-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KdRp6bVh4tUDTqcuKUzn6gLf4ynR+UfWuixrzZVLy/LTCTY71l5qLiYxP2F5E/+j JkViAXv17gsylkSDSdthbA== 0000950170-99-000289.txt : 19990302 0000950170-99-000289.hdr.sgml : 19990302 ACCESSION NUMBER: 0000950170-99-000289 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LENNAR CORP CENTRAL INDEX KEY: 0000058696 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 591281887 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19984 FILM NUMBER: 99552828 BUSINESS ADDRESS: STREET 1: 700 NW 107TH AVE CITY: MIAMI STATE: FL ZIP: 33172 BUSINESS PHONE: 3055594000 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 30, 1998 Commission file number 1-11749 LENNAR CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 59-1281887 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 NORTHWEST 107TH AVENUE, MIAMI, FLORIDA 33172 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 559-4000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Name of Each Exchange Title of Each Class on Which Registered - ------------------- ------------------- Common Stock, par value 10 cents New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of February 23, 1999, registrant had outstanding 48,417,506 shares of common stock and 9,848,562 shares of Class B common stock (which can be converted into common stock). Of the total shares outstanding, 47,988,014 shares of common stock and 29,701 shares of Class B common stock, having a combined aggregate market value (assuming the Class B shares were converted) on that date of $1,152,425,160, were held by non-affiliates of the registrant. Documents incorporated by reference: Related Section Documents - -------------------------------------------------------------------------------- II Pages 18 through 48 of the Annual Report to Stockholders for the year ended November 30, 1998. III Definitive Proxy Statement to be filed pursuant to Regulation 14A on or before March 30, 1999. PART I ITEM 1. BUSINESS. GENERAL DEVELOPMENT OF BUSINESS Lennar Corporation (together with its subsidiaries, the "Company") is one of the nation's premier homebuilders and is a provider of residential financial services. The Company's homebuilding operations include the sale and construction of single-family attached and detached homes, as well as the purchase, development and sale of residential land. The purchase, development and sale of residential land is conducted through its own efforts and its partnership interests. The financial services operations provide mortgage financing, title insurance and closing services for Lennar homebuyers and others; acquire, package and resell residential mortgage loans and mortgage-backed securities, perform mortgage loan servicing activities and provide cable television and alarm monitoring services to residents of Lennar communities and others. On October 31, 1997, the Company (i) distributed to the Company's stockholders all of the stock of LNR Property Corporation ("LNR"), to which the Company had transferred its commercial real estate investment and management activities, (ii) acquired Pacific Greystone Corporation through a merger and (iii) transferred a portion of its land inventory to Lennar Land Partners, of which the Company owns 50% and LNR owns 50%. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company operates in two industry segments - homebuilding and financial services. The financial information related to these industry segments and the discontinued Investment Division segment is contained in the financial statements incorporated by reference to pages 28 through 46 of the Company's 1998 Annual Report to Stockholders. NARRATIVE DESCRIPTION OF BUSINESS HOMEBUILDING The Company and its predecessor have been building homes since 1954. The Company believes that since its acquisition of Development Corporation of America in 1986, it has delivered more homes in Florida each year than any other homebuilder. The Company has been building homes in Arizona since 1972, where it currently is one of the leading homebuilders. In 1991, the Company began building homes in Dallas, Texas. In 1992, it started homebuilding operations in Houston, Texas. During 1995, the Company entered the California homebuilding market through the acquisition of Bramalea California, Inc. and expanded in this market in 1996 through the acquisition of Renaissance Homes, Inc. and through several partnership investments. During 1996, the Company significantly expanded its operations in Texas with the acquisition of the assets and operations of Houston-based Village Builders (a homebuilder) and Friendswood Development Company (a developer of master-planned communities). During 1997, the Company continued its expansion in California through homesite acquisitions and additional partnership investments. Additionally during 1997, the Company further expanded its operations in the California and Arizona homebuilding markets and entered the Nevada homebuilding market with the acquisition of Pacific Greystone Corporation. During 1998, the Company acquired the properties of two California homebuilders, ColRich Communities and Polygon Communities, and acquired a Northern California homebuilder, Winncrest Homes. The Company has constructed and sold approximately 151,000 homes to date. The Company's homebuilding activities in Florida are principally conducted through Lennar Homes, Inc. In Arizona, these activities are conducted through Lennar Homes of Arizona, Inc. and Greystone Homes, Inc. In Texas, these activities are conducted through two subsidiaries, one of which does business as Lennar Homes of Texas, Inc. and Houston Village Builders, Inc. Homebuilding activities in California are principally conducted through Lennar Homes of California, Inc., Lennar Renaissance, Inc., Greystone Homes, Inc. and Winncrest Homes. In Nevada, these activities are conducted through Greystone Homes, Inc. 1 The Company, through its own efforts and its partnership interests, is involved in all phases of planning and building in its residential communities, including land acquisition, site planning, preparation and improvement of land, and design, construction and marketing of homes. The Company subcontracts virtually all segments of development and construction to others. The Company primarily sells single-family attached and detached homes. The homes are targeted primarily at first-time homebuyers, move-up homebuyers and, in some communities, active adults. The average sales price of a Lennar home was $194,000 in fiscal 1998. CURRENT HOMEBUILDING ACTIVITIES The table on the following page summarizes information about the Company's recent homebuilding activities: 2
HOMEBUILDING ACTIVITIES HOMESITES AT NOVEMBER 30, 1998 -------------------------------------- Homes delivered Homes completed or in years ended under construction November 30, ----------------------- Sold homes ----------------------------- Available for not yet Region 1998 1997 1996 Sold(1) sale started(1) - ------------------- --------- --------- --------- ---------- ------------ ---------- Florida 3,761 3,367 3,363 825 488 719 California 3,029 587 58 1,123 619 25 Texas 2,484 2,075 1,832 575 599 128 Arizona/Nevada 1,503 673 715 479 75 226 --------- --------- --------- ---------- ------------ ---------- Totals 10,777 6,702 5,968 3,002 1,781 1,098 ========= ========= ========= ========== ============ ==========
HOMESITES AT NOVEMBER 30, 1998 -------------------------------------------------------------------- LENNAR CORPORATION PARTNERSHIPS ------------------------------------------------------------------ Estimated number Estimated number of homes that could of homes that could be constructed on be constructed on land land currently owned currently owned or or controlled(2)(4) controlled(2)(3)(4)(5) Total ------------------------ -------------------------- owned and Region Owned Controlled Owned Controlled controlled - ------------------- ---------- ------------- ------------- ----------- ----------- Florida 6,600 2,800 17,000 2,800 29,200 California 12,800 800 14,600 6,500 34,700 Texas 6,200 900 4,300 -- 11,400 Arizona/Nevada 2,900 1,100 600 -- 4,600 ---------- ------------- -------------- ----------- ---------- Totals 28,500 5,600 36,500 9,300 79,900 ========== ============= ============== =========== ==========
Notes: (1) Although firm contracts relating to these homes were executed, there can be no assurance that purchasers will meet their obligations under the contracts. (2) Based on current management estimates, which are subject to change. (3) As of November 30, 1998, one of the Company's partnerships had equity interests in other partnerships that owned and controlled approximately 10,600 homesites for sale to the Company and other builders. (4) Includes homesites that are currently designated for sale to other builders. (5) Represents partnerships and similar entities in which the Company has less than a controlling interest and are accounted for by the equity method. 3 MANAGEMENT AND OPERATING STRUCTURE The Company balances its local operating structure with centralized corporate-level management. The Company's local managers, who have significant experience in the homebuilding industry generally and in their respective markets, are responsible for operating decisions regarding land identification, home design, construction and marketing. Decisions related to overall Company strategy, acquisitions of land and businesses, financing and disbursements are centralized at the corporate level. PARTNERSHIPS AND SIMILAR ENTITIES The Company views partnerships and similar entities as a means to both expand its market opportunities and manage its risk profile. Typically, the Company acts as the general partner and the day-to-day manager. In October 1997, the Company, directly and through LNR, transferred to Lennar Land Partners, which is 50% owned by the Company and 50% owned by LNR, parcels of land or interests in land and other assets which had a total book value on the Company's books of approximately $372.4 million. The Company has an agreement with Lennar Land Partners under which, for a fee, the Company administers all its day-to-day activities, including overseeing planning and development of properties and overseeing sales of land to the Company and other builders. The Company is reimbursed for costs incurred related to these activities and certain other costs incurred on behalf of Lennar Land Partners. Such reimbursements totaled $7.7 million in 1998. In addition, the Company, in the ordinary course of business, purchases developed land at market prices from Lennar Land Partners. During the year ended November 30, 1998, Lennar Land Partners had land sale revenues of $224 million, of which $91 million was from sales to the Company. An Independent Directors Committee, comprised of non-employee members of the Board of Directors of the Company and LNR, approves significant transactions of Lennar Land Partners. PROPERTY ACQUISITION The Company continuously considers the purchase of, and from time to time acquires, land for its development and sales programs. These acquisitions may be made directly or through the Company's partnership interests. The Company generally does not acquire land for speculation. In some instances, the Company acquires land by acquiring options enabling it to purchase parcels as they are needed. Although some of the Company's land is held subject to purchase money mortgages, most of the Company's land is not subject to mortgages. The majority of land acquired by partnerships is subject to purchase money mortgages. CONSTRUCTION AND DEVELOPMENT The Company supervises and controls the development and building of its own residential communities. It employs subcontractors for site improvements and virtually all of the work involved in the construction of homes. In almost all instances, the arrangements between the Company and the subcontractors commit the subcontractors to complete specified work in accordance with written price schedules. These price schedules normally change to meet changes in labor and material costs. The Company does not own heavy construction equipment and generally only has a labor force used to supervise development and construction and perform routine maintenance and minor amounts of other work. The Company generally finances construction with its own funds or borrowings under its unsecured working capital lines. 4 MARKETING The Company generally has an inventory of homes under construction. A majority of these homes are sold (i.e., the Company has received executed sales contracts and deposits) before the Company starts construction. The Company employs sales associates who are paid salaries, commissions or both to make onsite sales of the Company's homes. The Company also sells through independent brokers. The Company advertises its residential communities through local media and sells primarily from models that it has designed and constructed. In addition, the Company advertises its active adult communities in areas where potential active adults live. MORTGAGE FINANCING The Company's financial services subsidiaries make conventional, FHA-insured and VA-guaranteed mortgage loans available to qualified purchasers of the Company's homes. Because of the availability of mortgage loans from the Company's financial services subsidiaries, as well as independent mortgage lenders, the Company believes access to financing has not been, and is not, a significant problem for most purchasers of the Company's homes. QUALITY SERVICE The Company employs a process which is intended to provide a positive atmosphere for each customer throughout the pre-sale, sale, building, closing and post-closing periods. The participation of sales representatives, on-site construction supervisors and post-closing customer personnel, working in a team effort, is intended to foster the Company's reputation for quality service and ultimately lead to enhanced customer retention and referrals. COMPETITION The housing industry is highly competitive. In its activities, the Company competes with numerous developers and builders in and near the areas where the Company's communities are located, including homebuilders with nationwide operations. Competition is on the basis of location, design, quality, amenities and price. The Company is the largest homebuilder in Florida and a leading homebuilder in California, Texas, Arizona and Nevada. Some of the Company's principal competitors include Kaufman and Broad Home Corporation, Centex Corporation, D.R. Horton, Inc., Pulte Corporation and U.S. Home Corporation. FINANCIAL SERVICES The Company's financial services subsidiaries provide mortgage financing, title insurance and closing services for Lennar homebuyers and others; acquire, package and resell residential mortgage loans and mortgage-backed securities; perform mortgage loan servicing activities and provide cable television and alarm monitoring services to residents of Lennar communities and others. MORTGAGE ORIGINATION Through a financial services subsidiary, Universal American Mortgage Company, the Company provides conventional, FHA-insured and VA-guaranteed mortgage loans to buyers of the Company's homes and others from offices located in Florida, California, Arizona, Texas and Nevada. In 1998, loans to buyers of the Company's homes represented approximately 77% of the Company's $1.0 billion of loan originations. The Company sells the loans it originates into the secondary mortgage market, generally on a non-recourse basis, and retains most of the servicing rights. The Company has an interest rate risk management policy under which it hedges its interest rate locked loan commitments and loans held for sale against exposure to interest rate fluctuations. The Company finances its loans held for sale with borrowings under the financial services subsidiaries' $200 million line of credit (secured by the loans and by certain servicing rights) or from Lennar Corporation when, on a consolidated basis, this enables the Company to minimize its overall cost of funds. 5 MORTGAGE SERVICING The Company generates earnings from servicing loans originated or acquired by its financial services subsidiaries. The Company services loans for the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) and other mortgage investors. At November 30, 1998, it had a servicing portfolio of approximately 41,000 loans with an unpaid principal balance of approximately $3.2 billion. TITLE INSURANCE AND CLOSING SERVICES The Company arranges title insurance for, and provides closing services to, buyers of the Company's homes and others. It provided these services in connection with approximately 123,000 real estate transactions during 1998. The Company provides these services through Universal Title Insurors in Florida, Regency Title in Texas, TitleAmerica Insurance in Florida and Texas and North American Title, which was acquired in 1998, in California, Arizona and Colorado. STRATEGIC TECHNOLOGIES During 1996, the Company formed Strategic Technologies, Inc. to provide cable television and alarm monitoring services to residents of Lennar communities and others. At November 30, 1998, the Company had approximately 5,300 cable television subscribers and approximately 5,300 alarm monitoring customers in Florida and California. OTHER ACTIVITIES The Company has a number of limited-purpose finance subsidiaries which have placed mortgages and other receivables as collateral for various long-term financings. These subsidiaries pay the debt service on the long-term borrowings primarily from the cash flows generated by the related pledged collateral. The Company believes that the cash flows generated by these subsidiaries will be adequate to meet the required debt payment schedules. RELATIONSHIP WITH LNR In connection with the transfer of the Company's commercial real estate investment and management business to LNR, and the spin-off of LNR to the Company's stockholders, the Company entered into an agreement which, among other things, prevents the Company from engaging at least until 2002 in any of the businesses in which LNR was engaged, or anticipated becoming engaged, at the time of the spin-off, and prohibited LNR from engaging, at least until 2002, in any businesses in which the Company was engaged, or anticipated becoming engaged, at the time of the spin-off (except in limited instances in which the activities or anticipated activities of the Company and LNR overlapped). Specifically, the Company is precluded, at least until 2002, from engaging in the business of (i) acquiring and actively managing commercial or residential multi-family rental real estate, other than as an incident to, or otherwise in connection with, their homebuilding business, (ii) acquiring portfolios of commercial mortgage loans or real estate assets acquired through foreclosures of mortgage loans, other than real estate acquired as sites of homes to be built or sold as part of its homebuilding business, (iii) making or acquiring mortgage loans, other than mortgage loans secured by detached or attached homes or residential condominium units, (iv) constructing office buildings or other commercial or industrial buildings, other than small shopping centers, professional office buildings and similar facilities which will be adjuncts to its residential developments, (v) purchasing commercial mortgage-backed securities or real estate asset-backed securities or (vi) acting as a servicer or special servicer with regard to securitized commercial mortgage pools. The Company is not, however, prevented from owning or leasing office buildings in which it occupies a majority of the space; acquiring securities backed by pools of residential mortgages; acquiring an entity which, when it is acquired, is engaged in one of the prohibited activities as an incidental part of its activities; owning as a passive investor an interest of less than 10% of a publicly traded company which is engaged in a prohibited business; acquiring commercial paper or short-term debt instruments of entities engaged in one or more of the prohibited businesses; or owning an interest in, and managing, Lennar Land Partners. 6 Although the Company and LNR are separate companies, Stuart Miller, the Company's President and Chief Executive Officer, is also Chairman of LNR, and Steven Saiontz, one of the Company's Directors, is the Chief Executive Officer and a Director of LNR. In addition, Leonard Miller owns stock which gives him voting control of both companies. There are provisions both in the by-laws of Lennar and in those of LNR requiring approval by an Independent Directors Committee of any significant transactions between the Company and LNR or any of its subsidiaries. The Company leases some office space, including its principal offices, from LNR. The two companies have been sharing certain computers and related equipment and computer service personnel. However, this arrangement expires in 1999. REGULATION Homes and residential communities built by the Company must comply with state and local regulations relating to, among other things, zoning, treatment of waste, construction materials which must be used, density requirements, certain aspects of building design and minimum elevation of properties and other local ordinances. These include laws requiring use of construction materials which reduce the need for energy-consuming heating and cooling systems. These laws and regulations are subject to frequent change and often increase construction costs. In some cases, there are laws which require that commitments to provide roads and other offsite infrastructure be in place prior to the commencement of new construction. The provisions of these laws are usually administered by individual counties and municipalities and may result in additional fees and assessments or building moratoriums. In addition, certain new development projects, particularly in Southern California, are subject to assessments for schools, parks, streets and highways and other public improvements, the costs of which can be substantial. The residential homebuilding industry also is subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. Additionally, the climate and geology of some parts of Florida, California and Texas present risks of natural disasters that could adversely affect the homebuilding industry in those areas in general, and the Company's business in particular. In recent years, several cities and counties in which the Company has developments have approved submission to voters of "slow growth" initiatives and other ballot measures which could impact the affordability and availability of homes and land within those localities. Although many of these initiatives have been defeated, the Company believes that if similar initiatives are introduced and approved, future residential construction by the Company and others within certain cities or counties could be negatively impacted. In order to make it possible for purchasers of some of the Company's homes to obtain FHA-insured or VA-guaranteed mortgages, the Company must construct those homes in compliance with regulations promulgated by those agencies. The Company has registered condominium communities with the appropriate authorities in Florida. Sales in other states would require compliance with laws in those states regarding sales of condominium homes. The Company's title insurance agency subsidiaries must comply with applicable insurance laws and regulations. The Company's mortgage financing subsidiaries must comply with applicable real estate lending laws and regulations. The Company's subsidiaries which underwrite title insurance are licensed in the states in which they do business and must comply with laws and regulations in those states regarding title insurance companies. These laws and regulations include provisions regarding capitalization, investments, forms of policies and premiums. 7 MARKET RISK The table on the following page provides information about the Company's significant derivative financial instruments and other financial instruments used for purposes other than trading that are sensitive to changes in interest rates. For mortgage loans held for sale or disposition, mortgage loans, investments and mortgage notes and other debts payable, the table presents principal cash flows and related weighted average interest rates by expected maturity dates and estimated fair market value at November 30, 1998. Weighted average variable interest rates are based on the variable interest rates at November 30, 1998. For interest rate swaps and hedges, the table presents notional amounts and weighted average interest rates by contractual maturity dates and estimated fair market value at November 30, 1998. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contract. See Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Notes 1, 9 and 15 of Notes to Consolidated Financial Statements in Item 14 for a further discussion of these items and the Company's strategy of mitigating its interest rate risk. 8
Information Regarding Interest Rate Sensitivity Principal (Notional) Amount by Expected Maturity Average Interest Rate ------------------------------------------------------------------- Fair Market Years Ending November 30, Value ---------------------------------------------- There- at November 30, (DOLLARS IN MILLIONS) 1999 2000 2001 2002 2003 after Total 1998 - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Financial Services: Mortgage loans held for sale or disposition, net: Fixed rate $ - - - - - 215.0 215.0 219.4 Average interest rate - - - - - 7.0% - - Mortgage loans and investments: Fixed rate $ 6.8 0.3 1.3 0.4 1.5 16.3 26.6 26.4 Average interest rate 5.8% 8.2% 6.9% 8.2% 6.7% 8.0% - - LIABILITIES Homebuilding: Mortgage notes and other debts payable: Fixed rate $ 13.7 7.7 0.7 0.2 2.5 367.6 392.4 372.8 Average interest rate 6.4% 9.3% 9.3% 10.0% 10.0% 5.3% - - Variable rate $ 1.5 - - 136.7 - - 138.2 138.2 Average interest rate 5.4% - - 6.4% - - - - Financial Services: Notes and other debts payable: Fixed rate $ 0.3 0.3 0.5 - - - 1.1 1.0 Average interest rate 1.2% 0.3% 0.2% - - - - - Variable rate $227.5 1.4 1.4 1.4 0.5 - 232.2 232.2 Average interest rate 6.4% 7.8% 7.8% 7.8% 7.8% - - - OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Homebuilding: Interest rate swaps: Variable to fixed - notional amount $ - - - 200.0 - - 200.0 (6.4) Average pay rate - - - 6.1% - - - - Average receive rate 30-day LIBOR Interest rate hedge: Notional amount $200.0 - - - - - 200.0 (15.6) Average pay rate 5.8% - - - - - - - Average receive rate 10-year U.S. Treasury Note rate
