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Lennar Corp/New – ‘10-K’ for 11/30/02 – EX-99

On:  Friday, 2/28/03, at 5:21pm ET   ·   For:  11/30/02   ·   Accession #:  931763-3-421   ·   File #:  1-11749

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 2/28/03  Lennar Corp/New                   10-K       11/30/02    6:4.1M                                   Donnelley R R & S… 10/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Period Ending 11/30/2002                            HTML   1.35M 
 2: EX-10       Amended and Restated Credit Agreement               HTML    552K 
 3: EX-21       List of Subsidiaries                                HTML    180K 
 4: EX-23       Independent Auditors Consent                        HTML      6K 
 5: EX-99       Financial Statements of Lennar Corp. Affilates      HTML   1.38M 
 6: EX-99.1     Certification of CEO and CFO                        HTML     10K 

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, 2002 and 2001 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, 2002. 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, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2002, in conformity with accounting principles generally accepted in the United States of America.

Certified Public Accountants

Miami, Florida

January 7, 2003

1

LENNAR HOMES, INC. AND SUBSIDIARIES

(A Wholly-Owned Subsidiary of Lennar Corporation)

CONSOLIDATED BALANCE SHEETS

NOVEMBER 30, 2002 AND 2001 (Dollars in thousands, except par value)

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, 2002, 2001 AND 2000 (Dollars in thousands)

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, 2002, 2001 AND 2000 (Dollars in thousands)

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, 2002, 2001 AND 2000 (Dollars in thousands)

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, 2002, 2001 AND 2000

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 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 an approximate 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, as well as the purchase, development and sale of residential land directly and through unconsolidated partnerships.

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 consolidated 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 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 original maturities of three months or less to be cash equivalents. Cash as of November 30, 2002 and 2001 included $14.4 million and $20.1 million, respectively, of primarily 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. Inventory costs include land, land development and home construction costs, real estate taxes and interest related to development and construction. 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 was recorded during the years ended November 30, 2002, 2001 or 2000.

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 to homes within the respective areas.

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 as inventories 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 the time operating properties and equipment are disposed of, the asset and related accumulated depreciation are removed from the accounts and any resulting gain or loss is charged to earnings. At November 30, 2002 and 2001, operating properties and equipment of $6.5 million and $7.2 million, respectively, were 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 carrying values 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.

Warranty Costs – Warranty reserves for homes are established in an amount estimated to be adequate to cover expected warranty-related costs for materials and outside labor to be incurred during the warranty period. Reserves are determined based on historical data and trends with respect to similar product types and geographical areas.

7

Self-Insurance – Certain insurable risks such as general liability, medical and workers’ compensation are self-insured by Lennar Corporation up to certain limits. Lennar Corporation allocates a portion of its self-insurance accrual to the Company based on various factors.

Fair Value of Financial Instruments – The carrying amount of accounts payable approximates fair value due to the short-term nature of the financial instrument. Since the mortgage notes payable have fixed interest rates that approximate market indices, the carrying amounts approximate fair value.

New Accounting Pronouncements – In October 2001, the Financial Accounting Standards Board (“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 believe that the implementation of SFAS No. 144 will have a material impact on the Company’s financial condition, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Management does not believe that the implementation of SFAS No. 145 will have a material impact on the Company’s financial condition, results of operations or cash flows.

In November 2002, the FASB issued Financial Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 clarifies and expands on existing disclosure requirements for guarantees, including product warranties. FIN No. 45 also requires recognition of a liability at fair value of a Company’s obligations under certain guarantee contracts. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The initial recognition and measurement provisions of FIN No. 45 are applied only on a prospective basis to guarantees issued after December 31, 2002, irrespective of the guarantor’s fiscal year-end. Management does not believe that the implementation of FIN No. 45 will have a material impact on the Company’s financial condition, results of operations or cash flows.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46 provides accounting guidance for consolidation of off-balance sheet entities with certain characteristics (variable interest entities). The consolidation requirements apply to variable interest entities created after January 31, 2003 and to variable interest entities in which the Company maintains an interest after August 31, 2003. The Company is in the process of evaluating all of its investments and other interests in entities that may be deemed variable interest entities under the provisions of FIN No. 46. These include interests in unconsolidated partnerships with assets totaling approximately $698.9 million at November 30, 2002 as discussed in Note 3. The Company’s maximum exposure to loss represents its recorded investment in these partnerships totaling $111.7 million. The Company believes that many of these interests and

8

entities will not be consolidated, and may not ultimately fall under the provisions of FIN No. 46. The Company cannot make any definitive conclusion until it completes its evaluation.

Reclassification – Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2002 presentation.

