<PAGE>
PROSPECTUS SUPPLEMENT
JUNE 4, 1997 Filed pursuant to Rule 424(b)(5)
(TO PROSPECTUS DATED JUNE 3, 1997) SEC File No. 333-27521
$150,000,000
D.R. HORTON, INC.
CUSTOM HOMES
8 3/8% SENIOR NOTES DUE 2004
The 8 3/8% Senior Notes due 2004 (the "Notes") are being offered (the
"Offering") by D.R. Horton, Inc. (the "Company"). The Notes will mature on
June 15, 2004. Interest on the Notes will be payable semi-annually on June 15
and December 15 of each year, commencing December 15, 1997. Except as set
forth in the following sentence, the Notes will not be redeemable. At any time
prior to June 15, 2000, the Company may, at its option, redeem Notes with the
net cash proceeds of one or more Public Equity Offerings (as defined) by the
Company, at a redemption price equal to 108.375% of the principal amount
thereof, plus accrued interest to the date of redemption; provided, however,
that after each such redemption not less than $97,500,000 principal amount of
Notes remains outstanding. Upon the occurrence of a Change of Control (as
defined), each holder of Notes will have the right to require the Company to
purchase such Notes at 101% of the principal amount thereof, plus accrued
interest to the date of purchase.
The Notes will be general unsecured obligations of the Company and will rank
senior in right of payment to all future Indebtedness (as defined) of the
Company that is, by its terms, expressly subordinated in right of payment to
the Notes and pari passu in right of payment with all existing and future
unsecured Indebtedness of the Company that is not so subordinated. The Notes
will be guaranteed (the "Guarantees"), jointly and severally, by each of the
existing and future Restricted Subsidiaries (as defined) of the Company (the
"Guarantors"). The Guarantees will be general unsecured obligations of the
Guarantors and will rank senior in right of payment to all future Indebtedness
of the Guarantors that is, by its terms, expressly subordinated in right of
payment to the Guarantees and pari passu in right of payment with all existing
and future unsecured Indebtedness of the Guarantors that is not so
subordinated. Secured creditors of the Company and of the Guarantors will have
a claim on the assets which secure the obligations of the Company and the
Guarantors to such creditors prior to claims of holders of the Notes against
those assets. At March 31, 1997, after giving pro forma effect to the
Offering, the Company and the Guarantors would have had approximately $321.5
million (including the Notes) of Indebtedness outstanding, of which $8.7
million would have been secured Indebtedness and none of which would have been
subordinated to the Notes.
The Company intends to apply for listing of the Notes on the New York Stock
Exchange.
SEE "RISK FACTORS" BEGINNING ON PAGE S-8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED PRIOR TO AN INVESTMENT IN THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Donaldson, Lufkin & Jenrette Securities Corporation (the "Underwriter") has
agreed to purchase the Notes from the Company at 98.419% of the principal
amount thereof (resulting in $147,628,500 aggregate proceeds to the Company
before deducting expenses payable by the Company estimated at $550,000)
subject to the terms and conditions set forth in the Underwriting Agreement.
See "Underwriting".
The Underwriter proposes to offer the Notes from time to time for sale in
one or more negotiated transactions or otherwise, at market prices prevailing
at the time of sale, at prices related to such market prices or at negotiated
prices. For further information with respect to the plan of distribution and
any discounts, commissions or profits on resale that may be deemed
underwriting discounts or commissions, see "Underwriting" herein. The Company
has agreed to indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act").
The Notes are being offered by the Underwriter, subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to various
prior conditions, including the right to reject orders in whole or in part. It
is expected that delivery of the Notes will be made through the book-entry
facilities of The Depository Trust Company, against payment therefor in same-
day funds on or about June 9, 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere or incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus. As
used in this Prospectus Supplement and the accompanying Prospectus, except as
the context otherwise requires, references to D.R. Horton, Inc. and its
subsidiaries (collectively, the "Company") and the financial and operating data
contained in this Prospectus Supplement and the accompanying Prospectus reflect
the consolidated results of such entities for the periods indicated. All share
and per share data included or incorporated by reference herein have been
adjusted to reflect the Company's 9% stock dividend of June 1995, seven-for-
five stock split of September 1995 and 8% stock dividend of May 1996.
THE COMPANY
The Company is a national homebuilder constructing and selling single-family
homes in metropolitan areas of the Mid-Atlantic, Midwest, Southeast, Southwest
and Western regions of the United States. The Company builds homes in 27
markets and believes that it is one of only three public homebuilders with
operations in 21 or more states. The Company offers high-quality homes with
custom features, designed principally for the entry-level and move-up market
segments. The Company's homes generally range in size from 1,000 to 5,000
square feet and in price from $80,000 to $600,000, with an average selling
price of $166,600 for the year ended September 30, 1996, and $166,300 for the
six months ended March 31, 1997.
In fiscal 1996, the Company recorded its tenth consecutive year of record
revenue and sales backlog. The Company's revenues have increased from $393.3
million in fiscal 1994 to $547.3 million in fiscal 1996, a compound annual
growth rate of 18%. Over this same period, homes closed by the Company have
increased from 2,360 homes to 3,284 homes.
Revenues increased 29%, to $304.0 million from $235.1 million for the six
months ended March 31, 1997, compared to the same period in 1996. The sales
value of net new contracts signed by the Company increased 18%, to $342.1
million (2,032 homes) compared to $290.3 million (1,727 homes) for the
comparable period in 1996. At March 31, 1997, the Company's backlog of homes
under contract totaled $324.5 million (1,841 homes), a 44% increase from $225.9
million (1,298 homes) at March 31, 1996.
OPERATING STRATEGY
The Company attributes its success to its proven operating strategy, which
focuses on the following elements:
Geographic Diversification. The Company is one of the most geographically
diversified homebuilders in the United States, with operating divisions in 21
states and 27 markets, as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC REGION MARKETS
----------------- -------
<S> <C>
Mid-Atlantic...... Charlotte, Greensboro, Greenville, North Central New
Jersey, Raleigh/Durham, Suburban Washington, D.C.
Midwest........... Chicago, Cincinnati, Kansas City, Minneapolis/St. Paul,
St. Louis
Southeast......... Atlanta, Birmingham, Nashville, Orlando, Pensacola, South
Florida
Southwest......... Albuquerque, Austin, Dallas/Fort Worth, Houston, Phoenix
Western........... Denver, Las Vegas, Los Angeles, Salt Lake City, San Diego
</TABLE>
The Company believes that its diversification strategy mitigates the effects
of local and regional economic cycles and enhances its growth potential.
S-3
<PAGE>
New Markets/Acquisitions. While the Company believes that there are
significant growth opportunities in its existing markets, it intends to
continue to evaluate new markets for entry that have significant entry-level
and move-up segments and satisfy the Company's profitability, investment return
and other criteria. Since October 1, 1992, the Company has expanded into 15 new
markets through start-up operations and has completed complementary
acquisitions that have expanded the Company into five additional markets. The
Company believes that the expansion of its operations through the selective
acquisition of existing homebuilding companies can afford it several benefits
not found in start-up operations.
Before entering new markets, the Company evaluates their potential on the
basis of local housing demand, demographic trends and other factors, such as
local growth initiatives, employment demand and growth, and the availability of
quality lots and undeveloped real estate at reasonable prices. Typically, the
Company will not invest significant 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 the Company and its products.
In evaluating potential acquisition candidates, the Company seeks
homebuilding companies that have an excellent reputation, a track record of
profitability and a strong management team. Typically, the Company endeavors to
limit the risks associated with acquiring an existing homebuilding company by
conducting extensive operational, financial and legal due diligence on each
acquisition candidate and by only acquiring homebuilding companies that the
Company believes should have an immediate positive impact on the Company's
earnings.
Market Focus--Custom Features. The Company typically positions itself in its
markets between large volume homebuilders and local custom builders by offering
a broader selection of homes with more amenities and greater design flexibility
than homes offered by volume builders, at prices that are generally more
affordable than those charged by local custom builders. The Company also is
able to customize its designs to deliver personalized homes to its customers.
While most design modifications are significant to the homebuyer, such changes
improve margins and typically involve relatively minor adjustments that allow
the Company to maintain the efficiencies of a volume homebuilder. The Company
believes that its ability to cater to the design tastes of prospective
homebuyers at competitive prices, even at the entry level, distinguishes it
from many of its competitors.
Decentralized Operations. The Company's homebuilding activities are
decentralized to give maximum flexibility to its local division managers. The
Company believes that division management is more informed to make decisions
regarding local operations. Each operating division is responsible for
preliminary site selection, negotiation of option contracts, and overseeing
land development activities. Additionally, each operating division plans its
homebuilding schedule, selects the building plans and architectural scheme for
its subdivisions, obtains all building approvals, and develops a marketing plan
for its homes. The Company's corporate office retains oversight and
responsibility for final approval of all land and lot acquisitions, inventory
levels, financing arrangements, accounting and management reporting, payment of
subcontractor invoices, payroll and employee benefits.
Cost Management. The Company strives to control its overhead costs by
centralizing the administrative and accounting functions and by limiting the
number of field administrative personnel and middle level management positions.
The Company attempts to control construction costs through the efficient design
of its homes and obtaining favorable pricing from certain subcontractors based
on the high volume of work performed for the Company. The Company's management
information systems also assist in controlling construction costs, overhead and
capital by allowing management to monitor construction expenditures on a home-
by-home basis and the composition and level of inventory on a subdivision
basis.
Limited Real Estate Exposure. The Company attempts to minimize the risks
associated with land ownership while maximizing its return on invested capital
by acquiring developed building lots pursuant to lot
S-4
<PAGE>
option contracts, generally on a non-recourse basis, after all zoning and other
governmental entitlements and approvals are obtained. The Company attempts to
control a two to four year supply of building lots based on current and
expected absorption rates. The Company also pursues selected land acquisition
and development opportunities to augment its inventory of option building lots
and to maximize profit opportunities. These acquisitions are generally limited
to smaller tracts of entitled land that will yield 50 to 150 lots when
developed. By limiting its land acquisition and development activities
generally to smaller parcels of land, the Company reduces the financial and
market risks associated with owning land during the development period.
THE OFFERING
Securities Offered.... $150,000,000 aggregate principal amount of 8 3/8%
Senior Notes due 2004 (the "Notes").
Maturity Date......... June 15, 2004.
Interest Payment
Dates................. Interest will accrue from the date of issuance and will
be payable semi-annually on each June 15 and December
15, commencing December 15, 1997.
Redemption............ Except as set forth in the following sentence, the
Notes are not redeemable. At any time prior to June 15,
2000, the Company may, at its option, redeem Notes with
the net cash proceeds of one or more Public Equity
Offerings by the Company, at a redemption price equal
to 108.375% of the principal amount thereof, plus
accrued interest to the date of redemption; provided,
however, that after each such redemption not less than
$97,500,000 principal amount of Notes (including any
Additional Notes (as defined) but excluding any Notes
held by the Company or any of its Affiliates) remains
outstanding.
Change of Control..... Upon a Change of Control, each holder of Notes will
have the right to require the Company to purchase all
or any part of such holder's Notes at 101% of the
principal amount thereof, plus accrued interest to the
date of purchase. There can be no assurance that upon a
Change of Control, the Company will have sufficient
funds to purchase any of the Notes.
Guarantees............ The Notes will be guaranteed, jointly and severally, by
each of the existing and future Restricted Subsidiaries
of the Company.
Ranking............... The Notes will be general unsecured obligations of the
Company and rank senior in right of payment to all
future Indebtedness of the Company that is, by its
terms, expressly subordinated in right of payment to
the Notes and pari passu in right of payment with all
existing and future unsecured Indebtedness of the
Company that is not so subordinated. The Guarantees
will be general unsecured obligations of the Guarantors
and will rank senior in right of payment to all future
Indebtedness of the Guarantors that is, by its terms,
expressly subordinated in right of payment to the
Guarantees and will rank pari passu in right of payment
with all existing and future unsecured Indebtedness of
the Guarantors that is not so subordinated. Secured
creditors of the Company and of the Guarantors will
have a claim on the assets which secure the obligations
of the Company and the Guarantors to such creditors
prior to claims of holders of the Notes against those
assets. At March 31, 1997, after giving pro forma
effect to the Offering, the Company and the Guarantors
would have had approximately $321.5 million (including
the
S-5
<PAGE>
Notes) of Indebtedness outstanding, of which $8.7
million would have been secured Indebtedness and none
of which would have been subordinated to the Notes.
Certain Covenants..... The Indenture (as defined) imposes certain limitations
on the ability of the Company and the Restricted
Subsidiaries to, among other things, incur
Indebtedness, make Restricted Payments (as defined),
effect certain Asset Dispositions (as defined), enter
into certain transactions with affiliates, merge or
consolidate with any other person or transfer all or
substantially all of their properties and assets.
Use of Proceeds....... The Company will use the net proceeds from the Offering
for general corporate purposes including, among other
things, development of new residential properties,
acquisition of residential development properties
and/or homebuilding companies, and temporary reduction
of existing indebtedness under the Company's credit
facilities (the "Credit Facilities").
RISK FACTORS
Prospective investors in the Notes should carefully consider the factors
discussed in detail elsewhere in this Prospectus Supplement under the caption
"Risk Factors."
S-6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
(DOLLARS IN THOUSANDS)
The following summary consolidated financial information for the three years
ended September 30, 1996, is derived from audited consolidated financial
statements. The summary consolidated financial information for the six months
ended March 31, 1996 and 1997, is derived from unaudited consolidated financial
statements.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED MARCH 31,
---------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................. $393,317 $437,388 $547,336 $ 235,110 $ 303,977
Gross profit............. 67,218 77,646 98,282 41,708 56,149
Income before income
taxes................... 28,591 32,557 44,432 16,791 21,760
Net income............... 17,663 20,539 27,379 10,537 13,497
SELECTED OPERATING DATA:
Gross profit margin...... 17.1% 17.8% 18.0% 17.7% 18.5%
Number of homes closed... 2,360 2,474 3,284 1,429 1,825
New sales orders, net
(homes)(1).............. 2,327 2,553 3,488 1,727 2,032
New sales orders, net ($
value)(1)............... $394,587 $449,260 $585,489 $ 290,266 $ 342,135
Sales backlog at end of
period (homes)(2)....... 773 1,000 1,204 1,298 1,841
Sales backlog at end of
period ($ value)(2)..... $140,524 $170,736 $208,888 $ 225,891 $ 324,455
OTHER FINANCIAL DATA:
Depreciation and
amortization............ $ 1,190 $ 2,025 $ 2,583 $ 1,408 $ 1,651
Interest incurred........ 7,269 12,002 14,835 7,554 9,011
Ratio of earnings to
fixed charges(3)........ 4.46x 3.43x 3.68x 2.83x 3.03x
<CAPTION>
AS OF SEPTEMBER 30, AS OF MARCH 31,
---------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Inventories.............. $204,094 $282,908 $345,283 $ 319,336 $ 541,444
Total assets............. 230,898 318,787 402,913 362,085 634,609
Total debt............... 108,578 169,879 169,873 157,541 318,550
Stockholders' equity..... 84,553 106,073 177,638 160,592 236,964
</TABLE>
- --------------------
(1) Represents homes placed under contract during the period, net of
cancellations. See "Business--Marketing and Sales."
(2) Represents homes under contract but not yet closed at the end of the
period. See "Business--Marketing and Sales."
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of the sum of income from continuing operations before income
taxes, interest amortized to cost of sales, interest expense and the
portion of rent expense deemed to represent interest. Fixed charges consist
of interest incurred, whether expensed or capitalized, including
amortization of debt issuance costs, if applicable, and the portion of rent
expense deemed to represent interest.
S-7
<PAGE>
RISK FACTORS
Prior to purchasing the Notes offered hereby, prospective purchasers should
consider all of the information set forth in this Prospectus Supplement and in
the accompanying Prospectus and, in particular, should evaluate the risk
factors set forth below.
Substantial Leverage. The Company has, and after consummation of the
Offering will continue to have, significant debt service obligations. As of
March 31, 1997, after giving pro forma effect to the Offering, the Company
would have had total indebtedness of $321.5 million. The degree to which the
Company is leveraged could have important consequences to holders of the
Notes, including (i) the ability of the Company to obtain any necessary
financing in the future for working capital, capital expenditures,
acquisitions, debt service requirements or other purposes may be limited; (ii)
a substantial portion of the Company's cash flows from operations must be
dedicated to the payment of the principal of and interest on its indebtedness
and will not be available for other purposes; (iii) the Company's level of
indebtedness could limit its flexibility in planning for, or reacting to, the
changes in its business; (iv) the Company is more highly leveraged than some
of its competitors, which may place it at a competitive disadvantage; and (v)
the Company's high degree of indebtedness will make it more vulnerable in the
event of a downturn in its business or in general economic conditions. The
ability of the Company to meet its debt service and other obligations will
depend upon its future performance. The Company is engaged in businesses that
are substantially affected by changes in economic cycles and whose revenues
and earnings vary with the level of general economic activity in the markets
they serve as well as by financial, political, business and other factors,
many of which are beyond the Company's control. The Company's ability to meet
its debt service obligations also may be affected by changes in prevailing
interest rates, as borrowings under the Credit Facilities bear interest at
floating rates. See "Capitalization."
In the event that internally generated funds and amounts available under the
Credit Facilities are not sufficient to fund the Company's capital
expenditures and its debt service obligations, including the Notes, the
Company would be required to raise additional funds through the sale of equity
securities, the refinancing of all or part of its indebtedness or the sale of
assets. Each of these alternatives is dependent upon financial, business and
other general economic factors affecting the Company, many of which are beyond
the control of the Company, and there can be no assurance that any such
alternatives would be available to the Company, if at all, on satisfactory
terms. While the Company believes that cash flow generated by operations,
along with borrowing availability under the Credit Facilities, will provide
adequate sources of long-term liquidity, a significant drop in operating cash
flows resulting from economic conditions, competition or other uncertainties
beyond the Company's control could increase the need for refinancing or new
capital.
The Indenture governing the Notes imposes restrictions on the operations and
activities of the Company. The most significant restrictions relate to debt
incurrence, sales of assets and cash distributions by the Company and require
the Company to comply with certain financial covenants. The failure to comply
with any of these restrictions or covenants could result in an event of
default under the applicable instrument, which could permit acceleration of
the debt under such instrument and in some cases acceleration of debt under
other instruments that contain cross-acceleration or cross-default provisions.
See "Description of Notes."
General Real Estate, Economic and Other Conditions. The homebuilding
industry is cyclical and is significantly affected by changes in general and
local economic conditions, such as employment levels, availability of
financing for homebuyers, interest rates, consumer confidence and housing
demand. In addition, homebuilders are subject to various risks, including
competitive overbuilding, availability and cost of building lots, materials
and labor, weather conditions, delays in construction schedules, cost
overruns, changes in governmental regulation and increases in real estate
taxes and other local government fees. Moreover, homebuilders are subject to
the risks associated with natural disasters such as hurricanes, earthquakes
and fires. The Company and its competitors also are impacted by comprehensive
local, state and Federal statutes and rules regulating environmental matters,
zoning, building design and density requirements, as they affect the
availability and cost of building lots and the timing of homebuilding
activities.
S-8
<PAGE>
Interest Rates; Mortgage Financing. Virtually all purchasers of the
Company's homes finance their acquisitions through third-party lenders
providing mortgage financing. In general, housing demand is adversely affected
by increases in interest rates, decreasing availability of mortgage financing,
increasing housing costs and unemployment. If mortgage interest rates increase
and the ability of prospective buyers to finance home purchases is adversely
affected, the Company's operating results may be negatively impacted. The
Company's homebuilding activities also are dependent upon the availability and
cost of mortgage financing for buyers of homes owned by potential customers so
those customers can sell their existing homes and purchase a home from the
Company. In addition, the Company believes that the availability of Federal
Housing Administration and Veterans Administration mortgage financing is an
important factor in marketing many of its homes. Any limitations or
restrictions on the availability of such financing could adversely affect the
Company's sales. See "Business--Customer Financing."
Competition. The homebuilding industry is highly competitive and fragmented.
Homebuilders compete not only for homebuyers, but also for desirable
properties, financing, raw materials and skilled labor. The Company competes
with other local, regional and national homebuilders, often within larger
subdivisions designed, planned and developed by such homebuilders. Some of the
Company's competitors have longer operating histories and greater financial,
marketing and sales resources than the Company, including, in some instances,
affiliated mortgage companies.
