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Dear Fellow Stockholders:
Fiscal 1999 marks our 22(nd) consecutive year of growth and increased
profitability. During this period of unprecedented growth, fiscal 1999 stands
out as an exceptional year. In 1999, we achieved quarterly and fiscal year
records in new sales contracts, sales backlog, revenues, homes closed, net
income, and earnings per share.
1999's key financial and operating accomplishments include:
- Record new sales contracts signed of $3,266.2 million (18,911 homes), a
29% increase over our fiscal 1998 record of $2,533.2 million (15,952
homes).
- Record revenues of $3,156.2 million (18,395 homes closed), a 45% increase
over our fiscal 1998 record of $2,176.9 million (13,944 homes closed).
- Record net income of $159.8 million, a 71% increase over our fiscal 1998
record of $93.4 million.
- Record earnings per share of $2.50, a 60% increase over our fiscal 1998
record of $1.56 per share.
- Record year-end sales backlog of $1,356.5 million (7,309 homes), a 29%
increase over our 1998 year-end record of $1,052.9 million (6,341 homes).
- Record stockholders' equity of $797.6 million, a 45% increase over our
1998 year-end record of $549.4 million.
- Providing stockholders with a 29% return on beginning stockholders' equity
and a 23% return on average stockholders' equity.
While the housing market in 1999 was aided by a strong economy, increased
housing demand and low mortgage rates, our record results continue to be fueled
by D.R. Horton's financial and operating strategies. These strategies have
allowed us to differentiate our Company from others in the industry, not only in
the way we operate, but also in our results. Our 22 year history of record
results clearly puts us in a league of our own.
In December 1999, PROFESSIONAL BUILDER magazine recognized our
accomplishments and selected D.R. Horton, Inc. as the 1999 "Builder of the
Year". This award honors the Company's superb financial performance, the
dedication and team approach of all of our employees, the Company's
entrepreneurial focus, and the quality of the homes built by the Company in 40
markets throughout the United States. It also recognizes D.R. Horton's growth
strategy and proven ability to expand through start-ups and acquisitions.
In fiscal 1999, D.R. Horton continued to expand and diversify its
homebuilding operations. Growth was achieved through both internal expansion and
acquisition. The Company increased its market share in core markets and
commenced start-up operations in Columbia, South Carolina. In addition, we
acquired Cambridge Homes, the largest builder in Chicago and the leading builder
of active-adult communities in the Midwest. We plan to expand our active-adult
operations into several new markets in fiscal 2000.
As one of the nation's three largest homebuilders, with operations in 23
states and 40 markets, our brand name and reputation for quality are becoming
increasingly valuable assets. We are harnessing the power of these assets to
expand our activities into related businesses. Our ability to leverage the
relationship with our home buyers is evident by the success achieved in our
financial services (mortgage and title) operations. In 1999, our pretax income
from financial services increased 84% to $13.1 million. In 1999, we
significantly expanded our mortgage and title operations. We commenced mortgage
operations in eight new markets and acquired Century Title Agency, a leading
title insurance company in Phoenix. We now have mortgage operations in 25
markets and title operations in eight markets. We plan to expand our mortgage
and title operations into our other markets in the years ahead. In addition, we
continue to explore other opportunities to profitably expand our relationship
with our homeowners.
Although we are extremely pleased with our financial and operating
performance this year, we are disappointed with the performance of our stock,
which was depressed with all housing stocks. Notwithstanding our record
earnings, investors became focused on a "potential" recession, a recession that
never
materialized. The Company took advantage of this situation and repurchased
$22.4 million of its common stock under our Board-approved $100 million Stock
Repurchase Program. We are making every effort to convey to investors the D.R.
Horton record, and will continue to repurchase our common stock as market
conditions warrant.
As we enter the new millennium, the Company is extremely well-positioned to
take advantage of its leadership role in the homebuilding industry. In fiscal
1999, our stockholders' equity increased 45% to $797.6 million, and our
homebuilding debt to total capitalization ratio declined by 239 basis points, to
57.7%. Our solid balance sheet, consistent financial performance, risk averse
operating strategies, and reduced leverage will keep improving our standing in
the capital markets. In January 1999, Moody's Investors Service upgraded our
senior unsecured rating to Ba1 from Ba2. To support our future growth, the
Company issued $385 million of 8% senior unsecured notes in February 1999. This
senior notes offering was oversubscribed and represents the largest public debt
financing completed in the homebuilding industry. To augment our growth, the
Company has a $775 million revolving credit facility with 15 banks, the largest
facility in the homebuilding industry. We also solidified our financial services
operations by increasing our mortgage company warehouse facility by $90 million
to $175 million.
We begin the new decade in the best financial and operating position in the
history of the Company. With our sales backlog at record levels and our business
model fully intact, we feel that we are well-positioned to thrive in an industry
that offers many opportunities for long-term growth. Our history clearly
demonstrates our ability to grow through cycles and shows that we are the most
interest rate and recession proof homebuilder in the United States. We thank all
D.R. Horton stockholders for supporting the building of a company with a solid
foundation and an exciting future. In addition, we thank our dedicated
employees, suppliers, and subcontractors. They are the backbone of this
organization and provide us the ability to react quickly and make sound
decisions. We look forward to a highly successful fiscal 2000 and anticipate
D.R. Horton will enjoy its 23(rd) consecutive year of growth, profitability, and
achieve its goal of $4 billion in revenues. We invite you to follow our progress
by accessing our website at http://www.DRHORTON.com.
/s/ DONALD R. HORTON
Donald R. Horton
CHAIRMAN OF THE BOARD
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-14122
------------------------
D.R. HORTON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2386963
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1901 ASCENSION BLVD., SUITE 100 76006
ARLINGTON, TEXAS (Zip Code)
(Address of principal executive offices)
(817) 856-8200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------- -----------------------------------------
Common Stock, par value $.01 per share The New York Stock Exchange
8 3/8% Senior Notes due 2004 The New York Stock Exchange
10% Senior Notes due 2006 The New York Stock Exchange
8% Senior Notes due 2009 The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K_____.
As of November 30, 1999, there were 62,511,555 shares of Common Stock, par
value $.01 per share, issued and outstanding, and the aggregate market value of
these shares held by non-affiliates of the registrant was approximately
$682,649,000. Solely for purposes of this calculation, all directors and
executive officers were excluded as affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 20, 2000, are incorporated herein by
reference in Part III.
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PART I
ITEM 1. BUSINESS
D. R. Horton, Inc. (the "Company") is a national homebuilder. As such, we
construct and sell single-family homes in metropolitan areas of the
Mid-Atlantic, Midwest, Southeast, Southwest and West regions of the United
States. We offer high-quality homes, designed principally for first-time and
move-up home buyers. Our homes generally range in size from 1,000 to 5,000
square feet and range in price from $80,000 to $600,000. For the year ended
September 30, 1999, we closed 18,395 homes with an average sales price
approximating $166,100.
On April 20, 1998, we acquired Continental Homes Holding Corp.
("Continental"), a geographically diversified homebuilder, through the merger of
Continental into Horton (the "Merger"). In the Merger, Horton issued
approximately 15.5 million shares of its common stock, and Continental's
outstanding convertible securities and options became convertible into and
exercisable for an additional 8.2 million shares. The Merger was accounted for
as a pooling of interests. Accordingly, all information for prior periods has
been restated to show the combined results of Horton and Continental.
We are one of the largest and most geographically diversified homebuilders
in the United States, with operating divisions in 23 states and 40 markets as of
September 30, 1999. The markets we operate in include: Albuquerque, Atlanta,
Austin, Birmingham, Charleston, Charlotte, Chicago, Cincinnati, Columbia,
Dallas/Fort Worth, Denver, Greensboro, Greenville, Hilton Head, Houston,
Jacksonville, Killeen, Las Vegas, Los Angeles, Louisville, Minneapolis/St. Paul,
Myrtle Beach, Nashville, New Jersey, Newport News, Orlando, Pensacola, Phoenix,
Portland, Raleigh/Durham, Richmond, Sacramento, Salt Lake City, San Antonio, San
Diego, St. Louis, South Florida, Tucson, suburban Washington, D.C. and
Wilmington.
We build homes under the following names: D.R. Horton, Arappco, Cambridge,
Continental, Dobson, Mareli, Milburn, Joe Miller, Regency, RMP, SGS, Torrey and
Trimark.
We were incorporated in Delaware on July 1, 1991, to acquire all of the
assets and businesses of 25 predecessor companies, which were residential home
construction and development companies owned or controlled by Donald R. Horton.
Our principal executive offices are located at 1901 Ascension Blvd.,
Suite 100, Arlington, Texas 76006, and the telephone number is (817) 856-8200.
1
OPERATING STRATEGY
We believe that the following operating strategies have enabled us to
achieve consistent growth and profitability:
GEOGRAPHIC DIVERSITY
From 1978 to late 1987, excluding Continental Homes' locations, our
homebuilding activities were conducted in the Dallas/Fort Worth area. We then
instituted a policy of diversifying geographically, entering the following
markets, both through startup operations and acquisitions, in the years shown:
YEARS ENTERED MARKETS
- ------------- -----------------------------------------------------------
1987 Phoenix
1988 Atlanta, Orlando
1989 Charlotte
1990 Houston
1991 Suburban Washington, D.C.
1992 Chicago, Cincinnati, Raleigh/Durham, South Florida
1993 Austin, Los Angeles, Salt Lake City, San Diego
1994 Minneapolis/St. Paul, Las Vegas, San Antonio
1995 Birmingham, Denver, Greensboro, St. Louis
1996 Albuquerque, Pensacola
1997 Greenville, Nashville, New Jersey, Tucson
1998 Charleston, Hilton Head, Jacksonville, Killeen, Louisville,
Myrtle Beach, Newport News, Portland, Richmond,
Sacramento, Wilmington
1999 Columbia
We continually monitor the sales and margins achieved in each of the
subdivisions in which we operate as part of our evaluation of the use of our
capital. While we believe there are significant growth opportunities in our
existing markets, we also intend to continue our policy of diversification by
seeking to enter new markets. We believe our diversification strategy mitigates
the effects of local and regional economic cycles and enhances our growth
potential. Typically, we will not invest material amounts in real estate,
including raw land, developed lots, models and speculative homes, or overhead in
start-up operations in new markets, until such markets demonstrate significant
growth potential and acceptance of our products.
ACQUISITIONS
As an integral component of our operational strategy of continued expansion,
we continually evaluate opportunities for strategic acquisitions. We believe
that expanding our operations through the acquisition of existing homebuilding
companies affords us several benefits not found in start-up operations. Such
benefits include:
- Established land positions and inventories;
- Existing relationships with land owners, developers, subcontractors and
suppliers;
- Brand name recognition; and
- Proven product acceptance by home buyers in the market.
In evaluating potential acquisition candidates, we seek homebuilding
companies that have an excellent reputation, a track record of profitability and
a strong management team with an entrepreneurial
2
orientation. We limit the risks associated with acquiring a going concern by
conducting extensive operational, financial and legal due diligence on each
acquisition and by only acquiring homebuilding companies that we believe will
have an immediate positive impact on our earnings. During the last five fiscal
years, we have made 14 acquisitions. We will continue to evaluate potential
future acquisition opportunities that satisfy our acquisition criteria in both
existing and new markets.
DECENTRALIZED OPERATIONS
We decentralize our homebuilding activities to give more operating
flexibility to our local division presidents. We have 50 separate operating
divisions, some of which are in the same market area. Generally, each operating
division consists of a division president, an office manager and staff, a sales
manager and sales personnel, and a construction manager and construction
superintendents. We believe that division presidents, who are intimately
familiar with local conditions, make better decisions regarding local
operations. Our division presidents receive performance bonuses based upon
achieving targeted operating levels in their operating divisions.
OPERATING DIVISION RESPONSIBILITIES
Each operating division is responsible for:
- Site selection which involves
--A feasibility study;
--Soil and environmental reviews;
--Review of existing zoning and other governmental requirements; and
--Review of the need for and extent of offsite work required to meet
local building codes.
- Negotiating lot option or similar contracts;
- Overseeing land development;
- Planning its homebuilding schedule;
- Selecting building plans and architectural schemes;
- Obtaining all necessary building approvals; and
- Developing a marketing plan.
CORPORATE OFFICE CONTROLS
The corporate office controls key risk elements through centralized:
- Financing;
- Cash management;
- Risk management;
- Accounting and management reporting;
- Payment of subcontractors' invoices;
- Administration of payroll and employee benefits;
- Final approval of land and lot acquisitions;
- Capital allocation; and
- Oversight of inventory levels.
3
COST MANAGEMENT
We control our overhead costs by centralized administrative and accounting
functions and by limiting the number of field administrative personnel and
middle level management positions. We also minimize advertising costs by
participating in promotional activities, publications and newsletters sponsored
by local real estate brokers, mortgage companies, utility companies and trade
associations.
We control construction costs through the efficient design of our homes and
by obtaining favorable pricing from certain subcontractors and national vendors
based on the high volume of services they perform for us. We also control
construction costs by monitoring expenses on each house through our purchase
order system. We control capital and overhead costs by monitoring our inventory
levels through our management information systems.
MARKETS
We conduct homebuilding activities in five geographic regions, consisting
of:
GEOGRAPHIC REGION MARKETS
- ----------------- -------------------------------------------------------
Mid-Atlantic Charleston, Charlotte, Columbia, Greensboro,
Greenville, Hilton Head, Myrtle Beach, New Jersey,
Newport News, Raleigh/Durham, Richmond, Suburban
Washington, D.C., Wilmington
Midwest Chicago, Cincinnati, Louisville, Minneapolis/St. Paul,
St. Louis
Southeast Atlanta, Birmingham, Jacksonville, Nashville, Orlando,
Pensacola, South Florida
Southwest Albuquerque, Austin, Dallas/Fort Worth, Houston,
Killeen, Phoenix, San Antonio, Tucson
West Denver, Las Vegas, Los Angeles, Portland, Sacramento,
Salt Lake City, San Diego
When entering new markets or conducting operations in existing markets,
among the things we consider are:
- Regional economic conditions;
- Job growth;
- Land availability;
- Local land development process;
- Consumer tastes;
- Competition; and
- Secondary home sales activity.
4
Our homebuilding revenues by geographic region are:
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
(IN MILLIONS)
Mid-Atlantic................................... $ 180.5 $ 372.2 $ 540.6
Midwest........................................ 95.9 130.4 347.1
Southeast...................................... 246.4 384.5 429.6
Southwest...................................... 694.3 789.6 1,068.0
West........................................... 350.4 478.3 733.7
-------- -------- --------
Total...................................... $1,567.5 $2,155.0 $3,119.0
======== ======== ========
LAND POLICIES
Typically, we acquire land and enter into lot option contracts to acquire
developed building lots only after necessary "entitlements" have been obtained,
I.E., when we have the right to begin development or construction. Before we
acquire lots or tracts of land, we will, among other things, complete a
feasibility study, which includes soil tests, independent environmental studies
and other engineering work, and determine that all necessary zoning and other
governmental entitlements required to develop and use the property for home
construction have been acquired. Although we purchase and develop land primarily
to support our own homebuilding activities, occasionally we sell lots and land
to other developers and homebuilders.
We also use lot option contracts, in which we purchase the right, but not
the obligation, to buy building lots at predetermined prices on a takedown
schedule commensurate with anticipated home closings. Lot option contracts
generally are on a nonrecourse basis, thereby limiting our financial exposure to
earnest money deposits given to property sellers. This enables us to control
significant lot positions with a minimal capital investment and substantially
reduces the risks associated with land ownership and development. At
September 30, 1999, about 36% of our total lot position of 62,610 lots was under
option contracts.
A summary of our land/lot position at September 30, 1999 is:
Finished lots we own........................................ 8,786
Lots under development we own............................... 31,366
------
Total lots owned............................................ 40,152
Lots available under lot option and similar contracts....... 22,458
------
Total land/lot positions.................................... 62,610
======
We limit our exposure to real estate inventory risks by:
- Generally commencing construction of homes under contract only after
receipt of a satisfactory down payment and, where applicable, the
buyer's receipt of mortgage approval;
- Limiting the number of speculative homes (homes started without an
executed sales contract) built in each subdivision;
- Closely monitoring local market and demographic trends, housing
preferences and related economic developments, such as new job
opportunities, local growth initiatives and personal income trends;
- Utilizing lot option contracts, where possible; and
- Limiting the size of acquired land parcels to smaller tracts of land.
5
CONSTRUCTION
Our home designs are prepared by architects in each of our markets to appeal
to local tastes and preferences of the community. We also offer optional
interior and exterior features to enhance the basic home design and to promote
our sales efforts.
Substantially all of our construction work is performed by subcontractors.
Our construction supervisors monitor the construction of each home, participate
in material design and building decisions, coordinate the activities of
subcontractors and suppliers, subject the work of subcontractors to quality and
cost controls and monitor compliance with zoning and building codes.
Subcontractors typically are retained for a specific subdivision pursuant to a
contract that obligates the subcontractor to complete construction at a fixed
price. Agreements with our subcontractors and suppliers generally are negotiated
for each subdivision. We compete with other homebuilders for qualified
subcontractors, raw materials and lots in the markets where we operate.
Construction time for our homes depends on the weather, availability of
labor, materials and supplies, size of the home, and other factors. We typically
complete the construction of a home within four months.
We do not maintain significant inventories of construction materials, except
for work in process materials for homes under construction. Typically, the
construction materials used in our operations are readily available from
numerous sources. We have contracts exceeding one year with certain suppliers of
our building materials that are cancellable at our option with a 30 day notice.
In recent years, we have not experienced any significant delays in construction
due to shortages of materials or labor.
MARKETING AND SALES
We market and sell our homes through commissioned employees and independent
real estate brokers. We typically conduct home sales from sales offices located
in furnished model homes in each subdivision. At September 30, 1999, we owned
586 model homes, which generally are not offered for sale until the completion
of a subdivision. Our sales personnel assist prospective home buyers by
providing them with floor plans, price information, tours of model homes and the
selection of options and other custom features. We train and inform our sales
personnel as to the availability of financing, construction schedules, and
marketing and advertising plans.
In addition to using model homes, we typically build a limited number of
speculative homes in each subdivision to enhance our marketing and sales
activities. Construction of these speculative homes also is necessary to satisfy
the requirements of relocated personnel and independent brokers, who often
represent home buyers requiring a completed home within 60 days. We sell a
majority of these speculative homes while they are under construction or
immediately following completion. The number of speculative homes is influenced
by local market factors, such as new employment opportunities, significant job
relocations, growing housing demand and the length of time we have built in the
market. Depending upon the seasonality of each market, we attempt to limit our
speculative homes in each subdivision. At September 30, 1999, we averaged about
5 speculative homes, in various stages of construction, in each subdivision.
We advertise on a limited basis in newspapers and in real estate broker,
mortgage company and utility publications, brochures, newsletters and on
billboards. To minimize advertising costs, we attempt to operate in subdivisions
in conspicuous locations that permit us to take advantage of local traffic
patterns. We also believe that model homes play a significant role in our
marketing efforts. Consequently, we expend significant effort in creating an
attractive atmosphere in our model homes.
Our sales contracts require a down payment of at least $500. The contracts
include a financing contingency which permits customers to cancel if they cannot
obtain mortgage financing at prevailing interest rates within a specified
period, typically four to six weeks, and may include other contingencies, such
as the sale of an existing home. We include a home sale in our sales backlog
when the sales contract is signed and we have received the initial down payment.
We do not recognize revenue upon the sale of a
6
home until it is closed and title passes to the home buyer. The average period
between the signing of a sales contract for a home and closing is approximately
three to five months.
CUSTOMER SERVICE AND QUALITY CONTROL
Our operating divisions are responsible for pre-closing, quality control
inspections and responding to customers' post-closing needs. We believe that
prompt and courteous response to home buyers' needs during and after
construction reduces post-closing repair costs, enhances our reputation for
quality and service, and ultimately leads to significant repeat and referral
business from the real estate community and home buyers. We provide our home
buyers with a limited one-year warranty on workmanship and building materials.
The subcontractors who perform most of the actual construction also provide us
with warranties on workmanship and are generally prepared to respond to us and
the homeowner promptly upon request. In most cases, we supplement our one-year
warranty by purchasing a ten-year limited warranty from a third party. To cover
our potential warranty obligations, we accrue an estimated amount for future
warranty costs.
CUSTOMER FINANCING
We provide mortgage financing services principally to purchasers of homes we
build and sell. CH Mortgage, a wholly-owned subsidiary, provides mortgage
banking services in Arizona, Colorado, Florida, Illinois, Kentucky, Minnesota,
Nevada, New Mexico, North and South Carolina, and Texas. D.R. Horton Mortgage
Company, Ltd., a joint venture formed in 1998 with a third party, presently
provides services in California. On a combined basis, related mortgage banking
entities provided mortgage financing services for about 65% of the homes closed
during the year ended September 30, 1999 in the markets served. We anticipate
expanding these mortgage activities to other markets we serve.
In other markets where we currently do not provide mortgage financing, we
work with a variety of mortgage lenders that make available to home buyers a
range of conventional mortgage financing programs. By making information about
these programs available to prospective home buyers and maintaining a
relationship with such mortgage lenders, we are able to coordinate and expedite
the entire sales transaction by ensuring that mortgage commitments are received
and that closings take place on a timely and efficient basis.
TITLE SERVICES
Through our subsidiaries, Century Title, DRH Title Company of Texas, Ltd.,
DRH Title Company of Florida, Inc., DRH Title Company of Minnesota, Inc., Metro
Title Company and Travis County Title Company, we serve as a title insurance
agent by providing title insurance policies and closing services to purchasers
of homes we build in the Dallas/Fort Worth, Austin, Orlando, Miami, Minneapolis,
Phoenix, San Antonio and suburban Washington, D.C. markets. We assume no
underwriting risk associated with these title policies.
EMPLOYEES
At September 30, 1999, we employed 3,355 persons, of whom 869 were sales and
marketing personnel, 1,067 were executive, administrative and clerical
personnel, 1,021 were involved in construction, and 398 worked in mortgage and
title operations. Fewer than 25 of our employees are covered by collective
bargaining agreements. Some of the subcontractors which we use are represented
by labor unions or are subject to collective bargaining agreements. We believe
that our relations with our employees and subcontractors are good.
7
COMPETITION
The single family residential housing industry is highly competitive and we
compete in each of our markets with numerous other national, regional and local
homebuilders, often with larger subdivisions designed, planned and developed by
such homebuilders. Our homes compete on the basis of quality, price, design,
mortgage financing terms and location.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
The housing, mortgage and title insurance industries are subject to
extensive and complex regulations. We and our subcontractors must comply with
various federal, state and local laws and regulations, including zoning, density
and development requirements, building, environmental, advertising and consumer
credit rules and regulations, as well as other rules and regulations in
connection with our development, homebuilding, sales and financial services
activities. These include requirements affecting the development process, as
well as building materials to be used, building designs and minimum elevation of
properties. Our homes are inspected by local authorities where required, and
homes eligible for insurance or guarantees provided by the FHA and VA are
subject to inspection by them. These regulations often provide broad discretion
to the administering governmental authorities. This can delay or increase the
cost of development or homebuilding.
We also are subject to a variety of local, state and federal statutes,
ordinances, rules and regulations concerning protection of health and the
environment. The particular environmental laws for each site vary greatly
according to location, environmental condition and the present and former uses
of the site and adjoining properties. These environmental laws may result in
delays, may cause us to incur substantial compliance and other costs, and can
prohibit or severely restrict development and homebuilding activity in certain
environmentally sensitive regions or areas.
Our internal mortgage activities and title insurance agencies must also
comply with various federal and state laws, consumer credit rules and
regulations and other rules and regulations unique to such activities.
Additionally, mortgage loans and title activities originated under the FHA, VA,
FNMA and GNMA are subject to rules and regulations imposed by those agencies.
ITEM 2. PROPERTIES
We own a 52,000 square foot office complex, consisting of three single-story
buildings of steel and brick construction, located in Arlington, Texas, that
serves as the principal executive offices and houses two of the Dallas/Fort
Worth divisions. We also lease approximately 312,000 square feet of space for
our operating divisions under leases expiring between November 1999 and
June 2006.
ITEM 3. LEGAL PROCEEDINGS
We are a party to routine litigation incidental to our business. Such
matters, if decided adversely to us, would not, in the opinion of management,
have a material adverse effect upon our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock (the "Common Stock") is listed on the New York Stock
Exchange under the symbol "DHI". The following table sets forth the high and low
sales prices for the Common Stock for the periods indicated.
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------
1998 1999
---------------------- ----------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
Quarter Ended December 31................................... $21 $15 $23 $10 5/8
Quarter Ended March 31...................................... 23 5/8 16 5/8 23 14 13/16
Quarter Ended June 30....................................... 24 16 5/8 20 15 3/8
Quarter Ended September 30.................................. 24 15/16 15 1/4 17 9/16 12 1/8
As of November 30, 1999, the closing price was $13.75, and there were
approximately 326 holders of record. We have declared quarterly cash dividends
of 2 1/4 cents per share for fiscal 1998 and 3 cents per share for fiscal 1999.
The declaration of cash dividends is at the discretion of our Board of
Directors and will depend upon, among other things, future earnings, cash flows,
capital requirements, our general financial condition and general business
conditions. We are required to comply with certain covenants contained in the
bank agreements and Senior Notes indentures. The most restrictive of these
requirements allows us to pay cash dividends on common stock in an amount, on a
cumulative basis, not to exceed 50% of consolidated net income, as defined,
subject to certain other adjustments. Pursuant to the most restrictive of these
requirements, we had approximately $179.6 million available for the payment of
dividends and the acquisition of our common stock at September 30, 1999.
9
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our
Consolidated Financial Statements. The data should be read in conjunction with
the Consolidated Financial Statements, related Notes thereto and other financial
data elsewhere herein. These historical results are not necessarily indicative
of the results to be expected in the future.
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
INCOME STATEMENT DATA: (1)(2)
Revenues ($ millions)......................... $869.5 $1,147.7 $1,578.4 $2,176.9 $3,156.2
Homebuilding revenues ($ millions)............ 862.8 1,136.3 1,567.5 2,155.0 3,119.0
Net income from continuing operations ($
millions)................................... 34.4 53.2 65.0 93.4 159.8
Net income per share from continuing
operations: (4)
Basic....................................... .80 1.15 1.28 1.75 2.55
Diluted..................................... .77 1.07 1.15 1.56 2.50
Cash dividends declared per common
share (3)................................... -- -- .06 .09 .11
AS OF SEPTEMBER 30,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
($ MILLIONS)
BALANCE SHEET DATA: (1)(2)
Inventories..................................... $574.2 $690.2 $1,024.3 $1,358.0 $1,866.1
Total Assets.................................... 705.6 841.3 1,248.3 1,667.8 2,361.8
Notes Payable................................... 402.7 420.4 650.7 854.5 1,190.6
Stockholders' Equity............................ 216.6 306.6 427.9 549.4 797.6
- ------------------------
(1) See Note C to the audited financial statements for details concerning
acquisitions by the Company.
(2) On April 20, 1998, Horton and Continental consummated a merger pursuant to
which Continental was merged into the Company, with 2.25 shares of the
Company common shares being exchanged for each outstanding share of
Continental. Approximately 15.5 million Horton common shares were issued to
effect the merger. The merger with Continental was treated as a pooling of
interests for accounting purposes. Therefore, all financial amounts have
been restated as if Continental and the Company had been combined throughout
the periods presented.
Prior to the merger, Continental had a fiscal year end of May 31.
Accordingly, the Continental consolidated balance sheets as of May 31, 1995
and 1996 have been combined with the Company's balance sheets as of
September 30, 1995 and 1996, respectively. The related Continental
statements of income, stockholders' equity and cash flows for the fiscal
years ended May 31, 1995 and 1996 have been combined with the Company's
statements of income, stockholders' equity and cash flows for the fiscal
years ended September 30, 1995 and 1996, respectively. Continental's balance
sheet and the related statements of income, stockholders' equity and cash
flows have been restated to conform to the Company's fiscal year end of
September 30, 1997.
As permitted by regulations of the Securities and Exchange Commission,
Continental's four-month period ended September 30, 1996 has been omitted
from the financial statements. Continental's revenues, cost of sales, income
before taxes and net income for this four month period were $234.4 million,
$191.6 million, $18.8 million and $11.2 million, respectively.
(3) Cash dividends per common share represent those dividends declared to D.R.
Horton, Inc. shareholders, unadjusted for the merger.
(4) In fiscal 1998, net income includes the net effect of a $7.1 million, net
of tax, provision for costs associated with the merger with Continental.
The earnings per share effects were $0.13 basic and $0.11 diluted.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS--CONSOLIDATED
D.R. Horton, Inc. and subsidiaries (the "Company") provide homebuilding
activities in 23 states and 40 markets through its 50 homebuilding divisions.
Through its financial services activities, the Company also provides mortgage
banking and title agency services in many of these same markets.
On April 20, 1998, D.R. Horton, Inc. ("Horton") acquired Continental Homes
Holding Corp. ("Continental"), a geographically diversified homebuilder, through
the merger of Continental into Horton (the "Merger"). In the Merger, Horton
issued approximately 15.5 million shares of its common stock, and Continental's
outstanding convertible securities and options became convertible into or
exercisable for an additional approximately 8.2 million shares. The Merger was
accounted for as a pooling of interests. Accordingly, Horton's financial
information for prior periods has been restated to show the combined results of
Horton and Continental. In the description of business that follows, the
business of Continental has been combined with Horton as though Continental had
been a part of Horton throughout the periods described.
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998
Consolidated revenues increased 45.0%, to $3,156.2 million in 1999 from
$2,176.9 million in 1998 due to increases in both home and land/lot sales
revenues as well as financial services revenues.
Consolidated selling, general and administrative (SG&A) expenses increased
by 39.0%, to $322.1 million in 1999, from $231.7 million in 1998. As a
percentage of revenues, SG&A expenses decreased to 10.2% in 1999, from 10.6% in
1998. The decrease in SG&A expenses as a percentage of revenue is primarily due
to the Company's cost containment efforts and the increased revenues that absorb
the fixed elements of overhead. Included in SG&A expenses in 1999 is a
$5.2 million charge (0.2% of revenues) for severance benefits associated with
former Continental executives. Consolidated 1998 SG&A expenses exclude
$11.9 million in non-recurring merger costs associated with the Continental
merger. The merger costs consisted primarily of fees paid to third party
investment, accounting, and legal advisors.
Excluding the nonrecurring merger costs in 1998, income before income taxes
increased 54.3% to $263.8 million in 1999 from $171.0 million in 1998. As a
percentage of revenues, income before income taxes increased 0.5%, to 8.4%, from
7.9% in 1998 primarily due to the overall reduction in selling, general and
administrative expenses as a percentage of revenues.
Consolidated interest expense increased to $16.5 million in 1999 from
$16.2 million in 1998. As a percentage of consolidated revenues, interest
expense decreased to 0.5% in 1999 from 0.7% in 1998. A significant increase in
interest costs associated with the Company's rapidly expanding financial
services operations was largely offset by a reduction in homebuilding interest
expense. Financial services interest expense grew from $2.2 million in 1998 to
$4.4 million in 1999. Interest expense associated with homebuilding decreased to
$12.0 million in 1999, from $14.0 million in 1998. The decrease in homebuilding
interest expense resulted from a slightly lower overall homebuilding effective
interest rate in 1999, due to the peak usage of the variable rate revolving line
of credit facility coinciding with the mid-year trough in the floating rate to
which it is tied. Homebuilding interest expense also declined due to the growth
in active inventory outpacing the growth in interest-bearing debt. That
permitted us to capitalize relatively higher amounts of incurred interest during
1999.
Consolidated other income consists mainly of interest income on funds
temporarily invested and, for financial services operations, on mortgage loans
held for sale. Also, other income is reduced by minority interests in income of
subsidiaries that are not wholly-owned. In 1999, consolidated other income was
$6.9 million, down $0.7 million from 1998. Increases in interest income
associated with financial services
11
mortgage loans held for sale were offset by increases in minority interests in
income resulting from improved 1999 operating results of subsidiaries that are
not wholly-owned.
The consolidated provision for income taxes increased 58.2%, to
$104.0 million in 1999, from $65.7 million in 1998, due to the corresponding
increase in income before income taxes. The effective income tax rate was down
1.9% to 39.4% in 1999, compared to 41.3% in 1998, due primarily to the
non-deductibility of certain merger costs in 1998.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
Consolidated revenues increased 37.9% to $2,176.9 million in 1998 from
$1,578.4 million in 1997 due to increases in both homebuilding and financial
services revenues.
Consolidated selling, general and administrative (SG&A) expenses increased
34.9% to $231.7 million in 1998 from $171.8 million in 1997. As a percentage of
consolidated revenues, SG&A expenses decreased to 10.6% in 1998 from 10.9% in
1997. Consolidated 1998 SG&A expenses exclude $11.9 million in non-recurring
costs associated with the Merger with Continental.
Consolidated interest expense increased to $16.2 million in 1998 from
$10.9 million in 1997 due to the increased interest costs associated with the
Company's rapidly expanding financial services operations, increased debt levels
from acquisitions and expansion of homebuilding activities. Financial services
interest expense grew from $0.7 million in 1997 to $2.2 million in 1998. As a
percentage of consolidated revenues, interest expense was 0.7% in both 1998 and
1997.
Consolidated other income consists mainly of interest income on funds
temporarily invested and, for financial services operations, on mortgage loans
held for sale. In 1998, consolidated other income was $7.6 million, up
$2.2 million from 1997, primarily due to larger amounts of temporarily
investable funds and mortgage loans held for sale.
The consolidated provision for income taxes increased 50.8%, to
$65.7 million in 1998, from $43.6 million in 1997, due in part to the
corresponding increase in income before income taxes. As a percentage of
consolidated revenues, the income tax provision increased by 0.2% to 3.0% in
1998. The increase as a percentage of revenues was due primarily to an increase
in the total effective income tax rate in 1998, from 40.2% to 41.3%, caused by
the non-deductibility of certain of the 1998 merger costs and increased earnings
in states with higher effective tax rates.
12
RESULTS OF OPERATIONS--HOMEBUILDING
The following tables set forth certain operating and financial data for the
Company's homebuilding activities:
PERCENTAGES OF
HOMEBUILDING
REVENUES
------------------------------------
YEARS ENDED
SEPTEMBER 30,
------------------------------------
1997 1998 1999
-------- -------- --------
Costs and expenses:
Cost of sales......................................... 82.4% 81.9% 82.1%
Selling, general and administrative expense........... 10.4 10.0 9.5
Interest expense...................................... 0.7 0.7 0.4
---- ---- ----
Total costs and expenses................................ 93.5 92.6 92.0
Other (income).......................................... (0.2) (0.2) --
---- ---- ----
Income before income taxes.............................. 6.7% 7.6% 8.0%
==== ==== ====
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1997 1998 1999
---------------------- ---------------------- ----------------------
HOMES HOMES HOMES
CLOSED % CLOSED % CLOSED %
HOMES CLOSED* -------- -------- -------- -------- -------- --------
Mid-Atlantic.............. 843 8.4% 2,056 14.7% 2,986 16.2%
Midwest................... 500 5.0% 701 5.0% 1,733 9.4%
Southeast................. 1,583 15.8% 2,595 18.6% 2,648 14.4%
Southwest................. 5,324 53.0% 6,145 44.1% 7,640 41.6%
West...................... 1,788 17.8% 2,447 17.6% 3,388 18.4%
------ ----- ------ ----- ------ -----
10,038 100.0% 13,944 100.0% 18,395 100.0%
====== ===== ====== ===== ====== =====
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
1997 1998 1999
---------------------- ---------------------- ----------------------
HOMES HOMES HOMES
SOLD $ SOLD $ SOLD $
NET NEW SALES CONTRACTS* -------- -------- -------- -------- -------- --------
($ MILLIONS)
Mid-Atlantic........ 849 $ 173.0 2,384 $ 440.6 3,145 $ 602.0
Midwest............. 496 96.6 888 169.5 1,996 416.7
Southeast........... 1,705 253.3 2,608 395.2 2,751 452.5
Southwest........... 5,571 709.9 7,161 952.6 7,678 1,103.5
West................ 1,930 362.9 2,911 575.3 3,341 691.5
------ -------- ------ -------- ------ --------
10,551 $1,595.7 15,952 $2,533.2 18,911 $3,266.2
====== ======== ====== ======== ====== ========
13
SEPTEMBER 30,
------------------------------------------------------------------------------
1997 1998 1999
---------------------- ---------------------- ----------------------
HOMES $ HOMES $ HOMES $
SALES BACKLOG* -------- -------- -------- -------- -------- --------
($ MILLIONS)
Mid-Atlantic.......... 334 $ 68.9 932 $ 180.9 1,091 $ 242.8
Midwest............... 180 35.5 419 80.5 1,134 247.2
Southeast............. 697 101.2 733 116.3 836 140.6
Southwest............. 2,027 260.8 3,043 423.9 3,081 472.9
West.................. 723 142.8 1,214 251.3 1,167 253.0
----- ------ ----- -------- ----- --------
3,961 $609.2 6,341 $1,052.9 7,309 $1,356.5
===== ====== ===== ======== ===== ========
* The Company's market regions consist of the following:
MID-ALTANTIC Charleston, Charlotte, Columbia, Greensboro, Greenville,
Hilton Head, Myrtle Beach, New Jersey, Newport News,
Raleigh/Durham, Richmond, Suburban Washington, D.C. and
Wilmington
MIDWEST Chicago, Cincinnati, Louisville, Minneapolis/St. Paul and
St. Louis
SOUTHEAST Atlanta, Birmingham, Jacksonville, Nashville, Orlando,
Pensacola and South Florida
SOUTHWEST Albuquerque, Austin, Dallas/Fort Worth, Houston, Killeen,
Phoenix, San Antonio and Tucson
WEST Denver, Las Vegas, Los Angeles, Portland, Sacramento, Salt
Lake City and San Diego
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998
Revenues from homebuilding activities (including land/lot sales) increased
44.7%, to $3,119.0 million (18,395 homes closed) in 1999, from $2,155.0 million
(13,944 homes closed) in 1998. The Company periodically sells land or lots to
others and revenues from these activities were $63.9 million in 1999, up from
$16.8 million in 1998. The number of homes closed increased in all of the
Company's market regions, with percentage increases ranging from 147.2% in the
Midwest region to 2.0% in the Southeast region. The increases in both revenues
and homes closed were due to strong housing demand, the Company's entrance into
new markets, and the increases attributable to the acquisition of Cambridge
Homes (January, 1999); C. Richard Dobson Builders, Inc. (February, 1998); Mareli
Development & Construction Co. (May, 1998); and RMP Development, Inc. (June,
1998). In markets where the Company operated during both fiscal years,
homebuilding revenues increased by 32.9%, to $2,828.1 million (17,206 homes
closed).
The average selling price of homes closed during 1999 was $166,100, up 8.3%
from $153,300 in 1998. The increase in average selling price was due to changes
in the mix of homes closed and increased selling prices.
New net sales contracts increased 18.5%, to 18,911 homes ($3,266.2 million)
in 1999, from 15,952 homes ($2,533.2 million) in 1998. Percentage increases in
new net sales contracts were achieved in all of the Company's market regions,
with increases ranging from 124.8% in the Midwest region to 5.5% in the
Southeast region. The overall increase in new net sales contracts was due in
part to sales achieved by Cambridge and the 1998 acquisitions, while new net
sales contracts increased 8.1%, to 17,243 homes, in markets where the Company
operated in both periods. The average price of a new net sales contract in 1999
was $172,700, up 8.8% over the $158,800 average in 1998. This increase was due
to changes in the mix of homes sold and increased selling prices.
At September 30, 1999, the Company's backlog of sales contracts was
$1,356.5 million (7,309 homes), up 28.8% from the comparable amount at
September 30, 1998. In markets in which the Company operated during both fiscal
years, the sales contract backlog was $1,195.4 million (6,585 homes), up 11.4%
from
14
1998. The average sales price of homes in sales backlog was $185,600 at
September 30, 1999, up 11.8% from the $166,000 average at September 30, 1998.
Cost of sales increased by 45.0%, to $2,560.7 million in 1999, from
$1,765.6 million in 1998. The increase in cost of sales was primarily
attributable to the increase in revenues. Cost of home sales as a percentage of
home sales revenues increased to 82.0% in 1999, from 81.8% in 1998. The
application of purchase accounting to homes acquired in the Cambridge
acquisition, and closed subsequent to the acquisition, caused an $8.4 million
increase (0.3% of revenues) in cost of goods sold for the year. Cost of land/lot
sales decreased to 88.2% of land/lot sales revenues in 1999, from 94.2% in 1998.
Total homebuilding cost of sales increased to 82.1% in 1999, from 81.9% in 1998.
Selling, general and administrative (SG&A) expenses from homebuilding
activities increased by 37.4%, to $297.3 million in 1999, from $216.4 million in
1998. As a percentage of revenues, SG&A expenses decreased to 9.5% in 1999, from
10.0% in 1998. The decrease in SG&A expenses as a percentage of revenue is
primarily due to the Company's cost containment efforts and the increased
revenues that absorb the fixed elements of overhead. Included in SG&A expenses
in 1999, is a $5.2 million charge (0.2% of revenues) for severance benefits
associated with former Continental executives.
Interest expense associated with homebuilding activities decreased to
$12.0 million in 1999, from $14.0 million in 1998. As a percentage of
homebuilding revenues, interest expense decreased to 0.4% in 1999, from 0.7% in
1998. The decrease in homebuilding interest expense resulted from a slightly
lower overall homebuilding effective interest rate in 1999, due to the peak
usage of the variable rate revolving line of credit facility coinciding with the
mid-year trough in the floating rate to which it is tied. Homebuilding interest
expense also declined due to the growth in active inventory outpacing the growth
in interest-bearing debt. That permitted us to capitalize relatively higher
amounts of incurred interest during 1999. The Company follows a policy of
capitalizing interest only on inventory under construction or development
("Active Inventory"). During 1999 and 1998, we expensed the portion of incurred
interest and other financing costs which could not be charged to inventory.
Capitalized interest and other financing costs are included in cost of sales at
the time of home closings.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
Revenues from homebuilding activities increased 37.5% to $2,155.0 million
(13,944 homes closed) in 1998 from $1,567.5 million (10,038 homes closed) in
1997, despite a decrease in land sales from $34.8 million in 1997 to
$16.8 million in 1998. The number of homes closed increased in all of the
Company's market regions, with percentage increases ranging from 143.9% in the
Mid-Atlantic region to 15.4% in the Southwest region. The increases in both
revenues and homes closed were due to strong housing demand, the Company's
entrance into new markets, and the home closings associated with the
acquisitions of C. Richard Dobson Builders, Inc. (Dobson), which was acquired in
February, 1998; Mareli Development & Construction Co. (Mareli) of Louisville,
Kentucky, acquired in May, 1998; and RMP Development, Inc. (RMP) of Portland,
Oregon, acquired in June, 1998. In markets in which the Company operated during
both fiscal years, revenues increased by 26.5% to $1,939.4 million (12,591 homes
closed). The average selling price of homes closed in 1998 was $153,300,
substantially unchanged from 1997.
New net sales contracts increased 51.2% to 15,952 homes in 1998 from 10,551
in 1997. Percentage increases in new net sales contracts ranging from 180.8% to
28.5% were achieved in the Company's market regions. The increases in new net
sales contracts were due in part to sales achieved by the 1998 acquisitions. In
markets in which the Company operated in both fiscal years, new net sales
contracts increased 37.2%, to 14,480 homes. The average amount of new net sales
contracts in 1998 was $158,800, up 5.0% from the $151,200 average in 1997.
At September 30, 1998, the Company's backlog of sales contracts was
$1,052.9 million (6,341 homes), up 72.8% from the comparable amount at
September 30, 1997. In markets in which the Company operated during both fiscal
years, the sales contract backlog was $978.9 million (5,850 homes), up 60.7%
from 1997.
15
The average sales price of homes in sales backlog was $166,000 at September 30,
1998, up 7.9% from the $153,800 average at September 30, 1997.
Cost of sales increased by 36.6%, to $1,765.6 million in 1998 from
$1,292.6 million in 1997. The increase in cost of sales was attributable to the
increase in revenues. Cost of sales as a percentage of revenues decreased by
0.5%, to 81.9% in 1998 from 82.4% in 1997, due to excellent housing demand
allowing increases in selling prices in certain markets, efforts to enhance
gross margins through efficiencies and materials discounts and purchase
accounting adjustments in 1997 that required the Company to increase its basis
in acquired inventory.
Selling, general and administrative (SG&A) expenses from homebuilding
activities increased by 32.8% to $216.4 million in 1998 from $163.0 million in
1997. As a percentage of revenues, SG&A expenses decreased to 10.0% in 1998 from
10.4% in 1997. The decrease in SG&A expenses as a percentage of revenues is
primarily due to the Company's cost containment efforts, the increased revenues
that absorb the fixed elements of overhead, and costs associated with
integrating the 1997 acquisitions into the Company.
Interest expense associated with homebuilding activities increased to
$14.0 million in 1998 from $10.2 million in 1997 due to the increase in debt
associated with the growth of the Company both internally and through
acquisitions. As a percentage of homebuilding revenues, homebuilding interest
expense was 0.7% in both 1998 and 1997. The Company follows a policy of
capitalizing interest only on inventory under construction or development.
During both 1998 and 1997, the Company expensed the portion of incurred interest
and other financing costs which could not be charged to inventory. Capitalized
interest and other financing costs are included in cost of sales at the time of
home closings.
RESULTS OF OPERATIONS--FINANCIAL SERVICES
Financial services include mortgage financing and title insurance agency and
closing services, primarily related to purchases of homes built and sold by the
Company. Mortgage services are provided in Arizona, California, Colorado,
Florida, Illinois, Kentucky, Minnesota, Nevada, New Mexico, North and South
Carolina and Texas. Title agency and closing services are provided in Arizona,
Florida, Minnesota, Texas and Virginia. The following table summarizes financial
and other information for the Company's financial services operations:
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
($ IN THOUSANDS)
FINANCIAL SERVICES:
Number of loans originated.................................. 3,157 5,875 8,137
------- ------- -------
Loan origination fees....................................... $ 3,174 $ 5,929 $ 8,702
Sale of servicing rights and gains from sale of mortgages... 4,666 9,276 16,632
Other revenues.............................................. 1,515 1,998 4,154
------- ------- -------
Total mortgage banking revenues............................. 9,355 17,203 29,488
Title policy premiums, net.................................. 1,612 4,689 7,763
------- ------- -------
Total revenues.............................................. 10,967 21,892 37,251
General and administrative expenses......................... 8,733 15,244 24,713
Interest expense............................................ 664 2,220 4,433
Interest/other (income)..................................... (1,396) (2,668) (4,984)
------- ------- -------
Income before income taxes.................................. $ 2,966 $ 7,096 $13,089
======= ======= =======
16
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998
Revenues from financial services operations increased 70.2%, to
$37.3 million in 1999, from $21.9 million in 1998. The increase in financial
services revenues was due to the expansion of mortgage and title activities into
new markets and growth in homebuilding operations in existing markets. The
increase in financial services revenues associated with sales of servicing
rights and mortgages was due to increased volume, improved hedging of loans in
process and better volume pricing terms on loans sold to third party investors.
SG&A expenses associated with financial services increased 62.1%, to
$24.7 million in 1999, from $15.2 million in the comparable period of 1998. As a
percentage of financial services revenues, SG&A expenses decreased by 3.3%, to
66.3% in 1999, from 69.6% in 1998, due to increased revenues in 1999 that
resulted from 1997 and 1998 investments in new market startup expenses.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
Revenues from financial services operations increased 99.6% to
$21.9 million in 1998 from $11.0 million in 1997. The increase in financial
services revenues was due to the rapid expansion of the Company's title agency
and mortgage loan services provided to the Company's homebuilding customers.
Accordingly, SG&A expenses associated with financial services increased 74.6%,
to $15.2 million in 1998 from $8.7 million in 1997. As a percentage of financial
services revenues, SG&A expenses decreased by 10.0% to 69.6% in 1998 from 79.6%
in 1997, due primarily to higher than normal 1997 startup expenses in new
markets.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had available cash and cash equivalents
of $128.6 million. Inventories (including finished homes, construction in
progress, and developed residential lots and other land) at September 30, 1999,
had increased by $508.1 million from September 30, 1998, due to a general
increase in business activity, the expansion of operations in the Company's
market areas and the acquisition of Cambridge's $110.1 million inventory. The
inventory increase was financed through borrowings, issuing $55 million of
common stock for the acquisition of Cambridge and by retaining earnings. The
increased borrowing was partially offset by the conversion of $58.8 million of
6 7/8% convertible subordinated notes to common stock. As a result, the
Company's ratio of homebuilding notes payable to total capital at September 30,
1999 decreased 2.4% to 57.7%, from 60.1% at September 30, 1998. The
stockholders' equity to total assets ratio increased to 33.8% at September 30,
1999, from 32.9% at September 30, 1998.
On February 4, 1999, under an existing shelf registration statement, the
Company issued $385 million aggregate principal amount of 8% Senior Notes, due
2009. The proceeds of the notes were used to repay outstanding debt under our
revolving credit facility and for general corporate purposes. The Company has
filed a $600 million universal shelf registration statement that is presently
effective and facilitates access to the capital markets.
The Company has an $825 million, unsecured revolving credit facility,
consisting of a $775 million four-year revolving loan and a $50 million
four-year standby letter of credit that matures in 2002. Additionally, the
Company has a $25 million standby letter of credit agreement in addition to a
$22.5 million non-renewable letter of credit facility acquired with the
Cambridge acquisition. At September 30, 1999, the Company had outstanding
homebuilding debt of $1,086.3 million, of which $395 million represented
advances under the revolving credit facility. Under the debt covenants
associated with the revolving credit facility, at September 30, 1999, the
Company had additional borrowing capacity of $443.7 million. The Company has
entered into multi-year interest rate swap agreements, aggregating
$200 million, that fix the interest rate on a portion of the variable rate
revolving credit facility.
At September 30, 1999, the financial services segment has mortgage loans
held for sale of $113.8 million and loan commitments for $103.0 million at fixed
rates. The Company hedges the interest rate market risk on these mortgage loans
held for sale and loan commitments through the use of best-efforts whole
17
loan delivery commitments, mandatory forward commitments to sell mortgage-backed
securities and the purchase of options on financial instruments.
The financial services segment has a $175 million, one-year mortgage
warehouse facility that is secured by mortgage loans held for sale. The
warehouse facility is not guaranteed by the parent company. As of September 30,
1999, $104.4 million had been drawn under this facility.
On January 28, 1999, the Company acquired the operating assets of Cambridge
Properties, a partnership doing business as Cambridge Homes. In the transaction,
the Company issued 2,555,911 shares of our Common Stock under our shelf
registration statement, and assumed debt of approximately $103 million, which
was repaid with borrowings under our revolving credit facility. On July 7, 1999,
the Company acquired all the outstanding stock of Century Title Agency in
Phoenix for $1.6 million in cash and the assumption of $0.8 million in trade and
notes payable.
The Company's rapid growth and acquisition strategy require significant
amounts of cash. It is anticipated that future home construction, lot and land
purchases and acquisitions will be funded through internally generated funds and
existing credit facilities. Additionally, an effective shelf registration
contains about 7.4 million shares of common stock issuable to effect, in whole
or in part, possible future acquisitions. However, should the Company require
capital in excess of that which is currently available, there can be no
assurance that it will be available.
During fiscal 1999, the Company's Board of Directors declared four quarterly
cash dividends of $.03 per common share, the last of which is payable
October 28, 1999, to stockholders of record on October 21, 1999.
In November, 1998, the Company's Board of Directors approved stock and debt
repurchase programs for up to $100 million each. These programs are intended to
allow the Company to repurchase securities at attractive prices should favorable
market conditions occur. During the fiscal year, the Company repurchased in the
open market $22.4 million of its common stock, or 1,484,300 shares at an average
cost of $15.09.
Except for ordinary expenditures for the construction of homes, the
acquisition of land and lots for development and sale of homes, at
September 30, 1999, the Company had no material commitments for capital
expenditures.
INFLATION
The Company and the homebuilding industry in general, may be adversely
affected during periods of high inflation, primarily because of higher land and
construction costs. Inflation also increases the Company's financing, labor and
material costs. In addition, higher mortgage interest rates significantly affect
the affordability of permanent mortgage financing to prospective homebuyers. The
Company attempts to pass through to its customers any increases in its costs
through increased sales prices and, to date, inflation has not had a material
adverse effect on the Company's results of operations. However, there is no
assurance that inflation will not have a material adverse impact on the
Company's future results of operations.
YEAR 2000
The "Year 2000" issue (Y2K) refers to potential complications that may be
caused by computer hardware and software that were not designed for the change
in the century. If not corrected, such computer hardware and software may cause
management information systems to fail or miscalculate data.
Through September 30, 1999, the Company's Year 2000 remediation efforts have
focused primarily on its core business computer applications (i.e., those
systems that the Company is dependent upon for the conduct of day-to-day
business operations). The Company initiated and completed a comprehensive review
of its core business applications to determine the adequacy of these systems to
meet future business requirements. Out of this effort, a number of systems were
identified for upgrade or replacement. In no
18
case was a system being replaced solely because of Year 2000 issues, although in
some cases the timing of system replacements was accelerated. The costs incurred
for this effort to date are less than $500,000 and are considered immaterial.
Additionally, the Company has conducted inquiries as to Y2K readiness among
the major third parties, including banks, telecommunications entities, vendors,
subcontractors and government agencies, with which it does business. In all
material cases, assurances as to Y2K readiness has been received or alternatives
to the services provided are readily available at nominal incremental costs.
The Company has also completed its assessment of other potential Y2K issues,
including non-information technology systems. Testing of non-IT systems is more
difficult to assess and repair due to embedded technology. The Company expects
to incur costs to replace or repair such equipment. The Company considers these
additional costs to be immaterial as some of the equipment would otherwise have
been replaced through normal attrition, lease expirations or scheduled upgrades
in the ordinary course of business.
It is possible that the Company could encounter disruptions to its business
that could have a material adverse effect on its results of operations if all
systems are not Y2K compliant. Also, the Company could be materially impacted by
widespread economic or financial market disruptions or by Y2K computer system
failures at government agencies on which the Company is dependent for utilities,
zoning, building permits and related matters. There can be no assurance that Y2K
will not adversely affect the Company and its operations.
A formal Y2K internal contingency plan has been prepared.
MARKET RISK
The Company is subject to interest rate risk on its long term debt. The
Company manages its exposure to changes in interest rates by optimizing the use
of variable and fixed rate debt. In addition, the Company hedges its exposure to
changes in interest rates on its variable rate bank debt by entering into
interest rate swap agreements to lock in a fixed interest rate for a portion of
these borrowings.
In connection with the Financial Services segment, mortgage loans held for
sale and the associated warehouse line are subject to interest rate risk. The
Company uses forward commitments to manage this interest rate risk. However, all
the financial services segment's obligations are short-term in duration and
repriced frequently. Accordingly, the Company does not believe that the risks
associated with this segment's financing activities are material.
The following table sets forth, as of September 30, 1999, the Company's long
term debt obligations, principal cash flows by scheduled maturity, weighted
average interest rates and estimated fair market value. In addition, the table
sets forth the notional amounts and weighted average interest rates of the
Company's interest rate swaps.
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------- FMV@
2000 2001 2002 2003 2004 THEREAFTER TOTAL 9/30/99
-------- -------- -------- -------- -------- ---------- -------- --------
($ IN MILLIONS)
Debt:
Fixed rate............... $ 5.2 $ 0 $ 0 $ 0 $149.2 $530.2 $684.6 $650.9
Average interest rate.... 5.25% -- -- -- 8.47% 8.61% 8.55% --
Variable rate............ $111.0 $ 0 $395.0 $ 0 $ 0 $ 0 $506.0 $506.0
Average interest rate.... 6.50% -- 6.26% -- -- -- 6.31% --
Interest Rate Swaps:
Variable to fixed........ $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 -- $ 1.5
Average pay rate......... 5.10% 5.10% 5.10% 5.10% 5.10% 5.08% -- --
Average receive rate..... 90 day LIBOR
19
SAFE HARBOR STATEMENT
Certain statements contained herein, as well as statements made by the
Company in periodic press releases and oral statements made by the Company's
officials to analysts and stockholders in the course of presentations about the
Company may be construed as "Forward-Looking Statements" as defined in the
Private Securities Litigation Reform Act of 1995. Such statements may involve
unstated risks, uncertainties and other factors that may cause actual results to
differ materially from those initially anticipated. Such risks, uncertainties
and other factors include, but are not limited to:
- The Company's substantial leverage
- Changes in general economic and market conditions
- Changes in interest rates and the availability of mortgage financing
- Changes in costs and availability of material, supplies and labor
- General competitive conditions
- The availability of capital
- The ability to successfully effect acquisitions
20
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Auditors.............................. 22
Consolidated Balance Sheets, September 30, 1998 and 1999.... 23
Consolidated Statements of Income for the three years ended
September 30, 1999........................................ 24
Consolidated Statements of Stockholders' Equity for the
three years ended September 30, 1999...................... 25
Consolidated Statements of Cash Flows for the three years
ended September 30, 1999.................................. 26
Notes to Consolidated Financial Statements.................. 27
21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
D.R. Horton, Inc.
We have audited the accompanying consolidated balance sheets of
D.R. Horton, Inc. and subsidiaries as of September 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended September 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
D.R. Horton, Inc. and subsidiaries, at September 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1999, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Fort Worth, Texas
November 8, 1999
22
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30,
-----------------------
1998 1999
---------- ----------
(IN THOUSANDS)
ASSETS
HOMEBUILDING:
Cash........................................................ $ 76,754 $ 128,568
Inventories:
Finished homes and construction in progress............... 717,709 952,015
Residential lots--developed and under development......... 630,252 909,586
Land held for development................................. 10,072 4,507
---------- ----------
1,358,033 1,866,108
Property and equipment (net)................................ 25,456 36,972
Earnest money deposits and other assets..................... 74,827 96,807
Excess of cost over net assets acquired (net)............... 56,782 112,456
---------- ----------
1,591,852 2,240,911
---------- ----------
FINANCIAL SERVICES:
Mortgage loans held for sale................................ 72,325 113,786
Other assets................................................ 3,658 7,111
---------- ----------
75,983 120,897
---------- ----------
$1,667,835 $2,361,808
========== ==========
LIABILITIES
HOMEBUILDING:
Accounts payable and other liabilities...................... $ 259,005 $ 365,506
Notes payable:
Unsecured:
Revolving credit facility due 2002...................... 455,000 395,000
8% senior notes due 2009, net........................... -- 382,941
8 3/8% senior notes due 2004, net....................... 147,754 148,150
10% senior notes due 2006, net.......................... 147,156 147,278
6 7/8% convertible subordinated notes, net.............. 58,794 --
Other secured............................................. 17,303 12,904
---------- ----------
826,007 1,086,273
---------- ----------
1,085,012 1,451,779
---------- ----------
FINANCIAL SERVICES:
Accounts payable and other liabilities...................... 1,444 3,268
Notes payable to financial institutions..................... 28,497 104,350
---------- ----------
29,941 107,618
---------- ----------
1,114,953 1,559,397
---------- ----------
Minority interest........................................... 3,446 4,802
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 30,000,000 shares
authorized, no shares issued.............................. -- --
Common stock, $.01 par value, 200,000,000 shares authorized,
55,836,733 shares at September 30, 1998 and 64,267,073 at
September 30, 1999, issued and outstanding................ 558 643
Additional capital.......................................... 301,503 419,259
Retained earnings........................................... 247,375 400,111
Treasury stock, 0 and 1,484,300 shares, respectively, at
cost...................................................... -- (22,404)
---------- ----------
549,436 797,609
---------- ----------
$1,667,835 $2,361,808
========== ==========
See accompanying notes to consolidated financial statements
23
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HOMEBUILDING:
Revenues
Home sales............................................. $1,532,691 $2,138,203 $3,055,032
Land/lot sales......................................... 34,764 16,846 63,928
---------- ---------- ----------
1,567,455 2,155,049 3,118,960
Cost of sales
Home sales............................................. 1,259,045 1,749,743 2,504,363
Land/lot sales......................................... 33,539 15,867 56,383
---------- ---------- ----------
1,292,584 1,765,610 2,560,746
Gross profit
Home sales............................................. 273,646 388,460 550,669
Land/lot sales......................................... 1,225 979 7,545
---------- ---------- ----------
274,871 389,439 558,214
Selling, general and administrative expense.............. 163,034 216,444 297,348
Interest expense......................................... 10,234 14,020 12,018
Other (income)........................................... (3,981) (4,945) (1,889)
---------- ---------- ----------
105,584 163,920 250,737
---------- ---------- ----------
FINANCIAL SERVICES:
Revenues................................................. 10,967 21,892 37,251
Selling, general and administrative expense.............. 8,733 15,244 24,713
Interest expense......................................... 664 2,220 4,433
Other (income)........................................... (1,396) (2,668) (4,984)
---------- ---------- ----------
2,966 7,096 13,089
---------- ---------- ----------
Merger costs............................................. -- 11,917 --
---------- ---------- ----------
INCOME BEFORE INCOME TAXES........................... 108,550 159,099 263,826
Provision for income taxes............................... 43,588 65,719 103,999
---------- ---------- ----------
NET INCOME........................................... $ 64,962 $ 93,380 $ 159,827
========== ========== ==========
Basic earnings per common share.......................... $ 1.28 $ 1.75 $ 2.55
========== ========== ==========
Diluted earnings per common share........................ $ 1.15 $ 1.56 $ 2.50
========== ========== ==========
See accompanying notes to consolidated financial statements.
24
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TOTAL
COMMON ADDITIONAL RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
-------- ---------- -------- -------- -------------
(IN THOUSANDS, EXCEPT COMMON STOCK SHARE DATA)
Balances at October 1, 1996................. $481 $219,640 $ 86,466 $ -- $306,587
Continental's net income for the period
from June 1, 1996 through September 30,
1996.................................... -- -- 11,150 -- 11,150
Net income................................ -- -- 64,962 -- 64,962
Stock sold through public offering
(3,838,800 shares)...................... 37 39,909 -- -- 39,946
Stock issued as partial consideration for
acquisition (844,444 shares)............ 8 9,142 -- -- 9,150
Exercise of stock options (289,930
shares)................................. 3 2,256 -- -- 2,259
Issuances under D.R. Horton, Inc. employee
benefit plans (33,350 shares)........... -- 310 -- -- 310
Repurchase of common stock................ (2) (2,626) -- -- (2,628)
Dividends declared ($.06 per share to D.R.
Horton stockholders).................... -- -- (3,870) -- (3,870)
---- -------- -------- -------- --------
Balances at September 30, 1997.............. 527 268,631 158,708 -- 427,866
Net income................................ -- -- 93,380 -- 93,380
Stock issued as partial consideration for
acquisition (70,249 shares)............. 1 1,124 -- -- 1,125
Issuances under D.R. Horton, Inc. employee
benefit plans (27,098 shares)........... -- 483 -- -- 483
Exercise of stock options (374,514
shares)................................. 4 4,429 -- -- 4,433
Conversion of convertible subordinated
notes (2,586,174 shares)................ 26 26,836 -- -- 26,862
Dividends declared ($.0875 per share to
D.R. Horton stockholders)............... -- -- (4,713) -- (4,713)
---- -------- -------- -------- --------
Balances at September 30, 1998.............. 558 301,503 247,375 -- 549,436
Net income................................ -- -- 159,827 -- 159,827
Stock issued as partial consideration for
acquisition (2,555,911 shares).......... 26 54,974 -- -- 55,000
Issuances under D.R. Horton, Inc. employee
benefit plans (11,217 shares)........... -- 150 -- -- 150
Exercise of stock options (293,869
shares)................................. 3 3,361 -- -- 3,364
Conversion of convertible subordinated
notes (5,569,343 shares)................ 56 59,271 -- -- 59,327
Purchase of treasury stock (1,484,300
shares)................................. -- -- -- (22,404) (22,404)
Dividends declared ($.1125 per share to
D.R. Horton stockholders)............... -- -- (7,091) -- (7,091)
---- -------- -------- -------- --------
Balances at September 30, 1999.............. $643 $419,259 $400,111 $(22,404) $797,609
==== ======== ======== ======== ========
See accompanying notes to consolidated financial statements
25
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
---------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................. $ 64,962 $ 93,380 $ 159,827
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 7,660 9,828 20,842
Expense associated with issuance of stock under employee
benefit plans........................................... 306 999 --
Changes in operating assets and liabilities:
Increase in inventories................................... (171,645) (261,189) (385,552)
Increase in earnest money deposits and other assets....... (11,071) (17,614) (13,521)
Increase in mortgage loans held for sale.................. (14,789) (38,253) (41,461)
Increase in accounts payable and other liabilities........ 22,572 87,552 88,949
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES....................... (102,005) (125,297) (170,916)
--------- --------- ---------
INVESTING ACTIVITIES
Net purchase of property and equipment.................... (6,894) (11,582) (17,251)
Net cash paid for acquisitions............................ (53,950) (34,035) (5,571)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES....................... (60,844) (45,617) (22,822)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from notes payable............................... 222,680 416,093 515,868
Repayment of notes payable................................ (242,946) (246,856) (621,469)
Issuance of Senior Notes payable.......................... 167,416 -- 377,134
Repurchase of treasury stock.............................. (2,628) -- (22,404)
Proceeds from common stock offerings and stock associated
with certain employee benefit plans..................... 39,950 483 150
Proceeds from exercise of stock options................... 2,117 4,433 3,364
Cash dividends paid....................................... (3,523) (4,713) (7,091)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 183,066 169,440 245,552
--------- --------- ---------
INCREASE / (DECREASE) IN CASH............................... 20,217 (1,474) 51,814
Cash at beginning of year................................. 58,011 78,228 76,754
--------- --------- ---------
Cash at end of year....................................... $ 78,228 $ 76,754 $ 128,568
========= ========= =========
Supplemental cash flow information:
Interest paid, net of amounts capitalized............... $ 9,915 $ 15,937 $ 16,279
========= ========= =========
Income taxes paid....................................... $ 47,563 $ 65,863 $ 99,784
========= ========= =========
Supplemental disclosures of noncash activities:
Notes payable assumed related to acquisitions........... $ 68,267 $ 61,377 $ 103,780
========= ========= =========
Conversion of subordinated notes to common stock........ $ -- $ 26,862 $ 59,327
========= ========= =========
Issuance of common stock related to acquisitions........ $ 9,150 $ 1,125 $ 55,000
========= ========= =========
See accompanying notes to consolidated financial statements
26
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: D. R. Horton, Inc. (the Company) is a national builder that is
engaged primarily in the construction and sale of single-family housing in 40
markets and 23 states in the United States. The Company designs, builds and
sells single-family houses on lots developed by the Company and on finished lots
which it purchases, ready for home construction. Periodically, the Company sells
lots it has developed. The Company also provides title agency and mortgage
brokerage services to its homebuyers. The Company does not retain or service the
mortgages that it originates but, rather, sells the mortgages and related
servicing rights to investors.
MERGER: On April 20, 1998, the Company and Continental Homes Holding Corp.
(Continental) consummated a merger pursuant to which Continental was merged into
the Company, with 2.25 shares of the Company common shares exchanged for each
outstanding share of Continental. Approximately 15,459,500 Horton common shares
were issued to effect the merger. The merger with Continental was treated as a
pooling of interests for accounting purposes. Therefore, all financial amounts
have been presented as if Continental and the Company had been combined at the
earliest period presented.
Prior to the merger, Continental had a fiscal year end of May 31. As
permitted by regulations of the Securities and Exchange Commission,
Continental's operations for the four-month period ended September 30, 1996 were
omitted from the statements of income and cash flows. Continental's net income
for the four-month period was $11.2 million.
Continental's statements of income, stockholders' equity and cash flows have
been restated to conform to the Company's fiscal year end of September 30, 1997.
The results of operations for the separate companies prior to combination and
the combined amounts presented in the consolidated financial statements are:
SIX MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31,
1997 1998
-------------- ----------
Revenue
D.R. Horton, Inc................................... $ 837,280 $508,603
Continental........................................ 730,175 358,910
---------- --------
Combined........................................... $1,567,455 $867,513
========== ========
Net income
D.R. Horton, Inc................................... $ 36,204 $ 22,574
Continental........................................ 28,758 15,242
---------- --------
Combined........................................... $ 64,962 $ 37,816
========== ========
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly-owned and majority-owned
subsidiaries. Intercompany accounts and transactions have been eliminated in
consolidation.
ACCOUNTING PRINCIPLES: The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
27
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED)
CASH: The Company considers all highly liquid investments with an initial
maturity of three months or less when purchased to be cash equivalents. Amounts
in transit from title companies for home closings are included in cash.
COST OF SALES: Cost of sales includes home warranty costs, purchased
discounts for customer financing, and sales commissions paid to third parties.
EXCESS OF COST OVER NET ASSETS ACQUIRED: The excess of amounts paid for
business acquisitions over the net fair value of the assets acquired and
liabilities assumed is amortized using the straight-line method over the
estimated benefit period, ranging from ten to twenty years. Additional
consideration paid in subsequent periods under the terms of purchase agreements
are included as acquisition costs. Amortization expense was $2,296,000,
$3,427,000 and $9,481,000 in fiscal 1997, 1998 and 1999, respectively.
Accumulated amortization was $11,635,000 and $21,116,000 at September 30, 1998
and 1999, respectively.
Impairment of intangible assets is reviewed annually or when events and
circumstances warrant an earlier review. Impairment is determined when estimated
future undiscounted cash flows associated with an intangible asset are less than
the asset's carrying value.
INTEREST. The Company capitalizes interest during development and
construction. Capitalized interest is charged to cost of sales as the related
inventory is delivered to the home buyer. Interest costs are (in thousands):
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
Capitalized interest, beginning of year........ $ 18,004 $ 28,952 $ 35,153
Interest incurred--homebuilding................ 50,505 68,216 76,543
Interest expensed
Directly--homebuilding....................... (10,234) (14,020) (12,018)
Amortized to cost of sales................... (29,323) (47,995) (58,153)
-------- -------- --------
Capitalized interest, end of year.............. $ 28,952 $ 35,153 $ 41,525
======== ======== ========
INVENTORIES: Finished inventories are stated at the lower of accumulated
cost or fair value less costs to sell. Inventories under development or held for
development are stated at accumulated costs, unless such costs would not be
recovered from the cash flows generated by future disposition. In this instance,
such inventories are measured at fair value, less costs of disposal.
Sold units are expensed on a specific identification basis as cost of sales.
Included in inventories are related interest and property taxes which are
capitalized in inventory during the development and construction periods.
Residential lots are transferred to construction in progress when building
permits are requested. Land and development costs are allocated to individual
lots on a prorata basis.
EARNINGS PER SHARE: Basic earnings per share is based upon the weighted
average number of shares of common stock outstanding during each year.
Diluted earnings per share is based upon the weighted average number of
shares of common stock outstanding during each year, adjusted for the effects of
dilutive securities.
28
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED)
The following table sets forth the computation of basic and diluted earnings
per share (in thousands):
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
Numerator:
Net income.................................... $64,962 $93,380 $159,827
Effect of dilutive securities:
Interest expense associated with 6 7/8%
convertible subordinated notes, net....... 3,498 3,322 --
------- ------- --------
Numerator for diluted earnings per share after
assumed conversions......................... $68,460 $96,702 $159,827
======= ======= ========
Denominator:
Denominator for basic earnings per share--
weighted-average shares..................... 50,580 53,328 62,777
Effect of dilutive securities:
6 7/8% convertible subordinated notes....... 8,172 7,633 329
Employee stock options...................... 568 1,125 849
------- ------- --------
Denominator for diluted earnings per share--
adjusted weighted average shares and assumed
conversions................................. 59,320 62,086 63,955
======= ======= ========
Options to purchase 1,675,000 and 1,562,000 shares of common stock at
various prices were outstanding during 1998 and 1999, respectively, but were not
included in the computation of diluted earnings per share because the exercise
prices were greater than the average market price of the common shares and,
therefore, their effect would be antidilutive.
MINORITY INTEREST: The Company has a joint venture arrangement on a land
project whereby the Company is entitled to 55% of the profits and/or losses and
is the managing partner. The financial position and results of operations of the
joint venture are consolidated for financial statement purposes and the
partners' equity position is disclosed as a minority interest.
PROPERTY AND EQUIPMENT: Property and equipment, including model home
furniture, are stated on the basis of cost. Major renewals and improvements are
capitalized. Repairs and maintenance are expensed as incurred. Depreciation
generally is provided using the straight-line method over the estimated useful
life of the asset. Accumulated depreciation was $18,944,000 and $30,563,000 as
of September 30, 1998 and 1999, respectively.
REVENUE RECOGNITION: Revenue is recognized at the time of the closing of a
sale, when title to and possession of the property transfer to the buyer.
COMPREHENSIVE INCOME: The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, during fiscal 1999.
SFAS 130 requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement and
29
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional capital in the equity section of its balance
sheet. The Company had no items of other comprehensive income in any period
presented in these consolidated financial statements.
SEGMENT INFORMATION: Effective September 30, 1999, the Company adopted SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
SFAS 131 establishes new standards for segment reporting which is based on the
way management organizes segments within a company for making operating
decisions and assessing performance.
The Company's financial reporting segments consist of homebuilding and
financial services. The Company's homebuilding operations comprise the most
substantial part of its business, with approximately 99% of consolidated
revenues in fiscal 1997, 1998 and 1999. The homebuilding operations segment
generates the majority of its revenues from the sale of completed homes with a
lesser amount from the sale of land and lots. The financial services segment
generates its revenues from originating and selling mortgages and collecting
fees for title insurance agency and closing services. Expenditures for
long-lived assets and depreciation and amortization related to the financial
services segment for the years ended September 30, 1997, 1998 and 1999 were
insignificant.
The accounting policies of the reportable segments are described throughout
this note. Assets, revenues and operating income of the Company's reportable
segments are included in the consolidated balance sheets and consolidated
statements of income.
MORTGAGE LOANS: Mortgage loans held for sale are reported net of discounts
and are stated at the lower of cost or market as determined in the aggregate,
based on sale commitments or current market quotes, net of any unrealized market
gains or losses on related hedge instruments Any gain or loss on the sale of
loans is recognized at the time of sale. Loan origination fees, net of the
rel