9 CAUTIONARY STATEMENTS Certain statements contained in this Report may be "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such factors include, but are not limited to, changes in general economic conditions, the market for homes generally and in areas where the Company has developments, the availability and cost of land suitable for residential development, materials prices, labor costs, interest rates, consumer confidence, competition, environmental factors and governmental regulations affecting the Company's operations. The following factors, among others, could particularly affect the Company's operations and financial results and cause results to differ from those anticipated by "forward-looking statements" in this Report. REAL ESTATE, ECONOMIC AND CERTAIN OTHER CONDITIONS The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions, such as levels of employment, consumer confidence and income, availability of financing for acquisition, construction and permanent mortgages, interest rate levels and demand for housing. Sales of new homes are also affected by the condition of the resale market for used homes, including foreclosed homes. The residential homebuilding industry has, from time to time, experienced fluctuating lumber prices and supply, as well as shortages of labor and other materials, including insulation, drywall, concrete, carpenters, electricians and plumbers. Delays in construction of homes due to these factors or to inclement weather conditions could have an adverse effect upon the Company's operations. Inflation can increase the cost of building materials, labor and other construction related costs. Conversely, deflation can reduce the value of the Company's inventory and can make it more difficult to include the full cost of previously purchased land in home sale prices. INTEREST RATES AND MORTGAGE FINANCING Virtually all of the purchasers of the Company's homes finance their acquisitions through third-party lenders or the Company's financial services subsidiaries. In general, housing demand is adversely affected by increases in interest rates, housing costs and unemployment and by decreases in the availability of mortgage financing. In addition, various proposals for changes in the federal income tax laws have been discussed, some of which would remove or limit the deduction for home mortgage interest. If effective mortgage interest rates increase and the ability or willingness of prospective buyers to finance home purchases is adversely affected, the Company's operating results may also be negatively affected. The Company's homebuilding activities also are dependent upon the availability and cost of mortgage financing for buyers of homes owned by potential customers permitting those customers to sell their existing homes and purchase homes from the Company. Any limitations or restrictions on the availability of such financing could adversely affect the Company's sales. VARIABILITY OF RESULTS The Company has historically experienced, and in the future expects to continue to experience, variability in operating results on a quarterly basis. Factors which may contribute to this variability include, among others (i) the timing of home closings; (ii) the timing of receipt of regulatory approvals for the construction of homes; (iii) the condition of the real estate market and general economic conditions; (iv) the cyclical nature of the homebuilding industry; (v) the prevailing interest rates and the availability of mortgage financing; (vi) pricing policies of the Company's competitors; (vii) the timing of the opening of new residential communities; (viii) weather and (ix) the cost and availability of materials and labor. The Company's historical financial performance is not necessarily a meaningful indicator of future results and, in particular, the Company expects its financial results to continue to vary from quarter to quarter. 10 DEPENDENCE ON KEY PERSONNEL The success of the Company depends to a significant degree on the efforts of the Company's senior management, especially its president and chief executive officer and other officers. The Company's operations may be adversely affected if one or more members of senior management cease to be active in the Company. The Company has designed its compensation structure and employee benefit programs to encourage long-term employment of executive officers. YEAR 2000 The Company does not believe the financial impact of being sure that all of its computer systems properly recognize the year 2000 will be material. However, it is possible the Company will be adversely affected by failure of vendors, subcontractors, suppliers or others with whom the Company does business to make their computer systems year 2000 compliant. Also, the Company could be adversely affected if governmental agencies are impeded because their computer systems are not year 2000 compliant. For additional information on the Year 2000 issue see Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7. EMPLOYEES At November 30, 1998, the Company employed 4,094 individuals of whom 2,167 related to homebuilding operations and 1,927 related to financial services operations. Some of the subcontractors utilized by the Company may employ members of labor unions. The Company does not have collective bargaining agreements relating to its employees. ITEM 2. PROPERTIES. For information about properties owned by the Company for use in its homebuilding activities, see Item 1. The Company leases and maintains its executive offices, financial services subsidiary headquarters and principal Miami-Dade County, Florida homebuilding office in an office complex built by the Company and now owned by LNR. The leases for these offices expire in 2002. Other Company offices are located in Company-owned communities or in leased space. ITEM 3. LEGAL PROCEEDINGS. The Company and certain subsidiaries are parties to various claims, lawsuits, legal actions and complaints arising in the ordinary course of business. Although the specific allegations in the lawsuits differ, in general the majority of the lawsuits assert that the Company failed to construct buildings in the community involved in accordance with plans and specifications and applicable construction codes, and seek reimbursement for sums allegedly necessary to spend to remedy the alleged construction deficiencies, or assert contract issues or relate to personal injuries. Suits of this type are common within the homebuilding industry. The Company does not believe that these lawsuits or threatened lawsuits will have a material effect upon the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. Information concerning the market data for the Company's common stock and related security holder matters is incorporated by reference to page 48 of the Company's 1998 Annual Report to Stockholders. 11 ITEM 6. SELECTED FINANCIAL DATA. Selected financial data is incorporated by reference to page 18 of the Company's 1998 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management's discussion and analysis of financial condition and results of operations is incorporated by reference to pages 19 through 25 of the Company's 1998 Annual Report to Stockholders. ITEM 7(A). MARKET RISK. For information on the Company's market risk, see Item 1. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Consolidated financial statements and supplementary data about the Company are incorporated by reference to pages 28 through 47 of the Company's 1998 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information about the Company's directors is incorporated by reference to the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 1999 (120 days after the end of the Company's fiscal year). The following people were the executive officers of Lennar Corporation on February 23, 1999:
NAME/POSITION AGE YEAR OF ELECTION ------------- --- ---------------- Stuart A. Miller, President and Chief Executive Officer 41 1997 Bruce E. Gross, Vice President and Chief Financial Officer 40 1997 Marshall H. Ames, Vice President 55 1982 Jonathan M. Jaffe, Vice President 39 1994 David B. McCain, Vice President, General Counsel and Secretary 38 1998 Allan J. Pekor, Vice President 62 1997 Diane J. Bessette, Controller 38 1997 Waynewright Malcolm, Treasurer 35 1997
The year of election represents the year that the executive officer was elected to his/her current position. 12 Mr. Stuart Miller (who is the son of Leonard Miller, the Chairman of the Board of Directors of the Company) has been President and Chief Executive Officer since April 1997. Prior to that, Mr. Miller held various executive positions with the Company and had been a Vice President since 1985. Mr. Miller is also the Chairman of the Board of LNR Property Corporation. Mr. Gross has been Vice President and Chief Financial Officer since 1997. Prior to joining the Company in 1997, Mr. Gross was employed as Senior Vice President, Controller and Treasurer of Pacific Greystone Corporation since its inception in 1991. Mr. Ames has been a Vice President since 1982 and is also a Regional President in the Company's Homebuilding Division. Mr. Jaffe has been a Vice President since 1994 and serves as a Regional President in the Company's Homebuilding Division. Prior to 1994, Mr. Jaffe held executive positions with several of the Company's subsidiaries. Mr. McCain has been employed by the Company since 1998 as Vice President, General Counsel and Secretary. Prior to joining the Company, Mr. McCain was employed at John Alden Asset Management Company for more than 10 years, where he last served as Vice President, General Counsel and Secretary. Mr. Pekor has held various executive positions with the Company since 1979. Mr. Pekor presently serves as Vice President of the Company and has served as President of Lennar Financial Services, Inc. since 1997. Ms. Bessette has been employed by the Company since 1995 and has been the Company's Controller since 1997. Prior to joining the Company, Ms. Bessette was employed as a Financial Senior Manager at the Holson Burnes Group, Inc. and before that, was employed by Price Waterhouse LLP. Mr. Malcolm joined the Company as Treasurer in 1997. Prior to joining the Company, Mr. Malcolm was employed as Director, Finance and Regulatory Affairs at Citizens Utilities Company. ITEM 11. EXECUTIVE COMPENSATION. The information called for by this item is incorporated by reference to the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 1999 (120 days after the end of the Company's fiscal year). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information called for by this item is incorporated by reference to the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 1999 (120 days after the end of the Company's fiscal year). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information called for by this item is incorporated by reference to the Company's definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 1999 (120 days after the end of the Company's fiscal year). 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Report. 1. The following financial statements are incorporated by reference in Item 8:
Page in 1998 Annual Financial Statements Report to Stockholders ------------------- ------------------------- Independent Auditors' Report 26 Consolidated Balance Sheets as of November 30, 1998 and 1997 28 Consolidated Statements of Earnings for the years ended November 30, 1998, 1997 and 1996 29 Consolidated Statements of Cash Flows for the years ended November 30, 1998, 1997 and 1996 30 Consolidated Statements of Stockholders' Equity for the years ended November 30, 1998, 1997 and 1996 32 Notes to Consolidated Financial Statements 33
2. The following financial statement schedule is included in this Report:
Financial Statement Schedule Page in this Report --------------------------- ------------------ Independent Auditors' Report on Schedule 18 II - Valuation and Qualifying Accounts 19
Information required by other schedules has either been incorporated in the financial statements and accompanying notes or is not applicable to the Company. 3. The following exhibits are filed with this Report or incorporated by reference: 3(a). Amended and Restated Certificate of Incorporation, dated April 28, 1998. 3(b). Bylaws - Incorporated by reference to Form 8-K dated October 31, 1997, file number 1-11749. 10(a). Amended and Restated Lennar Corporation 1997 Stock Option Plan - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1997. 10(b). Lennar Corporation 1991 Stock Option Plan - Incorporated by reference to Registration Statement No. 33-45442. 10(c). Lennar Corporation Employee Stock Ownership Plan and Trust - Incorporated by reference to Registration Statement No. 2-89104. 14 10(d). Amendment dated December 13, 1989 to Lennar Corporation Employee Stock Ownership Plan - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1990. 10(e). Lennar Corporation Employee Stock Ownership/401k Trust Agreement dated December 13, 1989 - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1990. 10(f). Amendment dated April 18, 1990 to Lennar Corporation Employee Stock Ownership/401k Plan - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1990. 10(g). Partnership Agreement by and between Lennar Land Partners Sub, Inc. and LNR Land Partners Sub, Inc., dated October 24, 1997 - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1997. 10(h). Separation and Distribution Agreement, dated June 10, 1997, between Lennar Corporation and LNR Property Corporation - Incorporated by reference to Registration Statement No. 333-35671. 10(i). Credit Agreement, dated October 31, 1997, by and among Lennar Land Partners and the Lenders named therein and a Guaranty Agreement of Lennar Corporation, dated October 31, 1997 - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1997. 10(j). Revolving Credit Agreement (Facilities A and B), dated October 31, 1997, among Lennar Corporation and Certain Subsidiaries and the First National Bank of Chicago, as agent - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1997. 10(k). First Amendment to Revolving Credit Agreement (Facilities A and B) dated January 20, 1998, among Lennar Corporation and Certain Subsidiaries and the First National Bank of Chicago, as agent - Incorporated by reference to Annual Report on Form 10-K for the year ended November 30, 1997. 10(l). Indenture, dated as of March 1, 1994, among Greystone Homes, Inc., Pacific Greystone Corporation, HLDC Acquisition Corp., Stonegrey Corporation, PGC Holdings, Inc., A-M Homes, a California Limited Partnership and U.S. Trust Company of California, N.A., as Trustee, relating to the 10 3/4% Senior Notes due March 1, 2004 of Greystone Homes, Inc. - Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1996 for Pacific Greystone Corporation (which was acquired by Lennar Corporation on October 31, 1997), file number 1-11749. 10(m). Indenture, dated as of December 31, 1997, between Lennar Corporation and First National Bank of Chicago, as trustee - Incorporated by Reference to Registration Statement No. 333-45527. 10(n). Equity Draw-Down Agreement, dated March 25, 1998, between Lennar Corporation and HSBC James Capel Canada, Inc. 10(o). Voting Agreement, dated June 10, 1997, between Lennar Corporation, Warburg Pincus Investors, L.P. and Pacific Greystone Corporation - Incorporated by reference to Form 8-K dated June 10, 1997, file number 1-11749. 15 10(p). First Supplemental Indenture, dated as of July 29, 1998, between Lennar Corporation and First National Bank of Chicago, as trustee (relating to Lennar's Zero Coupon Senior Convertible Debentures due 2018) - Incorporated by reference to Form 8-K dated July 24, 1998, file number 1-11749. 13. Pages 18 through 48 of the 1998 Annual Report to Stockholders. 21. List of subsidiaries. 23. Independent Auditors' Consent. 27. Financial Data Schedule. (b) Reports on Form 8-K filed during the quarter ended November 30, 1998. Not applicable. (c) The exhibits to this Report are listed in Item 14(a)3. (d) The financial statement schedules required by Regulation S-X which are excluded from the Annual Report to Stockholders as permitted by Rule 14a-3(b)(1) are listed in Item 14(a)2. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. LENNAR CORPORATION /s/ STUART A. MILLER ----------------------------------------- Stuart A. Miller President, Chief Executive Officer and Director Date: February 25, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated: Principal Executive Officer: Stuart A. Miller /s/ STUART A. MILLER President, Chief Executive Officer and Director ---------------------------- Date: February 25, 1999 Principal Financial Officer: Bruce E. Gross /s/ BRUCE E. GROSS Vice President and Chief Financial Officer ---------------------------- Date: February 25, 1999 Principal Accounting Officer: Diane J. Bessette /s/ DIANE J. BESSETTE Controller ---------------------------- Date: February 25, 1999 Directors: Irving Bolotin /s/ IRVING BOLOTIN ---------------------------- Date: February 25, 1999 Jonathan M. Jaffe /s/ JONATHAN M. JAFFE ---------------------------- Date: February 25, 1999 R. Kirk Landon /s/ R. KIRK LANDON ---------------------------- Date: February 25, 1999 Sidney Lapidus /s/ SIDNEY LAPIDUS ---------------------------- Date: February 25, 1999 Reuben S. Leibowitz /s/ REUBEN S. LEIBOWITZ ---------------------------- Date: February 25, 1999 Leonard Miller /s/ LEONARD MILLER ---------------------------- Date: February 25, 1999 Arnold P. Rosen /s/ ARNOLD P. ROSEN ---------------------------- Date: February 25, 1999 Steven J. Saiontz /s/ STEVEN J. SAIONTZ ---------------------------- Date: February 25, 1999 17 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Lennar Corporation: We have audited the consolidated financial statements of Lennar Corporation (the "Corporation") as of November 30, 1998 and 1997 and for each of the three years in the period ended November 30, 1998, and have issued our report thereon dated January 8, 1999; such financial statements and report are included in your 1998 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of Lennar Corporation, listed in Item 14(a)2. The financial statement schedule is the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida January 8, 1999 18
LENNAR CORPORATION AND SUBSIDIARIES SCHEDULE II Valuation and Qualifying Accounts Years ended November 30, 1998, 1997 and 1996 Additions --------------------------- Charged Charged Beginning to costs (credited) to Ending Description balance and expenses other accounts (Deductions) balance - ------------------------------------------------------ ----------- ------------- -------------- ------------- ----------- Year ended November 30, 1998 Allowances deducted from assets to which they apply: Allowances for doubtful accounts and notes receivable $ 1,952,000 1,505,000 1,091,000 (473,000) 4,075,000 =========== ============ ============== ============= =========== Deferred income and unamortized discounts $ 85,000 -- 146,000 -- 231,000 ============= ============= ============== ============= =========== Loan loss reserve $ 3,531,000 722,000 -- (1,163,000) 3,090,000 ============= ============= ============== ============= =========== Valuation allowance $ 2,176,000 -- 290,000 (563,000) 1,903,000 ============= ============= ============== ============= =========== Deferred tax asset valuation allowance $ 7,659,000 -- -- -- 7,659,000 ============= ============= ============== ============= =========== Year ended November 30, 1997 Allowances deducted from assets to which they apply: Allowances for doubtful accounts and notes receivable $ 3,037,000 552,000 -- (1,637,000)(A) 1,952,000 ============= ============= ============== ============= =========== Deferred income and unamortized discounts $ 601,000 -- -- (516,000)(A) 85,000 ============= ============= ============== ============= =========== Loan loss reserve $ 5,840,000 1,220,000 -- (3,529,000)(A) 3,531,000 ============= ============= ============== ============= =========== Valuation allowance $ 2,745,000 1,119,000 -- (1,688,000) 2,176,000 ============= ============= ============== ============= =========== Deferred tax asset valuation allowance $ -- -- 7,659,000 -- 7,659,000 ============= ============= ============== ============= =========== Year ended November 30, 1996 Allowances deducted from assets to which they apply: Allowances for doubtful accounts and notes receivable $ 2,372,000 1,202,000 97,000 (634,000) 3,037,000 ============= ============= ============== ============= =========== Deferred income and unamortized discounts $ 601,000 116,000 (116,000) -- 601,000 ============= ============= ============== ============= =========== Loan loss reserve $ 3,730,000 2,490,000 896,000 (1,276,000) 5,840,000 ============= ============= ============== ============= =========== Valuation allowance $ 1,286,000 3,341,000 -- (1,882,000) 2,745,000 ============= ============= ============== ============= ===========
(A) Includes amounts that were distributed in connection with the spin-off of the commercial real estate investment and management business as follows:
Allowances for doubtful accounts and notes receivable $ 739,000 Deferred income and unamortized discounts $ 493,000 Loan loss reserve $1,996,000
19 EXHIBIT INDEX EXHIBIT DESCRIPTION 3(a). Amended and Restated Certificate of Incorporation, dated April 28, 1998. 10(n). Equity Drawn-Down Agreement, dated March 25, 1998, between Lennar Corporation and HSBC James Capel Canada, Inc. 13. Pages 18 through 48 of the 1998 Annual Report to Stockholders. 21. List of subsidiaries. 23. Independent Auditors' Consent. 27. Financial Data Schedule. 20 EX-3.(A) 2 EXHIBIT 3(a) AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF LENNAR CORPORATION The undersigned authorized officer of Lennar Corporation (the "Corporation"), a Delaware corporation, certifies as follows: 1. The Corporation's present name is Lennar Corporation. The Corporation was originally incorporated under the name of Pacific Classic Corporation on September 6, 1991. 2. This amended and restated Certificate of Incorporation has been duly adopted by the Shareholders of Lennar Corporation in accordance with Section 242 and Section 245 of the Delaware General Corporation Law. This amended and restated Certificate of Incorporation amends, restates and integrates the Corporation's Certificate of Incorporation. 3. The effective time of this amended and restated Certificate of Incorporation shall be April 28, 1998. 4. The Certificate of Incorporation, as amended and restated herein, shall at the effective time of this amended and restated Certificate of Incorporation of the Corporation, read as follows: 1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF LENNAR CORPORATION ARTICLE I. NAME The name of this Corporation shall be Lennar Corporation. ARTICLE II. REGISTERED OFFICE AND REGISTERED AGENT The name and address of this Corporation's registered agent in the State of Delaware, County of New Castle, is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware. ARTICLE III. NATURE OF BUSINESS The general nature of the business and activities to be transacted and carried on by this Corporation are as follows: (a) To purchase or otherwise acquire, or obtain the use of and to hold, own, maintain, develop, sell, lease, exchange, hire, convey, mortgage or otherwise dispose of or turn to account lands and leaseholds and any interest, estates and rights in real property and any personal or mixed property, and any rights, licenses and privileges appurtenant to such property; to erect, construct, make, improve and operate or aid or subscribe toward the erection, construction, making, improvement and operation of any and all plants, factories, buildings, warehouses, agencies, depots, offices, houses, equipment and facilities whatsoever in connection with its property or which may appertain to or appear necessary, useful, 2 convenient or appropriate in connection with any of its business or the business of any corporation, association, co-partnership or individual in which the Corporation shall be in any manner interested. (b) To acquire by purchase, gift, devise, bequest or otherwise, to manufacture or construct, to own, use, hold and develop, to dispose of by sale, exchange or otherwise, to lease, mortgage, pledge, assign and generally to deal in and with real and personal property of every sort and description, services, goodwill, franchises, inventions, patents, copyrights, trademarks, trade names and licenses, and interests of any sort in any such property. (c) To enter into and perform contracts of every sort and description, with any person, firm, association, corporation, municipality, county, state, nation or other body politic, or with any colony, dependency or agency of any of the foregoing. (d) To issue, execute, deliver, endorse, buy, sell, draw, accept and discount notes, drafts, letters of credit, checks and other bills of exchange and other evidences of indebtedness. (e) To borrow money, to lend money and extend credit, without limit in either case as to amount, in such amounts as the Board of Directors may from time to time determine, to guarantee and act as surety with respect to the debts of any other person, firm, association or corporation without regard to the interest of this Corporation in any debt so guaranteed or assured or in such other person, firm, association or corporation; and to secure any direct or contingent indebtedness of the Corporation by the execution and delivery of mortgages, pledges, assignments, transfers in trust or other instruments appropriate for encumbering any or all of the property of the Corporation, or any interest therein. (f) To acquire, by purchase, merger or otherwise, all or any part of the goodwill, rights, property and business of any person, firm, association or corporation, in connection therewith to assume liabilities of any person, firm, association, or corporation, and, in consideration of any such acquisition, to pay cash, to deliver stock, bonds, other securities, or property of any other kind. (g) To issue, execute, deliver, guarantee, endorse, purchase, hold, sell, transfer, mortgage, pledge, assign and otherwise deal in and with shares of capital stock, bonds, debentures, other evidences of indebtedness and any and all other securities of any description created, issued or delivered 3 by this Corporation or by any other corporation, association, person or firm of the State of Delaware or of any other state or nation, and, while owner thereof, to exercise, to the extent permitted by law, all the rights, powers and privileges of ownership including, without limitation, the right to vote stock or other securities having voting rights as attributes. (h) In general, to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. (i) To perform every act necessary or proper for the accomplishment of the objects and purposes enumerated or for the protection and benefit of the Corporation. (j) The objects and purposes specified in the foregoing clauses of this Article shall, unless expressly limited, not be limited or restricted by reference to, or inference from, any provision in this or any other Article of this Certificate of Incorporation, shall be regarded as independent objects and purposes and shall be construed as powers as well as objects and purposes. ARTICLE IV. STOCK The total authorized number of shares of stock of the Corporation is 130,500,000 shares. Of these, 100,000,000 shares are classified as Common Stock, par value $.10 per share, 30,000,000 shares are classified as Class B Common Stock, par value $.10 per share and 500,000 shares are classified as Preferred Stock, par value $10.00 per share, except that if at any time after shares of Class B Common Stock are issued, there no longer are any outstanding shares of Class B Common Stock, the authorization to issue Class B Common Stock will terminate and after that time the shares of stock the Corporation is authorized to issue will be 130,000,000 shares of Common Stock, par value $.10 per share, and 500,000 shares of Preferred Stock, par value $10.00 per share, and the Company will file a Certificate of Amendment to its Certificate of Incorporation or a restated Certificate of Incorporation showing the change in the authorized stock. 