During 2002, the Company acquired the assets of a California homebuilder. Lennar Corporation paid $29.5 million in cash for the acquisition. These amounts paid on the Company’s behalf are included in due to affiliates in the consolidated balance sheets. The results of operations of the acquired homebuilder are included in the Company’s results of operations since the respective acquisition date. There was no goodwill associated with the acquisition. The Company acquired assets (primarily inventories) with a fair value of $29.5 million and assumed no liabilities. The pro forma effect of this acquisition on the consolidated results of operations is not presented as the effect is not considered material.

Summarized condensed financial information on a combined 100% basis related to unconsolidated partnerships and other similar entities (collectively the “Partnerships”) in which the Company invests that are accounted for by the equity method was as follows:

At November 30, 2002, the Company’s equity interest in these Partnerships was 50% or less. The Company’s partners generally are unrelated homebuilders, land sellers or other real estate

9

professionals. The Partnerships follow accounting principles generally accepted in the United States of America. The Company shares in the profits and losses of these Partnerships generally in accordance with its ownership interest. In many instances, the Company is appointed as the day-to-day manager of the Partnerships and receives fees for performing this function. During 2002, 2001 and 2000, the Company received management fees and reimbursement of expenses from the Partnerships totaling $6.6 million, $4.3 million and $2.1 million, respectively. In determining its share of the Partnerships’ net earnings, the Company does not include in its income its pro rata share of partnership earnings resulting from land sales to the Company. Instead, the Company accounts for those earnings as a reduction of the cost of purchasing the land from the partnerships. This in effect defers recognition of the Company’s share of the partnership earnings relating to these sales until a home is delivered and title passes to a homebuyer. Equity in earnings (loss) from unconsolidated partnerships is included in sales of land and other revenues in the consolidated statements of earnings. During 2002, 2001 and 2000, equity in earnings (loss) from unconsolidated partnerships was $21.8 million, $13.3 million and $(0.9) million, respectively.

The Company and/or its partners sometimes obtain options or enter into 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 options are purchased. During 2002, 2001 and 2000, $242.3 million, $83.6 million and $6.2 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, 2002, the Company had recourse guarantees of $5.3 million and limited maintenance guarantees of $146.1 million of Partnership debt. When the Company provides guarantees, the Partnerships generally receive more favorable terms from its lenders. The limited maintenance guarantees only apply if a partnership defaults on its loan arrangements and the carrying value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If the Company is required to make a payment under a limited maintenance guarantee to bring the carrying 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 the Company’s share of any funds it distributes.

At November 30, 2002 and 2001, the Company had mortgage notes on land with fixed interest rates ranging from 5.4% to 10.0% due through 2006 with an outstanding balance of $11.0 million and $9.0 million, respectively. These borrowings are collateralized by land.

The minimum aggregate principal maturities of mortgage notes payable during the five years subsequent to November 30, 2002 are as follows: 2003 - $5.6 million; 2004 - $1.6 million and 2006 - $3.8 million.

10

The provision (benefit) for income taxes consisted of the following:

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:

11

The net deferred tax asset is included in other assets in the consolidated balance sheets.

Lennar Corporation has 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. The fee and its related interest are included in expense to affiliates in the consolidated statements of earnings. During 2002, 2001 and 2000, the Company’s fee and related interest were $150.5 million, $129.2 million and $104.7 million, respectively. On a quarterly basis, these amounts are paid by Lennar Corporation to Greystone. During December 2002, Greystone transferred the license agreement to another wholly-owned subsidiary of Lennar Corporation. That subsidiary has continued to grant the Company the right to use the property under the same terms as applied to the grant from 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 automatically renews on the anniversary date unless terminated earlier by three months written notice by either party.

The Company has an agreement with Lennar Associates Management, LLC (“Lessor”), a wholly-owned subsidiary of Lennar Corporation, whereby the Lessor leases employees to the Company for its costs incurred, including salaries, plus a fee. Costs incurred are included in selling, general and administrative expenses and the fee is included in expense to affiliates in the consolidated statements of earnings. During 2002, the Company’s fee was $0.4 million. On a quarterly basis, these amounts are paid by Lennar Corporation to the Lessor. The amounts paid by Lennar Corporation on behalf of the Company are included in due to affiliates in the Company’s consolidated balance sheets. The term of the agreement automatically renews on the anniversary date unless terminated earlier by three-months written notice by either party.

During 2002 and 2001, Lennar Corporation and its subsidiaries advanced funds to the Company which had no stated repayment terms. At November 30, 2002 and 2001, the Company had a payable to affiliates of $535.2 million and $594.7 million, respectively.

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, results of operations or cash flows of the Company.

The Company is subject to the usual obligations associated with entering into contracts (including option contracts) for the purchase, 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 defer acquiring portions of properties owned by third parties and certain unconsolidated partnerships. 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, 2002, the Company had $44.6 million of primarily non-refundable option deposits with entities.

