-----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, VjFt4w1llM9VZWJCzS9+93R2wQiPj7JwmDs2/LU/Nm9rAXkVGBPTs2eRAcXCqIgg 8Tt0RxK2gu5ivEAHDukfuw== 0000931763-02-000536.txt : 20020414 0000931763-02-000536.hdr.sgml : 20020414 ACCESSION NUMBER: 0000931763-02-000536 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011130 FILED AS OF DATE: 20020228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LENNAR CORP /NEW/ CENTRAL INDEX KEY: 0000920760 STANDARD INDUSTRIAL CLASSIFICATION: GEN BUILDING CONTRACTORS - RESIDENTIAL BUILDINGS [1520] IRS NUMBER: 954337490 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11749 FILM NUMBER: 02562896 BUSINESS ADDRESS: STREET 1: 700 NW 107TH AVE STREET 2: STE 300 CITY: MIAMI STATE: FL ZIP: 33172 BUSINESS PHONE: 3055594000 MAIL ADDRESS: STREET 1: 700 N W 107TH AVE STREET 2: STE 300 CITY: MIAMI STATE: FL ZIP: 33172 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC GREYSTONE CORP /DE/ DATE OF NAME CHANGE: 19940323 10-K 1 d10k.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2001 Commission file number 1-11749 ---------------- LENNAR CORPORATION (Exact name of registrant as specified in its charter)
Delaware 95-4337490 (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) (305) 559-4000 Registrant's telephone number, including area code 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 10c 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. [_] As of January 31, 2002, registrant had outstanding 54,460,211 shares of common stock and 9,700,462 shares of Class B common stock (which can be converted into common stock). Of the total shares outstanding, 53,347,075 shares of common stock and 19,501 shares of Class B common stock, having a combined aggregate market value (assuming the Class B shares were converted) on that date of $2,959,176,639, were held by non-affiliates of the registrant. Documents incorporated by reference:
Related Section Documents ------- --------- III Definitive Proxy Statement to be filed pursuant to Regulation 14A on or before March 30, 2002.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I Item 1. Business. General Development of Business We are one of the nation's largest homebuilders and a provider of residential financial services. Our 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 directly and through our unconsolidated partnerships. Our financial services operations provide mortgage financing, title insurance and closing services for both our homebuyers and others, resell the residential mortgage loans it originates in the secondary mortgage market, and also provide high-speed Internet access, cable television and alarm monitoring services to residents of our communities and others. The following is a summary of our growth: 1954--We were founded as a Miami homebuilder. 1972--Entered the Arizona homebuilding market. 1986--Acquired Development Corporation of America in Florida. 1991--Entered the Texas homebuilding market. 1995--Entered the California homebuilding market through the acquisition of Bramalea California, Inc. 1996--Expanded in California through our acquisition of Renaissance Homes, Inc., significantly expanded our 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) and acquired Regency Title. 1997--Continued our expansion in California through homesite acquisitions and unconsolidated partnership investments. We also acquired Pacific Greystone Corporation which further expanded our operations in California and Arizona and brought us into the Nevada homebuilding market. 1998--Acquired the properties of two California homebuilders, ColRich Communities and Polygon Communities, acquired a Northern California homebuilder, Winncrest Homes and acquired North American Title. 1999--Acquired Southwest Land Title and Eagle Home Mortgage. 2000--Acquired U.S. Home Corporation which expanded our operations into New Jersey, Maryland/Virginia, Minnesota, Ohio and Colorado and strengthened our position in other states, and acquired Texas Professional Title. 2002--Acquired Patriot Homes, a homebuilder in the Baltimore marketplace, and expanded into the Carolinas with our acquisition of Don Galloway Homes and the assets and operations of Sunstar Communities. Financial Information about Operating Segments We have two operating segments--homebuilding and financial services. The financial information related to these operating segments is contained in Item 8. 2 Narrative Description of Business HOMEBUILDING Under the Lennar Family of Builders banner, we operate using the following brand names: Lennar Homes, U.S. Home, Greystone Homes, Village Builders, Renaissance Homes, Orrin Thompson Homes, Lundgren Bros., Winncrest Homes, Sunstar Communities, Don Galloway Homes, Patriot Homes, Rutenberg Homes and NuHome. Our active adult communities are primarily marketed under the Heritage and Greenbriar brand names. Through our own efforts and unconsolidated partnerships in which we have interests, we are involved in all phases of planning and building in our residential communities, including land acquisition, site planning, preparation and improvement of land, and design, construction and marketing of homes. We subcontract virtually all aspects of development and construction. We primarily sell single-family attached and detached homes. The homes are targeted primarily to first-time, move-up and active adult homebuyers. The average sales price of a Lennar home was $237,000 in fiscal 2001. Current Homebuilding Activities
Homes Delivered in the Years Ended November 30, -------------------- Region 2001 2000 1999 - ------ ------ ------ ------ Florida.................................................... 6,620 5,361 4,241 Maryland/Virginia.......................................... 692 466 -- New Jersey................................................. 422 328 -- ------ ------ ------ East Region.............................................. 7,734 6,155 4,241 ------ ------ ------ Texas...................................................... 5,972 4,696 3,107 Minnesota.................................................. 745 472 -- Ohio....................................................... 21 35 -- ------ ------ ------ Central Region........................................... 6,738 5,203 3,107 ------ ------ ------ California................................................. 4,372 3,805 3,731 Colorado................................................... 1,524 984 -- Arizona.................................................... 1,944 1,568 1,064 Nevada..................................................... 792 521 446 ------ ------ ------ West Region.............................................. 8,632 6,878 5,241 ------ ------ ------ Subtotal................................................. 23,104 18,236 12,589 Unconsolidated partnerships................................ 795 342 17 ------ ------ ------ Total.................................................... 23,899 18,578 12,606 ====== ====== ======
Management and Operating Structure We balance a local operating structure with centralized corporate level management. Our local managers, who have significant experience both in the homebuilding industry generally and in their particular markets, are responsible for operating decisions regarding land identification, home design, construction and marketing. Decisions related to our overall strategy, acquisitions of land and businesses, financing, cash management and information systems are centralized at the corporate level. We view unconsolidated partnerships and similar entities as a means to both expand our market opportunities and manage our risk. For additional information about our unconsolidated partnerships, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7. Property Acquisition In our homebuilding operations, we generally acquire land for the development and construction of homes which we sell to homebuyers. We also sell land to third parties. Land acquisitions are subject to strict underwriting criteria and may be made directly or through partnerships with other entities. Through unconsolidated partnerships, we reduce our risk and the amount invested in owned land and increase our access 3 to other land. Partnerships also, in some instances, help us acquire land to which we could not obtain access, or could not obtain access on as favorable terms, without the participation of a strategic partner. In some instances, we acquire land through option contracts, which let us defer purchasing land until we are ready to build homes on it. Most of our land is not subject to mortgages; however, the majority of land acquired by partnerships is subject to purchase money mortgages. We generally do not acquire land for speculation. At November 30, 2001, we owned approximately 55,000 homesites and had access to an additional 73,000 homesites through options or unconsolidated partnerships. Construction and Development We supervise and control the development and building of our residential communities. We employ subcontractors for site improvements and virtually all of the work involved in the construction of homes. In almost all instances, the arrangements with our 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. We do not own heavy construction equipment and only have a relatively small labor force used to supervise development and construction and perform routine maintenance and minor amounts of other work. We generally finance construction and land development activities with cash generated from operations as well as from borrowings under our working capital lines and issuances of public debt. Marketing We offer a diversified line of homes for first-time, move-up and active adult homebuyers. With homes priced from below $100,000 to above one million dollars and available in a variety of environments ranging from urban infill communities to golf course communities, we are focused on providing homes for a wide spectrum of buyers. Our unique dual marketing strategies of "Everything's Included/SM/"and "Design Studio/SM/"provide customers with flexibility to choose how they would like to purchase their new home. In our Everything's Included/SM/ homes, we make the homebuying experience simple by including desirable, top-of-the-line features as standard items. In our Design Studio/SM/ homes, we provide an individualized homebuying experience and personalized design consultation in our design studios, offering a diverse selection of upgrades and options for a new home. We sell our homes primarily from models that we have designed and constructed. We employ sales associates who are paid salaries, commissions or both to make on-site sales of homes. We also sell through independent brokers. We advertise our communities in newspapers and other local and regional publications, on billboards and through our web site, www.lennar.com. The web site allows homebuyers to search for homes with specific design criteria in their price range and desired location. In addition, we advertise our active adult communities in areas where prospective active adult homebuyers live. Quality Service We employ a process which is intended to provide a positive experience for each customer throughout the pre-sale, sale, building, closing and post- closing periods. The participation of sales associates, on-site construction supervisors and post-closing customer care associates, working in a team effort, is intended to foster our reputation for quality service and ultimately lead to enhanced customer retention and referrals. Our "Heightened Awareness" program is a full-time focused initiative designed to objectively evaluate and measure the quality of construction in our communities. The purpose of this program is to ensure that the homes delivered to our customers meet our high standards. Each of our communities is inspected and reviewed on a regular basis by one of our trained associates. This program is an example of our commitment to provide the finest homes to our customers. In addition to our "Heightened Awareness" program, we obtain independent surveys of selected customers through a third party consultant and use the survey results to further improve our standard of quality and customer satisfaction. Competition The housing industry is highly competitive. In our activities, we compete with numerous developers and builders of various sizes, both national and local, who are building homes in and near the areas where our communities are located. Competition is on the basis of location, design, quality, amenities, price, service and 4 reputation. Sales of existing homes also provide competition. Some of our principal national competitors include Centex Corporation, D.R. Horton, Inc., KB Home and Pulte Homes, Inc. FINANCIAL SERVICES Mortgage Financing We provide conventional, FHA-insured and VA-guaranteed mortgage loans to our homebuyers and others through our financial services subsidiaries: (1) Universal American Mortgage Company in Florida, California, Arizona, Texas, Nevada, Virginia, Maryland, New Jersey, Colorado, Minnesota, Ohio, North Carolina and South Carolina; (2) Eagle Home Mortgage, Inc. in Washington, Oregon, Utah, Arizona and Nevada and (3) AmeriStar Financial Services, Inc. in California and Nevada. In 2001, our financial services subsidiaries provided loans to 79% of our homebuyers who seek mortgage financing. Because of the availability of mortgage loans from our financial services subsidiaries, as well as independent mortgage lenders, we believe access to financing has not been, and is not, a significant problem for most purchasers of our homes. We sell the loans we originate into the secondary mortgage market, generally on a servicing released, non-recourse basis. We have a corporate risk management policy under which we hedge our interest rate risk on rate locked loan commitments and loans held for sale against exposure to interest rate fluctuations. We finance our mortgage loan activities with borrowings under our financial services subsidiaries' warehouse line of credit or from corporate liquidity when, on a consolidated basis, this enables us to minimize our overall cost of funds. Title Insurance and Closing Services We arrange title insurance for, and provide closing services to, our homebuyers and others. We provided these services in connection with approximately 173,000 real estate transactions during 2001. We provide these services through our various North American Title Company agency subsidiaries in Arizona, California, Colorado, Florida and Texas and our title insurance underwriters, North American Title Insurance Corporation in Florida and Texas and North American Title Insurance Company in Arizona, California and Colorado. Strategic Technologies Our subsidiary, Strategic Technologies, Inc., provides high-speed Internet access, cable television and alarm monitoring services to residents of our communities and others. At November 30, 2001, we had approximately 5,300 cable television subscribers in California and approximately 10,600 alarm monitoring customers in Florida and California. RELATIONSHIP WITH LNR PROPERTY CORPORATION In connection with the 1997 transfer of our commercial real estate investment and management business to LNR Property Corporation ("LNR"), and the spin-off of LNR to our stockholders, we entered into an agreement which, among other things, prevents us from engaging at least until December 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 December 2002, in any of the businesses in which we were engaged, or anticipated becoming engaged, at the time of the spin-off (except in limited instances in which our then activities or anticipated activities overlap with LNR). Specifically, we are precluded, at least until December 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, our 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 our 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 our 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. We are not, however, prevented from owning or leasing office buildings in which we occupy a majority of the space; acquiring securities backed by pools of residential mortgages; acquiring an entity which, when it is 5 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% in 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. We and LNR are separate publicly-traded companies and neither of us has any financial interest in the other except for partnerships in which we both have investments. Stuart Miller, our President and Chief Executive Officer, is the Chairman of the Board of Directors of LNR, and Steven Saiontz, one of our Directors, is the Chief Executive Officer and a Director of LNR. In addition, Leonard Miller, our Chairman of the Board of Directors, owns stock which gives him voting control of both companies and is Chairman of the Executive Committee and a Director of LNR, for which he receives a fee. There are provisions both in our by-laws and in those of LNR requiring approval by an Independent Directors Committee of any significant transactions between us and LNR or any of its subsidiaries. For information about our partnerships with LNR, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7. REGULATION Homes and residential communities that we build must comply with state and local laws and regulations relating to, among other things, zoning, treatment of waste, construction materials which must be used, density requirements, building design and minimum elevation of properties. 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. These laws and regulations are usually administered by individual counties and municipalities and may result in fees and assessments or building moratoriums. In addition, certain new development projects 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 us to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas. In recent years, several cities and counties in which we have developments have submitted to voters "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, we believe that if similar initiatives were approved, residential construction by us and others within certain cities or counties could be seriously impacted. In order to make it possible for purchasers of some of our homes to obtain FHA-insured or VA-guaranteed mortgages, we must construct those homes in compliance with regulations promulgated by those agencies. We have registered condominium communities with the appropriate authorities in Florida and California. Sales in other states would require compliance with laws in those states regarding sales of condominium homes. Our title insurance agency subsidiaries must comply with applicable insurance laws and regulations. Our mortgage financing subsidiaries must comply with applicable real estate lending laws and regulations. The mortgage banking and title insurance subsidiaries are licensed in the states in which they do business and must comply with laws and regulations in those states regarding mortgage banking and title insurance companies. These laws and regulations include provisions regarding capitalization, operating procedures, investments, forms of policies and premiums. 6 CAUTIONARY STATEMENTS Some of the statements in this Report are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those which the statements anticipate. PARTICULAR FACTORS WHICH COULD AFFECT US The following factors in particular could significantly affect our operations and financial results. The residential homebuilding industry is cyclical and is highly sensitive to changes in economic 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, interest rate levels and demand for housing. The resale market for used homes, including foreclosed homes, also affects the sale of new homes. The residential homebuilding industry has, from time-to-time, experienced fluctuating lumber prices and supply, as well as shortages of other materials and labor, including insulation, drywall, concrete, carpenters, electricians and plumbers. Delays in construction of homes due to these factors or due to weather conditions could have an adverse effect upon our operations. Inflation can increase the cost of building materials and labor and other construction related costs. Conversely, deflation can reduce the value of our land inventory and make it more difficult to include the full cost of previously purchased land in home sale prices. Customers may be unwilling or unable to purchase our homes at times when mortgage financing costs are high. Virtually all of our homebuyers finance their acquisitions through our financial services subsidiaries or third-party lenders. In general, housing demand is adversely affected by increases in interest rates and by decreases in the availability of mortgage financing. If effective mortgage interest rates increase and the ability or willingness of prospective buyers to finance home purchases is adversely affected, our operating results may be negatively affected. Our homebuilding activities also are dependent upon the availability and cost of mortgage financing for buyers of homes currently owned by potential purchasers of our homes who cannot purchase our homes until they sell their current homes. A number of things can cause our operating results to vary. We have historically experienced, and expect to continue to experience, variability in operating results on a quarterly basis. Factors which may contribute to this variability include, but are not limited to: . the timing of home deliveries and land sales; . the timing of receipt of regulatory approvals for the construction of homes; . the condition of the real estate market and general economic conditions; . the cyclical nature of the homebuilding and financial services industries; . prevailing interest rates and availability of mortgage financing; . the increase in the number of homes available for sale in the marketplace; . pricing policies of our competitors; . the timing of the opening of new residential communities; . weather conditions; and . the cost and availability of materials and labor. Our historical financial performance is not necessarily a meaningful indicator of future results. We expect our financial results to continue to vary from quarter to quarter. We depend on key personnel. Our success depends to a significant degree on the efforts of our senior management. Our operations may be adversely affected if certain members of senior management cease to be active in our Company. We have designed our compensation structure and employee benefit programs to encourage long-term employment by executive officers. 7 EMPLOYEES At November 30, 2001, we employed 7,728 individuals of whom 4,780 were involved in homebuilding operations and 2,948 were involved in financial services operations. We do not have collective bargaining agreements relating to any of our employees. However, some of the subcontractors we use have employees who are represented by labor unions. Item 2. Properties. For information about properties we own for use in our homebuilding activities, see Item 1. We lease and maintain our executive offices, financial services subsidiary headquarters, certain mortgage and title branches and Miami-Dade County, Florida homebuilding office in an office complex we built which is now owned by an independent third party. The leases for these offices expire in 2009. Our other homebuilding and financial services offices are located in the markets where we conduct business, generally in our communities or in leased space. Item 3. Legal Proceedings. We are parties to various claims and lawsuits which arise in the ordinary course of business. Although the specific allegations in the lawsuits differ, most of them involve claims that we failed to construct buildings in particular communities in accordance with plans and specifications or applicable construction codes and seek reimbursement for sums allegedly needed to remedy the alleged deficiencies, or assert contract issues or relate to personal injuries. Lawsuits of these types are common within the homebuilding industry. We do not believe that these claims or lawsuits will have a material effect on our business, financial position or results of operations. 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.
Common Stock Prices Cash Dividends New York Stock Exchange Per Share -------------------------- --------------------------- Fiscal Quarter High/Low Price Common Stock Class B - -------------- -------------------------- ------------- ------------- 2001 2000 2001 2000 2001 2000 First.................... $40.75--31.81 18.63--15.25 1 1/4c 1 1/4c 1 1/8c 1 1/8c Second................... $46.69--33.80 21.75--16.25 1 1/4c 1 1/4c 1 1/8c 1 1/8c Third.................... $49.88--35.02 29.44--17.88 1 1/4c 1 1/4c 1 1/8c 1 1/8c Fourth................... $45.44--31.04 34.88--25.63 1 1/4c 1 1/4c 1 1/8c 1 1/8c
As of November 30, 2001, there were approximately 2,000 holders of record of our common stock. 8 Item 6. Selected Financial Data.
At or for the Years Ended November 30, -------------------------------------------------- 2001 2000 1999 1998 1997 ---------- --------- --------- --------- --------- (Dollars in thousands, except per share amounts) Results of Operations: Revenues: Homebuilding............... $5,603,947 4,390,034 2,849,207 2,204,428 1,208,570 Financial services......... $ 425,354 316,934 269,307 212,437 94,512 Total revenues............. $6,029,301 4,706,968 3,118,514 2,416,865 1,303,082 Operating earnings: Homebuilding............... $ 785,626 480,796 340,803 283,369 120,240 Financial services......... $ 89,131 43,595 31,096 33,335 35,545 Corporate general and administrative expenses... $ 75,831 50,155 37,563 28,962 15,850 Earnings from continuing operations before income taxes..................... $ 679,423 375,635 285,477 240,114 85,727 Earnings from continuing operations................ $ 417,845 229,137 172,714 144,068 50,605 Earnings from discontinued operations................ $ -- -- -- -- 33,826 Net earnings............... $ 417,845 229,137 172,714 144,068 84,431 Per share amounts (diluted): Earnings from continuing operations................ $ 6.01 3.64 2.74 2.49 1.34 Earnings from discontinued operations................ $ -- -- -- -- 0.89 Net earnings per share..... $ 6.01 3.64 2.74 2.49 2.23 Cash dividends per share-- common stock.............. $ .05 .05 .05 .05 .088 Cash dividends per share-- Class B common stock...... $ .045 .045 .045 .045 .079 Financial Position: Total assets............... $4,714,426 3,777,914 2,057,647 1,917,834 1,343,284 Debt: Homebuilding............... $1,505,255 1,254,650 523,661 530,630 527,303 Financial services......... $ 707,077 448,860 278,634 268,208 134,392 Stockholders' equity....... $1,659,262 1,228,580 881,499 715,665 438,999 Shares outstanding (000s).. 64,015 62,731 57,917 58,151 53,160 Stockholders' equity per share..................... $ 25.92 19.58 15.22 12.31 8.26 Delivery and Backlog Information (including unconsolidated partnerships): Number of homes delivered.. 23,899 18,578 12,606 10,777 6,702 Backlog of home sales contracts................. 8,339 8,363 2,903 4,100 3,318 Dollar value of backlog.... $1,982,000 2,072,000 662,000 840,000 665,000
As a result of the October 1997 spin-off of our commercial real estate investment and management business, including the Investment Division business segment, the selected financial data for 1997 reflects our Investment Division as a discontinued operation. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Some of the statements contained in the following Management's Discussion and Analysis of Financial Condition and Results of Operations are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those which the statements anticipate. Factors which may affect our results include, but are not limited to, changes in general economic conditions, the market for homes generally or in areas where we have 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 our operations. 9 RESULTS OF OPERATIONS Overview We achieved record revenues, profits and earnings per share in 2001. Our net earnings in 2001 were $417.8 million, or $6.01 per share diluted, compared to $229.1 million, or $3.64 per share diluted, in 2000. The increase was primarily a result of our acquisition of U.S. Home Corporation ("U.S. Home"), which contributed a full year of earnings in 2001, compared to seven months contributed in 2000. With $824 million of cash and our $1 billion revolving credit facilities fully paid down to zero, our net homebuilding debt to total capital ratio (debt is net of homebuilding cash) was 29.1% at November 30, 2001, compared to 44.0% last year. Our record earnings combined with a strong balance sheet contributed to a return on net capital (debt is net of homebuilding cash) of approximately 20% in 2001, compared to approximately 14% in 2000. Homebuilding Our Homebuilding Division sells and constructs homes primarily for entry level, move-up and active adult homebuyers. We also use a dual marketing strategy in which we sell homes under both our "Everything's Included/SM/" and "Design Studio/SM/" programs. Our land operations include the purchase, development and sale of land for our homebuilding activities, as well as the sale of land to third parties. In certain circumstances, we diversify our operations through strategic alliances and minimize our risk by forming partnerships with other entities. The following tables set forth selected financial and operational information for the years indicated. The results of U.S. Home are included in the information since its acquisition in May 2000. Selected Homebuilding Division Financial Data
Years Ended November 30, -------------------------------- 2001 2000 1999 ---------- --------- --------- (Dollars in thousands, except average sales price) Revenues: Sales of homes.............................. $5,467,548 4,118,549 2,671,744 Sales of land and other revenues............ 109,348 258,145 157,981 Equity in earnings from unconsolidated part- nerships................................... 27,051 13,340 19,482 ---------- --------- --------- Total revenues............................. 5,603,947 4,390,034 2,849,207 Costs and expenses: Cost of homes sold.......................... 4,159,107 3,277,183 2,105,422 Cost of land and other expenses............. 86,010 220,948 130,432 Selling, general and administrative......... 573,204 411,107 272,550 ---------- --------- --------- Total costs and expenses................... 4,818,321 3,909,238 2,508,404 ---------- --------- --------- Operating earnings.......................... $ 785,626 480,796 340,803 ========== ========= ========= Gross margin on home sales.................. 23.9% 20.4% 21.2% SG&A expenses as a % of revenues from home sales...................................... 10.5% 10.0% 10.2% ---------- --------- --------- Operating margin as a % of revenues from home sales................................. 13.4% 10.4% 11.0% ---------- --------- --------- Average sales price......................... $ 237,000 226,000 212,000 ========== ========= =========
10 Summary of Home and Backlog Data By Region
Years Ended November 30, ------------------------------ 2001 2000 1999 ----------- --------- ------- (Dollars in thousands) Deliveries East............................................. 7,734 6,155 4,241 Central.......................................... 6,738 5,203 3,107 West............................................. 8,632 6,878 5,241 ----------- --------- ------- Subtotal........................................ 23,104 18,236 12,589 Unconsolidated partnerships...................... 795 342 17 ----------- --------- ------- Total........................................... 23,899 18,578 12,606 =========== ========= ======= New Orders East............................................. 8,058 5,676 3,788 Central.......................................... 6,760 5,089 3,056 West............................................. 8,224 6,770 4,536 ----------- --------- ------- Subtotal........................................ 23,042 17,535 11,380 Unconsolidated partnerships...................... 833 312 29 ----------- --------- ------- Total........................................... 23,875 17,847 11,409 =========== ========= ======= Backlog--Homes East............................................. 3,092 2,768 1,091 Central.......................................... 1,949 1,632 652 West............................................. 3,043 3,451 1,148 ----------- --------- ------- Subtotal........................................ 8,084 7,851 2,891 Unconsolidated partnerships...................... 255 512 12 ----------- --------- ------- Total........................................... 8,339 8,363 2,903 =========== ========= ======= Backlog Dollar Value (including unconsolidated partnerships) $1,982,000 2,072,000 662,000 =========== ========= =======
At November 30, 2001, our market regions consisted of the following states: East: Florida, Maryland/Virginia and New Jersey. Central: Texas, Minnesota and Ohio. West: California, Colorado, Arizona and Nevada. In addition, we have unconsolidated partnerships in Georgia, Michigan, Missouri and North Carolina. Revenues from sales of homes increased 33% in 2001 and 54% in 2000 compared to the previous years as a result of a 27% increase and a 45% increase in the number of home deliveries, and a 5% increase and a 7% increase in the average sales price in 2001 and 2000, respectively. New home deliveries were higher primarily due to the inclusion of a full year of U.S. Home's homebuilding activity in 2001, compared to seven months inclusion in 2000. The average sales price of homes delivered increased in 2001 and 2000 primarily due to an increase in the average sales price in most of our existing markets, combined with changes in our product mix. During 2001, U.S. Home and its subsidiaries contributed 40% of both our homebuilding revenues and our homebuilding expenses. During 2000, during which we owned U.S. Home and its subsidiaries for seven months, U.S. Home and its subsidiaries contributed 31% of our homebuilding revenues and 32% of our homebuilding expenses. Gross margin percentages on home sales were 23.9%, 20.4% and 21.2% in 2001, 2000 and 1999, respectively. The increase in 2001 compared to 2000 was due to improved operational efficiencies and strength in the homebuilding markets in which we operate. The decrease in the gross margin percentage in 2000 compared to 1999 was impacted by purchase accounting associated with the acquisition of U.S. Home. The gross margin percentage in 2000 would have been 21.3% excluding the effect of purchase accounting. Selling, general and administrative expenses as a percentage of revenues from home sales increased to 10.5% in 2001 compared to 10.0% and 10.2% in 2000 and 1999, respectively. The increase in 2001 was primarily due to higher personnel-related expenses, compared to 2000. We provide incentives to our associates to achieve 11 the highest level of financial performance and combined with our record results in 2001, resulted in significantly higher bonuses when compared to 2000. The improvement in 2000 compared to 1999 resulted primarily from the increased volume and efficiencies realized from the acquisition of U.S. Home in May 2000. Revenues from land sales totaled $87.2 million in 2001, compared to $243.5 million in 2000 and $150.3 million in 1999. Gross profits from land sales totaled $4.6 million, or a 5.2% margin, in 2001, compared to $27.6 million, or an 11.3% margin, in 2000 and $22.2 million, or a 14.8% margin, in 1999. Equity in earnings from unconsolidated partnerships increased to $27.1 million in 2001, compared to $13.3 million in 2000 and $19.5 million in 1999. Margins achieved on sales of land and equity in earnings from unconsolidated partnerships may vary significantly from period to period depending on the timing of land sales by us and our unconsolidated partnerships. New home orders increased 34% in 2001 and 56% in 2000 compared to the previous years. The increases in 2001 and 2000 were due to the inclusion of a full year of U.S. Home's homebuilding activity in 2001 and seven months of U.S. Home's homebuilding activity in 2000. Backlog dollar value was $2.0 billion at November 30, 2001, compared to $2.1 billion at November 30, 2000, due primarily to lower new orders in the months immediately following the tragic events of September 11, 2001. Financial Services Our Financial Services Division provides mortgage financing, title insurance and closing services for both our homebuyers and others. The Division also resells the residential mortgage loans it originates in the secondary mortgage market and provides high-speed Internet access, cable television and alarm monitoring services for both our homebuyers and other customers. The following table sets forth selected financial and operational information relating to our Financial Services Division. The results of U.S. Home's financial services operations are included in the information since its acquisition in May 2000.
Years Ended November 30, -------------------------------- 2001 2000 1999 ---------- --------- --------- (Dollars in thousands) Revenues..................................... $ 425,354 316,934 269,307 Costs and expenses........................... 336,223 273,339 238,211 ---------- --------- --------- Operating earnings........................... $ 89,131 43,595 31,096 ---------- --------- --------- Dollar value of mortgages originated......... $5,225,568 3,240,252 2,162,479 ---------- --------- --------- Number of mortgages originated............... 30,600 20,800 14,900 ---------- --------- --------- Mortgage capture rate of Lennar homebuyers... 79% 73% 63% ---------- --------- --------- Number of title transactions................. 173,000 120,000 139,000 ========== ========= =========
Operating earnings from our Financial Services Division increased to $89.1 million in 2001 compared to $43.6 million and $31.1 million in 2000 and 1999, respectively. The increase in 2001 was partially attributable to pretax earnings of approximately $16 million primarily related to the sale of our retained mortgage servicing rights. Additionally, the increase reflects the successful operational efficiencies which resulted from the combination of our and U.S. Home's mortgage operations under the Universal American Mortgage banner and the consolidation of our title operations under the North American Title banner. The increase also reflects a greater level of refinance activity and a higher capture rate of our homebuyers as well as a full year of earnings contribution from U.S. Home in 2001. The increase in 2000 compared to 1999 was primarily due to the seven months of earnings contribution from U.S. Home. The earnings contribution from U.S. Home represented 26% of the Division's operating earnings in 2001 and 28% of the Division's operating earnings in 2000. Corporate General and Administrative Corporate general and administrative expenses as a percentage of total revenues were 1.3% in 2001 compared to 1.1% and 1.2% in 2000 and 1999, respectively. 12 Interest Interest expense was $119.5 million, or 2.0% of total revenues, in 2001, $98.6 million, or 2.1% of total revenues, in 2000 and $48.9 million, or 1.6% of total revenues, in 1999. Interest incurred was $127.9 million, $117.4 million and $54.6 million in 2001, 2000 and 1999, respectively. The average rates for interest incurred were 7.6%, 6.2% and 6.2% in 2001, 2000 and 1999, respectively. The average debt outstanding was $1.5 billion, $1.4 billion and $0.8 billion in 2001, 2000 and 1999, respectively. FINANCIAL CONDITION AND CAPITAL RESOURCES At November 30, 2001, we had available cash of $824.0 million, compared to $287.6 million at the end of fiscal 2000. The increase in cash was primarily due to $417.8 million of net earnings generated from operations during 2001. Cash flows provided by operating activities in 2001 were reduced by financial services loans held for sale or disposition of $211.1 million and $57.1 million in receivables. We sell the loans we originate into the secondary mortgage market, generally within thirty days of the closing of the loan. The cash related to these loans and receivables was primarily received in December 2001 and was used to pay down our warehouse lines of credit. Additionally, although inventories decreased $223.3 million in 2000, they increased $130.7 million in 2001, as we positioned ourselves for future growth. Cash provided by investing activities was $1.9 million in 2001, compared to cash used in investing activities of $186.7 million in 2000. In 2001, $10.8 million was provided by the sale of substantially all of our mortgage servicing rights and $5.6 million related to net distributions by unconsolidated partnerships in which we invest. This generation of cash was offset by $13.1 million of net additions to operating properties and equipment. In 2000, $158.4 million of cash was used in the acquisitions of properties and businesses, which included $152.4 million used for the acquisition of U.S. Home. We finance our land acquisition and development activities, construction activities, financial services activities and general operating needs primarily with cash generated from operations, as well as cash borrowed under revolving credit facilities. In addition, we have in recent years sold convertible and non-convertible debt into public markets, and we have an effective Securities Act registration statement under which we could sell to the public up to $970 million of debt securities, common stock or preferred stock. We also buy land under option agreements, which permit us to acquire portions of properties when we are ready to build homes on them. The financial risks of adverse market conditions associated with land holdings is managed by prudent underwriting of land purchases in areas we view as desirable growth markets, careful management of the land development process, limitation of risk by using partners to share the costs of purchasing and developing land and obtaining access to land through option arrangements. Our senior secured credit facilities provide us with up to $1.4 billion of financing. The credit facilities consist of a $715 million five-year revolving credit facility, a $300 million 364-day revolving credit facility and a $400 million term loan B. We may elect to convert borrowings under the 364-day revolving credit facility to a term loan which would mature in May 2005. At November 30, 2001, there was $395 million outstanding under the term loan B and we had paid down our revolving credit facilities to zero. In the second quarter of 2001, we issued, for gross proceeds of approximately $230 million, zero-coupon convertible senior subordinated notes due 2021 ("Notes") with a face amount at maturity of approximately $633 million. The Notes were issued at a price of $363.46 per $1,000 face amount at maturity, which equates to a yield to maturity over the life of the Notes of 5.125%. Proceeds from the offering, after underwriting discount, were approximately $224 million. We used the proceeds to repay amounts outstanding under our revolving credit facilities and added the balance of the net proceeds to our working capital. The Notes are convertible into our common stock at any time, if the sale price of our common stock exceeds certain thresholds or in other specified instances, at the rate of approximately 6.4 shares per $1,000 face amount at maturity, or a total of approximately 4 million shares. The conversion ratio equates to an initial conversion price of $56.93 per share (when our stock price was $43.13 per share). These shares will be included in the calculation of our diluted earnings per share if the average closing price of our common stock over the last twenty trading days of each quarter exceeds 110% of the accreted conversion price. This calculation equated to $64.79 per share at November 30, 2001. Holders have the option to require us to repurchase the Notes on any of the fifth, tenth, or fifteenth anniversaries of the issue date for the initial issue price plus accrued yield to the purchase date. We have the option to satisfy the repurchases with any combination of cash and/or shares of common stock. We have the option to redeem the 13 Notes, in cash, at any time after the fifth anniversary for the initial issue price plus accrued yield to redemption. We will pay contingent interest on the Notes during specified six-month periods beginning on April 4, 2006 if the market price of the Notes exceeds specified levels. At November 30, 2001, the carrying value of the outstanding Notes, net of unamortized original issue discount, was $235.9 million. As a result of the U.S. Home acquisition, holders of U.S. Home's publicly- held notes totaling $525 million were entitled to require U.S. Home to repurchase the notes for 101% of their principal amount within 90 days after the transaction was completed. Independent of that requirement, in April 2000, we made a tender offer for all of the notes and a solicitation of consents to modify provisions of the indentures relating to the notes. As a result of the tender offer and required repurchases after the acquisition, we paid approximately $520 million in 2000, which includes tender and consent fees, for $508 million of U.S. Home's notes. In May 2000, we issued $325 million of 9.95% senior notes due 2010 at a price of 92.313% to finance a portion of the purchase price of U.S. Home's publicly-held notes that were tendered in response to our offer and consent solicitation in April 2000, and to pay associated costs and expenses. The senior notes are guaranteed on a joint and several basis by substantially all of our subsidiaries, other than subsidiaries engaged in mortgage and reinsurance activities. Proceeds from the offering, after underwriting discount and expenses, were approximately $295 million. At November 30, 2001, the carrying amount of the senior notes was $301.3 million. In February 1999, we issued $282 million of 7 5/8% senior notes. The senior notes are due in 2009 and were issued for the purpose of reducing amounts outstanding under revolving credit facilities and redeeming outstanding 10 3/4% notes. Proceeds from the offering, after underwriting and market discounts, expenses and settlement of a related interest rate hedge agreement, were approximately $266 million. The senior notes are collateralized by the stock of certain of our subsidiaries. In March 1999, we redeemed all of the outstanding 10 3/4% senior notes due 2004 of one of our subsidiaries, Greystone Homes, Inc., at a price of 105.375% of the principal amount outstanding plus accrued interest. Cash paid to redeem the notes was $132 million, which approximated their carrying value. At November 30, 2001, the carrying value of the 7 5/8% senior notes was $271.5 million. In July 1998, we issued, for $229 million, zero-coupon senior convertible debentures due 2018 (the "Debentures") with a face amount at maturity of $493 million. The Debentures have an effective interest rate of 3 7/8%. The Debentures are convertible at any time into our common stock at the rate of 12.3768 shares per $1,000 face amount at maturity. If the Debentures are converted during the first five years, we 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 us to repurchase the Debentures on any of the fifth, tenth or fifteenth anniversaries of the issue date for the initial issue price plus accrued original issue discount. We have the option to satisfy the repurchases with any combination of cash and/or shares of our common stock. We have the option to redeem the Debentures, in cash, at any time after the fifth anniversary for the initial issue price plus accrued original issue discount. The Debentures are collateralized by the stock of certain of our subsidiaries. At November 30, 2001, the carrying value of outstanding Debentures, net of unamortized original issue discount, was $256.9 million. Our ratio of net homebuilding debt to total capital was 29.1% at November 30, 2001, compared to 44.0% at November 30, 2000. The decrease primarily resulted from cash generated by our operations during 2001. In addition to the use of capital in our ordinary homebuilding and financial services activities, we will continue to actively evaluate various other uses of capital which fit into our homebuilding and financial services strategies and appear to meet our profitability and return on capital requirements. This may include acquisitions of or investments in other entities. These activities may be funded through any combination of our credit facilities, cash generated from operations, sales of assets or the issuance of public debt, common stock or preferred stock. Our Financial Services Division finances its mortgage loan activities by pledging them as collateral for borrowings under a line of credit totaling $500 million. Borrowings under the financial services line of credit were $483.2 million and $339.4 million at November 30, 2001 and 2000, respectively. During 2001, we sold substantially all of our retained mortgage servicing rights and realized a pretax profit of approximately $13 million. We have various interest rate swap agreements which effectively convert variable interest rates to fixed interest rates on approximately $400 million of outstanding debt related to our homebuilding operations. The interest rate swaps mature at various dates through 2007 and fix the LIBOR index (to which certain of our debt 14 interest rates are tied) at an average interest rate of 6.6% at November 30, 2001. The net effect on our operating results is that interest on the variable-rate debt being hedged is recorded based on fixed interest rates. Counterparties to each of the above agreements are major financial institutions. At November 30, 2001, the fair value of the interest rate swaps, net of tax, was a $19.3 million liability. Our Financial Services Division, in the normal course of business, uses derivative financial instruments to reduce our 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. We do not anticipate that we will suffer credit losses from counterparty non- performance. Our 2000 Stock Option and Restricted Stock Plan (the "Plan") provides for the granting of stock options and stock appreciation rights and awards of restricted common stock to key officers, employees and directors. The exercise prices of stock options and stock appreciation rights are not less than the market value of the common stock on the date of the grant. No options granted under the Plan may be exercisable until at least six months after the date of the grant. Thereafter, exercises are permitted in installments determined when the options are granted. Each stock option and stock appreciation right will expire on a date determined at the time of the grant, but not more than 10 years after the date of the grant. At November 30, 2001, 835,000 shares of restricted stock were outstanding under the Plan. The stock was valued based on its market price on the date of grant. The grants vest over 5 years. Unearned compensation arising from the restricted stock grants is amortized to expense over the period of restrictions and is shown as a reduction of stockholders' equity in the consolidated balance sheets. In June 2001, our Board of Directors increased our previously authorized stock repurchase program to permit future purchases of up to 10 million shares of our outstanding common stock. We may repurchase these shares in the open market from time-to-time. During 2001, we did not repurchase any of our outstanding common stock. As of November 30, 2000, under prior approvals, we had repurchased approximately 9.8 million shares of our outstanding common stock for an aggregate purchase price of approximately $158.9 million, or $16 per share. We have shelf registration statements under the Securities Act of 1933, as amended, relating to up to $970 million of equity or debt securities which we may sell for cash and up to $400 million of equity or debt securities which we may issue in connection with acquisitions of companies or interests in them, businesses, or assets. As of November 30, 2001, no securities had been issued under these registration statements. In March 1998, we entered into an equity draw-down agreement with a major international banking firm (the "Firm") under which we have 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 we elect 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, 2001, we had issued 1.1 million shares under the agreement resulting in proceeds to us of $36 million, all of which occurred in fiscal 1998. We believe we maintain excellent relationships with the financial institutions participating in our financing arrangements and have no reason to believe that these relationships will not continue in the future. Based on our current financial condition and credit relationships, we believe that our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of growth. Investments in Unconsolidated Partnerships We frequently enter into partnerships that acquire and develop land for our homebuilding operations or for sale to third parties. Through partnerships, we reduce and share our risk and the amount invested in land while increasing access to potential future homesites. The use of partnerships also, in some instances, enables us to acquire land to which we could not otherwise obtain access, or could not obtain access on as favorable terms, without the participation of a strategic partner. Our partners generally are third party homebuilders, land sellers seeking a share of the profits from development of the land or real estate professionals who do not have the capital and/or expertise to develop properties by themselves. While we view the use of unconsolidated partnerships as beneficial to our homebuilding activities, we do not view them as essential to those activities. 15 Many of the partnerships in which we invest are accounted for by the equity method of accounting. At November 30, 2001, we had ownership interests of between 10% to 50% in these unconsolidated partnerships. In many instances, we are appointed as the day-to-day manager of the partnerships and receive fees for performing this function. During 2001, 2000 and 1999, we received management fees and reimbursement of expenses totaling $26.1 million, $9.7 million, and $6.2 million, respectively, from unconsolidated partnerships in which we had interests. We may obtain options or other arrangements under which we can purchase portions of the land held by the unconsolidated partnerships. Option prices are generally negotiated prices that approximate fair value when we receive the options. During 2001, 2000 and 1999, $232.6 million, $134.6 million, and $111.3 million, respectively, of the unconsolidated partnerships' revenues were from land sales to our homebuilding divisions. At November 30, 2001, the unconsolidated partnerships in which we had interests had total assets of $1.4 billion and total liabilities of $777.1 million, which included $627.4 million of notes and mortgages payable. In some instances, we and/or our partners have provided varying levels of guarantees on certain partnership debt. We provided guarantees totaling $338.7 million of which $151.0 million were limited maintenance guarantees. When we provide guarantees, the partnership generally receives more favorable terms from its lenders. These limited guarantees only apply if the partnership defaults on its loan arrangements and the fair value of the collateral (generally land and improvements thereto) is less than a specified percentage of the loan balance. If we are required to make a payment under these guarantees to bring the fair value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution or loan to the unconsolidated partnership and increase our share of any funds distributed upon the dissolution of the partnership. During 2001, the unconsolidated partnerships in which we were a partner generated $903.3 million of revenues and incurred $761.7 million of expenses, resulting in net earnings of $141.6 million. Our share of those net earnings was $27.1 million. We do not include in our income our pro rata partnership earnings resulting from land sales to our homebuilding divisions. Instead, we account for those earnings as a reduction of our cost of purchasing the land from the partnerships when title passes to a third party homebuyer, which in effect defers recognition of the partnership earnings until we sell the land. At the time of the 1997 transfer of our commercial real estate investment to LNR Property Corporation ("LNR"), and the spin-off of LNR to our stockholders, we formed Lennar Land Partners with LNR, a 50%-50% owned unconsolidated partnership, which is included in the above discussion of unconsolidated partnerships. We also have several other unconsolidated partnerships with LNR. In these partnerships, we provide the residential development experience and LNR contributes the commercial property expertise. In 2001, 2000 and 1999, we purchased land from Lennar Land Partners for a total of $104.2 million, $112.3 million and $109.3 million, respectively. We believe the amounts we paid for land purchased from Lennar Land Partners approximates the amounts we would have paid to independent third parties for similar properties. Contractual Obligations and Commercial Commitments We are 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 our business. Option contracts for the purchase of land permit us to acquire portions of properties when we are ready to build homes on them. This reduces our financial risk associated with land holdings. At November 30, 2001, we had $180.3 million of primarily non- refundable option deposits and advanced costs, with entities including unconsolidated partnerships, which allows us to acquire approximately 31,000 homesites. The minimum aggregate principal maturities of senior notes and other debts payable during the five years subsequent to November 30, 2001 are as follows: 2002--$17.7 million; 2003--$7.3 million; 2004--$22.9 million; 2005--$6.3 million and 2006--$4.0 million. The remaining principal obligations are due subsequent to November 30, 2006. Our debt arrangements contain certain financial covenants with which we were in compliance at November 30, 2001. The minimum aggregate principal maturities of our Financial Services Division's notes and other debts payable during the five years subsequent to November 30, 2001 are as follows: 2002--$343.5 million and 2003--$350.4 million. 16 We have entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2002--$30.7 million; 2003--$25.2 million; 2004--$20.0 million; 2005--$14.5 million; 2006--$11.4 million and thereafter-- $24.7 million. We are 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 $154.3 million at November 30, 2001. Additionally, we had outstanding performance and surety bonds related to site improvements at various projects with estimated costs to complete of $750.7 million. We do not believe that any such bonds are likely to be drawn upon. At November 30, 2001, our Financial Services Division's pipeline of loans in process totaled approximately $1.7 billion. To minimize credit risk, we use the same credit policies in the approval of the commitments as are applied to our lending activities. Since a portion of these commitments is expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements. Loans in the pipeline of loans in process for which interest rates were committed to the borrower totaled approximately $235.0 million as of November 30, 2001. Substantially all of these commitments were for periods of 30 days or less. Mandatory mortgage-backed securities ("MBS") forward commitments are used by the Financial Services Division to hedge our interest rate exposure during the period from when we make an interest rate commitment to a loan applicant until the time at which the loan is sold to an investor. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by entering into agreements with investment bankers with primary dealer status and with permanent investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and current market value. At November 30, 2001, we had open commitments amounting to $291.0 million to sell MBS with varying settlement dates through January 2002. ECONOMIC CONDITIONS Despite difficult economic conditions in large portions of the United States during much of 2001, the homebuilding environment remained strong due to a positive supply/demand relationship as well as low interest rates. As a result of this favorable environment, our new orders increased by 34% in 2001 (6% giving pro forma effect for all of 2000 for the May 2000 acquisition of U.S. Home Corporation). New orders decreased 14% in the fourth quarter of fiscal 2001, compared to the same period in 2000, primarily as a result of the tragic events of September 11, 2001, resulting in a lower backlog at November 30, 2001 than at the same date in 2000. BACKLOG Backlog represents the number of homes subject to pending sales contracts. Homes are sold using sales contracts which are generally accompanied by sales deposits. Before entering into sales contracts, we generally prequalify our customers. In some instances, purchasers are permitted to cancel sales contracts if they are unable to close on the sale of their existing home or fail to qualify for financing and under certain other circumstances. We experienced an average cancellation rate of 22% in 2001, compared to 21% and 20% in 2000 and 1999, respectively. Although cancellations can delay the sales of our homes, they have not had a material impact on sales, operations or liquidity, because we closely monitor the progress of prospective buyers in obtaining financing and use the information to adjust construction start plans to match anticipated deliveries of homes. We do not recognize revenue on homes covered by pending sales contracts until the sales are closed and title passes to the new homeowners. SEASONALITY We have historically experienced variability in results of operations from quarter to quarter due to the seasonal nature of the homebuilding business. We typically experience the highest rate of orders for new homes in the first half of the calendar year although the rate of orders for new homes is highly dependent on the number of active communities and the timing of new community openings. Because new home deliveries trail orders for new homes by several months, we typically have a greater percentage of new home deliveries in the second half of our fiscal year compared to the first half. As a result, our earnings from sales of homes are generally higher in the second half of the fiscal year. 17 INTEREST RATES AND CHANGING PRICES Inflation can have a long-term impact on us 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. Rising interest rates, as well as increased materials and labor costs, may reduce gross margins. In recent years, the increases in these costs have followed the general rate of inflation and hence have not had a significant adverse impact on us. In addition, deflation can impact the value of real estate and make it difficult for us to recover our land costs. Therefore, either inflation or deflation could adversely impact our future results of operations. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and requires acquired intangible assets to be recognized as assets apart from goodwill if certain criteria are met. We adopted SFAS No. 141 for all future acquisitions. SFAS No. 142 no longer requires or permits the amortization of goodwill and indefinite-lived assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. We adopted SFAS No. 142 on December 1, 2001. Because of that, amortization of goodwill of approximately $6 million per year will not be incurred in the future. We do not currently believe that the implementation of SFAS No. 142 will have a material impact on our financial condition or results of operations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121. SFAS No. 144 is effective for our 2003 fiscal year. We do not currently believe that the implementation of SFAS No. 144 will have a material impact on our financial condition or results of operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. We are exposed to market risks related to fluctuations in interest rates on our debt obligations, mortgage loans and mortgage loans held for sale or disposition. We utilize derivative instruments, including interest rate swaps, in conjunction with our overall strategy to manage our exposure to changes in interest rates. We also utilize forward commitments and option contracts to mitigate the risk associated with our mortgage loan portfolio. The tables on the following pages provide information at November 30, 2001 and 2000 about our significant derivative financial instruments and other financial instruments used for purposes that are sensitive to changes in interest rates. For mortgage loans held for sale or disposition, mortgage loans and investments and senior notes and other debts payable, the tables present principal cash flows and related weighted average effective interest rates by expected maturity dates and estimated fair market values at November 30, 2001 and 2000. Weighted average variable interest rates are based on the variable interest rates at November 30, 2001 and 2000. For interest rate swaps, the tables present notional amounts and weighted average interest rates by contractual maturity dates and estimated fair market values at November 30, 2001 and 2000. Notional amounts are used to calculate the contractual cash flows to be exchanged under the contracts. Our limited-purpose finance subsidiaries have 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 almost entirely from the cash flows generated by the related pledged collateral and therefore, they received little more than is required to pay that debt service and are excluded from the following tables. See Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Notes 1 and 13 of Notes to Consolidated Financial Statements in Item 8 for a further discussion of these items and our strategy of mitigating our interest rate risk. 18 Information Regarding Interest Rate Sensitivity Principal (Notional) Amount by Expected Maturity and Average Interest Rate November 30, 2001