4 The description of the classes of stock and the relative rights, voting power, preferences and restrictions of the shares of each class which are fixed by the Certificate of Incorporation and the express grant of authority to the Board of Directors of the Corporation (hereinafter referred to as the "Board of Directors") to fix by resolution or resolutions the dividend rate, the redemption price, the liquidation price, the conversion rights, if any, and the sinking or purchase fund rights of shares of any class or of any series of any class or the number of shares constituting any series of any class are as follows: PREFERRED STOCK (a) The 500,000 shares of Preferred Stock may be issued from time to time in one or more series, each of such series to have such relative rights, voting power, preferences and restrictions as are stated herein and in the resolution or resolutions providing for the issuance of such series adopted by the Board of Directors as hereinafter provided. (b) Authority is hereby expressly granted to the Board of Directors, subject to the provisions of this Article, to authorize from time to time the issuance of one or more series of Preferred Stock, and with respect to each series to fix or alter from time to time as to shares then unallotted, by resolution or resolutions providing for the issuance of such series: (1) The distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased (except where otherwise provided by the Board of Directors in creating such series) or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors; (2) The dividend rate or rates to which shares of such series shall be entitled; the restrictions, conditions and limitations upon the payment of such dividends; whether such dividends shall be cumulative and, if cumulative, the date or dates from which such dividends shall be cumulative and the dates on which such dividends if declared shall be payable; 5 (3) The manner of selecting shares for redemption, the redemption price and the manner of redemption and the effect thereof; (4) The amount payable on shares of such series in the event of any liquidation, dissolution or winding up of the Corporation, which amount may vary at different dates and may vary depending upon whether such liquidation, dissolution or winding up is voluntary or involuntary; (5) The obligation, if any, of the Corporation to maintain a purchase, retirement or sinking fund for shares of such series and the provisions with respect thereto; (6) The terms and conditions of the rights, if any, of the holders of such series to convert such shares into shares of Common Stock of the Corporation; (7) The terms and conditions of the rights, if any, of the holders of shares of such series to vote such shares; (8) Any other rights, preferences, powers and restrictions not inconsistent with applicable law or the provisions hereof. (c) All shares of any one series of Preferred Stock shall be identical with each other in all respects, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be cumulative. All series of Preferred Stock shall be of equal rank and be identical in all respects, except as permitted by the foregoing provisions of paragraph (b) of this Article. (d) The holders of the Preferred Stock of each series shall be entitled to receive such dividends in cash, when and as declared by the Board of Directors, to be paid out of earned surplus or out of paid-in surplus or out of net earnings legally available for the payment thereof, as they may be entitled to in accordance with the resolution or resolutions adopted by the Board of Directors providing for the issuance of such series, payable on such dates as may be fixed in such resolution or resolutions. No dividends, whether in cash or property, shall be paid or declared, nor shall any distribution be made, in any year on the Common Stock unless and until all the full dividends on the Preferred Stock of all series required to be paid in that year have been paid or declared, and if declared, a sum sufficient for the 6 payment thereof has been set apart. In addition so long as there shall be outstanding any shares of Preferred Stock of any series entitled to cumulative dividends pursuant to the resolution or resolutions providing for the issuance of such series, no dividends, whether in cash or property shall be paid or declared, nor shall any distribution be made on the Common Stock, nor shall any shares of Common Stock be purchased, redeemed or otherwise acquired for value by the Corporation, unless the full cumulative dividends on the Preferred Stock of all series entitled to cumulative dividends for all past dividend periods and for the then current dividend period shall have been paid or declared, and if so declared, a sum sufficient for the payment thereof set apart, and the Corporation shall have set aside all amounts, if any, theretofore required to be set aside as and for a purchase, retirement or sinking fund, if any, for the Preferred Stock of all series for the then current year and all defaults, if any, in complying with any such purchase, retirement or sinking fund requirements in respect of previous years shall have been made good. The foregoing provisions of this Paragraph shall not, however, apply to a dividend payable in Common Stock or to the acquisition of shares of Common Stock in exchange for, or through application of the proceeds of the sale of, shares of Common Stock. Accruals of dividends shall not bear interest. (e) The holders of the Preferred Stock of each series shall be entitled in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, to be paid as a liquidating dividend, before any distribution or payment is made to the holders of any Common Stock, the amount per share provided for in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such series. When such payments shall have been made in full to the holders of the Preferred Stock, they shall have no further rights in respect of their shares or the assets of the Corporation. If upon any liquidation or dissolution or winding up of the Corporation the assets available for distribution shall be insufficient to pay the holders of all outstanding shares of Preferred Stock the full amounts to which they respectively shall be entitled, the holders of the shares of Preferred Stock of all series shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts 7 payable in respect of the Preferred Stock of all series were paid in full. Neither the statutory merger nor consolidation of the Corporation into or with any other corporation, nor the statutory merger or consolidation of any other corporation into or with the Corporation, nor a sale transfer or lease of all or any part of the assets of the Corporation shall be deemed a liquidation, dissolution or winding up of the Corporation within the meaning of this paragraph. (f) The Corporation at the option of the Board of Directors may at any time redeem the whole or from time to time may redeem any part of any series of Preferred Stock for the consideration provided in and in accordance with the terms and conditions of the resolution or resolutions of the Board of Directors authorizing such series. (g) At all meetings of Stockholders of the Corporation, each holder of record of Preferred Stock shall have such voting rights, if any, as may be provided in resolutions adopted by the Board of Directors providing for the issuance of each series. COMMON STOCK AND CLASS B COMMON STOCK (a) Voting Rights and Powers. With respect to all matters upon which stockholders are entitled to vote or to which stockholders are entitled to give consent, (1) the holders of the outstanding shares of the Common Stock and the holders of the outstanding shares of Class B Common Stock will vote together without regard to class, (2) each holder of record of Common Stock will be entitled to one vote for each share of Common Stock held in his name, and (3) each holder of record of Class B Common Stock will be entitled to ten votes for each share of Class B Common Stock held in his name, except that (i) any amendment to this Certificate of Incorporation which would change the number of authorized shares, the par value or the voting rights of, the restriction on dividends upon, or any other provision of this Certificate of Incorporation relating to, the Common Stock or the Class B Common Stock, in addition to being adopted as required by law, must be approved by holders of a majority of the shares of Common Stock which vote with regard to the amendment; and (ii) in addition to any other vote required by this Certificate of 8 Incorporation, the Corporation's by laws, by any rule of any securities exchange or otherwise, any merger, consolidation or other business combination involving the Corporation shall require the affirmative vote of the holders of at least a majority of the issued and outstanding shares of Common Stock (other than the Class B Common Stock), voting as a single class, unless the type and amount of the consideration received by the holder of a share of Common Stock in such transaction is the same as that received by a holder of a share of Class B Common Stock; provided, however that if stockholders are given the right to elect among differing kinds of consideration in such business combination, the foregoing requirement will be deemed satisfied if the holders of shares of Common Stock are given the same rights of election (including without limitation proration rights) as the holders of shares of Class B Common Stock. (b) Dividends and Distributions. (1) Cash Dividends. The cash dividends paid with regard to a share of Class B Common Stock in a calendar year may not be more than 90% of the cash dividends paid with regard to a share of Common Stock in that calendar year. (2) Other Dividends and Distributions. Each dividend or distribution made to the holders of Common Stock or Class B Common Stock (other than cash dividends) will be distributable to the holders of the Common Stock and the Class B Common Stock without regard to class, except that in the case of dividends or other distributions payable in stock of the Corporation other than Preferred Stock, the stock distributed with respect to the Common Stock will be additional shares of Common Stock and the stock distributed with respect to the Class B Common Stock will be additional shares of Class B Common Stock. (c) Restrictions on Transfer of the Class B Common Stock. (1) Permitted Transferees. No beneficial owner of shares of Class B Common Stock (a "Class B Stockholder") may transfer shares of Class B Common Stock, whether by sale, assignment, gift, bequest or otherwise, except to a Permitted Transferee of that 9 Class B Stockholder. A "Permitted Transferee" of a Class B Stockholder is (i) the Class B Stockholder's spouse; (ii) a parent or lineal descendant (including an adopted child) of a parent of the Class B Stockholder, or the spouse of a lineal descendant of a parent of the Class B Stockholder; (iii) a trustee, guardian or custodian for, or an executor, administrator or other legal representative of the estate of, the Class B Stockholder, or a trustee, guardian or custodian for a Permitted Transferee of the Class B Stockholder; (iv) the trustee of a trust (including a voting trust) for the benefit of the Class B Stockholder and (v) a corporation, partnership or other entity of which the Class B Stockholder and Permitted Transferees of the Class B Stockholder are the beneficial owners of a majority in voting power of the equity. For the purpose of this Paragraph a "beneficial owner" of Class B Common Stock is a person who, or entity which, has or shares the power to direct the voting or disposition of the Class B Common Stock. (2) Impermissible Transfer Void. Any purported transfer of Class B Common Stock other than to a Permitted Transferee will be void and will not be recognized by the Corporation. The Corporation may, as a condition to the registration of a transfer of Class B Common Stock to a purported Permitted Transferee, require such affidavits or other proof as the Corporation deems necessary to establish that the transferee is a Permitted Transferee. (3) Legend on Stock Certificates. Each certificate representing Class B Common Stock will bear a legend referring to the restrictions on transfer of the Class B Common Stock. (4) Registered Owner. Each share of Class B Common Stock will be registered in the name of the beneficial owner of the share and not in "street name" or the name of a nominee. (d) Issuance of Class B Common Stock. (1) Initial Issuance. Upon the merger of Lennar Corporation ("Old Lennar") with and into the Corporation (the "Merger") in accordance with a Plan and Agreement of Merger 10 dated June 10, 1997, (the "Merger Agreement") between the Corporation (the name of which at that date was Pacific Greystone Corporation) and Old Lennar, each share of Class B Common Stock, par value $.10 per share, of Old Lennar which is outstanding immediately before the Merger becomes effective is being converted into and becoming one share of Class B Common Stock of the Corporation. (2) Subsequent Issuance. The Corporation may not issue any shares of Class B Common Stock, except (i) as provided in Paragraph (d)(1) or (ii) as a dividend or distribution as provided in Paragraph (b)(2). (e) Conversion of Class B Common Stock into Common Stock. A Class B Stockholder may at any time convert shares of Class B Common Stock into a like number of shares of Common Stock by surrendering the certificates representing the shares of Class B Common Stock to be converted (or representing a greater number of shares of Class B Common Stock) to the Company accompanied by a request that all or a specified number of the shares of Class B Common Stock represented by the certificates be converted into Common Stock. Once Class B Common Stock has been converted into Common Stock, the Common Stock may not be reconverted into Class B Common Stock. (f) Termination of Class Rights and Powers. If at any time the number of outstanding shares of Class B Common Stock is less than 10% of the outstanding shares of Common Stock and Class B Common Stock taken together, the Class B Common Stock will automatically be converted into, and become for all purposes, shares of Common Stock. After the Class B Common Stock is converted into Common Stock as provided in this paragraph, the Company may issue certificates which represent Common Stock in exchange for certificates which represented Class B Common Stock. However, the automatic conversion of Class B Common Stock into Common Stock will be effective whether or not certificates are exchanged. (g) Other Rights. 11 Except as otherwise provided in this Certificate of Incorporation, or provided by law, each share of Common Stock and each share of Class B Common Stock will have identical powers, preferences and rights, including rights in liquidation, and copies of all reports and other communications which are sent by the Corporation to the holders of the Common Stock must also be sent to the holders of the Class B Common Stock. ARTICLE V. NUMBER OF DIRECTORS The business of this Corporation shall be managed by a Board of Directors consisting of not fewer than three, and not more than fifteen, persons, the exact number to be determined from time to time in accordance with the By-Laws. The Board of Directors will be divided into three classes, each of which will have the highest whole number of directors obtained by dividing the number of directors constituting the whole Board by three, with any additional directors allocated, one to a class, to the classes designated by the Board of Directors. The directors of each class will serve for a term of three years, and until their successors are elected and qualified, or with regard to any director until that director's earlier death or resignation, except that as to directors elected at the first annual meeting of stockholders at which directors are elected in classes, the term of directors of one class will expire at the annual meeting of Stockholders following the first annual meeting at which directors are elected in classes and the term of directors of a second class will expire at the second annual meeting of stockholders following the first annual meeting at which directors are elected in classes. If there is a vacancy in any class of directors, including a vacancy because of a newly created directorship, the person elected to fill that vacancy will serve until the next election of the directors of that class and until that person's successor is elected and qualified. No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith 12 or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. In addition to the circumstances in which a director of the Corporation is not personally liable as set forth in the preceding sentence, a director of the Corporation shall not be liable to the fullest extent permitted by any amendment to the Delaware General Corporation Law hereafter enacted that further limits the liability of a director. ARTICLE VI. OFFICERS The Corporation shall have a President, a Vice-President, a Secretary and a Treasurer, and may have such other officers and agents as are prescribed by the By-Laws or determined by the Board of Directors. A person may hold more than one office except that the President may not also be the Secretary or an Assistant Secretary. ARTICLE VII. BY-LAWS The Board of Directors shall adopt By-Laws for the Corporation. The By-Laws may be amended, altered or repealed by the stockholders or Directors in any manner permitted by the By-Laws. ARTICLE VIII. AMENDMENT The Certificate of Incorporation may be amended in any manner now or hereafter provided for by law and all rights conferred upon stockholders hereunder are granted subject to this reservation. 13 ARTICLE IX. TRANSACTIONS IN WHICH DIRECTORS OR OFFICERS ARE INTERESTED (a) No contract or transaction between the Corporation and one or more of its Directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its Directors or officers are Directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the Director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested Directors, even though the disinterested Directors be less than a quorum; or (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. (b) Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. 14 ARTICLE X. INDEMNIFICATION OF DIRECTORS AND OFFICERS (a) The Corporation shall indemnify any person who is made a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have 15 been adjudged to be liable for negligence or misconduct in the performance of his duty to the Corporation unless and only to the extent that the Court in which such action was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a Director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections (a) and (b) of this Article or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under Sections (a) and (b) of this Article (unless ordered by a Court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in said Sections (a) and (b). Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable and a quorum of disinterested Directors so directs, by independent legal counsel (compensated by the Corporation) in a written opinion, or (3) by the Stockholders. (e) Expenses incurred in defending a civil, criminal, administrative or investigative action, suit or proceeding, or threat thereof, may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the manner provided in Section (d) of this Article upon receipt of an undertaking by or on behalf of the Director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article. (f) The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any agreement, vote of stockholders or 16 disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (g) The Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article. Signed on April 28, 1998 /s/ BRUCE GROSS -------------------------------------- Vice President and Chief Financial Officer 17 EX-10.(N) 3 EXHIBIT 10(n) March 25, 1998 HSBC James Capel Canada Inc. 105 Adelaide Street West Suite 1200 Toronto, Ontario M5H 1P9 Dear Sirs: This is to set forth the agreement of HSBC James Capel Canada, Inc. ("HSBC") and Lennar Corporation ("Lennar") regarding purchases by HSBC from Lennar of Lennar common stock ("Common Stock"). That agreement is as follows: 1. HSBC will purchase from Lennar, at the times and for the prices described below, Common Stock with a total purchase price to HSBC of up to $120 million. 2. Prior to the beginning of a calendar month, Lennar will either (a) inform HSBC that Lennar wants to sell Common Stock to HSBC with regard to the month and specify to HSBC a maximum amount, not exceeding $15 million (or such higher amount as may be agreed to by HSBC), for which Lennar wants to sell Common Stock to HSBC during the month (the "Maximum Amount for the Month") and the minimum per share price for which it will sell Common Stock to HSBC during the month (the "Minimum Price for the Month") or (b) inform HSBC that it does not want to sell Common Stock to HSBC with regard to the month. 3. On the third New York Stock Exchange Trading Day ("Trading Day") after the end of a month with regard to which Lennar informs HSBC that Lennar wants to sell Common Stock to HSBC, HSBC will purchase from Lennar a number of shares of Common Stock, for a total purchase price, calculated as follows: (a) The Maximum Amount for the Month will be allocated equally among the Trading Days in the month or among specified Trading Days in the month agreed upon by Lennar and HSBC (the amount allocated to a Trading Day being the "Daily Purchase Amount"). (b) Except as provided in subparagraph (c), with regard to each Trading Day (or each of the specified Trading Days) during the month, HSBC will purchase, for a per share price equal to 98% of the average of the high and low sale prices of the Common Stock reported on the New York Stock Exchange Composite Tape with regard to that Trading Day, a number of shares of Common Stock having a total sale price equal to the Daily Purchase Amount. (c) If the per share price with regard to a Trading Day calculated as provided in subparagraph (b) is less than the Minimum Price for the Month, no Common Stock will be purchased with regard to that Trading Day. (d) The total number of shares of Common Stock HSBC will purchase with regard to a month will be the sum of the numbers of shares HSBC will purchase with regard to each Trading Day (or each of the specified Trading Days) during that month and the total price for which HSBC will purchase those shares will be the sum of the amounts 1 resulting from multiplying, with regard to each Trading Day (or each of the specified Trading Days) during the month, (i) the per share price calculated as described in subparagraph (b), times (ii) the number of shares HSBC will purchase calculated as described in subparagraphs (b) and (c). 4. On a day when HSBC purchases Common Stock from Lennar (i.e., the third Trading Day after the end of a month with regard to which Lennar informs HSBC that Lennar wants to sell Common Stock to HSBC), Lennar will cause the shares of Common Stock HSBC is purchasing to be issued to HSBC (either by delivery of stock certificates or by credit to an account specified by HSBC with The Depositary Trust Company or another book-entry clearing facility) and HSBC will cause the purchase price of those shares, in immediately available U.S. dollars, to be wire transferred to an account specified by Lennar with a bank in the United States of America. 