Future Capital Requirements. The Company's operations require significant
amounts of cash and the Company will be required to seek additional capital
for the future growth and development of its business. There can be no
assurance as to the terms or availability of such additional capital. If the
Company is not successful in obtaining sufficient capital, it could result in
a reduction in sales and may adversely affect the Company's future growth and
results of operations.
Acquisitions. From April 1994, through the present, the Company has acquired
six homebuilding companies. In the future, the Company intends to acquire
additional homebuilding companies. Subsequent to the acquisitions, the
previous owners of the acquired companies normally continue to manage their
operations as subsidiaries of the Company. Although the Company believes that
it has generally integrated these acquired companies into its operations
without substantial costs, delays or other problems, the Company has
experienced some delay in attaining operating efficiencies associated with the
acquisition of the Torrey Group of Atlanta ("Torrey"). There is no assurance
that the Company will be able to successfully integrate the operations of
future acquisitions of homebuilding companies. In addition, while the Company
believes that its management has been effective in overseeing the combined
operations of the Company and its acquisitions, there can be no assurance that
the Company will be able to implement successfully its operating and growth
strategies in each of its markets. Finally, there can be no assurance that the
pace of the Company's acquisitions will not adversely affect the Company's
efforts to integrate acquisitions and manage the acquired companies
profitably.
Control Relationships. Donald R. Horton and other affiliates of the Company
own, directly or indirectly, approximately 39% of the Company's outstanding
common stock. Accordingly, such persons may effectively be able to elect the
entire board of Directors of the Company and control its management,
operations and affairs. Donald R. Horton, along with his children and certain
family trusts of which he and his wife and children are the beneficiaries, own
approximately 34% of the Company's outstanding common stock. Circumstances may
occur in which the interest of the controlling shareholders could be in
conflict with the interests of the holders of Notes. In addition, such persons
may have an interest in pursuing transactions that, in their judgment, enhance
the value of their equity investment in the Company, even though such
transactions may involve risks to the holders of Notes.
Ranking. The Notes and the Guarantees will be general unsecured obligations
of the Company and the Guarantors, respectively, ranking pari passu in right
of payment with all existing and future unsubordinated indebtedness of the
Company and the Guarantors. Because they are unsecured, however, the Notes and
S-9
<PAGE>
the Guarantees will be junior to any secured indebtedness of the Company and
of the Guarantors as to claims against the assets securing such indebtedness.
The Indenture will permit the Company to incur significant amounts of secured
indebtedness. See "Description of Notes."
Exercise of Change of Control Rights. Upon the occurrence of a Change of
Control, the Company would be required to offer to purchase the Notes at 101%
of their principal amount, together with all accrued and unpaid interest, if
any. In such event, the Company may not have sufficient resources to satisfy
its purchase obligations resulting from a Change of Control. See "Description
of Notes."
Fraudulent Conveyance Issues. Although holders of Notes will be direct
creditors of the Guarantors by virtue of the Guarantees, existing or future
creditors of any Guarantor could avoid or subordinate such Guarantor's
Guarantee under fraudulent conveyance laws if they were successful in
establishing that (i) such Guarantee was incurred with fraudulent intent or
(ii) such Guarantor did not receive fair consideration or reasonably
equivalent value for issuing its Guarantee and that it (w) was insolvent at
the time of such issuance, (x) was rendered insolvent by reason of such
issuance, (y) was engaged in a business or transaction for which its assets
constituted unreasonably small capital to carry on its business or (z)
intended to incur, or believed that it would incur, debts beyond its ability
to pay such debts as they matured. Management of the Company and the
Guarantors believe that the Guarantors (w) will be solvent at the time of the
issuance of the Guarantees, (x) will not be rendered insolvent by reason of
such issuance, (y) are not engaged in a business or transaction for which
their assets constitute unreasonably small capital to carry on their business
and (z) do not intend to incur, or believe that they will incur, debts beyond
their ability to pay such debts as they mature.
The measures of insolvency for purposes of determining whether a fraudulent
conveyance occurred would vary depending upon the laws of the relevant
jurisdiction and upon the valuation assumptions and methodology applied by the
court. Generally, however, a company would be considered insolvent for
purposes of the foregoing if the sum of the company's debts, including
contingent, unliquidated and unmatured liabilities, is greater than all of
such company's property at a fair valuation, or if the present fair saleable
value of the company's assets is less than the amount that will be required to
pay the probably liability on its existing debts as they become absolute and
matured.
Lack of a Public Market for the Notes. The Notes are a new issue of
securities. There is no active public trading market for the Notes. The
Company intends to apply for listing of the Notes on the New York Stock
Exchange; however, there can be no assurance that the Notes will be so listed.
The Underwriter has advised the Company that, if the Notes are not listed on a
securities exchange, it currently intends to make a market in the Notes, but
the Underwriter is not obligated to do so and may discontinue any such market-
making at any time. There can be no assurance as to the liquidity of any
market that may develop for the Notes, the ability of holders to sell their
Notes or the price at which holders would be able to sell their Notes.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes in the Offering
are estimated to be approximately $147.1 million. The Company intends to use
the proceeds from the Offering for general corporate purposes, including,
among other things, development of new residential properties, acquisition of
residential development properties and/or other homebuilding companies and
temporary reduction of existing indebtedness under the Credit Facilities. See
footnote 3 to "Capitalization". Borrowings under the Company's various Credit
Facilities bear interest at effective rates ranging from LIBOR plus 1.20% to
LIBOR plus 1.85%.
S-10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1997, as adjusted to reflect the sale by the Company of the Notes offered
hereby and the application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------
AS ADJUSTED
ACTUAL (1) (2)
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Notes Payable(3).................................... $318,550 $ 171,472
8 3/8% Senior Notes due 2004........................ -- 150,000
----------- -----------
Total debt.......................................... 318,550 321,472
----------- -----------
Stockholders' equity:
Preferred Stock, $.10 par value; 30,000,000 shares
authorized,
no shares issued................................... -- --
Common Stock, $.01 par value; 100,000,000 shares
authorized;
36,839,791 shares, issued and outstanding.......... 368 368
Additional capital.................................. 206,147 206,147
Retained earnings................................... 30,449 30,449
----------- -----------
Total stockholders' equity............................ 236,964 236,964
----------- -----------
Total capitalization.................................. $555,514 $ 558,436
=========== ===========
</TABLE>
- ---------------------
(1) As adjusted to reflect the sale of $150 million of Notes offered hereby by
the Company and the application of the estimated net proceeds therefrom to
temporarily reduce indebtedness under the Credit Facilities. See "Use of
Proceeds."
(2) Does not reflect 2,254,833 additional shares of Common Stock subject to
outstanding options as of March 31, 1997, pursuant to the Company's 1991
Stock Incentive Plan.
(3) Presently, the Company has a $425 million unsecured credit facility with
12 financial institutions that matures in April 2000 and 2001. This
facility contains financial covenants generally relating to cash
dividends, minimum interest coverage, net worth, leverage, certain
inventory levels and other matters. Additionally, the Company has a $25
million unsecured credit facility with a bank that expires upon six
months' notice. The Company is in the process of extending and expanding
its $425 million unsecured credit facility to $625 million with maturity
dates in 2001 and 2002. This new credit facility will provide for a $200
million, five-year term note, a $400 million, four-year revolving credit
facility, and $25 million in standby letters of credit. The new facility
will contain certain financial covenants relating to cash dividends,
minimum interest coverage, leverage and certain inventory levels.
Covenants in the existing and new facilities will continue to limit
borrowings based on inventory levels. A Change of Control will continue to
constitute an event of default under these facilities.
S-11
<PAGE>
BUSINESS
The Company is engaged primarily in the construction and sale of single-
family homes in the Mid-Atlantic, Midwest, Southeast, Southwest and Western
regions of the United States. The Company offers high-quality homes with
custom features, designed principally for the entry-level and move-up market
segments. The Company's 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, 1996, the Company closed homes with an average sales price
approximating $166,600. The average sales price of homes closed in the six
months ended March 31, 1997, was $166,300.
The Company is one of the most geographically diversified homebuilders in
the United States, with operating divisions in 21 states and 27 markets. These
markets include Albuquerque, Atlanta, Austin, Birmingham, Charlotte, Chicago,
Cincinnati, Dallas/Fort Worth, Denver, Greensboro, Greenville, Houston, Kansas
City, Las Vegas, Los Angeles, Minneapolis/St. Paul, Nashville, North Central
New Jersey, Orlando, Pensacola, Phoenix, Raleigh/Durham, Salt Lake City, San
Diego, South Florida, St. Louis and suburban Washington, D.C. The Company was
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.
The Company's principal executive offices are located at 1901 Ascension
Blvd., Suite 100, Arlington, Texas 76006, and its telephone number is (817)
856-8200.
OPERATING STRATEGY
The Company believes that there are several important elements to its
operating strategy which have enabled it to achieve consistent growth and
profitability. The following are important elements of this strategy:
Geographic Diversification. From 1978 to late 1987, the Company's
homebuilding activities were conducted exclusively in the Dallas/Fort Worth
area. The Company then instituted a policy of diversifying geographically,
entering the following markets in the years indicated:
<TABLE>
<CAPTION>
YEAR ENTERED MARKETS
------------ -------
<S> <C>
Late 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................ Kansas City, Las Vegas, Minneapolis/St. Paul
1995................ Birmingham, Denver, Greensboro, St. Louis
1996................ Albuquerque, Pensacola
1997................ Greenville, Nashville, North Central New Jersey
</TABLE>
The Company continually monitors the sales and margins achieved in each of
the subdivisions in which it operates as part of an overall evaluation of the
employment of its capital. While the Company believes there are significant
growth opportunities in its existing markets, it intends to continue its
policy of geographic diversification by seeking to enter new markets. The
Company believes that its diversification strategy mitigates the effects of
local and regional economic cycles and enhances its growth potential.
Typically, the Company 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 the Company and its products.
S-12
<PAGE>
Acquisitions. As an integral component of the Company's operational strategy
of continued expansion and geographic diversification, the Company continually
evaluates opportunities for strategic acquisitions. The Company believes that
the expansion of its operations through the acquisition of existing
homebuilding companies affords it 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 homebuyers
in the market. In evaluating potential acquisition candidates, the Company
seeks homebuilding companies that have an excellent reputation, a track record
of profitability and a strong management team with an entrepreneurial
orientation. The Company has limited the risks associated with acquiring a
going concern by conducting extensive operational, financial and legal due
diligence on each acquisition candidate and by only acquiring homebuilding
companies that the Company believes should have an immediate positive impact
on the Company's earnings.
The Company has acquired six homebuilding companies since 1994:
<TABLE>
<CAPTION>
DATE ACQUIRED ENTITIES ACQUIRED MARKETS
------------- ----------------- -------
<S> <C> <C>
April, 1994............. Joe Miller Homes, Inc./Argus Development, Inc. Minneapolis/St. Paul
July, 1995.............. Arappco Inc. Greensboro
September, 1995......... Regency Development, Inc. Birmingham
October, 1996........... Trimark Communities, L.L.C. Denver
December, 1996.......... SGS Communities, Inc. North Central New Jersey
February, 1997.......... The Torrey Group of Companies Atlanta, Charlotte, Greenville
and Raleigh/Durham
</TABLE>
In both existing and new markets, the Company anticipates that it will
continue to evaluate potential future acquisition opportunities that satisfy
its acquisition criteria.
In February 1997, the Company completed the acquisition of all of the
outstanding capital stock of the entities comprising the Torrey Group of
Atlanta, Georgia ("Torrey") for $28.5 million in cash, 844,444 newly issued
shares of the Company's common stock, valued at $9.2 million, and a contingent
payment estimated at $1 million. In addition, $8.4 million was paid to
partnerships affiliated with Torrey for real estate assets of such
partnerships. The Company also assumed and refinanced approximately $80.6
million of indebtedness and other obligations.
Torrey has been the leading builder of single-family homes in the large and
growing Atlanta, Georgia market for the past three years as reported in
Builder Magazine. Atlanta has been the largest housing market in the United
States for the past three years based on single-family building permits
issued. Torrey targets both entry-level and first time move-up buyers. For the
twelve months ended September 30, 1996, Torrey delivered 1,442 homes,
generating $183.8 million of revenue. In addition to building homes in the
Atlanta market, Torrey has homebuilding operations in Charlotte and
Raleigh/Durham, North Carolina, and Greenville, South Carolina. Despite
Torrey's leading market share position in the Atlanta market, the Company
believes that it can improve Torrey's operating results by providing
additional and lower cost capital and operating synergies.
The Company believes that the Torrey acquisition is consistent with its
strategy of selectively pursuing acquisitions of homebuilders that have an
excellent reputation, a track record of profitability, and a strong management
team.
Market Focus--Custom Features. The Company positions itself between large
volume homebuilders and local custom homebuilders by offering a broader
selection of homes that typically have more amenities and greater design
flexibility than homes offered by volume builders, at prices that are
generally more affordable
S-13
<PAGE>
than those charged by local custom builders. The Company generally offers
between five and ten home designs that it believes will appeal to local
homebuyers at each of its subdivisions, but is prepared to offer additional
building plans and options that may be more suitable or desirable to
homebuyers. The Company also is prepared to customize such designs to the
individual tastes and specifications of its homebuyers. While most design
modifications are significant to homebuyers, such changes typically involve
relatively minor adjustments including, among other things, modifying the
interior or exterior dimensions of the home and changing exterior materials.
Such changes generally improve the Company's gross margins. Consequently, the
Company believes that it is able to maintain the efficiencies of a volume
builder while delivering high-quality, personalized homes to its customers.
The Company believes that its ability to cater to the design tastes and
desires of the prospective homebuyer at competitive prices, even at the entry-
level, distinguishes it from many of its competitors.
Decentralized Operations. The Company's homebuilding activities are
decentralized to give more operating flexibility to its local division
managers. The Company's homebuilding activities are conducted through 34
operating divisions, some of which are in the same general market area.
Generally, each operating division consists of a vice president, an office
manager and staff, a sales manager, one to eleven sales people and one
construction manager, who oversees one to nine construction supervisors. The
Company believes that division managers, who are intimately familiar with
local conditions, make better decisions regarding local operations than do the
centralized, corporate management teams who make such decisions for many of
its competitors. Each operating division is responsible for preliminary site
selection, negotiation of option or similar contracts, and overseeing land
development activities. Site selection and lot acquisition typically involve a
feasibility study by the operating division, including soil and environmental
reviews, a review of existing zoning and other governmental requirements, and
a review of the need for and extent of offsite work and additional lot
preparation required to meet local building codes. Each operating division
also plans its homebuilding schedule, selects the building plans and
architectural scheme for its subdivisions, obtains all necessary building
approvals, and develops a marketing plan for its homes. Division managers
receive performance bonuses based upon achieving targeted operating levels in
their operating divisions.
The Company's corporate office controls key risk elements by retaining
oversight and responsibility for final approval of all land and lot
acquisitions, inventory levels, financing arrangements, accounting and
management reporting, payment of subcontractor invoices, payroll and employee
benefits.
Cost Management. The Company strives to control its overhead costs by
centralizing its administrative and accounting functions and by limiting the
number of field administrative personnel and middle level management
positions. The Company also attempts to minimize advertising costs by
participating in promotional activities, publications and newsletters
sponsored by local real estate brokers, mortgage companies, utility companies
and trade associations, and, in certain instances, by positioning its
subdivisions in conspicuous locations that permit it to take advantage of
local traffic patterns.
The Company attempts to control construction costs through the efficient
design of its homes and by obtaining favorable pricing from certain
subcontractors based on the high volume of work they perform for the Company.
The Company's management information systems, including the purchase order
system, also assist in controlling construction costs by allowing corporate
and division management to monitor expenditures on a home-by-home basis. In
addition, the Company's management information systems allow the Company to
monitor its inventory composition and levels, thereby controlling capital and
overhead costs.
Limited Real Estate Exposure. The Company generally acquires developed
building lots pursuant to lot option and similar contracts after all zoning
and other governmental entitlements and approvals are obtained. By utilizing
lot option contracts, the Company purchases the right, but not the obligation,
to buy building lots at predetermined prices on a takedown schedule
commensurate with anticipated home closings. The lot option contracts are
generally on a nonrecourse basis, thereby limiting the Company's financial
exposure to earnest money deposits given to property sellers. This practice
enables the Company to control significant lot positions with minimal up front
capital and substantially reduces the risks associated with land ownership and
development. The Company attempts to control a two to four year supply of
building lots within each market
S-14
<PAGE>
based on current and expected absorption rates. At March 31, 1997, the Company
held lot option and similar contracts for 12,146 lots with an estimated
aggregate purchase price approximating $340 million. These options are secured
by cash deposits approximating $5.3 million, letters of credit approximating
$1.6 million and promissory notes approximating $1.7 million.
MARKETS
The Company's homebuilding activities are conducted in five geographic
regions, comprised of the following markets:
<TABLE>
<CAPTION>
GEOGRAPHIC REGION MARKETS
- ----------------- -------
<S> <C>
Mid-Atlantic.. Charlotte, Greensboro, Greenville, North Central New Jersey, Raleigh/Durham,
Suburban Washington, D.C.
Midwest....... Chicago, Cincinnati, Kansas City, Minneapolis/St. Paul, St. Louis
Southeast..... Atlanta, Birmingham, Nashville, Orlando, Pensacola, South Florida
Southwest..... Albuquerque, Austin, Dallas/Fort Worth, Houston, Phoenix
Western....... Denver, Las Vegas, Los Angeles, Salt Lake City, San Diego
</TABLE>
The Company's operations in each of its markets differ based on a number of
market-specific factors. These factors include regional economic conditions
and job growth, land availability and the local land development process,
consumer tastes, competition from other builders of new homes and secondary
home sales activity. The Company considers each of these factors when entering
new markets or conducting operations in existing markets.
Revenues for the Company by geographic region are:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
-------------------------- -----------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mid-Atlantic....................... $121,829 $113,251 $116,452 $ 56,151 $ 57,485
Midwest............................ 54,072 69,929 88,461 26,926 41,097
Southeast.......................... 53,384 49,291 87,181 41,829 58,376
Southwest.......................... 139,420 153,074 173,802 83,078 88,596
Western............................ 24,612 51,843 81,440 27,126 58,423
-------- -------- -------- -------- --------
Total............................ $393,317 $437,388 $547,336 $235,110 $303,977
======== ======== ======== ======== ========
</TABLE>
LAND POLICIES
While the Company expects to continue to utilize lot option and similar
contracts to secure developed lots, it will pursue selected land acquisition
and development opportunities to augment its inventory of low-cost, quality
building lots and to maximize profit opportunities. Substantially all of the
land acquired by the Company is purchased only after necessary entitlements
have been obtained so that the Company has the right to begin development or
construction. The Company generally limits its acquisitions to smaller tracts
of entitled land that will yield under 150 lots when developed and, where
possible, obtains options to acquire adjacent parcels for later development.
By limiting its acquisition and development activities to smaller parcels of
land, the Company reduces the financial and market risks associated with
holding land during the development period. Before it acquires tracts of land,
the Company 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. At March 31, 1997, only about 41% of the Company's total
lot position of 20,472 lots was purchased as finished lots or was being or had
been developed by the Company. Although the Company purchases land and engages
in land development activities primarily to support its own homebuilding
activities, lots and land are occasionally sold to other developers and
homebuilders.
S-15
<PAGE>
The following table sets forth a summary of the Company's land/lot positions
at March 31, 1997:
<TABLE>
<S> <C>
Finished lots owned by the Company.................................... 1,115
Lots under development owned by the Company........................... 7,211
------
Total lots owned.................................................... 8,326
Lots available under lot option and similar contracts................. 12,146
------
Total land/lot position............................................. 20,472
======
</TABLE>
The Company also seeks to limit its exposure to real estate inventory risks
by (i) 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, (ii) limiting the number of speculative homes
(homes started without an executed sales contract) built in each subdivision;
and (iii) 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.
CONSTRUCTION
The Company's home designs are prepared by architects in each of the
Company's markets to appeal to the local tastes and preferences of the
community. Optional interior and exterior features also are offered by the
Company to enhance the basic home design and to promote the custom aspect of
the Company's sales efforts.
Substantially all of the Company's construction work is performed by
subcontractors. The Company's 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 the Company's
subcontractors and suppliers generally are negotiated for each subdivision.
The Company competes with other homebuilders for qualified subcontractors, raw
materials and lots in the markets where it operates.
