansion in
Mexico. Foreign currency exchange gains in Mexico amounted to $335 for the
quarter and $414 year to date, reflecting a 5% year-to-date increase in the
value of the Mexican peso against the U.S. dollar.
The Company's aggregate net investment in its five joint ventures located
throughout Mexico approximated $33,600 at June 30, 1999. The largest of these
ventures, Condak-Pulte S. De R.L. De C.V., is located in the city of Juarez.
The Juarez-based venture is currently developing communities in Juarez,
Chihuahua, Nuevo Laredo, Reynosa and Matamoros, under agreements with Delphi
Automotive Systems and Sony Magneticos de Mexico, S.A. de C.V., an affiliate
of Sony Electronics, Inc. As of June 30, 1999, the Company's net investment
in the Juarez-based joint venture approximated $21,000.
Desarrollos Residenciales Turisticos, S.A. de C.V. (DRT), another of the
Company's joint ventures in Mexico, is constructing primarily social interest
housing in the Bajio region surrounding Mexico City, targeting the cities of
Puebla, Queretaro, San Jose du Iturbide, San Juan del Rio and Zamora. The
Company's net investment in this joint venture at June 30, 1999 approximated
$5,500.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Homebuilding Operations (continued):
Active Adult Homebuilding:
Active Adult Homebuilding operations are conducted through a 50%-owned
joint venture. Effective July 1, 1999, the Company purchased Blackstone Real
Estate Advisors' (BRE) interest in the net assets of the Active Adult joint
venture for an aggregate cash purchase price of $26.0 million. As a result of
this purchase, Pulte will own 100% of the Active Adult operations, the
results of which will be consolidated with the operating results of Pulte's
other homebuilding operations. Prior to this purchase, and since March 25,
1998, Pulte's 50% interest in this joint venture was accounted for as an
equity investment.
Active Adult operations acquire and develop major active adult residential
communities, highly amenitized age-targeted and age-restricted communities
appealing to a growing demographic group in their pre-retirement and
retirement years. The Venture, headquartered in Phoenix, Arizona, included
four communities located in Arizona, California and New Jersey. Springfield
at Whitney Oaks, the Venture's Active Adult Community in Northern California,
recently received the Gold Achievement Award for the best seniors' housing
development in the nation, as presented by the National Council on Seniors
Housing. At June 30, 1999, the Company's aggregate net investment in the
Active Adult joint venture approximated $19,000.
The following table presents selected financial data for Pulte's Active Adult
homebuilding operations for the three and six month period ended June 30,
1999 and 1998. Prior year data includes the operating results of the
Company's Active Adult subsidiaries from January 1, 1998, through March 25,
1998, the date upon which the formation of the joint venture occurred, and
the equity in income of the joint venture from that date forward. 1999 data
reflect the equity in income of the joint venture entity and the operating
results of Pulte's one 100%-owned Active Adult community, which recorded its
final unit settlement in January 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pre-tax income (loss):
Revenues ..................................... $ -- $ 3,021 $ 104 $ 12,173
Cost of sales ................................ -- (2,504) (77) (9,815)
Selling, general and administrative expense .. 15 (180) 16 (3,778)
Other income, net ............................ 79 (201) 81 (468)
Equity in income of joint venture ............ 560 (438) 816 126
-------- -------- -------- --------
Pre-tax income (loss) ........................ $ 654 $ (302) $ 940 $ (1,762)
======== ======== ======== ========
Pulte and Pulte-affiliate:
Average sales price .......................... $ 207 $ 151 $ 206 $ 159
======== ======== ======== ========
Unit settlements ............................. 152 120 280 200
======== ======== ======== ========
Net new orders - units ....................... 149 217 328 432
======== ======== ======== ========
Net new orders - dollars ..................... $ 5,700 $ 39,200 $ 42,200 $ 78,700
======== ======== ======== ========
Backlog at June 30 - units ................... 219 346
======== ========
Backlog at June 30 - dollars ................. $ 22,000 $ 66,000
======== ========
</TABLE>
The decreases in revenues, cost of sales, selling, general and administrative
expense and other income (expense) reflect the close-out of this one
remaining Pulte community.