5. The sales from Lennar to HSBC described above will be registered under the Securities Act of 1933, as amended. Lennar and HSBC will indemnify each other as provided on Exhibit A against liability with respect to the Registration Statement relating to the Common Stock which is sold to HSBC. 6. This Agreement will be governed by the laws of the State of Florida in the United States of America. Please execute a copy of this document, which, when executed by HSBC, will constitute a binding agreement between Lennar and HSBC. Very truly yours, LENNAR CORPORATION By: /s/ BRUCE GROSS --------------------------------- Title: Vice President and Chief Financial Officer AGREED TO: HSBC JAMES CAPEL CANADA, INC. By: /s/ ISSER ELISHIS ------------------------------------- Title: Executive Vice President and Director 2 EXHIBIT A TERMS OF INDEMNIFICATION (a) Lennar will indemnify HSBC and each person, if any, who controls HSBC for the purposes of the Securities Act of 1933, as amended (the "Securities Act"), against, and hold each of them harmless from, any loss, liability or expenses which any of them may incur, under the Securities Act or otherwise, as a result of a claim or action arising out of, or based upon,(i) any untrue statement or alleged untrue statement of a material fact contained, or incorporated by reference, in the Registration Statement relating to Common Stock being sold to HSBC (including the Prospectus dated February 12, 1998 and the Prospectus Supplement dated March 25, 1998 (the "Prospectus Supplement") which are a part of it), or any amendment or supplement to it, or (ii) the omission or alleged omission to state in that Registration Statement or any document incorporated by reference into it, a material fact required to be stated therein or necessary to make the statements therein not misleading, and Lennar will reimburse HSBC and each such controlling person promptly upon demand for any legal or other expenses reasonably incurred by HSBC or the controlling person in investigating, defending against, or preparing to defend against any such claim or action, except that Lennar will not be liable to the extent a claim or action which results in a loss, liability or expenses arises out of, or is based upon, an untrue statement, alleged untrue statement, omission or alleged omission, included in the Prospectus Supplement or any amendment or supplement to it in reliance upon, and in conformity with, written information furnished by HSBC to Lennar for inclusion in the Prospectus Supplement. (b) HSBC will indemnify Lennar, each of its directors and officers, and each person, if any, who controls Lennar for the purposes of the Securities Act, against, and hold each of them harmless from, any loss, liability or expenses which any of them may incur, under the Securities Act or otherwise, as a result of a claim or action arising out of, or based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus Supplement or any amendment or supplement to it or (ii) the omission or alleged omission to state in the Prospectus Supplement or any amendment or supplement to it a material fact required to be stated therein or necessary to make the statements therein not misleading, to the extent, but only to the extent, the untrue statement, alleged untrue statement, omission or alleged omission was made in reliance upon, and in conformity with, written information furnished by HSBC to Lennar for inclusion in the Prospectus Supplement or any amendment or supplement to it, and HSBC will reimburse Lennar and each such director, officer or controlling person promptly upon demand for any legal or any other expenses reasonably incurred by Lennar or the other person in investigating, defending against, or preparing to defend against any such claim or action. (c) Promptly after a person receives notice of a claim or the commencement of an action for which the person intends to seek indemnification under Paragraph (a) or (b), the person will notify the indemnifying party in writing of the claim or commencement of the action, but failure to notify the indemnifying party will not relieve the indemnifying party from liability under Paragraph (a) or (b), except to the extent it has been materially prejudiced by the failure to give notice. The indemnifying party will be entitled to participate in the defense of any claim or action as to which indemnification is being sought, and if the indemnifying party acknowledges in writing the obligation to indemnify the party against whom the claim or action is brought, the indemnifying party may (but will not be required to) assume the defense against the claim or action with counsel satisfactory to it. After an indemnifying party notifies 3 an indemnified party that the indemnifying party wishes to assume the defense of a claim or action, the indemnifying party will not be liable for any legal or other expenses incurred by the indemnified party in connection with the defense against the claim or action, except that if, in the opinion of counsel to the indemnifying party, one or more of the indemnified parties should be separately represented in connection with a claim or action, the indemnifying party will pay the fees and expenses of one separate counsel for the indemnified parties. Each indemnified party, as a condition to receiving indemnification as provided in Paragraph (a) or (b), will cooperate in all reasonable respects with the indemnifying party in the defense of any action or claim as to which indemnification is sought. No indemnifying party will be liable for any settlement of any action effected without its prior written consent. No indemnifying party will, without the prior written consent of the indemnified party, effect any settlement of a pending or threatened action with respect which an indemnified party is, or is informed that it may be, made a party and for which it would be entitled to indemnification, unless the settlement includes an unconditional release of the indemnified party from all liability and claims which are the subject matter of the pending or threatened action. (d) If for any reason the indemnification provided for in this Agreement is not available to, or is not sufficient to hold harmless, an indemnified party in respect of any loss or liability referred to in Paragraph (a) or (b), each indemnifying party will, in lieu of indemnifying the indemnified party, contribute to the amount paid or payable by the indemnified party as a result of the loss or liability, (i) in the proportion which is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and by the indemnified party on the other from the sale of stock which is the subject of the claim or action which resulted in the loss or liability or (ii) if that allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits of the sale of stock, but also the relative fault of the indemnifying party and the indemnified party with respect to the statements or omissions which are the subject of the claim or action that resulted in the loss or liability, as well as any other relevant equitable considerations. (e) HSBC confirms that the information with respect to the offering of Lennar stock set forth on the cover page of the Prospectus Supplement, and the information under the caption "Plan of Distribution" in the Prospectus Supplement, is correct and was furnished (and is the only information furnished) in writing to Lennar by HSBC for inclusion in the Prospectus Supplement. 4 EX-13 4 EXHIBIT 13
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA Lennar Corporation and Subsidiaries At or for the Years Ended November 30, (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS: Revenues: Homebuilding $ 2,204,428 1,208,570 952,648 665,510 647,750 Financial services $ 208,543 89,369 82,577 57,787 54,348 Limited-purpose finance subsidiaries $ 3,894 5,143 6,436 7,689 9,485 Total revenues $ 2,416,865 1,303,082 1,041,661 730,986 711,583 Operating earnings - business segments: Homebuilding $ 283,369 120,240 91,066 58,530 70,645 Financial services $ 33,335 35,532 28,653 19,013 14,844 Corporate general and administrative expenses $ 28,962 15,850 12,396 10,523 10,309 Earnings from continuing operations before income taxes and cumulative effect of changes in accounting principles $ 240,114 85,727 84,429 53,310 64,626 Earnings from continuing operations $ 144,068 50,605 51,502 32,519 39,422 Earnings from discontinued operations $ - 33,826 36,484 37,908 28,743 Net earnings $ 144,068 84,431 87,986 70,427 69,126 Per share amounts (diluted): Earnings from continuing operations $ 2.49 1.34 1.42 0.90 1.09 Earnings from discontinued operations $ - 0.89 1.01 1.05 0.80 Cumulative effect of changes in accounting principles $ - - - - 0.03 Net earnings per share $ 2.49 2.23 2.43 1.95 1.92 Cash dividends per share - common stock $ .05 .088 .10 .10 .095 Cash dividends per share - Class B common stock $ .045 .079 .09 .09 .084 FINANCIAL POSITION: Total assets $ 1,917,834 1,343,284 1,589,593 1,341,065 1,205,214 Total debt $ 798,838 661,695 689,159 557,055 493,203 Stockholders' equity $ 715,665 438,999 695,456 607,794 534,088 Shares outstanding (000's) 58,151 53,160 35,928 35,864 35,768 Stockholders' equity per share $ 12.31 8.26 19.36 16.95 14.93 DELIVERY AND BACKLOG INFORMATION: Number of homes delivered 10,777 6,702 5,968 4,680 4,965 Backlog of home sales contracts 4,100 3,318 1,929 1,802 1,703 Dollar value of backlog $ 840,000 665,000 312,000 255,000 247,000
As a result of the Company's spin-off of its commercial real estate investment and management business, including the Investment Division business segment, the selected financial data for 1996, 1995 and 1994 has been restated to reflect the Company's Investment Division as a discontinued operation. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS CONTAINED IN THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE "FORWARD-LOOKING STATEMENTS" AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO, CHANGES IN GENERAL ECONOMIC CONDITIONS, THE MARKET FOR HOMES GENERALLY AND IN AREAS WHERE THE COMPANY HAS DEVELOPMENTS, THE AVAILABILITY AND COST OF LAND SUITABLE FOR RESIDENTIAL DEVELOPMENT, MATERIALS PRICES, LABOR COSTS, INTEREST RATES, CONSUMER CONFIDENCE, COMPETITION, ENVIRONMENTAL FACTORS AND GOVERNMENT REGULATIONS AFFECTING THE COMPANY'S OPERATIONS. RESULTS OF OPERATIONS OVERVIEW Lennar achieved record results in 1998, reflecting a successful repositioning of operations in 1997 and a greater focus on homebuilding and residential financial services. Lennar's earnings from continuing operations increased in 1998 to $144.1 million, or $2.49 per share diluted ($2.59 per share basic), compared to $50.6 million, or $1.34 per share diluted ($1.35 per share basic), in 1997 and $51.5 million, or $1.42 per share diluted ($1.43 per share basic), in 1996. Several factors contributed to the growth in earnings from continuing operations in 1998. The Company has expanded significantly in California over the past three years through various strategic acquisitions and land purchases, including the merger with Pacific Greystone on October 31, 1997. The merger with Pacific Greystone also expanded the Company's operations in Arizona and provided the Company with operations in Nevada. The Company's growth in these markets, combined with favorable market conditions throughout all of its homebuilding markets, contributed to increased earnings in 1998. In addition, the Company's earnings from partnerships increased significantly, reflecting a full year of operations of Lennar Land Partners, which was formed on October 31, 1997, and is 50% owned by the Company. On October 31, 1997, the Company successfully completed a merger with Pacific Greystone Corporation. Additionally, Lennar completed the spin-off of its commercial real estate investment and management business consisting of the Investment Division (which is classified as a discontinued operation in the accompanying consolidated statements of earnings and cash flows), the portions of the Financial Services Division involved in commercial mortgage lending and investments (but not the portions of the Financial Services Division which are involved in lending to and providing title services to homeowners, servicing residential mortgages or providing services to homebuyers or homeowners) and certain assets of the Homebuilding Division utilized in related businesses. The spin-off was conducted through a distribution of the stock of LNR Property Corporation ("LNR") to the stockholders of Lennar. The spin-off, in the form of a tax-free distribution, was completed effective October 31, 1997. At the time of the spin-off transaction, Lennar and LNR formed a general partnership ("Lennar Land Partners") to acquire, develop and sell land. Lennar and LNR contributed properties to Lennar Land Partners in exchange for 50% general partnership interests in Lennar Land Partners. Lennar's results of operations for 1997 and 1996 include the results of the commercial real estate investment and management business for the period from December 1, 1995 to October 31, 1997, and the results of operations for Pacific Greystone Corporation and the Company's share of the earnings from Lennar Land Partners for the period from November 1, 1997 to November 30, 1997. 2 HOMEBUILDING The Homebuilding Division sells and constructs single-family attached and detached homes. These activities also include the purchase, development and sale of residential land. The following tables set forth selected financial and operational information for the periods indicated:
SELECTED HOMEBUILDING DIVISION FINANCIAL DATA (DOLLARS IN THOUSANDS, Years Ended November 30, EXCEPT AVERAGE SALES PRICES) 1998 1997 1996 - ------------------------------------------------------------------------- Sales of homes $ 2,089,762 1,130,989 894,663 Other 114,666 77,581 57,985 - ------------------------------------------------------------------------ Total revenues $ 2,204,428 1,208,570 952,648 Gross margin - home sales ($) $ 448,021 223,298 171,513 Gross margin - home sales (%) 21.4% 19.7% 19.2% Selling, general & administrative expenses ($) $ 210,039 130,006 99,301 Selling, general & administrative expenses as a percentage of homebuilding revenues (%) 9.5% 10.8% 10.4% Operating earnings ($) $ 283,369 120,240 91,066 Operating earnings (%) 12.9% 10.0% 9.6% Average sales price $ 194,000 169,000 150,000 - -------------------------------------------------------------------------
SUMMARY OF HOME AND BACKLOG DATA - -------------------------------------------------------------- DELIVERIES 1998 1997 1996 - -------------------------------------------------------------- Florida 3,761 3,367 3,363 California 3,029 587 58 Texas 2,484 2,075 1,832 Arizona/Nevada 1,503 673 715 - -------------------------------------------------------------- 10,777 6,702 5,968 - -------------------------------------------------------------- NEW ORDERS - -------------------------------------------------------------- Florida 4,010 3,457 3,251 California 2,851 758 52 Texas 2,519 2,305 1,884 Arizona/Nevada 1,636 592 660 - -------------------------------------------------------------- 11,016 7,112 5,847 - -------------------------------------------------------------- BACKLOG - HOMES - -------------------------------------------------------------- Florida 1,544 1,295 1,205 California 1,148 783 39 Texas 703 668 438 Arizona/Nevada 705 572 247 - -------------------------------------------------------------- 4,100 3,318 1,929 - -------------------------------------------------------------- BACKLOG - DOLLAR VALUE (IN THOUSANDS) $840,000 665,000 312,000 - -------------------------------------------------------------- 3 Revenues from homebuilding operations were $2.2 billion in 1998, $1.2 billion in 1997 and $953 million in 1996. The increased revenues in 1998 and 1997 were primarily the result of additional revenues from home sales. Higher revenues from home sales were primarily attributable to increases in the number of new home deliveries and the average sales price. The number of homes delivered increased in all markets in 1998. The primary increases occurred in California and Arizona/Nevada as a result of the merger with Pacific Greystone in 1997 and additional acquisitions made in 1998. The 1997 increase in deliveries was primarily generated from growth in the California and Texas homebuilding markets. The higher average sales price in both 1998 and 1997 was due primarily to a greater percentage of deliveries in the California market, where average sales prices are currently higher. Other Homebuilding Division revenues consisted primarily of residential land sales and equity in earnings from partnerships in all three years. In 1998, 1997 and 1996, sales of residential land totaled $77.2 million, $63.8 million and $50.8 million, respectively. Equity in earnings from partnerships increased to $30.9 million in 1998 from $4.0 million in 1997 and $0.2 million in 1996. The increase in 1998 was primarily due to the Company's equity in earnings from Lennar Land Partners, which was formed in late 1997. Gross margin percentages from sales of homes were 21.4% in 1998, 19.7% in 1997 and 19.2% in 1996. The increases in 1998 and 1997 were primarily attributable to a greater percentage of deliveries from the California market, where margin percentages are currently higher. The 1998 increase also reflected higher margin percentages in the Company's Texas homebuilding market. Gross margins from land sales totaled $12.6 million, or 16.3%, $16.2 million, or 25.3%, and $12.0 million, or 23.6%, in 1998, 1997 and 1996, respectively. Margins achieved on sales of land may vary significantly from period to period. Selling, general and administrative expenses as a percentage of total homebuilding revenues were 9.5% in 1998, 10.8% in 1997 and 10.4% in 1996. The 1998 decrease resulted primarily from the increase in revenues as a result of the Company's expansion. The increased percentage in 1997 was primarily attributable to start-up and operating costs in California related to the Company's expansion into the California market prior to the merger with Pacific Greystone. New sales orders increased 55% in 1998 and 22% in 1997. The growth in new orders for 1998 was attributable primarily to the Company's continued expansion in California, including the acquisition of Pacific Greystone, and generally favorable market conditions throughout all of the Company's homebuilding markets. The growth in new orders for 1997 was attributable primarily to the Company's expansion in California and Texas. The new sales orders increase in 1998, combined with acquisitions made in 1998, resulted in a 24% increase in the Company's backlog of home sales contracts to 4,100 at November 30, 1998, compared to a backlog of 3,318 contracts a year earlier. The dollar value of contracts in backlog increased 26% to $840.0 million at November 30, 1998 from $665.0 million a year earlier. FINANCIAL SERVICES The Financial Services Division provides mortgage financing, title insurance and closing services for Lennar homebuyers and others; acquires, packages and resells residential mortgage loans and mortgage-backed securities, performs mortgage loan servicing activities and provides cable television and alarm monitoring services to residents of Lennar communities and others. This Division previously invested in rated portions of issues of commercial real estate mortgage-backed securities ("CMBS") for which Lennar's discontinued Investment Division was the special servicer and also an investor in related securities. Such CMBS were distributed as part of the spin-off of the commercial real estate investment and management business. The following table sets forth selected financial and operational information relating to the Financial Services Division: 4 Years Ended November 30, (DOLLARS IN THOUSANDS) 1998 1997 1996 - --------------------------------------------------------------------- REVENUES $ 208,543 89,369 82,577 COSTS AND EXPENSES 175,208 53,837 53,924 - --------------------------------------------------------------------- OPERATING EARNINGS $ 33,335 35,532 28,653 - --------------------------------------------------------------------- Dollar volume of mortgages originated $ 1,031,338 419,933 527,036 - --------------------------------------------------------------------- Number of mortgages originated 7,900 3,500 4,600 - --------------------------------------------------------------------- Principal balance of servicing portfolio $ 3,213,235 3,073,010 3,286,225 - --------------------------------------------------------------------- Number of loans serviced 41,000 39,700 42,100 - --------------------------------------------------------------------- Operating earnings of the Financial Services Division in 1998 included a significant contribution from North American Title, which was acquired in January 1998 and provides title and escrow services in California, Arizona and Colorado. Additionally, the Division experienced improved profits from mortgage services primarily due to increased homebuilding volume and a greater capture rate of Lennar homebuyers and others. These improvements in 1998 were offset by the absence of the portions of this Division previously involved in commercial mortgage lending and investments, which were spun-off on October 31, 1997. The increase in 1997 operating earnings compared to 1996 was primarily the result of the expansion of the title business in the Houston market, increased mortgage profits and the effect of capitalization of mortgage servicing rights as required by Statement of Financial Accounting Standards ("SFAS") No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, as amended by SFAS No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. Additionally, operating earnings increased due to the Division's investment in the rated portion of CMBS, partnerships and commercial loans, prior to the spin-off transaction. Mortgage loan originations were lower in 1997 compared to 1996 due to a reduction in the Division's involvement in a less profitable wholesale loan origination business. DISCONTINUED OPERATIONS On June 10, 1997, the Company's Board of Directors approved a plan to spin-off its commercial real estate investment and management business, which primarily consisted of the Investment Division. The spin-off was conducted through the distribution of the stock of LNR Property Corporation to the stockholders of Lennar. The spin-off, in the form of a tax-free distribution, was completed effective October 31, 1997. The Investment Division was involved in the development, management and leasing, as well as the acquisition and sale, of commercial and multi-family residential rental properties and land. The Investment Division also was a participant and manager in a number of partnerships which acquired portfolios of commercial mortgage loans and real estate. The Division shared in the profits or losses of the partnerships and also received fees for management and disposition of the partnerships' assets. This Division also acquired, at a discount, the unrated portions of debt securities which were collateralized by commercial real estate loans. The Division only invested in securities for which it acted as the special servicer on behalf of all the holders of the securities. The Division earned interest on its investment, as well as fees for the special servicing activities. Operating earnings from the discontinued Investment Division were $68.4 million in 1997 and $68.0 million in 1996. The slight increase in 1997 related to higher sales of other real estate and other revenues, primarily consisting of an increased investment in CMBS, offset by lower management fees, lower rental income generated by operating properties owned by the Company and reduced earnings from the Division's partnerships. 5 INTEREST During 1998, 1997 and 1996, interest expense relating to continuing operations was $47.6 million, $25.0 million and $22.9 million, respectively. Capitalized interest charged to expense for continuing operations was $43.1 million in 1998, $24.7 million in 1997 and $20.5 million in 1996. The increase in interest expense and capitalized interest charged to expense in both years was due to higher debt levels and increased home deliveries as a result of the Company's expansion. The amount of interest capitalized by the Company's operations in any one year is a function of the assets under development, outstanding debt levels and interest rates. At November 30, 1998 and 1997, capitalized interest as a percentage of homebuilding inventories approximated 3% and 4%, respectively. RESTRUCTURING CHARGE In the fourth quarter of 1997, the Company recorded a restructuring charge to continuing operations for the estimated costs of the spin-off of LNR Property Corporation and formation of Lennar Land Partners. The restructuring charge was $29.2 million and consisted of professional fees, transaction costs, the write-off of deferred loan costs on mortgages and notes which were paid off to effect the spin-off and an impairment charge relating to the change in use of the land that was contributed to Lennar Land Partners. The impairment charge, which approximated $13.7 million, was a result of the change from the Company's previous intended use of the property for development and sale of homes to the new intended use in Lennar Land Partners where the land is being developed for sale as homesites. The liabilities recorded as part of the restructuring charge were substantially paid in 1997 and 1998. INCOME TAXES The provision for income taxes for 1998, 1997 and 1996 was 40.0%, 40.0% and 39.0% of pre-tax earnings, respectively. The increase in 1997 compared to 1996 resulted primarily from permanent differences arising from the restructuring charge recorded during the fourth quarter of 1997. PRO FORMA RESULTS OF OPERATIONS The pro forma results of operations give effect to the spin-off of the Company's commercial real estate investment and management business, the merger with Pacific Greystone Corporation and the formation of Lennar Land Partners, all of which were completed on October 31, 1997, as if such transactions had occurred at the beginning of the periods presented. Lennar Corporation pro forma results were derived from the 12 months ended November 30; Pacific Greystone Corporation pro forma results were derived from the 12 months ended December 31. 