Construction time for the Company's homes depends on the weather,
availability of labor, materials and supplies, and other factors. The Company
typically completes the construction of a home within four months.
The Company does not maintain significant inventories of construction
materials, except for work in process materials for homes under construction.
Typically, the construction materials used in the Company's operations are
readily available from numerous sources. The Company does not have any long-
term contracts with suppliers of its building materials. In recent years, the
Company has not experienced any significant delays in construction due to
shortages of materials or labor.
MARKETING AND SALES
The Company markets and sells its homes through commissioned employees and
independent real estate brokers. Home sales are typically conducted from sales
offices located in furnished model homes used in each subdivision. At March
31, 1997, the Company owned 313 model homes. These model homes generally are
not offered for sale until the completion of the respective subdivision. The
Company's sales personnel assist prospective homebuyers by providing them with
floor plans, price information, tours of model homes and the selection of
options and other custom features. Such personnel are trained by the Company
and kept informed as to the availability of financing, construction schedules
and marketing and advertising plans.
S-16
<PAGE>
In addition to using model homes, the Company typically builds a limited
number of speculative homes in each subdivision to enhance its 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 homebuyers requiring a completed home within 60 days. A
majority of these speculative homes are sold while 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 the
Company has built in the market. Depending upon the seasonality of each of its
markets, the Company seeks to limit its speculative homes to approximately
five homes per subdivision. At March 31, 1997, the Company was operating in
272 subdivisions and averaged six speculative homes in each subdivision.
The Company advertises on a limited basis in newspapers and in real estate
broker, mortgage company and utility publications, brochures, newsletters and
billboards. To minimize advertising costs, the Company attempts to operate in
subdivisions in conspicuous locations that permit it to take advantage of
local traffic patterns. The Company also believes that model homes play a
significant role in its marketing efforts. Consequently, the Company expends
significant efforts in creating an attractive atmosphere in its model homes.
Sales of the Company's homes generally are made pursuant to a standard sales
contract which requires a down payment of 5% to 10% of the sales price. The
contract includes a financing contingency which permits the customer to cancel
in the event mortgage financing at prevailing interest rates is unobtainable
within a specified period, typically four to six weeks, and may include other
contingencies, such as the sale of an existing home. The Company includes a
home sale in its sales backlog upon execution of the sales contract and
receipt of the initial down payment. The Company does not recognize revenue
upon the sale of a home until the home is closed and title passes. The Company
estimates that the average period between the execution of a sales contract
for a home and closing is approximately three to five months for presold
homes.
CUSTOMER SERVICE AND QUALITY CONTROL
The Company's operating divisions are responsible for pre-closing, quality
control inspections and responding to customers' post-closing needs. The
Company believes that prompt and courteous response to homebuyers' needs
during and after construction reduces post-closing repair costs, enhances the
Company's reputation for quality and service, and ultimately leads to
significant repeat and referral business from the real estate community and
homebuyers. The Company provides its homebuyers with a limited one-year
warranty on workmanship and building materials. The subcontractors who perform
most of the actual construction in turn provide warranties of workmanship to
the Company, and generally are prepared to respond to the Company and
homeowner promptly upon request. In most cases, the Company supplements its
one-year warranty by purchasing a ten-year limited warranty from a third
party. To cover its potential warranty obligations, the Company accrues an
estimated amount for future warranty costs.
CUSTOMER FINANCING
In 1996, the Company formed D.R. Horton Mortgage Company, Ltd., a joint
venture with a third party, to provide mortgage financing services,
principally to purchasers of homes built and sold by the Company. D.R. Horton
Mortgage presently provides services in Dallas/Fort Worth, Austin, Houston and
Phoenix.
In its other markets, the Company does not provide mortgage financing but
works with a variety of mortgage lenders that make available to homebuyers a
range of conventional mortgage financing programs. By making information about
these programs available to prospective homebuyers and maintaining a
relationship with such mortgage lenders, the Company is 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 its wholly owned subsidiaries, DRH Title Company of Texas, Ltd. and
DRH Title Company of Florida, Inc., the Company serves as a title insurance
agent by providing title insurance policies and closing services to purchasers
of homes built and sold by the Company in the Dallas/Fort Worth, Austin and
Florida markets. The Company assumes no underwriting risk associated with
these title policies.
S-17
<PAGE>
EMPLOYEES
At March 31, 1997, the Company employed 1,152 persons, of whom 327 were
sales and marketing personnel, 390 were executive, administrative and clerical
personnel, 423 were involved in construction, and 12 worked in title
operations. Fewer than 10 of the Company's employees are covered by collective
bargaining agreements. Certain of the subcontractors which the Company engages
are represented by labor unions or are subject to collective bargaining
agreements. The Company believes that its relations with its employees and
subcontractors are good.
S-18
<PAGE>
DESCRIPTION OF NOTES
The following description of the particular terms of the Notes supplements
and, to the extent inconsistent therewith, replaces the description of the
general terms of the Debt Securities set forth under the heading "Descriptions
of Debt Securities" in the accompanying Prospectus, to which description
reference is hereby made. The Notes will be issued under an Indenture dated as
of June 9, 1997, among the Company, the Guarantors and American Stock Transfer
and Trust Company, as trustee (the "Trustee"), as supplemented by a First
Supplemental Indenture (the "Supplemental Indenture") thereto (such Indenture
and Supplemental Indenture, collectively, the "Indenture"). The following is a
summary of the material terms and provisions of the Notes. The terms of the
Notes include those set forth in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), as in effect on the date of the Indenture. The Notes
are subject to all such terms, and prospective purchasers of the Notes are
referred to the Indenture and the Trust Indenture Act for a statement of such
terms. As used in this "Description of Notes," the term "Company" refers to
D.R. Horton, Inc. and not any of its Subsidiaries.
Definitions of certain terms are set forth under "--Certain Definitions" and
throughout this description. Capitalized terms that are used but not otherwise
defined herein have the meanings assigned to them in the Indenture, and those
definitions are incorporated herein by reference.
GENERAL
The Notes will bear interest from the date the Notes are first issued under
the Indenture at the rate per annum shown on the cover page of this
Prospectus, payable semiannually on June 15 and December 15 of each year,
commencing December 15, 1997, to holders of record at the close of business on
June 1 or December 1, as the case may be, immediately preceding each such
interest payment date. The Notes will mature on June 15, 2004, and will be
issued in denominations of $1,000 and integral multiples thereof.
The Notes will be general unsecured obligations of the Company limited to an
aggregate principal amount of $250 million, of which an aggregate principal
amount of $150 million will be issued in the Offering. Additional Notes
("Additional Notes") of up to $100 million aggregate amount may be issued in
one or more series from time to time subject to the limitations set forth
under "Certain Covenants--Limitations on Indebtedness." The Notes will be
guaranteed by each of the Guarantors pursuant to the guarantees (the
"Guarantees") described below. The Notes will be general unsecured obligations
of the Company and rank senior in right of payment to all future Indebtedness
of the Company that is, by its terms, expressly subordinated in right of
payment to the Notes and pari passu in right of payment with all existing and
future unsecured Indebtedness of the Company that is not so subordinated. The
Guarantees will be general unsecured obligations of the Guarantors and will
rank senior in right of payment to all future Indebtedness of the Guarantors
that is, by its terms, expressly subordinated in right of payment to the
Guarantees and will rank pari passu in right of payment with all existing and
future unsecured Indebtedness of the Guarantors that is not so subordinated.
Secured creditors of the Company and the Guarantors will have a claim on the
assets which secure the obligations of the Company and the Guarantors to such
creditors prior to claims of holders of the Notes against those assets. At
March 31, 1997, as adjusted to give effect to the Offering, the Company and
the Guarantors would have had approximately $321.5 million (including the
Notes) of Indebtedness outstanding, of which $8.7 million would have been
secured Indebtedness and none of which would have been subordinated to the
Notes.
REDEMPTION
Except as set forth in the following sentence, the Notes will not be
redeemable. The Company may redeem Notes, at any time prior to June 15, 2000,
with the net cash proceeds of one or more Public Equity Offerings by the
Company, at a redemption price equal to 108.375% of the principal amount of
such Notes, plus accrued and unpaid interest, if any, to the date of
redemption; provided, however, that after each such redemption not less
S-19
<PAGE>
than $97,500,000 principal amount of Notes (including any Additional Notes but
excluding any Notes held by the Company or any of its Affiliates) remains
outstanding. Notice of any such redemption must be given within 60 days after
the date of the closing of the relevant Public Equity Offering.
Selection of the Notes or portions thereof for redemption pursuant to the
foregoing shall be made by the Trustee only on a pro rata basis or on as
nearly a pro rata basis as is practicable (subject to the procedures of The
Depository Trust Company), unless such method is otherwise prohibited. Notice
of redemption will be mailed at least 30 days but not more than 60 days before
the redemption date to each holder whose Notes are to be redeemed at the
registered address of such holder. On and after the redemption date, interest
ceases to accrue on the Notes or portions thereof called for redemption.
There will be no sinking fund for the Notes.
THE GUARANTEES
Each of the Guarantors will (so long as it remains a Restricted Subsidiary)
unconditionally guarantee on a joint and several basis all of the Company's
obligations under the Notes, including its obligations to pay principal,
premium, if any, and interest with respect to the Notes. The Guarantees will
be general unsecured obligations of the Guarantors and will rank pari passu
with all existing and future unsecured Indebtedness of the Guarantors that is
not, by its terms, expressly subordinated in right of payment to the
Guarantees. The obligations of each Guarantor are limited to the maximum
amount which, after giving effect to all other contingent and fixed
liabilities of such Guarantor and after giving effect to any collections from
or payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, will result in the obligations
of such Guarantor under its Guarantee not constituting a fraudulent conveyance
or fraudulent transfer under federal or state law. Each Guarantor that makes a
payment or distribution under a Guarantee shall be entitled to a contribution
from each other Guarantor in an amount pro rata, based on the net assets of
each Guarantor, determined in accordance with GAAP. Except as provided in
"Certain Covenants" below, the Company is not restricted from selling or
otherwise disposing of any of the Guarantors.
The Indenture will require that each existing and future Restricted
Subsidiary be a Guarantor. The Company will be permitted to cause any
Unrestricted Subsidiary to be a Guarantor.
The Indenture will provide that if all or substantially all of the assets of
any Guarantor or all of the Capital Stock of any Guarantor is sold (including
by consolidation, merger, issuance or otherwise) or disposed of (including by
liquidation, dissolution or otherwise) by the Company or any of its
Subsidiaries, or, unless the Company elects otherwise, if any Guarantor is
designated an Unrestricted Subsidiary in accordance with the terms of the
Indenture, then such Guarantor (in the event of a sale or other disposition of
all of the Capital Stock of such Guarantor or a designation as an Unrestricted
Subsidiary) or the Person acquiring such assets (in the event of a sale or
other disposition of all or substantially all of the assets of such Guarantor)
shall be deemed automatically and unconditionally released and discharged from
any of its obligations under the Indenture without any further action on the
part of the Trustee or any holder of the Notes. An Unrestricted Subsidiary
that is a Guarantor shall be deemed automatically and unconditionally released
and discharged from all obligations under its Guarantee upon notice from the
Company to the Trustee to such effect, without any further action required on
the part of the Trustee or any Holder.
A sale of assets or Capital Stock of a Guarantor may constitute an Asset
Disposition subject to the "Limitations on Disposition of Assets" covenant.
CERTAIN COVENANTS
The following is a summary of certain covenants that will be contained in
the Indenture. Such covenants will be applicable (unless waived or amended as
permitted by the Indenture) so long as any of the Notes are outstanding or
until the Notes are defeased pursuant to provisions described under
"Defeasance of Indenture."
Repurchase of Notes upon Change of Control. In the event that there shall
occur a Change of Control, each holder of Notes shall have the right, at such
holder's option, to require the Company to purchase all or any
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part of such holder's Notes on a date (the "Repurchase Date") that is no later
than 60 days after notice of the Change of Control, at 101% of the principal
amount thereof plus accrued interest to the Repurchase Date.
On or before the thirtieth day after any Change of Control, the Company is
obligated to mail, or cause to be mailed, to all holders of record of Notes a
notice regarding the Change of Control and the repurchase right. The notice
shall state the Repurchase Date, the date by which the repurchase right must
be exercised, the price for the Notes and the procedure which the holder must
follow to exercise such right. Substantially simultaneously with mailing of
the notice, the Company shall cause a copy of such notice to be published in a
newspaper of general circulation in the Borough of Manhattan, The City of New
York. To exercise such right, the holder of such Note must deliver at least
ten days prior to the Repurchase Date written notice to the Company (or an
agent designated by the Company for such purpose) of the holder's exercise of
such right, together with the Note with respect to which the right is being
exercised, duly endorsed for transfer; provided, however, that if mandated by
applicable law, a holder may be permitted to deliver such written notice
nearer to the Repurchase Date than may be specified by the Company.
The Company will comply with applicable law, including Section 14(e) of the
Exchange Act and Rule 14e-1 thereunder, if applicable, if the Company is
required to give a notice of right of repurchase as a result of a Change of
Control.
The "Change of Control" definition, and the other components of this
covenant, generally mean that the Company will be obligated to purchase Notes
from tendering holders if control of the Company (whether through stock
ownership, control of all or substantially all of the Company's assets or
representation on the Board of Directors) is acquired by Persons other than
Donald R. Horton and certain related persons.
With respect to any disposition of assets, the phrase "all or substantially
all" as used in the Indenture (including as set forth under "--Limitations on
Mergers, Consolidations and Sales of Assets" below) varies according to the
facts and circumstances of the subject transaction, has no clearly established
meaning under New York law (which governs the Indenture) and is subject to
judicial interpretation. Accordingly, in certain circumstances there may be a
degree of uncertainty in ascertaining whether a particular transaction would
involve a disposition of "all or substantially all" of the assets of the
Company, and therefore it may be unclear as to whether a Change of Control has
occurred and whether the holders have the right to require the Company to
repurchase Notes.
None of the provisions relating to a repurchase upon a Change of Control is
waivable by the Board of Directors of the Company. The Company could, in the
future, enter into certain transactions, including certain recapitalizations
of the Company, that would not constitute a Change of Control under the
Indenture, but would increase the amount of Indebtedness outstanding at such
time.
The Indenture will require the payment of money for Notes or portions
thereof validly tendered to and accepted for payment by the Company pursuant
to a Change of Control offer. The Company's credit agreements may also be
accelerated in the event of a Change of Control. If a Change of Control were
to occur, there can be no assurance that the Company would have sufficient
funds to pay the purchase price for all Notes and amounts due under other
Indebtedness that the Company is required to repurchase or repay. After giving
effect to this Offering and the application of the estimated net proceeds
therefrom as set forth under "Use of Proceeds", the Company would not have
sufficient funds available to purchase all of the outstanding Notes pursuant
to a Change of Control offer. In the event that the Company were required to
purchase outstanding Notes pursuant to a Change of Control offer, the Company
expects that it would need to seek third-party financing to the extent it does
not have available funds to meet its purchase obligations. However, there can
be no assurance that the Company would be able to obtain such financing.
Failure by the Company to purchase the Notes when required upon a Change of
Control will result in an Event of Default with respect to the Notes.
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These provisions could have the effect of deterring hostile or friendly
acquisitions of the Company where the Person attempting the acquisition views
itself as unable to finance the purchase of the principal amount of Notes
which may be tendered to the Company upon the occurrence of a Change of
Control.
Limitations on Indebtedness. The Indenture will provide that the Company
will not, and will not cause or permit any Restricted Subsidiary, directly or
indirectly, to, create, incur, assume, become liable for or guarantee the
payment of (collectively, an "incurrence") any Indebtedness (including
Acquired Indebtedness) unless, after giving effect thereto and the application
of the proceeds therefrom, the Consolidated Fixed Charge Coverage Ratio on the
date thereof would be at least 2.0 to 1.0.
Notwithstanding the foregoing, the provisions of the Indenture will not
prevent the incurrence of: (i) Permitted Indebtedness, (ii) Refinancing
Indebtedness, (iii) Non-Recourse Indebtedness, (iv) any Guarantee of
Indebtedness of the Company represented by the Notes and (v) any guarantee of
Indebtedness incurred under Credit Facilities in compliance with the
Indenture.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness may be incurred through the first paragraph of this
covenant or by meeting the criteria of one or more of the types of
Indebtedness described in the second paragraph of this covenant (or the
definitions of the terms used therein), the Company, in its sole discretion,
(i) may classify such item of Indebtedness under and comply with either of
such paragraphs (or any of such definitions), as applicable, (ii) may classify
and divide such item of Indebtedness into more than one of such paragraphs (or
definitions), as applicable, and (iii) may elect to comply with such
paragraphs (or definitions), as applicable, in any order.
The Company will not, and will not cause or permit any Guarantor to,
directly or indirectly, in any event incur any Indebtedness that purports to
be by its terms (or by the terms of any agreement governing such Indebtedness)
subordinated to any other Indebtedness of the Company or of such Guarantor, as
the case may be, unless such Indebtedness is also by its terms (or by the
terms of any agreement governing such Indebtedness) made expressly
subordinated to the Notes or the Guarantee of such Guarantor, as the case may
be, to the same extent and in the same manner as such Indebtedness is
subordinated to such other Indebtedness of the Company or such Guarantor, as
the case may be.
Limitations on Restricted Payments. The Indenture will provide that the
Company will not, and will not cause or permit any Restricted Subsidiary to,
directly or indirectly, make any Restricted Payment unless:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of or immediately after giving effect to such Restricted
Payment;
(ii) immediately after giving effect to such Restricted Payment, the
Company could incur at least $1.00 of Indebtedness pursuant to the first
paragraph of the "Limitations on Indebtedness" covenant; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments (including the Fair Market
Value of any non-cash Restricted Payment) declared or made after the Issue
Date does not exceed the sum of (a) 50% of the Consolidated Net Income of
the Company on a cumulative basis during the period (taken as one
accounting period) from and including the fiscal quarter of the Company in
which the Issue Date occurs and ending on the last day of the Company's
fiscal quarter immediately preceding the date of such Restricted Payment
(or in the event such Consolidated Net Income shall be a deficit, minus
100% of such deficit), plus (b) 100% of the aggregate net cash proceeds of
and the fair market value of Property received by the Company from (1) any
capital contribution to the Company after the Issue Date or any issue or
sale after the Issue Date of Qualified Stock (other than to any Subsidiary
of the Company) and (2) the issue or sale after the Issue Date of any
Indebtedness or other securities of the Company convertible into or
exercisable for Qualified Stock of the Company that have been so converted
or exercised, as the case may be, plus (c) in the case of the disposition
or repayment of any Investment constituting a Restricted Payment made after
the Issue Date, an amount (to the extent not included in the calculation of
the Consolidated Net Income referred to in (a)) equal to the lesser of (x)
the return of capital with respect to such Investment (including by
dividend, distribution or sale of Capital Stock) and (y) the
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amount of such Investment that was treated as a Restricted Payment, in
either case, less the cost of the disposition or repayment of such
Investment (to the extent not included in the calculation of the
Consolidated Net Income referred to in (a)), plus (d) with respect to any
Unrestricted Subsidiary that is redesignated as a Restricted Subsidiary
after the Issue Date in accordance with the definition of Unrestricted
Subsidiary (so long as the designation of such Subsidiary as an
Unrestricted Subsidiary was treated as a Restricted Payment made after the
Issue Date and only to the extent not included in the calculation of the
Consolidated Net Income referred to in (a)), an amount equal to the lesser
of (x) the proportionate interest of the Company or a Restricted Subsidiary
in an amount equal to the excess of (I) the total assets of such
Subsidiary, valued on an aggregate basis at the lesser of book value and
Fair Market Value thereof, over (II) the total liabilities of such
Subsidiary, determined in accordance with GAAP, and (y) the Designation
Amount at the time of such Subsidiary's designation as an Unrestricted
Subsidiary, plus (e) $20 million.
The foregoing clauses (ii) and (iii) will not prohibit: (A) the payment of
any dividend within 60 days of its declaration if such dividend could have
been made on the date of its declaration without violation of the provisions
of the Indenture; (B) the repurchase, redemption or retirement of any shares
of Capital Stock of the Company in exchange for, or out of the net proceeds of
the substantially concurrent sale (other than to a Subsidiary of the Company)
of, other shares of Qualified Stock; and (C) the purchase, redemption or other
acquisition, cancellation or retirement for value of Capital Stock, or
options, warrants, equity appreciation rights or other rights to purchase or
acquire Capital Stock, of the Company or any Subsidiary held by officers or
employees or former officers or employees of the Company or any Subsidiary (or
their estates or beneficiaries under their estates) not to exceed $10 million
in the aggregate since the Issue Date; provided, however, that each Restricted
Payment described in clauses (A) and (B) of this sentence shall be taken into
account for purposes of computing the aggregate amount of all Restricted
Payments pursuant to clause (iii) of the immediately preceding paragraph.
For purposes of determining the aggregate and permitted amounts of
Restricted Payments made, the amount of any guarantee of any Investment in any
Person that was initially treated as a Restricted Payment and which was
subsequently terminated or expired, net of any amounts paid by the Company or
any Restricted Subsidiary in respect of such guarantee, shall be deducted.
In determining the "fair market value of Property" for purposes of clause
(iii) of the first paragraph of this covenant, Property other than cash, Cash
Equivalents and Marketable Securities shall be deemed to be equal in value to
the "equity value" of the Capital Stock or other securities issued in exchange
therefor. The "equity value" of such Capital Stock or other securities shall
be equal to (i) the number of shares of Common Equity issued in the
transaction (or issuable upon conversion or exercise of the Capital Stock or
other securities issued in the transaction) multiplied by the closing sale
price of the Common Equity on its principal market on the date of the
transaction (less, in the case of Capital Stock or other securities which
require the payment of consideration at the time of conversion or exercise,
the aggregate consideration payable thereupon) or (ii) if the Common Equity is
not then traded on the New York Stock Exchange, American Stock Exchange or
Nasdaq National Market, or if the Capital Stock or other securities issued in
the transaction does not consist of Common Equity (or Capital Stock or other
securities convertible into or exercisable for Common Equity), the value of
such Capital Stock or other securities as determined by a nationally
recognized investment banking firm retained by the Board of Directors of the
Company.
Limitations on Transactions with Affiliates. The Indenture will provide that
the Company will not, and will not cause or permit any Restricted Subsidiary
to, make any loan, advance, guarantee or capital contribution to, or for the
benefit of, or sell, lease, transfer or otherwise dispose of any property or
assets to, or for the benefit of, or purchase or lease any property or assets
from, or enter into or amend any contract, agreement or understanding with, or
for the benefit of, any Affiliate of the Company or any Affiliate of any of
the Company's Subsidiaries or any holder of 10% or more of the Common Equity
of the Company (including any Affiliates of such holders), in a single
transaction or series of related transactions (each, an "Affiliate
Transaction"), except for any Affiliate Transaction the terms of which are at
least as favorable as the terms which could be obtained by the Company or such
Restricted Subsidiary, as the case may be, in a comparable transaction made on
an arm's
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length basis with Persons who are not such a holder, an Affiliate of such a
holder or an Affiliate of the Company or any of the Company's Subsidiaries.
In addition, the Company will not, and will not cause or permit any
Restricted Subsidiary to, enter into an Affiliate Transaction unless (i) with
respect to any such Affiliate Transaction involving or having a value of more
than $5 million, the Company shall have (x) obtained the approval of a
majority of the Board of Directors of the Company and (y) either obtained the
approval of a majority of the Company's disinterested directors or obtained an
opinion of a qualified independent financial advisor to the effect that such
Affiliate Transaction is fair to the Company or such Restricted Subsidiary, as
the case may be, from a financial point of view and (ii) with respect to any
such Affiliate Transaction involving or having a value of more than $25
million, the Company shall have (x) obtained the approval of a majority of the
Board of Directors of the Company and (y) delivered to the Trustee an opinion
of a qualified independent financial advisor to the effect that such Affiliate
Transaction is fair to the Company or such Restricted Subsidiary, as the case
may be, from a financial point of view.
The Indenture will also provide that notwithstanding the foregoing, an
Affiliate Transaction will not include (i) any contract, agreement or
understanding with, or for the benefit of, or plan for the benefit of
employees of the Company or its Subsidiaries generally (in their capacities as
such) that has been approved by the Board of Directors of the Company, (ii)
Capital Stock issuances to directors, officers and employees of the Company or
its Subsidiaries pursuant to plans approved by the stockholders of the
Company, (iii) any Restricted Payment otherwise permitted under the
"Limitations on Restricted Payments" covenant, (iv) any transaction between or
among the Company and one or more Restricted Subsidiaries or between or among
Restricted Subsidiaries (provided, however, no such transaction shall involve
any other Affiliate of the Company (other than an Unrestricted Subsidiary to
the extent the applicable amount constitutes a Restricted Payment permitted by
the Indenture)) and (v) any transaction between one or more Restricted
Subsidiaries and one or more Unrestricted Subsidiaries where all of the
payments to, or other benefits conferred upon, such Unrestricted Subsidiaries
are substantially contemporaneously dividended, or otherwise distributed or
transferred without charge, to the Company or a Restricted Subsidiary.
Limitations on Dispositions of Assets. The Indenture will provide that the
Company will not, and will not cause or permit any Restricted Subsidiary to,
make any Asset Disposition unless (x) the Company (or such Restricted
Subsidiary, as the case may be) receives consideration at the time of such
Asset Disposition at least equal to the Fair Market Value thereof, and (y) not
less than 70% of the consideration received by the Company (or such Restricted
Subsidiary, as the case may be) is in the form of cash, Cash Equivalents and
Marketable Securities. The amount of any Indebtedness (other than any
subordinated Indebtedness) of the Company or any Restricted Subsidiary that is
actually assumed by the transferee in such Asset Disposition shall be deemed
to be consideration required by clause (y) above for purposes of determining
the percentage of such consideration received by the Company or the Restricted
Subsidiaries. The Net Cash Proceeds of an Asset Disposition shall, within one
year, at the Company's election, (a) be used by the Company or a Restricted
Subsidiary in the business of the construction and sale of homes conducted by
the Company and the Restricted Subsidiaries or any other business of the
Company or a Restricted Subsidiary existing at the time of such Asset
Disposition or (b) to the extent not so used, be applied to make a Net Cash
Proceeds Offer to purchase Notes and, if the Company or a Restricted
Subsidiary elects or is required to do so, repay any other unsubordinated
Indebtedness (on a pro rata basis if the amount available for such repurchase
and repayment is less than the aggregate amount of (i) the principal amount of
the Notes tendered in such Net Cash Proceeds Offer and (ii) the lesser of the
principal amount, or accreted value, of such other unsubordinated
Indebtedness, plus, in each case accrued interest to the date of repurchase or
repayment) at 100% of the principal amount or accreted value thereof, as the
case may be, plus accrued interest to the date of repurchase or repayment.
Notwithstanding the foregoing, (A) the Company will not be required to apply
such Net Cash Proceeds to the repurchase of Notes in accordance with clause
(b) of the preceding sentence except to the extent that such Net Cash
Proceeds, together with the aggregate Net Cash Proceeds of prior Asset
Dispositions (other than those so used) which have not been applied in
accordance with this provision and as to which no prior Net Cash Proceeds
Offer shall have been made, exceed 5% of Consolidated Tangible Assets and (B)
in connection with any Asset Disposition, the Company and the
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Restricted Subsidiaries will not be required to comply with the requirements
of clause (y) of the first sentence of this paragraph to the extent that the
aggregate non-cash consideration received in connection with such Asset
Disposition, together with the sum of all non-cash consideration received in
connection with all prior Asset Dispositions that has not yet been converted
into cash, does not exceed 5% of Consolidated Tangible Assets; provided,
however, that when any non-cash consideration is converted into cash, such
cash shall constitute Net Cash Proceeds and be subject to the preceding
sentence.
Limitation on Issuance of Preferred Stock of Restricted Subsidiaries. The
Indenture will provide that the Company will not permit any Restricted
Subsidiary to issue any Preferred Stock (except to the Company or a Restricted
Subsidiary) or permit any Person (other than the Company or a Restricted
Subsidiary) to own any Preferred Stock of any Restricted Subsidiary.
Limitations on Liens. The Indenture will provide that the Company will not,
and will not cause or permit any Restricted Subsidiary to, create, incur,
assume or suffer to exist any Liens, other than Permitted Liens, on any of its
Property, or on any shares of Capital Stock or Indebtedness of any Restricted
Subsidiary, unless contemporaneously therewith or prior thereto all payments
due under the Indenture and the Notes are secured on an equal and ratable
basis with the obligation or liability so secured until such time as such
obligation or liability is no longer secured by a Lien.
Limitations on Restrictions Affecting Restricted Subsidiaries. The Indenture
will provide that the Company will not, and will not cause or permit any
Restricted Subsidiary to, create, assume or otherwise cause or suffer to exist
or become effective any consensual encumbrance or restriction (other than
encumbrances or restrictions imposed by law or by judicial or regulatory
action or by provisions of leases and other agreements that restrict the
assignability thereof) on the ability of any Restricted Subsidiary to (i) pay
dividends or make any other distributions on its Capital Stock or any other
interest or participation in, or measured by, its profits, owned by the
Company or any other Restricted Subsidiary, or pay interest on or principal of
any Indebtedness owed to the Company or any other Restricted Subsidiary, (ii)
make loans or advances to the Company or any other Restricted Subsidiary, or
(iii) transfer any of its properties or assets to the Company or any other
Restricted Subsidiary, except for (a) encumbrances or restrictions existing
under or by reason of applicable law, (b) covenants or restrictions contained
in Indebtedness in effect on the date of the Indenture as such covenants or
restrictions are in effect on such date, (c) any restrictions or encumbrances
arising under Acquired Indebtedness; provided, that such encumbrance or
restriction applies only to either the assets that were subject to the
restriction or encumbrance at the time of the acquisition or the obligor on
such Indebtedness and its Subsidiaries, (d) any restrictions or encumbrances
arising in connection with Refinancing Indebtedness; provided, however, that
any restrictions and encumbrances of the type described in this clause (d)
that arise under such Refinancing Indebtedness shall not be materially more
restrictive than those under the agreement creating or evidencing the
Indebtedness being refunded, refinanced, replaced or extended, (e) any
Permitted Lien, or any other agreement restricting the sale or other
disposition of property, securing Indebtedness permitted by the Indenture if
such Permitted Lien or agreement does not expressly restrict the ability of a
Subsidiary of the Company to pay dividends or make or repay loans or advances
prior to default thereunder, (f) reasonable and customary borrowing base
covenants set forth in agreements evidencing Indebtedness otherwise permitted
by the Indenture, (g) customary provisions restricting subletting or
assignment of any lease governing a leasehold interest of the Company or any
Restricted Subsidiary, and (h) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition.
Limitations on Mergers, Consolidations and Sales of Assets. The Indenture
will provide that neither the Company nor any Guarantor will consolidate or
merge with or into, or sell, lease, convey or otherwise dispose of all or
substantially all of its assets (including, without limitation, by way of
liquidation or dissolution), or assign any of its obligations under the Notes,
the Guarantees or the Indenture (as an entirety or substantially in one
transaction or in a series of related transactions), to any Person (in each
case other than in a transaction in which the Company or a Restricted
Subsidiary is the survivor of a consolidation or merger, or the transferee in
a sale, lease, conveyance or other disposition) unless: (i) the Person formed
by or surviving such consolidation or
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merger (if other than the Company or the Guarantor, as the case may be), or to
which such sale, lease, conveyance or other disposition or assignment will be
made (collectively, the "Successor"), is a corporation or other legal entity
organized and existing under the laws of the United States or any state
thereof or the District of Columbia, and the Successor assumes by supplemental
indenture in a form reasonably satisfactory to the Trustee all of the
obligations of the Company or the Guarantor, as the case may be, under the
Notes or a Guarantee, as the case may be, and the Indenture, (ii) immediately
after giving effect to such transaction, no Default or Event of Default has
occurred and is continuing, (iii) immediately after giving effect to such
transaction and the use of any net proceeds therefrom, on a pro forma basis,
the Consolidated Net Worth of the Company or the Successor (in the case of a
transaction involving the Company), as the case may be, would be at least
equal to the Consolidated Net Worth of the Company immediately prior to such
transaction (exclusive of any adjustments to Consolidated Net Worth
attributable to transaction costs) less any amount treated as a Restricted
Payment in connection with such transaction in accordance with the Indenture
and (iv) immediately after giving effect to such transaction, the Company
could incur at least $1.00 of Indebtedness pursuant to the first paragraph of
the "Limitation on Indebtedness" covenant. The foregoing provisions shall not
apply to (i) a transaction involving the sale or disposition of Capital Stock
of a Guarantor, or the consolidation or merger of a Guarantor, or the sale,
lease, conveyance or other disposition of all or substantially all of the
assets of a Guarantor, that in any such case results in such Guarantor being
released from its Guarantee as provided under "The Guarantees" above or (ii) a
transaction the purpose of which is to change the state of incorporation of
the Company or any Guarantor.
Reports to Holders of Notes. The Company shall file with the Commission the
annual reports and the information, documents and other reports required to be
filed pursuant to Section 13 or 15(d) of the Exchange Act. The Company shall
file with the Trustee and mail to each holder of record of Notes such reports,
information and documents within 15 days after it files them with the
Commission. In the event that the Company is no longer subject to these
periodic requirements of the Exchange Act, it will nonetheless continue to
file reports with the Commission and the Trustee and mail such reports to each
holder of Notes as if it were subject to such reporting requirements.
Regardless of whether the Company is required to furnish such reports to its
stockholders pursuant to the Exchange Act, the Company will cause its
consolidated financial statements and a "Management's Discussion and Analysis
of Results of Operations and Financial Condition" written report, similar to
those that would have been required to appear in annual or quarterly reports,
to be delivered to holders of Notes.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(i) the failure by the Company to pay interest on any Note when the same
becomes due and payable and the continuance of any such failure for a
period of 30 days;
(ii) the failure by the Company to pay the principal or premium of any
Note when the same becomes due and payable at maturity, upon acceleration
or otherwise;
(iii) the failure by the Company or any Restricted Subsidiary to comply
with any of its agreements or covenants in, or provisions of, the Notes,
the Guarantees or the Indenture and such failure continues for the period
and after the notice specified below (except in the case of a default with
respect to the "Change of Control" and "Limitations on Mergers,
Consolidations and Sales of Assets" covenants, which will constitute Events
of Default with notice but without passage of time);
(iv) the acceleration of any Indebtedness (other than Non-Recourse
Indebtedness) of the Company or any Restricted Subsidiary that has an
outstanding principal amount of $20 million or more, individually or in the
aggregate, and such acceleration does not cease to exist, or such
Indebtedness is not satisfied, in either case within 5 days after such
acceleration;
(v) the failure by the Company or any Restricted Subsidiary to make any
principal or interest payment in an amount of $20 million or more,
individually or in the aggregate, in respect of Indebtedness (other
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than Non-Recourse Indebtedness) of the Company or any Restricted Subsidiary
within 5 days of such principal or interest becoming due and payable (after
giving effect to any applicable grace period set forth in the documents
governing such Indebtedness);
(vi) a final judgment or judgments in an amount of $20 million or more,
individually or in the aggregate, for the payment of money having been
entered by a court or courts of competent jurisdiction against the Company
or any of its Restricted Subsidiaries and such judgment or judgments is not
satisfied, stayed, annulled or rescinded within 60 days of being entered;
(vii) the Company or any Restricted Subsidiary that is a Significant
Subsidiary pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in an
involuntary case,
(C) consents to the appointment of a Custodian of it or for all or
substantially all of its property, or
(D) makes a general assignment for the benefit of its creditors;
(viii) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) is for relief against the Company or any Restricted Subsidiary
that is a Significant Subsidiary as debtor in an involuntary case,
(B) appoints a Custodian of the Company or any Restricted Subsidiary
that is a Significant Subsidiary or a Custodian for all or
substantially all of the property of the Company or any Restricted
Subsidiary that is a Significant Subsidiary, or
(C) orders the liquidation of the Company or any Restricted
Subsidiary that is a Significant Subsidiary,
and the order or decree remains unstayed and in effect for 60 days; or
(ix) any Guarantee of a Guarantor which is a Significant Subsidiary
ceases to be in full force and effect (other than in accordance with the
terms of such Guarantee and the Indenture) or is declared null and void and
unenforceable or found to be invalid or any Guarantor denies its liability
under its Guarantee (other than by reason of release of a Guarantor from
its Guarantee in accordance with the terms of the Indenture and the
Guarantee).
A Default as described in sub-clause (iii) above will not be deemed an Event
of Default until the Trustee notifies the Company, or the holders of at least
25 percent in principal amount of the then outstanding Notes notify the
Company and the Trustee, of the Default and (except in the case of a default
with respect to the "Change of Control" and "Limitations on Mergers,
Consolidations and Sales of Assets" covenants) the Company does not cure the
Default within 60 days after receipt of the notice. The notice must specify
the Default, demand that it be remedied and state that the notice is a "Notice
of Default." If such a Default is cured within such time period, it ceases.
If an Event of Default (other than an Event of Default with respect to the
Company resulting from sub-clauses (vii) or (viii) above), shall have occurred
and be continuing under the Indenture, the Trustee by notice to the Company,
or the holders of at least 25 percent in principal amount of the Notes then
outstanding by notice to the Company and the Trustee, may declare all Notes to
be due and payable immediately. Upon such declaration of acceleration, the
amounts due and payable on the Notes will be due and payable immediately. If
an Event of Default with respect to the Company specified in sub-clauses (vii)
or (viii) above occurs, such an amount will ipso facto become and be
immediately due and payable without any declaration, notice or other act on
the part of the Trustee and the Company or any holder. The holders of a
majority in principal amount of the Notes then outstanding by written notice
to the Trustee and the Company may waive any Default or Event of Default
(other than any Default or Event of Default in payment of principal or
interest) on the Notes under the Indenture. Holders of a majority in principal
amount of the then outstanding Notes may rescind an acceleration and its
consequence (except an acceleration due to nonpayment of principal or interest
on the Notes) if the rescission
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would not conflict with any judgment or decree and if all existing Events of
Default (other than the non-payment of accelerated principal) have been cured
or waived.
The holders may not enforce the provisions of the Indenture, the Notes or
the Guarantees except as provided in the Indenture. Subject to certain
limitations, holders of a majority in principal amount of the Notes then
outstanding may direct the Trustee in its exercise of any trust or power,
provided, however, that such direction does not conflict with the terms of the
Indenture. The Trustee may withhold from the holders notice of any continuing
Default or Event of Default (except any Default or Event of Default in payment
of principal or interest on the Notes or that resulted from the failure to
comply with the covenant entitled "Change of Control") if the Trustee
determines that withholding such notice is in the holders' interest.
The Company is required to deliver to the Trustee an annual statement
regarding compliance with the Indenture, and include in such statement, if any
Officer of the Company is aware of any Default or Event of Default, a
statement specifying such Default or Event of Default and what action the
Company is taking or proposes to take with respect thereto. In addition, the
Company is required to deliver to the Trustee prompt written notice of the
occurrence of any Default or Event of Default.
DEFEASANCE OF INDENTURE
The Indenture will permit the Company and the Guarantors to terminate all of
their respective obligations under the Indenture, other than the obligation to
pay interest on and the principal of the Notes and certain other obligations,
at any time by (i) depositing in trust with the Trustee, under an irrevocable
trust agreement, money or US. government obligations in an amount sufficient
to pay principal of and interest on the Notes to their maturity, and (ii)
complying with certain other conditions, including delivery to the Trustee of
an opinion of counsel or a ruling received from the Internal Revenue Service
to the effect that holders will not recognize income, gain or loss for federal
income tax purposes as a result of the Company's exercise of such right and
will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case otherwise,
In addition, the Indenture will permit the Company and the Guarantors to
terminate all of their respective obligations under the Indenture (including
the obligations to pay interest on and the principal of the Notes and certain
other obligations), at any time by (i) depositing in trust with the Trustee,
under an irrevocable trust agreement, money or U.S. government obligations in
an amount sufficient to pay principal of and interest on the Notes to their
maturity, and (ii) complying with certain other conditions, including delivery
to the Trustee of an opinion of counsel or a ruling received from the Internal
Revenue Service to the effect that holders will not recognize income, gain or
loss for federal income tax purposes as a result of the Company's exercise of
such right and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been the case otherwise,
which opinion of counsel is based upon a change in the applicable federal tax
law since the date of the Indenture.
TRANSFER AND EXCHANGE
A holder will be able to transfer or exchange Notes only in accordance with
the provisions of the Indenture. The Registrar may require a holder, among
other things, to furnish appropriate endorsements and transfer documents, and
to pay any taxes and fees required by law or permitted by the Indenture.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture, the Notes or the Guarantees
may be amended or supplemented with the consent (which may include consents
obtained in connection with a tender offer or exchange offer for Notes) of the
holders of at least a majority in principal amount of the Notes then
outstanding, and any existing Default under, or compliance with any provision
of the Indenture may be waived (other than any continuing Default or Event of
Default in the payment of interest on or the principal of the Notes) with the
consent (which
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may include consents obtained in connection with a tender offer or exchange
offer for Notes) of the holders of a majority in principal amount of the Notes
then outstanding. Without the consent of any holder, the Company and the
Trustee may amend or supplement the Indenture, the Notes or the Guarantees to
cure any ambiguity, defect or inconsistency; to comply with the "Limitations
on Mergers, Consolidations and Sales of Assets" covenant set forth in the
Indenture; to provide for uncertificated Notes in addition to or in place of
certificated Notes; to make any change that does not adversely affect the
legal rights of any holder; or to delete a Guarantor which, in accordance with
the terms of the Indenture, ceases to be liable on its Guarantee.
Without the consent of each holder affected, the Company and the Trustee may
not (i) reduce the amount of Notes whose holders must consent to an amendment,
supplement or waiver, (ii) reduce the rate of or change the time for payment
of interest, including default interest, on any Note, (iii) reduce the
principal of or change the fixed maturity of any Note or alter the provisions
(including related definitions) with respect to redemptions described under
"Optional Redemption" or with respect to mandatory offers to repurchase Notes
described under "Limitations on Dispositions of Assets" or "Change of
Control", (iv) make any Note payable in money other than that stated in the
Note, (v) make any change in the "Waiver of Past Defaults and Compliance with
Indenture Provisions", "Rights of Holders to Receive Payment" or the "With
Consent of Holders" sections set forth in the Indenture, (vi) modify the
ranking or priority of the Notes or any Guarantee, (vii) release any Guarantor
from any of its obligations under its Guarantee or the Indenture otherwise
than in accordance with the Indenture, or (viii) waive a continuing Default or
Event of Default in the payment of principal of or interest on the Notes.
The right of any holder to participate in any consent required or sought
pursuant to any provision of the Indenture (and the obligation of the Company
to obtain any such consent otherwise required from such holder) may be subject
to the requirement that such holder shall have been the holder of record of
any Notes with respect to which such consent is required or sought as of a
date identified by the Trustee in a notice furnished to holders in accordance
with the terms of the Indenture.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest (as
defined in the Indenture), it must eliminate such conflict or resign. In the
ordinary course of its business, the Trustee provides, and may continue to
provide, service to the Company as transfer agent for the common stock of the
Company.
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs and is not cured, the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent person in similar circumstances
in the conduct of his own affairs. Subject to such provisions, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder, unless such holder shall have offered
to the Trustee security and indemnity satisfactory to the Trustee.
GOVERNING LAW
The Indenture, the Notes and the Guarantees will be governed by the laws of
the State of New York without giving effect to principles of conflict of laws.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
terms used in the Indenture.
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"Acquired Indebtedness" means (i) with respect to any Person that becomes a
Restricted Subsidiary (or is merged into the Company or any Restricted
Subsidiary) after the Issue Date, Indebtedness of such Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
(or is merged into the Company or any Restricted Subsidiary) that was not
incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary (or being merged into the Company or any Restricted
Subsidiary) and (ii) with respect to the Company or any Restricted Subsidiary,
any Indebtedness expressly assumed by the Company or any Restricted Subsidiary
in connection with the acquisition of any assets from another Person (other
than the Company or any Restricted Subsidiary), which Indebtedness was not
incurred by such other Person in connection with or in contemplation of such
acquisition. Indebtedness incurred in connection with or in contemplation of
any transaction described in clause (i) or (ii) of the preceding sentence
shall be deemed to have been incurred by the Company or a Restricted
Subsidiary, as the case may be, at the time such Person becomes a Restricted
Subsidiary (or is merged into the Company or any Restricted Subsidiary) in the
case of clause (i) or at the time of the acquisition of such assets in the
case of clause (ii), but shall not be deemed Acquired Indebtedness.
"Affiliate" means, when used with reference to a specified Person, any
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Person specified.
"Asset Acquisition" means (i) an Investment by the Company or any Restricted
Subsidiary in any other Person if, as a result of such Investment, such Person
shall become a Restricted Subsidiary or shall be consolidated or merged with
or into the Company or any Restricted Subsidiary or (ii) the acquisition by
the Company or any Restricted Subsidiary of the assets of any Person, which
constitute all or substantially all of the assets or of an operating unit or
line of business of such Person or which is otherwise outside the ordinary
course of business.
"Asset Disposition" means any sale, transfer, conveyance, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback or sale of shares of Capital Stock in any Subsidiary)
(each, a "transaction") by the Company or any Restricted Subsidiary to any
Person of any Property having a fair market value in any transaction or series
of related transactions of at least $1,000,000. The term "Asset Disposition"
shall not include (i) a transaction between the Company and any Restricted
Subsidiary or a transaction between Restricted Subsidiaries, (ii) a
transaction in the ordinary course of business, including, without limitation,
sales (directly or indirectly), dedications and other donations to
governmental authorities, leases and sales and leasebacks of (A) homes,
improved land and unimproved land and (B) real estate (including related
amenities and improvements), (iii) a transaction involving the sale of Capital
Stock of, or the disposition of assets in, an Unrestricted Subsidiary, (iv)
any exchange or swap of assets of the Company or any Restricted Subsidiary for
assets that (x) are to be used by the Company or any Restricted Subsidiary in
the ordinary course of its Real Estate Business and (y) have a Fair Market
Value not less than the Fair Market Value of the assets exchanged or swapped
or (v) any sale, transfer, conveyance, lease or other disposition of assets
and properties of the Company that is governed by the provisions relating to
"Limitations on Mergers, Consolidation and Sales of Assets."
"Attributable Debt" means, with respect to any Capitalized Lease
Obligations, the capitalized amount thereof determined in accordance with
GAAP.
"Bankruptcy Law" means title 11 of the United States Code, as amended, or
any similar federal or state law for the relief of debtors.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of or in
such Person's capital stock or other equity interests, and options, rights or
warrants to purchase such capital stock or other equity interests, whether now
outstanding or issued after the Issue Date, including, without limitation, all
Disqualified Stock and Preferred Stock.
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"Capitalized Lease Obligations" of any Person means the obligations of such
Person to pay rent or other amounts under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of such obligations will be the capitalized amount thereof determined
in accordance with GAAP.
"Cash Equivalents" means: (a) U.S. dollars; (b) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency
or instrumentality thereof having maturities of one year or less from the date
of acquisition; (c) certificates of deposit and eurodollar time deposits with
maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500 million; (d) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clauses (b) and (c) entered into with any financial institution meeting the
qualifications specified in clause (c) above; (e) commercial paper rated P-1,
A-1 or the equivalent thereof by Moody's Investors Service, Inc. or Standard &
Poor's Ratings Group, respectively, and in each case maturing within six
months after the date of acquisition; and (f) investments in money market
funds substantially all of the assets of which consist of securities described
in the foregoing clauses (a) through (e).
"Change of Control" means (i) any sale, lease or other transfer (in one
transaction or a series of transactions) of all or substantially all of the
consolidated assets of the Company and its Restricted Subsidiaries to any
Person (other than a Restricted Subsidiary); provided, however, that a
transaction where the holders of all classes of Common Equity of the Company
immediately prior to such transaction own, directly or indirectly, more than
50% of all classes of Common Equity of such Person immediately after such
transaction shall not be a Change of Control; (ii) a "person" or "group"
(within the meaning of Section 13(d) of the Exchange Act (other than (x) the
Company or (y) Donald R. Horton, Terrill J. Horton, or their respective wives,
children, grandchildren and other descendants, or any trust or other entity
formed or controlled by any of such individuals)) becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of Common Equity of
the Company representing more than 50% of the voting power of the Common
Equity of the Company; (iii) Continuing Directors cease to constitute at least
a majority of the Board of Directors of the Company; or (iv) the stockholders
of the Company approve any plan or proposal for the liquidation or dissolution
of the Company; provided, however, that a liquidation or dissolution of the
Company which is part of a transaction that does not constitute a Change of
Control under the proviso contained in clause (i) above shall not constitute a
Change of Control.
"Common Equity" of any Person means Capital Stock of such Person that is
generally entitled to (i) vote in the election of directors of such Person or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will
control the management or policies of such Person.
"Consolidated Adjusted Tangible Assets" of the Company as of any date means
the Consolidated Tangible Assets of the Company and the Restricted
Subsidiaries at the end of the fiscal quarter immediately preceding the date
less any assets securing any Non-Recourse Indebtedness, as determined in
accordance with GAAP.
"Consolidated Cash Flow Available for Fixed Charges" means, for any period,
on a consolidated basis for the Company and the Restricted Subsidiaries,
Consolidated Net Income for such period plus (each to the extent deducted in
calculating such Consolidated Net Income and determined in accordance with
GAAP) (a) the sum for such period, without duplication, of (i) income taxes,
(ii) Consolidated Interest Expense, (iii) depreciation and amortization
expenses and other non-cash charges to earnings and (iv) interest and
financing fees and expenses which were previously capitalized and which are
amortized to cost of sales, minus (b) all other non-cash items (other than the
receipt of notes receivable) increasing such Consolidated Net Income.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
determination date, the ratio of (x) Consolidated Cash Flow Available for
Fixed Charges for the prior four full fiscal quarters (the "Four Quarter
Period") for which financial results have been reported immediately preceding
the determination date (the "Transaction Date"), to (y) the aggregate
Consolidated Interest Incurred for the Four Quarter Period. For
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purposes of this definition, "Consolidated Cash Flow Available for Fixed
Charges" and "Consolidated Interest Incurred" shall be calculated after giving
effect on a pro forma basis for the period of such calculation to (i) the
incurrence or the repayment, repurchase, defeasance or other discharge or the
assumption by another Person that is not an Affiliate (collectively,
"repayment") of any Indebtedness of the Company or any Restricted Subsidiary
(and the application of the proceeds thereof) giving rise to the need to make
such calculation, and any incurrence or repayment of other Indebtedness (and
the application of the proceeds thereof), at any time on or after the first
day of the Four Quarter Period and on or prior to the Transaction Date, as if
such incurrence or repayment, as the case may be (and the application of the
proceeds thereof), occurred on the first day of the Four Quarter Period,
except that Indebtedness under revolving credit facilities shall be deemed to
be the average daily balance of such Indebtedness during the Four Quarter
Period (as reduced on such pro forma basis by the application of any proceeds
of the incurrence of Indebtedness giving rise to the need to make such
calculation); (ii) any Asset Disposition or Asset Acquisition (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company or any Restricted Subsidiary (including
any Person that becomes a Restricted Subsidiary as a result of any such Asset
Acquisition) incurring Acquired Indebtedness at any time on or after the first
day of the Four Quarter Period and on or prior to the Transaction Date), as if
such Asset Disposition or Asset Acquisition (including the incurrence or
repayment of any such Indebtedness) and the inclusion, notwithstanding clause
(ii) of the definition of "Consolidated Net Income," of any Consolidated Cash
Flow Available for Fixed Charges associated with such Asset Acquisition as if
it occurred on the first day of the Four Quarter Period; provided, however,
that the Consolidated Cash Flow Available for Fixed Charges associated with
any Asset Acquisition shall not be included to the extent the net income so
associated would be excluded pursuant to the definition of "Consolidated Net
Income," other than clause (ii) thereof, as if it applied to the Person or
assets involved before they were acquired; and (iii) the Consolidated Cash
Flow Available for Fixed Charges and the Consolidated Interest Incurred
attributable to discontinued operations, as determined in accordance with
GAAP, shall be excluded. Furthermore, in calculating "Consolidated Cash Flow
Available for Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on Indebtedness in respect of which a pro forma calculation is
required that is determined on a fluctuating basis as of the Transaction Date
(including Indebtedness actually incurred on the Transaction Date) and which
will continue to be so determined thereafter shall be deemed to have accrued
at a fixed rate per annum equal to the rate of interest on such Indebtedness
in effect on the Transaction Date; and (2) notwithstanding clause (1) above,
interest on such Indebtedness determined on a fluctuating basis, to the extent
such interest is covered by agreements relating to Interest Protection
Agreements, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"Consolidated Interest Expense" of the Company for any period means the
Interest Expense of the Company and the Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Incurred" for any period means the Interest Incurred
of the Company and the Restricted Subsidiaries for such period, determined on
a consolidated basis in accordance with GAAP.
"Consolidated Net Income" for any period means the aggregate net income (or
loss) of the Company and its Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP; provided that there will be
excluded from such net income (loss) (to the extent otherwise included
therein), without duplication: (i) the net income (or loss) of (x) any
Unrestricted Subsidiary or (y) any Person (other than a Restricted Subsidiary)
in which any Person other than the Company or any Restricted Subsidiary has an
ownership interest, except, in each case, to the extent that any such income
has actually been received by the Company or any Restricted Subsidiary in the
form of cash dividends or similar cash distributions during such period, which
dividends or distributions are not in excess of the Company's or such
Restricted Subsidiary's (as applicable) pro rata share of such Unrestricted
Subsidiary's or such other Person's net income earned during such period, (ii)
except to the extent includable in Consolidated Net Income pursuant to the
foregoing clause (i), the net income (or loss) of any Person that accrued
prior to the date that (a) such Person becomes a Restricted Subsidiary or is
merged with or into or consolidated with the Company or any of its Restricted
Subsidiaries (except, in the case
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of an Unrestricted Subsidiary that is redesignated a Restricted Subsidiary
during such period, to the extent of its retained earnings from the beginning
of such period to the date of such redesignation) or (b) the assets of such
Person are acquired by the Company or any Restricted Subsidiary, (iii) the net
income of any Restricted Subsidiary to the extent that (but only so long as)
the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of that income is not permitted by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary during such period, (iv) the gains or losses, together with any
related provision for taxes, realized during such period by the Company or any
Restricted Subsidiary resulting from (a) the acquisition of securities, or
extinguishment of Indebtedness, of the Company or any Restricted Subsidiary or
(b) any Asset Disposition by the Company or any Restricted Subsidiary, and (v)
any extraordinary gain or loss together with any related provision for taxes,
realized by the Company or any Restricted Subsidiary; provided, further, that
for purposes of calculating Consolidated Net Income solely as it relates to
clause (iii) of the first paragraph of the "Limitations on Restricted
Payments" covenant, clause (iv)(b) above shall not be applicable.
"Consolidated Net Worth" of any Person as of any date means the
stockholders' equity (including any Preferred Stock that is classified as
equity under GAAP, other than Disqualified Stock) of such Person and its
Restricted Subsidiaries on a consolidated basis at the end of the fiscal
quarter immediately preceding such date, as determined in accordance with
GAAP, less any amount attributable to Unrestricted Subsidiaries.
"Consolidated Tangible Assets" of the Company as of any date means the total
amount of assets of the Company and its Restricted Subsidiaries (less
applicable reserves) on a consolidated basis at the end of the fiscal quarter
immediately preceding such date, as determined in accordance with GAAP, less:
(i) Intangible Assets and (ii) appropriate adjustments on account of minority
interests of other Persons holding equity investments in Restricted
Subsidiaries.
"Continuing Director" means a director who either was a member of the Board
of Directors of the Company on the date of the Indenture or who became a
director of the Company subsequent to such date and whose election, or
nomination for election by the Company's stockholders, was duly approved by a
majority of the Continuing Directors on the Board of Directors of the Company
at the time of such approval, either by a specific vote or by approval of the
proxy statement issued by the Company on behalf of the entire Board of
Directors of the Company in which such individual is named as nominee for
director.
"control", when used with respect to any Person, means the power to direct
the management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Credit Facilities" means, collectively, each of the credit facilities and
guidance lines of credit of the Company or one or more Restricted Subsidiaries
in existence on the date of the Indenture and one or more other facilities or
guidance lines of credit among or between the Company or one or more
Restricted Subsidiaries and one or more lenders pursuant to which the Company
or any Restricted Subsidiary may incur Indebtedness for working capital and
general corporate purposes (including acquisitions), as any such facility or
line of credit may amended, restated, supplemented or otherwise modified from
time to time, and includes any agreement extending the maturity of, increasing
the amount of, or restructuring, all or any portion of the Indebtedness under
such facility or line of credit or any successor facilities or lines of credit
and includes any facility or line of credit with one or more lenders
refinancing or replacing all or any portion of the Indebtedness under such
facility or line of credit or any successor facility or line of credit.
"Currency Agreement" of any Person means any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement designed to
protect such Person or any of its Subsidiaries against fluctuations in
currency values.
"Custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
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"Default" means any event, act or condition that is, or after notice or the
passage of time or both would be, an Event of Default.
"Designation Amount" has the meaning provided in the definition of
Unrestricted Subsidiary.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, (i) matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part, on or
prior to the final maturity date of the Notes or (ii) is convertible into or
exchangeable or exercisable for (whether at the option of the issuer or the
holder thereof) (a) debt securities or (b) any Capital Stock referred to in
(i) above, in each case, at any time prior to the final maturity date of the
Notes provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof (or the
holders of any security into or for which such Capital Stock is convertible,
exchangeable or exercisable) the right to require the Company to repurchase or
redeem such Capital Stock upon the occurrence of a change in control occurring
prior to the final maturity date of the Notes shall not constitute
Disqualified Stock if the change in control provisions applicable to such
Capital Stock are no more favorable to such holders than the provisions
described under the caption "--Certain Covenants--Repurchase of Notes upon
Change of Control" and such Capital Stock specifically provides that the
Company will not repurchase or redeem any such Capital Stock pursuant to such
provisions prior to the Company's repurchase of the Notes as are required
pursuant to the provisions described under the caption "--Certain Covenants--
Repurchase of Notes upon Change of Control."
"Event of Default" has the meaning set forth in "--Events of Default."
"Fair Market Value" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) that would be
negotiated in an arm's-length transaction for cash between a willing seller
and a willing and able buyer, neither of which is under any compulsion to
complete the transaction, as such price is determined in good faith by the
Board of Directors of the Company or a duly authorized committee thereof, as
evidenced by a resolution of such Board or committee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect on the date of the Indenture.
"Guarantee" means the guarantee of the Notes by each Guarantor under the
Indenture.
"Guarantors" means (i) initially, each of: D.R. Horton Management Company,
Ltd., a Texas limited partnership; DRHI, Inc., a Delaware corporation; D.R.
Horton-Royalty, Ltd., a Texas limited partnership; DRH Construction, Inc., a
Delaware corporation; DRH New Mexico Construction, Inc., a Delaware
corporation; D.R. Horton Denver Management Company, Inc., a Colorado
corporation; D.R. Horton Denver No. 10, Inc., a Colorado corporation; D.R.
Horton Denver No. 11, Inc., a Colorado corporation; D.R. Horton Denver No. 12,
Inc., a Colorado corporation; D.R. Horton Denver No. 13, Inc., a Colorado
corporation; D.R. Horton Denver No. 14, Inc., a Colorado corporation; D.R.
Horton Denver No. 15, Inc., a Colorado corporation; D.R. Horton Denver No. 16,
Inc., a Colorado corporation; D.R. Horton Denver No. 17, Inc., a Colorado
corporation; D.R. Horton Denver No. 18, Inc., a Colorado corporation; D.R.
Horton, Inc.-Albuquerque, a Delaware corporation; D.R. Horton, Inc.- Denver, a
Delaware corporation; D.R. Horton, Inc.-Minnesota, a Delaware corporation;
D.R. Horton, Inc.-New Jersey, a New Jersey corporation; Meadows I, Ltd., a
Delaware corporation; Meadows II, Ltd., a Delaware corporation; Meadows III,
Ltd., a Delaware corporation; Meadows IX, Inc., a New Jersey corporation;
Meadows X, Inc., a New Jersey corporation; SGS Communities at Grande Quay,
L.L.C., a New Jersey limited liability company; D.R. Horton Los Angeles
Holding Company, Inc., a California corporation; D.R. Horton Los Angeles
Management Company, Inc., a California corporation; D.R. Horton Los Angeles
No.