Years Ending November 30, Fair Market Value -------------------------------- at November 30, 2002 2003 2004 2005 2006 Thereafter Total 2001 ------ ----- ---- ----- ---- ---------- ------- ----------------- (Dollars in millions) ASSETS Financial Services: Mortgage loans held for sale or disposition, net: Fixed rate............. $ -- -- -- -- -- 573.9 573.9 574.1 Average interest rate.. -- -- -- -- -- 6.9% -- -- Variable rate.......... $ -- -- -- -- -- 13.8 13.8 13.8 Average interest rate.. -- -- -- -- -- 5.9% -- -- Mortgage loans and in- vestments: Fixed rate............. $ 18.4 4.8 1.2 0.3 5.9 24.2 54.8 54.2 Average interest rate.. 6.9% 9.9% 7.0% 9.2% 9.1% 10.7% -- -- LIABILITIES Homebuilding: Senior notes and other debts payable: Fixed rate............. $ 17.7 7.3 22.9 6.3 4.0 1,447.1 1,505.3 1,611.5 Average interest rate.. 5.6% 5.0% 7.6% 6.4% 5.7% 6.8% -- -- Financial Services: Notes and other debts payable: Fixed rate............. $ -- -- -- -- -- -- -- -- Average interest rate.. -- -- -- -- -- -- -- -- Variable rate.......... $343.5 350.4 -- -- -- -- 693.9 693.9 Average interest rate.. 3.0% 3.1% -- -- -- -- -- -- OTHER FINANCIAL INSTRUMENTS Homebuilding: Interest rate swaps: Variable to fixed-- notional amount....... $ -- -- -- 100.0 -- 300.0 400.0 (31.4) Average pay rate....... -- -- -- 6.7% -- 6.6% -- -- Average receive rate... -- -- -- LIBOR -- LIBOR -- --
19 Information Regarding Interest Rate Sensitivity Principal (Notional) Amount by Expected Maturity and Average Interest Rate November 30, 2000
Years Ending November 30, Fair Market Value ------------------------------- at November 30, 2001 2002 2003 2004 2005 Thereafter Total 2000 ------ ---- ---- ---- ----- ---------- ------- ----------------- (Dollars in millions) ASSETS Financial Services: Mortgage loans held for sale or disposition, net: Fixed rate............. $ -- -- -- -- -- 374.5 374.5 377.5 Average interest rate.. -- -- -- -- -- 7.8% -- -- Variable rate.......... $ -- -- -- -- -- 2.0 2.0 2.0 Average interest rate.. -- -- -- -- -- 7.9% -- -- Mortgage loans and investments: Fixed rate............. $ 23.6 1.1 3.3 1.3 0.3 25.4 55.0 54.5 Average interest rate.. 6.4% 9.6% 8.3% 7.2% 9.4% 9.2% -- -- LIABILITIES Homebuilding: Senior notes and other debts payable: Fixed rate............. $ 14.8 19.4 5.4 5.3 6.5 1,203.3 1,254.7 1,287.9 Average interest rate.. 9.0% 8.3% 8.2% 9.0% 8.7% 7.9% -- -- Financial Services: Notes and other debts payable: Fixed rate............. $ 0.7 0.1 0.1 -- -- -- 0.9 0.9 Average interest rate.. 4.9% 9.8% 9.8% -- -- -- -- -- Variable rate.......... $428.1 -- -- -- -- -- 428.1 428.1 Average interest rate.. 6.7% -- -- -- -- -- -- -- OTHER FINANCIAL INSTRUMENTS Homebuilding: Interest rate swaps: Variable to fixed-- notional amount....... $ -- -- -- -- 100.0 300.0 400.0 (5.7) Average pay rate....... -- -- -- -- 6.7% 6.6% -- -- Average receive rate... -- -- -- -- LIBOR LIBOR -- --
20 Item 8. Financial Statements and Supplementary Data. 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, 2001 and 2000, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended November 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2001, in conformity with accounting principles generally accepted in the United States of America. Certified Public Accountants Miami, Florida January 9, 2002 21 CONSOLIDATED BALANCE SHEETS Lennar Corporation and Subsidiaries November 30, 2001 and 2000
2001 2000 ---------- --------- (In thousands, except per share amounts) ASSETS Homebuilding: Cash..................................................... $ 824,013 287,627 Receivables, net......................................... 24,345 42,270 Inventories: Housing................................................. 2,410,058 2,284,548 Land held for development............................... 6,483 17,036 ---------- --------- Total inventories...................................... 2,416,541 2,301,584 Investments in unconsolidated partnerships............... 300,064 257,639 Other assets............................................. 253,933 277,794 ---------- --------- 3,818,896 3,166,914 Financial services....................................... 895,530 611,000 ---------- --------- $4,714,426 3,777,914 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding: Accounts payable and other liabilities................... $ 755,726 778,238 Senior notes and other debts payable, net................ 1,505,255 1,254,650 ---------- --------- 2,260,981 2,032,888 Financial services....................................... 794,183 516,446 ---------- --------- Total liabilities........................................ 3,055,164 2,549,334 Stockholders' equity: Preferred stock.......................................... -- -- Common stock of $0.10 par value per share Authorized 100,000 shares; Issued: 2001--64,124; 2000--62,731...................... 6,412 6,273 Class B common stock of $0.10 par value per share Authorized 30,000 shares; Issued: 2001--9,738; 2000--9,848........................ 974 985 Additional paid-in capital............................... 843,924 812,501 Retained earnings........................................ 996,998 582,299 Unearned restricted stock................................ (10,833) (14,535) Treasury stock, at cost; 2001--9,847 common shares; 2000--9,848 common shares.... (158,927) (158,943) Accumulated other comprehensive loss..................... (19,286) -- ---------- --------- Total stockholders' equity............................... 1,659,262 1,228,580 ---------- --------- $4,714,426 3,777,914 ========== =========
See accompanying notes to consolidated financial statements. 22 CONSOLIDATED STATEMENTS OF EARNINGS Lennar Corporation and Subsidiaries Years Ended November 30, 2001, 2000 and 1999
2001 2000 1999 ---------- --------- --------- (In thousands, except per share amounts) Revenues: Homebuilding.................................... $5,603,947 4,390,034 2,849,207 Financial services.............................. 425,354 316,934 269,307 ---------- --------- --------- Total revenues.................................. 6,029,301 4,706,968 3,118,514 ---------- --------- --------- Costs and expenses: Homebuilding.................................... 4,818,321 3,909,238 2,508,404 Financial services.............................. 336,223 273,339 238,211 Corporate general and administrative............ 75,831 50,155 37,563 Interest expense................................ 119,503 98,601 48,859 ---------- --------- --------- Total costs and expenses........................ 5,349,878 4,331,333 2,833,037 ---------- --------- --------- Earnings before provision for income taxes...... 679,423 375,635 285,477 Provision for income taxes...................... 261,578 146,498 112,763 ---------- --------- --------- Net earnings.................................... $ 417,845 229,137 172,714 ========== ========= ========= Earnings per share: Basic........................................... $ 6.66 4.00 2.97 ========== ========= ========= Diluted......................................... $ 6.01 3.64 2.74 ========== ========= =========
See accompanying notes to consolidated financial statements. 23 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Lennar Corporation and Subsidiaries Years Ended November 30, 2001, 2000 and 1999
2001 2000 1999 ---------- --------- ------- (In thousands) Common stock: Beginning balance............................. $ 6,273 4,851 4,824 U.S. Home acquisition......................... -- 1,298 -- Employee stock plans and restricted stock grants....................................... 128 124 21 Conversion of Class B common stock............ 11 -- 6 ---------- --------- ------- Balance at November 30........................ 6,412 6,273 4,851 ---------- --------- ------- Class B common stock: Beginning balance............................. 985 985 991 Conversion to common stock.................... (11) -- (6) ---------- --------- ------- Balance at November 30........................ 974 985 985 ---------- --------- ------- Additional paid-in capital: Beginning balance............................. 812,501 525,623 523,645 U.S. Home acquisition......................... -- 265,569 -- Payment made under acquisition agreement...... -- -- (1,252) Employee stock plans and restricted stock grants....................................... 19,273 20,204 2,210 Tax benefit from exercise of stock options.... 12,150 1,105 1,020 ---------- --------- ------- Balance at November 30........................ 843,924 812,501 525,623 ---------- --------- ------- Retained earnings: Beginning balance............................. 582,299 356,058 186,205 Net earnings.................................. 417,845 229,137 172,714 Cash dividends--common stock.................. (2,705) (2,453) (2,418) Cash dividends--Class B common stock.......... (441) (443) (443) ---------- --------- ------- Balance at November 30........................ 996,998 582,299 356,058 ---------- --------- ------- Unearned restricted stock: Beginning balance............................. (14,535) -- -- Restricted stock (grants) cancellations....... 415 (15,856) -- Amortization of unearned restricted stock..... 3,287 1,321 -- ---------- --------- ------- Balance at November 30........................ (10,833) (14,535) -- ---------- --------- ------- Treasury stock, at cost: Beginning balance............................. (158,943) (6,018) -- Repurchases of common stock................... -- (152,925) (6,018) Shares issued................................. 16 -- -- ---------- --------- ------- Balance at November 30........................ (158,927) (158,943) (6,018) ---------- --------- ------- Accumulated other comprehensive loss: Beginning balance............................. -- -- -- SFAS No. 133 transition adjustment, net of tax.......................................... (3,510) -- -- Change in fair value of interest rate swaps, net of tax................................... (15,776) -- -- ---------- --------- ------- Balance at November 30........................ (19,286) -- -- ---------- --------- ------- Net earnings.................................. 417,845 229,137 172,714 ---------- --------- ------- Comprehensive income.......................... 398,559 229,137 172,714 Total stockholders' equity.................... $1,659,262 1,228,580 881,499 ========== ========= =======
See accompanying notes to consolidated financial statements. 24 CONSOLIDATED STATEMENTS OF CASH FLOWS Lennar Corporation and Subsidiaries Years Ended November 30, 2001, 2000 and 1999
2001 2000 1999 -------- -------- -------- (In thousands) Cash flows from operating activities: Net earnings.................................... $417,845 229,137 172,714 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................... 48,383 44,267 38,956 Amortization of discount/premium on debt, net... 20,287 11,186 8,774 Equity in earnings from unconsolidated partner- ships.......................................... (27,051) (13,340) (19,482) Tax benefit from exercise of stock options...... 12,150 1,105 1,020 Increase (decrease) in deferred income taxes.... 9,769 (17,223) 28,125 Changes in assets and liabilities, net of ef- fects from acquisitions: (Increase) decrease in receivables.............. (57,100) (11,912) 8,173 (Increase) decrease in inventories.............. (130,725) 223,255 (77,428) (Increase) decrease in other assets............. 48 (14,179) (3,639) (Increase) decrease in financial services loans held for sale or disposition.................... (211,143) (75,871) 6,293 Increase (decrease) in accounts payable and other liabilities.............................. (23,267) 104,079 (41,196) -------- -------- -------- Net cash provided by operating activities....... 59,196 480,504 122,310 -------- -------- -------- Cash flows from investing activities: Net additions to operating properties and equip- ment........................................... (13,110) (10,502) (15,328) (Increase) decrease in investments in unconsoli- dated partnerships, net........................ 5,601 (2,857) 6,524 (Increase) decrease in financial services mort- gage loans..................................... (997) (11,834) 1,548 Purchases of investment securities.............. (18,143) (18,112) (13,119) Receipts from investment securities............. 17,700 14,946 11,600 Decrease in financial services mortgage servic- ing rights..................................... 10,812 -- -- Acquisition of U.S. Home Corporation, net of cash acquired.................................. -- (152,386) -- Acquisitions of properties and businesses, net of cash acquired............................... -- (5,971) (19,747) -------- -------- -------- Net cash provided by (used in) investing activi- ties........................................... 1,863 (186,716) (28,522) -------- -------- -------- Cash flows from financing activities: Net repayments under revolving credit facili- ties........................................... -- -- (136,650) Net borrowings (repayments) under financial services short-term debt....................... 265,607 153,155 (856) Payments for tender of U.S. Home Corporation's senior notes................................... -- (519,759) -- Net proceeds from issuance of 5.125% zero-coupon convertible senior subordinated notes............................. 224,250 -- -- Net proceeds from issuance of 9.95% senior notes.......................................... -- 294,988 -- Net proceeds from issuance of 7 5/8% senior notes.......................................... -- -- 266,153 Proceeds from other borrowings.................. 110 424,783 1,856 Principal payments on other borrowings.......... (26,382) (279,941) (160,570) Limited-purpose finance subsidiaries, net....... 2,110 45 769 Common stock: Issuance........................................ 19,789 4,472 2,231 Payment made under acquisition agreement........ -- -- (1,252) Repurchases..................................... -- (152,925) (6,018) Dividends....................................... (3,146) (2,896) (2,861) -------- -------- -------- Net cash provided by (used in) financing activi- ties........................................... 482,338 (78,078) (37,198) -------- -------- --------
25 CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED) Lennar Corporation and Subsidiaries Years Ended November 30, 2001, 2000 and 1999
2001 2000 1999 -------- ---------- ------- (In thousands) Net increase in cash............................. 543,397 215,710 56,590 Cash at beginning of year........................ 333,877 118,167 61,577 -------- ---------- ------- Cash at end of year.............................. $877,274 333,877 118,167 ======== ========== ======= Summary of cash: Homebuilding..................................... $824,013 287,627 83,256 Financial services............................... 53,261 46,250 34,911 -------- ---------- ------- $877,274 333,877 118,167 -------- ---------- ------- Supplemental disclosures of cash flow informa- tion: Cash paid for interest, net of amounts capital- ized............................................ $ 17,546 1,157 9,647 Cash paid for income taxes....................... $234,549 91,742 108,845 Supplemental disclosures of non-cash investing and financing activities: Assumption of mortgages related to acquisitions of properties...................................... $ 28,993 5,529 29,342 Acquisition of U.S. Home Corporation: Fair value of assets acquired, inclusive of cash of $90,997...................................... $ -- 1,654,444 -- Goodwill recorded................................ -- 47,809 -- Liabilities assumed.............................. -- (1,192,004) -- -------- ---------- ------- $ -- 510,249 -- ======== ========== ======= Common stock issued.............................. $ -- 266,867 -- Cash paid........................................ -- 243,382 -- -------- ---------- ------- Total consideration.............................. $ -- 510,249 -- ======== ========== =======
See accompanying notes to consolidated financial statements. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lennar Corporation and Subsidiaries 1. Summary of Significant Accounting Policies Basis of Consolidation The accompanying consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries and partnerships (and similar entities) in which a controlling interest is held (the "Company"). The Company's investments in unconsolidated partnerships in which a significant, but less than controlling, interest is held are accounted for by the equity method. Controlling interest is determined based on a number of factors, which include the Company's ownership interest and participation in the management of the partnership. All significant intercompany transactions and balances have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition Revenues from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate (including the sales of land and operating properties) are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash The Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values. Cash as of November 30, 2001 and 2000 included $64.4 million and $65.9 million, respectively, of cash held in escrow for approximately three days. Inventories Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company evaluates long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs of inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. No impairment existed during the years ended November 30, 2001, 2000 or 1999. Start-up costs, construction overhead and selling expenses are expensed as incurred. Homes held for sale are classified as housing inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated to homes within the respective areas. Interest and Real Estate Taxes Interest and real estate taxes attributable to land, homes and operating properties are capitalized while they are being actively developed. Interest related to homebuilding, including interest costs relieved from inventories, is included in interest expense. Interest expense related to the financial services operations is included in its costs and expenses. During 2001, 2000 and 1999, interest incurred by the Company's homebuilding operations was $127.9 million, $117.4 million and $54.6 million, respectively. Capitalized interest charged to expense in 2001, 2000 and 1999 was $119.5 million, $98.6 million and $48.9 million, respectively. Operating Properties and Equipment Operating properties and equipment are recorded at cost and are included in other assets in the consolidated balance sheets. The assets are depreciated over their estimated useful lives using the straight-line method. The estimated useful life for operating properties is 30 years and for equipment is 2 to 10 years. 27 Investment Securities Investment securities that have determinable fair values are classified as available-for-sale unless they are classified as held-to-maturity. Securities classified as held-to-maturity are carried at amortized cost because they are purchased with the intent and ability to hold to maturity. Available-for-sale securities are recorded at fair value. Any unrealized holding gains or losses on available-for-sale securities are reported in a separate component of stockholders' equity, net of tax effects, until realized. At November 30, 2001 and 2000, investment securities classified as held-to- maturity totaled $13.2 million and $12.5 million, respectively, and were included in other assets of the Financial Services Division. There were no other investment securities at November 30, 2001 or 2000. Derivative Financial Instruments Effective December 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income and recognized in the statement of earnings when the hedged item affects earnings, depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. The Company's policy is to designate at a derivative's inception the specific assets, liabilities, or future commitments being hedged and monitor the derivative to determine if it remains an effective hedge. The effectiveness of a derivative as a hedge is based on high correlation between changes in its value and changes in the value of the underlying hedged item. The Company recognizes gains or losses for amounts received or paid when the underlying transaction settles. The Company does not enter into or hold derivatives for trading or speculative purposes. The Company has various interest rate swap agreements which effectively convert variable interest rates to fixed interest rates on approximately $400 million of outstanding debt related to its homebuilding operations. The swap agreements have been designated as cash flow hedges and, accordingly, are reflected at their fair value in the consolidated balance sheet at November 30, 2001. The related loss is deferred in stockholders' equity as accumulated other comprehensive loss (see Note 11). The Company accounts for its interest rate swaps using the shortcut method, as described in SFAS No. 133. Amounts to be received or paid as a result of the swap agreements are recognized as adjustments to interest incurred on the related debt instruments. The Company believes that there will be no ineffectiveness related to the interest rate swaps and therefore no portion of the accumulated other comprehensive loss will be reclassified into future earnings. The net effect on the Company's operating results is that interest on the variable rate debt being hedged is recorded based on fixed interest rates. The Financial Services Division, in the normal course of business, uses derivative financial instruments to reduce its exposure to fluctuations in interest rates. The Division enters into forward commitments and option contracts to protect the value of fixed rate locked loan commitments and loans held for sale or disposition from fluctuations in market interest rates. These derivative financial instruments are designated as fair value hedges, and, accordingly, for all qualifying and highly effective fair value hedges, the changes in the fair value of the derivative and the loss or gain on the hedged asset relating to the risk being hedged are recorded currently in earnings. The effect of the implementation of SFAS No. 133 on the Financial Services Division's operating earnings was not significant. Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired and was amortized by the Company on a straight-line basis over periods ranging from 15 to 20 years. At November 30, 2001 and 2000, goodwill was $105.8 million and $110.4 million, respectively (net of accumulated amortization of $18.0 million and $11.6 million, respectively). In the event that facts and circumstances indicated that the carrying value of goodwill might be impaired, an evaluation of recoverability is performed. If an evaluation was required, the estimated future undiscounted cash flows associated with the goodwill would be compared to the carrying amount to determine if a write-down to fair value based on discounted cash flows was required. No impairment existed during the years ended November 30, 2001, 2000 or 1999. Goodwill is included in other 28 assets of the Homebuilding Division ($80.6 million and $85.2 million at November 30, 2001 and 2000, respectively) and the assets of the Financial Services Division ($25.2 million at both November 30, 2001 and 2000) in the consolidated balance sheets. Subsequent to the Company's adoption of SFAS No. 141 and SFAS No. 142, goodwill and its amortization will be accounted for in accordance with the standards they prescribe which will discontinue the Company's amortization of goodwill. See the New Accounting Pronouncements section of Note 1. 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 fixed numbers of shares with, in each instance, an exercise price not less than the fair value of the shares at the date of the 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 pro forma disclosures required by SFAS No. 123, Accounting for Stock-Based Compensation, are included in Note 12. Restricted stock grants are valued based on the market price of the common stock on the date of grant. Unearned compensation arising from the restricted stock grants is amortized to expense using the straight-line method over the period of the restrictions. Unearned restricted stock is shown as a reduction of stockholders' equity in the consolidated balance sheets. Earnings per Share Earnings per share is accounted for in accordance with SFAS No. 128, Earnings per Share, which requires a dual presentation of basic and diluted earnings per share on the face of the consolidated statement of earnings. Basic earnings per share is computed by dividing earnings attributable to common stockholders 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. Financial Services Mortgage loans held for sale or disposition by the Financial Services Division are carried at market value, as determined on an aggregate basis. Premiums and discounts recorded on these loans are presented as an adjustment to the carrying amount of the loans and are not amortized. When the Division sells loans into the secondary market, a gain or loss is recognized to the extent that the sales proceeds exceed, or are less than, the book value of the loans. Loan origination fees, net of direct origination costs, are deferred and recognized as a component of the gain or loss when loans are sold. In prior years, the Division retained servicing rights from some of the loans it originated and maintained a portfolio of mortgage servicing rights. During 2001, the Division sold substantially all of its existing portfolio of mortgage servicing rights and realized a pretax profit of approximately $13 million from the sale of the servicing rights. Subsequent to the sale, the Division has sold the servicing rights together with the loans it originated. Prior to the sale of the mortgage servicing rights portfolio, the book value of each mortgage loan the Division sold was allocated partly to the mortgage servicing right and partly to the loan (separately from the mortgage servicing right) based on their estimated relative fair values at the time the loan was sold and the servicing rights retained. The fair value of mortgage servicing rights was determined by discounting the estimated future cash flows using a discount rate commensurate with the risks involved. This method of valuation incorporated assumptions that market participants would use in their estimates of future servicing income and expense, including assumptions about prepayment, default and interest rates. Impairment, if any, was recognized through a valuation allowance and a charge to current operations. Mortgage servicing rights were amortized in proportion to, and over the period of, the estimated net servicing income of the underlying mortgages. The book value and estimated fair 29 value of mortgage servicing rights was $11.7 million and $13.4 million, respectively, at November 30, 2000. A valuation allowance related to mortgage servicing rights was not required at or for the year ended November 30, 2000. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and requires acquired intangible assets to be recognized as assets apart from goodwill if certain criteria are met. The Company adopted SFAS No. 141 for all future acquisitions. SFAS No. 142 no longer requires or permits the amortization of goodwill and indefinite-lived assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted SFAS No. 142 on December 1, 2001. Because of that, amortization of goodwill of approximately $6 million per year will not be incurred in the future. Management does not currently believe that the implementation of SFAS No. 142 will have a material impact on the Company's financial condition or results of operations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003. Management does not currently believe that the implementation of SFAS No. 144 will have a material impact on the Company's financial condition or results of operations. Reclassification Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2001 presentation. 2. Acquisition On May 3, 2000, the Company acquired U.S. Home Corporation ("U.S. Home") in a transaction in which U.S. Home stockholders received a total of approximately $243 million in cash and 13 million shares of the Company's common stock with a value of approximately $267 million. The cash portion of the acquisition was funded primarily from the Company's revolving credit facilities (see Note 7). U.S. Home is primarily a homebuilder and had operations in 13 states at the acquisition date. On an unaudited basis, U.S. Home had total revenues of $1.8 billion and net income of $72.4 million in 1999, and it delivered 9,246 homes (including unconsolidated partnerships) during that year. The acquisition was accounted for using the purchase method of accounting. In connection with the transaction, the Company acquired assets with a fair value of $1.7 billion, assumed liabilities with a fair value of $1.2 billion and recorded goodwill of $48 million. Through November 30, 2001, goodwill was being amortized on a straight-line basis over 20 years. The results of U.S. Home are included in the Company's consolidated statements of earnings since the acquisition date. Revenues and net earnings on an unaudited pro forma basis would have been $5.5 billion and $260.4 million, respectively, for the year ended November 30, 2000 and $4.9 billion and $233.2 million, respectively, for the year ended November 30, 1999, had the acquisition occurred on December 1, 1998. Pro forma earnings per share would have been $3.81 per share diluted ($4.15 per share basic) for the year ended November 30, 2000 and $3.07 per share diluted ($3.28 per share basic) for the year ended November 30, 1999. The pro forma information gives effect to actual operating results prior to the acquisition, adjusted for the pro forma effect of interest expense, amortization of goodwill, and certain other adjustments, together with their related income tax effect. The pro forma information does not purport to be indicative of the results of operations which would have actually been reported had the acquisition occurred on December 1, 1998. 30 3. Operating and Reporting Segments In 1999, the Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which establishes new standards for the way that public enterprises report information about operating and reporting segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has two operating and reporting segments: Homebuilding and Financial Services. The Company's reportable segments are strategic business units that offer different products and services. The accounting policies of the segments are described in the summary of significant accounting policies in Note 1. Homebuilding Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land by the Company and unconsolidated partnerships in which it has investments. The following table sets forth financial information relating to the homebuilding operations:
Years Ended November 30, ------------------------------ 2001 2000 1999 ---------- --------- --------- (In thousands) Revenues: Sales of homes................................. $5,467,548 4,118,549 2,671,744 Sales of land and other revenues............... 109,348 258,145 157,981 Equity in earnings from unconsolidated partner- ships......................................... 27,051 13,340 19,482 ---------- --------- --------- Total revenues............................... 5,603,947 4,390,034 2,849,207 Costs and expenses: Cost of homes sold............................. 4,159,107 3,277,183 2,105,422 Cost of land and other expenses................ 86,010 220,948 130,432 Selling, general and administrative............ 573,204 411,107 272,550 ---------- --------- --------- Total costs and expenses..................... 4,818,321 3,909,238 2,508,404 ---------- --------- --------- Operating earnings............................. $ 785,626 480,796 340,803 ========== ========= ========= Depreciation and amortization.................. $ 38,733 33,858 29,505 ---------- --------- --------- Additions to operating properties and equip- ment.......................................... $ 8,173 5,779 2,283 ========== ========= =========
Financial Services The Financial Services Division provides mortgage financing, title insurance and closing services for both the Company's homebuyers and others. The Division resells the residential mortgage loans it originates in the secondary mortgage market and also provides high-speed Internet access, cable television, and alarm monitoring services for both the Company's homebuyers and other customers. The following table sets forth financial information relating to the financial services operations:
Years Ended November 30, ------------------------ 2001 2000 1999 -------- ------- ------- (In thousands) Revenues.............................................. $425,354 316,934 269,307 Costs and expenses.................................... 336,223 273,339 238,211 -------- ------- ------- Operating earnings.................................... $ 89,131 43,595 31,096 ======== ======= ======= Depreciation and amortization......................... $ 9,650 10,409 9,451 -------- ------- ------- Interest income, net.................................. $ 21,279 15,707 12,301 -------- ------- ------- Additions to operating properties and equipment....... $ 7,087 10,243 13,045 ======== ======= =======
31 4. Receivables
November 30, ---------------- 2001 2000 -------- ------ (In thousands) Accounts receivable........................................... $ 20,076 32,327 Mortgages and notes receivable................................ 8,549 14,846 -------- ------ 28,625 47,173 Allowance for doubtful accounts............................... (4,280) (4,903) -------- ------ $ 24,345 42,270 ======== ======
5. Investments in Unconsolidated Partnerships Summarized condensed financial information on a combined 100% basis related to the Company's investments in unconsolidated partnerships and other similar entities (collectively the "Partnerships") accounted for by the equity method was as follows:
November 30, --------------------- 2001 2000 ----------- --------- (In thousands) Assets: Cash...................................................... $ 37,782 35,504 Land under development.................................... 1,203,089 962,835 Other assets.............................................. 161,598 145,866 ----------- --------- $ 1,402,469 1,144,205 =========== ========= Liabilities and equity: Accounts payable and other liabilities.................... $ 149,691 122,597 Notes and mortgages payable............................... 627,383 471,742 Equity of: The Company.............................................. 300,064 257,639 Others................................................... 325,331 292,227 ----------- --------- $ 1,402,469 1,144,205 =========== =========
Years Ended November 30, ------------------------ 2001 2000 1999 -------- ------- ------- (In thousands) Revenues............................................... $903,293 361,684 283,979 Costs and expenses..................................... 761,704 295,224 219,100 -------- ------- ------- Net earnings of unconsolidated partnerships............ $141,589 66,460 64,879 -------- ------- ------- Company share of net earnings.......................... $ 27,051 13,340 19,482 ======== ======= =======
At November 30, 2001, the Company's equity interest in each of these Partnerships ranged from 10% to 50%. The Company's partners generally are third party homebuilders, land sellers seeking a share of the profits from development of the land or real estate professionals who do not have the capital and/or expertise to develop properties by themselves. The Partnerships follow accounting principles generally accepted in the United States of America. The Company shares in the profits and losses of these Partnerships and, when appointed the manager of the Partnerships, receives fees for the management of the assets. During 2001, 2000 and 1999, the Company received management fees and reimbursement of expenses from the Partnerships totaling $26.1 million, $9.7 million and $6.2 million, respectively. The Company does not include in its income the pro rata Partnership earnings resulting from land sales to the Company. These amounts are recorded as a reduction of the cost of purchasing the land from the Partnerships which increases profits when title passes to a third party homebuyer. 32 The Company may obtain options or other arrangements under which the Company can purchase portions of the land held by the Partnerships. Option prices are generally negotiated prices that approximate fair value when the Company receives the options. During 2001, 2000 and 1999, $232.6 million, $134.6 million, and $111.3 million, respectively, of the Partnerships' revenues were from land sales to the Company. In some instances, the Company and/or its partners have provided varying levels of guarantees on certain partnership debt. At November 30, 2001, the Company provided guarantees on $338.7 million of unconsolidated partnership debt, of which $151.0 million were limited maintenance guarantees. At the time of the 1997 transfer of the Company's commercial real estate investment to LNR Property Corporation ("LNR"), and the spin-off of LNR to the Company's stockholders, the Company and LNR formed Lennar Land Partners, a 50%-50% owned partnership, which is included in the above discussion of Partnerships. At November 30, 2001, the Company also had several other unconsolidated partnerships with LNR. In 2001, 2000 and 1999, the Company purchased land from Lennar Land Partners for a total of $104.2 million, $112.3 million and $109.3 million, respectively. The Company believes the amounts it paid for land purchased from Lennar Land Partners approximates the amounts it would have paid to independent third parties for similar properties. 6. Operating Properties and Equipment
November 30, ----------------- 2001 2000 -------- ------- (In thousands) Furniture, fixtures and equipment............................ $ 45,267 47,043 Community recreational facilities............................ 8,774 2,098 -------- ------- 54,041 49,141 Accumulated depreciation..................................... (36,097) (30,556) -------- ------- $ 17,944 18,585 ======== =======
Operating properties and equipment are included in other assets in the consolidated balance sheets. 7. Senior Notes and Other Debts Payable
November 30, --------------------- 2001 2000 ----------- --------- (In thousands) 3 7/8% zero-coupon se- nior convertible deben- tures due 2018............... $ 256,877 247,205 5.125% zero-coupon con- vertible senior subor- dinated notes due 2021............... 235,894 -- 7 5/8% senior notes due 2009................... 271,493 270,480 9.95% senior notes due 2010................... 301,346 300,017 Term loan B due 2007.... 395,000 399,000 U.S. Home senior notes due through 2009....... 9,446 12,913 Mortgage notes on land with fixed interest rates from 5.4% to 10.0% due through 2009........... 35,199 25,035 ----------- --------- $ 1,505,255 1,254,650 =========== =========
In May 2000, the Company entered into new financing arrangements related to the acquisition of U.S. Home, for working capital and for future growth. The financings include senior secured credit facilities with a group of financial institutions which provide the Company with up to $1.4 billion of financing. The credit facilities consist of a $715 million five-year revolving credit facility, a $300 million 364-day revolving credit facility and a $400 million term loan B (collectively the "Facilities"). The Company may elect to convert borrowings under the 364-day revolving credit facility to a term loan which would mature in May 2005. The Facilities are collateralized by the outstanding common stock of certain of the Company's subsidiaries. Certain Financial Services Division subsidiaries are co-borrowers under the Facilities. At November 30, 2001, no borrowings were allocated to this Division. At November 30, 2001, $395 million was outstanding under the term loan B and no amounts were outstanding under the revolving credit facilities. The weighted average interest rate 33 of the Facilities at November 30, 2001 was 5.7%. The Company utilizes interest rate swap agreements to manage interest costs and hedge against risks associated with changing interest rates. In the second quarter of 2001, the Company issued, for gross proceeds of approximately $230 million, zero-coupon convertible senior subordinated notes due 2021 ("Notes") with a face amount at maturity of approximately $633 million. The Notes were issued at a price of $363.46 per $1,000 face amount at maturity, which equates to a yield to maturity over the life of the Notes of 5.125%. Proceeds from the offering, after underwriting discount, were approximately $224 million. The Company used the proceeds to repay amounts outstanding under its revolving credit facilities and added the balance of the net proceeds to working capital. The Notes are convertible into the Company's common stock at any time, if the sale price of the Company's common stock exceeds certain thresholds or in other specified instances, at the rate of approximately 6.4 shares per $1,000 face amount at maturity, or a total of approximately 4 million shares. The conversion ratio equates to an initial conversion price of $56.93 per share (when the Company's stock price was $43.13 per share). These shares will be included in the calculation of the Company's diluted earnings per share if the average closing price of the Company's common stock over the last twenty trading days of each quarter exceeds 110% of the accreted conversion price. This calculation equated to $64.79 per share at November 30, 2001. Holders have the option to require the Company to repurchase the Notes on any of the fifth, tenth, or fifteenth anniversaries of the issue date for the initial issue price plus accrued yield to the purchase date. 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 Notes, in cash, at any time after the fifth anniversary for the initial issue price plus accrued yield to redemption. The Company will pay contingent interest on the Notes during specified six-month periods beginning on April 4, 2006 if the market price of the Notes exceeds specified levels. At November 30, 2001, the carrying value of outstanding Notes, net of unamortized original issue discount, was $235.9 million. As a result of the U.S. Home acquisition, holders of U.S. Home's publicly- held notes totaling $525 million were entitled to require U.S. Home to repurchase the notes for 101% of their principal amount within 90 days after the transaction was completed. Independent of that requirement, in April 2000, the Company made a tender offer for all of the notes and a solicitation of consents to modify provisions of the indentures relating to the notes. As a result of the tender offer and required repurchases after the acquisition, the Company paid approximately $520 million in 2000, which includes tender and consent fees, for $508 million of U.S. Home's notes. In May 2000, the Company issued $325 million of 9.95% senior notes due 2010 at a price of 92.313% to finance a portion of the purchase price of U.S. Home's publicly-held notes that were tendered in response to the Company's offer and consent solicitation in April 2000, and to pay associated costs and expenses. The senior notes are guaranteed on a joint and several basis by substantially all of the Company's subsidiaries, other than subsidiaries engaged in mortgage and reinsurance activities. Proceeds from the offering, after underwriting discount and expenses, were approximately $295 million. At November 30, 2001, the carrying value of the senior notes was $301.3 million. In February 1999, the Company issued $282 million of 7 5/8% senior notes. The senior notes are due in 2009 and were issued for the purpose of reducing amounts outstanding under revolving credit facilities and redeeming outstanding 10 3/4% senior notes. Proceeds from the offering, after underwriting and market discounts, expenses and settlement of a related interest rate hedge agreement, were approximately $266 million. The senior notes are collateralized by the stock of certain of the Company's subsidiaries. In March 1999, the Company redeemed all of the outstanding 10 3/4% senior notes due 2004 of one of its subsidiaries, Greystone Homes, Inc., at a price of 105.375% of the principal amount outstanding plus accrued interest. Cash paid to redeem the notes was $132 million, which approximated their carrying value. At November 30, 2001, the carrying value of the 7 5/8% senior notes was $271.5 million. In July 1998, the Company issued, for $229 million, zero-coupon senior convertible debentures due 2018 (the "Debentures") with a face amount at maturity of $493 million. The Debentures have an effective interest rate of 3 7/8%. The Debentures are convertible at any time into the Company's common stock at the rate of 12.3768 shares per $1,000 face amount at maturity. If the Debentures are converted during the first five years, the Company may elect to pay cash equal to the fair value of the common stock at the time of the conversion. Holders have the option to require the Company to repurchase the Debentures on any of the fifth, tenth, or fifteenth anniversaries of 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 34 common stock. The Company will have the option to redeem the Debentures, in cash, at any time after the fifth anniversary for the initial issue price plus accrued original issue discount. The Debentures are collateralized by the stock of certain of the Company's subsidiaries. At November 30, 2001, the carrying value of outstanding Debentures, net of unamortized original issue discount, was $256.9 million. The minimum aggregate principal maturities of senior notes and other debts payable during the five years subsequent to November 30, 2001 are as follows: 2002--$17.7 million; 2003--$7.3 million; 2004--$22.9 million; 2005--$6.3 million and 2006--$4.0 million. The remaining principal obligations are due subsequent to November 30, 2006. The Company's debt arrangements contain certain financial covenants with which the Company was in compliance at November 30, 2001. 8. Financial Services The assets and liabilities related to the Company's financial services operations were as follows:
November 30, ----------------- 2001 2000 --------- ------- (In thousands) Assets: Cash and receivables, net..................................... $ 161,060 79,025 Mortgage loans held for sale or disposition, net.............. 587,694 376,452 Mortgage loans, net........................................... 41,590 42,504 Mortgage servicing rights, net................................ -- 11,653 Operating properties and equipment, net....................... 18,592 18,869 Title plants.................................................. 15,530 15,530 Goodwill, net................................................. 25,158 25,199 Other......................................................... 32,760 21,874 Limited-purpose finance subsidiaries.......................... 13,146 19,894 --------- ------- $ 895,530 611,000 ========= ======= Liabilities: Notes and other debts payable................................. $ 693,931 428,966 Other......................................................... 87,106 67,586 Limited-purpose finance subsidiaries.......................... 13,146 19,894 --------- ------- $ 794,183 516,446 ========= =======
At November 30, 2001, the Division had a $500 million warehouse line of credit which included a $145 million 30-day increase which expired in December 2001 to fund the Division's mortgage loan activities. Borrowings under this facility were $483.2 million and $339.4 million at November 30, 2001 and 2000, respectively, and were collateralized primarily by mortgage loans with outstanding principal balances of $518.8 million and $297.2 million, respectively, and in 2000, by servicing rights relating to approximately $1.8 billion of loans. There are several interest rate pricing options which fluctuate with market rates. The borrowing rate has been reduced to the extent that custodial escrow balances exceeded required compensating balance levels. The effective interest rate on this facility at November 30, 2001 and 2000 was 3.1% and 6.4%, respectively. The warehouse line of credit matures in June 2003, at which time the Company expects the facility to be renewed. At November 30, 2001 and 2000, the Division had advances under conduit funding agreements with certain major financial institutions amounting to $190.6 million and $58.8 million, respectively. Borrowings under these agreements are collateralized by mortgage loans and had an effective interest rate of 3.0% and 7.5% at November 30, 2001 and 2000, respectively. The Division also had a $20 million revolving line of credit with a bank, collateralized by certain assets of the Division and stock of certain title insurance subsidiaries. Borrowings under the line of credit were $20 million at both November 30, 2001 and 2000 and had an effective interest rate of 3.1% and 7.8% at November 30, 2001 and 2000, respectively. The limited-purpose finance subsidiaries of the Financial Services Division have 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 almost entirely 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, 2001 and 2000, the balances outstanding for the bonds and notes payable were 35 $13.1 million and $19.9 million, respectively. The borrowings mature in years 2013 through 2018 and carry interest rates ranging from 8.6% to 11.6%. The annual principal repayments are dependent upon collections on the underlying mortgages, including prepayments, and cannot be reasonably determined. The minimum aggregate principal maturities of the Company's Financial Services Division's notes and other debts payable during the five years subsequent to November 30, 2001 are as follows: 2002--$343.5 million and 2003--$350.4 million. 9. Income Taxes The provision for income taxes consisted of the following:
Years Ended November 30, -------------------------- 2001 2000 1999 --------- ------- ------- (In thousands) Current: Federal.............................................. $ 220,124 146,666 71,091 State................................................ 31,685 17,055 13,547 --------- ------- ------- 251,809 163,721 84,638 --------- ------- ------- Deferred: Federal.............................................. 9,281 (15,672) 24,422 State................................................ 488 (1,551) 3,703 --------- ------- ------- 9,769 (17,223) 28,125 --------- ------- ------- $ 261,578 146,498 112,763 ========= ======= =======
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, ----------------- 2001 2000 -------- ------- (In thousands) Deferred tax assets: Acquisition adjustments.................................... $ 41,202 75,997 Reserves and accruals...................................... 104,758 74,972 Net operating loss and capital loss carryforwards, tax af- fected.................................................... 4,466 4,466 Investments in unconsolidated partnerships................. 5,414 3,386 Deferred gains............................................. -- 1,900 Other...................................................... 6,555 7,412 -------- ------- Deferred tax assets........................................ 162,395 168,133 Less: valuation allowance.................................. (7,117) (7,117) -------- ------- Total deferred tax assets, net............................. 155,278 161,016 -------- ------- Deferred tax liabilities: Capitalized expenses....................................... 4,273 14,922 Deferred gains............................................. 115 -- Installment sales.......................................... 1,506 2,281 Section 461 deductions and other........................... 47,701 32,361 -------- ------- Total deferred tax liabilities............................. 53,595 49,564 -------- ------- Net deferred tax asset..................................... $101,683 111,452 ======== =======
The Homebuilding Division's net deferred tax asset amounting to $90.4 million and $110.0 million at November 30, 2001 and 2000, respectively, is included in other assets in the consolidated balance sheets. At November 30, 2001 and 2000, the Financial Services Division had a net deferred tax asset of $11.3 million and $1.5 million, respectively. 36 SFAS No. 109 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that a portion or all of the deferred tax asset will not be realized. At November 30, 2001 and 2000, the Company had a valuation allowance of $7.1 million for net operating loss and capital loss carryforwards and certain acquisition adjustments which currently are not expected to be realized. Based on management's assessment, it is more likely than not that the net deferred tax asset will be realized through future taxable earnings. A reconciliation of the statutory rate and the effective tax rate follows:
Percentage of Pre-tax Income -------------- 2001 2000 1999 ---- ---- ---- Statutory rate................................................... 35.0 35.0 35.0 State income taxes, net of federal income tax benefit............ 3.1 3.4 3.9 Other............................................................ 0.4 0.6 0.6 ---- ---- ---- Effective rate................................................... 38.5 39.0 39.5 ==== ==== ====
10.Earnings Per Share Basic and diluted earnings per share for the years ended November 30, 2001, 2000 and 1999 were calculated as follows:
2001 2000 1999 -------- ------- ------- (In thousands, except per share amounts) Numerator: Numerator for basic earnings per share--net earnings.. $417,845 229,137 172,714 Interest on zero-coupon senior convertible debentures due 2018, net of tax................................. 6,094 5,808 5,538 -------- ------- ------- Numerator for diluted earnings per share.............. $423,939 234,945 178,252 ======== ======= ======= Denominator: Denominator for basic earnings per share--weighted av- erage shares......................................... 62,737 57,341 58,246 Effect of dilutive securities: Employee stock options and restricted stock.......... 1,737 1,053 684 Zero-coupon senior convertible debentures due 2018... 6,105 6,105 6,105 -------- ------- ------- Denominator for diluted earnings per share--adjusted weighted average shares and assumed conversions...... 70,579 64,499 65,035 ======== ======= ======= Basic earnings per share.............................. $ 6.66 4.00 2.97 ======== ======= ======= Diluted earnings per share............................ $ 6.01 3.64 2.74 ======== ======= =======
11.Comprehensive Income In accordance with the transition provisions of SFAS No. 133, on December 1, 2000, the Company recorded a cumulative-effect type adjustment of $3.5 million (net of tax benefit of $2.2 million) in accounts payable and other liabilities and accumulated other comprehensive loss to recognize the fair value of interest rate swaps. Subsequent to the Company's adoption of SFAS No. 133 through November 30, 2001, the liability and accumulated other comprehensive loss increased $15.8 million (net of tax benefit of $9.9 million) to $19.3 million. Comprehensive income was $398.6 million, $229.1 million and $172.7 million for the years ended November 30, 2001, 2000 and 1999, respectively. 12.Capital Stock Preferred Stock The Company is authorized to issue 500,000 shares of preferred stock with a par value of $10 per share and 100 million shares of participating preferred stock with a par value of $0.10 per share. No shares of preferred stock or participating preferred stock have been issued as of November 30, 2001. 37 Common Stock The Company has two classes of common stock, common stock and Class B common stock. The common stockholders have one vote for each share owned in matters requiring stockholder approval and during both 2001 and 2000 received quarterly dividends of $0.0125 per share. The Class B common stockholders have ten votes for each share of stock owned and during both 2001 and 2000 received quarterly dividends of $0.01125 per share. As of November 30, 2001, Mr. Leonard Miller, Chairman of the Board of the Company, owned or controlled 9.7 million shares of common stock and Class B common stock, which represented approximately 64% voting control of the Company. In June 2001, the Company's Board of Directors increased the Company's previously authorized stock repurchase program to permit future purchases of up to 10 million shares of the Company's outstanding common stock. The Company may repurchase these shares in the open market from time-to-time. During 2001, the Company did not repurchase any of its outstanding common stock. During 2000 and 1999, under prior approvals, the Company repurchased approximately 9,406,000 and 442,000 shares of its outstanding common stock for an aggregate purchase price of approximately $152.9 million and $6.0 million, respectively. The Company has shelf registration statements under the Securities Act of 1933, as amended, relating to up to $970 million of equity or debt securities which it may sell for cash and up to $400 million of equity or debt securities which it may issue in connection with acquisitions of companies or interests in them, businesses, or assets. At November 30, 2001, no securities had been issued under these registration statements. Restrictions on Payment of Dividends Other than as required to maintain the financial ratios and net worth required by the revolving credit facilities, there are no restrictions on the payment of dividends on common stock by the Company. The cash dividends per share paid with regard to a share of Class B common stock in a calendar year may not be more than 90% of the per share cash dividends paid with regard to a share of common stock in that calendar year. There are no agreements which restrict the payment of dividends by subsidiaries of the Company other than as required to maintain the financial ratios and net worth requirements under the Financial Services Division's warehouse lines of credit. Stock Option Plans The Lennar Corporation 2000 Stock Option and Restricted Stock Plan (the "2000 Plan") provides for the granting of stock options and stock appreciation rights and awards of restricted common stock to key officers, employees and directors. The exercise prices of stock options and stock appreciation rights are not less than the market value of the common stock on the date of the grant. No options granted under the 2000 Plan may be exercisable until at least six months after the date of the grant. Thereafter, exercises are permitted in installments determined when options are granted. Each stock option and stock appreciation right will expire on a date determined at the time of the grant, but not more than 10 years after the date of the grant. At November 30, 2001, 835,000 shares of restricted stock were outstanding under the 2000 Plan. The stock was valued based on its market price on the date of the grant. The grants vest over 5 years. Unearned compensation arising from the restricted stock grants is amortized to expense over the period of the restrictions and is shown as a reduction of stockholders' equity in the consolidated balance sheets. The Lennar Corporation 1997 Stock Option Plan (the "1997 Plan") provided for the granting of stock options and stock appreciation rights to key employees of the Company to purchase shares at prices not less than market value of the common stock on 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 installments determined when options are granted. 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. The Lennar Corporation 1991 Stock Option Plan (the "1991 Plan") provided for the granting of options to certain key employees of the Company to purchase shares at prices not less than market value of the common stock on 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 installments determined when options are granted. 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. 38 A summary of the Company's stock option activity for the years ended November 30, 2001, 2000 and 1999 was as follows:
2001 2000 1999 -------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Stock Exercise Stock Exercise Stock Exercise Options Price Options Price Options Price ---------- -------- --------- -------- --------- -------- Outstanding, beginning of year................ 3,478,683 $16.68 3,445,230 $16.20 3,679,256 $15.52 Grants.................. 791,600 $37.47 671,000 $17.68 211,000 $23.95 Terminations............ (101,389) $29.33 (256,652) $19.43 (235,108) $19.83 Exercises............... (1,303,138) $14.14 (380,895) $11.74 (209,918) $10.05 ---------- ------ --------- ------ --------- ------ Outstanding, end of year................... 2,865,756 $23.13 3,478,683 $16.68 3,445,230 $16.20 ---------- ------ --------- ------ --------- ------ Exercisable, end of year................... 748,812 $15.60 1,422,734 $14.14 1,299,743 $11.87 ---------- ------ --------- ------ --------- ------ Available for grant, end of year................ 2,216,500 3,890,822 1,310,072 ---------- --------- --------- Weighted average fair value per share of options granted during the year under SFAS No. 123 ................... $18.41 $ 7.84 $ 9.40
The following table summarizes information about stock options outstanding at November 30, 2001:
Options Outstanding Options Exercisable ----------------------------------------- ----------------------------- Weighted Number Average Weighted Number Weighted Outstanding at Remaining Average Per Outstanding at Average Per Range of Per Share November 30, Contractual Share November 30, Share Exercise Prices 2001 Life Exercise Price 2001 Exercise Price - ------------------ -------------- ----------- -------------- -------------- -------------- $ 4.56 - $11.42 417,756 1.9 years $ 9.14 322,478 $ 9.91 $13.95 - $19.59 1,038,700 5.6 years $16.60 289,534 $15.94 $20.35 - $28.32 464,550 5.0 years $21.04 60,550 $21.03 $32.84 - $41.85 944,750 8.2 years $36.91 76,250 $34.03
The Company applies APB Opinion No. 25 and related Interpretations in accounting for its 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 grant. SFAS No. 123 requires "as adjusted" information regarding net earnings and earnings per share to be disclosed for new options granted. The Company determined this information using the fair value method of that statement. The fair value of these options was determined at the date of the grant using the Black-Scholes option-pricing model. The significant weighted average assumptions for the years ended November 30, 2001, 2000 and 1999 were as follows:
2001 2000 1999 ----------- ----------- ----------- Dividend yield.............................. 0.1% 0.2% - 0.3% 0.2% - 0.3% Volatility rate............................. 40% - 42% 39% - 44% 40% - 42% Risk-free interest rate..................... 4.5% - 5.8% 7.1% - 7.5% 4.8% - 6.1% Expected option life (years)................ 6.4 3.9 - 7.7 3.9 - 7.7
The estimated fair value of the options is recognized in expense over the options' vesting period for "as adjusted" disclosures. The earnings per share "as adjusted" for the effects of SFAS No. 123 is not indicative of the effects on reported net earnings for future years. The Company's reported "as adjusted" information for the years ended November 30, 2001, 2000 and 1999 was as follows: 39
2001 2000 1999 -------- ------- ------- (In thousands, except per share amounts) Net earnings........................................... $417,845 229,137 172,714 Net earnings "as adjusted"............................. $414,049 226,568 170,620 Earnings per share as reported-- basic................. $ 6.66 4.00 2.97 Earnings per share "as adjusted"--basic................ $ 6.60 3.95 2.93 Earnings per share as reported--diluted................ $ 6.01 3.64 2.74 Earnings per share "as adjusted"--diluted.............. $ 5.95 3.60 2.71
Employee Stock Ownership/401(k) Plan Prior to 1998, the Employee Stock Ownership/401(k) Plan (the "Plan") provided shares of stock to employees who had completed one year of continuous service with the Company. During 1998, the Plan was amended to exclude any new shares from being provided to employees. At November 30, 2001, the Plan held in employees' accounts 146,325 shares of the Company's common stock. 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 $6.5 million in 2001, $4.7 million in 2000 and $3.1 million in 1999. 13.Financial Instruments The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at November 30, 2001 and 2000, 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 are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The table excludes cash, receivables and accounts payable, which had fair values approximating their carrying values.
November 30, ------------------------------------------ 2001 2000 --------------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- --------- --------- --------- (In thousands) ASSETS Financial services: Mortgage loans held for sale or disposition, net................. $ 587,694 587,916 376,452 379,499 Mortgage loans, net............... 41,590 40,886 42,504 42,014 Investments held-to-maturity...... 13,235 13,284 12,488 12,507 Limited-purpose finance subsidiaries--collateral for bonds and notes payable.......... 13,146 13,730 19,894 20,320 LIABILITIES Homebuilding: Senior notes and other debts pay- able............................. $1,505,255 1,611,460 1,254,650 1,287,902 Financial services: Notes and other debts payable..... $ 693,931 693,931 428,966 428,966 Limited-purpose finance subsidiaries--bonds and notes payable.......................... 13,146 13,682 19,894 20,169 OTHER FINANCIAL INSTRUMENTS Homebuilding: Interest rate swap liability...... $ (31,359) (31,359) -- (5,707) Financial services assets (liabil- ities): Commitments to originate loans.... $ (1,085) (1,085) -- 445 Forward commitments to sell loans............................ 2,351 2,351 -- (119) ========== ========= ========= =========
40 The following methods and assumptions are used by the Company in estimating fair values: Homebuilding--Senior notes and other debts payable: The fair value of fixed rate borrowings is based on quoted market prices. Variable rate borrowings are tied to market indices and therefore approximate fair value. Interest rate swap agreements: The fair value is based on dealer quotations and generally represents an estimate of the amount the Company would pay or receive to terminate the agreement at the reporting date. Financial services--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. The Company utilizes interest rate swap agreements to manage interest costs and hedge against risks associated with changing interest rates. Counterparties to these agreements are major financial institutions. Credit loss from counterparty non-performance is not anticipated. A majority of the Company's available variable rate borrowings are based on the London Interbank Offered Rate ("LIBOR") index. At November 30, 2001, the Company had six interest rate swap agreements outstanding with a total notional amount of $400 million, which will mature at various dates through 2007. These agreements fixed the LIBOR index at an average interest rate of 6.6% at November 30, 2001. The effect of the interest rate swap agreements on interest incurred and on the average interest rate was an increase for the year ended November 30, 2001 of $7.2 million and 0.48%, a decrease of $1.2 million and 0.08% for the year ended November 30, 2000 and an increase of $1.8 million and 0.22% for the year ended November 30, 1999. As of November 30, 2001, the Financial Services Division's pipeline of loans in process totaled approximately $1.7 billion. To minimize credit risk, the Division uses the same credit policies in the approval of the commitments as are applied to all lending activities. Since a portion of these commitments is expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements. Loans in the pipeline of loans in process for which interest rates were committed to the borrower totaled approximately $235.0 million as of November 30, 2001. Substantially all of these commitments were for periods of 30 days or less. Mandatory mortgage-backed securities ("MBS") forward commitments are used by the Company to hedge its interest rate exposure during the period from when the Company makes an interest rate commitment to a loan applicant until the time at which the loan is sold to an investor. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by entering into agreements with investment bankers with primary dealer status and with permanent investors meeting the credit standards of the Company. At any time, the risk to the Company, in the event of default by the purchaser, is the difference between the contract price and current market value. At November 30, 2001, the Company had open commitments amounting to $291.0 million to sell MBS with varying settlement dates through January 2002. 14.Commitments and Contingent Liabilities The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition or results of operations of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate, which it does in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to reduce the financial risk of adverse market conditions associated with long-term land holdings. At November 30, 2001, the Company had $180.3 million of primarily non-refundable option deposits and advanced costs, with entities including unconsolidated partnerships, which allows the Company to acquire approximately 31,000 homesites. 41 The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2002--$30.7 million; 2003--$25.2 million; 2004--$20.0 million; 2005--$14.5 million; 2006--$11.4 million and thereafter-- $24.7 million. Rental expense for the years ended November 30, 2001, 2000 and 1999 was $42.3 million, $36.6 million and $24.3 million, respectively. The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $154.3 million at November 30, 2001. The Company also had outstanding performance and surety bonds with estimated costs to complete of $750.7 million related principally to its obligations for site improvements at various projects at November 30, 2001. The Company does not believe that any such bonds are likely to be drawn upon. 15.Supplemental Financial Information As discussed in Note 7, the Company issued $325 million of 9.95% senior notes due 2010. The Company's obligations to pay principal, premium, if any, and interest under the notes are guaranteed on a joint and several basis by substantially all of its subsidiaries, other than subsidiaries engaged in mortgage and title reinsurance activities. The Company has determined that separate, full financial statements of the guarantors would not be material to investors and, accordingly, supplemental financial information for the guarantors is presented. Consolidating statements of cash flows are not presented because cash flows for the non-guarantor subsidiaries were not significant for any of the periods presented. 42 CONSOLIDATING BALANCE SHEET November 30, 2001
Non- Lennar Guarantor Guarantor Corporation Subsidiaries Subsidiaries Eliminations Total ----------- ------------ ------------ ------------ ---------- (In thousands) ASSETS Homebuilding: Cash and receivables, net.................... $ 710,748 137,610 -- -- 848,358 Inventories............. -- 2,410,117 6,424 -- 2,416,541 Investments in unconsolidated partnerships........... -- 300,064 -- -- 300,064 Other assets............ 83,983 169,950 -- -- 253,933 Investments in subsidi- aries.................. 1,955,678 197,821 -- (2,153,499) -- ---------- ---------- --------- ----------- ---------- 2,750,409 3,215,562 6,424 (2,153,499) 3,818,896 Financial services...... -- 24,762 870,768 -- 895,530 ---------- ---------- --------- ----------- ---------- $2,750,409 3,240,324 877,192 (2,153,499) 4,714,426 ========== ========== ========= =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding: Accounts payable and other liabilities...... $ 295,188 460,320 218 -- 755,726 Senior notes and other debts payable, net..... 1,460,610 44,645 -- -- 1,505,255 Intercompany............ (664,651) 773,091 (108,440) -- -- ---------- ---------- --------- ----------- ---------- 1,091,147 1,278,056 (108,222) -- 2,260,981 Financial services...... -- 6,590 787,593 -- 794,183 ---------- ---------- --------- ----------- ---------- Total liabilities....... 1,091,147 1,284,646 679,371 -- 3,055,164 Stockholders' equity.... 1,659,262 1,955,678 197,821 (2,153,499) 1,659,262 ---------- ---------- --------- ----------- ---------- $2,750,409 3,240,324 877,192 (2,153,499) 4,714,426 ========== ========== ========= =========== ==========
43 CONSOLIDATING BALANCE SHEET November 30, 2000
Non- Lennar Guarantor Guarantor Corporation Subsidiaries Subsidiaries Eliminations Total ----------- ------------ ------------ ------------ ---------- (In thousands) ASSETS Homebuilding: Cash and receivables, net.................... $ 211,635 117,649 613 -- 329,897 Inventories............. -- 2,295,191 6,393 -- 2,301,584 Investments in unconsolidated partnerships........... -- 257,639 -- -- 257,639 Other assets............ 85,936 191,858 -- -- 277,794 Investments in subsidi- aries.................. 1,495,680 200,488 -- (1,696,168) -- ---------- ---------- --------- ----------- ---------- 1,793,251 3,062,825 7,006 (1,696,168) 3,166,914 Financial services...... -- 16,604 594,396 -- 611,000 ---------- ---------- --------- ----------- ---------- $1,793,251 3,079,429 601,402 (1,696,168) 3,777,914 ========== ========== ========= =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Homebuilding: Accounts payable and other liabilities...... $ 225,362 550,659 2,217 -- 778,238 Senior notes and other debts payable, net..... 1,216,703 37,947 -- -- 1,254,650 Intercompany............ (877,394) 993,477 (116,083) -- -- ---------- ---------- --------- ----------- ---------- 564,671 1,582,083 (113,866) -- 2,032,888 Financial services...... -- 1,666 514,780 -- 516,446 ---------- ---------- --------- ----------- ---------- Total liabilities....... 564,671 1,583,749 400,914 -- 2,549,334 Stockholders' equity.... 1,228,580 1,495,680 200,488 (1,696,168) 1,228,580 ---------- ---------- --------- ----------- ---------- $1,793,251 3,079,429 601,402 (1,696,168) 3,777,914 ========== ========== ========= =========== ==========
CONSOLIDATING STATEMENT OF EARNINGS Year Ended November 30, 2001
Non- Lennar Guarantor Guarantor Corporation Subsidiaries Subsidiaries Eliminations Total ----------- ------------ ------------ ------------ --------- (In thousands) Revenues: Homebuilding............ $ -- 5,603,943 4 -- 5,603,947 Financial services...... -- 55,146 370,208 -- 425,354 -------- --------- -------- -------- --------- Total revenues.......... -- 5,659,089 370,212 -- 6,029,301 -------- --------- -------- -------- --------- Costs and expenses: Homebuilding............ -- 4,817,778 543 -- 4,818,321 Financial services...... -- 62,358 273,865 -- 336,223 Corporate general and administrative......... 75,831 -- -- -- 75,831 Interest................ -- 119,503 -- -- 119,503 -------- --------- -------- -------- --------- Total costs and ex- penses................. 75,831 4,999,639 274,408 -- 5,349,878 -------- --------- -------- -------- --------- Earnings (loss) before income taxes........... (75,831) 659,450 95,804 -- 679,423 Provision (benefit) for income taxes........... (27,829) 253,888 35,519 -- 261,578 Equity in earnings from subsidiaries........... 465,847 60,285 -- (526,132) -- -------- --------- -------- -------- --------- Net earnings............ $417,845 465,847 60,285 (526,132) 417,845 ======== ========= ======== ======== =========
44 CONSOLIDATING STATEMENT OF EARNINGS Year Ended November 30, 2000
Non- Lennar Guarantor Guarantor Corporation Subsidiaries Subsidiaries Eliminations Total ----------- ------------ ------------ ------------ --------- (In thousands) Revenues: Homebuilding............ $ -- 4,387,157 2,877 -- 4,390,034 Financial services...... -- 47,818 269,116 -- 316,934 -------- --------- -------- --------- --------- Total revenues.......... -- 4,434,975 271,993 -- 4,706,968 -------- --------- -------- --------- --------- Costs and expenses: Homebuilding............ -- 3,906,772 2,466 -- 3,909,238 Financial services...... -- 52,533 220,806 -- 273,339 Corporate general and administrative......... 50,155 -- -- -- 50,155 Interest................ -- 98,601 -- -- 98,601 -------- --------- -------- --------- --------- Total costs and ex- penses................. 50,155 4,057,906 223,272 -- 4,331,333 -------- --------- -------- --------- --------- Earnings (loss) before income taxes........... (50,155) 377,069 48,721 -- 375,635 Provision (benefit) for income taxes........... (20,298) 147,057 19,739 -- 146,498 Equity in earnings from subsidiaries........... 258,994 28,982 -- (287,976) -- -------- --------- -------- --------- --------- Net earnings............ $229,137 258,994 28,982 (287,976) 229,137 ======== ========= ======== ========= =========
45 CONSOLIDATING STATEMENT OF EARNINGS Year Ended November 30, 1999
Non- Lennar Guarantor Guarantor Corporation Subsidiaries Subsidiaries Eliminations Total ----------- ------------ ------------ ------------ ---------- (In thousands) Revenues: Homebuilding............ $ -- 2,848,105 1,102 -- 2,849,207 Financial services...... -- 31,025 238,282 -- 269,307 -------- --------- -------- --------- ---------- Total revenues.......... -- 2,879,130 239,384 -- 3,118,514 -------- --------- -------- --------- ---------- Costs and expenses: Homebuilding............ -- 2,506,332 2,072 -- 2,508,404 Financial services...... -- 34,115 204,096 -- 238,211 Corporate general and administrative......... 37,563 -- -- -- 37,563 Interest................ -- 48,859 -- -- 48,859 -------- --------- -------- --------- ---------- Total costs and expenses............... 37,563 2,589,306 206,168 -- 2,833,037 -------- --------- -------- --------- ---------- Earnings (loss) before income taxes........... (37,563) 289,824 33,216 -- 285,477 Provision (benefit) for income taxes........... (15,823) 114,480 14,106 -- 112,763 Equity in earnings from subsidiaries........... 194,454 19,110 -- (213,564) -- -------- --------- -------- --------- ---------- Net earnings............ $172,714 194,454 19,110 (213,564) 172,714 ======== ========= ======== ========= ==========
16. Quarterly Data (unaudited)
First Second Third Fourth ---------- --------- --------- --------- (In thousands, except per share amounts) 2001 Revenues............................... $1,104,042 1,391,533 1,577,628 1,956,098 Earnings before income taxes........... $ 83,360 157,733 173,488 264,842 Net earnings........................... $ 51,266 97,006 106,695 162,878 Earnings per share: Basic................................ $ 0.83 1.55 1.69 2.58 Diluted.............................. $ 0.75 1.40 1.53 2.32 ========== ========= ========= ========= 2000 Revenues............................... $ 640,367 968,180 1,376,215 1,722,206 Earnings before income taxes........... $ 36,412 59,739 100,011 179,473 Net earnings........................... $ 22,211 36,441 61,007 109,478 Earnings per share: Basic................................ $ 0.42 0.69 0.99 1.77 Diluted.............................. $ 0.40 0.64 0.90 1.59 ========== ========= ========= =========
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. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable. 46 PART III Item 10. Directors and Executive Officers of the Registrant. Information about our directors is incorporated by reference to our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2002 (120 days after the end of our fiscal year). The following people were our executive officers on February 20, 2002:
Name/Position Age Year of Election - ------------- --- ---------------- Stuart A. Miller, President and Chief Executive Officer..................... 44 1997 Robert J. Strudler, Vice Chairman and Chief Operating Officer................. 59 2000 Bruce E. Gross, Vice President and Chief Financial Officer................ 43 1997 Marshall H. Ames, Vice President............................................ 58 1982 Diane J. Bessette, Vice President and Controller............................. 41 1997 Jonathan M. Jaffe, Vice President............................................ 42 1994 Craig M. Johnson, Vice President, Community Development..................... 48 2000 Waynewright Malcolm, Vice President and Treasurer.............................. 38 1997 David B. McCain, Vice President, General Counsel and Secretary............. 41 1998 Allan J. Pekor, Vice President............................................ 65 1997
The year of election represents the year that the executive officer was elected to his or her current position. Mr. Stuart Miller (who is the son of Leonard Miller, our Chairman of the Board of Directors) has been our President and Chief Executive Officer since April 1997 and is one of our Directors. Prior to that, Mr. Miller held various executive positions with us and had been a Vice President since 1985. Mr. Miller is also the Chairman of the Board of LNR Property Corporation. Mr. Strudler has been Vice Chairman of the Board of Directors and Chief Operating Officer since May 2000. Prior to that, Mr. Strudler was the Chairman and Co-Chief Executive Officer of U.S. Home Corporation. Mr. Gross has been a Vice President and our Chief Financial Officer since 1997. Prior to that, Mr. Gross was employed as Senior Vice President, Controller and Treasurer of Pacific Greystone Corporation. Mr. Ames has been a Vice President since 1982 and has held various positions in our Homebuilding Division. Ms. Bessette has been employed by us since 1995, has been our Controller since 1997 and became a Vice President in 2000. Mr. Jaffe has been a Vice President since 1994 and serves as a Regional President in our Homebuilding Division. Mr. Jaffe is one of our Directors. Mr. Johnson has been a Vice President since May 2000 and is President of Strategic Technologies, Inc. Prior to that, Mr. Johnson was a Senior Vice President of U.S. Home Corporation. Mr. Malcolm joined us as Treasurer in 1997 and became a Vice President in 2000. Prior to that, Mr. Malcolm was employed as Director, Finance and Regulatory Affairs, at Citizens Utilities Company. Mr. McCain joined us in 1998 as a Vice President, General Counsel and Secretary. Prior to joining us, 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 us since 1979. Mr. Pekor presently serves as a Vice President and has served as President of Lennar Financial Services, Inc. since 1997. 47 Item 11. Executive Compensation. The information called for by this item is incorporated by reference to our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2002 (120 days after the end of our fiscal year). Item 12. Security Ownership of Certain Beneficial Owners and Management. The information called for by this item is incorporated by reference to our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2002 (120 days after the end of our fiscal year). Item 13. Certain Relationships and Related Transactions. The information called for by this item is incorporated by reference to our definitive proxy statement, which will be filed with the Securities and Exchange Commission not later than March 30, 2002 (120 days after the end of our fiscal year). 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 contained in Item 8:
Financial Statements Page in this Report -------------------- ------------------- Report of Independent Auditors......................... 21 Consolidated Balance Sheets as of November 30, 2001 and 2000.................................................. 22 Consolidated Statements of Earnings for the Years Ended November 30, 2001, 2000 and 1999.............................................. 23 Consolidated Statements of Stockholders' Equity for the Years Ended November 30, 2001, 2000 and 1999.......... 24 Consolidated Statements of Cash Flows for the Years Ended November 30, 2001, 2000 and 1999................ 25 Notes to Consolidated Financial Statements............. 27
2. The following financial statement schedule is included in this Report:
Financial Statement Schedule Page in this Report ---------------------------- ------------------- Independent Auditors' Report on Schedule................. 52 II - Valuation and Qualifying Accounts................... 53
Information required by other schedules has either been incorporated in the consolidated financial statements and accompanying notes or is not applicable to us. 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--Incorporated by reference to Exhibit 3(a) to the Annual Report on Form 10-K for the fiscal year ended November 30, 1998. 3(b). Certificate of Amendment to Certificate of Incorporation, dated April 9, 1999--Incorporated by reference to Exhibit 3(a) to the Annual Report on Form 10-K for the fiscal year ended November 30, 1999. 3(c). Bylaws--Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K dated November 17, 1997, file number 1-06643. 4(a). Indenture, dated as of December 31, 1997, between Lennar Corporation and Bank One Trust Company, N.A., as successor in interest to The First National Bank of Chicago, as trustee-- Incorporated by Reference to Registration Statement No. 333- 45527. 48 4(b). First Supplemental Indenture, dated as of July 29, 1998, between Lennar Corporation and Bank One Trust Company, N.A., as successor in interest to The First National Bank of Chicago, as trustee (relating to Lennar's Zero Coupon Senior Convertible Debentures due 2018)--Incorporated by reference to the Current Report on Form 8-K dated July 24, 1998, file number 1-11749. 4(c). Second Supplemental Indenture, dated as of February 19, 1999, between Lennar Corporation and Bank One Trust Company, N.A., as successor in interest to The First National Bank of Chicago, as trustee (relating to Lennar's 7 5/8% Senior Notes due 2009)-- Incorporated by reference to the Current Report on Form 8-K dated February 19, 1999, file number 1-11749. 4(d). Third Supplemental Indenture, dated May 3, 2000, by and among Lennar Corporation and Bank One Trust Company, N.A., as successor trustee to The First National Bank of Chicago (relating to Lennar's 7 5/8% Senior Notes due 2009)--Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended November 30, 2000. 4(e). Fourth Supplemental Indenture, dated May 3, 2000, by and among Lennar Corporation and Bank One Trust Company, N.A., as successor trustee to The First National Bank of Chicago (relating to Lennar's Zero Coupon Senior Convertible Debentures due 2018)-- Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended November 30, 2000. 4(f). Fifth Supplemental Indenture, dated April 4, 2001, by and among Lennar Corporation and Bank One Trust Company, N.A., as trustee (relating to Lennar's Zero Coupon Convertible Senior Subordinated Notes due 2021)--Incorporated by reference to the Current Report on Form 8-K dated April 4, 2001, file number 1-11749. 4(g). Indenture, dated May 3, 2000, by and among Lennar Corporation and Bank One Trust Company, N.A., as trustee, including Form of 9.95% Series A Senior Notes due 2010 and Form of 9.95% Series B Senior Notes due 2010--Incorporated by reference to Registration Statement No. 333-41316. 4(h). Registration Rights Agreement, dated May 3, 2000, by and among Lennar Corporation and the Initial Purchasers--Incorporated by reference to Registration Statement No. 333-41316. 10(a). Lennar Corporation 2000 Stock Option and Restricted Stock Plan-- Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended February 28, 2001. 10(b). Amended and Restated Lennar Corporation 1997 Stock Option Plan-- Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended November 30, 1997. 10(c). Lennar Corporation 1991 Stock Option Plan--Incorporated by reference to Registration Statement No. 33-45442. 10(d). Lennar Corporation Employee Stock Ownership Plan and Trust-- Incorporated by reference to Registration Statement No. 2-89104. 10(e). Amendment dated December 13, 1989 to Lennar Corporation Employee Stock Ownership Plan--Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended November 30, 1990. 10(f). Lennar Corporation Employee Stock Ownership/401(k) Trust Agreement dated December 13, 1989--Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended November 30, 1990. 10(g). Amendment dated April 18, 1990 to Lennar Corporation Employee Stock Ownership/401(k) Plan--Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended November 30, 1990. 10(h). Partnership Agreement for Lennar Land Partners 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 fiscal year ended November 30, 1997. Lennar Land Partners Sub II, Inc. and LNR Land Partners Sub II, Inc. entered into an identical Partnership Agreement for Lennar Land Partners II on June 28, 1999. 10(i). Separation and Distribution Agreement, dated June 10, 1997, between Lennar Corporation and LNR Property Corporation-- Incorporated by reference to Registration Statement No. 333- 35671. 49 10(j). Credit Agreement, dated October 31, 1997, by and among Lennar Land Partners and the Lenders named therein--Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended November 30, 1997. 10(k). Credit Agreement, dated May 3, 2000, among Lennar Corporation and various lenders--Incorporated by reference to the Annual Report on Form 10-K for the fiscal year ended November 30, 2000. 10(l). Plan and Agreement of Merger, dated as of February 16, 2000, between Lennar Corporation, U.S. Home Corporation and Len Acquisition Corporation--Incorporated by reference to Current Report on Form 8-K dated February 23, 2000, file number 1-11749. 10(m). Warehousing Credit and Security Agreement dated June 25, 2001 between Universal American Mortgage Company, Eagle Home Mortgage, Inc., Ameristar Financial Services, Inc., Universal American Mortgage Company of California, UAMC Asset Corp. II and Residential Funding Corporation. 21. List of subsidiaries. 23. Independent Auditors' Consent. 99. Financial statements of Lennar Corporation's guarantor subsidiaries. (b) Current Reports on Form 8-K filed during the quarter ended November 30, 2001. We filed a Current Report on Form 8-K dated October 5, 2001, file number 1-11749, which contained our earnings release for the quarter ended August 31, 2001. (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. 50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this Report to be signed on our behalf by the undersigned, thereunto duly authorized. LENNAR CORPORATION /s/ Stuart A. Miller _______________________________________ Stuart A. Miller President, Chief Executive Officer and Director Date: February 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on our behalf and in the capacities and on the dates indicated: Principal Executive Officer: Stuart A. Miller /s/ Stuart A. Miller President, Chief Executive Officer and Direc- --------------------------------- tor Date: February 28, 2002 Principal Financial Officer: Bruce E. Gross /s/ Bruce E. Gross Vice President and Chief Financial Officer --------------------------------- Date: February 28, 2002 Principal Accounting Officer: Diane J. Bessette /s/ Diane J. Bessette Vice President and Controller --------------------------------- Date: February 28, 2002 Directors: Irving Bolotin /s/ Irving Bolotin --------------------------------- Date: February 28, 2002 Steven L. Gerard /s/ Steven L. Gerard --------------------------------- Date: February 28, 2002 Jonathan M. Jaffe /s/ Jonathan M. Jaffe --------------------------------- Date: February 28, 2002 R. Kirk Landon /s/ R. Kirk Landon --------------------------------- Date: February 28, 2002 Sidney Lapidus /s/ Sidney Lapidus --------------------------------- Date: February 28, 2002 Leonard Miller /s/ Leonard Miller --------------------------------- Date: February 28, 2002 Herve Ripault /s/ Herve Ripault --------------------------------- Date: February 28, 2002 Steven J. Saiontz /s/ Steven J. Saiontz --------------------------------- Date: February 28, 2002 Donna Shalala /s/ Donna Shalala --------------------------------- Date: February 28, 2002 Robert J. Strudler /s/ Robert J. Strudler --------------------------------- Date: February 28, 2002
51 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Lennar Corporation: We have audited the consolidated financial statements of Lennar Corporation and subsidiaries (the "Company") as of November 30, 2001 and 2000 and for each of the three years in the period ended November 30, 2001, and have issued our report thereon dated January 9, 2002; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedule of the Company, listed in Item 14(a)2. The financial statement schedule is the responsibility of the Company'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 consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Certified Public Accountants Miami, Florida January 9, 2002 52 Schedule II LENNAR CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts Years Ended November 30, 2001, 2000 and 1999
Additions ---------------------- Charged Charged Beginning to costs to other Ending Description balance and expenses accounts Deductions balance - ----------- ---------- ------------ --------- ---------- --------- Year ended November 30, 2001 Allowances deducted from assets to which they apply: Allowances for doubtful accounts and notes receivable......... $5,188,000 2,368,000 -- (2,801,000) 4,755,000 ---------- --------- --------- ---------- --------- Deferred income and unamortized discounts.......... $8,345,000 7,000 254,000 (3,965,000) 4,641,000 ---------- --------- --------- ---------- --------- Loan loss reserve... $3,645,000 655,000 9,000 (244,000) 4,065,000 ---------- --------- --------- ---------- --------- Valuation allowance.......... $1,377,000 -- -- (118,000) 1,259,000 ---------- --------- --------- ---------- --------- Deferred tax asset valuation allowance.......... $7,117,000 -- -- -- 7,117,000 ---------- --------- --------- ---------- --------- Year ended November 30, 2000 Allowances deducted from assets to which they apply: Allowances for doubtful accounts and notes receivable......... $2,471,000 3,834,000 28,000 (1,145,000) 5,188,000 ---------- --------- --------- ---------- --------- Deferred income and unamortized discounts.......... $1,128,000 -- 7,896,000 (679,000) 8,345,000 ---------- --------- --------- ---------- --------- Loan loss reserve... $3,778,000 -- -- (133,000) 3,645,000 ---------- --------- --------- ---------- --------- Valuation allowance.......... $1,249,000 -- 903,000 (775,000) 1,377,000 ---------- --------- --------- ---------- --------- Deferred tax asset valuation allowance.......... $8,508,000 -- -- (1,391,000) 7,117,000 ---------- --------- --------- ---------- --------- Year ended November 30, 1999 Allowances deducted from assets to which they apply: Allowances for doubtful accounts and notes receivable......... $4,075,000 2,011,000 38,000 (3,653,000) 2,471,000 ---------- --------- --------- ---------- --------- Deferred income and unamortized discounts.......... $ 231,000 -- 1,156,000 (259,000) 1,128,000 ---------- --------- --------- ---------- --------- Loan loss reserve... $3,090,000 1,200,000 21,000 (533,000) 3,778,000 ---------- --------- --------- ---------- --------- Valuation allowance.......... $1,903,000 93,000 56,000 (803,000) 1,249,000 ---------- --------- --------- ---------- --------- Deferred tax asset valuation allowance.......... $7,659,000 -- 849,000 -- 8,508,000 ---------- --------- --------- ---------- ---------
53 SHAREHOLDER INFORMATION Lennar Corporation and Subsidiaries Annual Meeting The Annual Stockholders' Meeting will be held at 11:00 a.m. on April 2, 2002 at the Doral Park Golf and Country Club, 5001 N.W. 104th Avenue Miami, Florida 33178 Registrar and Transfer Agent EquiServe, Inc. P.O. Box 43010 Providence, Rhode Island 02940 Listing New York Stock Exchange (LEN) Corporate Counsel Clifford Chance Rogers & Wells LLP 200 Park Avenue New York, New York 10166 Independent Auditors Deloitte & Touche LLP 200 South Biscayne Boulevard, Suite 400 Miami, Florida 33131 54 Exhibit Index Exhibit Number Exhibit Description -------------- ------------------- 10(m). Warehousing Credit and Security Agreement dated June 25, 2001 between Universal American Mortgage Company, Eagle Home Mortgage, Inc., Ameristar Financial Services, Inc., Universal American Mortgage Company of California, UAMC Asset Corp. II and Residential Funding Corporation. 21. List of subsidiaries. 23. Independent Auditors' Consent. 99. Financial statements of Lennar Corporation's guarantor subsidiaries. EX-10 3 dex10.txt WAREHOUSING CREDIT AND SECURITY AGREEMENT Exhibit 10(m) - -------------------------------------------------------------------------------- WAREHOUSING CREDIT AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- BETWEEN UNIVERSAL AMERICAN MORTGAGE COMPANY, a Florida corporation, EAGLE HOME MORTGAGE, INC., a Washington corporation, AMERISTAR FINANCIAL SERVICES, INC., a California corporation, UNIVERSAL AMERICAN MORTGAGE COMPANY OF CALIFORNIA, a California corporation, UAMC ASSET CORP. II, a Nevada corporation the Lenders Party Hereto AND RESIDENTIAL FUNDING CORPORATION, a Delaware corporation, as Credit Agent Dated as of June 25, 2001 - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- 1. THE CREDIT.....................................................1 1.1. The Warehousing Commitment.....................................1 1.2. Expiration of Warehousing Commitment...........................2 1.3. Swingline Facility.............................................2 1.4. Notes..........................................................2 1.5. Non-Receipt of funds by Credit Agent...........................3 1.6. Replacement Notes..............................................3 2. ELIGIBLE ASSETS................................................4 2.1. Limitation on Warehousing Advances.............................4 2.2. Limitation on RFC Direct Advances..............................4 2.3. Eligibility as Seller/Servicer of Mortgage Loans...............5 2.4. Eligible Assets................................................6 3. PROCEDURES FOR OBTAINING ADVANCES..............................7 3.1. Warehousing Advances...........................................7 3.2. Wet Settlement Advances........................................8 4. INTEREST, PRINCIPAL AND FEES...................................9 4.1. Interest.......................................................9 4.2. Interest Limitation............................................9 4.3. Principal Payments............................................10 4.4. Agent's Fees..................................................12 4.5. Commitment Fees...............................................13 4.6. Miscellaneous Charges.........................................13 4.7. Method of Making Payments.....................................13 4.8. Illegality....................................................14 4.9. Increased Costs; Capital Requirements.........................14 5. COLLATERAL....................................................16 5.1. Grant of Security Interest....................................16 5.2. Release of Security Interest in Pledged Loans and Pledged Securities............................................17 5.3. Collection and Servicing Rights...............................19 5.4. Return of Collateral at End of Warehousing Commitment.........19 5.5. Delivery of Collateral Documents..............................19 5.6. Borrower Remains Liable.......................................20 5.7. Further Assurance.............................................20 6. CONDITIONS PRECEDENT..........................................21 6.1. Initial Advance...............................................21 6.2. Each Advance..................................................24 7. GENERAL REPRESENTATIONS AND WARRANTIES........................26 7.1. Place of Business.............................................26 7.2. Organization; Good Standing; Subsidiaries.....................26 7.3. Authorization and Enforceability..............................27 7.4. Authorization and Enforceability of Lennar Undertaking........27 7.5. Approvals.....................................................27 7.6. Financial Condition...........................................27 7.7. Litigation....................................................28 7.8. Compliance with Laws..........................................28 7.9. Regulation U..................................................28 7.10. Investment Company Act........................................28 7.11. Payment of Taxes...............................................28 7.12. Agreements.....................................................29 7.13. Title to Properties............................................29 7.14. ERISA..........................................................29 7.15. No Retiree Benefits............................................29 7.16. Assumed Names..................................................29 8. AFFIRMATIVE COVENANTS..........................................31 8.1. Payment of Obligations.........................................31 8.2. Financial Statements...........................................31 8.3. Other Borrower Reports.........................................31 8.4. Maintenance of Existence; Conduct of Business..................32 8.5. Compliance with Applicable Laws................................32 8.6. Inspection of Properties and Books; Operational Reviews........32 8.7. Notice.........................................................33 8.8. Payment of Debt, Taxes and Other Obligations...................33 8.9. Insurance......................................................34 8.10. Closing Instructions...........................................34 8.11. Subordination of Certain Indebtedness..........................34 8.12. Other Loan Obligations.........................................34 8.13. ERISA..........................................................34 8.14. Use of Proceeds of Advances....................................35 9. NEGATIVE COVENANTS.............................................36 9.1. Contingent Liabilities.........................................36 9.2. Restrictions on Fundamental Changes............................36 9.3. Loss of Eligibility............................................36 9.4. Tangible Leverage Ratio........................................36 9.5. Minimum Tangible Net Worth.....................................36 9.6. Distributions to Shareholders..................................37 9.7. Transactions with Affiliates...................................37 9.8. Recourse Servicing Contracts...................................37 9.9. Deferral of Subordinated Debt..................................37 9.10. Limitation on Liens............................................37 9.11. Limitation on Debt.............................................38 10. SPECIAL REPRESENTATIONS, WARRANTIES AND COVENANTS..............39 CONCERNING COLLATERAL.........................................................39 10.1. Special Representations and Warranties Concerning Collateral...39 10.2. Special Affirmative Covenants Concerning Warehousing Collateral.....................................................41 10.3. Special Negative Covenants Concerning Warehousing Collateral...42 10.4. Special Affirmative Covenants Concerning Builder Construction Mortgage Loans....................................42 10.5. Special Representations Concerning Construction/Perm Mortgage Loans and Third Party Builder Construction Mortgage Loans......42 10.6. Special Representations and Warranties Concerning Receivables..43 10.7. Special Representations Concerning Pledged Shares..............44 10.8. Voting Rights; Dividends; Etc..................................44 11. DEFAULTS; REMEDIES.............................................46 11.1. Events of Default..............................................46 11.2. Remedies.......................................................47 11.3. Application of Proceeds........................................50 11.4. Credit Agent Appointed Attorney-in-Fact........................51 11.5. Right of Set-Off...............................................52 11.6. Sharing of Payments............................................52 12. AGENT..........................................................53 12.1. Appointment....................................................53 12.2. Duties of Agent................................................53 12.3. Standard of Care..............................................53 12.4. Delegation of Duties..........................................54 12.5. Exculpatory Provisions........................................54 12.6. Reliance by Agent.............................................54 12.7. Non-Reliance on Agent or Other Lenders........................55 12.8. Agent in Individual Capacity..................................55 12.9. Successor Agent...............................................55 13. MISCELLANEOUS.................................................57 13.1. Notices.......................................................57 13.2. Reimbursement Of Expenses; Indemnity..........................57 13.3. Indemnification by Lenders....................................58 13.4. Financial Information.........................................58 13.5. Terms Binding Upon Successors; Survival of Representations....58 13.6. Lenders in Individual Capacity................................59 13.7. Assignment and Participations.................................59 13.8. Commitment Increases..........................................59 13.9. Amendments....................................................60 13.10. Governing Law................................................60 13.11. Relationship of the Parties..................................60 13.12. Severability.................................................61 13.13. Consent to Credit References.................................61 13.14. Counterparts.................................................61 13.15. Entire Agreement.............................................61 13.16. Consent to Jurisdiction......................................61 13.17. Waiver of Jury Trial.........................................62 13.18. Confidentiality..............................................62 14. DEFINITIONS...................................................63 14.1. Defined Terms.................................................63 14.2. Other Definitional Provisions; Terms of Construction..........72 - -------------------------------------------------------------------------------- EXHIBITS - -------------------------------------------------------------------------------- Exhibit A Request for Advance Exhibit B Procedures and Documentation for Warehousing Single Family Mortgage Loans Exhibit C Schedule of Servicing Portfolio Exhibit D Subsidiaries Exhibit E Officer's Certificate Exhibit F Lines of Credit Exhibit G Assumed Names Exhibit H Eligible Assets Exhibit I Commitment Summary Report Exhibit J Commitment Amounts Exhibit K Advance Certificate Exhibit L Existing Liens Exhibit M Existing Debt - -------------------------------------------------------------------------------- WAREHOUSING CREDIT AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- WAREHOUSING CREDIT AND SECURITY AGREEMENT, dated as of June 25, 2001, between UNIVERSAL AMERICAN MORTGAGE COMPANY, a Florida corporation ("UAMC"), EAGLE HOME MORTGAGE, INC., a Washington corporation ("EHMI"), AMERISTAR FINANCIAL SERVICES, INC., a California corporation ("AFSI"), UNIVERSAL AMERICAN MORTGAGE CO. OF CALIFORNIA, a California corporation ("UAMCC"), UAMC ASSET CORP. II, a Nevada corporation ("UAMC Asset") (UAMC, EHMI, AFSI, UAMCC and UAMC Asset, collectively, "Borrower"), RESIDENTIAL FUNDING CORPORATION, a Delaware corporation ("RFC"), (RFC and any Additional Lender as may from time to time become a party hereto and their respective successors and permitted assigns being referred to individually as a "Lender" and collectively as the "Lenders"), and RFC as credit agent for Lenders (in such capacity, the "Credit Agent"). A. Borrower has requested certain financing from Lenders. B. Lenders have agreed to provide that financing to Borrower subject to the terms and conditions of this Agreement. C. The "Closing Date" for the transactions contemplated by this Agreement is June 25, 2001. NOW, THEREFORE, the parties to this Agreement agree as follows: 1. THE CREDIT 1.1. The Warehousing Commitment On the terms and subject to the conditions of this Agreement, Lenders agree, severally and not jointly, to make Warehousing Advances to Borrower from the Closing Date to the Business Day immediately preceding the Maturity Date, pro rata in accordance with their respective Percentage Shares, during which period Borrower may borrow, repay and reborrow in accordance with the provisions of this Agreement. On the terms and subject to the conditions of this Agreement, RFC agrees to make RFC Direct Advances to Borrower from the Closing Date to the Business Day immediately preceding the Maturity Date, during which period Borrower may borrow, repay and reborrow in accordance with the provisions of this Agreement. Effective as of the Closing Date, Lenders shall make Warehousing Advances and RFC shall make RFC Direct Advances in an amount equal to all loans outstanding under the Existing U.S. Home Agreement, and such Advances shall be applied by Credit Agent to repay such outstanding loans. In Credit Agent's discretion, Warehousing Advances and RFC Direct Advances may be made on or after June 30, 2001, against Eligible Assets previously financed under the Existing Universal Agreement, in connection with the repayment in full of Borrower's Debt under the Existing Universal Agreement. The total aggregate principal amount of all Warehousing Advances and Swingline Advances outstanding at any one time may not exceed the Warehousing Credit Limit, and the total aggregate principal amount of all RFC Direct Advances outstanding at any one time will not exceed the RFC Direct Commitment Amount. While a Default or Event of Default exists, Lenders may refuse to make any additional Warehousing Advances and RFC may refuse to make additional RFC Direct Advances to Borrower. All Warehousing Advances, RFC Direct Advances Page 1 and Swingline Advances under this Agreement constitute a single indebtedness, and all of the Collateral is security for the Notes and for the performance of all of the Obligations. 1.2. Expiration of Warehousing Commitment The Commitments expire on the earlier of ("Maturity Date"): (a) with respect to each Lender's Warehousing Commitment, June 24, 2002 or June 24, 2003, as set forth on Exhibit J, and with respect to the RFC Direct Commitments, June 24, 2003, as such date(s) may be extended in writing by the applicable Lenders, in their sole discretion, on which dates the Commitments will expire of their own terms and the related Advances will become due and payable, in each case without the necessity of Notice or action by Lenders, and (b) the date the Commitments are terminated and the Advances become due and payable under Section 11.2. 1.3. Swingline Facility On the terms and subject to the conditions set forth herein, RFC may, from time to time to, but not including, the Business Day immediately preceding the Maturity Date, make Warehousing Advances ("Swingline Advances") requested by Borrower, in an aggregate not to exceed the Swingline Facility Amount, without requesting Warehousing Advances from the other Lenders. Lenders hereby agree to purchase from RFC an undivided participation interest in all outstanding Swingline Advances at any time in an amount equal to each Lender's Percentage Share of such Swingline Advances. RFC may at any time in its sole and absolute discretion (and shall no less frequently than weekly and upon the acceleration of the Obligations following an Event of Default) request Lenders to make Warehousing Advances in principal amounts equal to their Percentage Shares of outstanding Swingline Advances, and each Lender absolutely and unconditionally agrees to fund such Warehousing Advances, regardless of any Default or Event of Default or other condition which would otherwise excuse such Lender from funding Warehousing Advances, provided that no Lender shall be required to make Advances to repay Swingline Advances which would cause such Lender's aggregate Warehousing Advances then outstanding to exceed the amount of such Lender's Warehousing Commitment Amount. Each Lender's Warehousing Advances made pursuant to the preceding sentence shall be delivered directly to RFC in immediately available funds at the office of Credit Agent by 4:00 p.m. on the day of the request therefor by RFC if such request is made on or before 3:00 p.m., or by 9:00 a.m. on the 1st Business Day following such request if such request is made after 3:00 p.m., and shall be promptly applied against the outstanding Swingline Advances. At the time of any request for Warehousing Advances from Lenders pursuant to this Section 1.3, Credit Agent shall deliver to each Lender a certificate in the form of Exhibit K attached hereto (the "Advance Certificate"), certified by Credit Agent. For purposes of the limitations set forth in Exhibit H hereto, Swingline Advances shall be deemed to be Warehousing Advances. 1.4. Notes Warehousing Advances made by each Lender against Eligible Assets other than Agreements for Deed and Foreclosure Claim Receivables are evidenced by Borrower's promissory note, payable to each Lender, in the form prescribed by Credit Agent (each, a "Warehousing Note"). Warehousing Advances made by each Lender against Agreements for Deed or Foreclosure Claim Receivables are evidenced by Borrower's promissory note, payable to each Lender, in the form prescribed by the Credit Agent (each, a "Sublimit Note"). RFC Direct Advances made by RFC are evidenced by Borrower's promissory note, payable to RFC, in the form prescribed by the Credit Agent (the "RFC Direct Note"). Swingline Advances of Borrower in favor of RFC are evidenced by Borrower's promissory note, payable to RFC, in the form prescribed by Credit Agent (the "Swingline Note"). The terms "Warehousing Note," "Sublimit Note," "RFC Direct Note" and "Swingline Note," as used in this Agreement, include all amendments, restatements, Page 2 renewals or replacements of the original "Warehousing Notes," "Sublimit Note," "RFC Direct Note" and "Swingline Note," and all substitutions for any of them. All terms and provisions of the "Warehousing Notes," "Sublimit Note," "RFC Direct Note" and "Swingline Note" are incorporated into this Agreement. 1.5. Non-Receipt of funds by Credit Agent. If Credit Agent receives notice from a Lender that such Lender does not intend to make its Percentage Share of any Warehousing Advances, neither Credit Agent nor any other Lender shall have any obligation to fund such Lender's Percentage Share. Notwithstanding the foregoing, unless a Lender notifies Credit Agent by 3:00 p.m. on the date of a proposed Warehousing Advance that it does not intend to make its Percentage Share of such Warehousing Advance available to Credit Agent at such time and on such date, Credit Agent may assume that such Lender will make such amount available to Credit Agent to be advanced to Borrower, and in reliance on such assumption, Credit Agent may, at its option, make a corresponding amount available to Borrower. 1.5(a) If Credit Agent makes such corresponding amount available to Borrower and such amount is not made available to Credit Agent by such Lender by close of business on the date of the Warehousing Advance, such Lender shall pay such amount to Credit Agent upon demand plus interest to the date of payment at a rate per annum equal to the Federal Funds Rate. 1.5(b) If a Lender fails to pay as provided herein, Borrower shall pay such amount to Credit Agent upon demand plus interest (at the rate applicable to Borrower for such Warehousing Advance) to the date of repayment. 1.5(c) Nothing in this Section 1.5 shall relieve any Lender from its obligation to fund its Percentage Share of any Advance, or prejudice any rights Borrower may have against any Lender as a result of such Lender's failure to make its Percentage Share of any Advance 1.6. Replacement Notes. Upon receipt by Credit Agent of an affidavit of an officer of any Lender as to the loss, theft, destruction or mutilation of any Note, and, in the case of any such mutilation, upon receipt by Credit Agent of such Note, Borrower will issue, in lieu thereof, a replacement note in the same principal amount thereof and otherwise of like tenor. End of Article 1 Page 3 2. Eligible Assets 2.1. Limitation on Warehousing Advances Lenders will make Warehousing Advances upon the request of Borrower, in the manner provided in Article 3, solely for the purpose of funding Eligible Assets, other than Land Loans and Other Construction Loans, and against the pledge of those Eligible Assets as Collateral. Lenders' obligations to make Warehousing Advances are subject to the limitations set forth in Exhibit H and to the following limitations: 2.1(a) No Warehousing Advance will be made against any Eligible Asset that has been previously sold or pledged to obtain financing (whether or not such financing constitutes Debt) under another warehousing financing arrangement, other than one of the Existing Agreements, or a Gestation Agreement. 2.1(b) No Warehousing Advance will be made against an Eligible Asset if the Warehousing Advance will exceed the amount applicable to that type of Eligible Asset at the time it is pledged, as set forth in Exhibit H. 2.1(c) No Warehousing Advance shall be made against a Mortgage Loan, other than a Foreclosure Mortgage Loan, an Investment Mortgage Loan, or a Construction/Perm Mortgage Loan, closed more than 90 days before the date of such Warehousing Advance, except to the extent such Warehousing Advance refinances a loan under an Existing Agreement. 2.1(d) No Advance shall be made against a Agreement for Deed, Foreclosure Mortgage Loan or Foreclosure Claim Receivable that is not owned by UAMC Asset. 2.2. Limitation on RFC Direct Advances RFC will make RFC Direct Advances against Land Loans and Other Construction Loans upon the request of Borrower, in the manner provided in Article 3, solely for the purpose of funding Land Loans and Other Construction Loans and against the pledge of those Eligible Assets as Collateral. RFC's obligation to make Warehousing Advances against Land Loans and Other Construction Loans is subject to the limitations set forth in Exhibit H and to the following limitations: 2.2(a) No Warehousing Advance will be made against any Eligible Asset that has been previously sold or pledged to obtain financing (whether or not such financing constitutes Debt) under another warehousing financing arrangement, other than one of the Existing Agreements or a Gestation Agreement. 2.2(b) No Warehousing Advance will be made against an Eligible Asset if the Warehousing Advance will exceed the amount applicable to that type of Eligible Asset at the time it is pledged, as set forth in Exhibit H. 2.2(c) No Warehousing Advance shall be made against a Mortgage Loan, other than a Third Party Builder Construction Mortgage Loan, closed more than 90 days before the date of such Warehousing Advance, except to the extent such Warehousing Advance refinances a loan under an Existing Agreement. Page 4 2.3. Eligibility as Seller/Servicer of Mortgage Loans 2.3(a) UAMC is approved and qualified and in good standing as a lender or seller/servicer, as set forth below, and meets all requirements applicable to its status as: (i) An FHA-approved mortgagee, eligible to originate, purchase, hold, sell and service FHA fully insured Mortgage Loans. (ii) A Ginnie Mae-approved seller/servicer of Mortgage Loans and issuer of Mortgage-backed Securities guaranteed by Ginnie Mae. (iii) A lender in good-standing under the VA loan guarantee program eligible to originate, purchase, hold, sell and service VA-guaranteed Mortgage Loans. (iv) A Fannie Mae-approved seller/servicer of Mortgage Loans, eligible to originate, purchase, hold, sell and service Mortgage Loans to be sold to Fannie Mae. (v) A Freddie Mac-approved seller/servicer of Mortgage Loans, eligible to originate, purchase, hold, sell and service Mortgage Loans to be sold to Freddie Mac. (vi) A RFC-approved seller/servicer of Mortgage Loans, eligible to originate, purchase, hold, sell and service Loans to be sold to RFC. 2.3(b) EHMI is approved and qualified and in good standing as a lender or seller/servicer, as set forth below, and meets all requirements applicable to its status as: (i) FHA-approved mortgagee, eligible to originate, purchase, hold, sell and service FHA fully insured Mortgage Loans. (ii) A Ginnie Mae-approved seller/servicer of Mortgage Loans and issuer of Mortgage-backed Securities guaranteed by Ginnie Mae. (iii) A lender in good-standing under the VA loan guarantee program eligible to originate, purchase, hold, sell and service VA-guaranteed Mortgage Loans. (iv) A Fannie Mae-approved seller/servicer of Mortgage Loans, eligible to originate, purchase, hold, sell and service Mortgage Loans to be sold to Fannie Mae. (v) A Freddie Mac-approved seller/servicer of Mortgage Loans, eligible to originate, purchase, hold, sell and service Mortgage Loans to be sold to Freddie Mac. (vi) A RFC-approved seller/servicer of Mortgage Loans, eligible to originate, purchase, hold, sell and service Loans to be sold to RFC. 2.3(c) AFSI is approved and qualified and in good standing as a lender or seller/servicer, as set forth below, and meets all requirements applicable to its status as: (i) FHA-approved mortgagee, eligible to originate, purchase, hold, sell and service FHA fully insured Mortgage Loans. (ii) A lender in good-standing under the VA loan guarantee program eligible to originate, purchase, hold, sell and service VA-guaranteed Mortgage Loans. 2.3(d) UAMCC is approved and qualified and in good standing as a lender or seller/servicer, as set forth below, and meets all requirements applicable to its status as: Page 5 (i) FHA-approved mortgagee, eligible to originate, purchase, hold, sell and service FHA fully insured Mortgage Loans. (ii) A lender in good-standing under the VA loan guarantee program eligible to originate, purchase, hold, sell and service VA-guaranteed Mortgage Loans. 2.4. Eligible Assets Subject to compliance with the terms, covenants and representations set forth in this Agreement, each of the Mortgage Loans described on Exhibit H is an Eligible Asset for the purposes of this Agreement. End of Article 2 Page 6 3. PROCEDURES FOR OBTAINING ADVANCES 3.1. Warehousing Advances 3.1(a) To obtain a Warehousing Advance or an RFC Direct Advance under this Agreement, Borrower must deliver to Credit Agent, either a completed and signed request for an Advance on the then current form approved by Credit Agent or an Electronic Advance Request, together with a list of Mortgage Loans for which the request is being made and a completed and signed RFConnects Pledge Agreement sent by facsimile ("Advance Request"), not later than (i) in the case of Electronic Advance Requests, 3:30 p.m. on the Business Day on which Borrower desires the Advance, and (ii) in all other cases, unless the Credit Agent agrees otherwise, one Business Day before the Business Day on which Borrower desires the Advance. Subject to the delivery of a Advance Request, Borrower may obtain an Advance under this Agreement upon compliance with the procedures set forth in this Section and in the applicable Exhibit B, including delivery to Credit Agent of all required Collateral Documents. Credit Agent's current form of Advance Request is set forth in the applicable Exhibit A. Upon not less than 3 Business Days' prior Notice to Borrower, Credit Agent may modify its form of Advance Request and any other Exhibit referred to in this Section to conform to either current legal requirements or Credit Agent practices and, as so modified, those Exhibits will be deemed a part of this Agreement. 3.1(b) Credit Agent has a reasonable time to examine Borrower's Advance Request and the Collateral Documents to be delivered by Borrower before funding the requested Advance, and may reject any Eligible Asset that does not meet the requirements of this Agreement or of the related Purchase Commitment. 3.1(c) Borrower must hold or cause its custodian to hold, in trust for Credit Agent, those original Collateral Documents of which only copies are required to be delivered to Credit Agent under Exhibit B. Unless a Pledged Loan is being held by an Investor for purchase or has been redeemed from pledge by Borrower, promptly upon request by Credit Agent or, if the recorded Collateral Documents have not yet been returned from the recording office, immediately upon receipt by Borrower or its custodian of those recorded Collateral Documents, Borrower must deliver or cause its custodian to deliver to Credit Agent any or all of the original Collateral Documents. 3.1(d) To fund Warehousing Advances, RFC Direct Advances and Swingline Advances under this Agreement, Credit Agent will cause the Funding Bank to credit either the Wire Disbursement Account or Check Disbursement Account upon compliance by Borrower with the terms of the Loan Documents. Credit Agent will determine, in its sole discretion, the method by which Advances and other amounts on deposit in the Wire Disbursement Account or Check Disbursement Account are disbursed by the Funding Bank to or for the account of Borrower. 3.1(e) If, under the authorization given by Borrower in the Funding Bank Agreement, Credit Agent (i) debits Borrower's Operating Account to cover a wire to be initiated by Credit Agent for the purpose of financing a Pledged Asset against which Lenders have made Warehousing Advances, or (ii) directs the Funding Bank to honor a check drawn by Borrower's on its Check Disbursement Account at the Funding Bank, and that debit or direction results in an overdraft, RFC may make an additional Swingline Advance to fund that overdraft. Page 7 3.2. Wet Settlement Advances Collateral Documents not required for a Wet Settlement Advance must be delivered by Borrower to Credit Agent within 7 Business Days after the date of the Wet Settlement Advance. End of Article 3 Page 8 4. INTEREST, PRINCIPAL AND FEES 4.1. Interest 4.1(a) Except as provided in Sections 4.1(b), 4.1(d) and 4.1(e), Borrower must pay interest on the unpaid amount of each Advance from the date the Advance is made until it is paid in full at the Interest Rate specified in Exhibit H. 4.1(b) Borrower and any Lender may enter into an agreement (a "Balance Funded Agreement") pursuant to which Borrower agrees to maintain Deposit Balances on deposit with such Lender or a Designated Bank in consideration of the funding of all or a portion of such Lender's Advances against Prime Mortgage Loans at a Balance Funded Rate. Borrower may give written notice to any Lender with which it has a Balance Funded Agreement, as and when provided in such Balance Funded Agreement, of Borrower's election to have a portion (the "Balance Funded Portion") of the principal amount of Lender's Advances against Prime Mortgage Loans bear interest at the Balance Funded Rate during any calendar month. In the event Borrower elects to have all or a portion of any Lender's Advances against Prime Mortgage Loans bear interest at the Balance Funded Rate during any month, such Lender shall notify Credit Agent no later than 12:00 Noon on the second Business Day of the following month of the estimated amount by which the interest to be paid by Borrower on such Lender's Advances during such month was reduced as a result of the application of such Balance Funded Agreement. If the Deposit Balances maintained by Borrower with such Lender or its Designated Bank during such month are less than the Balance Funded Portion, or if the estimate provided by Lender pursuant to the previous sentence is not accurate, Lender may charge and separately bill Borrower a deficiency fee (a "Balance Deficiency Fee"), or credit Borrower with any amount by which interest billed exceeded interest actually due, the amount of which shall be set forth in the Balance Funded Agreement between Borrower and such Lender. 4.1(c) Credit Agent computes interest on the basis of the actual number of days elapsed in a year of 360 days. Interest is payable monthly in arrears, as provided in Section 4.7. 4.1(d) After an Event of Default occurs and upon Notice to Borrower by Credit Agent, the unpaid amount of each Warehousing Advance or RFC Direct Advance will bear interest at the Default Rate until the Event of Default has been waived or cured, as provided herein, or the Warehousing Advance has been paid in full. 4.1(e) The rates of interest provided for in this Agreement will be adjusted as of the effective date of each change in the applicable index. Credit Agent's determination of such rates of interest as of any date of determination are conclusive and binding, absent manifest error. 4.2. Interest Limitation Lenders do not intend, by reason of this Agreement, the Notes or any other Loan Document, to receive interest in an amount in excess of that permitted by applicable law. If Lenders receive any interest in excess of the amount permitted by applicable law, whether by reason of acceleration of the maturity of this Agreement, the Notes or otherwise, Lenders will apply the excess to the unpaid principal balance of the Advances and not to the payment of interest. If all Advances have been paid in full and the Commitments have expired or have been terminated, Lenders will remit any excess to Borrower. This Section controls every other provision of all Page 9 agreements between Borrower and Lenders and is binding upon and available to any subsequent holder of the Notes. 4.3. Principal Payments 4.3(a) Borrower must pay the outstanding principal amount of all Warehousing Advances and RFC Direct Advances on the applicable Maturity Date, and the outstanding principal amount of all Swingline Advances on the final Maturity Date. 4.3(b) Borrower may prepay any portion of the Advances without premium or penalty at any time. 4.3(c) Borrower must pay to Credit Agent for the pro rata benefit of Lenders, without the necessity of prior demand or Notice from Credit Agent, and Borrower authorizes Credit Agent to cause the Funding Bank to charge Borrower's Operating Account for, or reduce the Buydown by, the amount of any outstanding Advance against a specific Pledged Loan upon the earliest occurrence of any of the following events: (1) One (1) Business Day elapses from the date an Advance was made if the Pledged Loan that was to have been funded by that Advance is not closed and funded. (2) Fifteen (15) Business Days elapse without the return of a Collateral Document delivered by Credit Agent to Borrower under a Trust Receipt for correction or completion. (3) On the date on which a Pledged Loan is determined to have been originated based on untrue, incomplete or inaccurate information or otherwise to be subject to fraud, whether or not Borrower had knowledge of the misrepresentation, incomplete or incorrect information or fraud, or on the date on which Borrower knows, or has reason to know, or receives Notice from Credit Agent, that one or more of the representations and warranties set forth in Article 10 were inaccurate or incomplete in any material respect on any date when made or deemed made. (4) Except in the case of Foreclosure Claim Receivables and Foreclosure Mortgage Loans, on the date the Pledged Loan or a Lien prior to the Pledged Loan is defaulted and remains in default for a period of 60 days or more. (5) Upon the sale, other disposition or prepayment of any Pledged Asset or, with respect to a Pledged Loan included in an Eligible Mortgage Pool, upon the sale or other disposition of the related Agency Security. (6) One (1) Business Day immediately preceding the date scheduled for the foreclosure or trustee sale of the premises securing a Mortgage Loan, unless such foreclosure or trustee sale will give rise to a Foreclosure Claim Receivable against which the related Advance may remain outstanding hereunder. 4.3(d) Upon telephonic Notice to Borrower by Credit Agent, Borrower must pay to Credit Agent, and Borrower authorizes Credit Agent to cause the Funding Bank to charge Borrower's Operating Account for, or reduce the Buydown, the amount of any outstanding Advance against a specific Pledged Loan upon the earliest occurrence of any of the following events: (1) For any Pledged Loan, the Warehouse Period elapses. Page 10 (2) Forty-five (45) days elapse from the date a Pledged Loan was delivered to an Investor or Approved Custodian for examination and purchase or for inclusion in a Mortgage Pool, without the purchase being made or an Eligible Mortgage Pool being initially certified, or upon rejection of a Pledged Loan as unsatisfactory by an Investor or Approved Custodian. (3) Seven (7) Business Days elapse from the date a Wet Settlement Advance was made against a Pledged Loan without receipt by Credit Agent of all Collateral Documents relating to the Pledged Loan, or the Collateral Documents, upon examination by Credit Agent, do not comply with the requirements of this Agreement. (4) With respect to any Pledged Loan, any of the Collateral Documents, upon examination by Credit Agent, are found not to be in compliance with the requirements of this Agreement or the related Purchase Commitment, unless such non-compliance is, in Credit Agent's reasonable judgement, readily curable. 4.3(e) Borrower must pay the outstanding amount of any Overdraft Advance in full within 1 Business Day after the date of the Overdraft Advance. 4.3(f) In addition to the payments required pursuant to Sections 4.3(c) and 4.3(d), if the principal amount of any Pledged Loan is prepaid in whole or in part while Advances are outstanding against the Pledged Loan, Borrower must pay to Credit Agent, without the necessity or prior demand or Notice from Credit Agent, and Borrower authorizes Credit Agent to cause the Funding Bank to charge Borrower's Operating Account for, the amount of the prepayment, to be applied against such Advances. 4.3(g) The proceeds of the sale, other disposition or collection of Pledged Assets must be paid directly by the Investor or other Obligor to the Cash Collateral Account. Borrower must give Notice to Credit Agent (by RFConnects) of the Pledged Assets for which proceeds have been received. Upon receipt of Borrower's Notice, Credit Agent will apply any proceeds deposited into the Cash Collateral Account to the payment of the Advances related to the Pledged Assets identified by Borrower in its Notice, and those Pledged Assets will be considered to have been redeemed from pledge. Credit Agent is entitled to rely upon Borrower's affirmation that deposits in the Cash Collateral Account represent payments from Investors or other Obligor for the purchase of or in payment of the Pledged Assets specified by Borrower in its Notice. If the payment from an Investor or other Obligor for the purchase of or in payment of Pledged Assets is less than the outstanding Advances against the Pledged Assets identified by Borrower in its Notice, Borrower authorizes Credit Agent to cause the Funding Bank to charge Borrower's Operating Account, or to charge the Buydown, in an amount equal to that deficiency. As long as no Default or Event of Default exists, Credit Agent will return to Borrower any excess payment from an Investor or other Obligor for Pledged Assets. 4.3(h) Amounts received by Credit Agent as proceeds of the sale or other disposition of Pledged Mortgages or Pledged Securities and applicable to the principal amount of Warehousing Advances and Swingline Advances, including without limitation, amounts from time to time deposited in the Cash Collateral Account, shall be allocated among Lenders as follows: (1) First, to RFC until the principal amount of the Swingline Advances have been paid in full; and (2) Second, pro rata to Lenders in accordance with their respective Percentage Shares, for application to the Warehousing Advances. Page 11 Amounts applied to the Swingline Advances as set forth above shall, unless the Advances outstanding against such Pledged Mortgages or Pledged Securities were Swingline Advances, shall be deemed to be (i) a repayment of the Warehousing Advances outstanding against such Pledged Mortgages or Pledged Securities and (ii) a refunding of the Swingline Advances repaid as Warehousing Advances made by Lenders in accordance with Section 1.3 hereof. 4.3(i) Credit Agent reserves the right to revalue any Pledged Loan that is not covered by a Purchase Commitment from Fannie Mae or Freddie Mac. Credit Agent reserves the right to revalue any Pledged Loan that is to be exchanged for an Agency Security if that Agency Security is not covered by a Purchase Commitment. Credit Agent reserves the right to revalue any other Eligible Asset. Borrower must pay to Credit Agent, without the necessity of prior demand or Notice from Credit Agent, and Borrower authorizes Credit Agent to cause the Funding Bank to charge Borrower's Operating Account for, any amount required after any such revaluation to reduce the principal amount of the Warehousing Advances, Swingline Advance or RFC Direct Advance outstanding against the revalued Eligible Asset to an amount equal to the Advance Rate for the applicable Eligible Asset type multiplied by the Fair Market Value of the Eligible Asset. 4.3(j) Upon the occurrence of any event described in Section 11.1(f) with respect to Lennar, Borrower shall, at the request of the Credit Agent or the Majority Lenders, repay all Advances outstanding against Agreements for Deed, Construction/Perm Mortgage Loans and Unimproved Land Loans. 4.3(k) Borrower may prepay a portion of the RFC Direct Advances, Swingline Advances and Warehousing Advances made by RFC (collectively, the "RFC Advances") outstanding under this Agreement (a "Buydown"). A Buydown is a reduction in the aggregate amount of the RFC Advances outstanding under this Agreement, but does not represent the prepayment of any particular RFC Advance, and does not entitle Borrower to the release of any Collateral. Unless a Default or Event of Default exists, all or any portion of a Buydown may be reborrowed upon Notice to Credit Agent not later than 3:30 p.m. on the Business Day that Borrower desires to reborrow such amount. If Credit Agent receives a payment of Advances that would, as a result of Buydowns by Borrower, reduce the outstanding principal balance of the RFC Advances to an amount less than zero, the Buydowns, or a portion of the Buydowns equal to such excess, will be re-advanced to Borrower. RFC may apply Buydowns to reduce interest payable by Borrower on outstanding RFC Advances in any order that Lender determines in its sole discretion. Upon application by RFC of any Buydown to RFC's Warehousing Advances, RFC shall be deemed to have purchased from each Lender an undivided participation interest in such Lender's outstanding Warehousing Advances in an amount equal to such Lender's Percentage Share of the amount so applied. The Lenders may at any time, in their sole and absolute discretion request RFC to make Warehousing Advances in a principal amount equal to the amount so applied. RFC's Warehousing Advances made pursuant to the preceding sentences shall be delivered directly to the Lenders, in their respective Percentage Shares, and shall be promptly applied by each Lender against its outstanding Warehousing Advances. 4.3(l) In addition to the payments required pursuant to Sections 4.3(a) - 4.3(j), Borrower shall repay the Warehousing Advances, RFC Direct Advances and Swingline Advances as set forth in Exhibit H. 4.4. Agent's Fees Borrower shall pay to Credit Agent, for its own account, such fees as shall be separately agreed between Borrower and Credit Agent. Page 12 4.5. Commitment Fees To each Lender, through Credit Agent, a non-refundable Commitment Fee in an amount equal to the percentage set forth below of such Lender's Warehousing Commitment Amount (plus, in the case of RFC, the RFC Direct Commitment Amount), based on the amount and tenor of such Lender's Warehousing Commitment (plus, in the case of RFC, the RFC Direct Commitment), for the period from the Closing Date through the applicable Maturity Date, payable on the Closing Date, calculated as follows:
Lender's Warehousing Initial Maturity Date Commitment Amount Commitment Fee Percentage --------------------- ----------------- ------------------------- May 31, 2002 $20,000,000 to $45,000,000 .02% May 31, 2002 $50,000,000 or more .10% May 31, 2003 $20,000,000 to $45,000,000 .035% May 31, 2003 $50,000,000 or more .10%
If any Lender increases its Warehousing Commitment Amount, if the Warehousing Credit Limit is increased by an Additional Lender becoming a party hereto, or if RFC increases the RFC Direct Commitment Amount, Borrower shall pay the prorated portion of the applicable Commitment Fee on the amount of such increase or the amount of such Additional Lender's Warehousing Commitment Amount from the effective date thereof to the applicable Maturity Date. If, at any time, the Maturity Date of any Commitment is extended, Borrower shall pay an additional Commitment Fee in the prorated amount determined pursuant to the above calculation of the extended Commitment Amount from the day after the original Maturity Date to the extended Maturity Date. Borrower shall not be entitled to a reduction in the amount of the Commitment Fee in the event the amount of any Lender's Warehousing Commitment is reduced at the request of Borrower, or in the event that any Lender's Warehousing Commitment is terminated prior to its stated expiration date as a result of an Event of Default hereunder. 4.6. Miscellaneous Charges Borrower must reimburse Credit Agent for all Miscellaneous Charges. Miscellaneous Charges are due when incurred, but will not be considered delinquent if Borrower pays them within 10 days after the date of Credit Agent's invoice or account analysis statement. 4.7. Method of Making Payments 4.7(a) Credit Agent shall, on or before the 5th Business Day of each month, deliver to Borrower billings for interest due and payable on Advances, Agent's Fees, Miscellaneous Charges and other fees and charges calculated through the end of the preceding month. On or before the 10th Business Day of each month, Borrower shall pay to Credit Agent the full amount of interest, fees and charges billed as described above. 4.7(b) All payments made on account of the Obligations shall be made by Borrower to Credit Agent for distribution to Lenders, except for Balance Deficiency Fees, which shall be made directly to the applicable Lender, and fees and charges payable to Credit Agent for its own account. All payments made on account of the Obligations shall be made without setoff or counterclaim, free and clear of and without deduction for any taxes, fees or other charges of any nature whatsoever imposed by any taxing authority, and must be received by Credit Agent by 4:00 p.m. on the day of payment, it being expressly agreed and Page 13 understood that if a payment is received after 4:00 p.m. by Credit Agent such payment will be considered to have been made on the next succeeding Business Day and interest thereon shall be payable by Borrower at the then applicable rate during such extension. No principal payments resulting from the sale of Pledged Mortgages or Pledged Securities shall be deemed to have been received by Credit Agent until Credit Agent has also received the Notice required under Section 4.3(g). All payments shall be made in lawful money of the United States of America in immediately available funds transferred via wire to the Cash Collateral Account. If any payment required to be made by Borrower hereunder becomes due and payable on a day other than a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest shall be payable on Advances so extended at the then applicable rate during such extension. 4.7(c) All amounts received by Credit Agent on account of the Obligations (except amounts received in respect of fees, Miscellaneous Charges or expenses payable hereunder to Credit Agent for its own account or amounts payable to RFC for RFC Direct Advances or Swingline Advances) shall be disbursed to Lenders by wire transfer by 12:00 noon on the Business Day after the date of receipt. 4.7(d) Without limiting any other right that Credit Agent or any Lender may have under applicable law or otherwise, while a Default or Event of Default exists, Borrower authorizes Credit Agent to cause the Funding Bank to charge Borrower's Operating Account for any Obligations due and owing, without the necessity of prior demand or Notice from Credit Agent. 4.8. Illegality In the event that any Lender shall have determined (which determination shall be conclusive and binding absent manifest error) at any time that the introduction of, or any change in, any applicable law, rule, regulation, order or decree or in the interpretation or the administration thereof by any Person charged with the interpretation or administration thereof, or compliance by such Lender with any request or directive (whether or not having the force of law) of any such Person, shall make it unlawful or impossible for such Lender to charge interest at the Balance Funded Rate based on Borrower's Eligible Balances as contemplated by this Agreement, then such Lender shall forthwith give Notice thereof to Credit Agent and Borrower describing such illegality in reasonable detail. Upon the giving of such Notice, the obligation of such Lender to charge interest at the Balance Funded Rate based on Borrower's Eligible Balances shall be immediately suspended for the duration of such illegality and with respect to Advances bearing interest at the Balance Funded Rate, each such Advance of such Lender shall bear interest at the applicable Interest Rate described in Exhibit H. If and when such illegality ceases to exist, such Lender shall notify Credit Agent and Borrower thereof and such suspension shall cease. 4.9. Increased Costs; Capital Requirements In the event any applicable law, order, regulation or directive issued by any governmental or monetary authority, or any change therein or in the governmental or judicial interpretation or application thereof, or compliance by any Lender with any request or directive (whether or not having the force of law) by any governmental or monetary authority: 4.9(a) Does or shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement or any Advances made hereunder, or change the basis of taxation on payments to such Lender of principal, fees, interest or any other amount payable hereunder (except for change in the rate of tax on the overall gross or net income of such Lender by the jurisdiction in which such Lender's principal office is located); Page 14 4.9(b) Does or shall impose, modify or hold applicable any reserve, capital requirement, special deposit, compulsory loan or similar requirement against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, such Lender which are not otherwise included in the determination of the interest rate as calculated hereunder; and the result of any of the foregoing is to increase the cost to such Lender of making, renewing or maintaining any Advance or to reduce any amount receivable in respect thereof or to reduce the rate of return on the capital of such Lender or any Person controlling such Lender as it relates to credit facilities in the nature of that evidenced by this Agreement, then, in any such case, Borrower shall promptly pay any additional amounts necessary to compensate such Lender for such additional cost or reduced amounts receivable or reduced rate of return as determined by such Lender with respect to this Agreement or Advances made hereunder. If a Lender becomes entitled to claim any additional amounts pursuant to this Section, it shall notify Borrower through Credit Agent of the event by reason of which it has become so entitled and Borrower shall pay such amount within 15 days thereafter. A certificate as to any additional amount payable pursuant to the foregoing sentence containing the calculation thereof in reasonable detail submitted by a Lender, through Credit Agent, to Borrower shall be conclusive in the absence of manifest error. End of Article 4 Page 15 5. COLLATERAL 5.1. Grant of Security Interest As security for the payment of the Notes and for the performance of all of Borrower's Obligations, Borrower grants a security interest to Credit Agent, for the benefit of Lenders, in all of Borrower's right, title and interest in and to the following described property ("Collateral"): 5.1(a) All amounts advanced by Credit Agent to or for the account of Borrower under this Agreement to fund a Mortgage Loan until that Mortgage Loan is closed and those funds disbursed. 5.1(b) All Mortgage Loans, including all Mortgage Notes and Mortgages evidencing or securing those Mortgage Loans, that are delivered or caused to be delivered to Credit Agent or any Lender (including delivery to a third party on behalf of Credit Agent), come into the possession, custody or control of Credit Agent or any Lender for the purpose of pledge, or in respect of which Advances have been made under this Agreement, including all Mortgage Loans in respect of which Wet Settlement Advances have been made (collectively, "Pledged Loans"). 5.1(c) All Agreements for Deed in respect of which Advances have been made under this Agreement (collectively, "Pledged Agreements for Deed"). 5.1(d) All Mortgage-backed Securities that are created in whole or in part on the basis of Pledged Loans or are delivered or caused to be delivered to Credit Agent or any Lender, or are otherwise in the possession of Credit Agent or any Lender, or its agent, bailee or custodian as assignee, or pledged to Credit Agent, or for such purpose are registered by book-entry in the name of Credit Agent (including delivery to or registration in the name of a third party on behalf of Credit Agent) under this Agreement or in respect of which an Advance has been made (collectively, "Pledged Securities"). 5.1(e) All private mortgage insurance and all commitments issued by the VA or FHA to insure or guarantee any Mortgage Loans included in the Pledged Loans; all Purchase Commitments held by Borrower covering Pledged Loans, Pledged Agreements for Deed or Pledged Securities or proposed permanent Pledged Loans, and all proceeds from the sale of Pledged Loans, Pledged Agreements for Deed or Pledged Securities to Investors pursuant to those Purchase Commitments; and all personal property, contract rights, servicing and servicing fees and income or other proceeds, amounts and payments payable to Borrower whether as compensation or reimbursement, accounts or general intangibles of whatsoever kind relating to Pledged Loans, Pledged Agreements for Deed, Pledged Securities, VA commitments, FHA commitments and the Purchase Commitments, and all other documents or instruments relating to Pledged Loans, Pledged Agreements for Deed and Pledged Securities, including any interest of Borrower in any fire, casualty or hazard insurance policies and any awards made by any public body or decreed by any court of competent jurisdiction for a taking or for degradation of value in any eminent domain proceeding as the same relate to Pledged Loans or Pledged Agreements for Deed. 5.1(f) All accounts and general intangibles owned by Borrower ("Receivables") for the payment of money against (1) VA under a VA Guaranty of, FHA or a private mortgage insurer under an FHA or private insurer's mortgage insurance policy insuring payment of, or any other Person under any other agreement (including a Servicing Contract) relating to, all or part of a Page 16 defaulted Mortgage Loan (A) repurchased by Borrower from an investor or out of a pool of Mortgage Loans serviced by Borrower or (B) being serviced by Borrower, (2) obligors and their accounts, Fannie Mae, Freddie Mac, Ginnie Mae or any other investor under a Servicing Contract covering, or out of the proceeds of any sale of or foreclosure sale in respect of, any Mortgage Loan (A) repurchased by Borrower out of a pool of Mortgage Loans serviced by Borrower or (B) being serviced by Borrower, in either case, for the reimbursement of real estate taxes or assessments, or casualty or liability insurance premiums, paid by Borrower in connection with Mortgage Loans and (3) obligors and their accounts, or Fannie Mae, Freddie Mac, Ginnie Mae or any other investor under or in respect of any Mortgage Loans serviced by Borrower for repayment of advances made by Borrower to cover shortages in principal and interest payments. 5.1(g) All escrow accounts, documents, instruments, files, surveys, certificates, correspondence, appraisals, computer programs, tapes, discs, cards, accounting records (including all information, records, tapes, data, programs, discs and cards necessary or helpful in the administration or servicing of the Collateral) and other information and data of Borrower relating to the Collateral. 5.1(h) All cash, whether now existing or acquired after the date of this Agreement, delivered to or otherwise in the possession of Credit Agent, the Funding Bank or any agent, bailee or custodian of Credit Agent or designated on the books and records of Borrower as assigned and pledged to Credit Agent, including all cash deposited in the Cash Collateral Account and the Settlement Account. 5.1(i) All Hedging Arrangements related to the Collateral ("Pledged Hedging Arrangements") and Borrower's accounts in which those Hedging Arrangements are held ("Pledged Hedging Accounts"), including all rights to payment arising under the Pledged Hedging Arrangements and the Pledged Hedging Accounts, except that Credit Agent's security interest in the Pledged Hedging Arrangements and Pledged Hedging Accounts is limited to benefits, including rights to payment, related to the Collateral. 5.1(j) All shares of the capital stock of UAMC Asset now owned or hereafter acquired by any Borrower (collectively, the "Pledged Shares"); all certificates representing the Pledged Shares; and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares. 5.1(k) All cash and non-cash proceeds of the Collateral, including all dividends, distributions and other rights in connection with, and all additions to, modifications of and replacements for, the Collateral, and all products and proceeds of the Collateral, together with whatever is receivable or received when the Collateral or proceeds of Collateral are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including all rights to payment with respect to any cause of action affecting or relating to the Collateral or proceeds of Collateral. 5.2. Release of Security Interest in Pledged Loans and Pledged Securities 5.2(a) Except as provided in Section 5.2(b), Pledged Loans will be released from Credit Agent's security interest only against payment of the Release Amount in connection with those Pledged Loans. Pledged Agreements for Deed will be released from Credit Agent's security interest only against payment of the Release Amount in connection with those Pledged Agreements for Deed. If Pledged Loans are transferred to a pool custodian or an investor for inclusion in a Mortgage Pool and Credit Agent's security interest in the Pledged Loans included in the Mortgage Pool is not released before the issuance of the related Mortgage-backed Security, then that Mortgage-backed Security, when issued, is Page 17 a Pledged Security. Credit Agent's security interest continues in the Pledged Loans backing that Pledged Security and Credit Agent is entitled to possession of the Pledged Security in the manner provided in this Agreement. 5.2(b) If Pledged Loans are transferred to an Approved Custodian and included in an Eligible Mortgage Pool, Credit Agent's security interest in the Pledged Loans included in the Eligible Mortgage Pool will be released upon the delivery of the Agency Security (including delivery to or registration in the name of a third party on behalf of Credit Agent), and that Agency Security is a Pledged Security. Credit Agent's security interest in that Pledged Security will be released only against payment to Credit Agent of the Release Amount in connection with the Mortgage Loans backing that Pledged Security. 5.2(c) Credit Agent has the exclusive right to possession of all Pledged Securities or, if Pledged Securities are issued in book-entry form or issued in certificated form and delivered to a clearing corporation (as such term is defined in the Uniform Commercial Code of Minnesota) or its nominee, Credit Agent has the right to have the Pledged Securities registered in the name of a securities intermediary (as such term is defined in the Uniform Commercial Code of Minnesota) in an account containing only customer securities and credited to an account of Credit Agent. Credit Agent has no duty or obligation to deliver Pledged Securities to an Investor or to credit Pledged Securities to the account of an Investor or the Investor's designee except against payment for those Pledged Securities. Borrower acknowledges that Credit Agent may enter into one or more standing arrangements with securities intermediaries with respect to Pledged Securities issued in book entry form or issued in certificated form and delivered to a clearing corporation or its designee, under which the Pledged Securities are registered in the name of the securities intermediary, and Borrower agrees, upon request of Credit Agent, to execute and deliver to those securities intermediaries Borrower's written concurrence in any such standing arrangements. 5.2(d) If no Default or Event of Default occurs, Borrower may redeem a Pledged Loan, a Pledged Agreement for Deed or Pledged Security from Credit Agent's security interest by notifying Credit Agent of its intention to redeem the Pledged Loan, a Pledged Agreement for Deed or Pledged Security from pledge and either (1) paying, or causing an Investor to pay, to Credit Agent, for application to prepayment on the principal balance of the Advances, the Release Amount in connection with the Pledged Loan, the Pledged Agreements for Deed or the Pledged Loans backing that Pledged Security, or (2) delivering substitute Collateral that, in addition to being acceptable to Credit Agent in its sole discretion will, when included with the remaining Collateral, result in a Fair Market Value of all Eligible Assets held by Credit Agent that is at least equal to the aggregate outstanding Swingline Advances, Warehousing Advances and RFC Direct Advances. 5.2(e) After a Default or Event of Default occurs, Credit Agent may, with no liability to Borrower, any Lender or any Person, continue to release its security interest in any Pledged Loan, Pledged Agreement for Deed or Pledged Security against payment of the Release Amount in connection with that Pledged Loan, the Pledged Agreements for Deed or the Pledged Loans backing that Pledged Security. 5.2(f) The amount ("Release Amount") to be paid by Borrower to obtain the release of Credit Agent's security interest in a Pledged Loan or Pledged Agreement for Deed will be (a) the payment required in any bailee letter pursuant to which Credit Agent ships a Pledged Loan or Pledged Agreement for Deed to an Investor or Approved Custodian, and (b) otherwise, until an Event of Default occurs, the principal amount of the Advances outstanding against the Pledged Loan or Pledged Agreement for Deed, and while an Event of Default exists, the amount paid to Credit Agent in a commercially reasonable disposition of that Pledged Loan or Pledged Agreement for Deed. Page 18 5.3. Collection and Servicing Rights All proceeds of any Purchase Commitment or any other sale of Collateral, and all amounts paid on any Receivable, shall be paid directly to the Cash Collateral Account, for application as provided in this Agreement. If no Event of Default exists, Borrower may service and receive and collect directly all other sums payable in respect of the Collateral. After an Event of Default, Credit Agent or its designee are entitled to service and receive and collect all sums payable to Borrower in respect of the Collateral, and in such case (1) Credit Agent or its designee in its discretion may, in its own name, in the name of Borrower or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but Credit Agent has no obligation to do so, (2) Borrower must, if Credit Agent requests it to do so, hold in trust for the benefit of Credit Agent and immediately pay to Credit Agent at its office designated by Notice, all amounts received by Borrower upon or in respect of any of the Collateral, advising Credit Agent as to the source of such funds and (3) all amounts so received and collected by Credit Agent will be held by it as part of the Collateral. 5.4. Return of Collateral at End of Warehousing Commitment If (a) the Warehousing Commitment has expired or been terminated, and (b) no Advances, interest or other Obligations are outstanding and unpaid, Credit Agent will release its security interest and deliver all Collateral in its possession to Borrower at Borrower's expense. Borrower's acknowledgement or receipt for any Collateral released or delivered to Borrower under any provision of this Agreement is a complete and full acquittance for the Collateral so returned, and Credit Agent is discharged from any liability or responsibility for that Collateral. 5.5. Delivery of Collateral Documents 5.5(a) Credit Agent may deliver documents relating to the Collateral to Borrower for correction or completion under a Trust Receipt. 5.5(b) If no Default or Event of Default exists, upon delivery by Borrower to Credit Agent of shipping instructions by RFConnects on the Business Day prior to transmission, Credit Agent will transmit Pledged Loans, Pledged Agreements for Deed or Pledged Securities, together with all related loan documents and pool documents in Credit Agent's possession, to the applicable Investor, Approved Custodian or other party acceptable to Credit Agent in its sole discretion. 5.5(c) If a Default or Event of Default exists, Credit Agent may, without liability to Borrower or any other Person, continue to transmit Pledged Loans, Pledged Agreements for Deed or Pledged Securities, together with all related loan documents and pool documents in Credit Agent's possession, to the applicable Investor, Approved Custodian or other party acceptable to Credit Agent in its sole discretion. 5.5(d) Upon receipt of Notice from Borrower under Section 4.3(g), and payment of the Release Amount with respect to a Pledged Asset identified by Borrower, Credit Agent will, at Borrower's request, release to Borrower any Collateral Documents relating to the redeemed Pledged Asset or the Pledged Loans backing a Pledged Security that Credit Agent has in its possession and that have not been delivered to an Investor or Approved Custodian; provided, that Credit Agent shall, if requested by an Investor or Approved Custodian or consistent with past practices, provide the Collateral Documents for any Pledged Asset purchased to such Investor, and the Collateral Documents for any Pledged Loan backing Mortgage-backed Securities to the Approved Custodian. Page 19 5.6. Borrower Remains Liable Anything herein to the contrary notwithstanding, Borrower shall remain liable under each item of the Collateral to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms thereof and any other agreement giving rise thereto, and in accordance with and pursuant to the terms and provisions thereof. Whether or not Credit Agent has exercised any rights in any of the Collateral, neither Credit Agent nor any Lender shall have any obligation or liability under any of the Collateral (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by Credit Agent of any payment relating thereto, nor shall Credit Agent nor any Lender be obligated in any manner to perform any of the obligations of Borrower under or pursuant to any of the Collateral (or any agreement giving rise thereto) to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any of the Collateral (or any agreement giving rise thereto), to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 5.7. Further Assurance Borrower agrees to execute such financing statements and to take whatever other actions are reasonably requested by Credit Agent (including, without limitation, amending this Agreement to take account of the adoption of Revised Article 9 of the Uniform Commercial Code) to perfect and continue Credit Agent's security interest in the Collateral, and authorizes Credit Agent to file financing statements (including financing statements containing a broader description of the Collateral than the description set forth herein). Borrower will execute and cooperate with Credit Agent in obtaining from third parties Control Agreements in form satisfactory to Credit Agent with respect to collateral consisting of investment property, deposit accounts, letter-of-credit rights, and electronic chattel paper. End of Article 5 Page 20 6. CONDITIONS PRECEDENT 6.1. Initial Advance The obligation of Credit Agent to make the initial Advance under this Agreement is subject to the satisfaction, in the sole discretion of Credit Agent, of the following conditions precedent: 6.1(a) Credit Agent must receive the following, all of which must be satisfactory in form and content to Credit Agent, in its sole discretion: (1) The Notes and this Agreement, duly executed by Borrower. (2) The Lennar Undertaking, on the form prescribed by Lender, duly executed by Lennar. (3) All certificates and instruments representing or evidencing the Pledged Shares, together with stock powers or other instruments of assignment, duly completed in blank (4) UAMC's articles of incorporation, together with all amendments, as certified by the Secretary of State of Florida; UAMC's bylaws, together with all amendments, certified by the corporate secretary or assistant secretary of UAMC; and certificates of good standing dated within 60 days of the date of this Agreement. (5) A resolution of the board of directors of UAMC authorizing the execution, delivery and performance of this Agreement and the other Loan Documents, each Advance Request and all other agreements, instruments or documents to be delivered by UAMC under this Agreement. (6) A certificate as to the incumbency and authenticity of the signatures of the officers of UAMC executing this Agreement and the other Loan Documents, and of the officers and employees of UAMC delivering each Advance Request and all other agreements, instruments or documents to be delivered under this Agreement (Credit Agent being entitled to rely on that certificate until a new incumbency certificate has been furnished to Credit Agent). (7) Assumed Name Certificates dated within 30 days of the date of this Agreement for any assumed name used by UAMC in the conduct of its business. (8) EHMI's articles of incorporation, together with all amendments, as certified by the Secretary of State of Washington; EHMI's bylaws, together with all amendments, certified by the corporate secretary or assistant secretary of EHMI; and certificates of good standing dated within 30 days of the date of this Agreement. (9) A resolution of the board of directors of EHMI authorizing the execution, delivery and performance of this Agreement and the other Loan Documents, each Advance Request and all other agreements, instruments or documents to be delivered by EHMI under this Agreement. (10) A certificate as to the incumbency and authenticity of the signatures of the officers of EHMI executing this Agreement and the other Loan Documents, and of the officers and employees of EHMI delivering each Advance Request and all other agreements, instruments or documents to be delivered under this Page 21 Agreement (Credit Agent being entitled to rely on that certificate until a new incumbency certificate has been furnished to Credit Agent). (11) Assumed Name Certificates dated within 30 days of the date of this Agreement for any assumed name used by EHMI in the conduct of its business. (12) AFSI's articles of incorporation, together with all amendments, as certified by the Secretary of State of California; AFSI's bylaws, together with all amendments, certified by the corporate secretary or assistant secretary of AFSI; and certificates of good standing dated within 30 days of the date of this Agreement. (13) A resolution of the board of directors of AFSI authorizing the execution, delivery and performance of this Agreement and the other Loan Documents, each Advance Request and all other agreements, instruments or documents to be delivered by AFSI under this Agreement. (14) A certificate as to the incumbency and authenticity of the signatures of the officers of AFSI executing this Agreement and the other Loan Documents, and of the officers and employees of AFSI delivering each Advance Request and all other agreements, instruments or documents to be delivered under this Agreement (Credit Agent being entitled to rely on that certificate until a new incumbency certificate has been furnished to Credit Agent). (15) Assumed Name Certificates dated within 30 days of the date of this Agreement for any assumed name used by AFSI in the conduct of its business. (16) UAMCC's articles of incorporation, together with all amendments, as certified by the Secretary of State of California; UAMCC's bylaws, together with all amendments, certified by the corporate secretary or assistant secretary of UAMCC; and certificates of good standing dated within 30 days of the date of this Agreement. (17) A resolution of the board of directors of UAMCC authorizing the execution, delivery and performance of this Agreement and the other Loan Documents, each Advance Request and all other agreements, instruments or documents to be delivered by UAMCC under this Agreement. (18) A certificate as to the incumbency and authenticity of the signatures of the officers of UAMCC executing this Agreement and the other Loan Documents, and of the officers and employees of UAMCC delivering each Advance Request and all other agreements, instruments or documents to be delivered under this Agreement (Credit Agent being entitled to rely on that certificate until a new incumbency certificate has been furnished to Credit Agent). (19) Assumed Name Certificates dated within 30 days of the date of this Agreement for any assumed name used by UAMCC in the conduct of its business. (20) UAMC Asset's articles of incorporation, together with all amendments, as certified by the Secretary of State of Nevada; UAMC Asset's bylaws, together with all amendments, certified by the corporate secretary or assistant secretary of UAMC Asset; and certificates of good standing dated within 30 days of the date of this Agreement. (21) A resolution of the board of directors of UAMC Asset authorizing the execution, delivery and performance of this Agreement and the other Loan Documents, Page 22 each Advance Request and all other agreements, instruments or documents to be delivered by UAMC Asset under this Agreement. (22) A certificate as to the incumbency and authenticity of the signatures of the officers of UAMC Asset executing this Agreement and the other Loan Documents, and of the officers and employees of UAMC Asset delivering each Advance Request and all other agreements, instruments or documents to be delivered under this Agreement (Credit Agent being entitled to rely on that certificate until a new incumbency certificate has been furnished to Credit Agent). (23) Assumed Name Certificates dated within 30 days of the date of this Agreement for any assumed name used by UAMC Asset in the conduct of its business. (24) Lennar's articles or certificate of incorporation, together with all amendments, as certified by the Secretary of State of Florida, bylaws certified by the corporate secretary of Lennar and certificates of good standing dated within 30 days of the date of this Agreement. (25) A resolution of the board of directors of Lennar, certified as of the date of the Agreement by its corporate secretary, authorizing the execution, delivery and performance of Lennar Undertaking, and all other agreements, instruments or documents to be delivered by Lennar under this Agreement. (26) A certificate as to the incumbency and authenticity of the signatures of the officers of Lennar executing Lennar Undertaking and all other agreements, instruments or documents to be delivered under this Agreement (Lender being entitled to rely on that certificate until a new incumbency certificate has been furnished to Lender). (27) Financial statements of Lennar containing a balance sheet as of November 30, 2000, and related statements of income, changes in stockholders' equity and cash flows for the period ended on the that date, all prepared in accordance with GAAP applied on a basis consistent with prior periods and audited by independent certified public accountants of recognized standing acceptable to Lender. (28) A favorable written opinion of counsel to each Borrower and Lennar, addressed to Lenders and dated as of the date of this Agreement, covering such matters as Credit Agent may reasonably request. (29) Uniform Commercial Code, tax lien and judgment searches of the appropriate public records for each Borrower that do not disclose the existence of any prior Lien on the Collateral other than in favor of Credit Agent or as permitted under this Agreement. (30) Copies of the certificates, documents or other written instruments that evidence each Borrower's eligibility described in Section 2.3, all in form and substance satisfactory to Credit Agent. (31) Copies of each Borrower's errors and omissions insurance policy or mortgage impairment insurance policy, and blanket bond coverage policy, or certificates in lieu of policies, showing compliance by each Borrower as of the date of this Agreement with the related provisions of Section 8.9. Page 23 (32) Executed financing statements in recordable form covering the Collateral and ready for filing in all jurisdictions required by Credit Agent. (33) Receipt by Credit Agent and Lenders of any fees due on the date of this Agreement. (34) An agreement among each Borrower that is selling Loans to Fannie Mae, Lender and Fannie Mae, pursuant to which Fannie Mae agrees to send all cash proceeds of Mortgage Loans sold by such Borrower to Fannie Mae to the Cash Collateral Account. (35) An executed Funding Bank Agreement. (36) An executed Electronic Tracking Agreement among Borrowers, Credit Agent and Mortgage Electronic Registration Systems, Inc. ("MERS"), and MERCORP, Inc., pursuant to which Credit Agent will have the authority to, among other things, withdraw Mortgages from the MERS system, if either the Mortgage Loan has been registered on the MERS system naming Borrower as servicer or subservicer, or the Mortgage Loan has not yet been registered on the MERS system. 6.1(b) If any Borrower is indebted to any of its directors, officers, shareholders or Affiliates, as of the date of this Agreement, which indebtedness is in excess of $35,000,000, the Person to whom that Borrower is indebted must have executed a Subordination of Debt Agreement, on the form prescribed by Credit Agent; and Credit Agent must have received an executed copy of that Subordination of Debt Agreement, certified by the corporate secretary of the respective Borrower to be true and complete and in full force and effect as of the date of the Advance. 6.1(c) The Credit Agent should have received satisfactory evidence that (i) upon disbursement of the Advances to be made on the Closing Date to repay loans outstanding under the Existing US Home Agreement, such loans shall be repaid in full, the commitments thereunder shall be terminated and the security interests granted in connection therewith shall be released, and (ii) as of the Closing Date, the commitments under the Existing Universal Agreement shall be terminated and, upon repayment of the remaining loans outstanding thereunder, the security interests granted in connection therewith shall be released. 6.1(d) U.S. Home shall have merged with and into UAMC, with UAMC being the surviving corporation. 6.2. Each Advance The obligation of Lenders to make the initial and each subsequent Advance, is subject to the satisfaction, in the sole discretion of Lenders, as of the date of each Advance, of the following additional conditions precedent: 6.2(a) Borrower must have delivered to Credit Agent the Advance Request and Collateral Documents called for under, and must have satisfied the procedures set forth in, Article 3. All items delivered to Credit Agent must be satisfactory to Credit Agent in form and content, and Credit Agent may reject any item that does not satisfy the requirements of this Agreement or the related Purchase Commitment. Page 24 6.2(b) Credit Agent must have received evidence satisfactory to them as to the making and/or continuation of any book entry or the due filing and recording in all appropriate offices of all financing statements and other instruments as may be necessary to perfect the security interest of Credit Agent in the Collateral under the Uniform Commercial Code or other applicable law. 6.2(c) The representations and warranties of Borrower contained in Section 2.3, Article 7, Article 10 and Exhibit H must be accurate and complete in all material respects as if made on and as of the date of each Advance. 6.2(d) Borrower must have performed all agreements to be performed by it under this Agreement, and after giving effect to the requested Advance, there will exist no Default or Event of Default under this Agreement. 6.2(e) Lennar must have performed all agreements to be performed by Lennar under the Lennar Undertaking. Delivery of an Advance Request by Borrower will be deemed a representation by Borrower that all conditions set forth in this Section have been satisfied as of the date of the Advance. End of Article 6 Page 25 7. GENERAL REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants to Credit Agent, as of the date of this Agreement and as of the date of each Advance Request and the making of each Advance, that: 7.1. Place of Business As of the Closing Date, and thereafter until Borrower provides Lenders with Notice of any change: 7.1(a) UAMC's chief executive office and principal place of business is 311 Park Place Boulevard, Suite 500, Clearwater, Florida 33759. 7.1(b) EHMI's chief executive office and principal place of business is 11000 NE 33rd Place, Suite 300, Bellevue, Washington 98004. 7.1(c) AFSI's chief executive office and principal place of business is 24896 Chrisanta Drive, Mission Viejo, CA 92691. 7.1(d) UAMCC's chief executive office and principal place of business is 24896 Chrisanta Drive, Mission Viejo, CA 92691. 7.1(e) UAMC Asset's chief executive office and principal place of business is 730 NW 107th Avenue, 4th Floor, Miami, Florida 33173. From and after the time Borrower provides Lenders with Notice of any change of address, the new address shall remain the chief executive office and principal place of business of the applicable Borrower(s) until Notice of a subsequent change of address is given. 7.2. Organization; Good Standing; Subsidiaries UAMC is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida, and has the full legal power and authority to own its property and to carry on its business as currently conducted. EHMI is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington, and has the full legal power and authority to own its property and to carry on its business as currently conducted. AFSI is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and has the full legal power and authority to own its property and to carry on its business as currently conducted. UAMCC is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and has the full legal power and authority to own its property and to carry on its business as currently conducted. UAMC Asset is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada, and has the full legal power and authority to own its property and to carry on its business as currently conducted. Each Subsidiary of each Borrower is duly organized, validly existing and in good standing under the laws of its jurisdiction of formation, and has the full legal power and authority to own its property and conduct its business as currently conducted. Each Borrower and each Subsidiary of each Borrower is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction in which the transaction of its business makes qualification necessary, except in jurisdictions, if any, where a failure to be in good standing has no material adverse effect on Borrowers' or the Subsidiaries' business, operations, assets or financial condition as a whole. For the purposes of this Agreement, good standing includes qualification for any and all licenses and payment of any and all taxes required in the jurisdiction Page 26 of its incorporation and in each jurisdiction in which Borrower transacts business. As of the date of this Agreement, no Borrower has any Subsidiaries except as set forth on Exhibit D, which sets forth with respect to each Subsidiary, its name, address, place of incorporation, each state in which it is qualified as a foreign corporation, and the percentage ownership of its capital stock by the respective Borrower. 7.3. Authorization and Enforceability Each Borrower has the power and authority to execute, deliver and perform this Agreement, the Notes and other Loan Documents to which Borrower is party and to make the borrowings under this Agreement. The execution, delivery and performance by Borrower of this Agreement, the Notes and the other Loan Documents to which Borrower is party and the making of the borrowings under this Agreement and the Notes, have been duly and validly authorized by all necessary corporate action on the part of Borrower (none of which actions has been modified or rescinded, and all of which actions are in full force and effect) and do not and will not conflict with or violate any provision of law, of any judgments binding upon Borrower, or of the articles of incorporation or by-laws of Borrower, conflict with or result in a breach of or constitute a default or require any consent under, or result in the creation of any Lien upon any property or assets of Borrower other than the Lien on the Collateral granted under this Agreement, or result in or require the acceleration of any indebtedness of Borrower under any agreement, instrument or indenture to which Borrower is a party or by which Borrower or its property may be bound or affected. This Agreement, the Notes and the other Loan Documents constitute the legal, valid, and binding obligations of each Borrower, enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency or other such laws affecting the enforcement of creditors' rights. 7.4. Authorization and Enforceability of Lennar Undertaking Lennar has the power and authority to execute, deliver and perform the Lennar Undertaking. The Lennar Undertaking constitutes the legal, valid, and binding obligation of Lennar, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or other such laws affecting the enforcement of creditors' rights. 7.5. Approvals The execution and delivery of this Agreement, the Notes and the other Loan Documents, the performance of each Borrower's obligations under this Agreement, the Notes and the other Loan Documents and the validity and enforceability of this Agreement, the Notes and the other Loan Documents do not require any license, consent, approval or other action of any state or federal agency or governmental or regulatory authority other than those which have been obtained and remain in full force and effect. 7.6. Financial Condition The balance sheet of each Borrower (and, if applicable, Borrower's Subsidiaries, on a consolidated basis) as of each Statement Date, and the related statements of income, cash flows and changes in stockholders' equity for the fiscal period ended on each Statement Date, previously furnished to Credit Agent, fairly present the financial condition of Borrower (and, if applicable, Borrower's Subsidiaries) as at that Statement Date and the results of its operations for the fiscal period ended on that Statement Date. Borrower had, on each Statement Date, no known material liabilities, direct or indirect, fixed or contingent, matured or unmatured, or liabilities for taxes, long-term leases or unusual forward or long-term commitments not disclosed by, or reserved against in, said balance sheet and related statements, and at the present time there are Page 27 no material unrealized or anticipated losses from any loans, advances or other commitments of any Borrower except as previously disclosed to Credit Agent in writing. Those financial statements were prepared in accordance with GAAP applied on a consistent basis throughout the periods involved. Since the Audited Statement Date, there has been no material adverse change in the business, operations, assets or financial condition of any Borrower (and, if applicable, Borrower's Subsidiaries), nor is any Borrower aware of any state of facts that (with or without notice or lapse of time or both) would or could result in any such material adverse change. 7.7. Litigation There are no actions, claims, suits or proceedings pending or, to any Borrower's knowledge, threatened or reasonably anticipated against or affecting Borrower or any Subsidiary of Borrower in any court or before any arbitrator or before any government commission, board, bureau or other administrative agency that, if adversely determined, may reasonably be expected to result in a material adverse change in Borrower's business, operations, assets or financial condition as a whole, or that would affect the validity or enforceability of this Agreement, the Notes or any other Loan Document. 7.8. Compliance with Laws No Borrower nor any Subsidiary of any Borrower is in violation of any provision of any law, or of any judgment, award, rule, regulation, order, decree, writ or injunction of any court or public regulatory body or authority that could result in a material adverse change in any Borrower's business, operations, assets or financial condition as a whole or that would affect the validity or enforceability of this Agreement, the Notes or any other Loan Document. 7.9. Regulation U No Borrower is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock, and no part of the proceeds of any Warehousing Advances made under this Agreement will be used to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. 7.10. Investment Company Act No Borrower is an "investment company" or controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 7.11. Payment of Taxes Each Borrower and each of their respective Subsidiaries has filed or caused to be filed all federal, state and local income, excise, property and other tax returns or extensions thereto that are required to be filed with respect to the operations of Borrower and their Subsidiaries, all such returns are true and correct and Borrower and each of their Subsidiaries has paid or caused to be paid all taxes shown on those returns or on any assessment, to the extent that those taxes have become due, including all FICA payments and withholding taxes, if appropriate. The amounts reserved as a liability for income and other taxes payable in the financial statements described in Section 7.6 are sufficient for payment of all unpaid federal, state and local income, excise, property and other taxes, whether or not disputed, of Borrower and their Subsidiaries accrued for or applicable to the period and on the dates of such financial statements and all years and periods prior to those financial statements and for which Borrower and their Subsidiaries may be Page 28 liable in its own right or as transferee of the assets of, or as successor to, any other Person. No tax Liens have been filed and no material claims are being asserted against Borrower, any Subsidiary of Borrower or any property of Borrower or any Subsidiary of Borrower with respect to any taxes, fees or charges. 7.12. Agreements No Borrower nor any Subsidiary of any Borrower is a party to any agreement, instrument or indenture or subject to any restriction materially and adversely affecting its business, operations, assets or financial condition, except as disclosed in the financial statements described in Section 7.6. No Borrower nor any Subsidiary of any Borrower is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement, instrument, or indenture which default could result in a material adverse change in Borrower's business, operations, properties or financial condition as a whole. No holder of any indebtedness of any Borrower or of any of their respective Subsidiaries has given notice of any asserted default under that indebtedness, and no liquidation or dissolution of any Borrower or of any of their Subsidiaries and no receivership, insolvency, bankruptcy, reorganization or other similar proceedings relative to Borrower or of any of their Subsidiaries or any of their properties is pending, or to the knowledge of Borrower, threatened. 7.13. Title to Properties Each Borrower and each Subsidiary of each Borrower has good, valid, insurable and (in the case of real property) marketable title to all of its properties and assets (whether real or personal, tangible or intangible) reflected on the financial statements described in Section 7.6, except for those properties and assets that Borrower has disposed of since the date of those financial statements either in the ordinary course of business or because they were no longer used or useful in the conduct of Borrower's or the Subsidiary's business. All of Borrower's properties and assets are free and clear of all Liens except as disclosed in each Borrower's respective financial statements. 7.14. ERISA Each Plan is in compliance with all applicable requirements of ERISA and the Internal Revenue Code and with all material applicable rulings and regulations issued under the provisions of ERISA and the Internal Revenue Code setting forth those requirements, except where any failure to comply would not result in a material loss to any Borrower or any ERISA Affiliate. All of the minimum funding standards or other contribution obligations applicable to each Plan have been satisfied. No Plan is a defined-benefit pension plan subject to Title IV of ERISA, and there is no Multiemployer Plan. 7.15. No Retiree Benefits Except as required under Section 4980B of the Internal Revenue Code, Section 601 of ERISA or applicable state law, no Borrower nor, if applicable, any of its respective Subsidiary is obligated to provide post-retirement medical or insurance benefits with respect to employees or former employees. 7.16. Assumed Names No Borrower originates Mortgage Loans or otherwise conduct business under any names other than its legal name and the assumed names set forth on Exhibit G. Each Borrower has made all Page 29 filings and taken all other action as may be required under the laws of any jurisdiction in which it originates Mortgage Loans or otherwise conducts business under any assumed name. To the best of Borrowers' knowledge, each Borrower's use of the assumed names set forth on Exhibit G does not conflict with any other Person's legal rights to any such name, nor otherwise give rise to any liability by that Borrower to any other Person. End of Article 7 Page 30 8. AFFIRMATIVE COVENANTS As long as the Commitments are outstanding or there remain any Obligations to be paid or performed under this Agreement or under any other Loan Document, Borrower must: 8.1. Payment of Obligations Punctually pay or cause to be paid all Obligations, including the Obligations payable under this Agreement and under the Notes, in accordance with their terms. 8.2. Financial Statements Deliver to Credit Agent: 8.2 (a) As soon as available and in any event within 30 days after the end of each month, interim statements of income of UAMC (and its Subsidiaries, on a consolidated basis) for the immediately preceding month and for the period from the beginning of the fiscal year to the end of that month, and the related balance sheet as at the end of the immediately preceding month, all in reasonable detail, subject, however, to year-end audit adjustments. 8.2 (b) As soon as available and in any event within 90 days after the end of each fiscal year of UAMC, fiscal year-end statements of income, cash flows and changes in stockholders' equity of UAMC (and its Subsidiaries, on a consolidated basis) for that year, and the related balance sheet as of the end of that year (setting forth in comparative form the corresponding figures for the preceding fiscal year), all in reasonable detail and accompanied by (1) an opinion as to those financial statements in form and substance satisfactory to Credit Agent and prepared by independent certified public accountants of recognized standing acceptable to Credit Agent, and (2) any management letters, management reports or other supplementary comments or reports delivered by those accountants to each Borrower or its respective board of directors. 8.2 (c) Together with each delivery of financial statements required by this Section, a Compliance Certificate for each Borrower substantially in the form of Exhibit E. 8.2 (d) Copies of all regular or periodic financial and other reports that each Borrower files with the Securities and Exchange Commission or any successor governmental agency or other entity. 8.3. Other Borrower Reports Deliver to Credit Agent: 8.3 (a) If at any time Borrowers' consolidated Servicing Portfolio exceeds $500,000,000, as soon as available and in any event within 45 days after the end of each Calendar Quarter, a consolidated report ("Servicing Portfolio Report") as of the end of the month, as to all Mortgage Loans the servicing rights to which are owned by Borrower (specified by investor type, recourse and non-recourse) regardless of whether the Mortgage Loans are Pledged Loans. The Servicing Portfolio Report must indicate which Mortgage Loans (1) are current and in good standing, (2) are more than 30, 60 or 90 days past due, (3) are the subject of pending bankruptcy or foreclosure proceedings, or (4) have been Page 31 converted (through foreclosure or other proceedings in lieu of foreclosure) into real estate owned by Borrower. 8.3 (b) With each Officer's Certificate, a monthly status report on each Construction/Perm Mortgage Loan, including, without limitation, the loan number, mortgagor name(s), property address, general contractor name, completion status (percent completed or staged draw no. and brief description), estimated completion date (if completion date is behind schedule, then an explanation of delay), date of last on-site inspection, and Pledged Mortgage payment status. 8.3 (c) Weekly or more frequently as Lender may from time to time request, a commitment summary and pipeline report substantially in the form of Exhibit I ("Commitment Summary Report") dated as of the close of business on the first Business Day of each week and provided to Lender by facsimile by the close of business on the next succeeding Business Day. 8.3 (d) As soon as available and in any event within 30 days after the end of each month, a consolidated loan production report as of the end of that month, presenting the total dollar volume and the number of Mortgage Loans originated and closed or purchased during that month and for the fiscal year-to-date, specified by property type and loan type. 8.3 (e) As soon as available and in any event within 30 days after filing with the Securities and Exchange Commission, a copy of the 10-Q and 10-K of Lennar. 8.3 (f) Other reports in respect of Pledged Loans and Pledged Securities, in such detail and at such times as Credit Agent in its discretion may reasonably request. 8.3 (g) With reasonable promptness, such further information regarding the business, operations, properties or financial condition of each Borrower as Credit Agent, or any Lender, through Credit Agent, may reasonably request, including copies of any audits completed by HUD, Ginnie Mae, Fannie Mae or Freddie Mac. 8.4. Maintenance of Existence; Conduct of Business Preserve and maintain each Borrower's corporate existence in good standing and all of its rights, privileges, licenses and franchises necessary or desirable in the normal conduct of its business, including its eligibility as lender, seller/servicer and issuer described under Section 2.3; conduct its business in an orderly and efficient manner; maintain a net worth of acceptable assets as required for maintaining Borrower's eligibility as lender, seller/servicer and issuer described under Section 2.3; and make no material change in the nature or character of its business. 8.5. Compliance with Applicable Laws Comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, a breach of which could result in a material adverse change in any Borrower's business, operations, assets, or financial condition as a whole or on the enforceability of this Agreement, any other Loan Document or any Collateral, except where contested in good faith and by appropriate proceedings. 8.6. Inspection of Properties and Books; Operational Reviews 8.6 (a) Permit Credit Agent, any Lender or any Participant (and their authorized representatives) to discuss the business, operations, assets and financial condition of each Borrower and their respective Subsidiaries with each Borrower's officers, agents and employees, and to Page 32 examine and make copies or extracts of each Borrower's and their Subsidiaries' books of account, all at such reasonable times as Credit Agent, any Lender or any Participant may request. 8.6 (b) Provide its accountants with a copy of this Agreement promptly after the execution of this Agreement and authorize and instruct them to answer candidly all questions that the officers of Credit Agent, any Lender or any Participant or any authorized representatives of Credit Agent, any Lender or any Participant may address to them in reference to the financial condition or affairs of each Borrower and their Subsidiaries. Each Borrower may have a representative in attendance at any meetings held between the officers or other representatives of Credit Agent, any Lender or any Participant and any Borrower's accountants under this authorization. 8.6 (c) Permit Credit Agent, any Lender or any Participant (and their authorized representatives) access to each Borrower's premises and records for the purpose of conducting a review of each Borrower's general mortgage business methods, policies and procedures, auditing its loan files, and reviewing the financial and operational aspects of each Borrower's business. 8.7. Notice Give prompt Notice to Credit Agent of (a) any action, suit or proceeding instituted by or against any Borrower or any of its Subsidiaries in any federal or state court or before any commission or other regulatory body (federal, state or local, domestic or foreign), which action, suit or proceeding has at issue in excess of $1,000,000, or any such proceedings threatened against any Borrower or any of its Subsidiaries in a writing containing the details of that action, suit or proceeding; (b) the filing, recording or assessment of any federal, state or local tax Lien against any Borrower, any of its Subsidiaries or any of their respective assets; (c) an Event of Default; (d) a Default that continues for more than 4 Business Days; (e) the suspension, revocation or termination of any Borrower's eligibility, in any respect, as approved lender, seller/servicer or issuer as described under Section 2.3; (f) the transfer, loss, nonrenewal or termination of any material Servicing Contracts to which any Borrower is a party, or which is held for the benefit of any Borrower, and the reason for that transfer, loss, nonrenewal or termination; (g) any Prohibited Transaction with respect to any Plan, specifying the nature of the Prohibited Transaction and what action Borrower proposes to take with respect to it; (h) any significant change in Borrowers' accounting treatment or reporting practices, or any change in Borrowers' fiscal year, or (i) any other action, event or condition of any nature that could lead to or result in a material adverse change in the business, operations, assets or financial condition of any Borrower or any of its Subsidiaries. 8.8. Payment of Debt, Taxes and Other Obligations Pay, perform and discharge, or cause to be paid, performed and discharged, all of the obligations and indebtedness of each Borrower and its Subsidiaries, all taxes, assessments and governmental charges or levies imposed upon Borrower or its Subsidiaries or upon their respective income, receipts or properties before those taxes, assessments and governmental charges or levies become past due, and all lawful claims for labor, materials and supplies or otherwise that, if unpaid, could become a Lien or charge upon any of their respective properties or assets. Each Borrower and its Subsidiaries are not required, however, to pay any taxes, assessments and governmental charges or levies or claims for labor, materials or supplies for which each Borrower or its Subsidiaries have obtained an adequate bond or insurance or that are being contested in good faith and by proper proceedings that are being reasonably and diligently pursued and for which proper reserves have been created. Page 33 8.9. Insurance Maintain errors and omissions insurance or mortgage impairment insurance, and blanket bond coverage, with such companies and in such amounts as satisfy prevailing requirements applicable to a lender, seller/servicer and issuer described under Section 2.3, and liability insurance and fire and other hazard insurance on its properties, in each case with responsible insurance companies acceptable to Credit Agent, in such amounts and against such risks as is customarily carried by similar businesses operating in the same location. 8.10. Closing Instructions Indemnify and hold Credit Agent and Lenders harmless from and against any loss, including reasonable attorneys' fees and costs, attributable to the failure of any title insurance company, agent or approved attorney to comply with any Borrower's disbursement or instruction letter relating to any Mortgage Loan. 8.11. Subordination of Certain Indebtedness Cause any indebtedness of any Borrower to any shareholder, director, officer or Affiliate of Borrower, which indebtedness is in excess of $35,000,000, to be subordinated to the Obligations by the execution and delivery to Credit Agent of a Subordination of Debt Agreement, on the form prescribed by Credit Agent, certified by the corporate secretary of that Borrower to be true and complete and in full force and effect. 8.12. Other Loan Obligations Perform all material obligations under the terms of each loan agreement, note, mortgage, security agreement or debt instrument by which any Borrower is bound or to which any of its property is subject, and promptly notify Credit Agent in writing of a declared default under or the termination, cancellation, reduction or nonrenewal of any of its other lines of credit or agreements with any other lender. Exhibit F is a true and complete list of all such lines of credit or agreements as of the date of this Agreement. Borrower must give Credit Agent at least 30 days Notice before entering into any additional lines of credit or agreements. 8.13. ERISA Maintain (and, if applicable, will cause each ERISA Affiliate to maintain) each Plan in compliance with all material applicable requirements of ERISA and of the Internal Revenue Code and with all applicable rulings and regulations issued under the provisions of ERISA and of the Internal Revenue Code, and not permit any ERISA Affiliate to, (a) engage in any transaction in connection with which Borrower or any ERISA Affiliate would be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue Code, in either case in an amount exceeding $25,000 or (b) fail to make full payment when due of all amounts that, under the provisions of any Plan, Borrower or any ERISA Affiliate is required to pay as contributions to that Plan, or permit to exist any accumulated funding deficiency (as such term is defined in Section 302 of ERISA and Section 412 of the Internal Revenue Code), whether or not waived, with respect to any Plan in an aggregate amount exceeding $25,000. Page 34 8.14. Use of Proceeds of Advances Use the proceeds of each Advance solely for the purpose of funding Eligible Assets and against the pledge of those Eligible Assets as Collateral or, in the case of Advances against Foreclosure Mortgage Loans and Foreclosure Claim Receivables, repaying Advances outstanding against or repurchase obligations with respect to the related Mortgage Loans. End of Article 8 Page 35 9. NEGATIVE COVENANTS As long as the Commitment is outstanding or there remain any Obligations to be paid or performed, no Borrower must, either directly or indirectly, without the prior written consent of Credit Agent: 9.1. Contingent Liabilities Assume, guarantee, endorse or otherwise become contingently liable for the obligation of any Person (including any Subsidiary that is not a Borrower), except by endorsement of negotiable instruments for deposit or collection in the ordinary course of business, and except for obligations arising in connection with the sale of Mortgage Loans without credit recourse (but subject to recourse for breaches of normal representations, warranties and other provisions) in the ordinary course of Borrower's business, and except for other contingent liabilities in an aggregate amount not greater than $10,000,000. 