ITEM 1. BUSINESS
Certain statements contained in this section and elsewhere in this Form 10-K are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements may be deemed to include statements regarding the intent, belief or current expectations of the Company and its management with respect to (i) the Company's strategic plans, (ii) the Company's future profitability, (iii) the Company's policy regarding capital expenditures, financing or other matters, (iv) the Company's sales and marketing plans, (v) industry trends affecting the Company's financial condition and (vi) the Company's growth strategy. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in the forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to the factors described below. In light of the uncertainties inherent in any forward-looking statement, the inclusion of a forward-looking statement herein should not be regarded as a representation by the Company or the Company's management that the Company's plans and objectives will be achieved.
Proposed Merger with Beazer Homes
On January 29, 2002, Crossmann Communities, Inc. ("Crossmann" or the "Company") entered into an Agreement and Plan of Merger with Beazer Homes USA, Inc. ("Beazer") and Beazer Homes Investment Corp. (the "Merger Agreement"). Under the Merger Agreement, the Company will be merged with and into Beazer Homes Investment Corp., a wholly-owned subsidiary of Beazer, with Beazer Homes Investment Corp. surviving the merger. Closing of the merger is subject to regulatory and shareholder approvals, among other conditions and terms, as set forth in the Merger Agreement. At the effective time of the merger, each outstanding share of the Company's common stock will be converted into the right to receive $17.60 per share and a fraction of a share of Beazer common stock that will vary according to the 15 day average trading price of Beazer common stock during the period ending three days before the Company's shareholder meeting with respect to the proposed transaction. Subject to certain limitations described in the Merger Agreement, shareholders of the Company will be permitted to elect to receive the merger consideration solely in shares of Beazer common stock or solely in cash. The transaction is expected to be completed in the second or third calendar quarter of 2002 and is expected to be accounted for as a purchase. On February 1, 2002, the Company filed a Form 8-K with the Securities and Exchange Commission that included other information concerning the merger and a copy of the Merger Agreement.
Copies of the aforementioned Form 8-K may be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these materials can also be obtained by mail at prescribed rates from the Public Reference Sections of the Securities and Exchange Commission, 405 Fifth Street NW, Washington, D.C. 20549, by calling the Securities and Exchange Commission at 1-800-SEC-0330, or at the web site of the Securities and Exchange Commission located at www.sec.gov.
The information contained in this report, including information regarding strategic plans, growth strategy and other forward-looking information, does not contemplate the effects of the proposed merger with Beazer.
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General
The Company has provided homes to families in central Indiana since 1973. Crossmann's homes are targeted primarily to entry-level and first move-up buyers. They range in price from approximately $81,900 to approximately $800,000; but the average size of one of Crossmann's new homes is 1,400 square feet, and the average selling price in 2001 was approximately $134,800. Homes sold at the high end of Crossmann's price range relate to a division that was sold in January 2002.
Today the Company operates in eleven markets in six states:
Indiana: Indianapolis, Lafayette, and Ft. Wayne; Ohio: Columbus, Cincinnati and Dayton; Kentucky: Lexington; Tennessee: Memphis; North Carolina: Charlotte and Raleigh; South Carolina: Myrtle Beach.
Crossmann delivered 5,924 new homes in 2001 compared to 4,804 in 2000. Crossmann is characterized by a record of strong and consistent sales and net income growth over recent years, having achieved a 5-year average compound growth in revenue of approximately 28.3%. The Company's success has been and will continue to be dependent upon the following key operating strategies:
1. Focused Market Approach. The Company focuses on affordably-priced entry-level and first move-up single family homes. Management believes that entry-level housing generally allows high volume homebuilders, such as the Company, to build a standardized product. Standardization permits efficiencies in construction and purchasing that can result in high margins. The Company will continue to focus on providing product lines that address the needs of this market segment.
2. Emphasis on Customer Service. The Company is committed to providing a high level of customer service as an integral component of its competitive strategy. The Company serves its customers through the attention it devotes to their financial concerns and by producing a high quality product at a reasonable price.
3. Market Concentration. The Company currently conducts its business in eleven Midwestern and Southeastern markets. The Company believes that these markets enjoy relatively low unemployment, diversified industry, and infrastructure that makes these markets attractive to employers. Strong employment creates demand for housing of the type offered by the Company. The Company intends to explore opportunities to expand its homebuilding operations to other metropolitan areas that offer stable economic characteristics similar to those of its existing markets. The Company believes that its most effective expansion opportunities will be in similar markets where it can effectively utilize the strengths of its operating strategy.
4. Land Development. Management believes that developing land achieves several strategic objectives: (i) it helps the Company to improve its profit margins by reducing the cost of the land on which its homes are built; (ii) it ensures the Company an adequate supply of lots to meet market demand; (iii) it allows the Company to control the developments in which it builds its homes; and (iv) it allows the Company to construct homes efficiently and cost-effectively by permitting the construction of several similar homes within the same neighborhood at the same time.
5. Stringent Cost Controls. The large number of homes built by the Company allows it to purchase both products and services at favorable prices. Additionally, the Company has relatively few home designs, enabling it to significantly reduce delays and expenses associated with educating subcontractors as to new design requirements. The Company controls its construction costs through favorable pricing negotiated with subcontractors due to the efficient design of its homes. The Company believes that its success in dealing with subcontractors can be attributed to the large amount of work each subcontractor performs for the Company and from the long-term relationships the Company has with most of its subcontractors.
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Markets
All Crossmann's markets enjoy relatively low cost land and stable, broad-based employment. When considering a city for expansion, Crossmann seeks markets where the entry-level consumer is under-served, but where land, labor, utilities and zoning are available so that homes can be produced in volume.
Product Lines
The Company offers a variety of floor plans and exterior styles with two, three, and four bedrooms, two or more bathrooms and, typically, a two-car attached garage. Standard features of each product line include built-in appliances and custom wood cabinets in the kitchen, wall-to-wall carpeting, a high-efficiency furnace, maintenance-free vinyl siding, landscaped yard, poured concrete walks, porches and driveways. Purchasers are given the opportunity to select, at additional cost, such amenities as patios or decks, wood windows, skylights, upgraded carpeting and flooring, a fireplace or a basement. The homes are primarily single-family detached units, although in some locations in some markets, the Company offers attached single-family units.
The Company sells homes under the names "Crossmann Communities" in most of its markets, except where operations were acquired from another builder. For example, in Lexington it sells as "Cutter Homes;" in Myrtle Beach, as "Pinehurst;" and in Raleigh it sells as "Homes by Huff & Co." Each local operation offers homes to entry-level and first move-up buyers. In Myrtle Beach, South Carolina, that target market has been expanded to include second-home and retirement buyers seeking homes at Crossmann's price point.
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Effective October 1, 2000, Crossmann acquired the remaining 50% interest in one of its joint ventures, Trinity Homes, LLC ("Trinity"), an Indianapolis-based homebuilder serving the first- and second-time move-up buyer. These homes are sold at a significantly higher selling price than the homes above, averaging approximately $223,000 in 2000, compared to $125,000 for Crossmann's core product.
The Company intends to focus on delivering attractive housing at prices entry-level consumers can afford. The Trinity acquisition was Crossmann's first departure from this niche. Management is comfortable with this diversification in product because it is limited to Indianapolis, Crossmann's home base.
Construction
The Company acts as the general contractor for the construction of its residential communities. The Company's construction supervisors monitor the construction of each home; actual construction is performed by subcontractors. The use of subcontractors enables the Company to minimize its investment in direct employee labor, capital, equipment and building supply inventory. This practice also increases the Company's flexibility in responding to changes in the demand for housing. The Company has had long business relationships with many of its subcontractors. These relationships, coupled with the volume of homes built by the Company, enable the Company to negotiate favorable agreements with its subcontractors. The Company has not experienced any significant delays in construction due to shortages of materials or labor.
Except as necessary to maintain customer satisfaction with the aesthetics of its product lines, the Company does not materially change its home designs and floor plans from year to year. The Company believes that consistency in the design of its homes helps reduce costs and minimize delays by avoiding expenses associated with educating subcontractors on the requirements of a new design. Where practical, the Company uses mass production techniques, construction on contiguous lots, and prepackaged standardized components to streamline the on-site construction phase.
The construction of detached single-family homes by the Company generally begins after execution of a sales contract with the home buyer, which minimizes the costs and risks of completed but unsold inventory. When a contract has been signed, a "house work order" is generated and sent out to the Company's field supervisor and to each subcontractor who will work on the home. The house work order describes the basic house purchased and the optional items selected by the customer. Subcontractors prepare invoices on the basis of a pre-negotiated price list specifying the current rate the Company will pay for the work to be completed and the materials used. Price lists are updated periodically based on changes in the costs of raw materials and other factors. Vouchers are prepared by the subcontractor according to the price list and must be reviewed and approved by the field supervisor before they are paid by the Company.
Despite the effects of the weather, the Company maintains a construction schedule throughout the entire year. The Company can build in all but the harshest winter weather; however, production is slower when cold temperatures and snow or ice interfere with work. Furthermore, additional construction cost may be incurred due to such factors as temporary heating costs, additives to concrete, extra utility charges and the placement of temporary driveways and sidewalks.
Land Acquisition and Development
The Company typically acquires unimproved land through contingent purchase agreements. Closing of the land is contingent upon, among other things, the Company's ability to obtain necessary zoning and other governmental approvals for the proposed development, confirmation of the availability of utilities and completion of an environmental review.
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Once the land has been purchased, the Company undertakes development activities that include site planning and engineering, and construction of roads, sewer, water and drainage facilities and other amenities. The activities are carefully managed, with phases geared to the Company's projected sales. Generally, management of the Company attempts to maintain an inventory of "finished" lots sufficient for approximately half the homes which the Company anticipates it will construct during the next 18 months. In addition, the Company maintains an inventory of raw land in anticipation of its needs for a period of 18 to 36 months in the future. The following chart summarizes the Company's available lot inventory as of December 31, 2001.
In addition to purchasing unimproved land outright, the Company uses partnerships and joint ventures to acquire and develop land. Joint ventures sell finished lots to builders, including, but not limited to, the Company. The Company will continue to use partnership and joint venture arrangements in the future when management perceives a favorable opportunity. At December 31, 2001, the Company was a participant in thirteen such joint ventures.
The development of land is extremely capital intensive, and as a result, the Company's ability to develop land is limited. In 2001 the Company developed approximately 46.6% of the lots on which its homes were built, compared to approximately 45.3% in 2000. The Company expects this percentage to stay approximately the same in 2002.
Marketing and Sales
The Company sells its homes through a sales force of commissioned independent contractors ("New Home Counselors") who work from sales offices located at the Company's headquarters and in model homes located in each residential community. New Home Counselors of the Company advise prospective buyers throughout the home buying process by providing information on the Company's product lines of homes, pricing, options and upgrades, financing options, warranties and construction.
New Home Counselors contract with the Company, and the Company attempts to maintain long-term relationships with them. New Home Counselors attend weekly sales meetings at which they are kept aprised of changes in available financing options and other information relevant to prospective buyers and semi-annual seminars offered by the Company on a variety of marketing topics.
The Company does most of its advertising in the classified advertisement section of local newspapers and on its company website. The Company also attracts buyers as a result of referrals, directional signs and direct mailings. From time to time the Company may participate in television and radio advertising promotions.
Financing
The Company assists its customers in financing their new homes in several ways. First, the Company's New Home Counselors advise buyers, many of whom are first-time home buyers, on available financing options. The Company builds most of its homes under the guidelines and specifications of the Federal Housing Administration ("FHA") and the Veterans Administration ("VA"), thereby providing eligible buyers the benefit of FHA/VA mortgages. This is significant because FHA and VA financing generally enables buyers to purchase homes with lower down payments than the down payments required by conventional mortgage lenders and allow applicants to direct a larger percentage of their incomes toward housing expenses. The FHA/VA insured mortgages also provide more liberal rules with respect to the amount of points and closing costs that the seller may pay.
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The Company believes that the availability of FHA/VA financing is important to its overall success in that many entry-level and first move-up buyers have limited financial resources. FHA and VA mortgages are backed by government insured Fannie Mae and Ginnie Mae securities and should therefore be a relatively secure source of financing for Crossmann's customers. In 2001, approximately 68.2% of the homes delivered by the Company were financed with FHA/VA mortgages.
The Company has established a mortgage brokerage subsidiary, Crossmann Mortgage Corp., which was certified by FHA, a program of the Federal Department of Housing and Urban Development in July 1994. Once certified, the subsidiary began processing FHA, VA and conventional loans and selling the servicing rights. In 1997, Crossmann Mortgage Corp. became a qualified FHA underwriter. The revenue of the subsidiary is comprised of origination fees and servicing release fees, and its expenses primarily include administrative personnel salaries and other general office expenses. Crossmann Mortgage Corp. does not warehouse loans and, as a result, does not incur significant credit risk or market risk associated with loans it originates.
In August 2000, the Company formed Paragon Title, Inc., a wholly owned subsidiary that provides title insurance and closing services to Crossmann's customers.
Customer Service and Quality Control
Before the sale, the Company's New Home Counselors work with customers to select from available options in order to customize their new home to their particular taste. After the contract is signed, the buyer visits the Company's administrative office to make color selections and complete the house work order. Here the Company provides the new homeowner an orientation to the construction process and a detailed checklist which describes the items covered by the Company's warranty. When construction on a new home commences, the Company encourages the buyer to visit the site during the construction process. Before a buyer takes occupancy of a new house a pre-inspection tour is conducted with the buyer to ensure that the buyer is satisfied with the condition of the home and to correct any problems before the buyer takes possession.
Approximately 45 days after closing, representatives of the Company place a courtesy call to the new homeowners to enable them to ask any questions that have arisen since they took possession. Customers are encouraged to request an additional walk-through of the home approximately 90 days after closing. Finally, the Company also offers its customers a final inspection on the eleven month anniversary of the closing to check the home for items to be submitted for warranty action and to discuss any items which the customer believes warrant the Company's attention.
Each home sold by the Company is covered by a comprehensive warranty from a HUD approved warranty company. The warranty extends coverage for ten years for structural matters, four years for the roof of the home and two years for other specified items. By maintaining this warranty program, the Company is required to undergo one inspection, rather than three, to qualify for FHA/VA financing, thereby reducing the cost and time delay associated with such inspections.
In January 2001, the Company formed Meridian Structural Insurance, Risk Retention Group, Inc., a wholly owned subsidiary to provide the insured structural warranty to Crossmann's customers. Service to customers is administered by a third-party administrator. The insurance subsidiary became operational May 1, 2001.
Competition and Market Factors
The development and sale of residential properties is highly competitive. The Company competes in the sale of homes with the resale market for existing homes and with other homebuilders.
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The resale market for existing homes has several attractions for home buyers including the following: (i) buyers of existing homes can generally take occupancy of their homes more quickly; (ii) sellers in the resale market generally have lower basis in their homes and therefore may have price expectations different from those of sellers of new homes; and (iii) resale homes are generally located in established neighborhoods. The Company attempts to meet this competition from the home resale market by offering benefits which this market cannot provide, notably newer design features, the flexibility to select interior and exterior finishes, new home warranties and more desirable locations from which to choose a homesite.
The Company competes with other homebuilders on the basis of a number of interrelated factors, including location, reputation, amenities, design, quality and price. Management believes that entry-level housing generally allows high volume homebuilders, such as the Company, to build a more standardized product, thus permitting efficiencies in construction and materials purchasing which can result in a better value to the consumer. Some of the Company's competitors have greater financial, marketing and sales resources in certain markets.
The Company believes that a competitive challenge facing it in all of its present markets is locating and acquiring undeveloped land suitable for the types of communities which it can profitably develop. Although the Company has been successful in the past in locating and developing such tracts within its present markets, there can be no assurance that this success will continue. If the Company expands the geographic scope of its business to new markets, there can be no assurance that the Company will be successful in acquiring suitable land for development in such markets.