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9, Inc., a California corporation; D.R. Horton Los Angeles No. 10, Inc., a
California corporation; D.R. Horton Los Angeles No. 11, Inc., a California
corporation; D.R. Horton Los Angeles No. 12, Inc., a California corporation;
D.R. Horton Los Angeles No. 13, Inc., a California corporation; D.R. Horton
Los Angeles No. 14, Inc., a California corporation; D.R. Horton Los Angeles
No. 16, Inc., a California corporation; D.R. Horton Los Angeles No. 17, Inc.,
a California corporation; D.R. Horton, Inc.--Birmingham, a Delaware
corporation; D.R. Horton, Inc.--Greensboro, a Delaware corporation; D.R.
Horton San Diego Holding Company, Inc., a California corporation; D.R. Horton
San Diego Management Company, Inc., a California corporation; D.R. Horton San
Diego No. 9, Inc., a California corporation; D.R. Horton San Diego No. 10,
Inc., a California corporation; D.R. Horton San Diego No. 11, Inc., a
California corporation; D.R. Horton San Diego No. 12, Inc., a California
corporation; D.R. Horton San Diego No. 13, Inc., a California corporation;
D.R. Horton San Diego No. 14, Inc., a California corporation; D.R. Horton San
Diego No. 15, Inc., a California corporation; D.R. Horton San Diego No. 16,
Inc., a California corporation; D.R. Horton San Diego No. 17, Inc., a
California corporation; D.R. Horton San Diego No. 18, Inc., a California
corporation; D.R. Horton San Diego No. 19, Inc., a California corporation;
D.R. Horton San Diego No. 20, Inc., a California corporation; D.R. Horton San
Diego No. 21, Inc., a California corporation; D.R. Horton-Texas, Ltd., a Texas
limited partnership; D.R. Horton, Inc.--Torrey, a Delaware corporation; and S.
G. Torrey Atlanta, Ltd., a Georgia corporation; and (ii) each of the Company's
Subsidiaries which becomes a guarantor of the Notes pursuant to the provisions
of the Indenture.
"Indebtedness" of any Person means, without duplication, (i) any liability
of such Person (a) for borrowed money or under any reimbursement obligation
relating to a letter of credit or other similar instruments (other than
standby letters of credit issued for the benefit of or surety, performance,
completion or payment bonds, earnest money notes or similar purpose
undertakings or indemnifications issued by, such Person in the ordinary course
of business), (b) evidenced by a bond, note, debenture or similar instrument
(including a purchase money obligation) given in connection with the
acquisition of any businesses, properties or assets of any kind or with
services incurred in connection with capital expenditures (other than any
obligation to pay a contingent purchase price which, as of the date of
incurrence thereof is not required to be recorded as a liability in accordance
with GAAP), or (c) in respect of Capitalized Lease Obligations (to the extent
of the Attributable Debt in respect thereof), (ii) any Indebtedness of others
that such Person has guaranteed to the extent of the guarantee, (iii) to the
extent not otherwise included, the obligations of such Person under Currency
Agreements or Interest Protection Agreements to the extent recorded as
liabilities not constituting Interest Incurred, net of amounts recorded as
assets in respect of such agreements, in accordance with GAAP, and (iv) all
Indebtedness of others secured by a Lien on any asset of such Person, whether
or not such Indebtedness is assumed by such Person; provided, that
Indebtedness shall not include accounts payable, liabilities to trade
creditors of such Person or other accrued expenses arising in the ordinary
course of business. The amount of Indebtedness of any Person at any date shall
be (a) the outstanding balance at such date of all unconditional obligations
as described above, net of any unamortized discount to be accounted for as
Interest Expense, in accordance with GAAP, (b) the maximum liability of such
Person for any contingent obligations under clause (ii) above at such date,
net of, any unamortized discount to be accounted for as Interest Expense in
accordance with GAAP and (c) in the case of clause (iv) above, the lesser of
(1) the fair market value of any asset subject to a Lien securing the
Indebtedness of others on the date that the Lien attaches and (2) the amount
of the Indebtedness secured.
"Intangible Assets" of the Company means all unamortized debt discount and
expense, unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, writeups of assets over their prior carrying
value (other than write-ups which occurred prior to the Issue Date and other
than, in connection with the acquisition of an asset, the write-up of the
value of such asset (within one year of its acquisition) to its fair market
value in accordance with GAAP) and all other items which would be treated as
intangibles on the consolidated balance sheet of the Company and the
Restricted Subsidiaries prepared in accordance with GAAP.
"Interest Expense" of any Person for any period means, without duplication,
the aggregate amount of (i) interest which, in conformity with GAAP, would be
set opposite the caption "interest expense" or any like caption on an income
statement for such Person (including, without limitation, imputed interest
included in
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Capitalized Lease Obligations, all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, the net costs (but reduced by net gains) associated with Currency
Agreements and Interest Protection Agreements, amortization of other financing
fees and expenses, the interest portion of any deferred payment obligation,
amortization of discount or premium, if any, and all other noncash interest
expense other than interest and other charges amortized to cost of sales), and
(ii) all interest actually paid by the Company or a Restricted Subsidiary
under any guarantee of Indebtedness (including, without limitation, a
guarantee of principal, interest or any combination thereof) of any Person
other than the Company or any Restricted Subsidiary during such period;
provided, that Interest Expense shall exclude any expense associated with the
complete write-off of financing fees and expenses in connection with the
repayment of any Indebtedness.
"Interest Incurred" of any Person for any period means, without duplication,
the aggregate amount of (i) Interest Expense and (ii) all capitalized interest
and amortized debt issuance costs.
"Interest Protection Agreement" of any Person means any interest rate swap
agreement, interest rate collar agreement, option or futures contract or other
similar agreement or arrangement designed to protect such Person or any of its
Subsidiaries against fluctuations in interest rates with respect to Debt
permitted to be incurred under the Indenture.
"Investments" of any Person means (i) all investments by such Person in any
other Person in the form of loans, advances or capital contributions, (ii) all
guarantees of Indebtedness or other obligations of any other Person by such
Person, (iii) all purchases (or other acquisitions for consideration) by such
Person of Indebtedness, Capital Stock or other securities of any other Person
and (iv) all other items that would be classified as investments in any other
Person (including, without limitation, purchases of assets outside the
ordinary course of business) on a balance sheet of such Person prepared in
accordance with GAAP.
"Issue Date" means the date on which the Notes are originally issued under
the Indenture.
"Lien" means, with respect to any Property, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
Property. For purposes of this definition, a Person shall be deemed to own,
subject to a Lien, any Property which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such Property.
"Marketable Securities" means (a) equity securities that are listed on the
New York Stock Exchange, the American Stock Exchange or The Nasdaq National
Market and (b) debt securities that are rated by a nationally recognized
rating agency, listed on the New York Stock Exchange or the American Stock
Exchange or covered by at least two reputable market makers.
"Net Cash Proceeds" means, with respect to an Asset Disposition, cash
payments received (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise
(including any cash received upon sale or disposition of such note or
receivable), but only as and when received), excluding any other consideration
received in the form of assumption by the acquiring Person of Indebtedness or
other obligations relating to the Property disposed of in such Asset
Disposition or received in any other non-cash form unless and until such non-
cash consideration is converted into cash therefrom, in each case, net of all
legal, title and recording tax expenses, commissions and other fees and
expenses incurred, and all federal, state and local taxes required to be
accrued as a liability under GAAP as a consequence of such Asset Disposition,
and in each case net of a reasonable reserve for the after-tax cost of any
indemnification or other payments (fixed and contingent) attributable to the
seller's indemnities or other obligations to the purchaser undertaken by the
Company or any of its Restricted Subsidiaries in connection with such Asset
Disposition, and net of all payments made on any Indebtedness which is secured
by or relates to such Property, in accordance with the terms of any Lien or
agreement upon or with respect to such Property or which must by its terms or
by applicable law be repaid out of the proceeds from such Asset Disposition,
and net of all contractually required
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distributions and payments made to minority interest holders in Restricted
Subsidiaries or joint ventures as a result of such Asset Disposition.
"Non-Recourse Indebtedness" with respect to any Person means Indebtedness of
such Person for which (i) the sole legal recourse for collection of principal
and interest on such Indebtedness is against the specific property identified
in the instruments evidencing or securing such Indebtedness and such property
was acquired with the proceeds of such Indebtedness or such Indebtedness was
incurred within 90 days after the acquisition of such property and (ii) no
other assets of such Person may be realized upon in collection of principal or
interest on such Indebtedness. Indebtedness which is otherwise Non-Recourse
Indebtedness will not lose its character as Non-Recourse Indebtedness because
there is recourse to the borrower, any guarantor or any other Person for (i)
environmental warranties and indemnities, or (ii) indemnities for and
liabilities arising from fraud, misrepresentation, misapplication or non-
payment of rents, profits, insurance and condemnation proceeds and other sums
actually received by the borrower from secured assets to be paid to the
lender, waste and mechanics' liens.
"Permitted Indebtedness" means (i) Indebtedness under Credit Facilities
which does not exceed $300 million principal amount outstanding at any one
time; (ii) Indebtedness in respect of obligations of the Company to the
Trustee under the Indenture; (iii) intercompany debt obligations of the
Company to any Restricted Subsidiary and of any Restricted Subsidiary to the
Company or any other Restricted Subsidiary; provided, however, that any
Indebtedness of any Restricted Subsidiary or the Company owed to any
Restricted Subsidiary or to the Company that ceases to be a Restricted
Subsidiary shall be deemed to be incurred and shall be treated as an
incurrence for purposes of the first paragraph of the covenant described under
"Limitations on Indebtedness" at the time the Restricted Subsidiary in
question ceases to be a Restricted Subsidiary; (iv) Indebtedness of the
Company or any Restricted Subsidiary under any Currency Agreements or Interest
Protection Agreements in a notional amount no greater than the payments due
with respect to the Indebtedness or currency being hedged; (v) Purchase Money
Indebtedness; (vi) Indebtedness secured only by office buildings owned or
occupied by the Company or any Restricted Subsidiary, which Indebtedness does
not exceed $10 million aggregate principal amount outstanding at any one time;
and (vii) Indebtedness of the Company or any Restricted Subsidiary which,
together with all other Indebtedness under this clause (vii), does not exceed
$30 million aggregate principal amount outstanding at any one time.
"Permitted Investment" means (i) Cash Equivalents; (ii) any Investment in
the Company or any Restricted Subsidiary or any Person that becomes a
Restricted Subsidiary as a result of such Investment or that is consolidated
or merged with or into, or transfers all or substantially all of the assets of
it or an operating unit or line of business to, the Company or a Restricted
Subsidiary; (iii) any receivables, loans or other consideration taken by the
Company or any Restricted Subsidiary in connection with any asset sale
otherwise permitted by the Indenture; (iv) Investments received in connection
with any bankruptcy or reorganization proceeding, or as a result of
foreclosure, perfection or enforcement of any Lien or any judgment or
settlement of any Person in exchange for or satisfaction of Indebtedness or
other obligations or other property received from such Person, or for other
liabilities or obligations of such Person created, in accordance with the
terms of the Indenture; (v) Investments in Currency Agreements or Interest
Protection Agreements described in the definition of Permitted Indebtedness;
(vi) any loan or advance to an executive officer or director of the Company or
any Restricted Subsidiary made in the ordinary course of business; provided,
however, that any such loan or advance exceeding $250,000 (other than a
readily marketable mortgage not exceeding $500,000) shall have been approved
by the Board of Directors of the Company or a committee thereof consisting of
disinterested members; and (vii) Investments in an aggregate amount
outstanding not to exceed $50 million.
"Permitted Liens" means (i) Liens for taxes, assessments or governmental or
quasi-government charges or claims that either (a) are not yet delinquent or
(b) are being contested in good faith by appropriate proceedings and as to
which appropriate reserves have been established or other provisions have been
made in accordance with GAAP, if required, (ii) statutory Liens of landlords
and carriers', warehousemen's, mechanics', suppliers', materialmen's,
repairmen's or other Liens imposed by law and arising in the ordinary course
of business and
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with respect to amounts that, to the extent applicable, either (a) are not yet
delinquent or (b) are being contested in good faith by appropriate proceedings
and as to which appropriate reserves have been established or other provisions
have been made in accordance with GAAP, if required, (iii) Liens (other than
any Lien imposed by the Employer Retirement Income Security Act of 1974, as
amended) incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types
of social security, (iv) Liens incurred or deposits made to secure the
performance of tenders, bids, leases, statutory obligations, surety and appeal
bonds, development obligations, progress payments, government contacts and
other obligations of like nature (exclusive of obligations for the payment of
borrowed money but including the items referred to in the parenthetical in
clause (i)(a) of the definition of "Indebtedness"), in each case incurred in
the ordinary course of business of the Company and the Restricted
Subsidiaries, (v) attachment or judgment Liens not giving rise to a Default or
an Event of Default, (vi) easements, rights-of-way, restrictions and other
similar charges or encumbrances not materially interfering with the ordinary
course of business of the Company and the Restricted Subsidiaries, (vii)
zoning restrictions, licenses, restrictions on the use of real property or
minor irregularities in title thereto, which do not materially impair the use
of such real property in the ordinary course of business of the Company and
the Restricted Subsidiaries, (viii) Liens securing Indebtedness permitted
under clause (vi) of the definition of Permitted Indebtedness, (ix) Liens
securing Indebtedness of the Company or any Restricted Subsidiary permitted to
be incurred under the Indenture; provided, that the aggregate amount of all
Indebtedness of the Company and the Restricted Subsidiaries (including, with
respect to Capitalized Lease Obligations, the Attributable Debt in respect
thereof) secured by Liens (other than Non-Recourse Indebtedness secured by
Liens) shall not exceed 40% of Consolidated Adjusted Tangible Assets at any
one time outstanding (after giving effect to the incurrence of such
Indebtedness and the use of the proceeds thereof), (x) Liens securing Non-
Recourse Indebtedness of the Company or any Restricted Subsidiary; provided
that such Liens apply only to the property financed out of the net proceeds of
such Non-Recourse Indebtedness within 90 days after the incurrence of such
Non-Recourse Indebtedness, (xi) Liens securing Purchase Money Indebtedness;
provided that such Liens apply only to the property acquired, constructed or
improved with the proceeds of such Purchase Money Indebtedness within 90 days
after the incurrence of such Purchase Money Indebtedness, (xii) Liens on
property or assets of the Company or any Restricted Subsidiary securing
Indebtedness of the Company or any Restricted Subsidiary owing to the Company
or one or more Restricted Subsidiaries, (xiii) leases or subleases granted to
others not materially interfering with the ordinary course of business of the
Company and the Restricted Subsidiaries, (xiv) purchase money security
interests (including, without limitation, Capitalized Lease Obligations);
provided that such Liens apply only to the Property acquired and the related
Indebtedness is incurred within 90 days after the acquisition of such
Property, (xv) any option, contract or other agreement to sell an asset;
provided such sale is not otherwise prohibited under the Indenture, (xvi) any
right of a lender or lenders to which the Company or a Restricted Subsidiary
may be indebted to offset against, or appropriate and apply to the payment of
such, Indebtedness any and all balances, credits, deposits, accounts or money
of the Company or a Restricted Subsidiary with or held by such lender or
lenders or its Affiliates, (xvii) any pledge or deposit of cash or property in
conjunction with obtaining surety, performance, completion or payment bonds
and letters of credit or providing earnest money obligations, escrows or
similar purpose undertakings or indemnifications in the ordinary course of
business of the Company and its Restricted Subsidiaries, (xviii) Liens for
homeowner and property owner association developments and assessments and
(xix) Liens securing Refinancing Indebtedness; provided that such Liens extend
only to the assets securing the Indebtedness being refinanced.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, incorporated or unincorporated association, joint
stock company, trust, unincorporated organization or government or any agency
or political subdivision thereof.
"Preferred Stock" of any Person means all Capital Stock of such Person which
has a preference in liquidation or with respect to the payment of dividends.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person, whether or not included in
the most recent consolidated balance sheet of such Person and its Subsidiaries
under GAAP.
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"Public Equity Offering" means an underwritten public offering of Common
Equity of the Company pursuant to an effective registration statement filed
under the Securities Act (excluding registration statements filed on Form S-8
or any successor form).
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary incurred for the purpose of financing all or any part of
the purchase price, or the cost of construction or improvement, of any
property to be used in the ordinary course of business by the Company and the
Restricted Subsidiaries; provided, however, that (i) the aggregate principal
amount of such Indebtedness shall not exceed such purchase price or cost and
(ii) such Indebtedness shall be incurred no later than 90 days after the
acquisition of such property or completion of such construction or
improvement.
"Qualified Stock" means Capital Stock of the Company other than Disqualified
Stock.
"Real Estate Business" means homebuilding, housing construction, real estate
development or construction and related real estate activities, but excluding
provision of mortgage financing or title insurance.
"Refinancing Indebtedness" means Indebtedness (to the extent not Permitted
Indebtedness) that refunds, refinances or extends any Indebtedness of the
Company or any Restricted Subsidiary (to the extent not Permitted
Indebtedness) outstanding on the Issue Date or other Indebtedness (to the
extent not Permitted Indebtedness) permitted to be incurred by the Company or
any Restricted Subsidiary pursuant to the terms of the Indenture, but only to
the extent that (i) the Refinancing Indebtedness is subordinated to the Notes
or the Guarantees, as the case may be, to the same extent as the Indebtedness
being refunded, refinanced or extended, if at all, (ii) the Refinancing
Indebtedness is scheduled to mature either (a) no earlier than the
Indebtedness being refunded, refinanced or extended or (b) after the maturity
date of the Notes, (iii) the portion, if any, of the Refinancing Indebtedness
that is scheduled to mature on or prior to the maturity date of the Notes has
a Weighted Average Life to Maturity at the time such Refinancing Indebtedness
is incurred that is equal to or greater than the Weighted Average Life to
Maturity of the portion of the Indebtedness being refunded, refinanced or
extended that is scheduled to mature on or prior to the maturity date of the
Notes, and (iv) such Refinancing Indebtedness is in an aggregate principal
amount that is equal to or less than the aggregate principal amount then
outstanding under the Indebtedness being refunded, refinanced or extended.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on Capital Stock of the
Company or any Restricted Subsidiary or any payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Restricted Subsidiary (other than (a) dividends or distributions
payable solely in Qualified Stock and (b) in the case of Restricted
Subsidiaries, dividends or distributions payable to the Company or to a
Restricted Subsidiary); (ii) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company or any Restricted
Subsidiary (other than a payment made to the Company or any Restricted
Subsidiary); and (iii) any Investment (other than any Permitted Investment),
including any Investment in an Unrestricted Subsidiary (including by the
designation of a Subsidiary of the Company as an Unrestricted Subsidiary).
"Restricted Subsidiary" means any Subsidiary of the Company which is not an
Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary of the Company which would
constitute a "significant subsidiary" as defined in Rule 1-02 of Regulation S-
X under the Securities Act and the Exchange Act.
"Subsidiary" of any Person means any corporation or other entity of which a
majority of the Capital Stock having ordinary voting power to elect a majority
of the Board of Directors or other persons performing similar functions is at
the time directly or indirectly owned or controlled by such Person.
"Trustee"' means the party named as such above until a successor replaces
such party in accordance with the applicable provisions of the Indenture and
thereafter means the successor serving hereunder.
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"Unrestricted Subsidiary" means any Subsidiary of the Company so designated
by a resolution adopted by the Board of Directors of the Company or a duly
authorized committee thereof as provided below; provided that (a) the holders
of Indebtedness thereof do not have direct or indirect recourse against the
Company or any Restricted Subsidiary, and neither the Company nor any
Restricted Subsidiary otherwise has liability, for any payment obligations in
respect of such Indebtedness (including any undertaking, agreement or
instrument evidencing such Indebtedness), except, (i) in each case, to the
extent that the amount thereof constitutes a Restricted Payment permitted by
the Indenture, (ii) in the case of Non-Recourse Indebtedness, to the extent
such recourse or liability is for the matters discussed in the last sentence
of the definition of "Non-Recourse Indebtedness," or (iii) to the extent such
Indebtedness is a guarantee by such Subsidiary of Indebtedness of the Company
or a Restricted Subsidiary and (b) no holder of any Indebtedness of such
Subsidiary shall have a right to declare a default on such Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity as a result of a default on any Indebtedness of the Company or any
Restricted Subsidiary. Subject to the foregoing, the Board of Directors of the
Company or a duly authorized committee thereof may designate any Subsidiary to
be an Unrestricted Subsidiary; provided, however, that (i) the net amount (the
"Designation Amount") then outstanding of all previous Investments by the
Company and the Restricted Subsidiaries in such Subsidiary will be deemed to
be a Restricted Payment at the time of such designation and will reduce the
amount available for Restricted Payments under the "Limitations on Restricted
Payments" covenant set forth in the Indenture, to the extent provided therein,
(ii) the Company must be permitted under the "Limitations on Restricted
Payments" covenant set forth in the Indenture to make the Restricted Payment
deemed to have been made pursuant to clause (i), and (iii) after giving effect
to such designation, no Default or Event of Default shall have occurred and be
continuing. The Board of Directors of the Company or a duly authorized
committee thereof may also redesignate an Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that (i) the Indebtedness of such
Unrestricted Subsidiary as of the date of such redesignation could then be
incurred under the "Limitations on Indebtedness" covenant, (ii) immediately
after giving effect to such redesignation and the incurrence of any such
additional Indebtedness, the Company and the Restricted Subsidiaries could
incur $1.00 of additional Indebtedness under the first paragraph of the
"Limitations on Indebtedness" covenant and (iii) the Liens of such
Unrestricted Subsidiary as of the date of such redesignation could then be
incurred in accordance with the "Limitation on Liens" covenant. Any such
designation or redesignation by the Board of Directors of the Company or a
committee thereof will be evidenced to the Trustee by the filing with the
Trustee of a certified copy of the resolution of the Board of Directors of the
Company or a committee thereof giving effect to such designation or
redesignation and an Officers' Certificate certifying that such designation or
redesignation complied with the foregoing conditions and setting forth the
underlying calculations of such Officers' Certificate. The designation of any
Person as an Unrestricted Subsidiary shall be deemed to include a designation
of all Subsidiaries of such Person as Unrestricted Subsidiaries; provided,
however, that the ownership of the general partnership interest (or a similar
member's interest in a limited liability company) by an Unrestricted
Subsidiary shall not cause a Subsidiary of the Company of which more than 95%
of the equity interest is held by the Company or one or more Restricted
Subsidiaries to be deemed an Unrestricted Subsidiary.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or portion thereof at any date, the number of years obtained by dividing (i)
the sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including, without limitation, payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest one-
twelfth) that will elapse between such date and the making of such payment by
(ii) the sum of all such payments described in clause (i)(a) above.
BOOK ENTRY, DELIVERY AND FORM
The Notes will be issued in the form of a fully registered Global Note (the
"Global Note"). The Global Note will be deposited on or about the Issue Date
with, or on behalf of, The Depository Trust Company (the "Depositary") and
registered in the name of Cede & Co., as nominee of the Depositary (such
nominee being referred to herein as the "Global Note Holder").
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The Depositary is a limited-purpose trust company which was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Underwriter), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depositary's
system is also available to other entities such as banks, brokers, dealers and
trust companies (collectively, the "Indirect Participants" or the
"Depositary's Indirect Participants") that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Persons who are not Participants may beneficially own securities held by or on
behalf of the Depositary only through the Depositary's Participants or the
Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Underwriters with portions of the
principal amount of the Global Note and (ii) ownership of the Notes will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depositary (with respect to the interests of the
Depositary's Participants), the Depositary's Participants and the Depositary's
Indirect Participants. Prospective purchasers are advised that the laws of
some states require that certain Persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer Notes
will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole owner or holder of such Notes
outstanding under the Indenture. Except as provided below, owners of Notes
will not be entitled to have Notes registered in their names, will not receive
or be entitled to receive physical delivery of Notes in definitive form, and
will not be considered the owners or holders thereof under the Indenture for
any purpose, including with respect to the giving of any directions,
instructions or approvals to the Trustee thereunder. As a result, the ability
of a Person having a beneficial interest in Notes represented by the Global
Note to pledge such interest to Persons or entities that do not participate in
the Depositary's system or to otherwise take actions in respect of such
interest may be affected by the lack of a physical certificate evidencing such
interest.
Neither the Company, the Trustee, the Paying Agent nor the Notes Registrar
will have any responsibility or liability for any aspect of the records
relating to or payments made on account of Notes by the Depositary, or for
maintaining, supervising or reviewing any records of the Depositary relating
to such Notes.
Payments in respect of the principal, premium, if any, and interest on any
Notes registered in the name of a Global Note Holder on the applicable record
date will be payable by the Trustee to or at the direction of such Global Note
Holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee may treat the Persons in whose names the Notes, including the
Global Notes, are registered as the owners thereof for the purpose of
receiving such payments and for any and all other purposes whatsoever.
Consequently, none of the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial
owners of Notes (including principal, premium, if any, and interest).
The Company believes, however, that it is currently the policy of the
Depositary to immediately credit the accounts of the relevant Participants
with such payment, in amounts proportionate to their respective holdings in
principal amount of beneficial interests in the relevant security as shown on
the records of the Depositary. Payments by the Depositary's Participants and
the Depositary's Indirect Participants to the beneficial owner of Notes will
be governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
As long as the Notes are represented by a Global Note, the Depositary's
nominee will be the holder of the Notes and therefore will be the only entity
that can exercise a right to repayment or repurchase of the Notes. See
"Covenants--Repurchase of Notes Upon a Change of Control" and "--Limitations
on Dispositions of Assets." Notice by Participants or Indirect Participants or
by owners of beneficial interests in a Global Note held through
S-41
<PAGE>
such Participants or Indirect Participants of the exercise of the option to
elect repayment of beneficial interests in Notes represented by a Global Note
must be transmitted to the Depositary in accordance with its procedures on a
form required by the Depositary and provided to Participants. In order to
ensure that the Depositary's nominee will timely exercise a right to repayment
with respect to a particular Note, the benefiche broker or the Participant or
Indirect Participant through which it holds an interest in such Note to notify
the Depositary of its desire to exercise a right to repayment. Different firms
have cut-off times for accepting instructions from their customers and,
accordingly, each beneficial owner should consult the broker or other
Participant or Indirect Participant through which it holds an interest in a
Note in order to ascertain the cut-off time by which such an instruction must
be given in order for timely notice to be delivered to the Depositary. The
Company will not be liable for any delay in delivery of notices of the
exercise of the option to elect repayment.
CERTIFICATED SECURITIES
Subject to certain conditions, any Person having a beneficial interest in
the Global Note may, upon request to the Company or the Trustee, exchange such
beneficial interest for Notes in the form of Certificated Securities. Upon any
such issuance, the Trustee is required to register such Notes in the name of,
and cause the same to be delivered to, such Person or Persons (or the nominee
of any thereof). In addition, if (i) the Company notifies the Trustee in
writing that the Depositary is no longer willing or able to act as a
depositary and the Company is unable to locate a qualified successor within 90
days or (ii) the Company, at its option, notifies the Trustee in writing that
it elects to cause the issuance of Notes in the form of Certificated
Securities under the Indenture, then, upon surrender by the relevant Global
Note Holder of its Global Note, Notes in such form will be issued to each
Person that such Global Note Holder and the Depositary identify as the
beneficial owner of the related Notes.
Neither the Company nor the Trustee shall be liable for any delay by the
related Global Note Holder or the Depositary in identifying the beneficial
owners of Notes and each such Person may conclusively rely on and shall be
protected in relying on, instructions from the Global Note Holder or of the
Depositary for all purposes (including with respect to the registration and
delivery, and the respective principal amounts, of the Notes to be issued).
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes (including
principal, premium, if any, and interest) be made by wire transfer of
immediately available funds to the accounts specified by the Global Note
Holders. The Company expects that secondary trading in the Certificated Notes
also will be settled in immediately available funds.
TRANSFER AND EXCHANGE
A holder may transfer or exchange the Notes in accordance with the
procedures set forth in the Indenture. The Registrar may require a holder,
among other things, to furnish appropriate endorsements and transfer
documents, and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar is not required to transfer or exchange any Note
selected for redemption. Also, the Registrar is not required to transfer or
exchange any Note for a period of 15 days before a selection of the Notes to
be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
S-42
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the Company, the Guarantors and Donaldson,
Lufkin & Jenrette Securities Corporation (the "Underwriter"), the Company has
agreed to sell to the Underwriter, and the Underwriter has agreed to purchase
from the Company, all of the Notes.
The Underwriting Agreement provides that the obligation of the Underwriter
thereunder is subject to certain conditions precedent. The Underwriting
Agreement also provides that the Company and the Guarantors will indemnify,
jointly and severally, the Underwriter and its controlling persons against
certain liabilities and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriter may be required to make
in respect thereof. The nature of the Underwriter's obligation is such that it
is required to purchase all the Notes if any Notes are purchased.
The Underwriter has advised the Company that it proposes to offer the Notes
for sale from time to time in one or more negotiated transactions or
otherwise, at market prices prevailing at the time of sale, at prices related
to such market prices or at negotiated prices. The Underwriter may effect such
transactions by selling the Notes to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter or purchasers of the Notes for whom they may
act as agent. Any dealers that participate with the Underwriter in the
distributions of the Notes may be deemed to be underwriters, and any discounts
or commissions received by them or the Underwriter and any profit on the
resale of the Notes by them or the Underwriter may be deemed to be
underwriting discounts or commissions, under the Securities Act.
The Notes are a new issue of securities. There is no active public trading
market for the Notes. The Company intends to apply for listing of the Notes on
the New York Stock Exchange; however, there can be no assurance that the Notes
will be so listed. The Underwriter has advised the Company that, if the Notes
are not listed on a securities exchange, it currently intends to make a market
in the Notes, but the Underwriter is not obligated to do so and may
discontinue any such market-making at any time. There can be no assurance as
to the liquidity of any market that may develop for the Notes, the ability of
holders to sell their Notes or the price at which holders would be able to
sell their Notes.
LEGAL MATTERS
Gibson, Dunn & Crutcher LLP, Dallas, Texas, has rendered render an opinion
(filed as an exhibit to the Registration Statement) with respect to the
validity of the Notes offered hereby. Certain legal matters will be passed
upon for the Underwriters by Cahill Gordon & Reindel (a partnership including
a professional corporation), New York, New York.
S-43
<PAGE>
$250,000,000
D.R. HORTON, INC.
CUSTOM HOMES
DEBT SECURITIES, PREFERRED STOCK
AND
COMMON STOCK
D.R. Horton, Inc., a Delaware corporation (the "Company"), may offer and
issue from time to time (i) its debt securities ("Debt Securities"), which may
be senior debt securities, senior subordinated debt securities or subordinated
debt securities, (ii) shares of its Preferred Stock, par value $.10 per share
("Preferred Stock"), or (iii) shares of its Common Stock, par value $.01 per
share ("Common Stock"). The Debt Securities, Preferred Stock and Common Stock
are herein collectively referred to as the "Securities". The Securities may be
offered in one or more separate classes or series, in amounts, at prices and
on terms to be determined by market conditions at the time of sale and to be
set forth in a supplement or supplements to this Prospectus (a "Prospectus
Supplement"). Any Securities may be offered with other Securities or
separately. Debt Securities or Preferred Stock may be exchangeable for or
convertible into shares of Common Stock. The aggregate offering price of the
Securities will not exceed $250,000,000.
Certain terms of any Debt Securities in respect of which this Prospectus is
being delivered will be set forth in an accompanying Prospectus Supplement
including, without limitation, the specific designation, aggregate principal
amount, purchase price, currency of payment, denomination, maturity, interest
rate (which may be fixed or variable) and time of payment of interest (if
any), guarantees thereof (if any), terms (if any) for the subordination,
redemption, purchase or conversion thereof, listing (if any) on a securities
exchange, additional or different covenants and events of default, and any
other material terms of the Debt Securities. Certain terms of any Preferred
Stock in respect of which this Prospectus is being delivered will be set forth
in an accompanying Prospectus Supplement including, without limitation, the
specific designation, number of shares, liquidation preference, purchase
price, dividends, voting, redemption and conversion provisions (if any), any
listing on a securities exchange and any other material terms of the Preferred
Stock. The purchase price of any Common Stock in respect of which this
Prospectus is being delivered will be set forth in an accompanying Prospectus
Supplement. The Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to the Securities covered by the Prospectus Supplement.
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol DHI.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Securities may be sold on a negotiated or competitive bid basis to or
through underwriters or dealers designated from time to time or to other
purchasers directly or through agents designated from time to time. Certain
terms of any offering and sale of the Securities, including, where applicable,
the names of the underwriters, dealers or agents, if any, the principal amount
or number of shares to be purchased, the purchase price of the Securities, the
proceeds to the Company from such sale and any applicable commissions,
discounts and other items constituting compensation of such underwriters,
dealers or agents will also be set forth in an accompanying Prospectus
Supplement.
This Prospectus may not be used to consummate sale of securities unless
accompanied by the applicable Prospectus Supplement.
The date of this Prospectus is June 3, 1997
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy and information
statements filed by the Company with the Commission pursuant to the
informational requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: New York Regional Office, Seven World Trade Center, 13th
Floor, New York, New York 10048; and Chicago Regional Office, Northwest Atrium
Center, 500 West Madison Street, Room 3190, Chicago, Illinois 60661. Copies of
such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such material is also available for inspection at the offices of the
New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. The
Commission also maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants such as the Company which file electronically with the Commission.
The Company has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, to which reference is hereby made. For further information
with respect to the Company and such Securities, reference is made to the
Registration Statement, including the documents and exhibits filed or
incorporated as a part thereof. Statements contained in this Prospectus
concerning the provisions of certain documents are not necessarily complete
and, in each instance, reference is made to the copy of such document filed as
an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. Copies of all or any part of the
Registration Statement, including exhibits thereto, may be obtained, upon
payment of the prescribed fees, at the offices of the Commission as set forth
above.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1996, the Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended December 31, 1996 and March 31, 1997, the Company's Current Report on
Form 8-K dated March 13, 1997, and pages two through seven ("Election of
Directors" through "Executive Compensation-Compensation Committee Interlocks
and Insider Participation") and page eleven ("Executive Compensation-
Transactions with Management") contained in the Company's Proxy Statement
dated December 20, 1996, relating to the 1997 Annual Meeting of Stockholders,
are incorporated into this Prospectus by reference. All documents filed by the
Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of any
offering of the Securities shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of filing such
documents.
Any statement in a document incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any subsequently filed document which
is incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus.
The Company will provide, without charge to each person, including any
beneficial owner, to whom a Prospectus is delivered, on the written or oral
request of any such person, a copy of any or all of the documents incorporated
herein by reference (not including exhibits to such documents unless such
exhibits are specifically incorporated by reference in the information
contained in this Prospectus). All such requests should be addressed
2
<PAGE>
to: D.R. Horton, Inc., 1901 Ascension Blvd., Suite 100, Arlington, Texas
76006, Attention: Chief Financial Officer (telephone (817) 856-8200).
CERTAIN PERSONS PARTICIPATING IN ANY OFFERING OF SECURITIES MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF SUCH
SECURITIES. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING" IN THE
ACCOMPANYING PROSPECTUS SUPPLEMENT.
3
<PAGE>
THE COMPANY
The Company is a national homebuilder constructing and selling single-family
homes in metropolitan areas of the Mid-Atlantic, Midwest, Southeast, Southwest
and Western regions of the United States. The Company offers high-quality
homes with custom features, designed principally for the entry level and move-
up market segments. The Company's homes generally range in size from 1,000 to
5,000 square feet and in price from $80,000 to $600,000, with an average
selling price of $166,600 for the year ended September 30, 1996, and $167,800
for the six months ended March 31, 1997.
The Company is one of the most geographically diversified homebuilders in
the United States, with operating divisions in 21 states and 27 markets. These
markets are Albuquerque, Atlanta, Austin, Birmingham, Charlotte, Chicago,
Cincinnati, Dallas/Fort Worth, Denver, Greensboro, Greenville, Houston, Kansas
City, Las Vegas, Los Angeles, Minneapolis/St. Paul, Nashville, North Central
New Jersey, Orlando, Pensacola, Phoenix, Raleigh/Durham, Salt Lake City, San
Diego, South Florida, St. Louis and suburban Washington, D.C.
The Company was 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. The Company's principal executive offices are located at 1901
Ascension Blvd., Suite 100, Arlington, Texas 76006, and its telephone number
is (817) 856-8200.
USE OF PROCEEDS
Except as otherwise set forth in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Securities for
general corporate purposes, including, among other things, development of new
residential properties, acquisition of residential development properties
and/or other homebuilding companies and repayment of existing indebtedness.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's historical ratio of earnings to
fixed charges for the five years ended September 30, 1996, and the six months
ended March 31, 1996 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED YEAR ENDED SEPTEMBER 30, MARCH 31,
DECEMBER 31, ----------------------------- -----------------
1992 1993(1) 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio(2).......... 7.41 6.64 4.46 3.43 3.68 2.83 3.03
==== ====== ====== ====== ====== ======== ========
</TABLE>
- ---------------------
(1) In 1993, the Company changed to a fiscal year ended September 30. The
ratio for the twelve months ended September 30, 1993, is presented for
purposes of comparison.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of the sum of income from continuing operations before income
taxes, interest amortized to cost of sales, interest expense and the
portion of rent expense deemed to represent interest. Fixed charges
consist of interest incurred, whether expensed or capitalized, including
amortization of debt issuance costs, if applicable, and the portion of
rent expense deemed to represent interest. To date, the Company has not
issued any Preferred Stock; therefore, the ratios of earnings to combined
fixed charges and preferred stock dividend requirements are the same as
the ratios of earnings to fixed charges presented above.
4
<PAGE>
DESCRIPTION OF DEBT SECURITIES
The following sets forth certain general terms and provisions of each
Indenture under which the Debt Securities are to be issued. The particular
terms of the Debt Securities will be set forth in a Prospectus Supplement
relating to such Debt Securities.
The Debt Securities are to be issued under one or more Indentures, as
amended or supplemented from time to time (the "Indenture"), to be entered
into between the Company, the Guarantors (as defined below), if any, and
American Stock Transfer & Trust Company, New York, New York, as trustee,
(together with any other trustee(s) chosen by the Company, qualified to act as
such under the Trust Indenture Act of 1939, as amended (the "TIA") and
appointed in a supplemental indenture with respect to a particular series, the
"Trustee"). The forms of Indentures have been filed as exhibits to the
Registration Statement of which this Prospectus is a part and will be
available for inspection at the corporate trust office of the Trustee, or as
described above under "Available Information". The Indentures are subject to,
and governed by, the TIA. The Company will execute an Indenture if and when
the Company issues any Debt Securities. The statements made hereunder relating
to the Indentures and the Debt Securities to be issued thereunder are
summaries of certain provisions thereof and do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all
provisions of the Indentures (including those terms made a part of the
Indenture by reference to the TIA) and such Debt Securities. Capitalized terms
used but not defined herein shall have the respective meanings set forth in
the Indentures. References below to an "Indenture" are deemed to constitute a
reference to the applicable Indenture under which a particular series of Debt
Securities is issued.
GENERAL
The Debt Securities will be unsecured obligations of the Company. The Debt
Securities may be issued in one or more series. Specific terms of each series
of Debt Securities will be contained in authorizing resolutions or a
supplemental indenture relating to that series. There will be Prospectus
Supplements relating to particular series of Debt Securities. Each Prospectus
Supplement will describe, as to the Debt Securities to which it relates: (i)
the title of the Debt Securities; (ii) any limit upon the aggregate principal
amount of a series of Debt Securities which may be issued; (iii) the date or
dates on which principal of the Debt Securities will be payable and the amount
of principal which will be payable; (iv) the rate or rates (which may be fixed
or variable) at which the Debt Securities will bear interest, if any, as well
as the dates from which interest will accrue, the dates on which interest will
be payable and the record date for the interest payable on any payment date;
(v) the currency or currencies in which principal, premium, if any, and
interest, if any, will be paid; (vi) the place or places where principal,
premium, if any, and interest, if any, on the Debt Securities will be payable
and where Debt Securities which are in registered form can be presented for
registration of transfer or exchange and the identification of any depositary
or depositaries for any global debt securities; (vii) any provisions regarding
the right of the Company to redeem or purchase Debt Securities or of holders
to require the Company to redeem Debt Securities; (viii) the right, if any, of
holders of the Debt Securities to convert them into stock or other securities
of the Company, including any provisions intended to prevent dilution of the
conversion rights or otherwise; (ix) any provisions by which the Company will
be required or permitted to make payments to a sinking fund which will be used
to redeem Debt Securities or a purchase fund which will be used to purchase
Debt Securities; (x) the percentage of the principal amount at which Debt
Securities will be issued and, if other than the full principal amount
thereof, the percentage of the principal amount of the Debt Securities which
is payable if maturity of the Debt Securities is accelerated because of a
default; (xi) the terms, if any, upon which Debt Securities may be
subordinated to other indebtedness of the Company; (xii) any additions to,
modifications of or deletions from the terms of the Debt Securities with
respect to Events of Default or covenants or other provisions set forth in the
Indenture; and (xiii) any other material terms of the Debt Securities, which
may be different than the terms set forth in this Prospectus.