9.2. Restrictions on Fundamental Changes 9.2 (a) Consolidate, merge or enter into any analogous reorganization or transaction with any Person, except that any Borrower may merge with another Borrower and any Borrower other than UAMC may enter into a merger if the surviving corporation will be a wholly-owned Subsidiary of UAMC. 9.2 (b) Liquidate, wind up or dissolve (or suffer any liquidation or dissolution). 9.2 (c) Cease actively to engage in the business of originating Mortgage Loans or make any other material change in the nature or scope of the business in which Borrower engages as of the date of this Agreement. 9.2 (d) Sell, assign, lease, convey, transfer or otherwise dispose of (whether in one transaction or a series of transactions) all or substantially all of Borrower's business or assets, whether now owned or acquired after the Closing Date. 9.2 (e) Change its name or jurisdiction of incorporation or formation without providing 30 days prior written notice to Credit Agent. 9.3. Loss of Eligibility Take any action that would cause any Borrower to lose all or any part of its status as an eligible lender, seller/servicer or issuer as described under Section 2.3. 9.4. Tangible Leverage Ratio Permit UAMC'S Tangible Leverage Ratio at any time to exceed 10 to 1. 9.5. Minimum Tangible Net Worth Permit UAMC's Tangible Net Worth at any time to be less than $40,000,000. Page 36 9.6. Distributions to Shareholders Declare or pay any dividends or otherwise declare or make any distribution to Borrower's shareholders (including any purchase or redemption of stock) unless, both before and after giving effect thereto, no Default or Event of Default will exist. 9.7. Transactions with Affiliates Directly or indirectly (a) make any loan, advance, extension of credit or capital contribution to any of Borrower's Affiliates, except (i) any Borrower may make loans, advances, extensions of credit or capital contributions to another Borrower, (ii) UAMC may make loans to Lennar, and (iii) Borrowers may make additional loans, advances, extensions of credit and capital contributions to Affiliates in an aggregate amount at any time outstanding not in excess of $15,000,000, in each case as long as, both before and after giving effect thereto, no Default or Event of Default will exist, (b) sell, transfer, pledge or assign any of its assets to or on behalf of those Affiliates, or (c) pay management fees to or on behalf of those Affiliates. 9.8. Recourse Servicing Contracts Acquire or enter into, or permit any Subsidiary to acquire or enter into, Servicing Contracts under which Borrower must repurchase or indemnify the holder of the Mortgage Loans as a result of defaults on the Mortgage Loans at any time during the term of those Mortgage Loans (but subject to recourse for breaches of normal representations, warranties and other provisions), if the aggregate principal amount of Mortgage Loans serviced pursuant to such Servicing Contracts would exceed $250,000,000. 9.9. Deferral of Subordinated Debt Pay any Subordinated Debt of Borrower in advance of its stated maturity or, after a Default or Event of Default under this Agreement has occurred, make any payment of any kind on any Subordinated Debt of Borrower until all of the Obligations have been paid and performed in full and any applicable preference period has expired. 9.10. Limitation on Liens. Create, incur, assume or permit to exist any Lien with respect to any property now owned or hereafter acquired by Borrower or any Subsidiary, or any income or profits therefrom, except (a) the security interests granted to Credit Agent, for the benefit of Lenders, under the Loan Documents; (b) Liens described on Exhibit L; (c) Liens in connection with deposits or pledges to secure payment of workers' compensation, unemployment insurance, old age pensions or other social security obligations, in the ordinary course of business of Borrower or any Subsidiary; (d) Liens for taxes, fees, assessments and governmental charges not delinquent or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established in accordance with GAAP; (e) encumbrances consisting of zoning regulations, easements, rights of way, survey exceptions and other similar restrictions on the use of real property and minor irregularities in title thereto which do not materially impair their use in operation of its business; (f) contingent Liens on office equipment arising under leases of office space; (g) Liens on equipment to secure Debt incurred to finance the acquisition of such Equipment, including, without limitations, capitalized leases, (h) Liens incurred in connection with Gestation Agreements with respect to the property described in the definition of such term, and (i) other Liens, provided the Debt secured by such Liens is permitted pursuant to Section 9.11(i). Page 37 9.11. Limitation on Debt. Incur or permit to remain outstanding any Debt other than (a) Debt incurred under this Agreement, (b) Debt described on Exhibit M hereto, (c) Debt incurred to finance the acquisition by Borrower or a Subsidiary of equipment used in the ordinary course of its business, (d) Debt incurred under Gestation Agreements, (e) current liabilities, not overdue unless contested in good faith, incurred by Borrower or any Subsidiary otherwise than for borrowed money, (f) deferred taxes arising from capitalized excess servicing fees and capitalized servicing rights, (g) Subordinated Debt, (h) Debt arising under Hedging Arrangements, and (i) other Debt in an aggregate amount at any time outstanding of not more than $50,000,000. End of Article 9 Page 38 10. SPECIAL REPRESENTATIONS, WARRANTIES AND COVENANTS CONCERNING COLLATERAL 10.1. Special Representations and Warranties Concerning Collateral Each Borrower represents and warrants to Lenders, as of the date of this Agreement and as of the date of each Advance Request and the making of each Warehousing Advance, that: 10.1 (a) No Borrower has selected the Collateral in a manner so as to affect adversely Lenders' interests. 10.1 (b) A Borrower is the legal and equitable owner and holder, free and clear of all Liens (other than Liens granted under this Agreement), of the Pledged Loans, Pledged Agreements for Deed and the Pledged Securities. All Pledged Loans, Pledged Agreements for Deed, Pledged Securities and related Purchase Commitments have been duly authorized and validly issued to Borrower, and all of the foregoing items of Collateral comply with all of the requirements of this Agreement, and have been and will continue to be validly pledged or assigned to Credit Agent, subject to no other Liens. 10.1 (c) Each Borrower has, and will continue to have, the full right, power and authority to pledge the Collateral pledged and to be pledged by it under this Agreement. 10.1 (d) Each Mortgage Loan and each related document included in the Pledged Loans (1) has been duly executed and delivered by the parties to that Mortgage Loan and that related document, (2) has been made in compliance with all applicable laws, rules and regulations (including all laws, rules and regulations relating to usury), (3) is and will continue to be a legal, valid and binding obligation, enforceable in accordance with its terms, without setoff, counterclaim or defense in favor of the mortgagor under the Mortgage Loan or any other obligor on the Mortgage Note and (4) has not been modified, amended or any requirements of which waived, except in a writing that is part of the Collateral Documents. No party to any Mortgage Loan or related document is in violation of any applicable law, rule or regulation if the violation would impair the collectibility of the Mortgage Loan or the performance by the mortgagor or any other obligor of its obligations under the Mortgage Note or any related document. 10.1 (e) Each Pledged Loan is secured by a Mortgage on, and each Pledged Agreement for Deed constitutes a Lien on, real property located in one of the states of the United States or the District of Columbia. 10.1 (f) Except for open-ended Second Mortgage Loans, Construction/Perm Mortgage Loans and Third Party Builder Construction Mortgage Loans, each Mortgage Loan has been fully advanced in the face amount of its Mortgage Note. 10.1 (g) Each First Mortgage is a first Lien on the premises described in that Mortgage, each Second Mortgage Loan is secured by a second Lien on the premises described in that Mortgage, and each Pledged Agreement for Deed is either a first or second Lien on the related Single Family Property. Each Pledged Loan has or will have a title insurance policy, in ALTA form or equivalent, from a recognized title insurance company, insuring the priority of the Lien of the Mortgage and meeting the usual requirements of Investors purchasing those Mortgage Loans. Page 39 10.1 (h) Each Mortgage Loan has been evaluated or appraised in accordance with Title XI of FIRREA. 10.1 (i) The Mortgage Note for each Pledged Loan is (1) payable or endorsed to the order of the respective Borrower, (2) an "instrument" within the meaning of Section 9-105 of the Uniform Commercial Code of all applicable jurisdictions and (3) is denominated and payable in United States dollars. 10.1 (j) No default has existed for 60 days or more under any Pledged Loan, except for a Foreclosure Mortgage Loan, or under any Pledged Agreement for Deed. 10.1 (k) No party to an Eligible Asset or any related document is in violation of any applicable law, rule or regulation that would impair the collectibility of the Eligible Asset or the performance by the mortgagor or any other obligor of its obligations under the Eligible Asset or any related document. 10.1 (l) All fire and casualty policies covering the premises encumbered by each Mortgage included in the Pledged Loans and each Pledged Agreement for Deed (1) name and will continue to name a Borrower and their successors and assigns as the insured under a standard mortgagee clause, (2) are and will continue to be in full force and effect and (3) afford and will continue to afford insurance against fire and such other risks as are usually insured against in the broadest form of extended coverage insurance available. 10.1 (m) Pledged Loans and Pledged Agreements for Deed secured by premises located in a special flood hazard area designated as such by the Director of the Federal Emergency Management Agency are and will continue to be covered by special flood insurance under the National Flood Insurance Program. 10.1 (n) Each Pledged Loan against which a Warehousing Advance is made on the basis of a Purchase Commitment meets all of the requirements of that Purchase Commitment, and each Pledged Security against which a Warehousing Advance is outstanding meets all of the requirements of the related Purchase Commitment. 10.1 (o) Pledged Loans that are intended to be exchanged for Agency Securities comply or, prior to the issuance of the Agency Securities will comply, with the requirements of any governmental instrumentality, department or agency issuing or guaranteeing the Agency Securities. 10.1 (p) Pledged Loans that are intended to be used in the formation of Mortgage-backed Securities (other than Agency Securities) comply with the requirements of the issuer of the Mortgage-backed Securities (or its sponsor) and of the Rating Agencies. 10.1 (q) The original assignments of Mortgage and UCC financing statements delivered to Credit Agent for each Pledged Loan and Pledged Agreement for Deed are in recordable form and comply with all applicable laws and regulations governing the filing and recording of such documents. 10.1 (r) Each Pledged Loan secured by real property to which a Manufactured Home is affixed will create a valid Lien on that Manufactured Home that will have priority over any other Lien on the Manufactured Home, whether or not arising under applicable real property law. Page 40 10.2. Special Affirmative Covenants Concerning Warehousing Collateral As long as the Warehousing Commitment is outstanding or there remain any Obligations to be paid or performed under this Agreement or under any other Loan Document, each Borrower must: 10.2 (a) Warrant and defend the right, title and interest of Lenders in and to the Collateral against the claims and demands of all Persons. 10.2 (b) Service or cause to be serviced all Pledged Loans in accordance with the standard requirements of the issuers of Purchase Commitments covering them and all applicable HUD, Fannie Mae and Freddie Mac requirements, including taking all actions necessary to enforce the obligations of the obligors under such Mortgage Loans. Service or cause to be serviced all Mortgage Loans backing Pledged Securities in accordance with applicable governmental requirements and requirements of issuers of Purchase Commitments covering them. Hold all escrow funds collected in respect of Pledged Loans and Mortgage Loans backing Pledged Securities in trust, without commingling the same with non-custodial funds, and apply them for the purposes for which those funds were collected. 10.2 (c) Execute and deliver to Credit Agent such Uniform Commercial Code financing statements with respect to the Collateral as Credit Agent may request, and those further instruments of sale, pledge, assignment or transfer, and those powers of attorney, as required by Credit Agent, and do and perform all matters and things necessary or desirable to be done or observed, for the purpose of effectively creating, maintaining and preserving the security and benefits intended to be afforded Credit Agent under this Agreement. 10.2 (d) Notify Credit Agent within 2 Business Days of any default under, or of the termination of, any Purchase Commitment relating to any Pledged Loan, Eligible Mortgage Pool or Pledged Security. 10.2 (e) Promptly comply in all respects with the terms and conditions of all Purchase Commitments, and all extensions, renewals and modifications or substitutions of or to all Purchase Commitments. Deliver or cause to be delivered to the Investor the Pledged Loans and Pledged Securities to be sold under each Purchase Commitment not later than the mandatory delivery date of the Pledged Loans or Pledged Securities under the Purchase Commitment. 10.2 (f) Maintain, at an office of Borrower approved by Credit Agent, or in the office of a computer service bureau engaged by Borrower and approved by Credit Agent and, upon request, make available to Credit Agent the originals, or copies in any case where the originals have been delivered to Credit Agent or to an Investor, of the Mortgage Notes and Mortgages included in Pledged Loans, Mortgage-backed Securities included in Pledged Securities, Purchase Commitments, and all related Mortgage Loan documents and instruments, and all files, surveys, certificates, correspondence, appraisals, computer programs, tapes, discs, cards, accounting records and other information and data relating to the Collateral. 10.2 (g) On or before originating any Mortgage Loan for sale to Fannie Mae, enter into an agreement among such Borrower, Credit Agent and Fannie Mae, pursuant to which Fannie Mae agrees to send all cash proceeds of Mortgage Loans sold by Borrower to Fannie Mae to the Settlement Account. Page 41 10.3. Special Negative Covenants Concerning Warehousing Collateral As long as the Warehousing Commitment is outstanding or there remain any Obligations to be paid or performed, no Borrower must, either directly or indirectly, without the prior written consent of Credit Agent: 10.3 (a) Amend, modify or waive any of the terms and conditions of, or settle or compromise any claim in respect of, any Pledged Loans or Pledged Securities, except in a manner consistent with the terms of the related Purchase Commitment and any FHA insurance policy or VA guaranty. 10.3 (b) Sell, transfer or assign, or grant any option with respect to, or pledge (except under a Purchase Commitment or this Agreement) any of the Collateral or any interest in any of the Collateral. 10.3 (c) Make any compromise, adjustment or settlement in respect of any of the Collateral or accept other than cash in payment or liquidation of the Collateral. 10.3 (d) Cause UAMC Asset not to issue any stock or other securities in addition to or in substitution for the Pledged Shares, except to UAMC, and pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of UAMC Asset. 10.4. Special Affirmative Covenants Concerning Builder Construction Mortgage Loans As long as the Warehousing Commitment is outstanding or there remain any Obligations to be paid or performed under this Agreement or under any other Loan Document, each Borrower must: 10.4 (a) Prior to the submission of a request for an initial Advance against a Third Party Builder Construction Mortgage Loan, Borrower shall have reviewed the financial and business ability of the builder to complete the improvements to the premises encumbered by a Pledged Mortgage in a timely and cost efficient manner. 10.4 (b) Notify Credit Agent within 2 Business Days of the following events: (1) a lien filed against premises encumbered by a Pledged Mortgage and not removed within 15 days of the filing, (2) a Pledged Mortgage being out of balance with the Cost Breakdown and not brought back in balance by the mortgagor within 15 days after such determination by Borrower, and (3) any damage or destruction of the premises encumbered by a Pledged Mortgage. 10.5. Special Representations Concerning Construction/Perm Mortgage Loans and Third Party Builder Construction Mortgage Loans Borrower hereby represents and warrants to Credit Agent, as of the date of this Agreement and as of the date of each Advance Request, that: 10.5 (a) Each Construction/Perm Mortgage Loan and Third Party Builder Construction Loan included in the Pledged Loans (1) has an American Land Title Association Lender's construction loan policy or commitment, (2) has "all risk" builder's insurance and workers' compensation insurance, (3) has a survey prepared and certified by a duly registered surveyor or title company showing no encroachments of the improvements or the proposed improvements to be constructed on the premises encumbered by the Pledged Page 42 Loan on to other lands or easements or restrictions, unless such encroachments have been insured over or are acceptable to the Investor, (5) has building permits and all necessary licenses and approvals for the construction of the improvements on the premises encumbered by the Pledged Loan, (6) has a "as completed" appraisal giving an As Completed Appraised Value, (7) has a fixed price general contract issued by a licensed contractor, and (8) has all necessary utilities available to the premises encumbered by the Pledged Loan. 10.5 (b) Prior to the initial Advance against a Construction/Perm Mortgage Loan or a Third Party Builder Construction Mortgage Loan included in the Pledged Loans, Borrower shall have received (1) a Cost Breakdown, (2) a draw schedule, and (3) an inspection report. 10.5 (c) Prior to each Advance against a Construction/Perm Mortgage Loan or a Third Party Builder Construction Mortgage Loan included in the Pledged Loans, Borrower (i) shall have received (A) an inspection report confirming completion of the work for which such Advance is being requested and the Total Hard Costs are adequate to complete the improvements and (B) invoices for each soft cost reimbursement for which such Advance is being requested, and (ii) shall not have received a notice of intent to assert a Lien from any contract, subcontractor, material supplier or other Person. 10.5 (d) Prior to the final Advance against a Construction/Perm Mortgage Loan or a Third Party Builder Construction Mortgage Loan included in the Pledged Loans, Borrower shall have received, (1) a final inspection report or certificate of occupancy confirming completion of all work in accordance with the plans and specifications, (2) final lien waivers, (3) final certificate of appraiser that the premises encumbered by the Pledged Loan equals the As Completed Appraised Value, and (4) a datedown endorsement from the title insurance company showing clear title as of the date of disbursement of such Advance. 10.5 (e) Within 15 days after the final Advance against a Construction/Perm Mortgage Loan or a Third Party Builder Construction Mortgage Loan included in the Pledged Loan, Borrower shall receive any Mortgage Note modification or modified Mortgage Note delivered in connection with a Construction/Perm Mortgage Loan and a Mortgage Note or Wet Settlement package evidencing a Mortgage Loan which refinances a related Mortgage Loan. 10.6. Special Representations and Warranties Concerning Receivables Borrower hereby represents and warrants to the Lender, as of the date of this Agreement and as of the date of each Advance Request and the making of each Advance that: 10.6 (a) Borrower is the legal and equitable owner and holder, free and clear of all Liens (other than Liens granted hereunder) of the Receivables, and the Receivables have been and will continue to be subject to a security interest in favor of the Credit Agent, subject to no other Liens. 10.6 (b) Borrower has, and will continue to have, the full right, power and authority to grant a security interest in the Receivables to the Credit Agent. 10.6 (c) Each Receivable is a valid, enforceable right to retain amounts received from obligors under Mortgage Loans serviced by Borrower, or a valid, enforceable right to payment from Fannie Mae, Freddie Mac, Ginnie Mae, VA, FHA or a private mortgage insurer, is currently due, and as to which no condition exists that will impair or materially delay payment thereof. Page 43 10.6 (d) To the best of Borrower's knowledge, with respect to any Receivables, the mortgagor who is liable for payments that will be applicable to such Receivables, or Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA or the private mortgage insurer, obligated thereon, has no defense, setoff, claim or counterclaim against Borrower which can be asserted against the Credit Agent, whether in any proceeding to enforce the Credit Agent's security interest in such Receivable or otherwise. 10.6 (e) Except for the Acknowledgment Agreements, to the extent required, no consent of any Person is required for the grant of a security interest in the Receivables to the Credit Agent, and no consent will need to be obtained upon the occurrence of an Event of Default for the Credit Agent to exercise its rights with respect to any of the Receivables. 10.7. Special Representations Concerning Pledged Shares. The Borrowers hereby represent and warrant to the Lenders, as of the date of this Agreement and as of the date of each Advance Request for an Advance and the making of each such Advance, that: 10.7 (a) UAMC has title to the Pledged Shares and will have title to all further Pledged Shares hereafter issued, free of all Liens except the security interest in favor of the Credit Agent. 10.7 (b) UAMC has full power and authority to subject the Pledged Shares to the security interest created hereby. 10.7 (c) No financing statement covering all or part of the Pledged Shares is on file in any public office (except for any financing statements filed by the Credit Agent). 10.7 (d) The Pledged Shares have been duly authorized and validly issued by UAMC Asset and are fully paid and non-assessable. The certificates representing the Pledged Shares are genuine. The Pledged Shares are not subject to any offset or similar right or claim of the issuers thereof. 10.7 (e) The Pledged Shares constitute 100% of the issued and outstanding shares of capital stock of UAMC Asset. 10.8. Voting Rights; Dividends; Etc. 10.8 (a) Subject to paragraph (d) of this Section 10.8, UAMC shall be entitled to exercise or refrain form exercising any and all voting and other consensual rights pertaining to the Pledged Shares for any purpose not inconsistent with the terms of this Agreement; provided, however, that UAMC shall not exercise or refrain from exercising any such right if such action could reasonably be expected to have a material adverse effect on the value of the Collateral or any material part thereof. 10.8 (b) Any and all dividends paid in respect of the Pledged Shares after the occurrence and during the continuance of any Default or Event of Default shall be forthwith delivered to the Credit Agent to hold as Collateral and shall, if received by any Borrower, be received in trust for the benefit of the Lenders, be segregated from the other property or funds of Borrowers, and be forthwith delivered to the Credit Agent as Collateral in the same form as so received (with any necessary endorsement or assignment). Each Borrower shall, upon request by the Lender, promptly execute all such documents and do all such acts as may be necessary or desirable to give effect to the provisions of this Section 10.8(b). 10.8 (c) The Credit Agent shall execute and deliver (or cause to be executed and delivered) to Page 44 UAMC all such proxies and other instruments as UAMC may reasonable request for the purpose of enabling UAMC to exercise the voting and other rights that it is entitled to exercise pursuant to Section 10.8(a) hereof and to receive the dividends that it is authorized to receive and retain pursuant to Section 10.8(b) hereof. 10.8 (d) Upon the occurrence and during the continuance of any Event of Default, the Credit Agent shall have the right in its sole discretion, and Borrowers shall execute and deliver all such proxies and other instruments as may be necessary or appropriate to give effect to such right, to terminate all rights of Borrowers to exercise or refrain from exercising the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 10.8(a) hereof, and all such rights shall thereupon become vested in the Credit Agent who shall thereupon have the sole right to exercise or refrain from exercising such voting and other consensual rights; provided, however, that the Credit Agent and the Lenders shall not be deemed to possess or have control over any voting rights with respect to any Collateral unless and until the Credit Agent has given written notice to Borrowers that any further exercise of such voting rights by Borrowers is prohibited and that the Credit Agent and/or its assigns will henceforth exercise such voting rights; and provided further, that neither the registration of any item of Collateral in the Credit Agent's name nor the exercise of any voting rights with respect thereto shall be deemed to constitute a retention by the Credit Agent or the Lenders of any such Collateral in satisfaction of the Obligations or any part thereof. End of Article 10 Page 45 11. DEFAULTS; REMEDIES 11.1. Events of Default The occurrence of any of the following is an event of default ("Event of Default"): 11.1 (a) Any Borrower fails to pay the principal of any Advance when due, whether at stated maturity, by acceleration, or otherwise; or fails to pay any installment of interest on any Advance within 12 days after the date of Credit Agent's invoice or account analysis statement; or fails to pay, within any applicable grace period, any other amount due under this Agreement or any other Obligation of Borrower to Credit Agents; or 11.1 (b) Any Borrower or any of their Subsidiaries, other than USH Funding Inc. or Edgewater Reinsurance Ltd., fails to pay, or defaults in the payment of any principal or interest on, any other indebtedness or any contingent obligation within any applicable grace period; breaches or defaults with respect to any other material term of any other indebtedness or of any loan agreement, mortgage, indenture or other agreement relating to that indebtedness, if the effect of that breach or default is to cause, or to permit the holder or holders of that indebtedness (or a trustee on behalf of such holder or holders) to cause, indebtedness of Borrower or their Subsidiaries, other than USH Funding Inc. or Edgewater Reinsurance Ltd., in the aggregate amount of $2,000,000 or more to become or be declared due before its stated maturity (upon the giving or receiving of notice, lapse of time, both, or otherwise); or 11.1 (c) Any Borrower fails to perform or comply with any term or condition applicable to it contained in Sections 8.4 (as to corporate existence) and 8.14 or in any Section of Article 9; or 11.1 (d) Any representation or warranty made or deemed made by each Borrower under this Agreement, other than in Section 10.1, in any other Loan Document or in any written statement or certificate at any time given by Borrower is inaccurate or incomplete in any material respect on the date as of which it is made or deemed made; or 11.1 (e) Any Borrower defaults in the performance of or compliance with any term contained in this Agreement or any other Loan Document other than those referred to in Sections 11.1 (a), 11.1 (c) or 11.1 (d) and such default has not been remedied or waived within 30 days after the earliest of (1) receipt by Borrower of Notice from Credit Agent of that default, (2) receipt by Credit Agent of Notice from Borrower of that default or (3) the date Borrower should have notified Credit Agent of that default under Section 8.7(c) or 8.7(d); or 11.1 (f) A case (whether voluntary or involuntary) is filed by or against any Borrower under any applicable bankruptcy, insolvency or other similar federal or state law and, in the event of an involuntary case, the same is not dismissed within 60 days; or a court of competent jurisdiction appoints a receiver (interim or permanent), liquidator, sequestrator, trustee, custodian or other officer having similar powers over any Borrower, or over all or a substantial part of their respective properties or assets; or any Borrower, (1) consents to the appointment of or possession by a receiver (interim or permanent), liquidator, sequestrator, trustee, custodian or other officer having similar powers over any Borrower, or over all or a substantial part of their respective properties or assets, (2) makes an assignment for the benefit of creditors, or (3) fails, or admits in writing its inability, to pay its debts as those debts become due; or Page 46 11.1 (g) Any Borrower fails to perform any contractual obligation to repurchase Mortgage Loans, if such obligations in the aggregate exceed $2,000,000; or 11.1 (h) Any money judgment, writ or warrant of attachment or similar process involving in an amount in excess of $2,000,000 is entered or filed against any Borrower or any of its Subsidiaries or any of their respective assets and remains undischarged, unvacated, unbonded or unstayed for a period of 30 days or 5 days before the date of any proposed sale under that money judgment, writ or warrant of attachment or similar process; or 11.1 (i) Any order, judgment or decree decreeing the dissolution of any Borrower is entered and remains undischarged or unstayed for a period of 20 days; or 11.1 (j) Any Borrower purports to disavow the Obligations or contests the validity or enforceability of any Loan Document; or 11.1 (k) Lennar purports to disavow its obligations under its Lennar Undertaking or contests the validity or enforceability of Lennar Undertaking; or 11.1 (l) Credit Agent's security interest on any portion of the Collateral becomes unenforceable or otherwise impaired and all Advances made against any of that Collateral are not paid in full, or the impairment is not cured, within 10 days after earliest of (i) receipt by Borrower of Notice from Credit Agent of the impairment, (ii) receipt by Credit Agent of Notice from Borrower of the impairment, or (iii) the date Borrower should have notified Credit Agent of the impairment under Section 8.7(c) or 8.7(d); or 11.1 (m) A material adverse change occurs in any Borrower's financial condition, business, properties, operations or prospects, or in any Borrower's ability to repay the Obligations; or 11.1 (n) Any Lien for any taxes, assessments or other governmental charges (1) is filed against any Borrower or any of its property, or is otherwise enforced against Borrower or any of its property, or (2) obtains priority that is equal or greater than the priority of Credit Agent's security interest in any of the Collateral; or 11.1 (o) UAMC ceases to own, directly, all of the capital stock of each other Borrower, or Lennar ceases to own, directly or indirectly, a majority of each class of the capital stock of UAMC; or 11.1 (p) UAMC Asset shall incur any Debt, other than Debt owed to the Lenders, or any Pledged Asset owned by UAMC Asset shall become subject to any Lien, other than Liens in favor of the Credit Agent. 11.2. Remedies 11.2 (a) If a Lender shall have knowledge of a Default or an Event of Default, it shall forthwith give Notice thereof to Credit Agent. Credit Agent shall not be deemed to have knowledge or Notice of the occurrence of a Default or an Event of Default unless Credit Agent has received Notice from a Lender or a Borrower. 11.2 (b) If an Event of Default described in Section 11.1 (f) occurs with respect to any Borrower, the Commitments will automatically terminate and the unpaid principal amount of and accrued interest on the Notes and all other Obligations will automatically become due and payable, without presentment, demand or other requirements of any kind, all of which Borrower expressly waives. Page 47 11.2 (c) If any other Event of Default occurs, Majority Lenders may, by Notice to each Borrower, terminate the Commitments and declare the Obligations to be immediately due and payable. 11.2 (d) If any Event of Default occurs, Credit Agent, on behalf of Lenders, may, and at the direction of the Majority Lenders shall (subject to Section 12.3(c)), also take any of the following actions: (1) Foreclose upon or otherwise enforce its security interest in and Lien on the Collateral to secure all payments and performance of the Obligations in any manner permitted by law or provided for in the Loan Documents. (2) Notify all obligors under any of the Collateral that the Collateral has been assigned to Credit Agent , on behalf of Lenders (or to another Person designated by Credit Agent) and that all payments on that Collateral are to be made directly to Credit Agent (or such other Person); settle, compromise or release, in whole or in part, any amounts any obligor or Investor owes on any of the Collateral on terms acceptable to Credit Agent; enforce payment and prosecute any action or proceeding involving any of the Collateral; and where any Collateral is in default, foreclose on and enforce any Liens securing that Collateral in any manner permitted by law and sell any property acquired as a result of those enforcement actions. (3) Act, or contract with a third party to act at Borrower's expense, as servicer or subservicer of Collateral requiring servicing and perform all obligations required under any Servicing Contracts and Purchase Commitments. (4) Require each Borrower to assemble and make available to Credit Agent the Collateral and all related books and records at a place designated by Credit Agent. (5) Enter onto property where any Collateral or related books and records are located and take possession of those items with or without judicial process as permitted by applicable law; and obtain access to each Borrower's data processing equipment, computer hardware and software relating to the Collateral and use all of the foregoing and the information contained in the foregoing in any manner Credit Agent deems necessary for the purpose of effectuating its rights under this Agreement and any other Loan Document. (6) Before the disposition of the Collateral, prepare it for disposition in any manner and to the extent Credit Agent deems appropriate. (7) Exercise all rights and remedies of a secured creditor under the Uniform Commercial Code of Minnesota or other applicable law, including selling or otherwise disposing of all or any portion of the Collateral at one or more public or private sales, whether or not the Collateral is present at the place of sale, for cash or credit or future delivery, on the terms and in the manner as Credit Agent may determine, including sale under any applicable Purchase Commitment. If notice is required under applicable law, Credit Agent will give Borrower not less than 10 days' notice of any public sale or of the date after which any private sale may be held. Each Borrower agrees that 10 days' notice is reasonable notice. Credit Agent may, without notice or publication, adjourn any public or private sale one or more times by announcement at the time and place fixed for the sale, and the sale may be held at any time or place announced at the adjournment. In the case of a sale of all or any portion of the Collateral on credit or for future delivery, the Collateral sold on those terms may be may be retained by Credit Agent until Page 48 the purchaser pays the selling price or takes possession of the Collateral. Credit Agent has no liability to Borrower if a purchaser fails to pay for or take possession of the Collateral sold on those terms, and in the case of any such failure, Credit Agent may sell the Collateral again upon notice complying with this Section. (8) Instead of or in conjunction with exercising the power of sale authorized by Section 11.2 (d)(7), Credit Agent may proceed by suit at law or in equity to collect all amounts due upon the Collateral, or to foreclose Credit Agent's Lien on and sell all or any portion of the Collateral pursuant to a judgment or decree of a court of competent jurisdiction. (9) Proceed against any Borrower on the Notes or against Lennar under the Lennar Undertaking. (10) Retain all excess proceeds from the sale or other disposition of the Collateral, and apply them to the payment of the Obligations under Section 11.3. 11.2 (e) Credit Agent shall follow the instructions of the Majority Lenders in exercising or not exercising its rights under this Section 11.2, but (i) Credit Agent shall have no obligation to take or not to take any action which it believes may expose it to any liability, and (ii) Credit Agent may, but shall be under no obligation to, await instructions from the Majority Lenders before exercising or not exercising its rights under this Section 11.2. 11.2 (f) Credit Agent or any Lender will incur no liability as a result of the commercially reasonable sale or other disposition of all or any portion of the Collateral at any public or private sale or other disposition. Each Borrower waives (to the extent permitted by law) any claims it may have against Credit Agent and each other Lender arising by reason of the fact that the price at which the Collateral may have been sold at a private sale was less than the price that Credit Agent might have obtained at a public sale, or was less than the aggregate amount of the outstanding Advances, plus accrued and unpaid interest on the Advances, and unpaid fees, even if Credit Agent accepts the first offer received and does not offer the Collateral to more than one offeree. Nothing set forth above in this Section 11.2(f) shall be construed as purporting to waive Credit Agent's obligation to dispose of Collateral in a commercially reasonable manner as required under the Uniform Commercial Code. Each Borrower agrees that any sale of Collateral under the terms of a Purchase Commitment or under the terms of the Lennar Undertaking, or any other disposition of Collateral arranged by Borrower, whether before or after the occurrence of an Event of Default, will be deemed to have been made in a commercially reasonable manner. 11.2 (g) Each Borrower acknowledges that Mortgage Loans are collateral of a type that is the subject of widely distributed standard price quotations and that Mortgage-backed Securities are collateral of a type that is customarily sold on a recognized market. Each Borrower waives any right it may have to prior notice of the sale of Pledged Securities, and agrees that Credit Agent may purchase Pledged Loans and Pledged Securities at a private sale of such Collateral. Nothing set forth above in this Section 11.2(g) shall be construed as purporting to waive Credit Agent's obligation to dispose of Collateral in a commercially reasonable manner as required under the Uniform Commercial Code. 11.2 (h) Each Borrower specifically waives and releases (to the extent permitted by law) any equity or right of redemption, stay or appraisal that Borrower has or may have under any rule of law or statute now existing or adopted after the date of this Agreement, and any right to require Credit Agent to (1) proceed against any Person, (2) proceed against or exhaust any of the Collateral or pursue its rights and remedies against the Collateral in any particular order, or (3) pursue any other remedy within its power. Credit Agent is not Page 49 required to take any action to preserve any rights of any Borrower against holders of mortgages having priority to the Lien of any Mortgage included in the Collateral or to preserve Borrower's rights against other prior parties. 11.2 (i) Credit Agent may, but is not obligated to, advance any sums or do any act or thing necessary to uphold or enforce the Lien and priority of, or the security intended to be afforded by, any Mortgage included in the Collateral, including payment of delinquent taxes or assessments and insurance premiums. All advances, charges, costs and expenses, including reasonable attorneys' fees and disbursements, incurred or paid by Credit Agent or any Lender in exercising any right, power or remedy conferred by this Agreement, or in the enforcement of this Agreement, together with interest on those amounts at the Default Rate, from the time paid by Credit Agent until repaid by Borrower, are deemed to be principal outstanding under this Agreement and the Notes. 11.2 (j) No failure or delay on the part of Credit Agent to exercise any right, power or remedy provided in this Agreement or under any other Loan Document, at law or in equity, will operate as a waiver of that right, power or remedy. No single or partial exercise by Credit Agent or any Lender of any right, power or remedy provided under this Agreement or any other Loan Document, at law or in equity, precludes any other or further exercise of that right, power, or remedy by Credit Agent or any Lender, or Credit Agent's exercise of any other right, power or remedy. Without limiting the foregoing, each Borrower waives all defenses based on the statute of limitations to the extent permitted by law. The remedies provided in this Agreement and the other Loan Documents are cumulative and are not exclusive of any remedies provided at law or in equity. 11.2 (k) Credit Agent is hereby granted a license or other right to use, upon the occurrence of an Event of Default ,without charge, each Borrower's computer programs, other programs, labels, patents, copyrights, rights of use of any name, Investor lists, trade names, trademarks, service marks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral, and each Borrower's rights under all licenses and all other agreements related to the foregoing inure to Lenders' benefit until the Obligations are paid in full. 11.3. Application of Proceeds The proceeds of any sale, disposition or other enforcement of Credit Agent's security interest in all or any part of the Collateral shall be applied by Credit Agent as follows: 11.3 (a) In the case of the proceeds of Other Eligible Assets (excluding Servicing Contracts) and related collateral: First, to the payment of the costs and expenses of such sale or enforcement, including reasonable compensation to Credit Agent's agents and counsel, and all expenses, liabilities and advances made or incurred by or on behalf of Credit Agent in connection therewith; Second, to the payment of the costs and expenses of such sale or enforcement, including reasonable compensation to Lenders' agents and counsel, and all expenses, liabilities and advances made or incurred by or on behalf of any Lender in connection therewith; Third, to Lenders, for application to the Obligations owed to each of them in respect of Swingline Advances, Warehousing Advances and RFC Direct Advances, as set forth in clauses Third, Fourth, Fifth, Sixth and Seventh of Section 11.3(b) and clauses Third and Fourth of Section 11.3(c); and Page 50 Fourth, to the remaining Obligations; and Finally, to the payment to Borrower, or to their successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. 11.3 (b) In the case of the proceeds of Eligible Assets and related Collateral: First, to the payment of the costs and expenses of such sale or enforcement, including reasonable compensation to Credit Agent's agents and counsel, and all expenses, liabilities and advances made or incurred by or on behalf of Credit Agent in connection therewith; Second, to the payment of the costs and expenses of such sale or enforcement, including reasonable compensation to Lenders' agents and counsel, and all expenses, liabilities and advances made or incurred by or on behalf of any Lender in connection therewith; Third, to RFC, in an amount equal to the amount of accrued interest or Balance Deficiency Fees owed to RFC in respect of Swingline Advances, until paid in full; Fourth, to RFC until the principal amount of all Swingline Advances outstanding are paid in full; Fifth, to Lenders holding Warehousing Advances, pro rata in accordance with the amount of accrued interest, or accrued Balance Deficiency Fees, owed to each of them in respect of Warehousing Advances, until such interest and fees are paid in full; Sixth, to Lenders holding Warehousing Advances, pro rata in accordance with their respective Percentage Shares, until the principal amounts of all Warehousing Advances outstanding are paid in full; Seventh, to Lenders holding Warehousing Advances, pro rata in accordance with their respective Percentage Shares, until all fees and other Obligations accrued by or due each Lender and Credit Agent are paid in full; Eighth, to RFC for RFC Direct Advances, until the principal amount of all RFC Direct Advances outstanding are paid in full; and Ninth, to RFC for RFC Direct Advances, until all fees and other Obligations accrued by or due RFC are paid in full; and Tenth, to the remaining Obligations; and Finally, to the payment to Borrower, or to their successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. 11.4. Credit Agent Appointed Attorney-in-Fact Each Borrower appoints Credit Agent its attorney-in-fact, with full power of substitution, for the purpose of carrying out the provisions of this Agreement, the Notes and the other Loan Documents and taking any action and executing any instruments that Credit Agent deems necessary or advisable to accomplish that purpose. Each Borrower's appointment of Credit Agent as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, Credit Agent may give notice of Credit Agent's Lien on the Collateral to any Person, either in the name of Borrower or in its own name, endorse all Pledged Loans or Page 51 Pledged Securities payable to the order of Borrower, change or cause to be changed the book-entry registration or name of subscriber or Investor on any Pledged Security, or receive, endorse and collect all checks made payable to the order of Borrower representing payment on account of the principal of or interest on, or the proceeds of sale of, any of the Pledged Loans or Pledged Securities and give full discharge for those transactions. 11.5. Right of Set-Off Without limiting any other right that Credit Agent or any Lender may have under applicable law or otherwise, if any Borrower defaults in the payment of any Obligation or in the performance of any of its duties under the Loan Documents, each Lender may, without Notice to or demand on Borrower (which Notice or demand each Borrower expressly waives), set-off, appropriate or apply any and all property of Borrower held at any time by such Lender, or any indebtedness at any time owed by such Lender to or for the account of Borrower, against the Obligations, whether or not those Obligations have matured. 11.6. Sharing of Payments If upon the occurrence of an Event of Default and acceleration of the Obligations, if any Lender shall hold or receive and retain any payment, whether by setoff, application of deposit balance or security, or otherwise, in respect of the Obligations, then such Lender shall purchase from the other Lenders for cash and at face value and without recourse, such participation in the Obligations held by them as shall be necessary to cause such payment to be shared ratably with each of them; provided, that if such payment or part thereof is thereafter recovered from such purchasing Lender, the related purchases from the other Lenders shall be rescinded ratably and the purchase price restored as to the portion of such excess payment so recovered, but without interest thereon unless the purchasing Lender is required to pay interest on such amounts to the Person recovering such payment, in which case with interest thereon, computed at the same rate, and on the same basis, as the interest that the purchasing Lender is required to pay. If any Lender receives a payment from any Borrower not in respect of the Obligations, but relating to another relationship of such Lender and Borrower, such Lender may apply the payment first to the indebtedness arising out of the other relationship and then against the Obligations as provided for above. End of Article 11 Page 52 12. AGENT 12.1. Appointment Each Lender hereby irrevocably designates and appoints Credit Agent as the agent of such Lender under the Loan Documents and each such Lender hereby irrevocably authorizes Credit Agent to take such action on its behalf under the provisions of the Loan Documents and to exercise such powers and perform such duties as are expressly delegated to Credit Agent by the terms of the Loan Documents, together with such other powers as are reasonably incidental thereto. Credit Agent hereby accepts such appointment and agrees to act in accordance with this Agreement. 12.2. Duties of Agent 12.2 (a) The provisions of the Loan Documents set forth the exclusive duties of Credit Agent and no implied duties or obligations shall be read into the Loan Documents against Credit Agent. Credit Agent shall not be bound in any way by any agreement or contract other than the Loan Documents and any other agreement to which it is a party. Credit Agent shall act as an independent contractor in performing its obligations as Credit Agent under the Loan Documents and nothing herein contained shall be deemed to create any fiduciary relationship among or between Credit Agent, Borrower or Lenders. 12.2 (b) Credit Agent shall examine the Pledged Loans delivered by or on behalf of Borrower hereunder to determine whether the Pledged Loans: (i) include the documents and instruments to be delivered for each Pledged Loan required pursuant to Section 3.1, (ii) conforms with the requirements of this Agreement, and (iii) is otherwise in conformity with any customary collateral review criteria which Credit Agent may communicate to Borrower from time to time. If Credit Agent shall have determined that any Mortgage Loan delivered to Credit Agent does not meet the requirements of this Agreement or the Credit Agreement, Credit Agent may return to Borrower all Collateral Documents relating thereto. 12.2 (c) As to any Pledged Loan against which Advances may be made pursuant to this Agreement, if Credit Agent shall note any minor discrepancies or deficiencies in any Collateral Documents pertaining thereto, Credit Agent shall: (a) immediately notify Borrower thereof, (b) if such discrepancies or deficiencies can be cured without returning any Collateral Documents to Borrower, request that Borrower cure such discrepancies or deficiencies immediately, and (c) if such discrepancies or deficiencies can only be cured by returning Collateral Documents to Borrower, return any Collateral Documents containing any discrepancy or deficiency to Borrower for correction against a Trust Receipt pursuant to Section 5.5(a) hereof. 12.3. Standard of Care Credit Agent shall act in accordance with customary standards for those engaged as credit agents or collateral agents of commercial transactions in similar capacities. 12.3 (a) Credit Agent shall not be required to ascertain or inquire as to the performance or observance of any of the conditions or agreements to be performed or observed by any other party, except as specifically provided in the Loan Documents. Credit Agent disclaims any responsibility for the validity or accuracy of the recitals to the Loan Page 53 Documents and any representations and warranties contained herein, unless specifically identified as recitals, representations or warranties of Credit Agent. 12.3 (b) The Credit shall not have any responsibility for ascertaining the value, collectibility, insurability, enforceability, effectiveness or suitability of any Collateral, the title of any party therein, the validity or adequacy of the security afforded thereby, or the validity of the Loan Documents (except as to its authority to enter into the Loan Documents and to perform its obligations hereunder and thereunder). 12.3 (c) No provision of this Agreement shall require Credit Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if, in its sole judgment, it shall believe that repayment of such funds or adequate indemnity against such risk or liability is not assured to it. 12.3 (d) Credit Agent is not responsible for preparing or filing any reports or returns relating to federal, state or local income taxes with respect to this Agreement, other than for its compensation or for reimbursement of expenses. 12.4. Delegation of Duties Credit Agent may execute any of its duties under the Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Credit Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 12.5. Exculpatory Provisions Credit Agent or any of its respective officers, directors, employees, agents, attorneys-in-fact or Affiliates shall not be (a) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with the Loan Documents (except for its or such Person's own gross negligence or willful misconduct), or (b) responsible in any manner to any of Lenders for any recitals, statements, representations or warranties made by each Borrower or any officer thereof contained in the Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by Credit Agent under or in connection with, the Loan Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of the Loan Documents or for any failure of any Borrower to perform its obligations under any Loan Document. Credit Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, the Loan Documents or to inspect the properties, books or records of each Borrower or any of its Subsidiaries. 12.6. Reliance by Agent Credit Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certification, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation reasonably believed by it to be correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to Borrower), independent accountants (including, without limitation, accountants to Borrower) and other experts selected by Credit Agent. Credit Agent may deem and treat the payee of any Note as the owner thereof for all purposes. As to Lenders (a) Credit Agent shall be fully justified in failing or refusing to take any action under the Loan Documents unless it shall first receive such advice or concurrence of the Majority Lenders or all of Lenders, as appropriate, or it shall first be Page 54 indemnified to its satisfaction by Lenders ratably in accordance with their respective Percentage Shares against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any action (except for liabilities and expenses resulting from Credit Agent's gross negligence or willful misconduct), (b) Credit Agent shall in all cases be fully protected in acting, or in refraining from acting, under the Loan Documents in accordance with a request of the Majority Lenders or all of Lenders, as appropriate, and such request and any action taken or failure to act pursuant thereto shall be binding upon all Lenders, (c) Credit Agent shall be fully justified in failing or refusing to take any action under the Loan Documents unless it shall first receive such advice or concurrence of Credit Agent, and (d) Credit Agent shall in all cases be fully protected in acting, or in refraining from acting, under the Loan Documents in accordance with a request of or instructions from Credit Agent, and such request and any action taken or failure to act pursuant thereto shall be binding upon all Lenders. 12.7. Non-Reliance on Agent or Other Lenders Each Lender expressly acknowledges that Credit Agent, nor any of their respective officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to such Lender and that no act by Credit Agent hereafter taken, including any review of the affairs of each Borrower, shall be deemed to constitute any representation or warranty by Credit Agent to any Lender. Each Lender represents to Credit Agent that it has, independently and without reliance upon Credit Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of each Borrower and made its own decision to enter into and make Advances under the Credit Agreement. Each Lender also represents that it will, independently and without reliance upon Credit Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under the Credit Agreement, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of each Borrower. Except for notices, reports and other documents expressly required to be furnished to Lenders by Credit Agent hereunder, Credit Agent shall have no duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial or other condition or creditworthiness of each Borrower or any Subsidiary which may come into the possession of Credit Agent or any of their respective officers, directors, employees, agents, attorneys-in-fact or Affiliates. 12.8. Agent in Individual Capacity Credit Agent may make loans to, accept deposits from and generally engage in any kind of business with any Borrower as though it were not an agent hereunder. With respect to the Advances made or renewed by them and any Note issued to them, Credit Agent shall have the same rights and powers under the Loan Documents as any Lender and may exercise the same as though it were not Credit Agent, and the terms "Lender" and "Lenders" shall include Credit Agent in its individual capacity. 12.9. Successor Agent Credit Agent may resign as such at any time upon giving 30 days Notice to Borrower and Lenders. Credit Agent may be removed immediately with cause or at any time upon 30 days Notice from the Majority Lenders to Credit Agent and Borrower. Upon Notice of such resignation or removal, the Majority Lenders may appoint a successor Credit Agent (which successor Credit Agent, assuming that no Default or Event of Default exists, shall be reasonably acceptable to Page 55 Borrower). The date on which Borrower, Credit Agent and Lenders have received Notice from such successor of its acceptance of appointment as Credit Agent shall constitute the effective date of resignation or removal of the resigning or removed Credit Agent. If no successor Credit Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment within the allotted time period, then, upon 5 days Notice to Borrower, the resigned or removed Credit Agent may, on behalf of Lenders, appoint a successor. Upon the effective date of resignation or removal of the resigning or removed Credit Agent, such successor will thereupon succeed to and become vested with all the rights, powers, privileges, and duties of the resigning or removed Credit Agent, but the resigning or removed Credit Agent shall not be discharged from any liability as a result of its or its directors', officers', agents', or employees' gross negligence or willful misconduct in the performance of its duties and obligations under this Agreement prior to the effective date of its resignation or removal. Upon the effective date of its resignation or removal, Credit Agent shall assign all of its right, title and security interest in and to all Collateral to its successor, without recourse, warranty or representation, express or implied. End of Article 12 Page 56 13. MISCELLANEOUS 13.1. Notices Except where telephonic or facsimile notice is expressly authorized by this Agreement, all communications required or permitted to be given or made under this Agreement ("Notices") must be in writing and must be sent by manual delivery, overnight courier or United States mail (postage prepaid), addressed as follows (or at such other address as may be designated by it in a Notice to the other): If to Borrower: Universal American Mortgage Company 730 NW 107th Avenue, 4th Floor Miami, FL 33172 Attention: Janice Munoz, Treasurer and Vice President If to Credit Agent: Residential Funding Corporation 4800 Montgomery Lane, #300 Bethesda, MD 20814 Attention: Jim Clapp, Director If to any Lender: As set forth on the signature pages hereof or of any amendment hereto. In addition, Credit Agent shall use its best efforts to provide a copy of any Notice of an Event of Default, or regarding the exercise of any of its remedies to Lennar Corporation, 700 N.W. 107th Avenue, 4th Floor, Miami, Florida 33172, Attention: David B. McCain, Vice President and General Counsel, or such other counsel as Borrower may designate, but failure to provide such copy shall not render any such Notice ineffective. All periods of Notice will be measured from the date of delivery if manually delivered, from the first Business Day after the date of sending if sent by overnight courier or from 4 days after the date of mailing if sent by United States mail, except that Notices to Credit Agent under Article 2 and Section 11.2 shall be deemed to have been given only when actually received. Each Borrower authorizes Credit Agent to accept Borrower's bailee pledge agreements, Advance Requests, shipping requests, wire transfer instructions and security delivery instructions transmitted to Credit Agent by facsimile or electronic transmission, and those documents, when transmitted to Credit Agent by facsimile or electronic transmission, have the same force and effect as the originals. 13.2. Reimbursement Of Expenses; Indemnity Borrower must: (a) pay such documentation production fees as Credit Agent may require and all out-of-pocket costs and expenses of Credit Agent, including reasonable fees, service charges and disbursements of counsel (including allocated costs of internal counsel), in connection with the amendment, enforcement and administration of this Agreement, the Notes, and other Loan Documents and the making and repayment of the Advances, and the payment of interest thereon; (b) indemnify, pay, and hold harmless Credit Agent, and any other holder of the Notes from and against, all present and future stamp, documentary and other similar taxes with respect to the foregoing matters and save Credit Agent, and any other holder of the Notes harmless from and against any and all liabilities with respect to or resulting from any delay or omission to pay such taxes; and (c) indemnify, pay and hold harmless Credit Agent, each Lender, any of their officers, directors, employees or agents and any subsequent holder of the Notes (collectively called the "Indemnitees") from and against all liabilities, obligations, actual losses, damages, penalties, judgments, direct suits, costs, expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel of the Indemnitees (including Page 57 allocated costs of internal counsel), exclusive of indirect, consequential and other similar losses, in connection with any investigative, administrative or judicial proceeding, whether or not the Indemnitees have been designated as parties to such proceeding) that may be imposed upon, incurred by or asserted against such Indemnitees in any manner relating to or arising out of this Agreement, the Notes, or any other Loan Document or any of the transactions contemplated hereby or thereby ("Indemnified Liabilities"), except that Borrower has no obligation under this Agreement to any Indemnity with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of such Indemnitee. To the extent that the undertaking to indemnify, pay and hold harmless as set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, Borrower must contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by the Indemnitees or any of them. The agreement of Borrower contained in this Article survives the expiration or termination of this Agreement and the payment in full of the Notes. Attorneys' fees and disbursements incurred in enforcing, or on appeal from, a judgment under this Agreement are recoverable separately from and in addition to any other amount included in such judgment, and this clause is intended to be severable from the other provisions of this Agreement and to survive and not be merged into such judgment. 13.3. Indemnification by Lenders Lenders agree to indemnify Credit Agent in its respective capacity as such (to the extent not reimbursed by Borrower and without limiting the obligation of Borrower to do so), ratably according to the respective amounts of their Percentage Shares, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation at any time following the payment of the Obligations) be imposed on, incurred by or asserted against Credit Agent in any way relating to or arising out of the Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by Credit Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Credit Agent's gross negligence or willful misconduct. The agreements in this Section shall survive the payment of the Obligations and the termination of this Agreement. Attorneys' fees and disbursements incurred in enforcing, or on appeal from, a judgment pursuant hereto shall be recoverable separately from and in addition to any other amount included in such judgment, and this clause is intended to be severable from the other provisions of this Agreement and to survive and not be merged into such judgment. 13.4. Financial Information All financial statements and reports furnished to Credit Agent under this Agreement must be prepared in accordance with GAAP, applied on a basis consistent with that applied in preparing the financial statements as at the end of and for each Borrower's most recent fiscal year (except to the extent otherwise required to conform to good accounting practice). 13.5. Terms Binding Upon Successors; Survival of Representations The terms and provisions of this Agreement are binding upon and inure to the benefit of each Borrower, Credit Agent, and their respective successors and assigns. All of Borrower's representations, warranties, covenants and agreements survive the making of any Advance, and remain effective for as long as the Commitments are outstanding or there remain any Obligations to be paid or performed. Page 58 13.6. Lenders in Individual Capacity Lenders and their Affiliates may make loans to, accept deposits from and generally engage in any kind of business with Borrowers and/or any Subsidiary regardless of the capacity of Lenders hereunder. Lenders may disclose to the other Lenders information regarding other relationships which they may have with Borrower and Borrower hereby consents to these disclosures. 13.7. Assignment and Participations This Agreement and the Obligations of each Borrower may not be assigned by any Borrower. Any Lender may, subject to the limitations set forth below, assign or transfer, in whole or in part, this Agreement and the other Loan Documents and further may sell participations in all or any part of its Advances or Maximum Commitment or any other interest in the Obligations or any of its obligations hereunder to another Person. In the case of an assignment, upon notice thereof by such Lender to Borrower and consent of Credit Agent, the assignee shall have, to the extent of such assignment (unless otherwise provided thereby), the same rights and benefits as it would have if it were a "Lender" hereunder, and, if the assignee has expressly assumed, for the benefit of Borrower, such Lender's obligations hereunder, such Lender shall be relieved of its obligations hereunder to the extent of such assignment and assumption, provided that Credit Agent shall have no obligation to consent to there being more than a total of 10 Lenders (a Participant is not a Lender). In the case of a participation, the participating Person's (a "Participant") rights against Lender from whom it has purchased such participation in respect of such participation are those set forth in the agreement executed by such Lender in favor of the Participant relating thereto. Such Lender shall remain solely responsible to the other parties hereto for the performance of such Lender's obligations under the Loan Documents, whether or not such Lender shall remain the holder of any Note. Such Lender shall retain all voting rights with respect to such Note, the Advances hereunder and Lender's Maximum Commitment. Borrower, Credit Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. Without limiting any Lender's exclusive right to collect and enforce the Obligations owed to it, Borrower agrees that each participation will give rise to a debtor-creditor relationship between Borrower and the Participant, and Borrower authorizes each Participant, upon the occurrence of an Event of Default, to proceed directly by right of setoff, banker's lien, or otherwise, against any assets of Borrower that may be held by that Participant. Nothing contained herein shall in any manner or to any extent affect the right of any Lender to pledge or assign its Notes and interests in this Agreement to any Federal Reserve Bank pursuant to applicable laws or regulations, or to assign its Notes and its right to receive and retain payments on its Notes provided such Lender remains primarily and directly liable pursuant to the terms and conditions of this Agreement to keep, observe and perform all of its obligations under this Agreement. Any Lender may furnish any information concerning Borrower in the possession of such Lender from time to time to Affiliates of such Lender and to assignees and Participants (including prospective assignees and Participants) and Borrower hereby consents to the provision of such information. 