The housing industry is affected by consumer confidence levels and prevailing economic conditions in general and by job availability and interest rate levels in particular. A variety of other factors affect the demand for new homes, including changes in costs associated with home ownership such as property taxes and energy costs, changes in consumer preferences, demographic trends and availability of and changes in mortgage financing programs.
Trademarks
"Crossmann Communities" is a federally registered service mark for construction planning, laying out residential communities and residential construction services that is owned by the Company.
Employees
At December 31, 2001, the Company had 739 full-time employees and 62 part-time employees. The Company is not a party to any collective bargaining agreements. The Company considers its relationship with its employees to be good.
Executive Officers of the Registrant
The executive officers and directors of the Company and their ages are as follows:
Name Age Position with Company ---- --- --------------------- John B. Scheumann 52 Chairman of the Board of Directors and Chief Executive Officer Richard H. Crosser 63 Vice Chairman of the Board of Directors Jennifer A. Holihen 43 Chief Financial Officer; Treasurer; Secretary; Director Steven M. Dunn 47 President and Chief Operating Officer
Mr. Scheumann has been the Company's Chairman of the Board of Directors and Chief Executive Officer since 1992 and has served as a senior executive officer since joining the Company in 1977. Before joining the Company, Mr. Scheumann was employed by National Homes Construction Corp. for three years in a variety of capacities, last serving as Division Controller for Multi-Family Construction.
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Mr. Crosser served as the Company's President and Chief Operating Officer from 1992 until 2001, and now serves on its Board of Directors as Vice Chairman. He has been a senior executive officer since joining the Company in 1974. Prior to 1974, Mr. Crosser was employed by National Homes Construction Corp. for 15 years in a variety of capacities, last serving as a regional manager of the company.
Ms. Holihen has been the Chief Financial Officer, Secretary, and Treasurer since September 1993 and serves on its Board of Directors. Ms. Holihen served as controller for the Company from 1983 until 1993. Ms. Holihen is a Certified Public Accountant and received her MBA in accounting and management information systems from Indiana University in 1987.
Mr. Dunn was elected President in March 2001. He has served as Executive Vice President of Operations since 1998, and prior to that, served as General Manager of the Company's Columbus, Ohio Division since October 1993. Mr. Dunn was the sole shareholder and president of Deluxe Homes of Columbus, Inc. from 1987 until its acquisition by the Company in 1993.
Government Regulations and Environmental Matters
The housing industry and the Company are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, resource protection, building design, construction and similar matters. These include local regulations that impose restrictive zoning and density requirements that may limit the number of residences that can eventually be built within the boundaries of a particular location. Furthermore, in developing its projects the Company must obtain the approval of numerous governmental authorities regulating such matters as permitted land uses, levels of density, and the installation of utility services such as electricity, water and waste disposal.
The length of time necessary to obtain permits and approvals increases the carrying cost of unimproved property acquired for the purpose of development and construction. In addition, the continued effectiveness of permits already granted is subject to changes in policies, rules and regulations and changes in their interpretation and application. Such regulation affects construction activities and may result in delays, cause the Company to incur substantial costs, or prohibit or severely restrict development in environmentally sensitive regions or areas. To date, the governmental approval processes discussed above have not had a material adverse effect on the Company's development activities. In addition, because the Company purchases land contingent upon necessary zoning, restrictive zoning issues also have not had a material adverse effect on the Company's development activities. However, there is no assurance that these and other restrictions will not adversely affect the Company in the future.
The Company generally will condition its obligation to purchase land on, among other things, an environmental review of the land. However, there can be no assurance that the Company will not incur material liabilities relating to the removal of toxic wastes or other environmental matters affecting land owned by the Company or land which the Company no longer owns. To date, the Company has not incurred any liability relating to the removal of toxic wastes or other environmental matters and to its knowledge has not acquired any land with environmental problems.
A significant number of the Company's customers obtain mortgage financing under programs sponsored by FHA and VA. Any reductions in the scope of funding of FHA/VA mortgage programs could have a material adverse effect on the Company and its operations.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases office space in Indianapolis, Lafayette, Ft. Wayne and Franklin, Indiana; Columbus and Cincinnati, Ohio; Lexington, Kentucky; Memphis, Tennessee; Charlotte and Raleigh, North Carolina and in Myrtle Beach, South Carolina. The leases for office space are at prevailing market rates.
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ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is involved in routine litigation incidental to its business. The Company does not believe that any liabilities resulting from litigation to which it is a party will materially affect the Company's financial position, results of operations or cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
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PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS
The Company's common shares trade on The Nasdaq Stock Market under the symbol: "CROS." Shares outstanding at December 31, 2001 were 10,671,503. The closing price at December 31, 2001 was $33.00. During the year ended December 31, 2001, the high closing sales price per share as reported by The Nasdaq Stock Market was $45.44. The low closing sales price per share was $20.50.
High and low share prices for the last two fiscal years were:
2000 2001 ------------------- ------------------- Quarter ended High Low High Low ------------- ------------------- ------------------- March 31 $21.50 $14.75 $31.00 $20.50 June 30 18.75 14.68 41.07 23.50 September 30 21.00 14.14 45.44 21.26 December 31 25.13 17.25 34.55 21.28
The closing sale price of the Company's Common Shares as reported on The Nasdaq Stock Market on February 5, 2002 was $45.41. As of January 17, 2002, there were 38 holders of record of the Company's Common Shares. The Company's transfer agent estimates that there were 10,671,503 shares outstanding, on January 17, 2002, and that on that date there are approximately 1,546 beneficial owners of the Company's Common Shares.
On October 7, 1999, Crossmann's Board of Directors authorized the repurchase of up to 15% of its outstanding shares (1,740,357 shares out of 11,602,382 shares then outstanding). As of December 31, 2001, 1,283,000 shares had been repurchased pursuant to this plan, at an average price of $15.78 per share. That authorization expired on April 7, 2001.
The transfer agent for the Company's Common Shares is American Stock Transfer & Trust. Its address is 40 Wall Street, New York, NY 10005.
The Company paid its first dividend of $.05 per common share at the end of the second quarter of 2001, and repeated this payment at the close of the third and fourth quarters respectively. In general, the Board of Directors prefers to retain earnings to finance the continuing development of its business, but has elected to pay cash dividends in 2001 in light of the Company's low debt. The payment of future dividends will be at the discretion of the Company's Board of Directors, and will be determined on a quarter-to-quarter basis but will be subject to limitations contained in the merger agreement unless and until the merger agreement is terminated in accordance with its terms. Payment of future dividends will depend upon, among other things, future earnings, the success of the Company's expansion activities, capital requirements, the general financial condition of the Company and general business conditions. The Company is party to credit agreements with noteholders and commercial banks that restrict its ability to pay cash dividends with respect to the Common Shares. (See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.")
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following is selected consolidated financial data of the Company for the five years ended December 31, 2001. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of Crossmann Communities, Inc. and notes thereto contained elsewhere in this Form 10-K.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Proposed Merger with Beazer Homes
On January 29, 2002, the Company entered into the Merger Agreement with Beazer and Beazer Homes Investment Corp. The following Management's Discussion and Analysis addresses the historical results of, and known trends and uncertainties with respect to, the business of the Company as a separate company, and does not contemplate the effect of the proposed merger with Beazer.
Overview
The Company's business and the homebuilding industry in general are subject to changes in economic conditions, including but not limited to employment levels, interest rates, the availability of credit, and consumer confidence. Orders for new homes were extraordinarily strong during the second half of 2000 and the first half of 2001, due to the environment of strong employment, favorable interest rates and consumer optimism. As the economy has slowed in the second half of 2001, and as uncertainty about the future lingers after the events of September 11th, 2001, orders have not met prior year levels in some markets. Crossmann ended the year with backlog down slightly. There were 1,983 homes in backlog at the end of 2001, compared to 2,010 at the end of 2000, a decline of 1%.
Crossmann adapts to changing patterns of demand by adjusting its overhead spending and land investment to match anticipated volume. For example, the Company cut overhead and closed underperforming markets of Louisville, Kentucky and Nashville, Tennessee during 2000 to improve margins. The Company also acquired full ownership of Trinity in October 2000 to help offset the closing shortfall. In 2001, the Company enjoyed higher volume and improved gross margins as a result of these changes.
In 2002, the Company will continue to allocate its resources to markets where there is the best opportunity for good returns.
Significant Accounting Estimates
Significant estimates made by Crossman's management include reserves for warranty expenses to be incurred on homes under warranty and accruals for the costs to be incurred for completion of homes closed. Estimates for warranty and costs to complete are made based on detailed budgets for each home, options selected by the customer and historical cost behavior patterns. Costs associated with these estimates are expensed in the period in which the associated home sale revenue is recognized.
Results of Operations
During the five-year period ended December 31, 2001, the Company's sales increased at an average compound annual rate of 28.3% per year, from $316.4 million in 1997 to $798.4 million in 2001. Net income increased at an average compound annual rate of 28.9%, from $20.0 million in 1997 to $53.7 million in 2001. Shareholders' equity increased from $110.8 million as of December 31, 1997 to $264.4 million as of December 31, 2001.
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The following table recaps unit growth in the Company's markets. Management views volume relative to the total size of each market a significant factor in producing good margins.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
The following table sets forth, for the years ended December 31, 2001 and 2000, certain income statement items related to the Company's operations:
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Sales increased by $177.4 million, or approximately 28.6%, in 2001 over 2000. Sales were higher primarily as a result of increased unit sales; 5,924 units were closed in 2001 compared to 4,804 in 2000. Crossmann's average selling price was also higher, approximately $134,800 in 2001, compared to approximately $129,275 in 2000. The increase in average selling price resulted principally from the contribution of 583 homes from Trinity, which averaged approximately $213,300 in 2001.
Gross profit increased by $52.3 million, or approximately 43.1%, for the year. This represents a gross margin percentage of 21.8% of sales in 2001 as compared to 19.5% in 2000. The improved gross margin percentage resulted, in part, from Crossmann's decision in 2000 to exit lower margin markets in Louisville, Kentucky and Nashville, Tennessee. Also, margins generated by Trinity, acquired by Crossmann in October 2000, have steadily improved throughout the year. At acquisition, Trinity's average gross margins were approximately 13.2%, lower than Crossmann's average in part because of less efficient purchasing and in part because of the effect of purchase accounting on the acquired operation. With better purchasing power and less costly land and capital available because of its relationship to Crossmann, Trinity's margins in the fourth quarter of 2001 had improved to approximately 18.7%.
Selling, general and administrative expenses increased as a percentage of sales from 10.6% in 2000 to 10.8% in 2001. This increase was due principally to incurring higher overhead for Trinity's operations for the entire year. In 2000, Trinity's spending was included for only the fourth quarter.
Due to the increase in sales, income before income taxes for 2001 increased approximately $30.3 million over 2000, or 51.9%. This represents an increase from 9.4% of sales in 2000 to 11.1% of sales in 2001. Net income increased $17.9 million or 50.0%. Net income as a percentage of sales was 6.7% in 2001 compared to 5.8% in 2000. The Company's effective tax rate was 39.5% in 2001, compared to 38.7% in 2000. The rise in tax rate occurred because of a change in state tax laws affecting some of Crossmann's markets.
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Sales increased by $11.7 million, or approximately 1.9%, in 2000 over 1999. Sales were higher due to the acquisition of Trinity in the fourth quarter. Unit sales were lower; 4,804 units were closed in 2000 compared to 5,100 in 1999; but the average selling price was higher, approximately $129,300 in 2000, compared to approximately $119,500 in 1999. Trinity contributed closings at an average selling price of approximately $240,400 in the fourth quarter, which is higher than Crossmann's other markets.
Gross profit decreased by $2.8 million, or approximately 2.3%, for the year. This represents a gross margin percentage of 19.5% of sales in 2000 as compared to 20.4% in 1999. The decrease in margin resulted principally from low margins and exit costs in Louisville and Nashville. Gross margin was also impacted in 2000 by lower margins from Trinity closings. Trinity sales had margins of 13.2% in the fourth quarter of 2000.
Selling, general and administrative expenses stayed fairly steady as a percentage of sales, 10.2% in 1999 compared to 10.6% in 2000.
Due to the decline in gross margin, income before income taxes for 2000 decreased approximately $7.3 million compared to 1999, or 11.1%. This represents a decrease from 10.8% of sales in 1999 to 9.4% of sales in 2000. Net income decreased $3.9 million or 9.8%. Net income as a percentage of sales was 5.8% in 2000 compared to 6.5% in 1999. Most of these declines were attributable to lower gross margin. The Company's effective tax rate was 38.7% in 2000, compared to 39.6% in 1999.
Backlog
The following table sets forth certain data relating to the operations of the Company for the years ended December 31, 1999, 2000 and 2001.
Historically, Crossmann has been able to close approximately three times its ending backlog of new homes in the subsequent year. Because of softening orders in the second half of 2001, Crossmann will be challenged to deliver three times its ending backlog in 2002.
Liquidity and Capital Resources
At December 31, 2001, Crossmann had cash and cash equivalent balances of $14.2 million.
On October 7, 1999, Crossmann's Board of Directors authorized the repurchase of up to 15% of its outstanding shares (1,740,357 shares out of 11,602,382 shares then outstanding). As of December 31, 2001, 1,283,000 shares had been repurchased and retired pursuant to this plan, at an average price of $15.78 per share. This authorization expired April 7, 2001.
During 2001, expenditures were financed with cash from operations and with borrowings on a $135 million unsecured line of credit with Bank One, Indiana N.A. and its participants. The line of credit bears interest at the bank's prime lending rate, but permits portions of the outstanding balance to be committed for fixed periods of time at a rate equal to LIBOR plus 1.3% through 1.6%. At December 31, 2001 the Company had drawn funds on its bank line of credit of $60,000,000. This line of credit has a three-year maturity, renewable annually and expires April 1, 2004.
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The Company also has $8.3 million in senior notes, maturing in 2004 with interest payable quarterly at 7.625%, and annual principal reductions of $2.8 million, and $50.0 million in senior notes issued in June of 1998, payable over 10 years at 7.75%, payable quarterly. Annual principal reductions of $8.3 million for the $50.0 million note begin June 11, 2003.
Both the note agreements and the bank line of credit require compliance with certain financial and operating covenants and place certain limitations on the Company's investments in land and unconsolidated joint ventures. They also restrict payments of cash dividends and repurchases of common stock by the Company. The Company is in compliance with all financial and operating covenants at December 31, 2001.
The Company's primary uses of capital are home construction costs and the purchase and development of land. Real estate inventories were approximately $339.3 million or 79.0% of total assets at December 31, 2001 compared to approximately $279.3 million or 74.7% of total assets at December 31, 2000. To assure the future availability of developed lots for next year's operations, from time to time in the normal course of business, the Company contracts to purchase a portion of its developed lots from outside developers. Total commitments for these purchases were approximately $169.8 million at December 31, 2001. The purchases of these lots are subject to various conditions imposed on both the sellers and the Company. Capital is also used to add and improve equipment used in administering the business and for model home furnishings.
From time to time, Crossmann enters into joint ventures with other builders and developers, to share land development risk and to obtain external expertise. Crossmann's investment in and advances to joint ventures decreased to approximately $15.3 million in 2001 from approximately $16.3 million in 2000.
The cash generated from operations and the banks' credit agreement are expected to provide adequate liquidity for planned internal growth and capital expenditures. In the event that the Company seeks to accelerate growth through the acquisition of large parcels of land or of other homebuilders, additional capital may be necessary. The Company believes that such capital could be obtained from banks or other financing alternatives, from the issuance of additional shares, or from seller financing; however, there can be no assurances that the Company would be able to secure the necessary capital.
Inflation and Effects of Changing Prices
The Company historically has been able to raise sales prices by amounts at least equal to its cost increases and, accordingly, has not experienced any detrimental effect from inflation. However, because the Company sells to a price-conscious consumer, its ability to raise prices is somewhat limited. In 2001, the Company was able to pass along certain price increases effectively. The average selling price of Crossmann's core product increased from approximately $129,275 in 2000 to approximately $134,800 in 2001.
Housing demand, in general, is affected adversely by increases in interest rates. If mortgage interest rates increase significantly, the Company's sales of residential real estate could be adversely affected. In addition, gross profit and net income can be affected because Crossmann can assist buyers, subject to certain limitations by FHA and VA, by paying a portion of a customer's points and closing costs needed to help in securing a mortgage loan.
New Accounting Pronouncements
In July 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 business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 141 also prohibits the use of pooling-of-interest method for all business combinations initiated after June 30, 2001.
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SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles would not be amortized into results of operations, but instead would be reviewed for impairment at least annually and written down and charged to results of operations in the periods in which the recorded value of goodwill and certain intangibles are determined to be greater than their fair value.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 142 will result in the discontinuation of amortization of goodwill recorded at December 31, 2001 of approximately $1,025,000 annually. We do not believe any impairment charges will result from the adoption of this statement.
SFAS No. 144, "Accounting for Long-Lived Assets," issued in August 2001 addresses accounting for and reporting of the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 31, 2001. We do not expect the adoption of SFAS No. 144 will have a significant impact on our financial position or results of operations.
Future Trends
Management views land acquisition and zoning as the greatest challenges to its business in years to come. The Company will continue to seek to maximize the value of each parcel it purchases so that it can continue to serve its core customer.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not invest in marketable securities, nor does it engage in hedging activities or foreign currency conversions. The Company's bank line of credit is carried at variable interest rates.
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Crossmann Communities, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Independent Auditors' Report............................................ 20 Consolidated Balance Sheets as of December 31, 2000 and 2001............ 21 Consolidated Statements of Income for the Years Ended December 31, 1999, 2000, and 2001..................................... 22 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 2000, and 2001.................................... 23 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000, and 2001..................................... 24 Notes to Consolidated Financial Statements.............................. 25-33
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Crossmann Communities, Inc. Indianapolis, Indiana
We have audited the accompanying consolidated balance sheets of Crossmann Communities, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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 the 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, such consolidated financial statements present fairly, in all material respects, the financial position of the companies as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP Indianapolis, Indiana
January 22, 2002
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Crossmann Communities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
for the Years Ended December 31, 1999, 2000 and 2001
1. Basis of Presentation
Crossmann Communities, Inc. ("Crossmann" or the "Company") is engaged primarily in the development, construction, marketing and sale of new single-family homes for first time and first move-up buyers. The Company also acquires and develops land for construction of such homes and provides mortgage origination, title company services and insured warranty coverage for the buyers through its wholly-owned subsidiaries Crossmann Mortgage Corporation, Paragon Title, Inc. and Meridian Structural Insurance, Risk Retention Group, Inc. The Company operates in Indianapolis, Ft. Wayne and Lafayette, Indiana; Cincinnati, Columbus and Dayton, Ohio; Lexington, Kentucky; Memphis, Tennessee; Charlotte and Raleigh, North Carolina; and Myrtle Beach, South Carolina. During 2000, Crossmann closed its operations in Louisville, Kentucky and Nashville, Tennessee.
2. Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company also owns 50% interests in certain unconsolidated joint ventures, which are accounted for using the equity method. Effective October 1, 2000, Crossmann acquired the remaining 50% interest in one of its joint ventures, Trinity Homes, LLC ("Trinity"). Prior to this date, the Company recorded its 50% share of Trinity earnings in other income.
Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates made by Crossman's management include reserves for warranty expenses to be incurred on homes under warranty and accruals for the costs to be incurred for completion of homes closed. Estimates for warranty and costs to complete are made based on detailed budgets for each home, options selected by the customer and historical cost behavior patterns. Costs associated with these estimates are expensed in the period in which the associated home sale revenue is recognized.
Business Segments Crossmann does not report its geographic regions separately because its product, pricing and margins are all very similar from market to market. Crossmann does not report its mortgage or title operations separately because they directly support its core homebuilding operations. Services to outside parties are rare. Generally, internal payments between the building operations and mortgage and title subsidiaries are eliminated in consolidation and flow through the income statement as savings in the builder's gross margin.
Cash and Cash Equivalents All highly liquid investments with maturities of three months or less when purchased are considered to be cash equivalents.
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Real Estate Inventories Real estate inventories are stated at the lower of cost (specific identification method) or net realizable value. In addition to direct land acquisition, land development and housing construction costs, inventory costs include interest, real estate taxes and related development and construction overhead costs which are capitalized in inventory during the development and construction periods. Net realizable value represents estimates, based on management's present plans and intentions, of sale price less development and disposition cost, assuming that disposition occurs in the normal course of business.
Goodwill Goodwill is amortized over twenty years using the straight-line method. Accumulated amortization was approximately $3,061,500 and $4,178,400 at December 31, 2000 and 2001, respectively. In the event that facts and circumstances indicate that the carrying value of goodwill may be impaired, an evaluation of recoverability is performed. The evaluation compares the estimated future undiscounted cash flows associated with the asset to the asset's carrying value to determine whether an impairment charge is required.
Furniture and Equipment Furniture and equipment are stated at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the respective assets ranging from 5 to 15 years. Accumulated depreciation is approximately $6,078,300 and $5,603,805 at December 31, 2000 and 2001, respectively. Repairs and maintenance costs are expensed as incurred.
Revenue Recognition Revenue is recognized upon a formal closing and as title to the property transfers to the buyer. At that time, the risks and responsibilities of ownership are transferred to the buyer. Revenue from mortgage and title operations are recognized at closing and are included as sales from residential real estate.
New Accounting Pronouncements In July 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 business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting and broadens the criteria for recording intangible assets separate from goodwill. SFAS No. 141 also prohibits the use of pooling-of-interest method for all business combinations initiated after June 30, 2001.
SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles would not be amortized into results of operations, but instead would be reviewed for impairment at least annually and written down and charged to results of operations in the periods in which the recorded value of goodwill and certain intangibles are determined to be greater than their fair value.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 142 will result in the discontinuation of amortization of goodwill recorded at December 31, 2001 of approximately $1,025,000 annually. We do not believe any impairment charges will result from the adoption of this statement.
SFAS No. 144, "Accounting for Long-Lived Assets," issued in August 2001 addresses accounting for and reporting of the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 31, 2001. We do not expect the adoption of SFAS No. 144 will have a significant impact on our financial position or results from operations.
3. Financial Instruments
SFAS No. 107, Disclosure About Fair Value of Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following summarizes the estimated fair values of financial instruments and the major methods and assumptions used in estimating such amounts:
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The recorded amounts of short-term financial instruments (primarily cash and cash equivalents, retainages, and accounts payable) approximate the fair values due to the relatively short period to maturity.
Debt with variable interest rates is recorded at carrying amounts which approximate the fair value based on discounted future cash flows. The fair value of senior notes payable due December 2004 and due June 2008 totals approximately 8,675,000 and $54,401,000, respectively, at December 31, 2001.
4. Real Estate Inventories
Real estate inventories at December 31 consist of:
2000 2001 ------------ ------------
Residential homes under construction $117,399,498 $145,043,489 Land held for future development 64,604,096 68,934,611 Land under development 50,578,935 74,856,935 Purchased developed lots 32,826,664 32,668,442 Homes held for resale 3,910,940 5,836,784 Model homes 9,992,568 11,993,185 ------------ ------------ $279,312,701 $339,333,446 ============ ============
The Company occasionally purchases homes from customers to facilitate the sale of new homes. Such homes held for resale are recorded at the lower of cost or net realizable value.
5. Investments in Unconsolidated Joint Ventures
The Company has entered into joint ventures with various real estate developers and owns 50% or less in each venture. The joint ventures are accounted for using the equity method. Aggregated condensed financial information for unconsolidated joint ventures is as follows:
1999 2000 2001 ------------ ----------- -----------
Revenue $126,940,421 $20,362,027 $35,566,337 Expenses 117,539,265 18,233,979 30,166,052 ------------ ----------- ----------- Net income $ 9,401,156 $ 2,128,048 $5,400,285 ============ =========== ===========
Assets $ 92,882,531 $63,657,068 $69,200,802 Liabilities 73,817,315 49,178,071 50,926,915 ------------ ----------- ----------- Equity $ 19,065,216 $14,478,997 $18,273,887 ============ =========== ===========
Assets of joint ventures consist primarily of developed lots, land under development and land held for future development. Revenue consists primarily of residential lot sales. Land joint ventures provided $6,022,340, $14,557,550 and $23,338,700 in lots to the Company in 1999, 2000 and 2001 respectively. Investments in unconsolidated joint ventures include accounts receivable from the joint ventures of $9,106,601 and $5,891,963 in 2000 and 2001, respectively. Interest and fee income from unconsolidated joint ventures totaled approximately $902,500, $552,800 and $826,800 for 1999, 2000 and 2001, respectively.
For the year ended December 31, 1999, and for the nine-month period ended October 1, 2000, the Company's investment in the Trinity joint venture provided approximately $3,645,100 and $1,438,500 in other income to the Company, respectively.
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6. Other Assets
At December 31, 2001, other assets includes $933,766 of restricted cash. In 2000, the Company financed model homes through certain unconsolidated joint ventures which require monthly payments of approximately 1% of the carrying cost. The corresponding finance obligation is included in accrued expenses and other liabilities. Interest expense associated with the financed model homes totaled approximately $45,400 and $626,100 for 2000 and 2001, respectively.
7. Credit Arrangements
The senior notes and line of credit agreements require a minimum current ratio, a minimum fixed charge coverage ratio, a maximum ratio of debt to tangible capital base, a maximum ratio of land to equity, and a maximum ratio of debt to a borrowing base derived from inventory levels. The senior note due April 2004 requires a premium in the event of pre-payment. Additionally, both credit agreements limit investment in unconsolidated joint ventures, restrict payments of cash dividends, and require express written consent of the lenders for certain transactions. The Company is in compliance with all financial and operating covenants at December 31, 2001.
Interest capitalized during real estate development and construction was $7,591,000, $8,307,400, and $8,323,000 for 1999, 2000, and 2001, respectively.
Interest paid, including amounts capitalized, was approximately $9,846,000, $10,669,800 and $10,887,000 in 1999, 2000, and 2001, respectively. The weighted average interest rate on outstanding borrowings was 5.94% at December 31, 2001.
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Scheduled maturities of notes payable for each of the five years and thereafter as of December 31, 2001 are as follows:
2002 $ 2,777,778 2003 11,111,112 2004 71,111,110 2005 8,333,334 2006 8,333,334 Thereafter 16,666,664 ------------ $118,333,332 ============
8. Shareholders' Equity
The Company has authorized 10,000,000 preferred shares which remain unissued at December 31, 2001. The Board of Directors of the Company has not yet determined the preferences, qualifications, relative voting or other rights of the authorized preferred shares.
On October 7, 1999, Crossmann's Board of Directors authorized the repurchase of up to 15% of its outstanding shares (1,740,357 shares out of 11,602,382 shares then outstanding). As of December 31, 2001, 1,283,000 shares had been repurchased and retired pursuant to this plan, at an average price of $15.78 per share. That authorization expired April 7, 2001. During 2001, cash dividends of $1,587,941 ($0.15 per share) were paid.
The Company has incentive share option plans for employees and directors pursuant to which 1,237,500 common shares are reserved. The options were issued at market prices on the grant date, became exercisable on the grant date and expire ten years after the grant date
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The following table summarizes information about stock options outstanding and exercisable at December 31, 2001:
The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for the option plans. No compensation cost has been recognized for the plans because the stock option price is equal to fair value at the grant date. Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's pro forma net income and basic and diluted net income per share for the years ended December 31, 1999, 2000 and 2001 would be as follows:
The fair value of the option grants are estimated on the date of grant using the Black-Sholes option pricing model based on the following assumptions for the years ended December 31,
2000 2001 ---- ----
Expected volatility 45.0% 45.0% Expected dividend yield none nominal Risk-free interest rate 6.0% 4.8% Expected life (in years) 5 5
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The following is a reconciliation of the weighted average common shares for the basic and diluted net income per share computations for the years ended December 31:
9. Income Taxes
Income taxes paid were $26,297,000, $22,455,000 and $32,679,000 during 1999, 2000 and 2001, respectively.
Total deferred tax assets (primarily related to warranty reserves and other non-deductible accruals) are approximately $2,009,000 and $1,154,000 at December 31, 2000 and 2001, respectively. Total deferred tax liabilities (primarily related to acquisition basis differences) are approximately $1,601,000 and $1,552,000 at December 31, 2000 and 2001, respectively.
10. Related Party Transactions
Office space at the Company's headquarters is leased from a related party. During 1999, 2000 and 2001 approximately $382,800, $382,800 and $475,700, respectively, in rental payments were made to a related entity controlled by certain key members of management. The Company paid approximately $217,700, $237,200 and $218,000 for 1999, 2000 and 2001, respectively, for aircraft charter services to a related entity. 11. Leases
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The Company leases office and warehouse space, vehicles and office equipment pursuant to operating lease agreements expiring on various dates through October 2012. Rent expense was approximately $1,018,500, $1,285,900 and $1,687,900 for 1999, 2000 and 2001, respectively. Annual minimum payments to be made to a related party incorporated in the amounts below range from approximately $511,300 in 2002 to $217,300 in 2004.
Annual minimum operating lease payments due as of December 31, 2001 are as follows:
2002 $2,253,568 2003 1,955,642 2004 1,345,353 2005 490,302 2006 369,472 ---------- $6,414,337 ==========
12. Employee Benefits
The Company's defined contribution savings plan covers substantially all employees of the Company. Participants are allowed to make nonforfeitable contributions up to limits established by the Internal Revenue Code. The plan also permits investments by employees in the Company's common shares. In 1999, 2000 and 2001 the Company matched in cash 50% of the first 6% of compensation contributed by each participant, totaling $331,600 and $365,000 and $460,800 respectively. On December 31, 1999, 2000 and 2001, the Company declared discretionary profit sharing contributions of approximately $871,300, $771,400 and $800,000 respectively, payable in the Company's common shares.
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14. Business Acquisitions
Crossmann acquired the remaining 50% interest in Trinity, effective October 1, 2000 for approximately $7,600,000 in cash, and assumed debt and other liabilities of approximately $42,800,000. The transaction was accounted for as a purchase. Cost in excess of the fair value of the net assets acquired of approximately $4,200,000 was recorded as goodwill. The unaudited pro forma results of operations as if the acquisition occurred on January 1, 1999 are presented below. These pro forma results are not necessarily indicative of the actual results of operations that would have occurred.
15. Commitments and Contingencies
To assure the future availability of developed lots, in the normal course of business, the Company has contracted to purchase developed lots. Total commitments for these purchases were approximately $169.8 million at December 31, 2001. These contracts are generally without specific performance requirements and limit the Company's exposure to the forfeiture of non-refundable deposits which were approximately $8.8 million and $9.1 million at December 31, 2000 and 2001, respectively. The purchase of these lots is subject to various conditions imposed on both the sellers and the Company.
The Company has outstanding letters of credit of approximately $4.2 million at December 31, 2001 of which $1.2 million was established to capitalize the Company's warranty insurance company, Meridian Structural Insurance, Risk Retention Group, Inc., and approximately $3.0 million was pledged to ensure the completion of land development work in various municipalities.
The Company from time to time is involved in routine litigation incidental to its business. The Company does not believe that any liabilities resulting from litigation to which it is a party will materially affect the Company's financial position and results of operations.
16. Subsequent Event (Unaudited)
On January 29, 2002, the Company entered into an Agreement and Plan of Merger with Beazer Homes USA, Inc. ("Beazer") and Beazer Homes Investment Corp. (the "Merger Agreement"). Closing of the merger is subject to regulatory and shareholder approvals, among other conditions and terms, as set forth in the Merger Agreement. Upon closing of the merger, shareholders of the Company will receive proceeds of $17.60 per share and a fraction of a share of Beazer common stock. The transaction is expected to be completed in the second or third quarter of 2002.