6 The following pro forma information for 1997 and 1996 is presented to report results on a more comparable basis to 1998. The following pro forma financial information does not purport to be indicative of the results of operations which would have been reported if the transactions had occurred on the dates or for the periods indicated. SELECTED PRO FORMA REVENUES AND EARNINGS INFORMATION Pro Forma ---------------------------- (IN THOUSANDS) 1998 1997 1996 - ----------------------------------------------------------------------- REVENUES: Homebuilding $ 2,204,428 1,692,083 1,354,568 Financial services 208,543 52,305 44,218 Limited-purpose finance subsidiaries 3,894 5,143 6,436 - ----------------------------------------------------------------------- Total revenues $ 2,416,865 1,749,531 1,405,222 - ----------------------------------------------------------------------- OPERATING EARNINGS: Homebuilding $ 283,369 172,141 142,988 Financial services 33,335 11,642 6,470 Limited-purpose finance subsidiaries - 13 (3) - ----------------------------------------------------------------------- Total operating earnings 316,704 183,796 149,455 Corporate general and administrative expenses 28,962 23,212 18,894 Interest expense 47,628 30,657 29,440 - ----------------------------------------------------------------------- PRE-TAX EARNINGS 240,114 129,927 101,121 Income taxes 96,046 52,646 41,348 - ----------------------------------------------------------------------- NET EARNINGS $ 144,068 77,281 59,773 - ----------------------------------------------------------------------- HOMEBUILDING Homebuilding revenues increased to $2.2 billion in 1998 from $1.7 billion (pro forma) in 1997. Revenues were higher due primarily to a 21% increase in the number of home deliveries, a 5% increase in the average sales price and increases in sales of land and equity in earnings from partnerships. New home deliveries increased to 10,777 homes in 1998 from 8,943 homes (pro forma) in 1997. New home deliveries increased primarily as a result of expansion in Texas and California and generally favorable market conditions throughout the Company's homebuilding markets. The average sales price on homes delivered increased to $194,000 in 1998 from $185,000 (pro forma) in 1997. This increase was due primarily to higher average sales prices in the Texas market and a higher percentage of deliveries in the California market, where average sales prices are currently higher. The Company recorded land sales totaling $77.2 million and $16.7 million (pro forma) in 1998 and 1997, respectively. The increase in land sales reflected, in part, the Company's strategy to redeploy capital from certain long-term assets to shorter-term assets. Equity in earnings from partnerships totaled $30.9 million in 1998 compared to $3.7 million (pro forma) in 1997. The increase in 1998 compared with 1997 reflected the contribution from Lennar Land Partners, which was formed on October 31, 1997. 7 Homebuilding revenues on a pro forma basis increased to $1.7 billion in 1997 from $1.4 billion in 1996. Revenues were higher due to a greater number of home deliveries and an increase in the average sales price. New home deliveries on a pro forma basis increased to 8,943 homes in 1997 from 7,929 homes in 1996. The greatest increases in deliveries were generated from growth in the California and Texas homebuilding markets. The average sales price on homes delivered on a pro forma basis increased to $185,000 in 1997 from $166,000 in 1996. The higher average sales price was due to a proportionately greater number of deliveries of higher-priced homes from the Company's move-up segment and a greater percentage of deliveries in the California market, which has higher-priced homes. The Company recorded land sales on a pro forma basis totaling $16.7 million and $29.1 million in 1997 and 1996, respectively. Gross margin percentages on home sales increased to 21.4% in 1998 from 19.7% (pro forma) in 1997 and 19.6% (pro forma) in 1996. The increase in 1998 compared to 1997 was primarily attributable to increased margin percentages in the Company's California and Texas markets and higher proportionate deliveries in California, where margin percentages are currently higher. Gross margins from land sales totaled $12.6 million, or 16.3%, $1.5 million, or 9.0% (pro forma), and $5.3 million, or 18.2% (pro forma), in 1998, 1997 and 1996, respectively. Margins achieved on sales of land may vary significantly from period to period. Selling, general and administrative expenses as a percentage of homebuilding revenues were 9.5% in both 1998 and 1997 (pro forma) and 9.3% (pro forma) in 1996. The increase in 1997 was primarily attributable to start-up and operating costs in California related to the Company's expansion into the California market, prior to the merger with Pacific Greystone Corporation. FINANCIAL SERVICES Operating earnings from the Financial Services Division increased to $33.3 million in 1998 from $11.6 million (pro forma) in 1997 due primarily to the strong performance of North American Title, which was acquired in January 1998, and increased earnings from mortgage services. Higher earnings in mortgage services were primarily due to higher homebuilding volume and a greater capture rate of Lennar homebuyers and others. Operating earnings from the Financial Services Division on a pro forma basis increased to $11.6 million in 1997 from $6.5 million in 1996. This increase was primarily due to expansion of the title business in the Houston market, increased mortgage profits and the effect of the capitalization of mortgage servicing rights. CORPORATE GENERAL AND ADMINISTRATIVE EXPENSES Corporate general and administrative expenses as a percentage of total revenues decreased to 1.2% in 1998 from 1.3% (pro forma) for both 1997 and 1996. This decrease was due primarily to the increase in revenues. INTEREST EXPENSE Interest expense increased to $47.6 million in 1998 from $30.7 million (pro forma) in 1997 and $29.4 million (pro forma) in 1996. The increase in interest expense in 1998 compared to 1997 was primarily the result of higher average debt levels in 1998, due to the Company's expansion, and an increase in the amount of capitalized interest charged to expense due to a greater number of homes delivered and an increase in interest per home delivered. Capitalized interest charged to expense was $43.1 million, $25.0 million (pro forma) and $23.7 million (pro forma) in 1998, 1997 and 1996, respectively. 8 FINANCIAL CONDITION AND CAPITAL RESOURCES The Company finances its land acquisition and development activities, construction activities, financial services activities and general operating needs primarily from cash generated from operations as well as from revolving lines of credit, public debt and equity, financial institution borrowings and purchase money notes. The Company also buys land under option agreements. Option agreements permit the Company to acquire portions of properties when it is ready to build homes on them. The financial risk of adverse market conditions associated with longer-term land holdings is managed by prudent underwriting of land purchases in areas that the Company views as desirable growth markets, diversification of risk through partnerships with other entities and careful management of the land development process. Based on its current financing capabilities, the Company does not believe that its land holdings have a significant adverse effect on its liquidity. At November 30, 1998, the Company had unsecured revolving credit facilities in the aggregate amount of $650 million, which may be used to refinance existing indebtedness, for working capital, for acquisitions and for general corporate purposes. At November 30, 1998, $136.7 million was outstanding under the Company's unsecured revolving credit facilities, compared to $376.5 million outstanding at November 30, 1997. The decrease in 1998 was primarily a result of the Company's issuance of $229 million of zero coupon senior convertible debentures in July 1998, combined with reductions in November 1998 resulting from several land sales, a high level of home deliveries at the end of the year and other transactions. Amounts outstanding under the unsecured revolving credit facilities are expected to increase in the first half of 1999 due to planned land acquisition and development and homebuilding activities, but the Company expects amounts borrowed under such facilities to remain well below amounts available. In the third quarter of 1998, the Company issued, for $229 million, zero coupon senior convertible debentures due 2018 ("Debentures") with a face amount at maturity of $493 million. The Debentures were issued at a price of $464.13 per $1,000 face amount at maturity, which equates to a yield to maturity over the life of the Debentures of 3 7/8%. Net proceeds from the offering, after underwriting discount and expenses, were approximately $223 million. The Company used the proceeds to repay $100 million in short-term loans which had been incurred to fund acquisitions and to reduce balances outstanding under its revolving credit facilities. The Debentures are convertible at any time into the Company's common stock at the rate of 12.3768 shares per $1,000 face amount at maturity, which equates to an initial conversion price of $37.50 per share. If the Debentures are converted during the first five years, the Company may elect to pay cash equal to the fair value of the common stock at the time of the conversion. Holders have the option to require the Company to repurchase the Debentures on any of the fifth, tenth or fifteenth anniversary dates from the issue date for the initial issue price plus accrued original issue discount. The Company has the option to satisfy the repurchases with any combination of cash and/or shares of the Company's common stock. The Company will have the option to redeem the Debentures, in cash, at any time after the fifth anniversary date for the initial issue price plus accrued original issue discount. At November 30, 1998, the amount outstanding, net of unamortized original issue discount, was $231.9 million. The Company's ratio of homebuilding debt to total capital was 43% at November 30, 1998, compared with 55% at November 30, 1997 and the Company's year-end target of less than 50%. 9 The Company utilizes interest rate swap agreements to manage interest costs and hedge against risks associated with changing interest rates. At November 30, 1998, the Company had three interest rate swap agreements outstanding with a total notional amount of $200 million, which will mature in 2002. These agreements fixed the LIBOR index (to which certain of the Company's debt interest rates are tied) at approximately 6.1%. In 1998, the Company entered into a contract to hedge the interest rate risk associated with an anticipated offering of $200 million of 10-year notes. The contract fixes the yield on the 10-year U.S. Treasury Note (which will be used as a basis for determining the interest rate on the Company's offering of notes) at 5.8%. The Company expects to issue the notes in 1999. Any amounts paid to or received from the counterparty to this agreement at the time the notes are issued will be recognized as an adjustment to interest over the life of the notes. The Financial Services Division, in the normal course of business, also uses derivative financial instruments to meet the financing needs of its customers and reduce its own exposure to fluctuations in interest rates. Counterparties to each of the above agreements are major financial institutions. Credit loss from counterparty non-performance is not anticipated. During 1998, Standard & Poor's upgraded its corporate credit and senior unsecured debt ratings on the Company to BBB- from BB+. The Company believes the "Investment Grade" rating from Standard & Poor's benefited the Company in 1998 and will continue to benefit it through reduced borrowing costs and better access to capital. Lennar Financial Services finances mortgage loans held for sale or disposition on a short-term basis by either pledging them as collateral for borrowings under a line of credit totaling $200 million or borrowing funds from Lennar Corporation in instances where, on a consolidated basis, this minimizes the overall cost of funds. Total borrowings under the financial services line of credit were $196.7 million and $86.9 million at November 30, 1998 and 1997, respectively. In 1998, the Company entered into an equity draw-down agreement with a major international banking firm, HSBC James Capel Canada, Inc. ("HSBC") under which the Company has the option to sell common stock, up to proceeds of $120 million, to HSBC in increments of up to $15 million (or such higher amount as may be agreed to by the parties) per month. As of November 30, 1998, the Company had issued 1.1 million shares under the agreement resulting in proceeds to the Company of $36 million. Also during 1998, the Company filed a shelf registration statement and prospectus with the Securities and Exchange Commission to offer, from time to time, its common stock, preferred stock, depositary shares, debt securities or warrants at an aggregate initial offering price not to exceed $500 million. As of November 30, 1998, the Company had $235 million available under the shelf registration statement. Proceeds can be used for repayment of debt, acquisitions and general corporate purposes. The Company will continue to actively evaluate potential acquisitions which fit into its homebuilding and financial services strategies and meet its profitability and return on capital requirements. Acquisitions, if any, will be funded through any of the Company's currently available credit facilities, amounts available under the shelf registration or the issuance of additional public debt, common stock or preferred stock. 10 The Company has maintained excellent relationships with the financial institutions participating in its financing arrangements and has no reason to believe that such relationships will not continue in the future. Based on the Company's current financial condition and credit relationships, Lennar believes that its operations and borrowing resources will provide for its current and long-term capital requirements at the Company's anticipated levels of growth. LIMITED-PURPOSE FINANCE SUBSIDIARIES Limited-purpose finance subsidiaries of Lennar Financial Services have placed mortgage loans and other receivables as collateral for various long-term financings. These subsidiaries pay the debt service on the long-term borrowings primarily from the cash flows generated by the related pledged collateral. Therefore, the related interest income and interest expense substantially offset one another in each of the years in the three-year period ended November 30, 1998. As part of the spin-off of the Company's commercial real estate investment and management business, the Company transferred to LNR its interest in the assets of the limited-purpose finance subsidiaries to the extent such assets exceeded the related liabilities. The Company believes that the cash flows generated by these subsidiaries will be adequate to meet the required debt payment schedules. CASH FLOWS In 1998, $63.2 million in cash was provided by the Company's operations, compared to $91.1 million in cash used in 1997. Cash flows from operations in 1998 consisted primarily of $144.1 million of net earnings and an increase in accounts payable and other liabilities of $119.6 million. This generation of cash was primarily offset by $112.3 million of cash used to increase inventories through land purchases, land development and construction and $111.6 million of cash used to increase loans held for sale or disposition by the Company's Financial Services Division. In 1997, cash flows used in operations primarily consisted of $107.0 million of cash used to increase inventories through land purchases, land development and construction and $32.4 million of cash used to increase loans held for sale or disposition by the Company's Financial Services Division. These uses were partially offset by $84.4 million of net earnings and an increase in accounts payable and other liabilities of $34.7 million. In 1998, $209.8 million in cash was used in the Company's investing activities compared to $171.3 million in cash provided in 1997. Cash flows used in investing activities in 1998 consisted primarily of $190.5 million of cash used for acquisitions. In 1997, $131.8 million was provided by the Company's investments in partnerships and $158.1 million was provided by sales of and principal payments received from the Company's portfolio of investment securities (CMBS) by both the discontinued Investment Division and the Financial Services Division. This generation of cash was partially offset by $113.0 million used to purchase investment securities. The Company's cash flows from financing activities are discussed above. BACKLOG Backlog represents the number of homes subject to pending sales contracts. Homes are sold using sales contracts which are usually accompanied by sales deposits. Before entering into sales contracts, the Company generally prequalifies its customers. In some instances, purchasers are 11 permitted to cancel sales contracts if they are unable to close on the sale of their existing home or fail to qualify for financing and under certain other circumstances. The Company experienced a cancellation rate of 20% in 1998, 19% in 1997 and 20% in 1996. Although cancellations can delay the sales of the Company's homes, they have not had a material impact on sales, operations or liquidity, because the Company closely monitors the progress of prospective buyers in obtaining financing and monitors and adjusts construction start plans to match the level of demand for homes. The Company does not recognize revenue on homes covered by pending sales contracts until the sales are closed and title passes to the new homeowners. SEASONALITY The Company has historically experienced variability in results of operations from quarter to quarter due to the seasonal nature of the homebuilding business. The Company typically experiences the highest rate of orders for new homes in the first half of the calendar year. Because new home deliveries trail orders for new homes by several months, the Company typically has a greater percentage of new home deliveries in the second half of its fiscal year compared to the first half. As a result, the Company's earnings from sales of homes are generally higher in the second half of the fiscal year. INTEREST RATES AND CHANGING PRICES Inflation can have a long-term impact on the Company because increasing costs of land, materials and labor result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and the costs of financing land development activities and housing construction. Increased construction costs, rising interest rates, as well as increased materials and labor costs, may reduce gross margins in the short-term; however, the Company attempts to recover the increased costs through increased sales prices without reducing sales volume. In recent years the increases in these costs have followed the general rate of inflation and hence have not had a significant adverse impact on the Company. In addition, deflation can impact the value of real estate. There can be no assurance that changing prices will not have a material adverse impact on the Company's future results of operations. YEAR 2000 The "Year 2000 issue" relates to issues which may arise from the inability of existing computer systems to properly recognize the year 2000. If not corrected, computer systems may fail or miscalculate data. The Company uses a variety of operating systems, computer software applications, computer hardware equipment and other equipment in conjunction with its homebuilding and financial services operations. In addition, the Company uses other non-information technology internal office systems. The Company is in the process of converting the majority of its computer information systems to one company-wide system. This new system is Year 2000 compliant. The Company has completed a significant portion of the implementation of this new system and expects to complete the implementation by the end of 1999. The Company is also making modifications to its existing computer information systems to make them Year 2000 compliant in the event it is not able to complete the conversion to the new company-wide system before the year 2000. The financial impact of becoming Year 2000 compliant has not been and is not expected to be material to the Company's financial position or results of operations. 12 The Company is surveying certain of its significant vendors, subcontractors, suppliers and others ("third parties") to assess their state of readiness for the Year 2000. The Company cannot assure that the third parties will be Year 2000 compliant and failure of the third parties to be Year 2000 ready could have an adverse effect on the Company. Disruptions of financial markets or computer system failures at government agencies, financial institutions, utilities and others on which the Company is dependent could also adversely impact the Company. The effects of a potential disruption cannot be determined at this time. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 requires public companies to report certain information about their operating segments in their annual and interim financial statements. It also requires public companies to report certain information about their products and services, the geographic areas in which they operate and their major customers. The Company will adopt the statement in its fiscal year 1999. This statement will require additional financial statement disclosures but will not have an impact on the Company's results of operations or financial position. In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for fiscal years beginning after June 15, 1999. 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. Management does not currently believe that the implementation of SFAS No. 133 will have a material impact on the Company's results of operations or financial position. 13 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Lennar Corporation: We have audited the accompanying consolidated balance sheets of Lennar Corporation and subsidiaries (the "Company") as of November 30, 1998 and 1997 and the related consolidated statements of earnings, cash flows and stockholders' equity for each of the three years in the period ended November 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lennar Corporation and subsidiaries at November 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 1998, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective December 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. /s/ Deloitte & Touche LLP Miami, Florida January 8, 1999 14 REPORT OF MANAGEMENT The accompanying consolidated financial statements are the responsibility of management. The statements have been prepared in accordance with generally accepted accounting principles and include amounts that are based on management's best judgments and estimates. Management relies on internal accounting controls, among other things, to produce records suitable for the preparation of financial statements. The Company employs internal auditors whose work includes evaluating and testing internal accounting controls. The responsibility of our independent auditors for the financial statements is limited to their expressed opinion on the fairness of the consolidated financial statements taken as a whole. Their examination is performed in accordance with generally accepted auditing standards which include tests of our accounting records and internal accounting controls and evaluation of estimates and judgments used to prepare the financial statements. An Audit Committee of outside members of the Board of Directors periodically meets with management, the external auditors and internal auditors to evaluate the scope of auditing activities and review results. Both the external and internal auditors have full and free access to the Committee, without management present, to discuss any appropriate matters. /s/ Bruce E. Gross /s/ Diane J. Bessette Bruce E. Gross Diane J. Bessette Chief Financial Officer Controller 15
CONSOLIDATED BALANCE SHEETS Lennar Corporation and Subsidiaries November 30, 1998 and 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 - ------------------------------------------------------------------------------------------------------- ASSETS HOMEBUILDING: Cash and cash equivalents $ 34,677 52,926 Receivables, net 23,803 34,646 Inventories: Construction in progress and model homes 1,131,540 636,622 Land held for development 67,013 170,353 --------------- ---------- Total inventories 1,198,553 806,975 Investments in partnerships 156,536 108,064 Other assets 137,311 136,229 --------------- ---------- 1,550,880 1,138,840 FINANCIAL SERVICES ASSETS 332,062 156,988 LIMITED-PURPOSE FINANCE SUBSIDIARIES - COLLATERAL FOR BONDS AND NOTES PAYABLE 34,892 47,456 --------------- ---------- $ 1,917,834 1,343,284 --------------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY HOMEBUILDING: Accounts payable and other liabilities $ 322,267 198,386 Income taxes currently payable 33,440 22,634 Mortgage notes and other debts payable, net 530,630 527,303 --------------- ---------- 886,337 748,323 FINANCIAL SERVICES LIABILITIES 280,940 108,506 LIMITED-PURPOSE FINANCE SUBSIDIARIES - BONDS AND NOTES PAYABLE 34,892 47,456 STOCKHOLDERS' EQUITY: Common stock of $0.10 par value per share Authorized 100,000 shares; issued and outstanding: 1998 - 48,241; 1997 - 43,223 4,824 4,322 Class B common stock of $0.10 par value per share Authorized 30,000 shares; issued and outstanding: 1998 - 9,910; 1997 - 9,937 991 994 Additional paid-in capital 523,645 388,797 Retained earnings 186,205 44,886 --------------- ---------- 715,665 438,999 --------------- ---------- $ 1,917,834 1,343,284 --------------- ----------
See accompanying notes to consolidated financial statements. 16
CONSOLIDATED STATEMENTS OF EARNINGS Lennar Corporation and Subsidiaries Years Ended November 30, 1998, 1997 and 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- REVENUES: Homebuilding $ 2,204,428 1,208,570 952,648 Financial services 208,543 89,369 82,577 Limited-purpose finance subsidiaries 3,894 5,143 6,436 ---------------- ---------- ---------- Total revenues 2,416,865 1,303,082 1,041,661 ---------------- ---------- ---------- COSTS AND EXPENSES: Homebuilding 1,921,059 1,088,330 861,582 Financial services 175,208 53,837 53,924 Limited-purpose finance subsidiaries 3,894 5,130 6,439 Corporate general and administrative 28,962 15,850 12,396 Interest 47,628 24,979 22,891 Restructuring charge - 29,229 - ---------------- ---------- ---------- Total costs and expenses 2,176,751 1,217,355 957,232 ---------------- ---------- ---------- EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 240,114 85,727 84,429 Provision for income taxes 96,046 35,122 32,927 ---------------- ---------- ---------- EARNINGS FROM CONTINUING OPERATIONS 144,068 50,605 51,502 EARNINGS FROM DISCONTINUED OPERATIONS (net of income taxes of: 1997 - $21,166 and 1996 - $23,326) - 33,826 36,484 ---------------- ---------- ---------- NET EARNINGS $ 144,068 84,431 87,986 ---------------- ---------- ---------- BASIC EARNINGS PER SHARE: CONTINUING OPERATIONS $ 2.59 1.35 1.43 DISCONTINUED OPERATIONS - 0.90 1.02 ---------------- ---------- ---------- $ 2.59 2.25 2.45 ---------------- ---------- ---------- DILUTED EARNINGS PER SHARE: CONTINUING OPERATIONS $ 2.49 1.34 1.42 DISCONTINUED OPERATIONS - 0.89 1.01 ---------------- ---------- ---------- $ 2.49 2.23 2.43 ---------------- ---------- ----------
See accompanying notes to consolidated financial statements. 17