13.8. Commitment Increases 13.8 (a) At any time and from time to time after the Closing Date, the Warehousing Credit Limit may be increased either by an Additional Lender establishing a Warehousing Commitment or by one or more then existing Lender ("Increase Lender") increasing its Warehousing Commitment Amount (each such increase by either means, a "Commitment Increase"), provided that no Commitment Increase shall become effective unless and until (i) Borrower, Credit Agent and the Additional Lender or the Increase Lender shall have executed and delivered an amendment or other modification with respect to such Commitment Increase, and (ii) if, after giving effect thereto, the Credit Limit would exceed $500,000,000, such Commitment Increase shall have been consented to by each of the Page 59 other Lenders. Any such increase may be temporary or permanent; provided, that the permanent Warehousing Commitment amount of each Lender shall at no time be less than $15,000,000. Prior to the effective date ("Effective Date") of any Commitment Increase involving an Additional Lender, Borrowers shall issue a promissory note to the Additional Lender. Such new promissory note or notes shall constitute a "Warehousing Note" for the purposes of the Loan Documents. 13.8 (b) On the Effective Date of any Commitment Increase, Credit Agent shall recompute the Percentage Share for each Lender based on the new Warehousing Credit Limit which results from the Commitment Increase, and within 2 Business Days, Credit Agent shall request Advances from or shall direct prepayments to each Lender so that the total amount of all then outstanding Warehousing Advances are shared pro rata by each Lender. 13.8 (c) On the effective date of any reduction of the Warehousing Credit Limit resulting from the expiration of a temporary increase in any Lender's Warehousing Commitment Amount, the Credit Agent shall recompute the Percentage Share for each Lender and request Warehousing Advances from and direct prepayments to each Lender so that the total amount of all the outstanding Advances are shared pro-rata by each Lender. 13.9. Amendments This Agreement may not be amended or terms or provisions hereof waived unless such amendment or waiver is in writing and signed by the Majority Lenders, Credit Agent and each Borrower; provided, however, that without the prior written consent of 100% of Lenders, no amendment or waiver shall: (1) waive or amend any term or provision of Sections 8.4 or the definition of any type of Collateral or the provisions of Section 5.2 hereof, (2) reduce the principal of, or rate of interest or fees on, the Advances or any Lender's Commitments, (3) except as provided in Section 13.8, modify the Warehousing Credit Limit, (4) except as provided in Section 13.8, modify any Lender's Percentage Share of the Warehousing Credit Limit, (5) modify the definition of "Majority Lenders," or of the number or percentage of Lenders that are required to take action under the Loan Documents, (6) extend the Warehousing Maturity Date, (7) release any material portion of the Collateral, except as expressly contemplated by the Loan Documents or in connection with a sale of such Collateral permitted hereunder, (8) amend Exhibit H, or (9) amend this Section. It is expressly agreed and understood that the failure by the Majority Lenders to elect to accelerate amounts outstanding hereunder or to terminate the obligation of Lenders to make Advances hereunder shall not constitute an amendment or waiver of any term or provision of this Agreement. 13.10. Governing Law This Agreement and the other Loan Documents are governed by the laws of the State of Minnesota, without reference to its principles of conflicts of laws. 13.11. Relationship of the Parties This Agreement provides for the making and repayment of Advances by Lenders (in their capacity as lenders) and each Borrower (in its capacity as a borrower), for the payment of interest on those Advances and for the payment of certain fees by Borrower to Lenders and Credit Agent. The relationship between Lenders and Borrower is limited to that of creditor and secured party on the part of Lenders, Credit Agent and of borrower and debtor on the part of Borrower. The provisions of this Agreement and the other Loan Documents for compliance with financial covenants and the delivery of financial statements and other operating reports are intended solely Page 60 for the benefit of Lenders to protect its interest as a creditor and lender. Nothing in this Agreement creates or may be construed as permitting or obligating any Lender to act as a financial or business advisor or consultant to Borrower, as permitting or obligating any Lender to control Borrower or to conduct Borrower's operations, as creating any fiduciary obligation on the part of Lenders to Borrower, or as creating any joint venture, agency, or other relationship between Lenders and Borrower other than as explicitly and specifically stated in the Loan Documents. Each Borrower acknowledges that it has had the opportunity to obtain the advice of experienced counsel of its own choosing in connection with the negotiation and execution of the Loan Documents and to obtain the advice of that counsel with respect to all matters contained in the Loan Documents, including the waiver of jury trial contained in Section 13.16. Each Borrower further acknowledges that it is experienced with respect to financial and credit matters and has made its own independent decisions to apply to Lenders for credit and to execute and deliver this Agreement. 13.12. Severability If any provision of this Agreement is declared to be illegal or unenforceable in any respect, that provision is null and void and of no force and effect to the extent of the illegality or unenforceability, and does not affect the validity or enforceability of any other provision of the Agreement. 13.13. Consent to Credit References Each Borrower consents to the disclosure of information regarding Borrower and its Subsidiaries and their relationships with Lenders to Persons making credit inquiries to Credit Agent. This consent is revocable by Borrower at any time upon Notice to Lenders as provided in Section 13.1. 13.14. Counterparts This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together constitute but one and the same instrument. 13.15. Entire Agreement This Agreement, the Notes and the other Loan Documents represent the final agreement among the parties with respect to their subject matter, and may not be contradicted by evidence of prior or contemporaneous oral agreements among the parties. There are no oral agreements among the parties with respect to the subject matter of this Agreement, the Notes and the other Loan Documents. 13.16. Consent to Jurisdiction AT THE OPTION OF CREDIT AGENT, THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS MAY BE ENFORCED IN ANY STATE OR FEDERAL COURT WITHIN THE STATE OF MINNESOTA. EACH BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF THOSE COURTS, AND WAIVES ANY OBJECTION TO THE JURISDICTION OR VENUE OF ANY OF THOSE COURTS, INCLUDING THE OBJECTION THAT VENUE IN THOSE COURTS IS NOT CONVENIENT. ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE COMMENCED AND INSTITUTED BY SERVICE OF PROCESS UPON EACH BORROWER BY FIRST CLASS REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO BORROWER AT ITS ADDRESS LAST KNOWN TO CREDIT AGENT. EACH BORROWER'S CONSENT AND AGREEMENT UNDER THIS SECTION DOES NOT AFFECT Page 61 CREDIT AGENT'S RIGHT TO ACCOMPLISH SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY BORROWER IN ANY OTHER JURISDICTION OR COURT. IN THE EVENT ANY BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, CREDIT AGENT AT ITS OPTION MAY HAVE THE CASE TRANSFERRED TO A STATE OR FEDERAL COURT WITHIN THE STATE OF MINNESOTA OR, IF A TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, MAY HAVE BORROWER'S ACTION DISMISSED WITHOUT PREJUDICE. 13.17. Waiver of Jury Trial EACH BORROWER, EACH OF LENDERS AND CREDIT AGENT EACH COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND FULLY WAIVES ANY RIGHT TO TRIAL BY JURY TO THE EXTENT THAT ANY SUCH RIGHT NOW EXISTS OR HEREAFTER ARISES. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY BORROWER AND CREDIT AGENT, AND IS INTENDED TO ENCOMPASS EACH INSTANCE AND EACH ISSUE FOR WHICH THE RIGHT TO TRIAL BY JURY WOULD OTHERWISE APPLY. CREDIT AGENT, EACH OF LENDERS AND BORROWER ARE EACH AUTHORIZED AND DIRECTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES TO THIS AGREEMENT AS CONCLUSIVE EVIDENCE OF THIS WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, EACH BORROWER, EACH OF LENDERS AND CREDIT AGENT EACH CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE OTHER PARTY, INCLUDING THE OTHER PARTY'S COUNSEL, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO ANY OF ITS REPRESENTATIVES OR AGENTS THAT THE OTHER PARTY WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO TRIAL BY JURY. 13.18. Confidentiality The Credit Agent and each Lender shall use reasonable efforts to assure that information about the Borrower and its operations, affairs and financial condition, not generally disclosed to the public or to trade and other creditors, which is furnished to the Credit Agent or such Lender pursuant to the provisions hereof is used only for the purposes of this Agreement and any other relationship between the Credit Agent or such Lender and the Borrower and not divulged to any Person other than the Credit Agent, such Lender, its Affiliates and their respective officers, directors, employees and agents, except: (a) to their attorneys and accountants, (b) in connection with the enforcement of the rights of the Credit Agent or such Lender hereunder and under the other Loan Documents or otherwise in connection with applicable litigation, (c) in connection with assignments and participations and the solicitation of prospective assignees and participants referred to in Section 13.7 (provided such assignees, participants and prospecting assignees and participants agree to be bound by this Section 13.18) and (d) as may otherwise be required or requested by any regulatory authority having jurisdiction over the Credit Agent or by any applicable law, rule, regulation or judicial process, the opinion of the Credit Agent's counsel concerning the making of such disclosure to be binding on the parties hereto. End of Article 13 Page 62 14. DEFINITIONS 14.1. Defined Terms Capitalized terms defined below or elsewhere in this Agreement have the following meanings or, as applicable, the meanings given to those terms in Exhibits to this Agreement: "Additional Lender" means a Person admitted as a Lender under the Agreement by the terms of an amendment hereto. "Advance" means a Warehousing Advance or an RFC Direct Advance. "Advance Rate" means, with respect to any Eligible Asset, the Advance Rate set forth in Exhibit H for that type of Eligible Asset. "Advance Request" has the meaning set forth in Section 3.1(a). "Affiliate" has the meaning set forth in the United States Bankruptcy Code, 11 U.S. C.ss.ss.101 et seq. "Agency Security" means a Mortgage-backed Security issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. "Agreement" means this Warehousing Credit and Security Agreement, either as originally executed or as it may be amended, restated, renewed or replaced. "Appraised Property Value" means with respect to an interest in real property, the then current fair market value of the real property and any improvements on it as of recent date determined in accordance with Title XI of FIRREA by a qualified appraiser who is a member of the American Institute of Real Estate Appraisers or other group of professional appraisers. "Approved Custodian" means a pool custodian or other Person that Credit Agent deems acceptable, in its sole discretion, to hold Mortgage Loans for inclusion in a Mortgage Pool or to hold Mortgage Loans as agent for an Investor that has issued a Purchase Commitment for those Mortgage Loans. Credit Agent may at any time, on 3 Business Days' Notice to Borrower, add or remove any Person as an Approved Custodian. "Audited Statement Date" means the date of Borrower's most recent audited financial statements (and, if applicable, Borrower's Subsidiaries, on a consolidated basis) delivered to Credit Agent under this Agreement. "Balance Deficiency Fee" has the meaning set forth in Section 4.1(b). "Balance Funded Agreement" has the meaning set forth in Section 4.1(b). "Balance Funded Portion" has the meaning set forth in Section 4.1(b). "Balance Funded Rate" means, for any Advance, the Balance Funded Rate specified for that Advance in Exhibit H. "Bank One" means BANK ONE, NATIONAL ASSOCIATION, Chicago, Illinois, or any successor bank. Page 63 "Borrower" has the meaning set forth in the first paragraph of this Agreement. "Business Day" means any day other than Saturday, Sunday or any other day on which national banking associations are closed for business. "Buydown" has the meaning set forth in Section 4.3(k). "Calendar Quarter" means the 3 month period beginning on each January 1, April 1, July 1 or October 1. "Cash Collateral Account" means a demand deposit account maintained at the Funding Bank in Credit Agent's name and designated for receipt of the proceeds of the sale or other disposition of Collateral. "Check Disbursement Account" means a demand deposit account maintained at the Funding Bank in the name of Borrower and under the control of Credit Agent for the clearing of checks written by Borrower to fund Warehousing Advances. "Closing Date" has the meaning set forth in the Recitals to this Agreement. "Collateral" has the meaning set forth in Section 5.1. "Collateral Documents" means, with respect to each Mortgage Loan, (a) the Required Documents, (b) as applicable, the original lender's ALTA Policy of Title Insurance or its equivalent, documents evidencing the FHA Commitment to Insure, the VA Guaranty or private mortgage insurance, the appraisal, the Regulation Z statement, an environmental assessment, if applicable, an engineering report, if applicable, certificates of casualty or hazard insurance, credit information on the maker of the Mortgage Note, the HUD-1 or corresponding purchase advice, (c) any other document required to be delivered to Credit Agent, and (d) any other document that is customarily desired for inspection or transfer incidental to the purchase of any Mortgage Note by an Investor or that is customarily executed by the seller of a Mortgage Note to an Investor. "Committed Purchase Price" means for an Eligible Asset (a) the dollar price as set forth in the Purchase Commitment or, if the price is not expressed in dollars, the product of the Mortgage Note Amount multiplied by the price (expressed as a percentage) as set forth in a Purchase Commitment for the Eligible Asset, or (b) if the Eligible Asset is to be used to back an Agency Security, the price (expressed as a percentage) as set forth in a Purchase Commitment for the Agency Security. "Commitment" means the Warehousing Commitment. "Compliance Certificate" means a certificate executed on behalf of Borrower by its chief financial officer or its treasurer or by another officer approved by Credit Agent, substantially in the form of Exhibit E. "Cost Breakdown" means a list of the costs and expenses to be financed by Advances against a Building Construction Mortgage Loan or a Construction/Perm Mortgage Loan, including, without limitation, real property acquisition costs, hard and soft construction costs, architectural fees, the Rehab Escrow and any other costs and expenses budgeted to construct and complete the improvements. "Credit Agent" means RFC, in its capacity as credit agent for Lenders hereunder, and any successor pursuant to Section 12.9 hereof. "Credit Limit" means the Warehousing Credit Limit. Page 64 "Debt" means (a) all indebtedness or other obligations of a Person that, in accordance with GAAP, would be included in determining total liabilities as shown on the liabilities side of a balance sheet of the Person on the date of determination, plus (b) all indebtedness or other obligations of the Person for borrowed money or for the deferred purchase price of property or services. For purposes of calculating a Person's Debt, Subordinated Debt not due within 1 year of that date and deferred taxes arising from capitalized excess servicing fees and capitalized servicing rights may be excluded from a Person's indebtedness. For purposes of calculating Borrowers' Debt, letters of credit outstanding on the date hereof naming Lennar and its Subsidiaries as beneficiary shall, to the extent otherwise included, be excluded. "Default" means the occurrence of any event or existence of any condition that, but for the giving of Notice or the lapse of time, would constitute an Event of Default. "Default Rate" means, for any Advance, the Interest Rate applicable to that Advance plus 2% per annum. If no Interest Rate is applicable to an Advance, "Default Rate" means, for that Advance, the highest Interest Rate then applicable to any outstanding Advance plus 2% per annum. "Deposit Balances" means funds of or maintained by Borrower and its Subsidiaries in accounts at a Lender or a Designated Bank. "Depository Benefit" means the compensation received by Credit Agent, directly or indirectly, as a result of Borrower's maintenance of Deposit Balances with a Designated Bank. "Designated Bank" means any bank designated by Credit Agent as a Designated Bank, but only for as long as Credit Agent has an agreement under which Credit Agent receives Depository Benefits from that bank. "Designated Bank Charges" means any fees, interest or other charges that would otherwise be payable to a Designated Bank in connection with Deposit Balances maintained at the Designated Bank, including deposit insurance premiums, service charges and any other charges that may be imposed by governmental authorities from time to time. "Eligible Asset" means a Mortgage Loan, Agreement for Deed or Foreclosure Claim Receivable that satisfies the conditions and requirements set forth in Exhibit H. "Eligible Mortgage Pool" means a Mortgage Pool for which (a) an Approved Custodian has issued its initial certification, (b) there exists a Purchase Commitment covering the Agency Security to be issued on the basis of that certification and (c) the Agency Security will be delivered to Credit Agent. "ERISA" means the Employee Retirement Income Security Act of 1974 and all rules and regulations promulgated under that statute, as amended, and any successor statute, rules, and regulations. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is a member of a group of which Borrower is a member and that is treated as a single employer under Section 414 of the Internal Revenue Code. "Event of Default" means any of the conditions or events set forth in Section 11.1. "Exchange Act" means the Securities Exchange Act of 1934 and all rules and regulations promulgated under that statute, as amended, and any successor statute, rules, and regulations. "Exhibit A" means Exhibit A-SF, Exhibit A-Construction, Exhibit A-Other Investments and Exhibit A-SF/UNI, as applicable to the type of Eligible Asset being financed. Page 65 "Exhibit B" means Exhibit B-SF, Exhibit B-Construction and Exhibit A-Other Investments, as applicable to the type of Eligible Asset being financed. "Existing Agreements" means the Existing Universal Agreement and the Existing U.S. Home Agreement. "Existing Universal Agreement" means the Fourth Restated Revolving Credit Agreement dated as of May 28, 1999, among Lennar Corporation, Universal American Mortgage Company, UAMC Asset Corp. and Eagle Home Mortgage, Inc., as Borrowers, the lenders named therein and The First National Bank of Chicago, acting in its capacity as administrative agent for the lenders, as the same may have been amended, supplemented or otherwise modified. "Existing U.S. Home Agreement" means the Second Amended and Restated Warehousing Credit and Security Agreement dated as of October 1, 1999, U.S. Home Mortgage Corporation, as borrower, and Residential Funding Corporation, as lender, as the same may have been amended, supplemented or otherwise modified. "Fair Market Value" means, at any time for an Eligible Asset or a related Agency Security (if the Eligible Asset is to be used to back an Agency Security) as of any date of determination, (a) the Committed Purchase Price if the Eligible Asset is covered by a Purchase Commitment from Fannie Mae or Freddie Mac or the Eligible Asset is to be exchanged for an Agency Security and that Agency Security is covered by a Purchase Commitment from an Investor, or (b) otherwise, the market price for such Eligible Asset or Agency Security, determined by Credit Agent based on market data for similar Mortgage Loans, Agency Securities or other assets and such other criteria as Credit Agent deems appropriate in its sole discretion. "Fannie Mae" means Fannie Mae, a corporation created under the laws of the United States, and any successor corporation or other entity. "Federal Funds Rate" means, for each week, the effective Federal Funds Rate (per annum) of interest in effect on the first Business Day of that week, as published by Bloomberg L.P. If the Federal Funds Rate is not published by Bloomberg L.P. on the first Business Day of any week, then the term "Federal Funds Rate" means the highest Federal Funds Rate published in The Wall Street Journal in its regular column entitled "Money Rates" on the first Business Day of that week. "FHA" means the Federal Housing Administration and any successor agency or other entity. "FICA" means the Federal Insurance Contributions Act, as amended, and any successor statute. "FIRREA" means the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and all rules and regulations promulgated under that statute, as amended, and any successor statute, rules, and regulations. "First Mortgage" means a Mortgage that constitutes a first Lien on the real property covered by the Mortgage. "First Mortgage Loan" means a Mortgage Loan secured by a First Mortgage. "Freddie Mac" means Freddie Mac, a corporation created under the laws of the United States, and any successor corporation or other entity. "Funding Bank" means Bank One or any other bank designated by Credit Agent as a Funding Bank. Page 66 "Funding Bank Agreement" means a letter agreement on the form prescribed by Credit Agent between the Funding Bank and Borrower authorizing Credit Agent's access to the Operating Account. "GAAP" means generally accepted accounting principles set forth in opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and in statements and pronouncements of the Financial Accounting Standards Board, or in opinions, statements or pronouncements of any other entity approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "Gestation Agreement" means an agreement under which Borrower agrees to sell or finance (a) a Mortgage Loan prior to the date of purchase by an Investor or (b) a Mortgage Pool prior to the date a Mortgage-backed Security backed by the Mortgage Pool is issued. "Ginnie Mae" means the Government National Mortgage Association, an agency of the United States government, and any successor agency or other entity. "GMAC-RFC Client Guide" means the applicable loan purchase guide issued by Credit Agent, as the same may be amended or replaced. "Hedging Arrangements" means, with respect to any Person, any agreements or other arrangements (including interest rate swap agreements, interest rate cap agreements and forward sale agreements) entered into to protect that Person against changes in interest rates or the market value of assets. "HUD" means the Department of Housing and Urban Development, and any successor agency or other entity. "Indemnified Liabilities" has the meaning set forth in Section 13.2. "Indemnitees" has the meaning set forth in Section 13.2. "Interest Rate" means, for any Advance, the floating rate of interest specified for that Advance in Exhibit H. "Interim Statement Date" means the date of the most recent unaudited financial statements of each Borrower (and, if applicable, each Borrower's Subsidiaries, on a consolidated basis) delivered to Credit Agent under this Agreement. "Internal Revenue Code" means the Internal Revenue Code of 1986, Title 26 of the United States Code, the regulations, rulings and interpretations issued under those statutory provisions and any subsequent federal income tax law or laws, as amended. "Investment" means any direct or indirect purchase or other acquisition by any Person of, or a beneficial interest in, stock or other securities of any other Person, or any direct or indirect loan, advance (other than advances to employees for moving and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution by that Person to any other Person, including all Debt and accounts receivable from that Person which are not current assets or did not arise from sales to that other Person in the ordinary course of business. "Investor" means Fannie Mae, Freddie Mac or a financially responsible private institution that Credit Agent deems acceptable, in its sole discretion, to issue Purchase Commitments with respect to a particular category of Eligible Assets. Credit Agent may at any time, on 3 Business Days' Notice to Borrower, add or remove any Person as an Investor. Page 67 "Lender" has the meaning set forth in the first paragraph of this Agreement. "Lennar" means LENNAR CORPORATION, a Delaware corporation. "Lennar Undertaking" means a guaranty of certain of Borrower's Obligations by Lennar. "LIBOR" means, for each week, the rate of interest per annum that is equal to the arithmetic mean of the U.S. Dollar London Interbank Offered Rates for 1 month periods of certain U.S. banks as of 11:00 a.m. (London time) on the first Business Day of each week on which the London Interbank market is open, as published by Bloomberg L.P. If those interest rates are not offered or published for any period, then during that period LIBOR means the London Interbank Offered Rate for 1 month periods as published in The Wall Street Journal in its regular column entitled "Money Rates" on the first Business Day of each week on which the London Interbank market is open. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature of such an agreement and any agreement to give any security interest). "Loan Documents" means this Agreement, the Notes, the Lennar Undertaking, any agreement of Borrower relating to Subordinated Debt, and each other document, instrument or agreement executed by Borrower in connection with any of those documents, instruments and agreements, as originally executed or as any of the same may be amended, restated, renewed or replaced. "Loan-to-Value Ratio" means, for any Mortgage Loan, the ratio of (a) the maximum amount that may be borrowed under the Mortgage Loan (whether or not borrowed) at the time of origination, plus the Mortgage Note Amounts of all other Mortgage Loans secured by the related Property, to (b) the Appraised Property Value of the related Property. "Manufactured Home" means a structure that is built on a permanent chassis (steel frame) with the wheel assembly necessary for transportation in one or more sections to a permanent site or semi-permanent site. "Majority Lenders" means at any date Lenders holding not less than 51% of the aggregate Credit Limit. Notwithstanding the foregoing, if there are only 2 Lenders the term "Majority Lenders" shall, except for purposes of Section 11.2(c), include both of Lenders. "Margin Stock" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System, as amended. "Miscellaneous Charges" means actual miscellaneous charges and expenses incurred by or on behalf of Credit Agent for the handling and administration of Advances and Collateral, including costs for UCC, tax lien and judgment searches conducted by Credit Agent, filing fees, charges for wire transfers and check processing charges, charges for security delivery fees, charges for overnight delivery of Collateral to Investors, the Funding Bank's service fees and overdraft charges and Designated Bank Charges. "Mortgage" means a mortgage or deed of trust on real property that is improved and substantially completed (including real property to which a Manufactured Home has been affixed in a manner such that the Lien of a mortgage or deed of trust would attach to the Manufactured Home under applicable real property law). "Mortgage-backed Securities" means securities that are secured or otherwise backed by Mortgage Loans. Page 68 "Mortgage Loan" means any loan evidenced by a Mortgage Note and secured by a Mortgage. "Mortgage Note" means a promissory note secured by one or more Mortgages. "Mortgage Note Amount" means, as of any date of determination, the then outstanding and unpaid principal amount of a Mortgage Note (whether or not an additional amount is available to be drawn under that Mortgage Note). "Mortgage Pool" means a pool of one or more Pledged Loans on the basis of which a Mortgage-backed Security is to be issued. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA, to which either Borrower or any ERISA Affiliate of Borrower has any obligation with respect to its employees. "Notes" means the Warehousing Notes and the Swingline Note. "Notices" has the meaning set forth in Section 13.1. "Obligations" means any and all indebtedness, obligations and liabilities of each Borrower to Lenders, Credit Agent (whether now existing or arising after the date of this Agreement, voluntary or involuntary, joint or several, direct or indirect, absolute or contingent, liquidated or unliquidated, or decreased or extinguished and later increased and however created or incurred) under the Loan Documents. "Operating Account" means a demand deposit account maintained at the Funding Bank in Borrower's name. "Overdraft Advance" has the meaning set forth in Exhibit B-SF. "Participant" has the meaning set forth in Section 13.7. "Percentage Share" means, for any Lender at any date, that percentage which such Lender's Warehousing Commitment Amount bears to the Warehousing Credit Limit. "Person" means and includes natural persons, corporations, limited liability companies, limited liability partnerships, limited liability limited partnerships, limited partnerships, general partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions of those governments. "Plan" means each employee benefit plan (whether in existence on the Closing Date or established after that date), as that term is defined in Section 3 of ERISA, maintained for the benefit of directors, officers or employees of Borrower or any ERISA Affiliate. "Pledged Assets" means, collectively, Pledged Loans, Pledged Agreements for Deed, Pledged Securities, and Foreclosure Claim Receivables in respect of which Advances are outstanding hereunder. "Pledged Agreements for Deed" has the meaning set forth in Section 5.1(c). "Pledged Hedging Accounts" has the meaning set forth in Section 5.1(i). "Pledged Hedging Arrangements" has the meaning set forth in Section 5.1(i). Page 69 "Pledged Loans" has the meaning set forth in Section 5.1 (b). "Pledged Securities" has the meaning set forth in Section 5.1(d). "Pledged Shares" has the meaning set forth in Section 5.1(j). "Prohibited Transaction" has the meanings set forth for such term in Section 4975 of the Internal Revenue Code and Section 406 of ERISA. "Purchase Commitment" means a written commitment, in form and substance satisfactory to Credit Agent, issued in favor of Borrower by an Investor under which that Investor commits to purchase Mortgage Loans or Mortgage-backed Securities. "Receivables" has the meaning set forth in Section 5.1 (f). "Rehab Escrow" means an escrow established as part of the initial Advance against a Construction/Perm Mortgage Loan in an amount equal to the difference between the amount funded for the financing or refinancing of existing improvements on the real property encumbered by the Pledged Mortgage and the amount funded for the renovation or rehabilitation of the existing improvements. "Release Amount" has the meaning set forth in Section 5.2 (f). "RFC" means Residential Funding Corporation, a Delaware corporation, and any successor thereto. "RFC Advance" has the meaning set forth in Section 4.3(k). "RFC Direct Advance" means a disbursement by RFC under the RFC Direct Commitment. "RFC Direct Commitment" means the obligation of RFC to make RFC Direct Advances to Borrower under Section 1.1. "RFC Direct Commitment Amount" means $55,000,000. "RFC Direct Note" has the meaning set forth in Section 1.4. "Second Mortgage" means a Mortgage that constitutes a second Lien on the property covered by the Mortgage. "Second Mortgage Loan" means a Mortgage Loan secured by a Second Mortgage. "Servicing Contract" means, with respect to any Person, the arrangement, whether or not in writing, under which that Person has the right to service Mortgage Loans. "Servicing Portfolio" means, as to any Person, the unpaid principal balance of Mortgage Loans serviced by that Person under Servicing Contracts, minus the principal balance of all Mortgage Loans that are serviced by that Person for others under subservicing arrangements. "Single Family Mortgage Loan" means a Mortgage Loan secured by a Mortgage covering a Single Family Property "Single Family Property" means improved real property containing one to four family residences. Page 70 "Statement Date" means the Audited Statement Date or the Interim Statement Date, as applicable. "Sublimit" means the aggregate amount of Warehousing Advances (expressed as a dollar amount or as a percentage of the Warehousing Credit Limit) that is permitted to be outstanding at any one time against a specific type of Eligible Asset. "Sublimit Note" has the meaning set forth in Section 1.4. "Subordinated Debt" means (a) all indebtedness of Borrower for borrowed money that is effectively subordinated in right of payment to all other present and future Obligations either (1) under a Subordination of Debt Agreement on the form prescribed by Credit Agent or (2) otherwise on terms acceptable to Credit Agent, and (b) solely for purposes of Section 9.9, all indebtedness of Borrower that is required to be subordinated by Sections 6.1 (b) and 8.11. "Subsidiary" means any corporation, partnership, association or other business entity in which more than 50% of the shares of stock or other ownership interests having voting power for the election of directors, managers, trustees or other Persons performing similar functions is at the time owned or controlled by any Person either directly or indirectly through one or more Subsidiaries of that Person. "Swingline Advance" means an Advance made by RFC under Section 1.3. "Swingline Facility Amount" means the maximum amount of Swingline Advances to be made by RFC from time to time, but not to exceed $75,000,000. "Swingline Note" has the meaning set forth in Section 1.4. "Tangible Leverage Ratio" means the ratio of a Person's (and, if applicable, the Person's Subsidiaries, on a consolidated basis) Debt to Tangible Net Worth. For purposes of calculating a Person's Leverage Ratio, Debt arising under Hedging Arrangements, to the extent of assets arising under those Hedging Arrangements, [Debt arising under Gestation Agreements covering Agency Securities or Eligible Mortgage Pools and Debt arising under Investment Line Agreements, to the extent of the Investments securing the same], may be excluded from a Person's Debt. "Tangible Net Worth" means the excess of a Person's (and, if applicable, the Person's Subsidiaries, on a consolidated basis) total assets over total liabilities as of the date of determination, each determined in accordance with GAAP applied in a manner consistent with UAMC's audited financial statements as of November 30, 2000, plus that portion of Subordinated Debt not due within 1 year of that date. For purposes of calculating a Person's Tangible Net Worth, advances or loans to shareholders, directors, officers, employees or Affiliates, investments in Affiliates, assets pledged to secure any liabilities not included in the Debt of the Person, intangible assets, Servicing Contracts of the type described in Section 9.8, those other assets that would be deemed by HUD to be non-acceptable in calculating adjusted net worth in accordance with its requirements in effect as of that date, as those requirements appear "Consolidated Audit Guide for Audits of HUD Programs," and other assets Credit Agent deems unacceptable, in its sole discretion, must be excluded from a Person's total assets. "Third Party Originated Loan" means a Mortgage Loan originated and funded by a third party (other than with funds provided by Borrower at closing to purchase the Mortgage Loan) and subsequently purchased by Borrower. "Total Hard Costs" means the total of the costs and expenses listed on the Cost Breakdown. Page 71 "Trust Receipt" means a trust receipt in a form approved by and under which Credit Agent may deliver any document relating to the Collateral to Borrower for correction or completion. "U.S. Home" means U.S. HOME MORTGAGE CORPORATION, a Florida corporation. "Warehouse Period" means, for any Eligible Asset, the maximum number of days a Warehousing Advance against that type of Eligible Asset may remain outstanding as set forth in Exhibit H. "Warehousing Advance" means a disbursement by a Lender under its Warehousing Commitment. "Warehousing Commitment" means the obligation of each Lender to make Warehousing Advances to Borrower under Section 1.1. "Warehousing Commitment Amount" means, for any Lender at any date, that dollar amount designated as such opposite such Lender's name on Exhibit J as its Warehousing Commitment Amount. "Warehousing Commitment Fee" has the meaning set forth in Section 4.5. "Warehousing Credit Limit" means the sum of the Warehousing Commitment Amounts of all of Lenders. The initial Warehousing Credit Limit is $335,000,000. "Warehousing Maturity Date" has the meaning set forth in Section 1.2. "Warehousing Note" has the meaning set forth in Section 1.4. "Wet Settlement Advance" means any Warehousing Advance from the date the Warehousing Advance is made until the date of Lender's receipt of the Collateral Documents as provided in Article 3 and the Exhibit referenced therein. "Wire Disbursement Account" means a demand deposit account maintained at the Funding Bank in Credit Agent's name for clearing wire transfers requested by Borrower to fund Advances. 14.2. Other Definitional Provisions; Terms of Construction 14.2 (a) Accounting terms not otherwise defined in this Agreement have the meanings given to those terms under GAAP. Except as may be expressly provided to the contrary herein, all accounting determinations hereunder shall be made in accordance with GAAP, applied consistently with the audited financial statements described in Section 6.1(a)(27). To the extent any change in GAAP or Borrowers' accounting practices affects any computation or determination required to be made pursuant to this Agreement, such computation or determination shall be made as if such change in GAAP or Borrowers accounting practices had not occurred unless Borrower and Lenders agree in writing on an adjustment to such computation or determination to account for such change in GAAP or Borrowers' accounting practices 14.2 (b) Defined terms may be used in the singular or the plural, as the context requires. 14.2 (c) All references to time of day mean the then applicable time in Chicago, Illinois, unless otherwise expressly provided. 14.2 (d) References to Sections, Exhibits, Schedules and like references are to Sections, Exhibits, Schedules and the like of this Agreement unless otherwise expressly provided. Page 72 14.2 (e) The words "include," "includes" and "including" are deemed to be followed by the phrase "without limitation." 14.2 (f) Unless the context in which it is used otherwise clearly requires, the word "or" has the inclusive meaning represented by the phrase "and/or." 14.2 (g) All incorporations by reference of provisions from other agreements are incorporated as if such provisions were fully set forth into this Agreement, and include all necessary definitions and related provisions from those other agreements. 14.2 (h) All references to the Uniform Commercial Code shall be deemed to be references to the Uniform Commercial Code in effect on the Closing Date in the applicable jurisdiction. 14.2 (i) Unless the context in which it is used otherwise clearly requires, all references to days, weeks and months mean calendar days, weeks and months. End of Article 14 Page 73 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. BORROWER: UNIVERSAL AMERICAN MORTGAGE COMPANY, a Florida corporation By: /s/ Janice Munoz -------------------------------- Its: Vice President EAGLE HOME MORTGAGE, INC., a Washington corporation By: /s/ Janice Munoz ---------------------------------- Its: Vice President AMERISTAR FINANCIAL SERVICES, INC., a California corporation By: /s/ Janice Munoz ---------------------------------- Its: Vice President UNIVERSAL AMERICAN MORTGAGE COMPANY OF CALIFORNIA, a California corporation By: /s/ Janice Munoz ---------------------------------- Its: Vice President UAMC ASSET CORP. II, a Nevada corporation By: /s/ Janice Munoz ---------------------------------- Its: Vice President S-1 CREDIT AGENT: RESIDENTIAL FUNDING CORPORATION, a Delaware corporation By: /s/ Jim Clapp ------------------------------- Its: Director S-2 LENDERS: RESIDENTIAL FUNDING CORPORATION, a Delaware corporation By: /s/ Jim Clapp ------------------------------- Its: Director S-3 EX-21 4 dex21.txt LIST OF SUBSIDIARIES Lennar Corporation and Subsidiaries Listing of Subsidiaries Exhibit 21
State of Incorporation --------------- Lennar Corporation Delaware Subsidiaries - -------------------------------------------------------------------------------------------- 56th And Lone Mountain, L.L.C. Arizona Adjustable Mortgage Finance Corporation Florida Alma Del Lagos, L.L.C. Arizona Ameristar Financial Services, Inc. California Ann Arundel Farms, Ltd. Texas Aquaterra Utilities, Inc. Florida BCDC Corp. California Bermuda Springs Developers Joint Venture Nevada Bickford Holdings, LLC Nevada Boca Greens, Inc. Florida Boca Isles South Club, Inc. Florida Bramalea California Properties, Inc. California Bramalea California Realty, Inc. California Bramalea California, Inc. California Brazoria County LP, Inc. Nevada Builders Acquisition Corp. Delaware C/L JV Holdings Limited Partnership Florida Canterbury Corporation Florida Canyon View Development, LLC Colorado Chancellor Place, L.L.C. New Jersey Chantilly Green Joint Venture, L.L.C. Virginia Clodine-Bellaire LP, Inc. Nevada Club Pembroke Isles, Inc. Florida Club Tampa Palms, Inc. Florida Continental Escrow Company California Coto de Caza, Ltd. California Countryplace Golf Course, Inc. Texas Crismon & Baseline, L.L.C. Arizona Custer/Hedgecoxe L.L.C. Texas Dalco Land Limited Liability Company Colorado DCA Acceptance Corp. Alabama DCA Builder Issuer, Inc. Florida DCA CML Acceptance, Inc. Florida DCA Financial Corporation Florida DCA NJ Realty, Inc. New Jersey DCA of Lake Worth, Inc. Florida DCA of New Jersey, Inc. New Jersey Don Galloway Homes, LLC Delaware E.M.J.V. Corp. Florida Eagle Bend Commercial, LLC Colorado Eagle Home Mortgage, Inc. Washington East Kingsbridge Joint Venture Florida East Meadows Joint Venture Florida Edgewater Reinsurance, Ltd. Turks & Caicos Islands Edwards Landing, L.L.C. Virginia
1 Lennar Corporation and Subsidiaries Listing of Subsidiaries
Subsidiaries - -------------------------------------------------------------------------------------------- El Dorado Development, LLC Delaware Estates Seven, LLC Delaware Fidelity Guaranty and Acceptance Corporation Delaware Fieldstone Estates, L.L.C. Arizona Fortress Mortgage, Inc. Delaware Friendswood Development Company, Ltd. Texas Galloway Enterprises, LLC Delaware Glenwood Investors, L.L.C. Maryland Greenbriar at River Valley, Ltd. Ohio Greentree Holdings, LLC New Jersey Greystone Construction, Inc. Arizona Greystone Homes of Nevada, Inc. Delaware Greystone Homes, Inc. Delaware Greystone Nevada, LLC Delaware Greywes, LLC California Hallston Burbank LLC Delaware Harbourvest, L.L.C. Florida Harris County LP, Inc. Nevada HCC Investors, LLC Delaware Heartland Colorado, LLC Colorado Heritage at Hawk Ridge, L.L.C. Missouri Heritage at Miami Bluffs, LLC Ohio Heritage Housing Group, Inc. Maryland Heritage Hunt Commercial, LLC Virginia Heritage of Auburn Hills, L.L.C. Michigan Heritage Pines, LLC North Carolina Heritage Ridge, LLC Georgia Hickory Ridge, Ltd. Texas Homecraft Corporation Texas Hometrust Insurance Company Vermont Homevest, L.L.C. Florida Homeward Development Corporation Florida Hunters Creek Holdings, LLC New Jersey Imperial Homes Corporation Florida Inactive Corporations, Inc. Florida Independence L.L.C. Virginia Independence Land Title Company Texas Institutional Mortgages, Inc. Florida Kings Ridge Golf Corporation Florida Kings Ridge Recreation Corporation Florida Kings Wood Development Company, L.C. Florida Kings Wood Development Corporation Florida L/Cleve Holdings Limited Partnership Florida La Canada Holding Company California Laureate Homes of Arizona, Inc. Arizona Legends Golf Club, Inc. Florida LEN-Ashford III, LLC Delaware LEN-Brentwood II, LLC California LEN-Carmel Oaks, LLC Delaware LEN-El Dorado Hills II, LLC Delaware LEN-Glendora II, LLC Delaware LEN-Greystone Torrey Highlands, LLC Delaware
2 Lennar Corporation and Subsidiaries Listing of Subsidiaries
Subsidiaries - -------------------------------------------------------------------------------------------- LEN-Hiddenbrooke II Sub, LLC California LEN-Hiddenbrooke II, LLC Delaware LEN-Highland Park LLC Delaware LEN-Lakeside, LLC California LENNAR - BVHP, LLC California Lennar Acquisition Corp. II California Lennar Associates Management Holding Company Florida Lennar Associates Management, LLC Delaware Lennar Aviation, Inc. Delaware Lennar Bressi Carlsbad, LLC California Lennar Bressi Ranch Venture, LLC California Lennar Bridges, LLC California Lennar Central Region Sweep, Inc. Nevada Lennar Charitable Housing Foundation California Lennar Communities Development, Inc. Delaware Lennar Communities of Florida, Inc. Florida Lennar Communities of South Florida, Inc. Florida Lennar Communities, Inc. California Lennar Construction, Inc. Arizona Lennar Coto Holdings, L.L.C. California Lennar Financial Services, Inc. Florida Lennar Financial Services, LLC Florida Lennar Greer Ranch Venture, LLC California Lennar Homes, Inc. Florida Lennar Homes of Arizona, Inc. Arizona Lennar Homes of California, Inc. California Lennar Homes of Hawaii, Inc. Hawaii Lennar Homes of Texas Land and Construction, Ltd. Texas Lennar Homes of Texas Sales and Marketing, Ltd. Texas Lennar Huntington Beach, LLC California Lennar Insurance Services, Inc. Florida Lennar La Paz, Inc. California Lennar La Paz Limited, Inc. California Lennar Land Partners Florida Lennar Land Partners II Florida Lennar Land Partners Sub, Inc. Delaware Lennar Land Partners Sub II, Inc. Nevada Lennar Little Italy, LLC Delaware Lennar Mare Island LLC California Lennar Moorpark, L.L.C. Delaware Lennar Mote Ranch, Ltd. Florida 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 Northpointe North, LLC California Lennar Oceanside, LLC California Lennar Pacific Properties, Inc. Delaware Lennar Pacific, Inc. Delaware
3 Lennar Corporation and Subsidiaries Listing of Subsidiaries
Subsidiaries - -------------------------------------------------------------------------------------------- Lennar Pacific, L.P. Delaware Lennar Realty, Inc. Florida Lennar Renaissance, Inc. California 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 Stevenson Holdings, L.L.C. California Lennar Sun Ridge, LLC California Lennar Sycamore Creek, LLC California Lennar Texas Holding Company Texas Lennar Winncrest, LLC Delaware Lennar.Com, Inc. Florida Lennar-LNR Ford Island, LLC Hawaii Lennarstone Marketing Group, LLC Arizona LEN-Natomas Village 15, LLC Delaware LEN-Natomas Village 16, LLC Delaware LEN-OBS Windemere, LLC Delaware LEN-Rivermark Greens, LLC Delaware LEN-Rivermark Promenade, LLC Delaware LEN-SCGA50, LLC Delaware LEN-SCGA60, LLC Delaware LEN-Spectrum, LLC Delaware LEN-Windemere Village 11, LLC Delaware LEN-Windemere Village 15, LLC Delaware LEN-Woodlands, LLC Delaware LFS Holding Company, LLC Delaware LL Partners, Inc. Nevada LNR Meadowlark, LLC California LNR-Lennar 250 Brannan Street, LLC California LNR-Lennar Brannan Street, LLC California Long Point Development Corporation Texas Lori Gardens Associates, L.L.C. New Jersey Lorton Station, LLC Virginia LSC Associates Florida Lucerne Merged Condominiums, Inc. Florida Lundgren Bros. Construction, Inc. Minnesota LW1, LLC Delaware M.A.P. Builders, Inc. Florida Majestic Woods, LLC New Jersey Marlborough Development Corporation California Marlborough Financial Corporation California Marlborough Mortgage Corporation California Maywood, L.L.C. Virginia Meritus Title Company California Midland Housing Industries Corp. California Midland Investment Corporation California Mill Branch Associates, LLC New Jersey Millennium Ventures Limited Partnership, LLP Florida
4 Lennar Corporation and Subsidiaries Listing of Subsidiaries
Subsidiaries - -------------------------------------------------------------------------------------------- Millennium Ventures Management Company, Ltd., L.L.P. Florida Mission Viejo 12S Venture, LP California Mission Viejo Holdings, Inc. California Multi-Builder Acceptance Corp. Alabama Natomas Estates, LLC California NC Builders Acquisition Corp. Delaware Netter Woods, LLC New Jersey New Century Title of Ft. Myers, L.L.C. Florida New Century Title of Orlando, L.L.C. Florida New Century Title of Tampa, L.L.C. Florida New Home Brokerage, Inc. Florida 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 Florida North American Title Company of Colorado Colorado North American Title Company, Inc. California North American Title Group, Inc. Florida North American Title Insurance Company California North American Title Insurance Corporation Florida North County Land Company, LLC California Northgate Highlands Development II, LLC Colorado Northgate Highlands Development, LLC Colorado Northpointe North, LLC California NuHome Designs, L.L.C. Texas NuHome Holdings, LLC Delaware Oceanpointe Development Corporation Florida Orrin Thompson Construction Company Minnesota Orrin Thompson Homes Corp. Minnesota Palmdale 101 Venture California Paparone Construction Co. New Jersey Patriot Homes of Virginia, Inc. Virginia Patriot Homes, Inc. Maryland PDC Fairway Village, Ltd. Texas Perris Green Valley Associates California Prairie Lake Corporation Florida Prairie Lake Joint Venture Florida Quest Testing Texas Rancho Summit LLC California REGTC, INC. Texas Restoration Development, LLC Minnesota Rivendell Joint Venture Florida Rivenhome Corporation Florida Riverwalk at Waterside Island, LLC Florida Riviera Land Corp. Florida Roseridge Development, LLC California Rottlund Advantage, LLC Florida Rutenberg Homes of Texas, Inc. Texas Rutenberg Homes, Inc. (Florida) Florida San Felipe Indemnity Co., Ltd. Bermuda
5 Lennar Corporation and Subsidiaries Listing of Subsidiaries
Subsidiaries - -------------------------------------------------------------------------------------------- Satisfaction, Inc. Florida Savell Gulley Development Corporation Texas SEA Joint Venture, LLC Colorado September 11th Homebuilders Fund, Inc. Florida Silver Lakes-Gateway Clubhouse, Inc. Florida SLTC, Inc. Texas Sossaman Estates, L.L.C. Arizona South Park Development, LLC Delaware Spanish Springs Development, LLC Nevada Spring Ridge Development, Ltd. Texas State Home Acceptance Corporation Florida Stevenson Ranch Venture LLC Delaware Stoney Corporation Florida Stoneybrook Clubhouse West, Inc. Florida Stoneybrook Clubhouse, Inc. Florida Stoneybrook Golf Club, Inc. Florida Stoneybrook Golf Management, L.L.C. Florida Stoneybrook Joint Venture Florida Stoyko Holdings, LLC New Jersey Strategic Holdings, Inc. Nevada Strategic Technologies Communications of Calif., Inc. California Strategic Technologies, Inc. Florida Summerway Investment Corp. Florida T/L Huntington Beach, LLC Delaware Texas Professional Title, Inc. Texas Texas-Wide General Agency, Inc. Texas Texas-Wide Insurance Agency, Inc. Texas The Bridges at Rancho Santa Fe Sales Company, Inc. California The Bridges Club at Rancho Santa Fe, Inc. California
6 Lennar Corporation and Subsidiaries Listing of Subsidiaries
Subsidiaries - -------------------------------------------------------------------------------------------- The Club at Stoneybrook, Inc. Florida The Homeward Foundation Texas U.S. Home Acceptance Corporation Delaware U.S. Home Corporation Delaware U.S. Home Corporation of New York New York U.S. Home of Arizona Construction Co. Arizona U.S. Home of Colorado Real Estate, Inc. Colorado U.S. Home Realty Corporation Florida U.S. Home Realty, Inc. Texas U.S. Home Southwest Holding Corp. Nevada U.S. Insurors, Inc. Florida U.S.H. Realty, Inc. Maryland U.S.H. Corporation of New York New York U.S.H. Indemnity Co, Ltd. Bermuda U.S.H. Los Prados, Inc. Nevada UAMC Asset Corp. II Nevada UAMC Holding Company, LLC Delaware Universal American Finance Corp., I. Florida Universal American Insurance Agency, Inc. Colorado Universal American Insurance Agency, Inc. (FL) Florida Universal American Mortgage Company Florida Universal American Mortgage Company of California California Universal American Mortgage Company, LLC Florida USH (West Lake), Inc. New Jersey USH Acquisition Corp. Delaware USH Bickford, LLC California USH Equity Corporation Nevada USH Funding Corp. Texas USH Heritage Pom, L.L.C. Arizona USH Holding, Inc. Delaware USH Millennium Ventures Corp. Florida USH Woodbridge, Inc. Texas USH/MJR, Inc. Texas USH/SVA Star Valley, LLC Arizona USHHH, Inc. Florida West Chocolate Bayou Development Corp. Texas West Lake Village, L.L.C. New Jersey Westchase Development, LLC Colorado Westchase, Inc. Nevada Westchase, Ltd. Texas Westgate Partners I California Westgate Partners II California Weststone Corporation Florida Wheatland Development, LLC Colorado Willow Estates Holdings, LLC New Jersey Willowbrook Investors, LLC New Jersey Windemere BLC Land Company LLC California Woodbridge Residential Partners, Ltd. Texas Wright Farm, L.L.C. Virginia
7 EX-23 5 dex23.txt INDEPENDENT AUDITORS' CONSENT Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-70212 on Form S-8, Registration Statement No. 333-65244 on Form S-3 and Registration Statement No. 333-65246 on Form S-4 of Lennar Corporation of our reports dated January 9, 2002, appearing in this Annual Report on Form 10-K of Lennar Corporation for the year ended November 30, 2001. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida February 28, 2002 EX-99 6 dex99.txt FINANCIALS OF LENNAR CORP'S GUARANTOR SUBSIDIARIES Exhibit 99 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lennar Homes, Inc.: We have audited the accompanying consolidated balance sheets of Lennar Homes, Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar Corporation, as of November 30, 2001 and 2000 and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the three years in the period ended November 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida January 9, 2002 1 LENNAR HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2001 AND 2000 (Dollars in thousands, except par value) - -------------------------------------------------------------------------------- 2001 2000 ASSETS Cash $ 55,901 $ 59,324 Inventories 969,421 935,491 Investments in unconsolidated partnerships 91,154 41,491 Other assets 81,202 75,085 ---------- ---------- $1,197,678 $1,111,391 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and other liabilities $ 201,460 $ 199,175 Mortgage notes payable 8,993 5,439 Due to affiliates 594,745 575,215 ---------- ---------- Total liabilities 805,198 779,829 ---------- ---------- STOCKHOLDER'S EQUITY: Common stock, $10 par value; 5,000 shares authorized, issued and outstanding 50 50 Additional paid-in capital 16,175 16,175 Retained earnings 376,255 315,337 ---------- ---------- Total stockholder's equity 392,480 331,562 ---------- ---------- $1,197,678 $1,111,391 ========== ========== See accompanying notes to consolidated financial statements. 2 LENNAR HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - -------------------------------------------------------------------------------- 2001 2000 1999 REVENUES: Sales of homes $2,632,946 $2,247,227 $1,848,428 Sales of land and other revenues 89,867 119,453 48,617 ---------- ---------- ---------- Total revenues 2,722,813 2,366,680 1,897,045 ---------- ---------- ---------- COSTS AND EXPENSES: Cost of homes sold 2,063,181 1,808,564 1,499,497 Cost of land and other expenses 44,843 94,987 29,470 Selling, general and administrative 295,183 245,691 207,562 Licensing expense to affiliate 129,161 104,677 63,285 Minority interest 42,697 26,874 -- Interest 48,694 41,318 24,419 ---------- ---------- ---------- Total costs and expenses 2,623,759 2,322,111 1,824,233 ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES 99,054 44,569 72,812 INCOME TAXES 38,136 17,382 28,761 ---------- ---------- ---------- NET EARNINGS $ 60,918 $ 27,187 $ 44,051 ========== ========== ========== See accompanying notes to consolidated financial statements. 3 LENNAR HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - --------------------------------------------------------------------------------
Additional Common Paid-in Retained Stock Capital Earnings Total Balance, November 30, 1998 $ 50 $ 10,211 $244,099 $254,360 1999 net earnings -- 44,051 44,051 -------- -------- -------- -------- Balance, November 30, 1999 50 10,211 288,150 298,411 Contribution of capital from affiliate (see Note 1) -- 5,964 -- 5,964 2000 net earnings -- 27,187 27,187 -------- -------- -------- -------- Balance, November 30, 2000 50 16,175 315,337 331,562 2001 net earnings -- 60,918 60,918 -------- -------- -------- -------- Balance, November 30, 2001 $ 50 $ 16,175 $376,255 $392,480 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 4 LENNAR HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - --------------------------------------------------------------------------------
2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 60,918 $ 27,187 $ 44,051 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 12,501 11,803 12,167 Equity in (earnings) loss from unconsolidated partnerships (13,340) 851 (3,785) Changes in assets and liabilities: (Increase) decrease in inventories (39,614) 67,562 (115,403) (Increase) decrease in other assets (7,086) (39,477) 14,362 Increase (decrease) in accounts payable and other liabilities 2,285 (9,698) 26,871 --------- --------- --------- Net cash provided by (used in) operating activities 15,664 58,228 (21,737) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) decrease in investments in unconsolidated partnerships, net (36,323) 7,231 (23,375) --------- --------- --------- Net cash provided by (used in) investing activities (36,323) 7,231 (23,375) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings -- -- 167 Principal payments on borrowings (2,294) (9,548) (23,012) Increase (decrease) in amounts due to affiliates 19,530 (58,651) 101,530 --------- --------- --------- Net cash provided by (used in) financing activities 17,236 (68,199) 78,685 --------- --------- --------- NET INCREASE (DECREASE) IN CASH (3,423) (2,740) 33,573 CASH AT BEGINNING OF YEAR 59,324 62,064 28,491 --------- --------- --------- CASH AT END OF YEAR $ 55,901 $ 59,324 $ 62,064 ========= ========= ========= See Note 1 for supplemental disclosures of cash flow information related to interest and income taxes paid. Supplemental disclosures of non-cash investing and financing activities: Purchases of inventory financed by sellers $ 5,848 $ 5,250 $ 14,360
See accompanying notes to consolidated financial statements. 5 LENNAR HOMES, INC. and subsidiaries (A Wholly-Owned Subsidiary of Lennar Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The accompanying consolidated financial statements include the accounts of Lennar Homes, Inc., a wholly-owned subsidiary of Lennar Corporation, and all subsidiaries and partnerships (and similar entities) in which a controlling interest is held (the "Company"). The Company's investments in unconsolidated partnerships in which a significant, but less than a controlling, interest is held are accounted for by the equity method. Controlling interest is determined based on a number of factors, which include the Company's ownership interest and participation in the management of the partnership. All significant intercompany transactions and balances have been eliminated. During 2001, U.S. Home Corporation, a wholly-owned subsidiary of Lennar Corporation, made a tax-free contribution of real and personal property and equity interests of its, and certain of its subsidiaries, homebuilding business within the State of Texas (the "Texas Operations"), to Lennar Homes of Texas Land & Construction, Ltd. (the "Texas Partnership"), a majority-owned subsidiary of Lennar Southwest Holding Corp., which is a wholly-owned subsidiary of Lennar Homes, Inc., in exchange for a 40% limited partners' interest in the Texas Partnership. The transaction was accounted for as a reorganization of entities under common control, which is similar to the pooling of interests method of accounting for business combinations and, accordingly, all prior period consolidated financial statements have been restated to consolidate the carrying values of the net assets and historical operations of the Texas Operations as if this transaction occurred on May 3, 2000, the date of Lennar Corporation's acquisition of U.S. Home Corporation. At the date of the acquisition, the Texas Operations had assets of $132.5 million and liabilities of $126.5 million. Minority interest is classified in "due to affiliates" in the consolidated balance sheets. The Company operates in one operating and reporting segment - homebuilding. Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land by the Company and unconsolidated partnerships in which it has investments. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition - Revenue from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate, including the sale of land, are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. 6 Cash - The Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values. Cash as of November 30, 2001 and 2000 included $20.1 million and $40.1 million, respectively, of cash held in escrow for approximately three days. Inventories - Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company evaluates long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs of inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. No impairment existed during the years ended November 30, 2001, 2000 or 1999. Start-up costs, construction overhead and selling expenses are expensed as incurred. Homes held for sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated proportionately to homes within the respective area. Due to Affiliates - Due to affiliates includes the Company's transactions in the normal course of business with Lennar Corporation and/or affiliated companies as well as minority interest. Interest and Real Estate Taxes - Interest and real estate taxes attributable to land, homes and operating properties are capitalized while they are being actively developed. Interest costs relieved from inventories are included in interest expense. Interest costs result from the interest related to the Company's outstanding debt as disclosed in the consolidated balance sheets, as well as debt incurred by the Company's parent, Lennar Corporation. Lennar Corporation allocates a portion of its interest to the Company based on the Company's inventory levels during the year. Operating Properties and Equipment - Operating properties and equipment are recorded at cost. The assets are depreciated over their estimated useful lives using the straight-line method. The estimated useful life for operating properties is 30 years and for equipment is 2 to 10 years. At November 30, 2001 and 2000, operating properties and equipment of $7.2 million and $2.1 million, respectively, was included in other assets in the consolidated balance sheets. Income Taxes - The Company files a consolidated federal income tax return with Lennar Corporation. Income taxes have been provided at the Company level as if the Company filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar Corporation, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Fair Value of Financial Instruments - The carrying amounts of cash, accounts payable and mortgage notes payable approximate fair value. New Accounting Pronouncements - In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and requires acquired intangible assets to be recognized as 7 assets apart from goodwill if certain criteria are met. The Company adopted SFAS No. 141 for all future acquisitions. SFAS No. 142 no longer requires or permits the amortization of goodwill and indefinite-lived assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted SFAS No. 142 on December 1, 2001. Management does not currently believe that the implementation of SFAS No. 142 will have a material impact on the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003. Management does not currently believe that the implementation of SFAS No. 144 will have a material impact on the Company's financial position or results of operations. Reclassification - Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2001 presentation. 2. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS Summarized condensed financial information on a combined 100% basis related to the Company's investments in unconsolidated partnerships and other similar entities (collectively the "Partnerships") accounted for by the equity method was as follows: 8 November 30, (In thousands) 2001 2000 -------------------------------------------------------------------- Assets: Cash $ 15,976 $ 6,586 Land under development 574,667 179,369 Other assets 17,286 18,492 -------- -------- $607,929 $204,447 ======== ======== Liabilities and equity: Accounts payable and other liabilities $ 42,979 $ 29,615 Notes and mortgages payable 339,040 75,265 Equity 225,910 99,567 -------- -------- $607,929 $204,447 ======== ========
Years ended November 30, 2001, 2000 and 1999 (In thousands) 2001 2000 1999 -------------------------------------------------------------------------------------------- Revenues $429,834 $ 38,518 $30,210 Costs and expenses 364,209 40,731 28,470 -------- -------- ------- Net earnings (loss) of unconsolidated partnerships $ 65,625 $ (2,213) $ 1,740 ======== ======== =======