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: 2003 -

12

$6.4 million; 2004 - $4.8 million; 2005 - $2.6 million; 2006 - $2.2 million; 2007 - $2.0 million and thereafter - $1.9 million. Rental expense for the years ended November 30, 2002, 2001 and 2000 was $9.2 million, $9.0 million and $10.4 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 $153.4 million at November 30, 2002. The Company also had outstanding performance and surety bonds with estimated costs to complete of $390.6 million related principally to its obligations for site improvements at various projects at November 30, 2002. The Company does not believe that draws upon these bonds, if any, will have a material effect on the Company’s financial condition, results of operations or cash flows.

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.

13

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, 2002 and 2001 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, 2002. 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, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended November 30, 2002, in conformity with accounting principles generally accepted in the United States of America.

January 7, 2003

14

LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES

(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)

CONSOLIDATED BALANCE SHEETS

NOVEMBER 30, 2002 AND 2001 (Dollars in thousands, except par value)

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 EARNINGS

YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000 (Dollars in thousands)

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 STOCKHOLDER’S EQUITY

YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000 (Dollars in thousands)

See accompanying notes to consolidated financial statements.

17

LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES

(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000 (Dollars in thousands)

See Note 1 for supplemental disclosures of cash flow information

    related to interest and income taxes paid.

See accompanying notes to consolidated financial statements.

18

LENNAR SOUTHWEST HOLDING CORP. AND SUBSIDIARIES

(A Wholly-Owned Subsidiary of Lennar Homes, Inc.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED NOVEMBER 30, 2002, 2001 AND 2000

Basis of Consolidation – The accompanying consolidated financial statements include the accounts of Lennar Southwest Holding Corp. and all subsidiaries, partnerships and other 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. 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 an approximate 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, as well as the purchase, development and sale of residential land directly and through unconsolidated partnerships.

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 consolidated 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 are recognized when a significant down payment is received, the earnings process is complete and the collection of any remaining receivables is reasonably assured.

19

Cash – The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash as of November 30, 2002 and 2001 included $10.0 million and $10.3 million, respectively, of primarily 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. Inventory costs include land, land development and home construction costs, real estate taxes and interest related to development and construction. 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 was recorded during the years ended November 30, 2002, 2001 or 2000.

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 to homes within the respective areas.

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 as inventories 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 the time operating equipment is disposed of, the asset and related accumulated depreciation are removed from the accounts and any resulting gain or loss is charged to earnings. At November 30, 2002 and 2001, operating equipment of $0.8 million and $1.0 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 carrying values 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.

Warranty Costs – Warranty reserves for homes are established in an amount estimated to be adequate to cover expected warranty-related costs for materials and outside labor to be incurred during the warranty period. Reserves are determined based on historical data and trends with respect to similar product types and geographical areas.

20

Self-Insurance – Certain insurable risks such as general liability, medical and workers’ compensation are self-insured by Lennar Corporation up to certain limits. Lennar Corporation allocates a portion of its self-insurance accrual to the Company based on various factors.

Fair Value of Financial Instruments – The carrying amounts of cash and accounts payable approximate fair value due to the short-term nature of these financial instruments.

New Accounting Pronouncements – In October 2001, the Financial Accounting Standards Board (“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 believe that the implementation of SFAS No. 144 will have a material impact on the Company’s financial condition, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Management does not believe that the implementation of SFAS No. 145 will have a material impact on the Company’s financial condition, results of operations or cash flows.

In November 2002, the FASB issued Financial Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 clarifies and expands on existing disclosure requirements for guarantees, including product warranties. FIN No. 45 also requires recognition of a liability at fair value of a Company’s obligations under certain guarantee contracts. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The initial recognition and measurement provisions of FIN No. 45 are applied only on a prospective basis to guarantees issued after December 31, 2002, irrespective of the guarantor’s fiscal year-end. Management does not believe that the implementation of FIN No. 45 will have a material impact on the Company’s financial condition, results of operations or cash flows.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46 provides accounting guidance for consolidation of off-balance sheet entities with certain characteristics (variable interest entities). The consolidation requirements apply to variable interest entities created after January 31, 2003 and to variable interest entities in which the Company maintains an interest after August 31, 2003. The Company is in the process of evaluating all of its investments and other interests in entities that may be deemed variable interest entities under the provisions of FIN No. 46. These include interests in unconsolidated partnerships with assets totaling approximately $91.5 million at November 30, 2002 as discussed in Note 2. The Company’s maximum exposure to loss represents its recorded investment in these partnerships totaling $15.3 million. The Company believes that many of these interests and entities will not be consolidated, and may not ultimately fall under the provisions of FIN No. 46. The Company cannot make any definitive conclusion until it completes its evaluation.

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Reclassification – Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2002 presentation.

Summarized condensed financial information on a combined 100% basis related to unconsolidated partnerships and other similar entities (collectively the “Partnerships”) in which the Company invests that are accounted for by the equity method was as follows: