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.
GENERAL
Crossmann Communities, Inc. ("Crossmann" or 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 $1,200,000; but the average size of one of Crossmann's new homes is 1,400 square feet, and the average selling price in 2000 was approximately $129,300. Today the Company operates in twelve markets in six states:
Crossmann delivered 4,804 new homes in 2000 compared to 5,100 in 1999. During 2000, Crossmann acquired the remaining 50% equity interest in Trinity Homes, LLC ("Trinity") in Indianapolis, Indiana.
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 29.4%. 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 twelve Midwestern and Southeastern markets. The Company believes that these cities enjoy relatively low unemployment, diversified industry, and infrastructure that makes these cities 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.
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 Memphis it sells as "Heartland Homes" or "Paragon;" 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.
In October 2000, the Company acquired the remaining 50% equity interest in Trinity Homes, LLC, an Indianapolis-based homebuilder serving the first- and second-time move-up buyer. Trinity sells homes under the "Trinity Homes" label and under the label "Homes by John McKenzie." 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. The Company will explore modification of its existing product lines or creation of new product lines when local marketing efforts indicate changes will improve profitability.
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.
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, 2000.
In addition to purchasing unimproved land outright, the Company from time to time has used 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 consider such partnership and joint venture arrangements in the future when management perceives a favorable opportunity. At December 31, 2000, 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 2000 the Company developed approximately 45.3% of the lots on which its homes were built, compared to approximately 52% in 1999. The Company expects this percentage to stay approximately 50% in 2001.
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 apprised 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.
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 2000, approximately 65.9% 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. In general, 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.
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 attempt to correct any problems before the buyer takes possession.
Approximately 30 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 first 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 an independent 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.
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.
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, 2000, the Company had 656 full-time employees and 73 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
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.
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 in 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 rate and can be changed at any time without an effect to the Company.
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 and results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS None.
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, 2000 were 10,457,922. The closing price at December 31, 2000 was $21.00. During the year ended December 31, 2000, the high closing sales price per share as reported by The Nasdaq Stock Market was $24.44. The low closing sales price per share was $14.31.
The closing sale price of the Company's Common Shares as reported on The Nasdaq Stock Market on March 2, 2001 was $27.31. As of March 2, 2001, there were 44 holders of record of the Company's Common Shares. The Company's transfer agent estimates that there were 10,466,624 shares outstanding, on March 2, 2001, and that on that date there are approximately 1,382 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 March 2, 2001, 1,283,000 shares had been repurchased pursuant to this plan, at an average price of $15.78 per share. There were 10,466,624 shares outstanding at March 2, 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 has not paid dividends since its initial public offering in October 1993. It anticipates that future earnings will be retained to finance the continuing development of its business and does not anticipate paying cash dividends on its Common Shares in the foreseeable future. The payment of future dividends will be at the discretion of the Company's Board of Directors and subject to consent of its primary lenders. 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, 2000. 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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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. During the second half of 1999, interest rates rose, and orders fell precipitously compared to the prior year. This decline was borne out in lower closing volume in 2000. Crossmann adjusted its overhead spending and closed underperforming markets of Louisville, Kentucky and Nashville, Tennessee. The Company also modified its product in some markets to compete more effectively and acquired full ownership of Trinity to help offset the closing shortfall.
Fortunately, weak order trends reversed themselves. During the second half of 2000, as mortgage interest rates began to decline and as Crossmann's improved pricing and marketing efforts took effect, orders improved. Backlog at December 31, 2000 is 34% higher than at December 31, 1999. Without Louisville and Nashville, margins are expected to be stronger, and Trinity should contribute a full twelve months' earnings in 2001.
RESULTS OF OPERATIONS
During the five-year period ended December 31, 2000, the Company's sales increased at an average compound annual rate of 29.4% per year, from $229.5 million in 1996 to $621.0 million in 2000. Net income increased at an average compound annual rate of 26.3%, from $15.1 million in 1996 to $35.8 million in 2000. Shareholders' equity increased from $59.6 million as of December 31, 1996 to $207.7 million as of December 31, 2000.
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, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
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 salesin 2000as 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. Trinty sales had margins of 13.2% in the fourth quarter of 2000. Margins produced by Crossmann's core markets stayed strong.
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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Sales increased by $187.4 million, or approximately 44.4%, in 1999 over 1998. Sales were higher primarily as a result of increased unit sales; 5,100 units were closed in 1999 compared to 3,714 in 1998. Crossmann's average selling price was higher, approximately $119,500 in 1999, compared to approximately $113,600 in 1998. The Company attributes the higher selling price to strong employment and relatively low interest rates during much of the year. These factors caused consumers to add optional items to their homes. The rise in selling price was also attributable to Crossmann's acquisition of Homes by Huff & Co. in June of 1999. The new acquisition contributed closings at an average selling price of approximately $173,600, which is higher than Crossmann's other markets.
Gross profit increased by $34.4 million, or approximately 38.4%, for the year. This represents a gross margin percentage of 20.4% of sales in 1999 as compared to 21.3% in 1998. The decrease in margin percentage resulted in part from market mix: Crossmann achieves generally higher margins in cities where it has operated longer and has greater buying power in the local building market. Stronger closings in newer markets generally yielded lower margins than in more established markets. The decrease in gross margin percentage can also be attributed to financing assistance paid by Crossmann. As rates trended higher in 1999, the Company contributed points and closing costs toward its consumers' financing cost, to help keep consumers qualified for mortgage financing. This practice helps the Company retain backlog in periods of rising rates; however, it adds to cost of those sales. Management believes that the lower gross margin in 1999 compared to 1998 helped Crossmann to achieve significantly higher overall volume.
Selling, general and administrative expenses decreased as a percentage of sales from 10.8% in 1998 to 10.2% in 1999. Higher volume in the newer divisions helped to offset overhead.
Due to the increase in sales, income before income taxes for 1999 increased approximately $16.1 million over 1998, or 32.4%. This represents a decrease from 11.8% of sales in 1998 to 10.8% of sales in 1999. Net income increased $9.8 million or 33.0%. Net income as a percentage of sales was 6.5% in 1999 compared to 7.1% in 1998. Most of the rate declines were attributable to lower gross margins. The Company's effective tax rate was 39.6% in 1999, compared to 39.8% in 1998.
BACKLOG
The following table sets forth certain data relating to the operations of the Company for the years ended December 31, 1998, 1999 and 2000.
Historically, a substantial portion of the homes in backlog at December 31 are closed prior to June 30, but because of weather conditions late in 2000 and early in 2001, management believes closings will be more skewed than normal to the second half of 2001. Furthermore, Trinity homes in backlog are larger and take longer to complete. Thus, both volume and average selling price should be higher in the second half of 2001, than in the first half.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, Crossmann had cash and cash equivalents balances of $17.4 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, 2000, 1,283,000 shares had been repurchased and retired pursuant to this plan, at an average price of $15.78 per share.
During 2000, 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, 2000 the Company had drawn funds on its bank line of credit of $80,170,000. This line of credit has a three-year maturity, renewable annually.
The Company also has $11.1 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 for this note issue of $8.3 million 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's primary uses of capital are home construction costs and the purchase and development of land. Real estate inventories were approximately $279.3 million or 74.7% of total assets at December 31, 2000 compared to approximately $260.0 million or 76.5% of total assets at December 31, 1999. 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 $100.1 million at December 31, 2000. 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.
In 2000, the Company acquired the remaining 50% interest of a joint venture, Trinity Homes, LLC. This transaction gave rise to approximately $4.2 million in goodwill in 2000.
From time to time, Crossmann enters into joint ventures with other builders and developers, to share risk and to obtain external expertise. Crossmann's investment in and advances to joint ventures decreased to approximately $16.3 million in 2000 from approximately $27.7 million in 1999. This investment declined in 2000 when the remaining equity interest in Trinity Homes, LLC was acquired.
The notes 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 2000, the Company was able to pass along certain price increases effectively. The average selling price of Crossmann's core product increased from approximately $119,500 in 1999 to approximately $125,000 in 2000. Generally, management seeks to optimize volume by keeping homes affordable and to optimize margins thorough careful planning.
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
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for the Company on January 1, 2001. This statement, as amended by SFAS No. 138 and interpreted, establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a fair value hedge, a cash flow hedge, or a hedge of a foreign currency exposure. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Management has evaluated the requirements of SFAS No. 133 and has determined that the Company has no derivative instruments other than normal purchase and sale contracts. Accordingly, management does not expect that the adoption of this statement will have a significant impact on the Company's consolidated financial position or results from 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. A portion of its revolving debt is carried at floating interest rates, but the exposure to changes in prime rate related to that debt is not material.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Crossmann Communities, Inc. and Subsidiaries
Index to Consolidated Financial Statements
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, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP Indianapolis, Indiana
March 2, 2001
Crossmann Communities, Inc and Subsidiaries
Consolidated Balance Sheets
as of December 31, 1999 and 2000
Crossmann Communities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
for the Years Ended December 31, 1998, 1999 and 2000
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 originates mortgage loans for the buyers. The Company operates in Indianapolis, Ft. Wayne, Lafayette, and Southern 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.
Cash and Cash Equivalents All highly liquid investments with maturities of three months or less when purchased are considered to be cash equivalents.
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, subject to an ongoing analysis of impairment. Accumulated amortization was approximately $2,074,400 and $3,061,500 at December 31, 1999 and 2000, respectively.
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 39 years. Accumulated depreciation is approximately $3,996,200 and $6,078,300 at December 31, 1999 and 2000, 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.
New Accounting Pronouncements Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for the Company on January 1, 2001. This statement, as amended by SFAS No. 138 and interpreted, establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a fair value hedge, a cash flow hedge, or a hedge of a foreign currency exposure. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Management has evaluated the requirements of SFAS No. 133 and has determined that the Company has no derivative instruments other than normal purchase and sale contracts. Accordingly, management does not expect that the adoption of this statement will have a significant impact on the Company's consolidated 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:
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 $10,900,000 and $47,900,000, respectively, at December 31, 2000.
4. REAL ESTATE INVENTORIES
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 market.
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:
At December 31, 1999 and 2000, assets of joint ventures, excluding Trinity in 2000, consisted primarily of developed lots, land under development and land held for future development. Revenue consisted primarily of single-family home and residential lot sales. Land joint ventures provided $6,525,180, $6,022,340 and $14,557,550 in lots to the Company in 1998, 1999 and 2000 respectively. Investments in land joint ventures include accounts receivable from the joint ventures of $6,957,448 and $9,106,601 in 1999 and 2000, respectively.
At December 31, 1999, the Trinity joint venture assets consisted primarily of residential homes under construction. For the years ended December 31, 1998 and 1999, and for the nine-month period ended October 1, 2000, this joint venture provided approximately $2,866,700, $3,645,100 and $1,438,500 in other income to the Company, respectively. Investments in joint ventures at December 31, 1999 includes $11,009,196 in notes receivable from this joint venture.
6. OTHER ASSETS
In 2000, the Company financed model homes for approximately $6,632,500 at approximately 1% interest payable monthly. The corresponding finance obligation is included in other liabilities.
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 2004 requires a premium in the event of pre-payment. Additionally, both credit agreements limit investment in unconsolidated joint ventures, payments of cash dividends, and require express written consent of the lenders for certain transactions.
Interest capitalized during real estate development and construction was $4,704,200, $7,591,000, and $8,307,400 for 1998, 1999, and 2000, respectively.
Interest paid, including amounts capitalized, was approximately $6,053,000, $9,846,000 and $10,669,800 in 1998, 1999, and 2000, respectively. The weighted average interest rate on outstanding borrowings was 8.1% at December 31, 2000.
8. SHAREHOLDERS' EQUITY
The Company has authorized 10,000,000 preferred shares which remain unissued at December 31, 2000. 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, 2000, 1,283,000 shares had been repurchased and retired pursuant to this plan, at an average price of $15.78 per share.
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 or in some cases three years from the grant date, and expire ten years after the grant date. As of December 31, 2000, options outstanding had exercise prices between $5.17 and $30.38 and a weighted average remaining contractual life of 6.7 years.
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, 1998, 1999 and 2000 would be as follows:
The fair value of the option grants are estimated on the date of grant using an option pricing model with the following assumptions: no dividend yield, risk-free interest rates ranging from approximately 4.5% to 7.0%, volatility ranging from approximately 38 to 45 and expected lives ranging from five to ten years. The pro forma amounts are not representative of the effects on reported net income for future years.
9. INCOME TAXES
Income taxes paid were $14,860,000, $26,297,000 and $22,455,000 during 1998, 1999 and 2000, respectively.
Total deferred tax assets (primarily related to warranty reserves and other non-deductible accruals) are approximately $2,009,000 and $1,334,000 at December 31, 2000 and 1999, respectively. Total deferred tax liabilities (primarily related to acquisition basis differences) are approximately $1,601,000 and $1,778,000 at December 31, 2000 and 1999, respectively.
10. RELATED PARTY TRANSACTIONS
Office space at the Company's headquarters is leased from a related party. During 1998, 1999 and 2000 approximately $294,600, $382,800 and $382,800, respectively, in rental payments were made to related parties.
11. LEASES
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 $603,600, $1,018,500 and $1,285,900 for 1998, 1999 and 2000, respectively. Annual minimum payments to be made to a related party incorporated in the amounts below range from approximately $457,800 in 2001 to $190,700 in 2004.
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 1998, 1999 and 2000 the Company matched in cash 50% of the first 6% of compensation contributed by each participant, totaling $215,900 and $331,600 and $365,000 respectively. On December 31, 1998, 1999 and 2000, the Company declared discretionary profit sharing contributions of approximately $773,700, $871,300 and $771,400 respectively, payable in the Company's common shares.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
14. BUSINESS ACQUISITIONS
Crossmann acquired the remaining 50% interest in Trinity, effective October 1, 2000. Crossmann paid approximately $7,600,000 in cash, and assumed debt and other liabilities of approximately $42,800,000. 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.
In 1998, the Company acquired two homebuilders for approximately $13,850,000 in cash and notes and 311,938 shares of the Company's common stock. The transactions were accounted for as purchases. Cost in excess of fair value of approximately $10,900,000 was recorded as goodwill. In June 1999, the Company acquired one homebuilder for approximately $11,800,000 in cash, assumed notes and other assumed liabilities. The transaction was accounted for as a purchase. Cost in excess of the fair value of net assets acquired of approximately $2,871,000 was recorded as goodwill. The pro forma effects of these acquisitions on results of operations are not presented as they are not considered material.
15. COMMITMENTS AND CONTINGENCIES
To assure the future availability of various developed lots, in the normal course of business, the Company has contracted to purchase developed lots. Total commitments for these purchases were approximately $100.1 million at December 31, 2000. The purchase of these lots is subject to various conditions imposed on both the sellers and the Company.
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.
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 information required by this Item is contained in the sections captioned "Election of Directors" and "Section 16(A) Beneficial Ownership Reporting Compliance" of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 24, 2001 (the "Proxy Statement"), and is incorporated herein by reference. Information with respect to Executive Officers of the Company is set forth under the caption "Executive Officers of the Registrant" in Part I, Item 1 of this report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is contained in the section captioned "Executive Compensation" of the Company's Proxy Statement and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is contained in the section captioned "Security Ownership of Certain Beneficial Owners and Management" of the Company's Proxy Statement and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is contained in the section captioned "Certain Transactions" of the Company's Proxy Statement and is incorporated herein by reference.
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. None.
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 /s/ John B. Scheumann John B. Scheumann Chairman and Chief Executive Officer
Dated: March 5, 2001
EXHIBIT 21.1 AMENDED SUBSIDIARIES OF THE REGISTRANT
1. abMerit Realty, Inc. 2. abCrossmann Communities of Ohio, Inc 3. abDeluxe Homes of Lafayette, Inc. 4. abCrossmann Management, Inc. 5. abDeluxe Aviation, Inc. 6. abCrossmann Investments, Inc. 7. abCrossmann Mortgage Corp. 8. abCutter Homes, Ltd. 9. abCrossmann Communities of Tennessee, LLC 10. abCrossmann Communities of North Carolina, Inc. 11. abPinehurst Builders, LLC 12. abTrinity Homes, LLC
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Nos. 33-94568, 333-2626, and 333-4980 on Forms S-8 each of Crossmann Communities, Inc. of our report dated March 2, 2001, appearing in the Annual Report on Form 10-K of Crossmann Communities, Inc. for the year ended December 31, 2000.
DELOITTE & TOUCHE LLP Indianapolis, Indiana
March 2, 2001