CONSOLIDATED STATEMENTS OF CASH FLOWS Lennar Corporation and Subsidiaries Years Ended November 30, 1998, 1997 and 1996 (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Earnings from continuing operations $ 144,068 50,605 51,502 Earnings from discontinued operations -- 33,826 36,484 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 25,264 9,352 12,039 Amortization of discount/premium on debt, net (885) (313) -- Equity in earnings of partnerships (30,908) (32,947) (52,278) Investment Division gain on sales of other real estate -- (25,401) (4,098) Restructuring charge -- 29,229 -- Increase (decrease) in deferred income taxes 12,469 (30,086) (16,067) Changes in assets and liabilities, net of effects from acquisitions: Decrease (increase) in receivables 8,636 (22,468) 1,303 Increase in inventories (112,347) (106,995) (62,015) (Increase) decrease in other assets (1,970) 5,194 89 (Increase) decrease in financial services loans held for sale or disposition (111,582) (32,358) 21,476 Increase in accounts payable and other liabilities 119,645 34,708 29,158 Increase (decrease) in income taxes currently payable 10,806 (3,411) 13,826 ---------------------------------------------- Net cash provided by (used in) operating activities 63,196 (91,065) 31,419 ---------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Operating properties and equipment: Additions (13,233) (70,773) (26,310) Sales 51 48,178 10,840 Sales of land held for investment -- 6,253 11,515 (Increase) decrease in investments in partnerships (6,724) 131,777 42,812 Decrease (increase) in financial services mortgage loans 136 745 (6,970) Purchases of investment securities (3,361) (113,011) (119,525) Receipts from investment securities 3,733 158,053 48,059 Acquisitions of properties and businesses, net of cash acquired (190,524) -- (133,792) Acquisition of Pacific Greystone Corporation - cash acquired -- 7,764 -- Other, net 150 2,279 (2,054) ---------------------------------------------- Net cash (used in) provided by investing activities (209,772) 171,265 (175,425) ---------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings under revolving credit agreement (239,850) 7,600 153,700 Net borrowings (repayments) under financial services short-term debt 136,205 30,641 (45,058) Net proceeds from issuance of zero coupon senior convertible debentures 222,960 -- -- Mortgage notes and other debts payable: Proceeds from borrowings 114,581 164,873 162,022 Principal payments (127,571) (212,206) (109,333) Limited-purpose finance subsidiaries: Principal reduction of mortgage loans and other receivables 12,411 9,593 15,226 Principal reduction of bonds and notes payable (11,684) (9,289) (14,581)
18
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Spin-off transaction - assets distributed, cash -- (69,035) -- Common stock: Issuance 41,251 2,829 1,038 Dividends (2,749) (3,277) (3,492) --------------------------------------------- Net cash provided by (used in) financing activities 145,554 (78,271) 159,522 --------------------------------------------- Net (decrease) increase in cash and cash equivalents (1,022) 1,929 15,516 Cash and cash equivalents at beginning of year 62,599 60,670 45,154 --------------------------------------------- Cash and cash equivalents at end of year $ 61,577 62,599 60,670 Summary of cash and cash equivalent balances: Homebuilding $ 34,677 52,926 43,312 Financial services 26,900 9,673 13,560 Discontinued operations -- -- 3,798 --------------------------------------------- $ 61,577 62,599 60,670 ============================================= Supplemental disclosures of cash flow information: Cash paid for interest, net of amounts capitalized $ 15,254 27,511 31,921 Cash paid for income taxes $ 60,157 86,796 60,329 Supplemental disclosures of non-cash investing and financing activities: Purchases of investment securities financed by sellers $ -- 23,366 25,619 Assumption of mortgages related to acquisitions of properties $ 28,913 25,348 17,353 Exchange transactions - like kind tax deferred $ -- 46,000 -- Contribution to Lennar Land Partners $ -- 146,803 -- Common stock issued in 1998 acquisitions $ 94,096 -- -- Acquisition of Pacific Greystone Corporation: Fair value of assets acquired, inclusive of cash of $7,764 $ -- 394,786 -- Goodwill recorded -- 45,803 -- Liabilities assumed -- (224,516) -- -------------------------------------------- Common stock issued $ -- 216,073 -- -------------------------------------------- Spin-off of commercial real estate investment and management business: Assets distributed, non-cash $ -- (959,752) -- Assets distributed, cash -- (69,035) -- Liabilities distributed -- 461,400 -- Net unrealized gain on securities available-for-sale distributed -- 18,774 -- -------------------------------------------- Distribution $ -- (548,613) -- ============================================
See accompanying notes to consolidated financial statements. 19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Lennar Corporation and Subsidiaries Years Ended November 30, 1998, 1997 and 1996 (IN THOUSANDS) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- COMMON STOCK: Beginning balance $ 4,322 2,594 2,588 Shares issued - merger with Pacific Greystone Corporation -- 1,703 -- Shares issued - acquisitions 350 -- -- Shares issued - equity draw-down agreement 114 -- -- Shares issued - employee stock plans 35 20 6 Conversion of Class B common stock 3 5 -- -------------------------------------------- Balance at November 30 4,824 4,322 2,594 -------------------------------------------- CLASS B COMMON STOCK: Beginning balance 994 999 999 Conversion to common stock (3) (5) -- -------------------------------------------- Balance at November 30 991 994 999 -------------------------------------------- ADDITIONAL PAID-IN CAPITAL: Beginning balance 388,797 171,618 170,586 Shares issued - merger with Pacific Greystone Corporation -- 214,370 -- Shares issued - acquisitions 93,746 -- -- Shares issued - equity draw-down agreement 35,957 -- -- Shares issued - employee stock plans 5,145 2,809 1,032 -------------------------------------------- Balance at November 30 523,645 388,797 171,618 -------------------------------------------- RETAINED EARNINGS: Beginning balance 44,886 512,345 427,851 Net earnings 144,068 84,431 87,986 Spin-off of commercial real estate investment and management business -- (548,613) -- Cash dividends - common stock (2,302) (2,493) (2,593) Cash dividends - Class B common stock (447) (784) (899) -------------------------------------------- Balance at November 30 186,205 44,886 512,345 -------------------------------------------- UNREALIZED GAIN ON SECURITIES AVAILABLE-FOR-SALE, NET: Beginning balance -- 7,900 5,770 Net unrealized gains for the year -- 10,874 2,130 Spin-off of commercial real estate investment and management business -- (18,774) -- -------------------------------------------- Balance at November 30 -- -- 7,900 -------------------------------------------- Total stockholders' equity $715,665 438,999 695,456 ============================================
See accompanying notes to consolidated financial statements. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lennar Corporation and Subsidiaries 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Lennar Corporation, all wholly-owned subsidiaries and partnerships in which a controlling interest is held (the "Company"). The Company's investments in partnerships (and similar entities) in which a significant, but less than a controlling, interest is held are accounted for by the equity method. All significant intercompany transactions and balances have been eliminated. As a result of the Company's spin-off of its commercial real estate investment and management business, including the Investment Division business segment, the accompanying 1997 and 1996 financial statements have been restated to reflect the Investment Division as a discontinued operation (see Note 2). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Revenues from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate (including the sales of land and operating properties) are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values. Cash and cash equivalents as of November 30, 1998 and 1997 include $15.0 million and $41.9 million, respectively, of cash held in escrow for periods of up to three days. INVENTORIES The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, in the first quarter of 1997. Under this standard, inventories to be held and used are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. SFAS No. 121 requires companies to evaluate long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs of inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. The Company's adoption of SFAS No. 121 in the first quarter of 1997 had no effect on the Company's financial position or results of operations. Start-up costs, construction overhead and selling expenses are expensed as incurred. Homes held for sale are classified as construction in progress until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated proportionately to homes within the respective area. 21 INTEREST AND REAL ESTATE TAXES Interest and real estate taxes attributable to land, homes and operating properties are capitalized and added to the cost of those properties as long as the properties are being actively developed. Interest related to homebuilding, including interest costs relieved from inventories, is included in interest expense. Interest expense relating to the financial services operations and limited-purpose finance subsidiaries is included in their respective costs and expenses. During 1998, 1997 and 1996, interest costs of $55.7 million, $62.8 million and $50.1 million, respectively (excluding the limited-purpose finance subsidiaries), were incurred and $45.9 million, $33.5 million and $24.9 million, respectively, were capitalized by the Company's homebuilding and discontinued investment operations. Capitalized interest charged to expense, including amounts charged to discontinued investment operations, in 1998, 1997 and 1996 was $43.1 million, $25.7 million and $20.9 million, respectively. OPERATING PROPERTIES AND EQUIPMENT Operating properties and equipment are recorded at cost. Depreciation is calculated to amortize the cost of depreciable assets over their estimated useful lives using the straight-line method. The range of estimated useful lives for operating properties is 15 to 40 years and for equipment is 2 to 10 years. INVESTMENT SECURITIES Investment securities are accounted for in accordance with SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under SFAS No. 115, debt and equity securities that have determinable fair values are classified as available-for-sale unless they are classified as held-to-maturity. Securities classified as held-to-maturity are carried at amortized cost because they are purchased with the intent and ability to hold to maturity. Available-for-sale securities are recorded at fair value. Any unrealized holding gains or losses on available-for-sale securities are reported in a separate component of stockholders' equity, net of tax effects, until realized. Historically, the majority of investment securities were held by the commercial real estate investment and management business, which was spun-off in 1997. At November 30, 1998, investment securities classified as held-to-maturity totaled $5.2 million and were included in other assets of the Financial Services Division. There were no other investment securities at November 30, 1998 or 1997. DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes interest rate swap and other agreements to manage interest costs and hedge against risks associated with changing interest rates. The Company designates interest rate swaps and other agreements as hedges of specific debt instruments or anticipated transactions and recognizes interest differentials as adjustments to interest expense. The Financial Services Division, in the normal course of business, uses derivative financial instruments to meet the financing needs of its customers and reduce its own exposure to fluctuations in interest rates. The Division enters into forward commitments and option contracts to protect the value of loans held for sale or disposition from increases in market interest rates. Adjustments are made to the carrying values of these loans based on changes in the market value of these hedging contracts (see Note 15). 22 GOODWILL Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is amortized by the Company over a 20-year period on a straight-line basis. At November 30, 1998 and 1997, goodwill was $50.7 million and $45.8 million, respectively (net of accumulated amortization of $3.1 million and $0.5 million, respectively). In the event that facts and circumstances indicate that the carrying value of goodwill may be impaired, an evaluation of recoverability is performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the goodwill are compared to the carrying amount to determine if a write-down to fair value based on discounted cash flows is required. No impairment existed at November 30, 1998 or 1997. Goodwill is included in other assets of the Homebuilding and Financial Services Divisions in the consolidated balance sheets. INCOME TAXES Income taxes are accounted for in accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. STOCK-BASED COMPENSATION The Company grants stock options to certain employees for a fixed number of shares with an exercise price not less than the fair value of the shares at the date of grant. The Company accounts for the stock option grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. No compensation expense is recognized because all stock options granted have exercise prices not less than the market value of the Company's stock on the date of the grant. The impact of the pro forma disclosures required by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, is included in Note 14. EARNINGS PER SHARE In 1998, the Company adopted SFAS No. 128, EARNINGS PER SHARE, which requires a dual presentation of basic and diluted earnings per share on the face of the statement of earnings. Basic earnings per share is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Earnings per share for 1997 and 1996 have been restated to conform with SFAS No. 128 (see Note 13). FINANCIAL SERVICES Mortgage loans held for sale or disposition by the Financial Services Division are recorded at the lower of cost or market, as determined on an aggregate basis. Premiums and discounts recorded on these loans are presented as an adjustment to the carrying amount of the loans and are not amortized. When the Division sells loans or mortgage-backed securities into the secondary market, a gain or loss is recognized to the extent that the sales proceeds exceed, or are less than, the book value of the loans or the securities. Loan origination fees, net of direct origination costs, are deferred and recognized as a component of the gain or loss when loans are sold. The Division generally retains the servicing on the loans and mortgage-backed securities it sells and recognizes servicing fee income as those services are performed. 23 On December 1, 1996, the Company adopted SFAS No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. SFAS No. 122, among other provisions, requires mortgage loan servicing rights to be recognized as separate assets from the related loans. Upon origination of a mortgage loan, the book value of the mortgage loan is allocated to the mortgage servicing right and to the loan (without the mortgage servicing right) based on the estimated relative fair value, provided there is a plan to sell or securitize the related loan. The adoption of SFAS No. 122 resulted in an increase of $1.5 million in after-tax net earnings in the year ended November 30, 1997. In accordance with SFAS No. 122, prior period financial statements have not been restated. On January 1, 1997, the Company adopted SFAS No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, which amended SFAS No. 122, and requires, among other things, that the book value of loans be allocated between the mortgage servicing right and the related loan at the time of sale or securitization, if servicing is retained. Mortgage servicing rights are periodically evaluated for impairment based on the fair value of these rights. The fair value of mortgage servicing rights is determined by discounting the estimated future cash flows using a discount rate commensurate with the risks involved. This method of valuation incorporates assumptions that market participants would use in their estimates of future servicing income and expense, including assumptions about prepayment, default and interest rates. For purposes of measuring impairment, the loans underlying the mortgage servicing rights are stratified on the basis of interest rate and type. The amount of impairment is the amount by which the mortgage servicing rights, net of accumulated amortization, exceed their fair value by strata. Impairment, if any, is recognized through a valuation allowance and a charge to current operations. The book value and fair value of mortgage servicing rights was $11.1 million and $14.8 million, respectively, at November 30, 1998 and $2.5 million and $3.6 million, respectively, at November 30, 1997. A valuation allowance related to mortgage servicing rights was not required at or for the years ended November 30, 1998 and 1997. Mortgage servicing rights are amortized in proportion to, and over the period of, the estimated net servicing income of the underlying mortgages. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 requires public companies to report certain information about their operating segments in their annual and interim financial statements. It also requires public companies to report certain information about their products and services, the geographic areas in which they operate and their major customers. The Company will adopt this statement in its fiscal year 1999. This statement will require additional financial statement disclosures but will not have an impact on the Company's results of operations or financial position. In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for years beginning after June 15, 1999. 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 derivatives are hedges, depending on the nature of the hedges, changes in the fair value of derivatives will either be offset against changes in the fair values of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged items are recognized in earnings. Management does not currently believe that the implementation of SFAS No. 133 will have a material impact on the Company's results of operations or financial position. RECLASSIFICATION Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 1998 presentation. 24 2. SPIN-OFF OF COMMERCIAL REAL ESTATE INVESTMENT AND MANAGEMENT BUSINESS AND FORMATION OF LENNAR LAND PARTNERS On June 10, 1997, the Company's Board of Directors approved a plan to spin-off the commercial real estate investment and management business consisting of the Investment Division, the portions of the Financial Services Division involved in commercial mortgage lending and investments (but not the portions of the Financial Services Division which were involved in lending to and providing title services to homeowners, servicing residential mortgages or providing services to homebuyers or homeowners) and certain assets of the Company's Homebuilding Division utilized in related businesses. The spin-off was conducted through a distribution of the stock of LNR Property Corporation ("LNR") to the stockholders of Lennar pursuant to a separation and distribution agreement that provided that for each existing share of the Company, the shareholders received one share of common stock of LNR, with the right during a limited period after the spin-off to exchange that common stock for Class B common stock of LNR. The spin-off, in the form of a tax-free distribution, was completed on October 31, 1997 and was recorded as an adjustment to stockholders' equity. At the time of the spin-off transaction, the Company and LNR formed a general partnership ("Lennar Land Partners") to acquire, develop and sell land. The Company and LNR contributed properties to Lennar Land Partners in exchange for 50% general partnership interests in Lennar Land Partners. Pursuant to a management agreement, the Company manages the day-to-day operations of Lennar Land Partners and receives a management fee. The partnership agreement for Lennar Land Partners permits the Company and LNR to (i) engage in business activities which conflict with or are in direct competition with Lennar Land Partners and (ii) acquire properties from, or sell properties to, Lennar Land Partners. The Company has options to purchase a portion of the assets originally contributed to Lennar Land Partners and may be granted options to purchase all or portions of properties which subsequently are acquired by Lennar Land Partners. The formation of Lennar Land Partners was effective as of October 31, 1997. The Company's 1997 and 1996 consolidated financial statements were restated to reflect the Investment Division business segment as a discontinued operation. Accordingly, the revenues and expenses have been excluded from the respective captions in the consolidated statements of earnings, and have been reported through the date of disposition as "earnings from discontinued operations". 25 The components of earnings from discontinued operations were as follows:
YEARS ENDED NOVEMBER 30, (IN THOUSANDS) 1997 1996 ---------------------------------------------------------------------------------- REVENUES: Rental income $ 51,254 56,686 Equity in earnings from partnerships 21,071 36,382 Management fees 13,343 18,229 Gain on sales of real estate, net 20,401 4,098 Other 18,418 12,278 ------------------------- Total revenues 124,487 127,673 COSTS AND EXPENSES 56,099 59,721 ------------------------- OPERATING EARNINGS 68,388 67,952 Interest 13,396 8,142 ------------------------- EARNINGS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES 54,992 59,810 Income taxes 21,166 23,326 ------------------------- EARNINGS FROM DISCONTINUED OPERATIONS $ 33,826 36,484 =========================
Earnings from discontinued operations include the results of operations through October 31, 1997, the measurement and disposal date. Accordingly, the Company did not recognize a loss on disposal of the discontinued Investment Division. During the fourth quarter of 1997, the Company recorded a restructuring charge to continuing operations for the estimated costs of the spin-off and formation of Lennar Land Partners. The restructuring charge was $29.2 million and consisted of professional fees, transaction costs, the write-off of deferred loan costs on mortgages and notes which were paid off to effect the spin-off and an impairment charge relating to the change in use of land that was contributed to Lennar Land Partners. The impairment charge, which approximated $13.7 million, was a result of the change from the Company's previous intended use of the property for development and sale of homes to the new intended use in Lennar Land Partners, where the land will be developed for sale as homesites. No impairment charge was recorded for the portions of the land that the Company has options to purchase from Lennar Land Partners. Amounts relating to the restructuring charge were substantially paid in 1997 and 1998. In addition to the Investment Division business segment, assets and liabilities of the Homebuilding and Financial Services Divisions utilized in the commercial real estate investment and management business were distributed in the spin-off of LNR. The following revenues and expenses were associated with the assets and liabilities of the Financial Services Division distributed in the spin-off of LNR:
YEARS ENDED NOVEMBER 30, (IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------------------- Revenues $39,913 37,466 ---------------------------- Expenses $15,518 14,980 ============================
The revenues and expenses associated with the assets and liabilities of the Homebuilding Division distributed in the spin-off of LNR were not significant for the periods presented. 26 3. ACQUISITIONS During the third quarter of 1998, the Company acquired the properties of two California homebuilders, ColRich Communities and Polygon Communities. During the first quarter of 1998, the Company acquired a Northern California homebuilder, Winncrest Homes, and the North American Asset Development Group of companies ("NAADC"), which provide title and escrow services in California, Arizona and Colorado. In September 1998, NAADC acquired a small escrow company in California. In connection with these transactions, the Company paid $202 million in cash (inclusive of cash acquired of $12 million) and issued $94 million in common stock (3.5 million shares). The cash portion of these transactions was funded primarily from the Company's revolving credit facilities and issuance of zero coupon senior convertible debentures. The Company received assets with a fair value of $335 million and assumed liabilities totaling $47 million in connection with these transactions. In addition, the Company recorded goodwill of $8 million relating to the acquisitions of NAADC, Winncrest and the escrow company. Goodwill is being amortized on a straight-line basis over 20 years. The acquisitions were accounted for using the purchase method of accounting. The results of each acquired entity are included in the Company's consolidated statements of earnings since the respective acquisition dates. The pro forma effect of the acquisitions on the results of operations are not presented as they are not considered material. On June 10, 1997, the Company's Board of Directors approved a plan to acquire Pacific Greystone Corporation ("Greystone") through a merger in which the shareholders of the Company received one share of common stock or Class B common stock of the corporation which survived the merger for each share of common stock or Class B common stock of the Company held by them, and the shareholders of Greystone received 1.138 shares of common stock of the surviving corporation for each outstanding share of Greystone common stock. The surviving corporation was renamed Lennar Corporation. This merger resulted in the Company's shareholders owning approximately 68% of the surviving corporation and Greystone shareholders owning the remaining 32% of that corporation. The merger became effective after the distribution of the stock of LNR to which the Company transferred its commercial real estate investment and management business and the Greystone shareholders did not receive any interest in LNR. The merger was conditioned upon the distribution taking place. Such merger became effective on October 31, 1997. Total consideration for this acquisition was $216.1 million, of which $45.8 million was assigned to the excess of the purchase price over the fair value of net assets acquired and recorded as goodwill. Goodwill is being amortized on a straight-line basis over 20 years. The consideration consisted of $213.7 million (17 million shares) for newly issued common stock and $2.4 million for Greystone stock options which vested at the acquisition date. The Company accounted for the merger using the purchase method of accounting and the results of Greystone's operations have been included in the Company's consolidated statements of earnings since November 1, 1997. Revenues and net earnings on an unaudited pro forma basis would have increased by $580.6 million and $28.5 million, respectively, during 1997 and by $423.5 million and $20.0 million, respectively, during 1996 had the acquisition occurred on December 1, 1995. The pro forma earnings per share would have been $2.13 per share diluted ($2.16 per share basic) in 1997 and $2.01 per share diluted ($2.04 per share basic) in 1996. On December 29, 1995, the Company purchased the assets and operations of the residential business of Houston-based Village Builders and Friendswood Development Company, real estate subsidiaries of Exxon Corporation, for $110.5 million in cash (substantially all of which was allocated to inventories). The Company financed this transaction through borrowings under its revolving credit agreement. The pro forma effect of the acquisition on 1996 results of operations was not considered significant since the acquisition occurred near the beginning of the year. The acquisition of these assets and operations was accounted for using the purchase method of accounting. 27 4. BUSINESS SEGMENTS The Company has two business segments: Homebuilding and Financial Services. The limited-purpose finance subsidiaries are not considered a business segment and are not included in the following tables. See Note 2 regarding the discontinued Investment Division business segment. HOMEBUILDING Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land. The following table sets forth financial information relating to the homebuilding operations:
YEARS ENDED NOVEMBER 30, (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ REVENUES: Sales of homes $2,089,762 1,130,989 894,663 Other 114,666 77,581 57,985 ------------------------------------------------ Total revenues 2,204,428 1,208,570 952,648 COSTS AND EXPENSES: Cost of homes sold 1,641,741 907,691 723,150 Cost of other revenues 69,279 50,633 39,131 Selling, general and administrative 210,039 130,006 99,301 ------------------------------------------------ Total costs and expenses 1,921,059 1,088,330 861,582 ------------------------------------------------ OPERATING EARNINGS $ 283,369 120,240 91,066 ------------------------------------------------ Identifiable assets $1,550,880 1,138,840 862,055 ------------------------------------------------ Depreciation and amortization $ 20,762 2,085 3,167 ================================================
FINANCIAL SERVICES Lennar Financial Services provides mortgage financing, title insurance and closing services for Lennar homebuyers and others, acquires, packages and resells residential mortgage loans and mortgage-backed securities, performs mortgage loan servicing activities and provides cable television and alarm monitoring services to residents of Lennar communities and others. The following table sets forth financial information relating to the financial services operations:
YEARS ENDED NOVEMBER 30, (IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- REVENUES $208,543 89,369 82,577 COSTS AND EXPENSES 175,208 53,837 53,924 ------------------------------------------------ OPERATING EARNINGS $ 33,335 35,532 28,653 ------------------------------------------------ Identifiable assets $332,062 156,988 382,083 ------------------------------------------------ Depreciation and amortization $ 4,502 594 1,416 ================================================
28 5. RESTRICTED CASH Cash includes restricted deposits of $1.6 million and $0.7 million as of November 30, 1998 and 1997, respectively. These balances are comprised primarily of escrow deposits held related to sales of homes. 6. RECEIVABLES
NOVEMBER 30, (IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------------ Accounts receivable $ 9,374 21,077 Mortgages and notes receivable 17,962 2,175 Receivable from LNR -- 12,607 ------------------------------ 27,336 35,859 Allowance for doubtful accounts (3,533) (1,213) ------------------------------ $ 23,803 34,646 ==============================
7. PARTNERSHIPS Summarized financial information on a combined 100% basis related to the Company's significant partnerships and other similar entities (collectively the "Partnerships") accounted for by the equity method was as follows:
NOVEMBER 30, (IN THOUSANDS) 1998 1997 - ----------------------------------------------------------------------------------------------- ASSETS: Cash $ 16,880 5,947 Land under development 353,850 338,074 Other assets 105,154 60,547 ------------------------------- $475,884 404,568 =============================== LIABILITIES AND EQUITY: Accounts payable and other liabilities $ 43,867 37,701 Notes and mortgages payable 143,286 163,608 Equity of: The Company 154,544 108,064 Others 134,187 95,195 ------------------------------- $475,884 404,568 ===============================
YEARS ENDED NOVEMBER 30, (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Revenues $277,544 227,517 170,081 Costs and expenses 192,130 173,951 80,191 ------------------------------------------- Pre-tax earnings of partnerships $ 85,414 53,566 89,890 ------------------------------------------- Company share of pre-tax earnings $ 30,908 11,876 15,896 ===========================================
29 At November 30, 1998, the Company's equity interest in each of these Partnerships ranged from 33% to 50%. At November 30, 1998, these Partnerships were primarily involved in the acquisition and development of residential land. The Company shares in the profits and losses of these Partnerships and, when appointed the manager of the Partnerships, receives fees for the management of the assets. In most cases, when the Company is involved in a partnership, it is through a subsidiary which is the general partner and whose only asset is its interest in the partnership. Certain of the Partnerships have partnership interests in other Partnerships. The outstanding debt of five of these Partnerships, including two second-tier Partnerships, amounting to $133.9 million at November 30, 1998, is guaranteed by the Company. As manager of Lennar Land Partners, the Company is entitled to reimbursement for all out-of-pocket expenses directly incurred in its capacity as manager (the "Direct Expenses") including but not limited to costs and expenses of employees (salary, bonus and benefits), contractors, agents, professional fees, telephone, travel, productions and reproductions of documents and postage. In addition to the Direct Expenses, the Company shares some of its employees, contractors, agents, facilities and equipment and other expenses with Lennar Land Partners (the "Indirect Expenses"). The reimbursement for the Indirect Expenses is $0.5 million per month. In 1998 and 1997, Lennar Land Partners reimbursed the Company $1.7 million and $0.2 million, respectively, of Direct Expenses and $6.0 million and $0.5 million, respectively, of Indirect Expenses. The Company, in the ordinary course of business, purchases developed land from Lennar Land Partners for use in its homebuilding activities. In 1998 and 1997, these land purchases amounted to $90.7 million and $3.2 million, respectively. The Company believes amounts paid to Lennar Land Partners for land purchases approximate amounts that would have been paid to independent third parties. 8. OPERATING PROPERTIES AND EQUIPMENT
NOVEMBER 30, (IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------------------------ Furniture, fixtures and equipment $ 17,996 10,520 Community recreational facilities 7,905 4,341 ------------------------------- 25,901 14,861 Accumulated depreciation (11,300) (6,263) ------------------------------- $ 14,601 8,598 ===============================
Operating properties and equipment are included in other assets in the consolidated balance sheets. 9. MORTGAGE NOTES AND OTHER DEBTS PAYABLE
NOVEMBER 30, (IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------------------------ Zero coupon senior convertible debentures due 2018 $231,897 -- Unsecured revolving credit notes payable with floating interest rates 136,650 376,500 Senior unsecured notes payable 133,812 137,812 Secured without recourse to the Company: Mortgage notes on land with fixed interest rates from 0% to 10.0% due through 2006 28,271 12,485 Other notes payable with floating interest rates -- 506 ------------------------------- $530,630 527,303 ===============================
30 In July 1998, the Company issued, for $229 million, zero coupon senior convertible debentures due 2018 ("Debentures") with a face amount at maturity of $493 million. The Debentures were issued at a price of $464.13 per $1,000 face amount at maturity, which equates to a yield to maturity over the life of the Debentures of 3 7/8%. Proceeds from the offering, after underwriting discount and expenses, were approximately $223 million. The Company used the proceeds to repay $100 million in short-term loans which had been incurred to fund acquisitions and to reduce balances outstanding under its revolving credit facilities. The Debentures are convertible at any time into the Company's common stock at the rate of 12.3768 shares per $1,000 face amount at maturity, which equates to an initial conversion price of $37.50 per share. If the Debentures are converted during the first five years, the Company may elect to pay cash equal to the fair value of the common stock at the time of the conversion. Holders have the option to require the Company to repurchase the Debentures on any of the fifth, tenth, or fifteenth anniversary dates from the issue date for the initial issue price plus accrued original issue discount. The Company has the option to satisfy the repurchases with any combination of cash and/or shares of the Company's common stock. The Company will have the option to redeem the Debentures, in cash, at any time after the fifth anniversary date for the initial issue price plus accrued original issue discount. During 1997, the Company obtained unsecured revolving credit facilities (together the "Facilities") in the aggregate amount of $550.0 million (increased to $650.0 million during 1998), which may be used to refinance existing indebtedness, for working capital, for acquisitions and for general corporate purposes. The Facilities agreement is with 19 financial institutions. Of the total Facilities, $500.0 million was structured as a five-year revolving credit facility maturing June 30, 2002. The second facility (up to $150.0 million) was structured as a revolving credit facility, maturing October 30, 1999. The Company may elect, at the maturity of the second facility, to convert borrowings under that facility to a term loan which amortizes in equal quarterly amounts and matures on June 30, 2002. Certain Financial Services Division subsidiaries are co-borrowers under this facility. At November 30, 1998 and 1997, no borrowings were allocated to this Division. The weighted average interest rate of the Facilities at November 30, 1998 and 1997 was 6.4% and 7.3%, respectively. The Company utilizes interest rate swap agreements to manage interest costs and hedge against risks associated with changing interest rates. In addition, the Company entered into a contract to hedge the interest rate risk associated with an anticipated offering of $200 million of 10-year notes. The contract fixes the yield on the 10-year U.S. Treasury Note (which will be used as a basis for determining the interest rate on the Company's offering of notes) at 5.8%. The Company expects to issue the notes in 1999. Any amounts paid to or received from the counterparty to this agreement at the time the notes are issued will be recognized as an adjustment to interest over the life of the notes. See Notes 1 and 15 for a further discussion of these items. 31 Previously, Greystone Homes, Inc., a wholly-owned subsidiary of Greystone, sold in a private placement $125.0 million aggregate principal amount of 10.75% Senior Notes (the "Notes"), which were subsequently registered with the Securities and Exchange Commission. In conjunction with the Company's acquisition of Greystone (see Note 3), such Notes were recorded at fair value at the acquisition date ($138.2 million) to reflect an effective interest rate of 7.75%. The premium is being amortized on an effective yield basis. The Notes are due March 1, 2004 with interest payable semi-annually. The Company may, at its option, redeem the Notes, in whole or in part, at any time on or after March 1, 1999, initially at 105.375% of the principal amount thereof, declining to 100% of the principal amount thereof on or after March 1, 2001. The Notes are general unsecured senior obligations, ranking pari passu in right of payment with all existing and future unsecured indebtedness that is not, by its terms, expressly subordinated in right of payment to the Notes. The Notes contain certain restrictive covenants including limitations on additional indebtedness. The indentures with respect to the Notes limit the ability of Greystone Homes, Inc. to pay cash dividends or make loans and advances to the Company. Under the terms of the indentures, Greystone Homes, Inc. could pay cash dividends or make loans to the Company in an amount of $60.4 million at November 30, 1998. The Notes are fully and unconditionally guaranteed by the Company. The minimum aggregate principal maturities of mortgage notes and other debts payable during the five years subsequent to November 30, 1998 are as follows: 1999 - $15.2 million; 2000 - $7.7 million; 2001 - $0.7 million; 2002 - $136.9 million and 2003 - $2.5 million. The remaining principal obligations are due subsequent to November 30, 2003. All of the notes secured by land contain collateral release provisions for accelerated payment which may be made as necessary to maintain construction schedules. 10. FINANCIAL SERVICES The assets and liabilities related to the Company's financial services operations (as described in Note 4) are summarized as follows:
NOVEMBER 30, (IN THOUSANDS) 1998 1997 - ----------------------------------------------------------------------------------------------- ASSETS: Cash and receivables, net $ 40,479 14,993 Mortgage loans held for sale or disposition, net 214,954 106,020 Mortgage loans, net 21,370 19,600 Mortgage servicing rights, net 11,080 2,471 Title plants 16,104 800 Other 28,075 13,104 ------------------------------ $332,062 156,988 ============================== LIABILITIES: Notes and other debts payable $233,316 86,936 Other 47,624 21,570 ------------------------------ $280,940 108,506 ==============================
32 A $200 million warehouse line of credit is used to fund the Division's mortgage loan activities. Borrowings under this agreement were $196.7 million and $86.9 million at November 30, 1998 and 1997, respectively, and were collateralized by mortgage loans with outstanding principal balances of $196.9 million and $87.6 million, respectively, and by servicing rights relating to approximately $2.7 billion and $1.0 billion of loans, respectively. There are several interest rate pricing options which fluctuate with market rates. The borrowing rate has been reduced to the extent that custodial escrow balances exceeded required compensating balance levels. The effective interest rate on this agreement at November 30, 1998 and 1997 was 5.1% and 1.1%, respectively. The warehouse line of credit facility matures April 28, 1999 at which time the Company expects this facility to be renewed. Certain of the Division's servicing agreements require it to pass through payments on loans even though it is unable to collect such payments and, in certain instances, be responsible for losses incurred through foreclosure. Exposure to this credit risk is minimized through geographical diversification and review of the mortgage loan servicing created or purchased. Management believes that it has provided adequate reserves for expected losses based on the fair value of the underlying collateral. Provisions for these losses have not been material to the Company. 11. LIMITED-PURPOSE FINANCE SUBSIDIARIES In prior years, limited-purpose finance subsidiaries of the Financial Services Division placed mortgages and other receivables as collateral for various long-term financings. These limited-purpose finance subsidiaries pay the principal of, and interest on, these financings primarily from the cash flows generated by the related pledged collateral, which includes a combination of mortgage notes, mortgage-backed securities and funds held by a trustee. At November 30, 1998 and 1997, the balances outstanding for the bonds and notes payable were $34.9 million and $47.5 million, respectively. The borrowings mature in years 2013 through 2018 and carry interest rates ranging from 6.7% to 14.3%. The annual principal repayments are dependent upon collections on the underlying mortgages, including prepayments, and cannot be reasonably determined. As part of the spin-off of the Company's commercial real estate investment and management business, LNR received an interest in the assets of the limited-purpose finance subsidiaries to the extent such assets exceeded the related liabilities. This interest amounted to $3.0 million at the date of the spin-off. 12. INCOME TAXES The provision for income taxes, including the provision relating to discontinued operations, consisted of the following:
YEARS ENDED NOVEMBER 30, (IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- CURRENT: Federal $74,739 75,769 65,635 State 9,308 7,239 8,604 ----------------------------------------------- 84,047 83,008 74,239 ----------------------------------------------- DEFERRED: Federal 6,493 (26,043) (17,591) State 5,506 (677) (395) ----------------------------------------------- 11,999 (26,720) (17,986) ----------------------------------------------- $96,046 56,288 56,253 ===============================================
33 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows:
NOVEMBER 30, (IN THOUSANDS) 1998 1997 - ----------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS: Acquisition adjustments $ 24,630 56,823 Reserves and accruals 41,722 36,003 Net operating loss and capital loss carryforwards, tax affected 6,340 6,340 Investments in partnerships 4,943 -- Other 3,229 2,882 ------------------------------ Deferred tax assets 80,864 102,048 Less: valuation allowance (7,659) (7,659) ------------------------------ Total deferred tax assets, net 73,205 94,389 ------------------------------ DEFERRED TAX LIABILITIES: Capitalized expenses 5,538 15,397 Deferred gains 1,203 1,061 Investments in partnerships -- 2,813 Installment sales 2,386 3,397 Other 2,978 2,467 ------------------------------ Total deferred tax liabilities 12,105 25,135 ------------------------------ Net deferred tax asset $ 61,100 69,254 ==============================
The Homebuilding Division's net deferred tax asset amounting to $57.5 million and $61.3 million at November 30, 1998 and 1997, respectively, is included in other assets in the consolidated balance sheets. At November 30, 1998 and 1997, the Financial Services Division and the limited-purpose finance subsidiaries had net deferred tax assets of $3.6 million and $8.0 million, respectively. SFAS No. 109 requires the reduction of the deferred tax asset by a valuation allowance if, based on the weight of available evidence, it is more likely than not that a portion or all of the deferred tax asset will not be realized. For the years ended November 30, 1998 and 1997, the Company had a valuation allowance of $7.7 million for net operating loss and capital loss carryforwards and certain acquisition adjustments which currently are not expected to be realized. Based on management's assessment, it is more likely than not that the net deferred tax asset will be realized through future taxable earnings. 34 A reconciliation of the statutory rate and the effective tax rate follows:
% OF PRE-TAX INCOME ---------------------------------------- 1998 1997 1996 ---------------------------------------- Statutory rate 35.0 35.0 35.0 State income taxes, net of federal income tax benefit 4.0 4.0 4.0 Other 1.0 1.0 -- ---------------------------------------- Effective rate 40.0 40.0 39.0 ========================================
13. EARNINGS PER SHARE The Company adopted SFAS No. 128 in the first quarter of 1998. Earnings per share for 1997 and 1996 have been restated to conform with SFAS No. 128. Basic and diluted earnings per share for the years ended November 30, 1998, 1997 and 1996 were calculated as follows:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 ----------------------------------------------- NUMERATOR: Numerator for basic earnings per share - net earnings $144,068 84,431 87,986 Interest on zero coupon convertible debentures 1,732 -- - ----------------------------------------------- Numerator for diluted earnings per share $145,800 84,431 87,986 =============================================== DENOMINATOR: Denominator for basic earnings per share - weighted average shares 55,660 37,473 35,901 Effect of dilutive securities: Employee stock options 945 410 315 Zero coupon convertible debentures 2,019 -- - ----------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 58,624 37,883 36,216 =============================================== Basic earnings per share $ 2.59 2.25 2.45 =============================================== Diluted earnings per share $ 2.49 2.23 2.43 ===============================================
35 14. CAPITAL STOCK COMMON STOCK The Company has two classes of common stock. The common stockholders have one vote for each share owned in matters requiring stockholder approval and during 1998 received quarterly dividends of $0.0125 per share and during 1997 received quarterly dividends of $0.025 per share prior to the spin-off and $0.0125 per share subsequent to the spin-off. The Class B common stockholders have ten votes for each share of stock owned and during 1998 received quarterly dividends of $0.01125 per share and during 1997 received quarterly dividends of $0.0225 per share prior to the spin-off and $0.01125 per share subsequent to the spin-off. As of November 30, 1998, Mr. Leonard Miller, Chairman of the Board of the Company, owned or controlled 9.9 million shares of common stock and Class B common stock, which represented approximately 67% voting control of the Company. In February 1998, the Company filed a shelf registration statement and prospectus with the Securities and Exchange Commission to offer, from time to time, its common stock, preferred stock, depositary shares, debt securities or warrants at an aggregate offering price not to exceed $500 million. As of November 30, 1998, the Company had $235 million available under the shelf registration statement. Proceeds can be used for repayment of debt, acquisitions and general corporate purposes. In March 1998, the Company entered into an equity draw-down agreement with a major international banking firm (the "Firm") under which the Company has the option to sell common stock, up to proceeds of $120 million, to the Firm in increments of up to $15 million (or such higher amount as may be agreed to by the parties) per month. In the event the Company elects to sell common stock, the sales price is equal to 98% of the average of the daily high and low stock price from time to time. As of November 30, 1998, the Company had issued 1.1 million shares under the agreement resulting in proceeds to the Company of $36 million. In 1998 and 1997, the Company issued 3.5 million and 17.0 million shares of common stock, respectively, in connection with acquisitions of businesses and properties (see Note 3). STOCK OPTION PLANS The Lennar Corporation 1991 Stock Option Plan ("1991 Plan") provided for the granting of options to certain key employees of the Company to purchase shares at prices not less than market value as of the date of the grant. No options granted under the 1991 Plan may be exercisable until at least six months after the date of the grant. Thereafter, exercises are permitted in varying installments, on a cumulative basis. Each stock option granted will expire on a date determined at the time of the grant, but not more than 10 years after the date of the grant. The Lennar Corporation 1997 Stock Option Plan ("1997 Plan") provides for the granting of options or stock appreciation rights to certain key employees of the Company to purchase shares at prices not less than market value as of the date of the grant. No options granted under the 1997 Plan may be exercisable until at least six months after the date of the grant. Thereafter, exercises are permitted in varying installments, on a cumulative basis. Each stock option and stock appreciation right granted will expire on a date determined at the time of the grant, but not more than 10 years after the date of the grant. 36 A summary of the Company's stock option activity for the years ended November 30, 1998, 1997 and 1996 was as follows:
1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE STOCK OPTIONS PRICE STOCK OPTIONS PRICE STOCK OPTIONS PRICE ------------------------------------------------------------------------------------------------------------------------------ Outstanding, beginning of year 2,815,880 $ 10.60 1,056,350 $ 12.65 995,250 $ 11.15 Granted 1,372,500 $ 24.12 972,500 $ 19.52 126,500 $ 23.74 Forfeited: Terminations (201,498) $ 16.60 (13,900) $ 19.47 (16,600) $ 12.90 Spin-off transaction -- -- (249,150) $ 12.55 - -- Exercised (307,626) $ 8.41 (173,850) $ 11.17 (48,800) $ 10.91 Spin-off adjustment -- -- 459,030 $(11.45) -- -- Greystone options assumed -- -- 764,900 $ 11.58 -- -- ---------------------------------------------------------------------------------- Outstanding, end of year 3,679,256 $ 15.52 2,815,880 $ 10.60 1,056,350 $ 12.65 ---------------------------------------------------------------------------------- Exercisable, end of year 1,142,616 $ 10.69 1,012,946 $ 10.24 232,912 $ 11.20 ---------------------------------------------------------------------------------- Available for grant, end of year 1,334,622 2,611,122 654,550 --------- --------- ------- Weighted average fair value per share of options granted during the year under SFAS No. 123 $9.03 $ 7.96 $ 9.21
The following table summarizes information about fixed stock options outstanding at November 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------ ----------------------------------- NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED OUTSTANDING AT AVERAGE AVERAGE PER OUTSTANDING AT AVERAGE PER RANGE OF PER SHARE NOVEMBER 30, REMAINING SHARE NOVEMBER 30, SHARE EXERCISE PRICES 1998 CONTRACTUAL LIFE EXERCISE PRICE 1998 EXERCISE PRICE ---------------------------------------------------------------------------------------------------------------------------- $ 2.56 - $ 5.86 414,585 2.6 years $ 3.35 96,299 $ 3.15 $ 6.66 - $ 9.97 563,147 3.9 years $ 9.04 323,946 $ 9.54 $10.14 - $16.47 1,375,024 7.8 years $13.76 717,371 $12.17 $18.16 - $34.13 1,326,500 5.8 years $23.91 5,000 $18.16
The Company applies APB Opinion No. 25 and related Interpretations in accounting for its fixed stock option plans. No compensation expense is recognized because all stock options granted have exercise prices not less than the market value of the Company's stock on the date of the grant. Under SFAS No. 123, compensation cost for the Company's stock-based compensation plans would be determined based on the fair value at the grant dates for awards under those plans. Had the Company adopted SFAS No. 123 in accounting for fixed stock option plans, the pro forma effect would not be material to the Company's reported earnings from continuing operations, net earnings and earnings per share for the years ended November 30, 1998, 1997 and 1996. 37 The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
1998 1997 1996 -------------------------------------------------------------------------- Dividend yield 0.1% - 0.3% 0.3% - 0.4% 0.4% Volatility rate 32% - 39% 25% - 28% 30% - 35% Risk-free interest rate 4.7% - 6.0% 5.8% - 6.1% 5.8% - 6.1% Expected option life (years) 3.9 - 7.7 3.9 - 8.6 4.5 - 8.6
EMPLOYEE STOCK OWNERSHIP/401(K) PLAN Prior to 1998, the Employee Stock Ownership/401(k) Plan ("Plan") provided shares of stock to employees who had completed one year of continuous service with the Company. During 1998, the Plan was amended to exclude any new shares from being provided to employees. All prior year contributions to employees actively employed on or after October 1, 1998 vest at a rate of 20% per year over a five year period. All active participants in the plan whose employment terminated prior to October 1, 1998 vested based upon the plan that was active prior to their termination of employment. Under the 401(k) portion of the Plan, contributions made by employees can be invested in a variety of mutual funds, and the Company may also make contributions for the benefit of employees. The Company records as compensation expense an amount which approximates the vesting of the contributions to the Employee Stock Ownership portion of the Plan, as well as the Company's contribution to the 401(k) portion of the Plan. This amount was $2.9 million in 1998, $1.7 million in 1997 and $1.1 million in 1996. In 1997 and 1996, 34,469 and 20,505 shares, respectively, of Lennar common stock were contributed to participants' accounts. RESTRICTIONS ON PAYMENT OF DIVIDENDS Other than as required to maintain the financial ratios and net worth requirements under the revolving credit facilities, there are no restrictions on the payment of dividends on common stock by the Company. The cash dividends paid with regard to a share of Class B common stock in a calendar year may not be more than 90% of the cash dividends paid with regard to a share of common stock in that calendar year. Furthermore, there are no agreements which restrict the payment of dividends by subsidiaries to the Company, except for the indentures with respect to the Greystone Homes, Inc. Notes (see Note 9). 15. FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at November 30, 1998 and 1997, using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The table excludes cash and cash equivalents, receivables and accounts payable, which had fair values approximating their carrying values. 38
NOVEMBER 30, - ---------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS FINANCIAL SERVICES: Mortgage loans held for sale or disposition, net $214,954 219,395 106,020 107,617 Mortgage loans, net 21,370 21,100 19,600 19,773 Investments held-to-maturity 5,240 5,297 -- -- LIMITED-PURPOSE FINANCE SUBSIDIARIES: Collateral for bonds and notes payable $ 34,892 38,221 47,456 50,715 LIABILITIES HOMEBUILDING: Mortgage notes and other debts payable $530,630 511,019 527,303 527,303 FINANCIAL SERVICES: Notes and other debts payable $233,316 233,188 86,936 86,936 LIMITED-PURPOSE FINANCE SUBSIDIARIES: Bonds and notes payable $ 34,892 35,591 47,456 47,886 OFF-BALANCE SHEET FINANCIAL INSTRUMENTS HOMEBUILDING: Interest rate swap agreements $ -- (6,423) -- (139) Interest rate hedge agreement -- (15,578) -- -- FINANCIAL SERVICES: Commitments to originate loans $ -- 18 -- (42) Forward commitments to sell loans -- (539) -- (103)
The following methods and assumptions are used by the Company in estimating fair values: Mortgages notes and other debts payable: The fair value of fixed rate borrowings is based on discounting future cash flows using the Company's incremental borrowing rate. Variable rate borrowings are tied to market indices and thereby approximate fair value. Financial services assets, liabilities and off-balance sheet financial instruments: The fair values are based on quoted market prices, if available. The fair values for instruments which do not have quoted market prices are estimated by the Company on the basis of discounted cash flows or other financial information. Interest rate swap and hedge agreements: The fair value is based on dealer quotes and generally represents an estimate of the amount the Company would pay to terminate the agreement at the reporting date. During 1997, proceeds from the sale of available-for-sale securities amounted to $122.5 million and resulted in gross realized gains of $2.9 million. During 1996, proceeds from the sale of available-for-sale securities amounted to $18.1 million and resulted in gross realized gains of $1.7 million. In 1997 and 1996, available-for-sale securities were held by the commercial real estate investment and management business, which was spun-off in 1997. 39 The Company utilizes interest rate swap agreements to manage interest costs and hedge against risks associated with changing interest rates. The Company designates interest rate swaps as hedges of specific debt instruments and recognizes interest differentials as adjustments to interest expense as the differentials occur. Counterparties to these agreements are major financial institutions. Credit loss from counterparty non-performance is not anticipated. A majority of the Company's variable rate borrowings are based on the London Interbank Offering Rate ("LIBOR") index. At November 30, 1998, Lennar had three interest rate swap agreements outstanding with a total notional amount of $200 million, which will mature in 2002. These agreements fixed the LIBOR index at approximately 6.1%. The effect of the interest rate swap agreements on interest incurred and on the average cost of borrowing was an increase of $0.8 million and 0.11%, $0.8 million and 0.17% and $1.5 million and 0.18% for the years ended November 30, 1998, 1997 and 1996, respectively. During 1998, the Company entered into a contract to hedge the interest rate risk associated with an anticipated offering of $200 million of 10-year notes. The contract fixes the yield on the 10-year U.S. Treasury Note (which will be used as a basis for determining the interest rate on the Company's offering of notes) at 5.8%. The Company expects to issue the notes in 1999. Any amounts paid to or received from the counterparty to this agreement at the time the notes are issued will be recognized as an adjustment to interest over the life of the notes. As of November 30, 1998, the Financial Services Division's pipeline of loans in process totaled approximately $46.6 million. There is no exposure to credit risk in this type of commitment until the loans are funded. However, the Division uses the same credit policies in the approval of the commitments as are applied to all lending activities. Since a portion of these commitments is expected to expire without being exercised by the borrower, the total commitments do not necessarily represent future cash requirements. There is no exposure to market risk until a rate commitment is extended by the Company to a borrower. Loans in the pipeline of loans in process for which interest rates were committed to the borrower totaled approximately $35.4 million as of November 30, 1998. Substantially all of these commitments are for periods of 30 days or less. Mandatory mortgage-backed securities ("MBS") forward commitments are used by the Company to hedge its interest rate exposure during the period from when the Company extends an interest rate lock to a loan applicant until the time at which the loan is sold to an investor. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by the Company by entering into agreements with investment bankers with primary dealer status and with permanent investors meeting the credit standards of the Company. At any time, the risk to the Company, in the event of default by the purchaser, is the difference between the contract price and current market value. At November 30, 1998, the Company had open commitments amounting to $187.8 million to sell MBS with varying settlement dates through February 1999. The mortgage loan inventory and pipeline will be used to form the MBS that will fill the forward delivery contracts. 16. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development, and sale of real estate in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to manage the financial risk of adverse market conditions associated with longer-term land holdings. The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 1999 - $16.1 million; 2000 - $13.1 million; 2001 - $9.7 million; 2002 - $6.9 million; 2003 - $3.8 million and thereafter - $5.7 million. Rental expense for the years ended November 30, 1998, 1997 and 1996 was $14.3 million, $2.5 million and $2.0 million, respectively. 40 The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $81.4 million at November 30, 1998. The Company also had outstanding performance and surety bonds with estimated costs to complete of $174.4 million related principally to its obligations for site improvements at various projects at November 30, 1998. The Company does not believe that any such bonds are likely to be drawn upon. 17. SUPPLEMENTAL INFORMATION ON GREYSTONE HOMES, INC. Summarized financial information for Greystone Homes, Inc. is presented below.
SUMMARY CONSOLIDATED BALANCE SHEETS NOVEMBER 30, (IN THOUSANDS) 1998 1997 ----------------------------------------------------------------------------------------------------------- ASSETS: Cash and cash equivalents $ 17,038 5,565 Inventories 452,742 330,568 Goodwill, net 43,322 45,612 Other assets 36,280 42,521 -------------------------- $549,382 424,266 ========================== LIABILITIES AND STOCKHOLDER'S EQUITY: Accounts payable and other liabilities $ 74,966 47,460 Intercompany payable to Lennar Corporation 90,164 19,600 Notes payable 2,458 4,160 Senior unsecured notes payable 133,812 137,812 -------------------------- Total liabilities 301,400 209,032 Stockholder's equity 247,982 215,234 -------------------------- $549,382 424,266 ========================== SUMMARY CONSOLIDATED STATEMENTS OF EARNINGS PRO FORMA ------------------------------- YEAR ENDED NOVEMBER 30, YEARS ENDED NOVEMBER 30, (IN THOUSANDS) 1998 1997 1996 -------------------------------------------------------------------------------------------------------------------------- Homebuilding revenues $669,077 577,729 421,708 Cost of homes sold 516,571 456,829 329,067 ------------------------------------------------------------- Gross margin 152,506 120,900 92,641 Selling, general and administrative expenses 81,484 57,901 44,976 Interest and other, net 16,442 14,005 12,905 ------------------------------------------------------------- Pretax earnings 54,580 48,994 34,760 Provision for income taxes 21,832 20,498 14,804 ------------------------------------------------------------- Net earnings $ 32,748 28,496 19,956 =============================================================
41 The pro forma consolidated statements of earnings reflect all purchase accounting adjustments related to the merger between the Company and Greystone. The primary purchase accounting adjustment was an increase to cost of homes sold of $6.8 million to reflect the inventories of Greystone Homes, Inc. at estimated fair value. Greystone Homes, Inc. is a wholly-owned subsidiary of the Company and is the obligor on the Notes (see Note 9). The Notes are fully and unconditionally guaranteed by the Company. Separate financial statements and other related disclosures for Greystone Homes, Inc. are not presented, as the Company's management does not consider the information material to investors. 18. QUARTERLY DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------------------------------------------------- 1998 Revenues $440,712 532,106 620,935 823,112 Earnings before income taxes $ 27,005 42,677 58,441 111,991 Net earnings $ 16,203 25,606 35,065 67,194 Earnings per share: Basic $ 0.30 0.48 0.61 1.16 Diluted $ 0.30 0.47 0.59 1.06 ========================================================= 1997 Revenues $232,455 271,924 332,620 466,083 Earnings from continuing operations before income taxes $ 16,082 20,866 32,634 16,145 Earnings from discontinued operations $ 9,617 9,276 8,374 6,559 Net earnings $ 19,427 22,004 28,281 14,719 Basic earnings per share: Continuing operations $ 0.27 0.35 0.55 0.19 Discontinued operations 0.27 0.26 0.23 0.16 --------------------------------------------------------- $ 0.54 0.61 0.78 0.35 ========================================================= Diluted earnings per share: Continuing operations $ 0.27 0.35 0.55 0.19 Discontinued operations 0.27 0.26 0.23 0.16 --------------------------------------------------------- $ 0.54 0.61 0.78 0.35 =========================================================
Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with per share amounts for the year. 42 SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION (UNAUDITED) On June 10, 1997, the Company's Board of Directors approved a plan to spin-off its commercial real estate investment and management business through the distribution of the stock of LNR. The spin-off, in the form of a tax-free distribution, was completed effective October 31, 1997. Following the spin-off transaction, the Company and LNR formed Lennar Land Partners to acquire, develop and sell land. The Company and LNR contributed properties to Lennar Land Partners in exchange for 50% general partnership interests in Lennar Land Partners. The formation of Lennar Land Partners was effective as of October 31, 1997. On June 10, 1997, the Company's Board of Directors also approved a plan to acquire Pacific Greystone Corporation. The merger became effective after the spin-off of the commercial real estate investment and management business. Such merger became effective on October 31, 1997. The following pro forma information for 1997 and 1996 is presented to report results on a more comparable basis to 1998. Results for 1997 and 1996 have been adjusted to give pro forma effect to these transactions as if such transactions had been completed as of the beginning of each period for which pro forma consolidated operating data is presented. The pro forma results for Lennar were derived from the 12 months ended November 30 and the pro forma results for Greystone were derived from the 12 months ended December 31. The following pro forma financial information does not purport to be indicative of the results of operations which would actually have been reported if the transactions had occurred on the dates or for the periods indicated:
PRO FORMA -------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 ----------------------------------------------------------------------------------------------------------------------------- REVENUES: Homebuilding $2,204,428 1,692,083 1,354,568 Financial services 208,543 52,305 44,218 Limited-purpose finance subsidiaries 3,894 5,143 6,436 ------------------------------------------------------------- Total revenues $2,416,865 1,749,531 1,405,222 ------------------------------------------------------------- OPERATING EARNINGS: Homebuilding $ 283,369 172,141 142,988 Financial services 33,335 11,642 6,470 Limited-purpose finance subsidiaries -- 13 (3) ------------------------------------------------------------- Total operating earnings 316,704 183,796 149,455 ------------------------------------------------------------- Corporate general and administrative expenses 28,962 23,212 18,894 Interest expense 47,628 30,657 29,440 ------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 240,114 129,927 101,121 Provision for income taxes 96,046 52,646 41,348 ------------------------------------------------------------- NET EARNINGS $ 144,068 77,281 59,773 ------------------------------------------------------------- BASIC EARNINGS PER SHARE $ 2.59 1.46 1.13 ============================================================= DILUTED EARNINGS PER SHARE $ 2.49 1.44 1.12 =============================================================
43 SHAREHOLDER INFORMATION LENNAR CORPORATION AND SUBSIDIARIES ANNUAL MEETING The Annual Stockholders' Meeting will be held at 10:00 a.m. on April 6, 1999 at the Doral Park Golf and Country Club, 5001 N.W. 104th Avenue Miami, Florida 33178 REGISTRAR AND TRANSFER AGENT The First National Bank of Boston 150 Royall Street Canton, Massachusetts 02021 LISTING New York Stock Exchange (LEN) CORPORATE COUNSEL Rogers & Wells 200 Park Avenue New York City, New York 10166 INDEPENDENT AUDITORS Deloitte & Touche LLP 100 Southeast Second Street Miami, Florida 33131 FORM 10-K AVAILABLE A copy of the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission is available without charge to any stockholder upon written request to: Investor Relations Lennar Corporation 700 N.W. 107th Avenue Miami, Florida 33172 Telephone: (305) 559-4000 COMPARATIVE COMMON STOCK DATA
======================================================================================================= COMMON STOCK PRICES CASH DIVIDENDS NEW YORK STOCK EXCHANGE PER SHARE - ------------------------------------------------------------------------------------------------------- FISCAL HIGH/LOW PRICE COMMON STOCK CLASS B QUARTER 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------- First $28.75 - 19.00 27.75 - 25.00* 1 1/4 /cents/ 2 1/2 /cents/ 1 1/8 /cents/ 2 1/4 /cents/ Second 36.19 - 24.19 27.50 - 24.00* 1 1/4 /cents/ 2 1/2 /cents/ 1 1/8 /cents/ 2 1/4 /cents/ Third 34.38 - 18.13 37.63 - 26.00* 1 1/4 /cents/ 2 1/2 /cents/ 1 1/8 /cents/ 2 1/4 /cents/ Fourth 24.38 - 14.88 44.81 - 15.81* 1 1/4 /cents/ 1 1/4 /cents/ 1 1/8 /cents/ 1 1/8 /cents/ =======================================================================================================
* Market prices prior to November 1, 1997 are reflective of the stock value prior to the spin-off of the commercial real estate investment and management business. As of November 30, 1998, there were approximately 800 holders of record of the Company's common stock. 44 EX-21 5 EXHIBIT 21
Lennar Corporation and Subsidiaries Listing of Subsidiaries STATE OF INCORPORATION ---------------- LENNAR CORPORATION DELAWARE SUBSIDIARIES - ------------------------------------------------------------------------------------------------------- Adjustable Mortgage Finance Corporation Florida Ameristar Financial Services, Inc. California BCDC Corp. California Boca Greens, Inc. Florida Boca Isles Club, Inc. Florida Boca Isles South Club, Inc. Florida Bramalea California Properties, Inc. California Bramalea California Realty, Inc. California Bramalea California, Inc. California Bramalea Mortgage, Inc. California Clodine-Bellaire LP, Inc. Nevada Club Pembroke Isles, Inc. Florida Continental Escrow Company California DCA Acceptance Corporation Alabama DCA at Banyan Tree, Inc. Florida DCA at North Lauderdale, Inc. Florida DCA at Pembroke Pointe, Inc. Florida DCA at Wiggins Bay, Inc. Florida DCA Builder Issuer, Inc. Florida DCA CML Acceptance, Inc. Florida DCA Financial Corporation Florida DCA General Contractors, Inc. Florida DCA Homes of Central Florida, Inc. Florida DCA NJ Realty, Inc. New Jersey DCA of Broward County, Inc. Florida DCA of Hialeah, Inc. Florida DCA of Lake Worth, Inc. Florida DCA of New Jersey, Inc. New Jersey Devco Land Corp. Florida Dyeing & Finishing, Inc. Florida First Atlantic Building Corp. Florida Greystone Construction, Inc. Arizona Greystone Homes of Nevada, Inc. Delaware
1
Lennar Corporation and Subsidiaries Listing of Subsidiaries SUBSIDIARIES - ------------------------------------------------------------------------------------------------------- Greystone Homes, Inc. Delaware Greystone Nevada, LLC Delaware Harris County LP, Inc. Nevada Hillside, Inc. Florida Inactive Corporations, Inc. Florida Institutional Mortgages, Inc. Florida Kings Isle Recreation Corp. Florida Kings Ridge Golf Corporation Florida Kings Ridge Recreation Corporation Florida Kings Wood Development Corporation Florida La Canada Holding Company California Lennar Acquisition Corp. II California Lennar Bridges, LLC California Lennar Communities Development, Inc. Delaware Lennar Financial Services, Inc. Florida Lennar Homes, Inc. Florida Lennar Homes of Arizona, Inc. Arizona Lennar Homes of California, Inc. California Lennar Homes of Texas Land and Construction, Ltd. Texas Lennar Homes of Texas Sales and Marketing, Ltd. Texas Lennar La Paz, Inc. California Lennar La Paz Limited, Inc. California Lennar Land Partners Sub, Inc. Delaware Lennar Management, Inc. California Lennar Nevada Partners Nevada Lennar Nevada, Inc. Nevada Lennar Northland I, Inc. California Lennar Northland II, Inc. California Lennar Northland III, Inc. California Lennar Northland IV, Inc. California Lennar Northland V, Inc. California Lennar Northland VI, Inc. California Lennar Oceanside, LLC California Lennar Realty, Inc. Florida Lennar Renaissance, Inc. California
2
Lennar Corporation and Subsidiaries Listing of Subsidiaries SUBSIDIARIES - ------------------------------------------------------------------------------------------------------- Lennar Sacramento, Inc. California Lennar Sales Corp. California Lennar San Jose Holdings, Inc. California Lennar Southland I, Inc. California Lennar Southland II, Inc. California Lennar Southland III, Inc. California Lennar Southwest Holding Corp. Nevada Lennar Texas Holding Company Texas Lennar Title Services, Inc. Florida Long Point Development Corporation Texas Lucerne Greens, Inc. Florida Lucerne Merged Condominiums, Inc. Florida M.A.P. Builders, Inc. Florida M.A.P. Vineyards of Plantation, Inc. Florida Marlborough Development Corporation (CA) California Marlborough Financial Corporation California Marlborough Investment Corporation, The California Marlborough Mortgage Corporation California Meritus Title Company California Midland Housing Industries Corp. California Midland Investment Corporation California Mission Viejo 12S Venture, L.P. California Mission Viejo Holdings, Inc. California Monterey Village Development Corp. Florida Multi-Builder Acceptance Corp. Alabama NGMC Finance Corporation Florida NGMC Finance Corporation, IV Florida North American Asset Development Corporation California North American Real Estate Services, Inc. California North American Title Agency of Arizona, Inc. Arizona North American Title Company of Colorado Colorado North American Title Company, Inc. California North American Title Guaranty California North American Title Insurance Company California Perris Green Valley Associates California Polygon La Paz Associates Washington Polygon Northwood Limited Partnership Washington Quality Roof Truss Company Florida Rancho Summit LLC California Regency Title Company Texas
3
Lennar Corporation and Subsidiaries Listing of Subsidiaries SUBSIDIARIES - ------------------------------------------------------------------------------------------------------- Riviera Land Corp. Florida Rockhurst-Fontaine Limited Partnership Washington Santa Fe Lakes, L.P. California Satisfaction, Inc. Florida Savell Gulley Development Corporation Texas Silver Lakes-Gateway Clubhouse, Inc. Florida State Home Acceptance Corporation Florida Stevenson Ranch Cable, Inc. California Strategic Holdings, Inc. Nevada Strategic Technologies Communications of Calif., Inc. California Strategic Technologies, Inc. Florida Superior Realty & Marketing, Inc Florida TitleAmerica Insurance Corporation Florida UAMC Asset Corp. Nevada Universal American Finance Corp., I. Florida Universal American Mortgage Company Florida Universal American Mortgage Co. of California California Universal Title Insurors, Inc. Florida W.B. Homes, Inc. Florida West Venture California West Venture BFA Corporation California West Venture Homes Sales, Inc. California
4 EX-23 6 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-45442 and No. 2-89104 of Lennar Corporation on Form S-8 of our reports dated January 8, 1999, appearing in and incorporated by reference in this Annual Report on Form 10-K of Lennar Corporation for the year ended November 30, 1998. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Certified Public Accountants Miami, Florida February 26, 1999 EX-27 7
5 1,000 YEAR NOV-30-1998 NOV-30-1998 34,677 0 27,336 3,533 1,198,553 1,257,033 25,901 11,300 1,917,834 355,707 798,838 0 0 5,815 709,850 1,917,834 2,089,762 2,416,865 1,641,741 1,711,020 418,103 0 47,628 240,114 96,046 144,068 0 0 0 144,068 2.59 2.49 Represents basic EPS in accordance with SFAS 128.
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