At November 30, 2001, the Company's equity interest in each of these Partnerships was 50% or less. The Company's partners generally are third party homebuilders, land sellers seeking a share of the profits from development of the land or real estate professionals who do not have the capital and/or expertise to develop properties by themselves. The Partnerships follow accounting principles generally accepted in the United States of America. The Company shares in the profits and losses of these Partnerships and, when appointed the manager of the Partnerships, receives fees for the management of the assets. During 2001, 2000 and 1999, the Company received management fees and reimbursement of expenses from the Partnerships totaling $4.3 million, $2.1 million and $0.2 million, respectively. The Company does not include in its income the pro rata Partnership earnings resulting from land sales to the Company. These amounts are recorded as a reduction of the cost of purchasing the land from the Partnerships which increases profits when title passes to a third party homebuyer. Equity in earnings from unconsolidated partnerships is included in sales of land and other revenues in the consolidated statements of earnings. The Company may obtain options or other arrangements under which the Company can purchase portions of the land held by the Partnerships. Option prices are generally negotiated prices that approximate fair value when the Company receives the options. During 2001, 2000 and 1999, $83.6 million, $6.2 million and $1.9 million, respectively, of the Partnerships' revenues were from land sales to the Company. In some instances, Lennar Corporation and/or the Company's partners have provided varying levels of guarantees on certain partnership debt. At November 30, 2001, Lennar Corporation 9 provided guarantees on $205.9 million of unconsolidated partnership debt, of which $44.2 million were limited maintenance guarantees. 3. MORTGAGE NOTES PAYABLE At November 30, 2001 and 2000, the Company had mortgage notes on land with fixed interest rates ranging from 5.4% to 10.0% due through 2008 with an outstanding balance of $9.0 million and $5.4 million, respectively. These borrowings are collateralized by land. 4. INCOME TAXES The provision for income taxes consisted of the following: Years Ended November 30, (Dollars in thousands) 2001 2000 1999 ---------------------------------------------------------------------- Current: Federal $ 42,730 $ 30,786 $ 19,527 State 6,151 3,579 3,719 -------- -------- -------- 48,881 34,365 23,246 -------- -------- -------- Deferred: Federal (10,208) (15,454) 4,789 State (537) (1,529) 726 -------- -------- -------- (10,745) (16,983) 5,515 -------- -------- -------- $ 38,136 $ 17,382 $ 28,761 ======== ======== ======== The actual income tax expense differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 10 The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows: November 30, (Dollars in thousands) 2001 2000 ---------------------------------------------------------------------- Deferred tax assets: Acquisition adjustments $ 872 $ 1,729 Reserves and accruals 22,165 12,347 Capitalized expenses 17,021 15,571 Investments in unconsolidated partnerships 4,259 2,526 Other 5,239 4,211 ------- ------- Total deferred tax assets 49,556 36,384 ------- ------- Deferred tax liabilities: Installment sales 28 804 Other 13,251 10,048 ------- ------- Total deferred tax liabilities 13,279 10,852 ------- ------- Net deferred tax asset $36,277 $25,532 ======= ======= The net deferred tax asset is included in other assets in the consolidated balance sheets. 5. RELATED PARTY TRANSACTIONS On April 1, 1999, Lennar Corporation entered into an agreement with Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned subsidiary of Lennar Corporation, whereby Greystone has granted to the Company the right to use certain property for a fee. Unpaid fees bear interest at 9% annually. The fee and its related interest comprise the classification "licensing expense to affiliate" in the consolidated statements of earnings. On a quarterly basis, these amounts are paid by Lennar Corporation to Greystone. The amounts paid by Lennar Corporation on behalf of the Company are included in due to affiliates in the Company's consolidated balance sheets, and bear interest at 9% annually. The term of the agreement ends on November 30, 2002, with automatic one-year renewals unless terminated earlier by three-months written notice by either party. During 2001 and 2000, Lennar Corporation and its subsidiaries advanced funds to the Company which had no stated repayment terms. At November 30, 2001 and 2000, the Company had a payable to affiliates of $594.7 million and $575.2 million, respectively. 6. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the results of operations and financial condition of the Company. 11 The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate, which it does in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to reduce the financial risk of adverse market conditions associated with long-term land holdings. At November 30, 2001, the Company had $19.6 million of primarily non-refundable option deposits and advanced costs with entities including unconsolidated partnerships. The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2002 - $5.2 million; 2003 - $4.2 million; 2004 - $3.2 million; 2005 - $1.6 million; 2006 - $1.1 million and thereafter - $3.0 million. Rental expense for the years ended November 30, 2001, 2000 and 1999 was $9.0 million, $10.4 million and $8.0 million, respectively. The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $85.0 million at November 30, 2001. The Company also had outstanding performance and surety bonds with estimated costs to complete of $422.0 million related principally to its obligations for site improvements at various projects at November 30, 2001. The Company does not believe that any such bonds are likely to be drawn upon. The Company has guaranteed obligations of Lennar Corporation with regard to certain issues of its outstanding debt, and the stock of the Company has been pledged as collateral for Lennar Corporation's obligations with regard to that debt. The Company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. 12 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lennar Southwest Holding Corp.: We have audited the accompanying consolidated balance sheets of Lennar Southwest Holding Corp. and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar Homes, Inc., as of November 30, 2001 and 2000 and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the three years in the period ended November 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida January 9, 2002 13 LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2001 AND 2000 (Dollars in thousands, except par value) - -------------------------------------------------------------------------------- 2001 2000 ASSETS Cash $ 43,379 $ 31,330 Inventories 398,779 357,549 Investments in unconsolidated partnerships 12,231 6,563 Other assets 32,370 22,174 -------- -------- $486,759 $417,616 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and other liabilities $ 53,043 $ 37,705 Mortgage note payable -- 1,061 Due to affiliates 352,806 318,481 -------- -------- Total liabilities 405,849 357,247 -------- -------- STOCKHOLDER'S EQUITY: Common stock, $1 par value; 5,000 shares authorized, issued and outstanding 5 5 Additional paid-in capital 9,296 9,296 Retained earnings 71,609 51,068 -------- -------- Total stockholder's equity 80,910 60,369 -------- -------- $486,759 $417,616 ======== ======== See accompanying notes to consolidated financial statements. 14 LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - -------------------------------------------------------------------------------- 2001 2000 1999 REVENUES: Sales of homes $1,013,847 $ 837,927 $ 563,315 Sales of land and other revenues 35,221 29,270 15,986 ---------- ---------- ---------- Total revenues 1,049,068 867,197 579,301 ---------- ---------- ---------- COSTS AND EXPENSES: Cost of homes sold 788,978 683,260 457,306 Cost of land and other expenses 14,058 12,648 4,942 Selling, general and administrative 109,215 81,540 51,193 Licensing expense to affiliate 43,731 35,069 19,539 Minority interest 42,697 26,874 -- Interest 16,989 12,313 5,286 ---------- ---------- ---------- Total costs and expenses 1,015,668 851,704 538,266 ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES 33,400 15,493 41,035 INCOME TAXES 12,859 6,042 16,209 ---------- ---------- ---------- NET EARNINGS $ 20,541 $ 9,451 $ 24,826 ========== ========== ========== See accompanying notes to consolidated financial statements. 15 LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - --------------------------------------------------------------------------------
Additional Common Paid-in Retained Stock Capital Earnings Total Balance, November 30, 1998 $ 5 $ 3,332 $16,791 $20,128 1999 net earnings -- -- 24,826 24,826 ------- ------- ------- ------- Balance, November 30, 1999 5 3,332 41,617 44,954 Contribution of capital from affiliate (see Note 1) -- 5,964 -- 5,964 2000 net earnings -- -- 9,451 9,451 ------- ------- ------- ------- Balance, November 30, 2000 5 9,296 51,068 60,369 2001 net earnings -- -- 20,541 20,541 ------- ------- ------- ------- Balance, November 30, 2001 $ 5 $ 9,296 $71,609 $80,910 ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 16 LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - --------------------------------------------------------------------------------
2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 20,541 $ 9,451 $ 24,826 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 1,934 1,482 686 Equity in earnings from unconsolidated partnerships (4,688) (547) (759) Changes in assets and liabilities: Increase in inventories (42,936) (40,618) (53,473) Increase in other assets (10,424) (2,434) (5,817) Increase (decrease) in accounts payable and other liabilities 15,338 (977) 6,483 -------- -------- -------- Net cash used in operating activities (20,235) (33,643) (28,054) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) decrease in investments in unconsolidated partnerships, net (980) (3,789) 1,579 -------- -------- -------- Net cash provided by (used in) investing activities (980) (3,789) 1,579 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on borrowing (1,061) (1,363) -- Increase in amounts due to affiliates 34,325 44,160 37,667 -------- -------- -------- Net cash provided by financing activities 33,264 42,797 37,667 -------- -------- -------- NET INCREASE IN CASH 12,049 5,365 11,192 CASH AT BEGINNING OF YEAR 31,330 25,965 14,773 -------- -------- -------- CASH AT END OF YEAR $ 43,379 $ 31,330 $ 25,965 ======== ======== ========
See Note 1 for supplemental disclosures of cash flow information related to interest and income taxes paid. See accompanying notes to consolidated financial statements. 17 LENNAR SOUTHWEST HOLDING CORP. and subsidiaries (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The accompanying consolidated financial statements include the accounts of Lennar Southwest Holding Corp. and all subsidiaries and partnerships (and similar entities) in which a controlling interest is held (the "Company"). The Company's investments in unconsolidated partnerships in which a significant, but less than a controlling, interest is held are accounted for by the equity method. Controlling interest is determined based on a number of factors, which include the Company's ownership interest and participation in the management of the partnership. All significant intercompany transactions have been eliminated. The Company is a wholly-owned subsidiary of Lennar Homes, Inc. which is a wholly-owned subsidiary of Lennar Corporation. During 2001, U.S. Home Corporation, a wholly-owned subsidiary of Lennar Corporation, made a tax-free contribution of real and personal property and equity interests of its, and certain of its subsidiaries, homebuilding business within the State of Texas (the "Texas Operations"), to Lennar Homes of Texas Land & Construction, Ltd. (the "Texas Partnership"), a majority-owned subsidiary of Lennar Southwest Holding Corp., in exchange for a 40% limited partners' interest in the Texas Partnership. The transaction was accounted for as a reorganization of entities under common control, which is similar to the pooling of interests method of accounting for business combinations and, accordingly, all prior period consolidated financial statements have been restated to consolidate the carrying values of the net assets and historical operations of the Texas Operations as if this transaction occurred on May 3, 2000, the date of Lennar Corporation's acquisition of U.S. Home Corporation. At the date of the acquisition, the Texas Operations had assets of $132.5 million and liabilities of $126.5 million. Minority interest is classified in "due to affiliates" in the consolidated balance sheets. The Company operates in one operating and reporting segment - homebuilding. Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land by the Company and unconsolidated partnerships in which it has investments. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition - Revenue from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate including the sales of land are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash - The Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values. Cash as of November 30, 2001 and 2000 18 included $10.3 million and $14.3 million, respectively, of cash held in escrow for approximately three days. Inventories - Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company evaluates long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs of inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. No impairment existed during the years ended November 30, 2001, 2000 or 1999. Start-up costs, construction overhead and selling expenses are expensed as incurred. Homes held for sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated proportionately to homes within the respective area. Due to Affiliates - Due to affiliates includes the Company's transactions in the normal course of business with Lennar Corporation and/or affiliated companies as well as minority interest. Interest and Real Estate Taxes - Interest and real estate taxes attributable to land and homes are capitalized while they are being actively developed. Interest costs relieved from inventories are included in interest expense. Interest costs result from the interest related to the Company's outstanding debt as disclosed in the consolidated balance sheets, as well as debt incurred by Lennar Corporation. Lennar Corporation allocates a portion of its interest to the Company based on the Company's inventory levels during the year. Operating Equipment - Operating equipment is recorded at cost. The assets are depreciated over their estimated useful lives using the straight-line method. The estimated useful life is 2 to 10 years. At November 30, 2001 and 2000, operating equipment of $1.0 million and $1.1 million, respectively, was included in other assets in the consolidated balance sheets. Income Taxes - The Company files a consolidated federal income tax return with Lennar Corporation. Income taxes have been provided at the Company level as if the Company filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar Corporation, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Fair Value of Financial Instruments - The carrying amounts of cash and accounts payable approximate fair value. New Accounting Pronouncements - In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and requires acquired intangible assets to be recognized as assets apart from goodwill if certain criteria are met. The Company adopted SFAS No. 141 for all future acquisitions. SFAS No. 142 no longer requires or permits the amortization of goodwill and indefinite-lived assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, Accounting for the 19 Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted SFAS No. 142 on December 1, 2001. Management does not currently believe that the implementation of SFAS No. 142 will have a material impact on the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003. Management does not currently believe that the implementation of SFAS No. 144 will have a material impact on the Company's financial position or results of operations. Reclassification - Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2001 presentation. 2. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS Summarized condensed financial information on a combined 100% basis related to the Company's investments in unconsolidated partnerships and other similar entities (collectively the "Partnerships") accounted for by the equity method was as follows: November 30, (In thousands) 2001 2000 --------------------------------------------------------------- Assets: Cash $ 2,207 $ 1,617 Land under development 69,774 34,749 Other assets 294 5,288 ------- ------- $72,275 $41,654 ======= ======= Liabilities and equity: Accounts payable and other liabilities $ 7,350 $ 5,897 Notes and mortgages payable 42,099 23,227 Equity 22,826 12,530 ------- ------- $72,275 $41,654 ======= =======
Years ended November 30, 2001, 2000 and 1999 (In thousands) 2001 2000 1999 --------------------------------------------------------------------------------- Revenues $ 26,568 $ 6,554 $ 7,131 Costs and expenses 18,147 6,517 6,659 -------- ------- ------- Net earnings of unconsolidated partnerships $ 8,421 $ 37 $ 472 ======== ======= =======
20 At November 30, 2001, the Company's equity interest in each of these Partnerships was 50% or less. The Company's partners generally are third party homebuilders, land sellers seeking a share of the profits from development of the land or real estate professionals who do not have the capital and/or expertise to develop properties by themselves. The Partnerships follow accounting principles generally accepted in the United States of America. The Company shares in the profits and losses of these Partnerships and, when appointed the manager of the Partnerships, receives fees for the management of the assets. During 2001, 2000 and 1999, the Company received management fees and reimbursement of expenses from the Partnerships totaling $0.5 million, $0.3 million and $0.1 million, respectively. The Company does not include in its income the pro rata Partnership earnings resulting from land sales to the Company. These amounts are recorded as a reduction of the cost of purchasing the land from the Partnerships which increases profits when title passes to a third party homebuyer. Equity in earnings from unconsolidated partnerships is included in sales of land and other revenues in the consolidated statements of earnings. The Company may obtain options or other arrangements under which the Company can purchase portions of the land held by the Partnerships. Option prices are generally negotiated prices that approximate fair value when the Company receives the options. During 2001, 2000 and 1999, $11.5 million, $3.6 million, and $1.9 million, respectively, of the Partnerships' revenues were from land sales to the Company. 3. INCOME TAXES The provision for income taxes consisted of the following: Years Ended November 30, (Dollars in thousands) 2001 2000 1999 --------------------------------------------------------------------- Current: Federal $ 12,909 $ 10,596 $ 12,172 State 1,858 1,232 2,318 -------- -------- -------- 14,767 11,828 14,490 -------- -------- -------- Deferred: Federal (1,813) (5,265) 1,493 State (95) (521) 226 -------- -------- -------- (1,908) (5,786) 1,719 -------- -------- -------- $ 12,859 $ 6,042 $ 16,209 ======== ======== ======== The actual income tax expense differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows: 21 November 30, (Dollars in thousands) 2001 2000 --------------------------------------------------------------------- Deferred tax assets: Capitalized expenses $5,166 $4,035 ------ ------ Total deferred tax assets 5,166 4,035 ------ ------ Deferred tax liabilities: Other 628 1,405 ------ ------ Total deferred tax liabilities 628 1,405 ------ ------ Net deferred tax asset $4,538 $2,630 ====== ====== The net deferred tax asset is included in other assets in the consolidated balance sheets. 4. RELATED PARTY TRANSACTIONS On April 1, 1999, Lennar Corporation entered into an agreement with Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned subsidiary of Lennar Corporation, whereby Greystone has granted to the Company the right to use certain property for a fee. Unpaid fees bear interest at 9% annually. The fee and its related interest comprise the classification "licensing expense to affiliate" in the consolidated statements of earnings. On a quarterly basis, these amounts are paid by Lennar Corporation to Greystone. The amounts paid by Lennar Corporation on behalf of the Company are included in due to affiliates in the Company's consolidated balance sheets, and bear interest at 9% annually. The term of the agreement ends on November 30, 2002, with automatic one-year renewals unless terminated earlier by three-months written notice by either party. During 2001 and 2000, Lennar Corporation and its subsidiaries advanced funds to the Company which had no stated repayment terms. At November 30, 2001 and 2000, the Company had a payable to affiliates of $352.8 million and $318.5 million, respectively. 5. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition or results of operations of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate, which it does in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to reduce the financial risk of adverse market conditions associated with long-term land holdings. At November 30, 2001, the Company had $8.1 million of primarily non-refundable option deposits and advanced costs with entities including unconsolidated partnerships. The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2002 - $1.3 million; 2003 - $1.2 million; 2004 - $1.1 million; 2005 - $1.0 million; 2006 - $1.0 million and 22 thereafter - $2.6 million. Rental expense for the years ended November 30, 2001, 2000, and 1999 was $2.0 million, $1.5 million, and $0.7 million, respectively. The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $18.5 million at November 30, 2001. The Company also had outstanding performance and surety bonds with estimated costs to complete of $12.8 million related principally to its obligations for site improvements at various projects at November 30, 2001. The Company does not believe that any such bonds are likely to be drawn upon. The Company has guaranteed obligations of Lennar Corporation with regard to certain issues of its outstanding debt, and the stock of the Company has been pledged as collateral for Lennar Corporation's obligations with regard to that debt. The Company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. 23 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lennar Homes of California, Inc.: We have audited the accompanying consolidated balance sheets of Lennar Homes of California, Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar Homes, Inc., as of November 30, 2001 and 2000 and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the three years in the period ended November 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida January 9, 2002 24 LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2001 AND 2000 (Dollars in thousands, except par value) - -------------------------------------------------------------------------------- 2001 2000 ASSETS Inventories $151,098 $145,067 Investments in unconsolidated partnerships 74,002 25,064 Other assets 2,932 3,010 -------- -------- $228,032 $173,141 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and other liabilities $ 32,267 $ 33,902 Mortgage note payable 1,800 2,000 Due to affiliates 132,652 87,486 -------- -------- Total liabilities 166,719 123,388 -------- -------- STOCKHOLDER'S EQUITY: Common stock, $1 par value; 5,000 shares authorized, issued and outstanding 5 5 Retained earnings 61,308 49,748 -------- -------- Total stockholder's equity 61,313 49,753 -------- -------- $228,032 $173,141 ======== ======== See accompanying notes to consolidated financial statements. 25 LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - -------------------------------------------------------------------------------- 2001 2000 1999 REVENUES: Sales of homes $398,858 $419,508 $348,084 Sales of land and other revenues 24,484 16,606 520 -------- -------- -------- Total revenues 423,342 436,114 348,604 -------- -------- -------- COSTS AND EXPENSES: Cost of homes sold 315,727 327,229 265,730 Cost of land and other expenses 13,093 18,702 3,588 Selling, general and administrative 45,135 44,918 38,946 Licensing expense to affiliate 21,114 20,696 11,039 Interest 9,477 11,880 7,555 -------- -------- -------- Total costs and expenses 404,546 423,425 326,858 -------- -------- -------- EARNINGS BEFORE INCOME TAXES 18,796 12,689 21,746 INCOME TAXES 7,236 4,949 8,590 -------- -------- -------- NET EARNINGS $ 11,560 $ 7,740 $ 13,156 ======== ======== ======== See accompanying notes to consolidated financial statements. 26 LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - -------------------------------------------------------------------------------- Common Retained Stock Earnings Total Balance, November 30, 1998 $ 5 $28,852 $28,857 1999 net earnings -- 13,156 13,156 ------- ------- ------- Balance, November 30, 1999 5 42,008 42,013 2000 net earnings -- 7,740 7,740 ------- ------- ------- Balance, November 30, 2000 5 49,748 49,753 2001 net earnings -- 11,560 11,560 ------- ------- ------- Balance, November 30, 2001 $ 5 $61,308 $61,313 ======= ======= ======= See accompanying notes to consolidated financial statements. 27 LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - --------------------------------------------------------------------------------
2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 11,560 $ 7,740 $ 13,156 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 3,103 3,166 5,215 Equity in (earnings) loss from unconsolidated partnerships (8,044) 3,783 247 Changes in assets and liabilities: (Increase) decrease in inventories (8,886) 69,468 1,635 (Increase) decrease in other assets (170) 364 1,646 Increase (decrease) in accounts payable and other liabilities (1,635) 6,934 4,567 -------- -------- -------- Net cash provided by (used in) operating activities (4,072) 91,455 26,466 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in investments in unconsolidated partnerships, net (40,894) (3,193) (13,741) -------- -------- -------- Net cash used in investing activities (40,894) (3,193) (13,741) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings -- -- 167 Principal payments on borrowings (200) (200) (12,682) Increase (decrease) in amounts due to affiliates 45,166 (88,062) (3,630) -------- -------- -------- Net cash provided by (used in) financing activities 44,966 (88,262) (16,145) -------- -------- -------- NET DECREASE IN CASH -- -- (3,420) CASH AT BEGINNING OF YEAR -- -- 3,420 -------- -------- -------- CASH AT END OF YEAR $ -- $ -- $ -- ======== ======== ======== See Note 1 for supplemental disclosures of cash flow information related to interest and income taxes paid Supplemental disclosures of non-cash investing and financing activities: Purchases of inventory financed by sellers $ -- $ -- $ 11,680
See accompanying notes to consolidated financial statements. 28 LENNAR HOMES OF CALIFORNIA, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Homes, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The accompanying consolidated financial statements include the accounts of Lennar Homes of California, Inc. and all subsidiaries and partnerships (and similar entities) in which a controlling interest is held (the "Company"). The Company is a wholly-owned subsidiary of Lennar Homes, Inc. which is a wholly-owned subsidiary of Lennar Corporation. The Company's investments in unconsolidated partnerships in which a significant, but less than a controlling, interest is held are accounted for by the equity method. Controlling interest is determined based on a number of factors, which include the Company's ownership interest and participation in the management of the partnership. All significant intercompany transactions and balances have been eliminated. The Company operates in one operating and reporting segment - homebuilding. Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land by the Company and unconsolidated partnerships in which it has investments. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition - Revenue from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate, including the sale of land, are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash - The Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. Inventories - Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company evaluates long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs to inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. No impairment existed during the years ended November 30, 2001, 2000 or 1999. Start-up costs, construction overhead and selling expenses are expensed as incurred. Homes held for sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated proportionately to homes within the respective area. Due to Affiliates - The Company has transactions in the normal course of business with Lennar Corporation and/or affiliated companies. 29 Interest and Real Estate Taxes - Interest and real estate taxes attributable to land and homes are capitalized while they are being actively developed. Interest costs relieved from inventories are included in interest expense. Interest costs result from the interest related to the Company's outstanding debt as disclosed in the consolidated balance sheets as well as debt incurred by Lennar Corporation. Lennar Corporation allocates a portion of its interest to the Company based on the Company's inventory levels during the year. Operating Equipment - Operating equipment is recorded at cost. The assets are depreciated over their estimated useful lives using the straight-line method. The estimated useful life is 2 to 10 years. At November 30, 2001 and 2000, operating equipment of $0.4 million and $0.5 million, respectively, was included in other assets in the consolidated balance sheets. Income Taxes - The Company files a consolidated federal income tax return with Lennar Corporation. Income taxes have been provided at the Company level as if the Company filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar Corporation, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Fair Value of Financial Instruments - The carrying amounts of accounts payable and the mortgage note payable approximate fair value. New Accounting Pronouncements - In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and requires acquired intangible assets to be recognized as assets apart from goodwill if certain criteria are met. The Company adopted SFAS No. 141 for all future acquisitions. SFAS No. 142 no longer requires or permits the amortization of goodwill and indefinite-lived assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted SFAS No. 142 on December 1, 2001. Management does not currently believe that the implementation of SFAS No. 142 will have a material impact on the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003. Management does not currently believe that the implementation of SFAS No. 144 will have a material impact on the Company's financial position or results of operations. Reclassification - Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2001 presentation. 30 2. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS Summarized condensed financial information on a combined 100% basis related to the Company's investments in unconsolidated partnerships and other similar entities (collectively the "Partnerships") accounted for by the equity method was as follows: November 30, (In thousands) 2001 2000 ----------------------------------------------------------------------- Assets: Cash $ 13,566 $ 2,531 Land under development 500,429 119,609 Other assets 13,943 10,618 -------- -------- $527,938 $132,758 ======== ======== Liabilities and equity: Accounts payable and other liabilities $ 34,661 $ 21,683 Notes and mortgages payable 295,020 45,742 Equity 198,257 65,333 -------- -------- $527,938 $132,758 ======== ========
Years ended November 30, 2001, 2000 and 1999 (In thousands) 2001 2000 1999 ---------------------------------------------- ------------------------------- Revenues $403,255 $ 26,334 $ 23,064 Costs and expenses 345,493 30,400 21,610 -------- -------- --------- Net earnings (loss) of unconsolidated partnerships $ 57,762 $ (4,066) $ 1,454 ======== ======== ========
At November 30, 2001, the Company's equity interest in each of these Partnerships was 50% or less. The Company's partners generally are third party homebuilders, land sellers seeking a share of the profits from development of the land or real estate professionals who do not have the capital and/or expertise to develop properties by themselves. The Partnerships follow accounting principles generally accepted in the United States of America. The Company shares in the profits and losses of these Partnerships and, when appointed the manager of the Partnerships, receives fees for the management of the assets. During 2001 and 2000, the Company received management fees and reimbursement of expenses from the Partnerships totaling $3.8 million and $1.6 million, respectively. The Company does not include in its income the pro rata Partnership earnings resulting from land sales to the Company. These amounts are recorded as a reduction of the cost of purchasing the land from the Partnerships which increases profits when title passes to a third party homebuyer. Equity in earnings from unconsolidated partnerships is included in sales of land and other revenues in the consolidated statements of earnings. 31 The Company may obtain options or other arrangements under which the Company can purchase portions of the land held by the Partnerships. Option prices are generally negotiated prices that approximate fair value when the Company receives the options. During 2001, $72.1 million of the Partnerships' revenues were from land sales to the Company. In some instances, Lennar Corporation and/or the Company's partners have provided varying levels of guarantees on certain partnership debt. At November 30, 2001, Lennar Corporation provided guarantees on $205.9 million of unconsolidated partnership debt, of which $44.2 million were limited maintenance guarantees. 3. MORTGAGE NOTE PAYABLE At November 30, 2001 and 2000, the Company had a mortgage note on land bearing interest at 10.0% maturing in 2008 with an outstanding balance of $1.8 million and $2.0 million, respectively. This borrowing is collateralized by land. 4. INCOME TAXES The provision for income taxes consisted of the following: Years Ended November 30, (Dollars in thousands) 2001 2000 1999 ----------------------------------------------------------------------- Current: Federal $ 6,603 $ 7,972 $ 4,095 State 950 927 780 ------- ------- ------- 7,553 8,899 4,875 ------- ------- ------- Deferred: Federal (301) (3,594) 3,226 State (16) (356) 489 ------- ------- ------- (317) (3,950) 3,715 ------- ------- ------- $ 7,236 $ 4,949 $ 8,590 ======= ======= ======= The actual income tax expense differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit. 32 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows: November 30, (Dollars in thousands) 2001 2000 ----------------------------------------------------------------------- Deferred tax assets: Capitalized expenses $1,958 $1,637 Other 1,789 1,789 ------ ------ Total deferred tax assets 3,747 3,426 ------ ------ Deferred tax liabilities: Other 2,235 2,231 ------ ------ Total deferred tax liabilities 2,235 2,231 ------ ------ Net deferred tax asset $1,512 $1,195 ====== ====== The net deferred tax asset is included in other assets in the consolidated balance sheets. 5. RELATED PARTY TRANSACTIONS On April 1, 1999, Lennar Corporation entered into an agreement with Greystone Homes of Nevada, Inc. ("Greystone"), a wholly-owned subsidiary of Lennar Corporation, whereby Greystone has granted to the Company the right to use certain property for a fee. Unpaid fees bear interest at 9% annually. The fee and its related interest comprise the classification "licensing expense to affiliate" in the consolidated statements of earnings. On a quarterly basis, these amounts are paid by Lennar Corporation to Greystone. The amounts paid by Lennar Corporation on behalf of the Company are included in due to affiliates in the Company's consolidated balance sheets, and bear interest at 9% annually. The term of the agreement ends on November 30, 2002, with automatic one-year renewals unless terminated earlier by three-months written notice by either party. During 2001 and 2000, Lennar Corporation and its subsidiaries advanced funds to the Company which had no stated repayment terms. At November 30, 2001 and 2000, the Company had a payable to affiliates of $132.7 million and $87.5 million, respectively. 6. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition or results of operations of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate, which it does in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to 33 reduce the financial risk of adverse market conditions associated with long-term land holdings. At November 30, 2001, the Company had $4.3 million of primarily non-refundable option deposits and advanced costs with entities including unconsolidated partnerships. The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2002 - $1.0 million; 2003 - $0.8 million; 2004 - $0.5 million and 2005 - $0.1 million. Rental expense for the years ended November 30, 2001, 2000 and 1999 was $1.4 million, $1.7 million and $0.7 million, respectively. The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $24.8 million at November 30, 2001. The Company also had outstanding performance and surety bonds with estimated costs to complete of $182.6 million related principally to its obligations for site improvements at various projects at November 30, 2001. The Company does not believe that any such bonds are likely to be drawn upon. The Company has guaranteed obligations of Lennar Corporation with regard to certain issues of its outstanding debt, and the stock of the Company has been pledged as collateral for Lennar Corporation's obligations with regard to that debt. The Company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. 34 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Greystone Homes, Inc.: We have audited the accompanying consolidated balance sheets of Greystone Homes, Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of U.S. Home Corporation, as of November 30, 2001 and 2000 and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the three years in the period ended November 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida January 9, 2002 35 GREYSTONE HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2001 AND 2000 (Dollars in thousands, except par value) - -------------------------------------------------------------------------------- 2001 2000 ASSETS Inventories $302,569 $313,613 Goodwill, net 36,451 38,742 Investments in unconsolidated partnerships 15,202 1,707 Other assets 26,032 29,502 Due from affiliates 241,713 118,656 -------- -------- $621,967 $502,220 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and other liabilities $ 52,166 $ 51,262 Mortgage note payable -- 672 -------- -------- Total liabilities 52,166 51,934 -------- -------- STOCKHOLDER'S EQUITY: Common stock, $0.01 par value; 1,000 shares authorized, issued and outstanding -- -- Additional paid-in capital 216,073 216,073 Retained earnings 353,728 234,213 -------- -------- Total stockholder's equity 569,801 450,286 -------- -------- $621,967 $502,220 ======== ======== See accompanying notes to consolidated financial statements. 36 GREYSTONE HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - -------------------------------------------------------------------------------- 2001 2000 1999 REVENUES: Sales of homes $789,141 $646,206 $823,317 Sales of land and other revenues 22,504 110,822 100,223 Licensing revenues from affiliates 129,161 104,677 63,285 -------- -------- -------- Total revenues 940,806 861,705 986,825 -------- -------- -------- COSTS AND EXPENSES: Cost of homes sold 602,462 495,930 634,103 Cost of land and other expenses 22,693 99,606 91,876 Selling, general and administrative 99,536 89,017 86,023 Interest 21,782 20,944 23,159 -------- -------- -------- Total costs and expenses 746,473 705,497 835,161 -------- -------- -------- EARNINGS BEFORE INCOME TAXES 194,333 156,208 151,664 INCOME TAXES 74,818 60,921 59,907 -------- -------- -------- NET EARNINGS $119,515 $ 95,287 $ 91,757 ======== ======== ======== See accompanying notes to consolidated financial statements. 37 GREYSTONE HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - -------------------------------------------------------------------------------- Additional Common Paid-in Retained Stock Capital Earnings Total Balance, November 30, 1998 $-- $216,073 $ 47,169 $263,242 1999 net earnings -- -- 91,757 91,757 --- -------- -------- -------- Balance, November 30, 1999 -- 216,073 138,926 354,999 2000 net earnings -- -- 95,287 95,287 --- -------- -------- -------- Balance, November 30, 2000 -- 216,073 234,213 450,286 2001 net earnings -- -- 119,515 119,515 --- -------- -------- -------- Balance, November 30, 2001 $-- $216,073 $353,728 $569,801 === ======== ======== ======== See accompanying notes to consolidated financial statements. 38 GREYSTONE HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - --------------------------------------------------------------------------------
2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 119,515 $ 95,287 $ 91,757 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization, net 9,984 12,874 13,516 Equity in (earnings) loss from unconsolidated partnerships (6) (8) 112 Changes in assets and liabilities: Decrease in inventories 3,605 45,449 41,966 (Increase) decrease in other assets 3,216 (1,388) 18,953 Increase (decrease) in accounts payable and other liabilities 904 12,245 (971) --------- --------- --------- Net cash provided by operating activities 137,218 164,459 165,333 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in investments in unconsolidated partnerships, net (13,489) (161) (1,561) --------- --------- --------- Net cash used in investing activities (13,489) (161) (1,561) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on borrowings (672) (7,368) (143,255) Increase in amounts due from affiliates (123,057) (118,656) -- Decrease in amounts due to affiliates -- (38,274) (41,514) --------- --------- --------- Net cash used in financing activities (123,729) (164,298) (184,769) --------- --------- --------- NET DECREASE IN CASH -- -- (20,997) CASH AT BEGINNING OF YEAR -- -- 20,997 --------- --------- --------- CASH AT END OF YEAR $ -- $ -- $ -- ========= ========= ========= See Note 1 for supplemental disclosures of cash flow information related to interest and income taxes paid Supplemental disclosures of non-cash investing and financing activities: Purchases of inventory financed by sellers $ -- $ -- $ 6,505
See accompanying notes to consolidated financial statements. 39 GREYSTONE HOMES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of U.S. Home Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The accompanying consolidated financial statements include the accounts of Greystone Homes, Inc., and all subsidiaries and partnerships (and similar entities) in which a controlling interest is held (the "Company"). The Company's investments in unconsolidated partnerships in which a significant, but less than controlling, interest is held are accounted for by the equity method. Controlling interest is determined based on a number of factors, which include the Company's ownership interest and participation in the management of the partnership. All significant intercompany transactions and balances have been eliminated. During 2001, the Company became a wholly-owned subsidiary of U.S. Home Corporation, which is a wholly-owned subsidiary of Lennar Corporation. The Company operates in one operating and reporting segment - homebuilding. Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land by the Company and unconsolidated partnerships in which it has investments. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition - Revenue from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate, including the sale of land, are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash - The Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. Inventories - Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company evaluates long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs of inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. No impairment existed during the years ended November 30, 2001, 2000 or 1999. Start-up costs, construction overhead and selling expenses are expensed as incurred. Homes held for sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated proportionately to homes within the respective area. Due from Affiliates - The Company has transactions in the normal course of business with Lennar Corporation and/or affiliated companies. 40 Interest and Real Estate Taxes - Interest and real estate taxes attributable to land and homes are capitalized while they are being actively developed. Interest costs relieved from inventories are included in interest expense. Interest costs result from the interest related to the Company's outstanding debt as disclosed in the consolidated balance sheets, as well as debt incurred by Lennar Corporation. Lennar Corporation allocates a portion of its interest to the Company based on the Company's inventory levels during the year. Operating Equipment - Operating equipment is recorded at cost. The assets are depreciated over their estimated useful lives using the straight-line method. The estimated useful life is 2 to 10 years. At November 30, 2001 and 2000, operating equipment of $0.5 million and $0.4 million, respectively, was included in other assets in the consolidated balance sheets. Goodwill - Goodwill represents the excess of the purchase price over the fair value of net assets acquired and was amortized by the Company on a straight-line basis over 20 years. At November 30, 2001 and 2000, goodwill was $36.5 million and $38.7 million, respectively (net of accumulated amortization of $9.4 million and $7.1 million, respectively). In the event that facts and circumstances indicate that the carrying value of goodwill might be impaired, an evaluation of recoverability is performed. If an evaluation was required, the estimated future undiscounted cash flows associated with the goodwill would be compared to the carrying amount to determine if a write-down to fair value based on discounted cash flows was required. No impairment existed during the years ended November 30, 2001, 2000 or 1999. Subsequent to the Company's adoption of Statement of Financial Accounting Standards ("SFAS") No. 141 and SFAS No. 142, goodwill and its amortization will be accounted for in accordance with the standards they prescribe which will discontinue the Company's amortization of goodwill. See the New Accounting Pronouncements section of Note 1. Income Taxes - The Company files a consolidated federal income tax return with Lennar Corporation. Income taxes have been provided at the Company level as if the Company filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar Corporation, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Fair Value of Financial Instruments - The carrying amount of accounts payable approximates fair value. New Accounting Pronouncements - In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and requires acquired intangible assets to be recognized as assets apart from goodwill if certain criteria are met. The Company adopted SFAS No. 141 for all future acquisitions. SFAS No. 142 no longer requires or permits the amortization of goodwill and indefinite-lived assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted SFAS No. 142 on December 1, 2001. Because of that, amortization of goodwill of approximately $2 million per year will not be incurred in the future. Management does not currently believe that the 41 implementation of SFAS No. 142 will have a material impact on the Company's financial condition or results of operations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003. Management does not currently believe that the implementation of SFAS No. 144 will have a material impact on the Company's financial condition or results of operations. Reclassification - Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2001 presentation. 2. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS Summarized condensed financial information on a combined 100% basis related to the Company's investments in unconsolidated partnerships and other similar entities (collectively the "Partnerships") accounted for by the equity method was as follows: November 30, (In thousands) 2001 2000 ----------------------------------------------------------------------- Assets: Cash $ 1,236 $ 716 Land under development 71,961 6,503 Other assets 26 2 ------- ------- $73,223 $ 7,221 ======= ======= Liabilities and equity: Accounts payable and other liabilities 3,912 501 Notes and mortgages payable 30,836 5,013 Equity 38,475 1,707 ------- ------- $73,223 $ 7,221 ======= ======= Years ended November 30, 2001, 2000 and 1999 (In thousands) 2001 2000 1999 ----------------------------------------------------------------------- Revenues $ 32 $ 31 $ 25 Costs and expenses 2,905 284 -- ------- ------- ------- Net earnings (loss) of unconsolidated partnerships $(2,873) $ (253) $ 25 ======= ======= ======= 42 At November 30, 2001, the Company's equity interest in each of these Partnerships was 50% or less. The Company's partners generally are third party homebuilders, land sellers seeking a share of the profits from development of the land or real estate professionals who do not have the capital and/or expertise to develop properties by themselves. The Partnerships follow accounting principles generally accepted in the United States of America. The Company shares in the profits and losses of these Partnerships and, when appointed the manager of the Partnerships, receives fees for the management of the assets. The Company does not include in its income the pro rata Partnership earnings resulting from land sales to the Company. These amounts are recorded as a reduction of the cost of purchasing the land from the Partnerships which increases profits when title passes to a third party homebuyer. Equity in earnings from unconsolidated partnerships is included in sales of land and other revenues in the consolidated statements of earnings. 3. INCOME TAXES The provision for income taxes consisted of the following: Years Ended November 30, (Dollars in thousands) 2001 2000 1999 ------------------------------------------------------------- Current: Federal $61,692 $51,687 $45,105 State 8,880 6,011 8,591 ------- ------- ------- 70,572 57,698 53,696 ------- ------- ------- Deferred: Federal 4,034 2,933 5,393 State 212 290 818 ------- ------- ------- 4,246 3,223 6,211 ------- ------- ------- $74,818 $60,921 $59,907 ======= ======= ======= The actual income tax expense differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit, and the amortization of goodwill. 43 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows: November 30, (Dollars in thousands) 2001 2000 ------------------------------------------------------------------- Deferred tax assets: Acquisition adjustments $ 10,158 $ 10,158 Reserves and accruals 23,516 21,390 Net operating loss and capital loss carryforwards, tax affected 4,466 4,466 Capitalized expenses 5,685 5,305 Deferred gains -- 1,959 Investments in unconsolidated partnerships 745 745 -------- -------- Deferred tax assets 44,570 44,023 Less: valuation allowance (7,117) (7,117) -------- -------- Total deferred tax assets, net 37,453 36,906 -------- -------- Deferred tax liabilities: Deferred gains 55 -- Other 21,126 16,387 -------- -------- Total deferred tax liabilities 21,181 16,387 -------- -------- Net deferred tax asset $ 16,272 $ 20,519 ======== ======== The net deferred tax asset is included in other assets in the consolidated balance sheets. SFAS No. 109 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that a portion or all of the deferred tax asset will not be realized. At both November 30, 2001 and 2000, the Company had a valuation allowance of $7.1 million for net operating loss and capital loss carryforwards and certain acquisition adjustments which currently are not expected to be realized. Based on management's assessment, it is more likely than not that the net deferred tax asset will be realized through future taxable earnings. 4. RELATED PARTY TRANSACTIONS On April 1, 1999, Lennar Corporation entered into an agreement with Greystone Homes of Nevada, Inc. ("Greystone"), a majority-owned subsidiary of Greystone Homes, Inc., which is a wholly-owned subsidiary of Lennar Corporation, whereby Greystone has granted to affiliates of Lennar Corporation the right to use certain property for a fee. Unpaid fees bear interest at 9% annually. The classification "licensing revenues from affiliates" in the consolidated statements of earnings is comprised of the affiliates' fee and interest. On a quarterly basis, these amounts are paid to Greystone by Lennar 44 Corporation. The term of the agreement ends on November 30, 2002, with automatic one-year renewals unless terminated earlier by three-months written notice by either party. On April 1, 1999, Lennar Corporation entered into a financing arrangement with Greystone which matured on December 31, 2001 and was extended through December 31, 2007, whereby Lennar Corporation may borrow up to $950 million, from Greystone at an interest rate of 9% payable quarterly. As of November 30, 2001 and 2000, Lennar Corporation had borrowed $333.3 million and $178.4 million under this financing arrangement. During 2001 and 2000, Lennar Corporation and its subsidiaries advanced and borrowed funds to and from the Company which had no stated repayment terms, other than the financing arrangement discussed above. At November 30, 2001 and 2000, the Company had a receivable from affiliates of $241.7 million and $118.7 million, respectively. 5. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition or results of operations of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate, which it does in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to reduce the financial risk of adverse market conditions associated with long-term land holdings. At November 30, 2001, the Company had $12.8 million of primarily non-refundable option deposits and advanced costs with entities including unconsolidated partnerships. The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2002 - $1.6 million; 2003 - $1.1 million; 2004 - $1.0 million and 2005 - $0.2 million. Rental expense for the years ended November 30, 2001, 2000 and 1999 was $2.0 million, $2.2 million and $1.6 million, respectively. The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $10.2 million at November 30, 2001. The Company also had outstanding performance and surety bonds with estimated costs to complete of $158.7 million related principally to its obligations for site improvements at various projects at November 30, 2001. The Company does not believe that any such bonds are likely to be drawn upon. The Company has guaranteed obligations of Lennar Corporation with regard to certain issues of its outstanding debt, and the stock of the Company has been pledged as collateral for Lennar Corporation's obligations with regard to that debt. The Company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. 45 INDEPENDENT AUDITORS' REPORT To the Board of Directors of U.S. Home Corporation: We have audited the accompanying consolidated balance sheets of U.S. Home Corporation and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar Corporation, as of November 30, 2001 and 2000 and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the three years in the period ended November 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida January 9, 2002 46 U.S. HOME CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2001 AND 2000 (Dollars in thousands, except par value) - -------------------------------------------------------------------------------- ASSETS 2001 2000 Homebuilding: Cash $ 98,127 $ 53,934 Inventories 1,459,909 1,386,066 Investments in unconsolidated partnerships 121,467 80,881 Goodwill, net 77,655 82,009 Other assets 151,675 163,208 ---------- ---------- 1,908,833 1,766,098 Financial services 887,659 599,053 ---------- ---------- $2,796,492 $2,365,151 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Homebuilding: Accounts payable and other liabilities $ 254,069 $ 326,062 Senior notes and other debts payable 35,652 32,508 Due to affiliates 232,531 360,908 ---------- ---------- Total liabilities 522,252 719,478 ---------- ---------- Financial services 788,258 511,846 ---------- ---------- Stockholder's equity: Common stock, $0.10 par value; 5,000 shares authorized, issued and outstanding 1 1 Additional paid-in capital 737,331 737,331 Retained earnings 748,650 396,495 ---------- ---------- Total stockholder's equity 1,485,982 1,133,827 ---------- ---------- $2,796,492 $2,365,151 ========== ========== See accompanying notes to consolidated financial statements. 47 U.S. HOME CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - -------------------------------------------------------------------------------- 2001 2000 1999 REVENUES: Homebuilding $2,928,380 $2,031,190 $ 923,540 Financial services 424,554 315,301 269,307 Licensing revenues from affiliates 129,161 104,677 63,285 ---------- ---------- ---------- Total revenues 3,482,095 2,451,168 1,256,132 ---------- ---------- ---------- COSTS AND EXPENSES: Homebuilding 2,187,404 1,614,398 725,979 Financial services 333,657 272,774 238,548 Selling, general and administrative 320,105 200,958 86,023 Interest 70,490 55,152 23,159 ---------- ---------- ---------- Total costs and expenses 2,911,656 2,143,282 1,073,709 ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES 570,439 307,886 182,423 INCOME TAXES 218,284 120,768 73,037 ---------- ---------- ---------- NET EARNINGS $ 352,155 $ 187,118 $ 109,386 ========== ========== ========== See accompanying notes to consolidated financial statements. 48 U.S. HOME CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED NOVEMBER 30, 2001, 2000 and 1999 (Dollars in thousands) - --------------------------------------------------------------------------------
Additional Common Paid-in Retained Stock Capital Earnings Total Balance, November 30, 1998 $ 1 $ 233,046 $ 99,991 $ 333,038 1999 net earnings -- -- 109,386 109,386 -------- --------- --------- ----------- Balance, November 30, 1999 1 233,046 209,377 442,424 Contribution of capital to acquire U.S. Home Corporation (see Note 2) -- 510,249 -- 510,249 Distribution of capital to affiliate (see Note 1) -- (5,964) -- (5,964) 2000 net earnings -- -- 187,118 187,118 -------- --------- --------- ----------- Balance, November 30, 2000 1 737,331 396,495 1,133,827 2001 net earnings -- -- 352,155 352,155 -------- --------- --------- ----------- Balance, November 30, 2001 $ 1 $ 737,331 $ 748,650 $ 1,485,982 ======== ========= ========= ===========
See accompanying notes to consolidated financial statements. 49 U.S. HOME CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in thousands) - --------------------------------------------------------------------------------
2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 352,155 $ 187,118 $ 109,386 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization, net 30,470 30,290 22,825 Equity in (earnings) loss from unconsolidated partnerships (1,473) 58 112 Changes in assets and liabilities, net of effects from acquisitions: (Increase) decrease in inventories (70,266) 156,363 41,966 Increase in other assets (81,856) (29,050) (7,988) (Increase) decrease in financial services loans held for sale or disposition (206,461) (75,872) 6,293 Decrease in accounts payable and other liabilities (60,995) (43,459) (7,578) ----------- ----------- ----------- Net cash provided by (used in) operating activities (38,426) 225,448 165,016 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in investments in unconsolidated partnerships, net (39,113) (33,553) (1,561) (Increase) decrease in financial services mortgage loans 3,910 (11,834) 1,548 Purchases of investment securities (18,143) (18,112) (13,119) Receipts from investment securities 17,700 14,946 11,600 Decrease in financial services mortgage servicing rights 10,812 1,315 -- Acquisition of businesses - net of cash acquired (1,630) (158,357) (19,747) ----------- ----------- ----------- Net cash used in investing activities (26,464) (205,595) (21,279) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under financial services debt 264,996 165,452 (3,168) Payments for tender of senior notes -- (519,759) -- Proceeds from borrowings -- 2,981 2,578 Principal payments on borrowings (20,419) (260,654) (146,756) Contributed capital -- 243,383 -- Increase (decrease) in amounts due to affiliates (128,377) 407,287 (9,376) ----------- ----------- ----------- Net cash provided by (used in) financing activities 116,200 38,690 (156,722) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH 51,310 58,543 (12,985) CASH AT BEGINNING OF YEAR 93,454 34,911 47,896 ----------- ----------- ----------- CASH AT END OF YEAR $ 144,764 $ 93,454 $ 34,911 =========== =========== =========== Summary of cash: Homebuilding $ 98,127 $ 53,934 $ -- Financial services 46,637 39,520 34,911 ----------- ----------- ----------- $ 144,764 $ 93,454 $ 34,911 =========== =========== =========== See Note 1 for supplemental disclosures of cash flow information related to interest and income taxes paid Supplemental disclosures of non-cash investing and financing activities: Purchases of inventory financed by sellers $ 17,897 $ -- $ 6,505 Fair value of assets acquired in U.S. Home acquisition, inclusive of cash of $90,997 $ -- $ 1,654,444 $ -- Goodwill recorded from U.S. Home acquisition $ -- $ 47,809 $ -- Liabilities assumed in U.S. Home acquisition $ -- $ 1,192,004 $ --
See accompanying notes to consolidated financial statements. 50 U.S. HOME CORPORATION AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The accompanying consolidated financial statements include the accounts of U.S. Home Corporation, a wholly-owned subsidiary of Lennar Corporation, and all subsidiaries and partnerships (and similar entities) in which a controlling interest is held (the "Company" or "U.S. Home"). The Company's investments in unconsolidated partnerships in which a significant, but less than a controlling, interest is held are accounted for by the equity method. Controlling interest is determined based on a number of factors, which include the Company's ownership interest and participation in the management of the partnership. All significant intercompany transactions and balances have been eliminated. During 2001, the Company made a tax-free contribution of real and personal property and equity interests of its, and certain of its subsidiaries, homebuilding business within the State of Texas (the "Texas Operations"), to Lennar Homes of Texas Land & Construction, Ltd. (the "Texas Partnership"), a majority-owned subsidiary of Lennar Southwest Holding Corp., in exchange for a 40% limited partners' interest in the Texas Partnership. This transaction was accounted for as a reorganization of entities under common control, which is similar to the pooling of interests method of accounting for business combinations and accordingly, all prior period consolidated financial statements have been restated as if this transaction occurred on May 3, 2000, the date of Lennar Corporation's acquisition of U.S. Home. During 2001, Lennar Corporation contributed to the Company, as a tax-free contribution, all of the issued and outstanding shares of the common stock of Greystone Homes, Inc. and Lennar Financial Services, Inc., both of which were wholly-owned subsidiaries of Lennar Corporation. These transactions were accounted for as a reorganization of entities under common control, which is similar to the pooling of interests method of accounting for business combinations and accordingly, all prior period consolidated financial statements have been restated as if this transaction occurred on November 30, 1998. LEN Acquisition Corporation, a wholly-owned subsidiary of Lennar Corporation, was incorporated on February 15, 2000. In May 2000, U.S. Home Corporation was acquired by LEN Acquisition Corporation. LEN Acquisition Corporation was subsequently renamed U.S. Home Corporation. See Note 2. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition - Revenue from sales of homes are recognized when the sales are closed and title passes to the new homeowners. Revenues from sales of other real estate (including the sales of land and operating properties) are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. 51 Cash - The Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values. Cash as of November 30, 2001 and 2000 included $42.9 million and $25.8 million, respectively, of cash held in escrow for approximately three days. Inventories - Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company evaluates long-lived assets for impairment based on the undiscounted future cash flows of the assets. Write-downs to inventories deemed to be impaired are recorded as adjustments to the cost basis of the respective inventories. No impairment existed during the years ended November 30, 2001, 2000 and 1999. Start-up costs, construction overhead and selling expenses are expensed as incurred. Homes held for sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated proportionately to homes within the respective area. Due to Affiliates - Due to affiliates includes the Company's transactions in the normal course of business with Lennar Corporation and/or affiliated companies as well as minority interest. Interest and Real Estate Taxes - Interest and real estate taxes attributable to land and homes are capitalized while they are being actively developed. Interest related to homebuilding, including interest costs relieved from inventories, is included in interest expense. Interest costs result from the interest related to the Company's outstanding debt as disclosed in the consolidated balance sheets as well as debt incurred by the Company's parent, Lennar Corporation. Lennar Corporation allocates a portion of its interest to the Company based on the Company's inventory levels during the year. Interest expense relating to the financial services operations is included in its respective costs and expenses. Operating Equipment - Operating equipment is recorded at cost. The assets are depreciated over their estimated useful lives using the straight-line method. The estimated useful life for operating equipment is 2 to 10 years. At November 30, 2001 and 2000, operating equipment of $9.3 million and $13.2 million, respectively, was included in other assets in the consolidated balance sheets. Investment Securities - Investment securities that have determinable fair values are classified as available-for-sale unless they are classified as held-to-maturity. Securities classified as held-to-maturity are carried at amortized cost because they are purchased with the intent and ability to hold to maturity. Available-for-sale securities are recorded at fair value. Any unrealized holding gains or losses on available-for-sale securities are reported in a separate component of stockholder's equity, net of tax effects, until realized. At November 30, 2001 and 2000, investment securities classified as held-to-maturity totaled $13.2 million and $12.5 million, respectively, and were included in other assets of the Financial Services Division. There were no other investment securities at November 30, 2001 or 2000. Derivative Financial Instruments - Effective December 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income and recognized in the statement of 52 earnings when the hedged item affects earnings, depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. The Financial Services Division, in the normal course of business, uses derivative financial instruments to reduce its exposure to fluctuations in interest rates. The Division enters into forward commitments and option contracts to protect the value of fixed rate locked loan commitments and loans held for sale or disposition from fluctuations in market interest rates. These derivative financial instruments are designated as fair value hedges, and, accordingly, for all qualifying and highly effective fair value hedges, the changes in the fair value of the derivative and the loss or gain on the hedged asset relating to the risk being hedged are recorded currently in earnings. The effect of the implementation of SFAS No. 133 on the Financial Services Division's operating earnings was not significant. Goodwill - Goodwill represents the excess of the purchase price over the fair value of net assets acquired and was amortized by the Company on a straight-line basis over periods ranging from 15 to 20 years. At November 30, 2001 and 2000, goodwill was $102.8 million and $107.2 million, respectively (net of accumulated amortization of $17.7 million and $11.5 million, respectively). In the event that facts and circumstances indicated that the carrying value of goodwill might be impaired, an evaluation of recoverability is performed. If an evaluation was required, the estimated future undiscounted cash flows associated with the goodwill would be compared to the carrying amount to determine if a write-down to fair value based on discounted cash flows was required. No impairment existed during the years ended November 30, 2001, 2000 or 1999. The Homebuilding Division's goodwill was $77.7 million and $82.0 million at November 30, 2001 and 2000, respectively, and the Financial Services Division's goodwill was $25.2 million at both November 30, 2001 and 2000. Subsequent to the Company's adoption of SFAS No. 141 and SFAS No. 142, goodwill and its amortization will be accounted for in accordance with those standards they prescribe which will discontinue the Company's amortization of goodwill. See the New Accounting Pronouncements section of Note 1. Income Taxes - The Company files a consolidated federal income tax return with Lennar Corporation. Income taxes have been provided at the Company level as if the Company filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar Corporation, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Financial Services - Mortgage loans held for sale or disposition by the Financial Services Division are carried at market value, as determined on an aggregate basis. Premiums and discounts recorded on these loans are presented as an adjustment to the carrying amount of the loans and are not amortized. When the Division sells loans into the secondary market, a gain or loss is recognized to the extent that the sales proceeds exceed, or are less than, the book value of the loans. Loan origination fees, net of direct origination costs, are deferred and recognized as a component of the gain or loss when loans are sold. In prior years, the Division retained servicing rights from some of the loans it originated and maintained a portfolio of mortgage servicing rights. During 2001, the Division sold substantially all of its existing portfolio of mortgage servicing rights and realized a pretax profit of approximately $13 million from the sale of the servicing rights. Subsequent to the sale, the Division has sold the servicing rights together with the loans it originated. Prior to the sale of the mortgage servicing rights portfolio, the book value of each mortgage loan the Division sold was allocated partly to the mortgage servicing right and partly to the loan (separately from the mortgage servicing right) based on their estimated relative fair values at the time the loan was sold and the servicing rights retained. The fair value of 53 mortgage servicing rights was determined by discounting the estimated future cash flows using a discount rate commensurate with the risks involved. This method of valuation incorporated assumptions that market participants would use in their estimates of future servicing income and expense, including assumptions about prepayment, default and interest rates. Impairment, if any, was recognized through a valuation allowance and a charge to current operations. Mortgage servicing rights were amortized in proportion to, and over the period of, the estimated net servicing income of the underlying mortgages. The book value and estimated fair value of mortgage servicing rights was $11.7 million and $13.4 million, respectively, at November 30, 2000. A valuation allowance related to mortgage servicing rights was not required at or for the year ended November 30, 2000. New Accounting Pronouncements - In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and requires acquired intangible assets to be recognized as assets apart from goodwill if certain criteria are met. The Company adopted SFAS No. 141 for all future acquisitions. SFAS No. 142 no longer requires or permits the amortization of goodwill and indefinite-lived assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted SFAS No. 142 on December 1, 2001. Because of that, amortization of goodwill of approximately $6 million per year will not be incurred in the future. Management does not currently believe that the implementation of SFAS No. 142 will have a material impact on the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003. Management does not currently believe that the implementation of SFAS No. 144 will have a material impact on the Company's financial position or results of operations. Reclassification - Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2001 presentation. 2. ACQUISITIONS On May 3, 2000, U.S. Home Corporation was acquired by LEN Acquisition Corporation in a transaction in which U.S. Home stockholders received a total of approximately $243 million in cash and 13 million shares of Lennar Corporation common stock with a value of approximately $267 million. LEN Acquisition Corporation was subsequently renamed U.S. Home Corporation. The acquisition was accounted for using the purchase method of accounting. In connection with the transaction, the Company acquired assets with a fair value of $1.7 billion, assumed liabilities with a fair value of $1.2 billion and recorded goodwill of $48 million. Goodwill was being amortized on a straight-line basis over 20 years. The results of U.S. Home are included in the Company's consolidated statements of earnings since the acquisition date. Revenues and net earnings on an unaudited pro forma basis would have been $2.2 billion and $101.8 million, respectively, for the year ended November 30, 2000 had the acquisition occurred on December 1, 1999. The pro forma information gives effect to 54 actual operating results prior to the acquisition, adjusted for the pro forma effect of interest expense, amortization of goodwill, and certain other adjustments, together with their related income tax effect. During 2000, the Company acquired a title company for $1.7 million in cash and acquired assets with a fair value of $1.0 million, assumed liabilities of $1.7 million and recorded goodwill of $2.4 million. During 1999, the Company acquired a mortgage company and several title companies for $19.7 million in cash and acquired assets with a fair value of $40.5 million, assumed liabilities of $32.2 million and recorded goodwill of $11.4 million. The acquisitions were accounted for using the purchase method of accounting. Goodwill was being amortized on a straight-line basis over 15 to 20 years. The results of these companies are included in the Company's consolidated statements of earnings since their acquisition dates. 3. OPERATING AND REPORTING SEGMENTS The Company has two operating and reporting segments: Homebuilding and Financial Services. The Company's reportable segments are strategic business units that offer different products and services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1. Homebuilding - Homebuilding operations include the sale and construction of single-family attached and detached homes. These activities also include the purchase, development and sale of residential land by the Company and unconsolidated partnerships in which it has investments. The following table sets forth financial information relating to the homebuilding operations: Years Ended November 30, 2001, 2000 and 1999 (Dollars in thousands) 2001 2000 1999 ----------------------------------------------------------------------- Revenues: Sales of homes $2,834,602 $1,871,322 $ 823,317 Sales of land and other revenues 93,778 159,868 100,223 ---------- ---------- ---------- Total revenues 2,928,380 2,031,190 923,540 ---------- ---------- ---------- Costs and expenses: Cost of homes sold 2,144,718 1,496,448 634,103 Cost of land and other expenses 42,686 117,950 91,876 ---------- ---------- ---------- Total costs and expenses 2,187,404 1,614,398 725,979 ---------- ---------- ---------- $ 740,976 $ 416,792 $ 197,561 ========== ========== ========== Depreciation and amortization $ 20,983 $ 20,310 $ 13,516 ========== ========== ========== 55 Financial Services - The Financial Services Division provides mortgage financing, title insurance and closing services for both the Company's homebuyers and others. The Division resells the residential mortgage loans it originates in the secondary mortgage market and also provides high-speed Internet access, cable television, and alarm monitoring services for both the Company's homebuyers and other customers. The following table sets forth financial information relating to the financial services operations: Years Ended November 30, 2001, 2000 and 1999 (Dollars in thousands) 2001 2000 1999 ---------------------------------------------------------------- Revenues $424,554 $315,301 $269,307 Costs and expenses 333,657 272,774 238,548 -------- -------- -------- $ 90,897 $ 42,527 $ 30,759 ======== ======== ======== Depreciation and amortization $ 9,487 $ 9,980 $ 9,309 ======== ======== ======== Interest income, net $ 24,139 $ 15,066 $ 11,964 ======== ======== ======== 56 4. INVESTMENTS IN UNCONSOLIDATED PARTNERSHIPS Summarized condensed financial information on a combined 100% basis related to the Company's investments in unconsolidated partnerships and other similar entities (collectively the "Partnerships") accounted for by the equity method was as follows:
November 30, (In thousands) 2001 2000 ------------------------------------------------------------------------------ Assets: Cash $ 9,323 $ 7,456 Land under development 415,930 255,776 Other assets 22,950 30,035 -------- -------- $448,203 $293,267 ======== ======== Liabilities and equity: Accounts payable and other liabilities $ 56,847 $ 38,966 Notes and mortgages payable 185,679 135,917 Equity 205,677 118,384 -------- -------- $448,203 $293,267 ======== ======== Years ended November 30, 2001, 2000 and 1999 (In thousands) 2001 2000 1999 ---------------------------------------------------------------------------- Revenues $158,619 $ 65,069 $ 25 Costs and expenses 157,702 63,450 -- -------- -------- -------- Net earnings of unconsolidated partnerships $ 917 $ 1,619 $ 25 ======== ======== ========
At November 30, 2001, the Company's equity interest in each of these Partnerships was 50% or less. The Company's partners generally are third party homebuilders, land sellers seeking a share of the profits from development of the land or real estate professionals who do not have the capital and/or expertise to develop properties by themselves. The Partnerships follow accounting principles generally accepted in the United States of America. The Company shares in the profits and losses of these Partnerships and, when appointed the manager of the Partnerships, receives fees for the management of the assets. During 2001 and 2000, the Company received management fees and reimbursement of expenses from the Partnerships totaling $15.9 million and $1.1 million, respectively. The Company does not include in its income the pro rata Partnership earnings resulting from land sales to the Company. These amounts are recorded as a reduction of the cost of purchasing the land from the Partnerships which increases profits when title passes to a third party homebuyer. Equity in earnings from unconsolidated partnerships is included in homebuilding revenues in the consolidated statements of earnings. 57 The Company may obtain options or other arrangements under which the Company can purchase portions of the land held by the Partnerships. Option prices are generally negotiated prices that approximate fair value when the Company receives the options. During 2001 and 2000, $44.6 million and $16.1 million, respectively, of the Partnerships' revenues were from land sales to the Company. In some instances, Lennar Corporation, the Company and/or the Company's partners have provided varying levels of guarantees on certain partnership debt. At November 30, 2001, Lennar Corporation and/or the Company provided guarantees on $84.6 million of unconsolidated partnership debt, of which $62.7 million were limited maintenance guarantees. 5. SENIOR NOTES AND OTHER DEBTS PAYABLE November 30, (Dollars in thousands) 2001 2000 --------------------------------------------------------------------- 7.95% senior notes paid in 2001 $ -- $ 3,467 8.25% senior notes due 2004 980 980 7.75% senior notes due 2005 2,279 2,279 8.88% senior subordinated notes due 2007 4,800 4,800 8.875% senior subordinated notes due 2009 1,387 1,387 Mortgage notes on land with fixed interest rates from 5.5% to 10.0% due through 2009 26,206 19,595 ------- ------- $35,652 $32,508 ======= ======= As a result of LEN Acquisition Corporation's acquisition of U.S. Home, holders of U.S. Home's publicly-held notes totaling $525 million were entitled to require U.S. Home to repurchase the notes for 101% of their principal amount within 90 days after the transaction was completed. Independent of that requirement, in April 2000, Lennar Corporation made a tender offer for all of the notes and a solicitation of consents to modify provisions of the indentures relating to the notes. As a result of the tender offer and required repurchases after the acquisition, Lennar Corporation paid approximately $520 million in 2000, which includes tender and consent fees, for $508 million of U.S. Home's notes. These amounts paid on the Company's behalf are included in due to affiliates in the consolidated balance sheets. The minimum aggregate principal maturities of senior notes and other debts payable during the five years subsequent to November 30, 2001 are as follows: 2002 - $8.0 million; 2004 - $18.9 million; 2005 - $2.3 million and $6.5 million thereafter. 58 6. FINANCIAL SERVICES The assets and liabilities related to the Company's financial services operations were as follows: November 30, (Dollars in thousands) 2001 2000 ----------------------------------------------------------------------- Assets: Cash $ 46,637 $ 39,520 Receivables 105,024 27,450 Mortgage loans held for sale or disposition, net 587,694 376,452 Mortgage loans, net 41,590 42,504 Title plants 15,530 15,530 Goodwill, net 25,158 25,199 Collateral for bonds and notes payable 12,398 20,740 Other 53,628 51,658 -------- -------- $887,659 $599,053 ======== ======== Liabilities: Notes and other debts payable $693,931 $428,966 Bonds and notes payable 11,680 18,278 Other 82,647 64,602 -------- -------- $788,258 $511,846 ======== ======== At November 30, 2001, the Division had a $500 million warehouse line of credit which included a $145 million 30-day increase which expired in December 2001 to fund the Division's mortgage loan activities. Borrowings under this facility were $483.2 million and $339.4 million at November 30, 2001 and 2000, respectively, and were collateralized primarily by mortgage loans with outstanding principal balances of $518.8 million and $297.2 million, respectively, and in 2000, by servicing rights relating to approximately $1.8 billion of loans. There are several interest rate pricing options which fluctuate with market rates. The borrowing rate has been reduced to the extent that custodial escrow balances exceeded required compensating balance levels. The effective interest rate on this facility at November 30, 2001 and 2000 was 3.1% and 6.4%, respectively. The warehouse line of credit matures in June 2003, at which time the Company expects the facility to be renewed. At November 30, 2001 and 2000, the Division had advances under conduit funding agreements with certain major financial institutions amounting to $190.6 million and $58.8 million, respectively. Borrowings under this agreement are collateralized by mortgage loans and had an effective interest rate of 3.0% and 7.5% at November 30, 2001 and 2000, respectively. The Division also had a $20 million revolving line of credit with a bank, collateralized by certain assets of the Division and stock of certain title insurance subsidiaries. Borrowings under the line of credit were $20 million at both November 30, 2001 and 2000 and had an effective interest rate of 3.1% and 7.8% at November 30, 2001 and 2000, respectively. At November 30, 2001 and 2000, bonds and notes payable had an outstanding balance of $11.7 million and $18.3 million, respectively. The borrowings mature in years 2013 through 2018 and carry interest rates ranging from 8.6% to 11.6%. 59 The minimum aggregate principal maturities of the Financial Services Division's notes and other debts payable during the five years subsequent to November 30, 2001 are as follows: 2002 - $343.5 million and 2003 - $350.4 million. 7. INCOME TAXES The provision for income taxes consisted of the following: Years Ended November 30, 2001, 2000 and 1999 (Dollars in thousands) 2001 2000 1999 ---------------------------------------------------------------- Current: Federal $ 182,425 $ 104,391 $ 52,321 State 24,141 14,666 11,354 --------- --------- --------- 206,566 119,057 63,675 --------- --------- --------- Deferred: Federal 11,468 2,000 7,672 State 250 (289) 1,690 --------- --------- --------- 11,718 1,711 9,362 --------- --------- --------- $ 218,284 $ 120,768 $ 73,037 ========= ========= ========= The actual income tax expense differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit, and the amortization of goodwill. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the net deferred tax asset are as follows: 60 November 30, (Dollars in thousands) 2001 2000 -------------------------------------------------------------------- Deferred tax assets: Acquisition adjustments $ 48,239 $ 72,049 Reserves and accruals 67,680 55,096 Net operating loss and capital loss carryforwards, tax affected 4,466 4,466 Capitalized expenses 5,685 5,305 Deferred gains -- 1,959 Investments in unconsolidated partnerships 745 859 Other 5,290 3,640 --------- --------- Deferred tax assets 132,105 143,374 Less: valuation allowance (7,117) (7,117) --------- --------- Total deferred tax assets, net 124,988 136,257 --------- --------- Deferred tax liabilities: Capitalized expenses 23,542 32,376 Deferred gains 130 75 Investments in unconsolidated partnerships 167 -- Other 39,292 28,843 --------- --------- Total deferred tax liabilities 63,131 61,294 --------- --------- Net deferred tax asset $ 61,857 $ 74,963 ========= ========= The net deferred tax asset is included in other assets of the Homebuilding Division and the assets of the Financial Services Division in the consolidated balance sheets. SFAS No. 109 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that a portion or all of the deferred tax asset will not be realized. At both November 30, 2001 and 2000, the Company had a valuation allowance of $7.1 million for net operating loss and capital loss carryforwards and certain acquisition adjustments which currently are not expected to be realized. Based on management's assessment, it is more likely than not that the net deferred tax asset will be realized through future taxable earnings. 8. FINANCIAL INSTRUMENTS The Company estimates the fair value of its financial instruments using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimated fair values are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. At November 30, 2001, the Company believes that the fair value of cash 61 and accounts payable approximates their carrying value because of their typically liquid, short-term nature and market rate terms. At November 30, 2001, the Homebuilding Division's senior notes and other debts payable consisted of fixed rate debt. The carrying value of the fixed rate debt approximates fair value based on quoted market prices. At November 30, 2001, the fair value of the Financial Services Division's mortgage loans approximate their carrying value based on interest rates on the loans compared to the current market rates and the collectibility, term and type of loans. The fair value of the Financial Services Division's notes and other debts payable approximate their carrying value because these variable rate borrowings are tied to market indices. At November 30, 2001, the fair value of commitments to purchase loans was not material based upon the difference between the current value of similar loans and the price at which the Company has committed to originate the loans. The fair value of commitments to sell loan contracts was not material based on the estimated amount that the Company would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments. As of November 30, 2001, the Financial Services Division's pipeline of loans in process totaled approximately $1.7 billion. To minimize credit risk, the Division uses the same credit policies in the approval of the commitments as are applied to all lending activities. Since a portion of these commitments is expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements. Loans in the pipeline of loans in process for which interest rates were committed to the borrower totaled approximately $235.0 million as of November 30, 2001. Substantially all of these commitments were for periods of 30 days or less. Mandatory mortgage-backed securities ("MBS") forward commitments are used by the Company to hedge its interest rate exposure during the period from when the Company makes an interest rate commitment to a loan applicant until the time at which the loan is sold to an investor. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by entering into agreements with investment bankers with primary dealer status and with permanent investors meeting the credit standards of the Company. At any time, the risk to the Company, in the event of default by the purchaser, is the difference between the contract price and current market value. At November 30, 2001, the Company had open commitments amounting to $291.0 million to sell MBS with varying settlement dates through January 2002. 9. RELATED PARTY TRANSACTIONS On April 1, 1999, Lennar Corporation entered into an agreement with Greystone Homes of Nevada, Inc. ("Greystone"), a majority-owned subsidiary of Greystone Homes, Inc. and U.S. Home, which are both wholly-owned subsidiaries of Lennar Corporation, whereby Greystone has granted to affiliates of Lennar Corporation the right to use certain property for a fee. Unpaid fees bear interest at 9% annually. The classification "licensing revenues from affiliates" in the consolidated statements of earnings is comprised of the affiliates' fee and interest. On a quarterly basis, these amounts are paid to Greystone by Lennar Corporation. The term of the agreement ends on November 30, 2002, with automatic one-year renewals unless terminated earlier by three-months written notice by either party. On April 1, 1999, Lennar Corporation entered into a financing arrangement with Greystone which matured on December 31, 2001 and was extended through December 31, 2007, whereby Lennar Corporation may borrow up to $950 million from Greystone at an interest rate of 9% payable quarterly. As of November 30, 2001 and 2000, Lennar Corporation had borrowed $333.3 million and $178.4 million under this financing arrangement. During 2001 and 2000, Lennar Corporation and its subsidiaries advanced and borrowed funds to and from the Company which had no stated repayment terms, other than the financing arrangement discussed above. At November 30, 2001 and 2000, the Company had a payable to affiliates of $232.5 million and $360.9 million, respectively. 62 10. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition or results of operations of the Company. The Company is subject to the usual obligations associated with entering into contracts for the purchase (including option contracts), development and sale of real estate, which it does in the routine conduct of its business. Option contracts for the purchase of land permit the Company to acquire portions of properties when it is ready to build homes on them. The use of option contracts allows the Company to reduce the financial risk of adverse market conditions associated with long-term land holdings. At November 30, 2001, the Company had $154.6 million of primarily non-refundable option deposits and advanced costs with entities including unconsolidated partnerships. The Company has entered into agreements to lease certain office facilities and equipment under operating leases. Future minimum payments under the noncancelable leases are as follows: 2002 - $23.7 million; 2003 - $19.6 million; 2004 - $15.4 million; 2005 - $11.7 million; 2006 - $8.7 million and thereafter - $16.5 million. Rental expense for the years ended November 30, 2001, 2000 and 1999 was $33.4 million, $25.9 million and $15.3 million, respectively. The Company is committed, under various letters of credit, to perform certain development and construction activities and provide certain guarantees in the normal course of business. Outstanding letters of credit under these arrangements totaled $57.0 million at November 30, 2001. The Company also had outstanding performance and surety bonds with estimated costs to complete of $328.3 million related principally to its obligations for site improvements at various projects at November 30, 2001. The Company does not believe that any such bonds are likely to be drawn upon. The Company has guaranteed obligations of Lennar Corporation with regard to certain issues of its outstanding debt, and the stock of the Company has been pledged as collateral for Lennar Corporation's obligations with regard to that debt. The Company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. 63 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lennar Land Partners Sub II, Inc.: We have audited the accompanying consolidated balance sheets of Lennar Land Partners Sub II, Inc. and subsidiaries (the "Company"), a wholly-owned subsidiary of Lennar Corporation, as of November 30, 2001 and 2000 and the related consolidated statements of earnings, stockholder's equity and cash flows for the years ended November 30, 2001 and 2000 and the period from inception (June 21, 1999) to November 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of November 30, 2001 and 2000, and the results of its operations and its cash flows for the years ended November 30, 2001 and 2000 and the period from inception (June 21, 1999) to November 30, 1999, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida January 9, 2002 64 LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2001 AND 2000 (Dollars in thousands, except par value) - -------------------------------------------------------------------------------- 2001 2000 ASSETS Cash $ 236 $ -- Land held for development and sale 3,212 2,221 Investment in unconsolidated partnership 44,843 56,669 Other assets 52 100 Due from affiliates 128,518 82,793 -------- -------- $176,861 $141,783 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and other liabilities $ 15,438 $ 4,763 -------- -------- Total liabilities 15,438 4,763 -------- -------- STOCKHOLDER'S EQUITY: Common stock, $1 par value; 5,000 shares authorized, 100 shares issued and outstanding -- -- Additional paid-in capital 92,420 92,420 Retained earnings 69,003 44,600 -------- -------- Total stockholder's equity 161,423 137,020 -------- -------- $176,861 $141,783 ======== ======== See accompanying notes to consolidated financial statements. 65 LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED NOVEMBER 30, 2001 AND 2000 AND THE PERIOD FROM INCEPTION (JUNE 21, 1999) TO NOVEMBER 30, 1999 (Dollars in thousands) - -------------------------------------------------------------------------------- 2001 2000 1999 REVENUES: Land sales $37,270 $52,423 $15,839 Equity in earnings from unconsolidated partnership 16,386 21,845 9,213 Other 425 262 1,116 ------- ------- ------- Total revenues 54,081 74,530 26,168 ------- ------- ------- COSTS AND EXPENSES: Cost of land sales 14,111 21,951 4,878 General and administrative 291 379 202 ------- ------- ------- Total costs and expenses 14,402 22,330 5,080 ------- ------- ------- EARNINGS BEFORE INCOME TAXES 39,679 52,200 21,088 INCOME TAXES 15,276 20,358 8,330 ------- ------- ------- NET EARNINGS $24,403 $31,842 $12,758 ======= ======= ======= See accompanying notes to consolidated financial statements. 66 LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED NOVEMBER 30, 2001 AND 2000 AND THE PERIOD FROM INCEPTION (JUNE 21, 1999) TO NOVEMBER 30, 1999 (Dollars in thousands) - -------------------------------------------------------------------------------- Additional Common Paid-in Retained Stock Capital Earnings Total Initial capitalization (June 21, 1999) $-- $ 92,420 $ -- $ 92,420 Net earnings from June 21, 1999 to November 30, 1999 -- -- 12,758 12,758 --- -------- -------- -------- Balance, November 30, 1999 -- 92,420 12,758 105,178 2000 net earnings -- -- 31,842 31,842 --- -------- -------- -------- Balance, November 30, 2000 -- 92,420 44,600 137,020 2001 net earnings -- -- 24,403 24,403 --- -------- -------- -------- Balance, November 30, 2001 $-- $ 92,420 $ 69,003 $161,423 === ======== ======== ======== See accompanying notes to consolidated financial statements. 67 LENNAR LAND PARTNERS SUB II, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Lennar Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2001 AND 2000 AND THE PERIOD FROM INCEPTION (JUNE 21, 1999) TO NOVEMBER 30, 1999 (Dollars in thousands) - --------------------------------------------------------------------------------
2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 24,403 $ 31,842 $ 12,758 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Equity in earnings from unconsolidated partnership (16,386) (21,845) (9,213) Changes in assets and liabilities: (Increase) decrease in land held for development and sale (991) 14,892 563 (Increase) decrease in other assets 48 (25) 12 Increase (decrease) in accounts payable and other liabilities 10,675 2,019 (7,596) -------- -------- -------- Net cash provided by (used in) operating activities 17,749 26,883 (3,476) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in investment in unconsolidated partnership, net 28,212 52,382 3,105 -------- -------- -------- Net cash provided by investing activities 28,212 52,382 3,105 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: (Increase) decrease in amounts due from affiliates (45,725) (79,343) 449 -------- -------- -------- Net cash provided by (used in) financing activities (45,725) (79,343) 449 -------- -------- -------- NET INCREASE (DECREASE) IN CASH 236 (78) 78 CASH AT BEGINNING OF PERIOD -- 78 -- -------- -------- -------- CASH AT END OF PERIOD $ 236 $ -- $ 78 ======== ======== ========
See Note 1 for supplemental disclosures of cash flow information related to interest and income taxes paid. See accompanying notes to consolidated financial statements. 68 LENNAR LAND PARTNERS SUB II, INC. and subsidiaries (A Wholly-Owned Subsidiary of Lennar Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 2001 AND 2000 AND THE PERIOD FROM INCEPTION (JUNE 21, 1999) TO NOVEMBER 30, 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation - The accompanying consolidated financial statements include the accounts of Lennar Land Partners Sub II, Inc., its subsidiaries and an unconsolidated partnership in which a significant, but less than a controlling, interest is held (the "Company"). Controlling interest is determined based on a number of factors, which include the Company's ownership interest and participation in the management of the partnership. The Company is a wholly-owned subsidiary of Lennar Corporation and was formed on June 21, 1999 by the contribution of an investment in an unconsolidated partnership. The investment in the unconsolidated partnership was recorded at Lennar Corporation's historical carrying value. All significant intercompany transactions and balances have been eliminated. The Company operates in one operating and reporting segment. The activities in this segment include the purchase, development and sale of residential land by the Company and its unconsolidated partnership. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition - Revenues from land sales are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured. Cash - The Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values. Land Held for Development and Sale - The cost of land held for development and sale includes direct and indirect costs, capitalized interest and property taxes. The cost of land, major infrastructure, amenities and other common costs are apportioned among the parcels within a real estate community. Land is carried at cost, unless the land within a community is determined to be impaired, in which case the impaired land will be written down to fair value. The Company evaluates long-lived assets for impairment based on undiscounted future cash flows of the assets. Write-downs of land deemed to be impaired will be recorded as adjustments to the cost basis of the respective land. No impairment existed during the years ended November 30, 2001 and 2000 and the period from inception (June 21, 1999) to November 30, 1999. Due from Affiliates - The Company has transactions in the normal course of business with Lennar Corporation and/or affiliated companies. Interest and Real Estate Taxes - Interest and real estate taxes attributable to land are capitalized while the properties are being actively developed. Interest costs relieved from inventories are included in 69 "cost of land sales" in the consolidated statements of earnings. Interest costs result from the interest related to debt incurred by the Company's parent, Lennar Corporation. Lennar Corporation allocates a portion of its interest to the Company based on the Company's inventory levels during the year. Income Taxes - The Company files a consolidated federal income tax return with Lennar Corporation. Income taxes have been provided at the Company level as if the Company filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar Corporation, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured by using enacted tax rates expected to apply to taxable income in the years in which those differences are expected to reverse. Fair Value of Financial Instruments - The carrying amounts of cash and accounts payable approximate fair value. New Accounting Pronouncements - In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and requires acquired intangible assets to be recognized as assets apart from goodwill if certain criteria are met. The Company adopted SFAS No. 141 for all future acquisitions. SFAS No. 142 no longer requires or permits the amortization of goodwill and indefinite-lived assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted SFAS No. 142 on December 1, 2001. Management does not currently believe that the implementation of SFAS No. 142 will have a material impact on the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121. SFAS No. 144 is effective for the Company in fiscal 2003. Management does not currently believe that the implementation of SFAS No. 144 will have a material impact on the Company's financial position or results of operations. Reclassification - Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2001 presentation. 70 2. INVESTMENT IN UNCONSOLIDATED PARTNERSHIP At November 30, 2001, the Company had a 50% equity interest in an unconsolidated partnership with a related party. The Company accounts for the unconsolidated partnership by the equity method of accounting. The unconsolidated partnership follows accounting principles generally accepted in the United States of America. Financial information related to this unconsolidated partnership was as follows: November 30, (Dollars in thousands) 2001 2000 ----------------------------------------------------------------- Assets: Cash $ 10,004 $ 17,912 Land held for development and sale 115,231 150,150 Other assets 64,167 90,167 -------- -------- $189,402 $258,229 ======== ======== Liabilities and equity: Accounts payable and other liabilities $ 36,349 $ 38,566 Mortgage notes and other debts payable 63,367 106,325 Equity 89,686 113,338 -------- -------- $189,402 $258,229 ======== ======== Years ended November 30, 2001 and 2000 and the period from inception (June 21, 1999) to November 30, 1999 (Dollars in thousands) 2001 2000 1999 --------------------------------------------------------------------- Revenues $130,002 $172,432 $ 73,139 Costs and expenses 97,230 128,742 54,713 -------- -------- -------- Net earnings of unconsolidated partnership $ 32,772 $ 43,690 $ 18,426 ======== ======== ======== In some instances, Lennar Corporation and/or the Company's partner have provided varying levels of guarantees on certain of the partnership's debt. At November 30, 2001, Lennar Corporation provided guarantees on $49.6 million of unconsolidated partnership debt, including a second-tier partnership, of which $44.1 million were limited maintenance guarantees. 71 3. INCOME TAXES The provision for income taxes consisted of the following: Years ended November 30, 2001 and 2000 and the period from inception (June 21, 1999) to November 30, 1999 (Dollars in thousands) 2001 2000 1999 ----------------------------------------------------------- Current: Federal $ 13,369 $ 18,491 $ 6,780 State 1,924 2,150 1,292 -------- -------- -------- 15,293 20,641 8,072 -------- -------- -------- Deferred: Federal (16) (258) 224 State (1) (25) 34 -------- -------- -------- (17) (283) 258 -------- -------- -------- $ 15,276 $ 20,358 $ 8,330 ======== ======== ======== The actual income tax expense differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant temporary differences that give rise to the deferred tax assets are as follows: November 30, (Dollars in thousands) 2001 2000 ----------------------------------------------------------- Deferred tax assets: Capitalized expenses $ 42 $ 25 ===== ==== The deferred tax assets are included in other assets in the consolidated balance sheets. 72 4. RELATED PARTY TRANSACTIONS The Company and its unconsolidated partnership, in the ordinary course of business, sell land to affiliates of Lennar Corporation. During 2001, 2000 and the period from inception (June 21, 1999) to November 30, 1999, these land sales amounted to $88.7 million, $106.9 million, and $16.7 million, respectively, and generated gains of $39.4 million, $47.9 million and $6.3 million respectively. The Company believes amounts received from affiliates of Lennar Corporation approximate amounts that would have been received from independent third parties. During 2001 and 2000, Lennar Corporation and its subsidiaries advanced and borrowed funds to and from the Company which had no stated repayment terms. At November 30, 2001 and 2000, the Company had a receivable from affiliates of $128.5 million and $82.8 million, respectively. 5. COMMITMENTS AND CONTINGENT LIABILITIES The Company and certain subsidiaries are parties to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the financial condition or results of operations of the Company. The Company has guaranteed obligations of Lennar Corporation with regard to certain issues of its outstanding debt, and the stock of the Company has been pledged as collateral for Lennar Corporation's obligations with regard to that debt. The Company knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. 73 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Lennar Financial Services, Inc.: We have audited the accompanying consolidated balance sheets of Lennar Financial Services, Inc. and subsidiaries ("LFS"), a wholly-owned subsidiary of U.S. Home Corporation, as of November 30, 2001 and 2000 and the related consolidated statements of earnings, stockholder's equity and cash flows for each of the three years in the period ended November 30, 2001. These financial statements are the responsibility of LFS' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LFS as of November 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Certified Public Accountants Miami, Florida January 9, 2002 74 LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED BALANCE SHEETS NOVEMBER 30, 2001 AND 2000 (Dollars in Thousands, Except Par Value) - -------------------------------------------------------------------------------- ASSETS 2001 2000 Cash $ 46,293 $ 39,321 Receivables 105,024 27,450 Loans held for sale, net 587,694 376,452 Loans held for investment and performance notes, net 41,590 42,504 Collateral for bonds and notes payable 12,398 20,740 Due from affiliates 110,037 63,648 Title plants 15,530 15,530 Goodwill, net 25,158 25,199 Other assets 50,974 50,723 -------- -------- TOTAL $994,698 $661,567 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and accrued expenses $ 30,307 $ 28,186 Borrowings under credit agreements 693,931 428,966 Bonds and notes payable 11,680 18,278 Other liabilities 52,320 36,316 -------- -------- Total liabilities 788,238 511,746 -------- -------- STOCKHOLDER'S EQUITY: Common stock, $1 par value; 5,000 shares authorized, issued and outstanding 5 5 Additional paid-in capital 16,979 16,979 Retained earnings 189,476 132,837 -------- -------- Total stockholder's equity 206,460 149,821 -------- -------- TOTAL $994,698 $661,567 ======== ======== See accompanying notes to consolidated financial statements. 75 LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in Thousands) - -------------------------------------------------------------------------------- 2001 2000 1999 REVENUES: Title and escrow activities $232,294 $179,444 $181,941 Loan origination and sales activities 136,164 79,715 44,650 Interest income 37,410 28,862 22,682 Mortgage servicing activities 3,889 9,838 12,006 Other 13,738 16,849 8,028 -------- -------- -------- Total revenues 423,495 314,708 269,307 -------- -------- -------- OPERATING EXPENSES: Payroll and benefits 185,747 150,056 139,688 Other administrative expenses 88,843 66,062 57,286 Occupancy 24,853 20,653 17,474 Data processing 2,456 2,183 2,050 Provision for losses 8,591 9,448 1,592 Depreciation and amortization 9,809 10,521 9,740 Interest 13,271 13,796 10,718 -------- -------- -------- Total operating expenses 333,570 272,719 238,548 -------- -------- -------- EARNINGS BEFORE INCOME TAXES 89,925 41,989 30,759 INCOME TAXES 33,286 17,068 13,130 -------- -------- -------- NET EARNINGS $ 56,639 $ 24,921 $ 17,629 ======== ======== ======== See accompanying notes to consolidated financial statements. 76 LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED NOVEMBER 30, 2001, 2000, AND 1999 (Dollars in Thousands) - -------------------------------------------------------------------------------- Additional Common Paid-in Retained Stock Capital Earnings Total BALANCE, NOVEMBER 30, 1998 $ 5 $ 16,969 $ 52,822 $ 69,796 Net earnings -- 17,629 17,629 -------- -------- -------- -------- BALANCE, NOVEMBER 30, 1999 5 16,969 70,451 87,425 Reorganization (see Note 1) -- 10 37,465 37,475 Net earnings -- 24,921 24,921 -------- -------- -------- -------- BALANCE, NOVEMBER 30, 2000 5 16,979 132,837 149,821 Net earnings -- 56,639 56,639 -------- -------- -------- -------- BALANCE, NOVEMBER 30, 2001 $ 5 $ 16,979 $189,476 $206,460 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. 77 LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in Thousands) - --------------------------------------------------------------------------------
2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 56,639 $ 24,921 $ 17,629 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 9,809 10,521 9,740 Amortization of loan discounts (322) (541) (431) Origination and acquisition of loans (5,135,877) (2,140,310) (2,043,571) Proceeds on sales of loans 4,929,416 2,064,439 2,047,714 Net (increase) decrease in receivables (77,814) (8,697) 2,150 Net (increase) decrease in other assets (4,665) 9,532 (4,824) Net increase (decrease) in accounts payable and accrued expenses 10,998 (13,841) (6,428) ----------- ----------- ----------- Net cash (used in) provided by operating activities (211,816) (53,976) 21,979 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to loans and mortgage-backed securities held for investment (16,705) (26,754) (3,328) Sales and principal reductions of loans and mortgage-backed securities held for investment 20,615 14,920 3,015 Purchases of investments (18,143) (18,112) (13,119) Maturities of investments 17,700 14,946 11,600 Principal reductions of collateral for bonds and notes payable -- 5,864 10,226 Originations (sales) of mortgage servicing rights, net 10,802 1,315 (8,317) Additions to operating properties and equipment (6,875) (10,229) (13,045) Acquisition of North American Asset Development Corporation and subsidiaries, net of cash acquired (1,581) (2,050) (1,915) Acquisition of Southwest Land Title, net of cash acquired -- -- (6,631) Acquisition of Eagle Home Mortgage, Inc., net of cash acquired -- (2,255) (5,874) Acquisition of North American Title Insurance Company -- -- (4,049) Acquisition of North American Title Guaranty, net of cash acquired -- -- (508) Acquisition of Texas Professional Title (49) (1,666) -- Reorganization of U.S. Home Mortgage -- 1,019 -- Investment in USH Funding -- 1,000 -- ----------- ----------- ----------- Net cash provided by (used in) investing activities 5,764 (22,002) (31,945) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in borrowings under credit agreements 264,996 165,452 (3,168) Repayment of bonds and notes payable (5,666) (5,789) (9,457) (Decrease) increase in amounts due to/from affiliates (46,306) (79,275) 30,603 ----------- ----------- ----------- Net cash provided by financing activities 213,024 80,388 17,978 ----------- ----------- ----------- NET INCREASE IN CASH 6,972 4,410 8,012 CASH AT BEGINNING OF YEAR 39,321 34,911 26,899 ----------- ----------- ----------- CASH AT END OF YEAR $ 46,293 $ 39,321 $ 34,911 =========== =========== =========== (Continued)
78 LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of U.S. Home Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 (Dollars in Thousands) - --------------------------------------------------------------------------------
2001 2000 1999 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 13,981 $ 12,942 $ 10,982 =========== =========== =========== ACQUISITION OF TEXAS PROFESSIONAL TITLE: Fair value of assets (inclusive of cash of $ - ) $ 1,002 Goodwill recorded 2,411 Liabilities assumed (1,747) ----------- Cash paid $ 1,666 =========== ACQUISITION OF SOUTHWEST LAND TITLE, EAGLE HOME MORTGAGE, INC., NORTH AMERICAN TITLE INSURANCE COMPANY, AND NORTH AMERICAN TITLE GUARANTY: Fair value of assets (inclusive of cash of $2,656) $ 40,482 Goodwill recorded 11,429 Liabilities assumed (32,193) ----------- Cash paid $ 19,718 =========== (Concluded)
See accompanying notes to consolidated financial statements. 79 LENNAR FINANCIAL SERVICES, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of U.S. Home Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - Lennar Financial Services, Inc. and Subsidiaries ("LFS"), a wholly-owned subsidiary of U.S. Home Corporation ("U.S. Home"), which is a wholly-owned subsidiary of Lennar Corporation ("Lennar"), is the holding company for the entities which form the Financial Services Division (the "Division") of Lennar. The Division's operations include mortgage financing, title insurance and closing services, high-speed Internet access, cable television and alarm monitoring services all of which are available to residents of Lennar communities and others. These services are conducted by the Division's subsidiaries: Universal American Mortgage Company ("UAMC"), North American Title Group, Inc., Strategic Technologies, Inc. and their related subsidiaries. The Division's investments in unconsolidated limited liability corporations in which a significant, but less than a controlling interest is held, are accounted for by the equity method. Controlling interest is determined based on a number of factors, which include the Division's ownership interest and participation in the management of the partnership. On May 3, 2000, Lennar acquired U.S. Home. In June 2001, the ownership structure of LFS was reorganized whereby LFS became a subsidiary of U.S. Home. U.S. Home Mortgage Corporation (formerly a subsidiary of U.S. Home) became a subsidiary of LFS and U.S. Home Mortgage Corporation was then merged into LFS's subsidiary UAMC, with UAMC being the surviving entity. These transactions were accounted for as a reorganization of entities under common control which is similar to the pooling of interests method of accounting for business combinations and, accordingly, all prior period consolidated financial statements have been restated at historical carrying values as if this transaction occurred on May 3, 2000. The financial statements of Lennar Financial Services, Inc. include the accounts of LFS and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Loans Held for Sale - Loans held for sale consist of residential mortgage loans. Effective December 1, 2000, loans held for sale that are designated as hedged assets are carried at market value, as the effect of changes in fair value are reflected in the carrying amount of the loans and in earnings. Premiums and discounts recorded on loans held for sale are presented as an adjustment of the carrying amount of the loans and are not amortized. Effective December 1, 2000, LFS adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings or recorded in other comprehensive income and recognized in the statement of earnings when the hedged item affects earnings, depending on the purpose of the derivatives and whether they qualify for hedge accounting treatment. 80 The Division's policy is to designate at a derivative's inception the specific assets, liabilities, or future commitments being hedged and monitor the derivative to determine if it remains an effective hedge. The effectiveness of a derivative as a hedge is based on high correlation between changes in its value and changes in the value of the underlying hedged item. LFS does not enter into or hold derivatives for trading or speculative purposes. The Division originates residential mortgage loans, which it sells to investors on a servicing released non-recourse basis. The Division has a risk management policy which governs its secondary marketing and hedging practices. Pursuant to the requirements of this policy, LFS uses derivative financial instruments to reduce its exposure to fluctuations in interest rates. LFS enters into forward commitments and option contracts to protect the value of fixed rate locked loan commitments and loans held for sale or disposition from fluctuations in market interest rates. These derivative financial instruments are designated as fair value hedges under SFAS No. 133 and, accordingly, for all qualifying and highly effective fair value hedges, the changes in the fair value of the derivative and the loss or gain on the hedged asset relating to the risk being hedged are recorded currently in earnings. The effect of the implementation of SFAS No. 133 on LFS' operating earnings was not significant. Loans Held for Investment - Loans for which LFS has the positive intent and ability to hold to maturity consist of mortgage loans carried at cost net of unamortized discounts. Discounts are amortized over the estimated lives of the loans using the interest method. Collateral for Bonds and Notes Payable - Collateral for bonds and notes payable consists of mortgage loans, mortgage-backed securities, and funds held by the trustee. Mortgage loans and mortgage-backed securities are carried net of unamortized discounts. Discounts are amortized over the estimated lives of the assets using the interest method. An unaffiliated company holds an interest in the collateral for bonds and notes payable to the extent such assets exceed the related liabilities. Mortgage Servicing Rights - Historically, LFS retained servicing rights when it sold certain of the loans it originated. During 2001, LFS sold substantially all of its existing portfolio of mortgage servicing rights, realizing a pretax profit from the sale of approximately $13 million. LFS currently sells all of its loans on a servicing released nonrecourse basis. Mortgage servicing rights of $11,653,000 as of November 30, 2000 are included in other assets in the accompanying consolidated balance sheets. Loan servicing revenue represents fees earned by LFS for servicing loans for investors prior to the sale of its servicing portfolio. Loan Servicing Revenue - Loan servicing revenue represents fees earned for servicing loans owned by others, generally calculated as a percentage of outstanding principal balance, as well as late charges and other ancillary revenues resulting from servicing activities. Income Taxes - LFS files a consolidated federal income tax return with Lennar. Income taxes have been provided at the LFS level as if LFS filed an income tax return on a stand-alone basis. Current taxes due are recorded as a payable to Lennar, and the deferred portion is recorded as deferred taxes. Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. Title Plants - Title plants, which are comprised of indexed and cataloged information concerning titles to real property, are recorded at cost. Such costs are not amortized because there is no indication of reduction of plant values. Costs of maintaining and operating title plants are charged to operations in the period in which they are incurred. LFS owns title plants in four states. In other locations, LFS purchases access to title plant information for a fee based on the revenues. 81 Goodwill - Goodwill represents the excess of the purchase price over the fair value of net assets acquired and was amortized on a straight-line basis over periods ranging from 15 to 20 years. At November 30, 2001 and 2000, goodwill was $25.2 million and $25.2 million, respectively (net of accumulated amortization of $4.4 million and $2.8 million, respectively). In the event that facts and circumstances indicate that the carrying value of goodwill might be impaired, an evaluation of recoverability is performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the goodwill would be compared to the carrying amount to determine if a write-down to fair value based on discounted cash flows is necessary. No impairment existed during the years ended November 30, 2001, 2000 or 1999. Subsequent to the Division's adoption of SFAS No. 141 and SFAS No. 142, goodwill and its amortization will be accounted for in accordance with the standards they prescribe, which will discontinue the amortization of goodwill. See the New Accounting Pronouncements section of Note 1. Operating Properties and Equipment - Operating properties and equipment are recorded at cost and are included in other assets in the accompanying consolidated balance sheets. The assets are depreciated over their estimated useful lives using the straight-line method. The estimated useful life for operating properties is 30 years and for equipment is 2 to 10 years. Escrow Funds Held in Trust - At November 30, 2001 and 2000, LFS held approximately $358,736,000 and $365,749,000, respectively, in trust for others, pending completion of real estate transactions. These funds are not included in LFS' consolidated balance sheets. Title and Escrow Revenue - Premiums from title insurance policies are recognized as revenue over the lives of the policies, beginning on the effective date of the policy. Escrow fees are recognized at the time the related real estate transactions are completed, usually upon the close of escrow. Provision for Losses - LFS provides an allowance for estimated title and escrow losses based upon management's evaluation of claims presented and estimates for any incurred but not reported claims. The allowance is established at a level that management estimates to be sufficient to satisfy those claims where a loss is determined to be probable and the amount of such loss can be reasonably estimated. The allowance for title and escrow losses for both known and incurred but not reported claims is considered by management of LFS to be adequate for such purposes. LFS also provides allowances for loan losses when and if management determines that loans or portions thereof are uncollectible. The provision recorded and the adequacy of the related allowance is determined by management's continuing evaluation of the loan portfolio in light of past loan loss experience, regulatory examinations, present economic conditions and other factors considered relevant by management. Anticipated changes in economic factors which may influence the level of the allowance are considered in the evaluation by management when the likelihood of the changes can be reasonably determined. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary as a result of future economic and other conditions that may be beyond management's control. New Accounting Pronouncements - In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method and requires acquired intangible assets to be recognized as assets apart from goodwill if certain criteria are met. The Division adopted SFAS No. 141 for all future acquisitions. 82 SFAS No. 142 no longer requires or permits the amortization of goodwill and indefinite-lived assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Division adopted SFAS No. 142 on December 1, 2001. Because of that, amortization of goodwill of approximately $1.7 million per year will not be incurred in the future. Management does not currently believe that the implementation of SFAS No. 142 will have a material impact on the Division's financial condition or results of operations. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 provides accounting guidance for financial accounting and reporting for impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121. SFAS 144 is effective for the Division in fiscal 2003. Management does not currently believe that the implementation of SFAS No. 144 will have a material impact on the Division's financial condition or results of operations. Financial Statement Presentation - LFS prepares its financial statements using an unclassified balance sheet presentation as is customary in the financial services industry. A classified balance sheet presentation would have aggregated current assets, current liabilities, and net working capital at November 30, 2001 and 2000 as follows: 2001 2000 Current assets $836,653,000 $489,241,000 Current liabilities 736,419,000 414,187,000 ------------ ------------ Net working capital $100,234,000 $ 75,054,000 ============ ============ Reclassifications - Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2001 presentation. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. LOANS HELD FOR INVESTMENT AND PERFORMANCE NOTES LFS periodically acquires loans collateralized by residential and other real property which it holds for investment. At November 30, 2001 and 2000, these loans totaling $38,791,000 and $40,094,000, respectively, carried interest rates ranging from 6.5% to 16.2% per annum (weighted average interest rate of 10.3% at November 30, 2001). At November 30, 2001, mortgage notes receivable of $39,301,000 were pledged as collateral for short-term debt. At November 30, 2001, LFS estimates that the fair value of its investments in residential mortgage loans and mortgage notes receivable approximate their recorded amount based on the interest rates on the loans compared to the current market rates, the collectibility, term and type of loans, the value of the underlying properties and the remaining available mortgage loan insurance coverage. During the years ended November 30, 2001 and 2000, LFS purchased subordinated performance notes issued by affiliates of two mortgage insurance companies in which the interest earned on each note is 83 variable depending on, among other things, the default experience and related losses from mortgage insurance claims on a specific pool of mortgage loans originated by LFS. At November 30, 2001 and 2000, the performance notes of $2,799,000 and $2,410,000, respectively, earned interest at an average rate of 24.4% and 29.5% per annum, respectively. At November 30, 2001, LFS estimates that the fair value of its investments in performance notes approximates their recorded amount based on the Division's history of originating high quality loans with related low delinquency and default rates, and its option to redeem at par certain of the performance notes (representing a majority of such notes) having an acceptable underlying loan loss experience. 3. COLLATERAL FOR BONDS AND NOTES PAYABLE Collateral for bonds and notes payable (the "Collateral") consists of fixed and adjustable rate mortgage loans and fixed-rate mortgage-backed securities guaranteed by U.S. government agencies. All collateral is pledged to secure repayment of the bonds and notes payable. All principal and interest on the Collateral is remitted directly to a trustee and, together with any reinvestment income earned thereon, is available for payment on the bonds and notes payable. The components of the collateral at November 30, 2001 and 2000 are as follows: 2001 2000 Mortgage-backed securities held-to-maturity $ 9,232,000 $11,328,000 Mortgage loans 2,813,000 8,492,000 Funds held by trustee 353,000 920,000 ----------- ----------- $12,398,000 $20,740,000 =========== =========== 84 4. INVESTMENTS The amortized cost, unrealized gains, unrealized losses and fair values for held-to-maturity securities by type as of November 30, 2001 and 2000 are as follows:
2001 ------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury securities $ 7,841,000 $ 49,000 $ -- $ 7,890,000 U.S. government agency obligations -- -- -- -- Certificates of deposit 5,394,000 -- -- 5,394,000 ----------- ----------- ----------- ----------- Total $13,235,000 $ 49,000 $ -- $13,284,000 =========== =========== =========== =========== 2000 ------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Treasury securities $ 1,829,000 $ 21,000 $ (1,000) $ 1,849,000 U.S. government agency obligations 5,861,000 -- (1,000) 5,860,000 Certificates of deposit 4,798,000 -- -- 4,798,000 ----------- ----------- ----------- ----------- Total $12,488,000 $ 21,000 $ (2,000) $12,507,000 =========== =========== =========== ===========
Investments are included in other assets in the accompanying consolidated balance sheets. The amortized cost and estimated fair value of securities held-to-maturity at November 30, 2001 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value Due in one year or less $12,386,000 $12,388,000 Due after one year through five years 649,000 689,000 Due after five years through ten years 200,000 207,000 ----------- ----------- Total $13,235,000 $13,284,000 =========== =========== 85 5. OTHER ASSETS Other assets consist of the following at November 30, 2001 and 2000:
2001 2000 Operating properties and equipment (net of accumulated depreciation of $18,080,000 and $14,623,000 for 2001 and 2000, respectively) $18,592,000 $18,869,000 Investments 13,235,000 12,488,000 Mortgage servicing rights -- 11,653,000 Other 19,147,000 7,713,000 ----------- ----------- $50,974,000 $50,723,000 =========== ===========
6. BORROWINGS UNDER CREDIT AGREEMENTS
2001 2000 Warehouse line of credit with banks totaling $500 million, ($240 million at November 30, 2000) including a $145 million 30-day increase expiring on December 15, 2001, variable interest rate (approximately 3.1% and 6.4% at November 30, 2001 and 2000, respectively); secured by receivables on loans sold not yet funded, mortgage loans and, at November 30, 2000, by servicing rights; maturing June 24, 2003 $ 483,209,000 $ 339,376,000 Advances under conduit funding lines with certain major financial institutions, variable interest rates (approximately 3.0% and 7.5% at November 30, 2001 and 2000, respectively); secured by mortgage loans 190,577,000 58,837,000 Line of credit with a bank totaling $20 million expiring on March 31, 2002; variable interest rate (approximately 3.1% and 7.8% at November 30, 2001 and 2000, respectively); secured by substantially all of the assets and common stock of North American Asset Development Corporation and the common stock of North American Title Insurance Company (both are subsidiaries of North American Title Group, Inc.) 20,000,000 20,000,000 Unsecured revolving credit agreement totaling $10 million, variable interest rate (approximately 8.7% at November 30, 2000); paid in 2001 -- 9,900,000 Other borrowings 145,000 853,000 ------------- ------------- Total $ 693,931,000 $ 428,966,000 ============= =============
The warehouse lines of credit are subject to restrictive covenants relating to certain financial ratios as to net worth and debt. 86 7. BONDS AND NOTES PAYABLE At November 30, 2001 and 2000, bonds and notes payable had an outstanding balance of $11,680,000 and $18,278,000, respectively. The borrowings mature in years 2013 through 2018 and carry interest rates ranging from 8.5% to 11.7%. The annual principal repayments are dependent upon collections on the Collateral, including prepayments, and, as a result, the actual maturity may occur earlier than its stated maturity. 8. INCOME TAXES Income tax expense (benefit) for the years ended November 30, 2001, 2000 and 1999 consists of: 2001 2000 1999 Current $ 43,386,000 $ 20,652,000 $ 9,979,000 Deferred (10,100,000) (3,584,000) 3,151,000 ------------ ------------ ------------ $ 33,286,000 $ 17,068,000 $ 13,130,000 ============ ============ ============ The actual income tax differs from the "expected" tax expense for the year (computed by applying the U.S. federal corporate rate of 35% to earnings before income taxes) primarily due to the amount of state income taxes, net of the related federal tax benefit. At November 30, 2001 and 2000, the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows: 2001 2000 Deferred tax assets: Loss reserves $ 10,741,000 $ 7,321,000 Accruals not currently deductible 2,977,000 2,227,000 Other 3,311,000 1,722,000 ------------ ------------ 17,029,000 11,270,000 Valuation allowance (318,000) (363,000) ------------ ------------ 16,711,000 10,907,000 ------------ ------------ Deferred tax liabilities: Intangible assets 1,659,000 1,668,000 Other 3,397,000 6,297,000 ------------ ------------ 5,056,000 7,965,000 ------------ ------------ Net deferred tax asset $ 11,655,000 $ 2,942,000 ============ ============ The net deferred tax asset is included in other assets in the accompanying balance sheets. 87 9. LOAN SERVICING As of November 30, 2000, LFS was servicing approximately 29,000 loans with an unpaid principal balance aggregating $2,313,000,000 for investors. Related escrow funds of approximately $11,427,000 on deposit in custodial bank accounts at November 30, 2000 are not included in the accompanying consolidated balance sheets. LFS has errors and omissions and fidelity bond insurance policies, both in the amount of $1,600,000. 10. FINANCIAL INSTRUMENTS Discussion of Credit and Interest Rate Risk Management LFS enters into derivative financial instruments in the normal course of business through the origination and sale of mortgage loans and the management of the related loss exposure caused by fluctuations in interest rates. These financial instruments include commitments to extend credit (e.g., the mortgage loan pipeline), forward contracts for the delivery of mortgage-backed securities ("MBS"), and other hedging instruments. These instruments involve, to varying degrees, elements of credit and market risk. All of LFS' derivative financial instruments are held or issued for purposes other than trading. As of November 30, 2001, the Division's pipeline of loans in process totaled approximately $1,691,387,000. Loans in process for which interest rates were committed to the borrower totaled approximately $235,049,000 as of November 30, 2001. Substantially all of these commitments were for periods of 30 days or less. To minimize credit risk, LFS uses the same credit policies in the approval of the commitments as are applied to all lending activities. Since a portion of these commitments are expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements. Mandatory MBS forward commitments and MBS option contracts are used by LFS to hedge its interest rate exposure during the period from when LFS extends an interest rate lock to a loan applicant until the time in which the loan is sold to an investor. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by LFS by entering into agreements only with investment bankers with primary dealer status and with permanent investors meeting the credit standards of LFS. At any time, the risk to LFS, in the event of default by the purchaser, is the difference between the contract price and current market value. At November 30, 2001, LFS had open commitments amounting to $291,000,000 to sell MBSs with varying settlement dates through January 2002. Fair Value of Financial Instruments SFAS No. 107, Disclosures About Fair Values of Financial Instruments, requires the disclosure of information about certain financial instruments. The estimated fair values have been determined by LFS using available market information and appropriate valuation methodologies. The fair values are significantly affected by the assumptions used. Accordingly, the use of different assumptions and/or estimation methodologies may have a material effect on the estimated fair values. The estimated fair values presented herein are not necessarily indicative of the amounts that LFS could realize in a current market exchange. 88 The following describes the methods and assumptions used by LFS in estimating fair values: Cash - The carrying amounts reported in the consolidated balance sheets approximate fair values, as original maturities are less than 90 days. Loans Held for Sale - Fair value is based on quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. Loans Held for Investment - Fair value is based on discounting estimated cash flows through the estimated maturity, adjusted for approximate prepayments, using appropriate market discount rates, or quoted market prices. Collateral for Bonds and Notes Payable - Fair value is based on quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. Investment Securities - Fair value is based on quoted market prices. Borrowings under Credit Agreements - Fair value approximates carrying value due to variable interest rate pricing terms and the short-term nature of the borrowings. Bonds and Notes Payable - Fair value is based on quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. Commitments to Originate and to Sell Loans - Fair value of commitments to purchase loans is based upon the difference between the current value of similar loans and the price at which LFS has committed to originate the loans. The fair value of commitments to sell loan contracts is the estimated amount that LFS would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments. The estimated fair value of the Division's financial instruments was as follows (in thousands of dollars):
NOVEMBER 30, 2001 2000 Carrying Fair Carrying Fair Value Value Value Value Financial assets: Cash $ 46,293 $ 46,293 $ 39,321 $ 39,321 Loans held for sale, net 587,694 587,916 376,452 379,499 Loans held for investment and performance notes, net 41,590 40,886 42,504 42,014 Collateral for bonds and notes payable 12,398 12,982 20,740 21,166 Investment securities 13,235 13,284 12,488 12,507 Financial liabilities: Borrowings under credit agreements 693,931 693,931 428,966 428,966 Bonds and notes payable 11,680 12,216 18,278 18,553 Other instruments: Commitments to originate loans (1,085) (1,085) -- 445 Commitments to sell loans and option contracts 2,351 2,351 -- (119)
89 11. RELATED PARTIES During 2001 and 2000, Lennar has periodically advanced and borrowed funds to and from LFS, which bear interest at a rate tied to Lennar's short-term borrowing rate. At November 30, 2001 and 2000, Lennar had borrowed $109,537,000 and $63,148,000, respectively, from LFS. LFS recorded net interest income related to these advances of $3,130,037 and $18,000 in 2001 and 2000, respectively. At November 30, 2001 and 2000, LFS had issued and outstanding $2,205,000 and $3,375,000, respectively, of letters of credit for the benefit of Lennar. 12. COMMITMENTS AND CONTINGENCIES Because of the nature of its activities, LFS is at times subject to threatened legal actions which arise out of the normal course of business. In the opinion of management, there is no pending or threatened litigation which will have a material effect on the Division's financial position or results of operations. LFS has guaranteed obligations of Lennar with regard to certain issues of its outstanding debt, and the stock of LFS has been pledged as collateral for Lennar's obligations with regard to that debt. LFS knows of no event of default which would require it to satisfy these guarantees and, therefore, the fair value of these contingent liabilities is considered immaterial. 90 -----END PRIVACY-ENHANCED MESSAGE-----