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Directors, executive officers of the Company are set forth in the following table:
Name Age Position with Company - ---- --- --------------------- John B. Scheumann 52 Chairman of the Board of Directors and Chief Executive Officer Richard H. Crosser 63 Vice Chairman of the Board of Directors Jennifer A. Holihen 43 Chief Financial Officer; Treasurer; Secretary; Director Steven M. Dunn 47 President and Chief Operating Officer James C. Shook 70 Director Larry S. Wechter 46 Director John E. Worthen 68 Director
Mr. Scheumann has been the Company's Chairman of the Board of Directors and Chief Executive Officer since 1992 and has served as a senior executive officer since joining the Company in 1977. Before joining the Company, Mr. Scheumann was employed by National Homes Construction Corp. for three years in a variety of capacities, last serving as Division Controller for Multi-Family Construction.
Mr. Crosser served as the Company's President and Chief Operating Officer from 1992 until 2001, and now serves on its Board of Directors as Vice Chairman. He has been a senior executive officer since joining the Company in 1974. Prior to 1974, Mr. Crosser was employed by National Homes Construction Corp. for 15 years in a variety of capacities, last serving as a regional manager of the company.
Ms. Holihen has been the Chief Financial Officer, Secretary, and Treasurer since September 1993 and serves on its Board of Directors. Ms. Holihen served as controller for the Company from 1983 until 1993. Ms. Holihen is a Certified Public Accountant and received her MBA in accounting and management information systems from Indiana University in 1987.
Mr. Dunn was elected President in March 2001. He has served as Executive Vice President of Operations since 1998, and prior to that, served as General Manager of the Company's Columbus, Ohio Division since October 1993. Mr. Dunn was the sole shareholder and president of Deluxe Homes of Columbus, Inc. from 1987 until its acquisition by the Company in 1993.
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James C. Shook was elected to Crossmann's Board of Directors in March 1994. Mr. Shook was President of Coldwell Banker/The Shook Agency, Inc., a real estate brokerage firm in Lafayette, Indiana from 1984 until his retirement in January 2000. Mr. Shook's other corporate affiliations have included directorships of Vectren, Inc., NBD Indiana N.A., Bank One Indiana N.A., and Lafayette Life Insurance Co. He is a life director of the Indiana Chamber of Commerce.
John E. Worthen served as President of Ball State University from 1984 until his retirement in 2000, and as President of Indiana University of Pennsylvania from 1979 until 1984. Dr. Worthen has a Bachelor of Science degree in Psychology from Northwestern University, a Master of Arts degree from Columbia University, and a Doctor of Education degree from Harvard, in Counseling, Psychology and Administration in Higher Education. He has served as a consultant to public schools, universities, the U.S Women's Bureau, and the U.S. Department of Labor. He served on the board of directors of Indiana Energy, Inc. and Indiana Gas Company, Inc. from 1997 until 2000 and currently serves on the boards of the Ball State University Foundation, First Merchants Corporation and Ball Memorial Hospital.
Larry S. Wechter is the Managing Director and CEO of Monument Advisors, Inc. Monument Advisors manages a private equity fund and a mezzanine fund. These funds focus on small to medium size manufacturing, service, and distribution firms throughout the United States, but primarily in the Midwest.
Prior to founding Monument, Mr. Wechter served in the Office of the Chairman as President and Director of ADESA Corporation (NASDAQ: SOLD), the second largest auto auction chain in the world and the largest used car floor plan finance company in the U.S. ADESA was formerly a publicly traded company and is now a wholly-owned subsidiary of Allete, Inc. (formally Minnesota Power, Inc.) a diversified company based in Duluth, Minnesota. Mr. Wechter also served on Allete's (NYSE: ALL) management committee. Prior to his role as President of ADESA, Mr. Wechter served as its Chief Financial Officer. Mr. Wechter was the lead financial executive in ADESA's initial public offering and its second primary offering, and all debt underwriting and was directly involved in all aspects of the negotiations and structuring that led to ADESA's acquisitions of its business units.
Mr. Wechter serves on the board of Symons International Group (OTC: SIGC), the Ball State University School of Entrepreneurship, the Midwest Entrepreneurship Education Association and the Indiana Humanities Council. Mr. Wechter serves on the board of many privately held companies, including portfolio companies of Monument. Mr. Wechter currently holds NASD Series 7, 24, 27, and 63 securities licenses and is a CPA.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's Chief Executive Officer and the Company's four other highest-paid executive officers for services rendered in all capacities to the Company and its subsidiaries for the fiscal years ended December 31, 1999, 2000, and 2001, respectively.
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Option Plan Benefits
The following table sets forth the benefits allocated under the Outside Director Plan and the Employee Option Plan (collectively, the "Plans") for the fiscal year ended December 31, 2001 to each of the named executive officers; all current executive officers as a group; all current directors who are not executive officers as group; and all employees, including all current officers who are not executive officers, as a group. The amount of such benefits are not necessarily indicative of the amounts that will be granted in the future. The closing sale price of a Common Share at the close of business on February 5, 2002 was $45.41. Option Plan Benefits
Employee Option Plan Outside Director Option Name Number of Units Plan Number of Units - ---- --------------- --------------------
John B. Scheumann -0- -0- Richard H. Crosser -0- -0- Steve M. Dunn 4,000 -0- Jennifer A. Holihen 4,000 -0-
All Other Executive Officers as a Group -0- -0-
All Directors who are not Executive Officers 5,000
All non-Executive Officers and Employees as a Group 27,000
The following table contains information concerning the grant of stock options under the Company's Employee Option Plan to the named executive officers and groups indicated. The table also lists potential realizable values of such options on the basis of assumed annual compounded appreciation rates of 5% and 10% over the life of the options, which are set at a maximum of 10 years.
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The following table provides information with respect to the named executive officers and groups indicated concerning the unexercised options held as of the end of the last fiscal year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial ownership of the Company's Common Shares as of February 5, 2002 by (i) each person or entity who is known to the Company to own beneficially more than 5% of the outstanding shares of Common Shares of the Company, (ii) each director, (iii) each officer listed in the Summary Compensation Table on page 6 of this Proxy Statement and (iv) all directors and officers as a group. All shares are subject to the named person's sole voting and investment power except where otherwise indicated.
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ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had business dealings with certain affiliates, including its Chairman of the Board and CEO, John B. Scheumann and its Vice Chairman, Richard H. Crosser and entities with which they are affiliated. Since its initial public offering , the policy of the Company has been to require that such transactions be on terms not less favorable to the Company than reasonably available from unrelated third parties and that they be approved by a majority of the disinterested members of the Board of Directors of the Company.
The Company leases approximately 25,000 square feet of office space for its headquarters, and an additional 4,000 square feet for its mortgage brokerage subsidiary, at 9202 and 9210 North Meridian Street in Indianapolis, Indiana from Crossmann Properties LLC, an entity 81.0% owned by principal shareholders John B. Scheumann and Richard H. Crosser and 19.0% owned by the Company. The monthly lease payments are $42,942.
The Company chartered an aircraft for corporate use from DJAC LLC, an entity 30% owned by principal shareholders John B. Scheumann and Richard H. Crosser and 50% owned by the Company. In 2001, the Company paid approximately $218,000 for aircraft charter services. DJAC LLC ceased operations in July, 2001.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed with this Report. See Index to Consolidated Financial Statements included in this report. See Item 14(d) for an index of the supplementary financial statement schedule included in this report.
(b) Reports on Form 8-K. A report on Form 8-K was filed on February 1, 2002 to announce the proposed merger with Beazer Homes USA, Inc.
(c) Exhibits. There are included in this report or incorporated by reference the following exhibits.
Exhibit Number Description of Exhibit - ------ ----------------------
3.1 Amended and restated Articles of Incorporation of Crossmann Communities, Inc. (Incorporated by reference to Exhibit 3.1 to Form S-1 Registration Statement No. 33-68396.)
3.2 Bylaws of Crossmann Communities, Inc. (Incorporated by reference to Exhibit 3.2 to Form S-1 Registration Statement No. 33-68396.)
4.1 Specimen Share Certificate for Common Shares. (Incorporated by reference to Exhibit 2.9 to Form S-1 Registration Statement No. 33-68396.)
10.1 1993 Outside Director Stock Option Plan. (Incorporated by reference to Exhibit 10.2 to Form S-1 Registration Statement No. 33-68396.)
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10.2 1993 Employee Stock Option Plan. (Incorporated by reference to Exhibit 10.3 to Form S-1 Registration Statement No. 33-68396.)
10.3 Partnership Agreement of Mark Anthony Partnership, dated April 17, 1991. (Incorporated by reference to Exhibit 10.6 to Form S-1 Registration Statement No. 33-68396.)
10.4 Non-standardized Joinder Agreement for McCready and Keene, Inc. 401(k) Basic Regional Prototype Plan (with Revised Options) for Crossmann Communities, Inc. (Incorporated by reference to Exhibit 10.26 to Form 10-Q dated May 10, 1995.)
10.5 McCready and Keene, Inc. 401(k) Basic Regional Prototype Plan Basic Plan Document #03. (Incorporated by reference to Exhibit 10.27 to Form 10-Q dated May 10, 1995.)
10.6 Trust Agreement for Crossmann Communities, Inc. 401(k) Profit Sharing Plan, by and between Crossmann Communities, Inc. and Richard H. Crosser, John Scheumann, and Jennifer Holihen, Trustees. (Incorporated by reference to Exhibit 10.28 to Form 10-Q dated May 10, 1995.)
10.7 Note Agreement dated as of December 19, 1995, $25,000,000 7.625% Senior Notes due December 19, 2004, by Crossmann Communities, Inc., et al. (Incorporated by reference to Exhibit 10.37 to Form 10-K dated March 20, 1996.)
10.8 7.625% Senior Note due December 19, 2004, issued to Combined Insurance Company of America by Crossmann Communities, Inc. et al. (Incorporated by reference to Exhibit 10.38 to Form 10-K dated March 20, 1996.)
10.9 7.625% Senior Note due December 19, 2004, issued to The Minnesota Mutual Life Insurance Company by Crossmann Communities, Inc. et al. (Incorporated by reference to Exhibit 10.39 to Form 10-K dated March 20, 1996.)
10.10 Employee Stock Option Agreement, dated March 13, 1996 by and between Crossmann Communities, Inc. and Jennifer A. Holihen. (Incorporated by reference to Exhibit 10.47 to Form 10-K dated March 24, 1998.)
10.11 Employee Stock Option Agreement, dated February 18, 1997 by and between Crossmann Communities, Inc. and Jennifer A. Holihen. (Incorporated by reference to Exhibit 10.48 to Form 10-K dated March 24, 1998.)
10.12 Amended and Restated Operating Agreement for Trinity Homes, LLC dated October 17, 1997, by and among Crossmann Communities, Inc., Trinity Homes, Inc., and Pyramid Mortgage Co., Inc. (Incorporated by reference to Exhibit 10.50 to Form 10-K dated March 24, 1998.)
10.13 Agreement and Plan of Merger, dated May 29, 1998 by and among Crossmann Communities, Inc., Crossmann Communities of North Carolina, Inc., Pinehurst Builders, Inc., Buck Creek Development, Inc., CTS Communications, Inc., Beach Vacations, Inc., James T. Callihan, Ralph R. Teal, Jr., Jeffrey H. Skelley, and H. Gilford Edwards. (Incorporated reference to Exhibit 10.49 to Form 10-Q dated August 14, 1998.)
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10.14 Purchase agreement dated May 29,1998, by and between Crossmann Communities of North Carolina, Inc., True Blue Development, LLC, and James T. Callihan, Ralph R. Teal, Jr., Jeffrey H. Skelley, Charles D. Floyd and Ralph Jones. (Incorporated by reference to Exhibit 10.50 to Form 10-Q dated August 14, 1998.)
10.15 Agreement and Plan of Merger, dated May 29, 1998, by and among Crossmann Communities, Inc., Crossmann Communities of North Carolina, Inc., River Oaks Golf Development Corporation and James T. Callihan, Ralph R. Teal, Jr., Jeffrey H. Skelley, Charles D. Floyd and Ralph C. Jones. (Incorporated by reference to Exhibit 10.51 to Form 10-Q dated August 14, 1998.)
10.16 Employee Stock Option Agreement, dated March 5, 1998 by and between Crossmann Communities, Inc. and Jennifer A. Holihen. (Incorporated by reference to Exhibit 10.24 to Form 10-K dated March 23, 1999.)
10.17 Director Stock Option Agreement, dated March 5, 1998 by and between Crossmann Communities, Inc. and James C. Shook. (Incorporated by reference to Exhibit 10.25 to Form 10-K dated March 23, 1999.)
10.18 Director Stock Option Agreement, dated March 5, 1998 by and between Crossmann Communities, Inc. and Larry S. Wechter. (Incorporated by reference to Exhibit 1026 to Form 10-K dated March 23, 1999.)
10.19 Director Stock Option Agreement, dated January 4, 1999 by and between Crossmann Communities, Inc. and James C. Shook. (Incorporated by reference to Exhibit 10.19 to Form 10-K dated March 29, 2000.)
10.20 Director Stock Option Agreement, dated January 4, 1999 by and between Crossmann Communities, Inc. and Larry S. Wechter. (Incorporated by reference to Exhibit 10.20 to Form 10-K dated March 29, 2000.)
10.21 Membership Interest Purchase Agreement, dated October 20, 2000, by and among Crossmann Communities Partnership, Trinity Hones, Inc., and Pyramid Mortgage Co., Inc. (Incorporated by reference to Exhibit 10.52 to Form 10-Q dated November 14, 2000.)
10.22 Membership Interest Purchase Agreement, dated October 20, 2000, by and among Crossmann Communities Partnership, John E. McKenzie, James D. McKenzie, and Mark W. Thune. (Incorporated by reference to Exhibit 10.53 to Form 10-Q dated November 14, 2000.)
10.23 Employment Agreement dated October 20, 2000, by and among Trinity Homes, LLC, Crossmann Communities, Inc. and John E. McKenzie. (Incorporated by reference to Exhibit 10.54 to Form 10-Q dated November 14, 2000.)
10.24 Employment Agreement dated October 20, 2000, by and among Trinity Homes, LLC, Crossmann Communities, Inc. and James D. McKenzie. (Incorporated by reference to Exhibit 10.55 to Form 10-Q dated November 14, 2000.)
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10.25 Fourth Amendment to Amended and Restated Credit Agreement, dated October 20, 2000 among Crossmann Communities, Inc. and Bank One, Indiana, NA (As "Agent") and the Lenders Party Thereto. (Incorporated by reference to Exhibit 10.51 to Form 10-Q dated November 14, 2000.)
10.26 Employment Agreement dated January 29, 2002, by and between Crossmann Communities, Inc. and Steve Dunn.
10.27 Employment Agreement dated January 29, 2002 by and between Crossmann Communities, Inc. and Jennifer Holihen.
19.1 Lease by and between Pinnacle Properties LLC ("Landlord") and Crossmann Communities, Inc. ("Tenant"), 9202 North Meridian Street, Suite 300, Indianapolis, Indiana 46260, executed April 18, 1994. (Incorporated by references as Exhibit 19.1 to Form 10-Q filed with the Securities and Exchange Commission August 12, 1994.)
21.1 Amended subsidiaries of the registrant.
23.1 Consent of Deloitte & Touche LLP.
SIGNATURES
Pursuant to the requirements of Section 12 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CROSSMANN COMMUNITIES, INC.
By -------------------------------------------- John B. Scheumann Chairman and Chief Executive Officer
By -------------------------------------------- Lisa D. Hupfer Controller and Principal Accounting Officer
Dated: February 5, 2002
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated.
Signature Title Date - --------- ----- ----
- -------------------------- Chairman of the Board of February 8, 2002 John B. Scheumann Directors; Chief Executive Officer
Vice Chairman of the Board February 8, 2002 - -------------------------- of Directors Richard H. Crosser
- -------------------------- Director; Chief Financial February 8, 2002 Jennifer A. Holihen Officer; Treasurer; Secretary
- -------------------------- Director February 8, 2002 James C. Shook
- -------------------------- Director February 8, 2002 Larry S. Wechter
- -------------------------- Director February 8, 2002 John E. Worthen
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