Net new orders decreased for the three and six month periods ended June 30,
1999 by 68 and 104 units, respectively, while unit settlements increased by
32 and 80 units, respectively, both reflecting the build-out of Pulte's one
remaining Active Adult community and the ramping up of new communities for
the joint venture.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Financial Services Operations:
The Company conducts its financial services operations principally through
Pulte Mortgage Corporation (PMC), the Company's mortgage banking subsidiary,
and to a limited extent through Pulte Financial Companies, Inc. (PFCI), the
Company's financing subsidiary. Pre-tax income (loss) of the Company's
financial services operations for the three and six month periods ended June
30, 1999 and 1998, is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
----- ------- ---- ----
Pre-tax income (loss):
Mortgage banking ....... $5,079 $3,577 $10,645 $ 5,988
Financing activities ... (2) (17) 1,633 (40)
------ ------ ------- -------
Pre-tax income ..... $5,077 $3,560 $12,278 $ 5,948
====== ====== ======= =======
Mortgage Banking:
The following table presents mortgage origination data for Pulte Mortgage:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Total originations:
Loans ........................... 3,423 3,186 6,532 5,558
======== ======== ======== ========
Principal ....................... $474,200 $416,400 $896,500 $721,800
======== ======== ======== ========
Originations for Pulte customers:
Loans ........................... 2,569 2,297 4,790 4,092
======== ======== ======== ========
Principal ....................... $367,400 $311,200 $679,700 $546,100
======== ======== ======== ========
Mortgage unit origination volume for the three and six month periods ended
June 30, 1999, increased 7% and 18%, respectively, over the comparable 1998
periods, driven primarily by a 17% increase in unit sales realized in Pulte's
domestic homebuilding operations and a 19% increase in origination volume in
the retail sector. Refinancings approximated 7% of total loan originations
for the six month period ended June 30, 1999. At June 30, 1999, loan
application backlog increased 36% to $710,000 as compared with $522,000 at
June 30, 1998. Pulte continues to hedge its mortgage pipeline in the normal
course of its business and there has been no change in Pulte Mortgage's
strategy or use of derivative financial instruments in this regard.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is required to be adopted in years
beginning after June 15, 2000, with earlier adoption encouraged. This
Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted
to fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. Pulte Mortgage, in the
normal course of business, uses derivative financial instruments to meet the
financing needs of its customers and reduce its own exposure to fluctuations
in interest rates. The Company plans to adopt this statement on January 1,
2001, but has not yet determined what effect Statement No. 133 will have on
its earnings and financial position.
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Financial Services Operations (continued):
During the three and six month periods ended June 30, 1999, origination fees
increased 67% and 62%, respectively. This increase is attributable to higher
revenues per loan and an increase in non-funded (brokered) loans. Pricing and
marketing gains increased 13% and 34%, respectively, primarily the result of
increased funded mortgage originations and increased servicing retained loan
production. Net interest income increased 54% and 58%, respectively, due to
higher funded production and a widening of the yield curve.
Financing Activities:
The Company's secured financing operations, which had been conducted by the
limited-purpose subsidiaries of Pulte Financial Companies, Inc. (PFCI),
included the acquisition of mortgage loans and mortgage-backed securities
financed principally through the issuance of long-term bonds secured by such
mortgage loans and mortgage-backed securities. During the first quarter of
this year, PFCI recognized a net gain of approximately $1,700 in connection
with the early redemption of its remaining mortgage-backed bond portfolio.
Corporate:
Corporate is a non-operating business segment whose primary purpose is to
support the operations of the Company's subsidiaries as the internal source
of financing, to develop and implement strategic initiatives centered on new
business development and operating efficiencies, and to provide the
administrative support associated with being a publicly traded entity. The
Company views the corporate function as a form of research and development,
by exploring and nurturing strategic initiatives centered on new business and
product development. As a result, the corporate segment's operating results
will vary from quarter to quarter as these strategic initiatives evolve.
The following table presents corporate results of operations for the three
and six months ended June 30, 1999 and 1998:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Net interest expense............... $5,197 $4,252 $ 9,641 $ 7,716
Other corporate expenses, net...... 3,714 3,152 7,006 3,983
------ ------ ------- -------
Loss before income taxes........... $8,911 $7,404 $16,647 $11,699
====== ====== ======= =======
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Corporate (continued):
Pre-tax loss of the Company's corporate business segment increased $1,507 and
$4,948, respectively, from the three and six month periods ended June 30,
1998. The increase in pre-tax loss for the quarter primarily reflects an
increase of approximately $1,000 in the corporate net interest spread.
Year-to-date results reflect an increase of approximately $2,000 in the
corporate net interest spread, and an increase in other corporate expenses,
net, of approximately $3,000. Increases in the corporate net interest spread
are attributed to increased borrowings for additional capital investment,
primarily in the domestic homebuilding operations. Other corporate expenses,
net in 1998 were reduced by the net of one-time events, including a gain of
approximately $5,000 on the sale of Expression Homes, partially offset by
provisions of $3,500 for the write down of certain projects and R&D
investments.
Restructuring:
During the fourth quarter of 1997, a pre-tax charge of $20,000 was recorded
in connection with the reorganization of the Company's operations. This
reorganization entailed:
o the realignment of homebuilding operations into business lines which focus
on specific customer segments;
o the creation of a mortgage applications center, which increased overhead
leverage by moving Pulte Mortgage's loan officers from field branches to a
central location in Denver, Colorado; and
o the right-sizing of its workforce on a company-wide basis.
The 1997 restructuring charge included $11,787 of separation and other costs
for approximately 150 employees, $7,000 of asset impairments and $1,213 of
other costs, principally for office leases. The after-tax effect of this
charge was $12,300 or $.28 per diluted share (adjusted for the effect of the
Company's 2-for-1 stock split effective June 1, 1998). As of June 30, 1999,
the Company has severed employment with approximately 150 employees.
The following table displays a rollforward of the liabilities accrued for the
Company's restructuring from December 31, 1998 to June 30, 1999:
Balance at 1999 Balance at
December 31, Reserve June 30,
Type of Cost 1998 Uses 1999
- ------------ ------------ -------- ----------
Homebuilding operations:
Employee separation and other $ 1,502 $ (584) $ 918
Other 255 (91) 164
------- ------- -------
1,757 (675) 1,082
------- ------- -------
Mortgage Banking operations:
Employee separation and other 337 (121) 216
Other 79 (58) 21
------- ------- -------
416 (179) 237
------- ------- -------
Corporate:
Employee separation and other 922 (318) 604
------- ------- -------
$ 3,095 $(1,172) $ 1,923
======= ======= =======
The remaining accrual for restructuring costs at June 30, 1999 primarily
relates to longer term severance agreements and deferred compensation
liabilities which are expected to be fully paid by December 31, 2000.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Liquidity and Capital Resources:
Continuing Operations:
The Company's net cash used in operating activities amounted to $127,132,
reflecting an increase in the use of operating funds as compared with the
same period last year. This increase is primarily attributable to increases
in inventory levels resulting from land purchases offset by a decrease in
PMC's holdings of residential mortgage loans available-for-sale, increases in
net income and other assets and an increase in accounts payable. Net cash
provided by investing activities increased to $28,809 primarily reflecting
the sale of the underlying collateral of PFCI's mortgage-backed bond
portfolio which was redeemed during the first quarter of this year. Cash used
in 1998 investing activity primarily reflects the Company's purchase of
Radnor Homes. Net cash used in financing activities decreased to $1,658 in
1999. 1999 activity reflects PFCI's redemption of its remaining
mortgage-backed bond portfolio, payments on collateralized short-term debt
related to PMC's residential mortgage loan portfolio and other debt, offset
by increased borrowings under the Company's revolving credit facility.
The Company finances its land acquisitions and its development and
construction activities from internally generated funds and existing credit
agreements. The Company had $112,800 of borrowings under its $210,000
unsecured revolving credit facility at June 30, 1999. Pulte Mortgage provides
mortgage financing for many of its home sales and uses its own funds and
borrowings made available pursuant to various committed and uncommitted
credit arrangements which, at June 30, 1999, amounted to $275,000, an amount
deemed adequate to cover foreseeable needs. There was approximately $137,000
of borrowings outstanding under the $275,000 PMC arrangement at June 30,
1999. Mortgage loans originated by PMC are subsequently sold to outside
investors. The Company anticipates that there will be adequate mortgage
financing available for purchasers of its homes.
The Company's income tax liabilities are affected by a number of factors.
During the second quarter, the Company revised its estimate of the effective
tax rate for 1999 to 37.5% from a previously reported estimate of between 39%
and 40%. The reduced income tax rate primarily relates to a lower effective
state tax rate and the favorable resolution of various state income tax
matters, including the utilization of certain state net operating loss
carry-forwards. The Company expects its effective tax rate to increase to
38.5% in 2000.
At June 30, 1999, the Company had cash and equivalents of $25,217 and total
long-term indebtedness of $540,944. Long-term indebtedness includes $487,593
of unsecured senior notes, a $22,405 unsecured senior subordinated debenture,
$21,000 unsecured promissory note and other Pulte limited recourse debt of
$9,946. The $22,405 unsecured senior subordinated debenture was redeemed on
July 15, 1999. The first installment of $7,000 due under the $21,000 unsecured
promissory note, originally due on July 1, 1999, was, at the option
of the noteholder, extended to 2000. Included in discontinued operations is
First Heights advances of $760. The Company also has other non-recourse
short-term notes payable of $51,765.
Sources of the Company's working capital at June 30, 1999 include its cash
and equivalents, its $210,000 committed unsecured revolving credit facility
and its $10,000 uncommitted bank credit arrangement. In July, the Company
arranged for an additional $200,000 credit facility with a consortium of
banks which is expected to close in early September. The Company has also
obtained a $50,000 bridge loan with Bank of America for the purpose of having
available funds during the period prior to the close of the $200,000 credit
facility. This bridge loan will mature upon the close of the $200,000 credit
facility. During the remainder of 1999, management anticipates projected
homebuilding and corporate working capital requirements will be principally
funded with internally generated funds and the previously mentioned credit
facilities. The Company routinely monitors current operational requirements
and financial market conditions to evaluate the utilization of available
financing sources, including securities offerings.
Discontinued Operations:
The Company's remaining investment in First Heights at June 30, 1999
approximated $28,600. Since the acquisition of First Heights, the Company's
income taxes have been significantly impacted by its thrift operations,
principally because
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Liquidity and Capital Resources (continued):
Discontinued Operations (continued):
payments received from the FSLIC Resolution Fund (FRF) were exempt from
federal income taxes. The Company's thrift assets are subject to regulatory
restrictions and a court order and thus are not available for general
corporate purposes. The final liquidation of the Company's thrift operations
is dependent on the final resolution of outstanding matters with the Federal
Deposit Insurance Corporation (FDIC), manager of FRF. As discussed in Note 4
of Notes to Condensed Consolidated Financial Statements, the Company
vigorously disagrees with the Final Judgment entered by the United States
District Court and has appealed to the Sixth Circuit Court of Appeals. The
Company has posted a bond in the amount of $110 million. Based upon the
Company's assessment of its legal position in the District Court litigation
with the FDIC, as well as the expected duration of the legal process in this
case, the Company does not currently believe that the judgment ordered by the
District Court against Pulte Diversified Companies, Inc. and First Heights
will have a material impact on the Company's liquidity.
Inflation
The Company and the homebuilding industry in general, may be adversely
affected during periods of high inflation, because of higher land and
construction costs. Inflation also increases the Company's financing, labor
and material costs. In addition, higher mortgage interest rates significantly
affect the affordability of permanent mortgage financing to prospective
homebuyers. The Company attempts to pass through to its customers any
increases in its costs through increased sales prices and, to date, inflation
has not had a material adverse effect on the Company's results of operations.
However, there is no assurance that inflation will not have a material
adverse impact on the Company's future results of operations.
Information Technology and Year 2000 Compliance:
An integral part of the Company's operating strategy is to provide Pulte
management and employees the information systems needed to support the
Company's current operations and future growth, a strategy supported by
Pulte's investment in technology, which in 1998, and forecasted for 1999,
will exceed $15,000 in annual spending. Management believes that substantial
progress has been made toward the goal of developing an integrated set of
systems to support marketing, land and product development, home sales,
construction, service, and comprehensive financial management.
A critical component of this integrated systems effort involves replacement
of the Company's existing accounting systems. This new system is designed to
enhance access to and reporting of operating results and other financial
measurements, as well as substantially resolve the Company's exposure to Year
2000 risk (the inability of certain computer software, hardware and other
equipment with embedded computer chips to properly process two-digit
year-date codes after 1999). To address the millennium date change issue, the
Company's homebuilding and corporate operations performed risk assessments of
information technology (IT), non-IT (embedded technology such as
microprocessors in office equipment and facilities) and essential
homebuilding supplier/contractor relationships. The Company's mortgage
banking operation also completed a Year 2000 risk assessment for both
internal information systems and external relationships.
The Company's State of Readiness
The chart illustrated below summarizes the Company's current major
information systems and management's current assessment of the potential risk
of Year 2000 issues. The status of each major information technology (IT)
activity is reported by "phase" as defined below.
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Information Technology and Year 2000 Compliance (continued):
The Company's State of Readiness (continued)
Phase 1 Assessment Exposure (analysis and testing)
Phase 2 Problem correction and validation
Phase 3 Implementation/rollout of upgrades and corrections
Phase 4 Communication with affected parties
<TABLE>
<CAPTION>
1999 Expected Date
of Completion
IT related Systems IT Dependency Phase/Status (all Phases)
- ------------------ ------------- ------------ ------------------
<S> <C> <C> <C>
1. Integrated Business Systems
- Financial accounting High 3 November 30
- Sales & Construction support Medium 3 October 31
- Service management Low Complete Complete
- Payroll and Benefits administration High Complete Complete
2. Datacenter Equipment & Operations High Complete Complete
3. Data and Voice Communications Networks High 3 September 30
4. Desktop PC's, incl. electronic mail, except Medium 3 October 31
leased equipment
5. Key suppliers
- Banking providers Medium 2 October 31
- Field trade contractors and
material suppliers Low 4 October 31
</TABLE>
Non-IT Systems
The Company does not own or operate any material "non-IT" systems,
facilities, or industrial equipment that it believes might be adversely
affected by the Year 2000 issue. All administrative office premises are
leased, and are typically low-rise facilities in major metropolitan areas.
All telephone systems and electronic office equipment are being assessed and
corrected as part of Project 3 listed above.
Supplier/Contractor Relationships
Customer deliverables are not critically reliant on information technology.
In markets where contracts and legal correspondence are computer generated,
final documents are always printed in hard-copy form for signature. Should
existing computerized sales systems be rendered inoperable for any reason,
sales personnel are currently trained to prepare all required customer
documentation manually. In addition, standard Pulte contract language does
not permit customers to cancel purchases for nominal delays.
The Company's trade contractors/suppliers in general are not highly reliant
on information systems for delivery of service or materials to the job-site,
as is the case for the majority of the homebuilding industry. Day-to-day
business communication of printed schedules and home specification
information typically occurs via fax or manual exchange in printed form (as
opposed to electronically, e.g., via EDI data communications). Pulte will be
providing Year 2000 risk assessment guidelines to its field operations and
purchasing managers during the year to ensure that any predictable Year
2000-related issues can be identified and resolved, or alternative supplier
relationships
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
($000's omitted)
Information Technology and Year 2000 Compliance (continued):
established with compliant service providers. Current Pulte operating policy
normally requires that supply relationships be established locally with at
least two alternative sources for all building tasks and materials supply.
The Company has either already exchanged Year 2000 readiness information with
all national contract suppliers, or will have completed this activity by the
end of this year. Such Year 2000 readiness information has already been
exchanged with all of the Company's major banks. Verification testing will be
performed with each major bank to the extent possible, with full
implementation scheduled by October 31, 1999.
The Risks of the Company's Year 2000 Issues and The Company's Contingency
Plans
The major focus of the Company's information systems efforts in 1999 will be
to complete the nationwide roll-out of its new financial accounting and
operating systems. Management believes that this initiative is properly
resourced and expects this roll-out to be completed by November 30, 1999.
While management believes it unlikely, it is possible, on a
worst-case-scenario basis, that some markets may not be completely
transitioned by year end. Should this occur, the Company plans to resort to
the use of manual business tracking processes which could delay normal
day-to-day back office activities, but which would not interfere with the
Company's ability to complete the construction of homes or close home sales.
This worst-case scenario, is therefore, not expected to have a material
adverse effect upon the Company's liquidity, financial position or results of
operations.
While there can be no assurance that no legal claims will arise due to
perceived or real Year 2000 issues, the Company does not expect a material
impact on its liquidity, financial position or results of operations caused
by internal Year 2000 issues or by possible claims asserted by third parties.
Costs Related to Year 2000
The cumulative portion of total IT spending which has been capitalized for
the Company's internally-developed business software, a project which
comprises the majority of the Year 2000 effort, approximated $6,600 at June
30, 1999. The Company anticipates spending an additional $4,000 this year to
complete the project. In addition to the software development costs, the
Company expects to incur additional expenses to be Year 2000 compliant;
however, the Company does not expect the cost for such compliance to have a
material impact on its liquidity, financial position or results of
operations.
36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to interest rate risk on its long term debt. The
Company seeks to minimize its interest rate exposure by using variable rate
financing; however, the Company runs the risk of interest rate declines with
respect to its fixed rate long term corporate debt instruments. The following
table sets forth, as of June 30, 1999, the Company's long term debt
obligations, principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market value:
<TABLE>
<CAPTION>
($000's omitted)
Fair
There- Value
1999 2000 2001 2002 2003 after Total 6/30/99
---- ---- ---- ---- ---- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive liabilities:
Fixed interest rate debt:
Pulte Corporation public
debt instruments ............. $ -- -- -- -- 100,000 390,000 $490,000 $475,953
Average interest rate .......... -- -- -- -- 7.00% 7.74% 7.61% --
Pulte Diversified Companies,
Inc., unsecured promissory
note ......................... $ -- 14,000 7,000 -- -- -- $ 21,000 $ 21,000
Average interest rate .......... -- 8.00% 8.00% -- -- -- 8.00% --
Pulte Home Corporation
other non-recourse
debt ......................... $22,405 -- -- -- -- -- $ 22,405 $ 22,900
Average interest rate .......... 10.13% -- -- -- -- -- 10.13% --
Pulte Home Corporation
other non-recourse
debt ......................... $ 5,225 3,193 1,500 28 -- -- $ 9,946 $ 9,946
Average interest rate .......... 10.32% 10.53% 10.00% 10.00% -- -- 10.34% --
</TABLE>
PMC, operating as a mortgage banker, is also subject to interest rate risk.
Interest rate risk begins when PMC commits to lend money to a customer at
agreed upon terms, (i.e. commit to lend at a certain interest rate for a
certain period of time). The interest rate risk continues through the loan
closing and until the loan is sold to an investor. During 1999, this period
of interest rate exposure averaged approximately 60 days. In periods of
rising interest rates, the length of exposure will generally increase due to
customers locking in an interest rate sooner as opposed to letting the
interest rate float.
In order to minimize the interest rate risk PMC does two things; it finances
the loans via a variable rate borrowing agreement tied to the Federal Funds
rate and it hedges its loan commitments and closed loans through derivative
financial instruments with off-balance sheet risk. These financial
instruments include cash forward placement contracts on mortgage-backed
securities, whole loan investor commitments, options on treasury future
contracts, and options on cash forward placement contracts on mortgage-backed
securities. PMC does not use any derivative financial instruments for trading
purposes.
Hypothetical changes in the fair values of PMC's financial instruments
arising from immediate parallel shifts in long-term mortgage rates of plus
50, 100 and 150 basis points would not be material to the Company's financial
results.
The Company's aggregate net investment in Mexico approximated $33,600 at
June 30, 1999. The Company estimates that this investment, which is exposed to
foreign currency exchange risk, could devalue by as much as $2,000 during the
remainder of 1999, assuming a hypothetical monthly devaluation of the Mexican
peso against the U.S. dollar of one percent in each month of 1999.
37
PART 1. FINANCIAL INFORMATION (continued)
PULTE CORPORATION
Forward-Looking Statements:
As a cautionary note, except for the historical information contained herein,
certain matters discussed in Item 2., "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Item 3., "Quantitative
and Qualitative Disclosures About Market Risk", are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Such matters involve risks and uncertainties, including: the
Company's exposure to certain market risks, changes in economic conditions,
tax and interest rates, increases in raw material and labor costs, weather
conditions, and general competitive factors, that may cause actual results to
differ materially; its ability to resolve all outstanding matters related to
First Heights (including the outcome of the Company's appeal in the District
Court litigation with the FDIC), its ability to correct all material
applications addressing the Year 2000 problem; as well as, the ability of the
Company's vendors to correct all material applications addressing the Year
2000 problem, and the Company's assessment of the Year 2000 problem's impact
on its financial results and operations.
38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
First Heights Related Litigation: Update on Lawsuit Filed on July 7,
1995 in the United States District Court, Eastern District of Michigan
(the "Court"), by the Federal Deposit Insurance Corporation ("FDIC")
against the Company, Pulte Diversified Companies, Inc. and First Heights
Bank (collectively, "the Pulte Parties") (the "District Court Case").
See Note 4, Notes to Condensed Consolidated Financial Statements, which
is contained in Part I, Item 1, of this Quarterly Report on Form 10-Q
and which is incorporated by reference into this response.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on May 6, 1999. The
following matters were considered and acted upon, with the results
indicated below:
Shares Shares
Election of Directors Voted For Abstaining
--------------------- --------- ----------
The election of Director for term
expiring 2002
Robert K. Burgess 38,370,236 339,823
Ralph L. Schlosstein 38,333,235 376,824
John J. Shea 38,333,635 376,424
Item 5. Other Information
The Company must receive notice of any proposals of shareholders that
are intended to be presented at the Company's 2000 Annual Meeting of
Shareholders, but that are not intended to be considered for inclusion
in the Company's Proxy Statement and Proxy related to that meeting, no
later than February 15, 2000 to be considered timely. Such proposals
should be sent to the Company's Secretary at the Company's offices, 33
Bloomfield Hills Parkway, Suite 200, Bloomfield Hills, MI 48304 by
certified mail, return receipt requested. If the Company does not have
notice of the matter by that date, the Company's form of proxy in
connection with that meeting may confer discretionary authority to vote
on that matter, and the persons named in the Company's form of proxy
will vote the shares represented by such proxies in accordance with
their best judgment.
Item 6. Exhibits
Page herein or incorporated
Exhibit number and description by reference from
------------------------------ ---------------------------
(27) Financial Data Schedule
All other exhibits are omitted from this report because they are not
applicable.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PULTE CORPORATION
/s/ ROGER A. CREGG
-----------------------------
Roger A. Cregg
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ VINCENT J. FREES
-----------------------------
Vincent J. Frees
Vice President and Controller
(Principal Accounting Officer)
Date: August 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1999
AND FOR THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 25,217
<SECURITIES> 0
<RECEIVABLES> 67,732
<ALLOWANCES> 0
<INVENTORY> 1,723,814
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,467,632
<CURRENT-LIABILITIES> 0
<BONDS> 540,944<F1>
<COMMON> 432
0
0
<OTHER-SE> 979,759
<TOTAL-LIABILITY-AND-EQUITY> 2,467,632
<SALES> 1,488,140<F2>
<TOTAL-REVENUES> 1,516,619
<CGS> 1,235,908<F2>
<TOTAL-COSTS> 1,421,153
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,574<F3>
<INCOME-PRETAX> 97,626
<INCOME-TAX> 36,609
<INCOME-CONTINUING> 61,017
<DISCONTINUED> 429
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 1.42
<EPS-DILUTED> 1.38
<FN>
<F1> Bonds are comprised of subordinated debentures and senior notes.
<F2> Relates to homebuilding operations.
<F3> Relates to homebuilding operations. The Company capitalizes interest
cost into homebuilding inventories and charges the interest to
homebuilding interest expense when the related inventories are sold.
</TABLE>