Each Prospectus Supplement will describe, as to the Debt Securities to which
it relates, any guarantees (the "Guarantees") by certain direct and indirect
subsidiaries of the Company which may guarantee the Debt Securities (the
"Guarantors"), including the terms of subordination (if any) of any such
Guarantee.
5
<PAGE>
EVENTS OF DEFAULT AND REMEDIES
An Event of Default with respect to any series of Debt Securities is defined
in the Indenture as being default in payment of the principal of or premium,
if any, on any of the Debt Securities of such series; default for 30 days in
payment of any installment of interest on any Debt Security of such series;
default by the Company or any Guarantor for 60 days after notice in the
observance or performance of any other covenants in the Indenture relating to
such series; and certain events involving bankruptcy, insolvency or
reorganization of the Company or certain Guarantors. The Indenture provides
that the Trustee may withhold notice to the holders of any series of Debt
Securities of any default (except a default in payment of principal, premium,
if any, or interest, if any, with respect to such series of Debt Securities)
if the Trustee considers it in the interest of the holders of such series of
Debt Securities to do so.
The Indenture provides that if any Event of Default has occurred and is
continuing with respect to any series of Debt Securities, the Trustee or the
holders of not less than 25% in principal amount of such series of Debt
Securities then outstanding may declare the principal of all the Debt
Securities of such series to be due and payable immediately. However, the
holders of a majority in principal amount of the Debt Securities of such
series then outstanding by written notice to the Trustee and the Company may
waive any Event of Default (other than any Event of Default in payment of
principal or interest) with respect to such series of Debt Securities. Holders
of a majority in principal amount of the then outstanding Debt Securities of
any series may rescind an acceleration with respect to such series and its
consequences (except an acceleration due to nonpayment of principal or
interest on such series) if the rescission would not conflict with any
judgement or decree and if all existing Events of Default with respect to such
series have been cured or waived.
The holders of a majority in principal amount of the Debt Securities of any
series then outstanding will have the right to direct the time, method and
place of conducting any proceedings for any remedy available to the Trustee
with respect to such series, subject to certain limitations specified in the
Indenture.
DEFEASANCE OF INDENTURE
The Indenture permits the Company and the Guarantors to terminate all of
their respective obligations under the Indenture as they relate to any
particular series of Debt Securities, other than the obligation to pay
interest, if any, on and the principal of the Debt Securities of such series
and certain other obligations, at any time by (i) depositing in trust with the
Trustee, under an irrevocable trust agreement, money or U.S. government
obligations in an amount sufficient to pay principal of and interest, if any,
on the Debt Securities of such series to their maturity, and (ii) complying
with certain other conditions, including delivery to the Trustee of an opinion
of counsel or a ruling received from the Internal Revenue Service to the
effect that holders will not recognize income, gain or loss for federal income
tax purposes as a result of the Company's exercise of such right and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case otherwise.
In addition, the Indenture permits the Company and the Guarantors to
terminate all of their respective obligations under the Indenture as they
relate to any particular series of Debt Securities (including the obligations
to pay interest, if any, on and the principal of the Debt Securities of such
series and certain other obligations), at any time by (i) depositing in trust
with the Trustee, under an irrevocable trust agreement, money or U.S.
government obligations in an amount sufficient to pay principal of and
interest, if any, on the Debt Securities of such series to their maturity, and
(ii) complying with certain other conditions, including delivery to the
Trustee of an opinion of counsel or a ruling received from the Internal
Revenue Service to the effect that holders will not recognize income, gain or
loss for federal income tax purposes as a result of the Company's exercise of
such right and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been the case otherwise,
which opinion of counsel is based upon a change in the applicable federal tax
law since the date of the Indenture.
6
<PAGE>
TRANSFER AND EXCHANGE
A holder will be able to transfer or exchange Debt Securities only in
accordance with the provisions of the Indenture. The registrar may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents, and to pay any taxes and fees required by law or permitted by the
Indenture.
AMENDMENT, SUPPLEMENT AND WAIVER
Subject to certain exceptions, the Indenture, the Debt Securities or the
Guarantees of a particular series may be amended or supplemented with the
consent (which may include consents obtained in connection with a tender offer
or exchange offer for Debt Securities) of the holders of at least a majority
in principal amount of the Debt Securities of such series then outstanding,
and any existing Default under, or compliance with any provision of the
Indenture relating to a particular series of Debt Securities may be waived
(other than any continuing Default or Event of Default in the payment of
interest on or the principal of such Debt Securities) with the consent (which
may include consents obtained in connection with a tender offer or exchange
offer for Debt Securities) of the holders of a majority in principal amount of
the Debt Securities of such series then outstanding. Without the consent of
any holder, the Company and the Trustee may amend or supplement the Indenture,
the Debt Securities or the Guarantees to cure any ambiguity, defect or
inconsistency; to provide for uncertificated Debt Securities in addition to or
in place of certificated Debt Securities; to make any change that does not
adversely affect the legal rights of any holder; to create a series and
establish its terms; or to delete a Guarantor which, in accordance with the
terms of the Indenture, ceases to be liable on its Guarantee.
Without the consent of each holder affected, the Company and the Trustee may
not (i) reduce the amount of Debt Securities of such series whose holders must
consent to an amendment, supplement or waiver, (ii) reduce the rate of or
change the time for payment of interest, (iii) reduce the principal of or
change the fixed maturity of any Debt Security or alter the provisions with
respect to redemptions or mandatory offers to repurchase Debt Securities
pursuant to certain covenants set forth in the Indenture, (iv) make any Debt
Security payable in money other than that stated in the Debt Security, (v)
modify the ranking or priority of the Debt Securities or any Guarantee, (vi)
release any Guarantor from any of its obligations under its Guarantee or the
Indenture otherwise than in accordance with the Indenture, or (vii) waive a
continuing default in the payment of principal of or interest on the Debt
Securities.
The right of any holder to participate in any consent required or sought
pursuant to any provision of the Indenture (and the obligation of the Company
to obtain any such consent otherwise required from such holder) may be subject
to the requirement that such holder shall have been the holder of record of
any Debt Securities with respect to which such consent is required or sought
as of a date identified by the Trustee in a notice furnished to holders in
accordance with the terms of the Indenture.
CONCERNING THE TRUSTEE
In the ordinary course of its business, American Stock Transfer and Trust
Company, the Trustee, provides, and may continue to provide, service to the
Company as transfer agent for the Common Stock of the Company. The Indenture
contains certain limitations on the rights of the Trustee, should it become a
creditor of the Company, to obtain payment of claims in certain cases or to
realize on certain property received in respect of any such claim as security
or otherwise. The Trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest, it must eliminate such
conflict or resign.
The Indenture provides that in case an Event of Default occurs and is not
cured, the Trustee will be required, in the exercise of its power, to use the
degree of care of a prudent person in similar circumstances in the conduct of
its own affairs. The Trustee may refuse to perform any duty or exercise any
right or power under the Indenture, unless it receives indemnity satisfactory
to it against any loss, liability or expense.
7
<PAGE>
GOVERNING LAW
The Indenture, the Debt Securities and the Guarantees will be governed by
the laws of the State of New York without giving effect to principles of
conflict of laws.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock is 100,000,000 shares of Common
Stock, $.01 par value, and 30,000,000 shares of Preferred Stock, $.10 par
value. At May 12, 1997, 37,222,841 shares of Common Stock and no shares of
Preferred Stock were outstanding.
PREFERRED STOCK
The Preferred Stock may be issued in series with any rights and preferences
which may be authorized by the Company's Board of Directors. There will be
Prospectus Supplements relating to particular series of Preferred Stock. Each
Prospectus Supplement will describe, as to the Preferred Stock to which it
relates: (i) the title of the Preferred Stock; (ii) any limit upon the number
of shares of the series of Preferred Stock which may be issued; (iii) the
preference, if any, to which holders of the series of Preferred Stock will be
entitled upon liquidation of the Company; (iv) the date or dates on which the
Company will be required or permitted to redeem the Preferred Stock; (v) the
terms, if any, on which the Company or holders of the Preferred Stock will
have the option to cause the Preferred Stock to be redeemed or purchased; (vi)
the voting rights, if any, of the holders of the Preferred Stock; (vii) the
dividends, if any, which will be payable with regard to the series of
Preferred Stock (which may be fixed dividends or participating dividends and
may be cumulative or non-cumulative); (viii) the right, if any, of holders of
the Preferred Stock to convert it into another class of stock or securities of
the Company, including provisions intended to prevent dilution of those
conversion rights; (ix) any provisions by which the Company will be required
or permitted to make payments to a sinking fund which will be used to redeem
Preferred Stock or a purchase fund which will be used to purchase Preferred
Stock; and (x) any other material terms of the Preferred Stock.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. There are
no cumulative voting rights with respect to the election of directors.
Accordingly, the holder or holders of a majority of the outstanding shares of
Common Stock will be able to elect the entire Board of Directors of the
Company. Holders of Common Stock have no preemptive rights and are entitled to
such dividends as may be declared by the Board of Directors of the Company out
of funds legally available therefor. The Common Stock is not entitled to any
sinking fund, redemption or conversion provisions. On liquidation, dissolution
or winding up of the Company, the holders of Common Stock are entitled to
share ratably in the net assets of the Company remaining after the payment of
all creditors and liquidation preferences of Preferred Stock, if any. The
outstanding shares of Common Stock are duly authorized, validly issued, fully
paid and nonassessable. There will be a Prospectus Supplement relating to any
offering of Common Stock offered by this Prospectus. The transfer agent and
registrar for the Common Stock is American Stock Transfer & Trust Company, New
York, New York, which also serves as Trustee under the Indenture.
The Company currently has the following provisions in its charter or bylaws
which could be considered to be "anti-takeover" provisions: (i) an article in
its charter prohibiting stockholder action by written consent; (ii) an article
in its charter requiring the affirmative vote of the holders of two-thirds of
the outstanding shares of Common Stock to remove a director; (iii) a bylaw
limiting the persons who may call special meetings of stockholders to the
Board of Directors or a committee thereof so empowered by the Board, the
bylaws or by law; and (iv) a bylaw providing time limitations for nominations
for election to the Board of Directors or for proposing matters which can be
acted upon at stockholders' meetings. These provisions may have the effect of
delaying stockholder actions with respect to certain business combinations and
the election of new members to
8
<PAGE>
the Board of Directors. As such, the provisions could have the effect of
discouraging open market purchases of the Company's Common Stock because they
may be considered disadvantageous by a stockholder who desires to participate
in a business combination or elect a new director. Additionally, the issuance
of Preferred Stock under certain circumstances could have the effect of
delaying or preventing a change of control or other corporate action.
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" with the Company for three years following the date that person
became an interested stockholder unless: (i) before that person became an
interested stockholder, the Board of Directors of the Company approved the
transaction in which the interested stockholder became an interested
stockholder or approved the business combination; (ii) upon completion of the
transaction that resulted in the interested stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the Company outstanding at the time the transaction commenced (excluding
stock held by persons who are both directors and officers of the Company or by
certain employee stock plans); or (iii) on or following the date on which that
person became an interested stockholder, the business combination is approved
by the Company's Board and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least 66 2/3% of the outstanding voting
stock of the Company (excluding shares held by the interested stockholder). A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder.
PLAN OF DISTRIBUTION
The Securities may be sold (i) through agents, (ii) through underwriters,
(iii) through dealers, (iv) directly to purchasers (through a specific bidding
or auction process or otherwise); or (v) through a combination of any such
methods of sale. The distribution of Securities may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices
relating to such prevailing market prices or at negotiated prices.
Offers to purchase the Securities may be solicited by agents designated by
the Company from time to time. Any such agent involved in the offer or sale of
the Securities will be named, and any commissions payable by the Company to
such agent will be set forth, in the Prospectus Supplement. Unless otherwise
indicated in the Prospectus Supplement, any such agent will be acting on a
best efforts basis for the period of its appointment. Any such agent may be
deemed to be an underwriter, as that term is defined in the Securities Act, of
the Securities so offered and sold.
If an underwriter or underwriters are utilized in the sale of Securities,
the Company will execute an underwriting agreement with such underwriter or
underwriters at the time an agreement for such sale is reached, and the names
of the specific managing underwriter or underwriters, as well as any other
underwriters, and the terms of the transactions, including compensation of the
underwriters and dealers, if any, will be set forth in the Prospectus
Supplement, which will be used by the underwriters to make resales of the
Securities.
If a dealer is utilized in the sale of the Securities, the Company or an
underwriter will sell such Securities to the dealer, as principal. The dealer
may then resell such Securities to the public at varying prices to be
determined by such dealer at the time of resale. The name of the dealer and
the terms of the transactions will be set forth in the Prospectus Supplement
relating thereto.
Offers to purchase the Securities may be solicited directly by the Company
and sales thereof may be made by the Company directly to institutional
investors or others. The terms of any such sales, including the terms of any
bidding or auction process, if utilized, will be described in the Prospectus
Supplement relating thereto.
9
<PAGE>
Agents, underwriters and dealers may be entitled under agreements which may
be entered into with the Company to indemnification by the Company against
certain liabilities, including liabilities under the Securities Act, and any
such agents, underwriters or dealers, or their affiliates may be customers of,
engage in transactions with or perform services for the Company in the
ordinary course of business.
LEGAL MATTERS
Gibson, Dunn & Crutcher LLP, Dallas, Texas has rendered an opinion (filed as
an exhibit to the Registration Statement) with respect to the validity of the
Securities being offered hereby. If certain legal matters in connection with
offerings made by this Prospectus are passed on by counsel for the
underwriters of an offering of those Securities, that counsel will be named in
the Prospectus Supplement relating to that offering.
EXPERTS
The consolidated financial statements of the Company appearing in the
Company's Annual Report (Form 10-K) for the year ended September 30, 1996, and
also appearing elsewhere herein, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon included therein
and included and incorporated by reference herein. Such consolidated financial
statements are included and incorporated herein by reference in reliance upon
such reports given upon the authority of such firm as experts in accounting
and auditing.
The combined financial statements of S. G. Torrey Atlanta, Ltd. and
Affiliates appearing in the Company's Current Report (Form 8-K) dated March
13, 1997, have been audited by Whittington, McLemore, Land, Davis & White,
P.C., independent auditors, as set forth in their report thereon included
therein and incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
10
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets, September 30, 1995, and 1996 and March 31,
1997..................................................................... F-3
Consolidated Statements of Income for the three years ended September 30,
1996 and the Six Months Ended March 31, 1996 and 1997......... .......... F-4
Consolidated Statements of Stockholders' Equity for the three years ended
September 30, 1996 and the Six Months Ended March 31, 1997............... F-5
Consolidated Statements of Cash Flows for the three years ended September
30, 1996 and the Six Months Ended March 31, 1996 and 1997................ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
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, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 1996. 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, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended September 30, 1996, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Fort Worth, Texas
November 8, 1996, except for Note I, as to which the date is May 16, 1997
F-2
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
----------------- -----------
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash............................................. $ 16,737 $ 32,467 $ 26,814
Inventories:
Finished homes and construction in progress.... 182,772 216,264 348,148
Residential lots--developed and under
development................................... 98,824 127,707 191,984
Land held for development...................... 1,312 1,312 1,312
-------- -------- --------
282,908 345,283 541,444
Property and equipment (net) .................... 5,359 5,631 11,852
Earnest money deposits and other assets.......... 10,680 15,247 26,196
Excess of cost over net assets acquired (net).... 3,103 4,285 28,303
-------- -------- --------
$318,787 $402,913 $634,609
======== ======== ========
LIABILITIES
Accounts payable................................. $ 29,312 $ 34,391 $ 52,931
Accrued expenses and customer deposits........... 13,523 21,011 26,164
Notes payable.................................... 169,879 169,873 318,550
-------- -------- --------
212,714 225,275 397,645
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 30,000,000
shares authorized, no shares issued............. -- -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 25,437,067 shares in 1995,
32,362,036 in 1996 and 36,839,791 in 1997,
issued and outstanding.......................... 254 324 368
Additional capital............................... 91,635 159,714 206,147
Retained earnings................................ 14,184 17,600 30,449
-------- -------- --------
106,073 177,638 236,964
-------- -------- --------
$318,787 $402,913 $634,609
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------- ------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues...................... $393,317 $437,388 $547,336 $235,110 $303,977
Cost of sales................. 326,099 359,742 449,054 193,402 247,828
-------- -------- -------- -------- --------
67,218 77,646 98,282 41,708 56,149
Selling, general and
administrative expense....... 39,073 44,549 53,860 24,573 33,911
-------- -------- -------- -------- --------
Operating income.............. 28,145 33,097 44,422 17,135 22,238
Other:
Interest expense............ -- (1,161) (1,474) (941) (1,600)
Other income................ 446 621 1,484 597 1,122
-------- -------- -------- -------- --------
446 (540) 10 (344) (478)
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES.. 28,591 32,557 44,432 16,791 21,760
Provision for income taxes.... 10,928 12,018 17,053 6,254 8,263
-------- -------- -------- -------- --------
NET INCOME.................. $ 17,663 $ 20,539 $ 27,379 $ 10,537 $ 13,497
======== ======== ======== ======== ========
Net income per share.......... $ 0.63 $ 0.74 $ 0.87 $ 0.35 $ 0.40
======== ======== ======== ======== ========
Weighted average number of
shares of common stock
outstanding, including common
stock equivalents............ 27,845 27,849 31,420 29,874 33,635
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON ADDITIONAL RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C> <C>
Balances at October 1, 1993.......... $155 $ 61,305 $ 4,413 $ 65,873
Net income......................... -- -- 17,663 17,663
Exercise of stock options (109,860
shares)........................... 1 907 -- 908
Issuance under D.R. Horton, Inc.
employee benefit plans (7,200
shares)........................... -- 110 -- 110
Six percent stock dividend......... 9 11,225 (11,235) (1)
---- -------- -------- --------
Balances at September 30, 1994....... 165 73,547 10,841 84,553
Net income......................... -- -- 20,539 20,539
Exercise of stock options (116,400
shares)........................... 1 772 -- 773
Issuances under D.R. Horton, Inc.
employee benefit plans (20,549
shares)........................... -- 208 -- 208
Nine percent stock dividend........ 15 17,181 (17,196) --
Seven for five stock split......... 73 (73) -- --
---- -------- -------- --------
Balances at September 30, 1995....... 254 91,635 14,184 106,073
Net income......................... -- -- 27,379 27,379
Stock sold through public offering
(4,375,000 shares)................ 44 43,149 -- 43,193
Exercise of stock options (124,619
shares)........................... 1 696 -- 697
Issuances under D.R. Horton, Inc.
employee benefit plans (29,300
shares)........................... 1 296 -- 297
Eight percent stock dividend....... 24 23,938 (23,963) (1)
---- -------- -------- --------
Balances at September 30, 1996....... 324 159,714 17,600 177,638
Net income (unaudited )............ -- -- 13,497 13,497
Stock sold through public offering
(3,500,000 shares) (unaudited).... 35 36,368 -- 36,403
Issuance as partial consideration
for acquisition (844,444 shares)
(unaudited)....................... 8 9,142 -- 9,150
Stock issuance under employee
benefit plans (15,100 shares)
(unaudited)....................... -- 134 -- 134
Exercise of stock options (118,211
shares)(unaudited)................ 1 789 -- 790
Cash dividends paid (unaudited).... -- -- (648) (648)
---- -------- -------- --------
Balances at March 31, 1997
(unaudited)......................... $368 $206,147 $ 30,449 $236,964
==== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
----------------------------------- -------------------
1994 1995 1996 1996 1997
-------- --------- -------------- -------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............. $ 17,663 $ 20,539 $ 27,379 $ 10,537 $ 13,497
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation and
amortization........ 1,190 2,025 2,583 1,408 1,651
Expense associated
with issuance of
stock under certain
D.R. Horton employee
benefit plans....... 110 208 229 90 100
Changes in operating
assets and
liabilities:
Increase in
inventories......... (61,234) (56,401) (62,375) (36,428) (110,078)
Increase in earnest
money deposits and
other assets........ (393) (910) (4,271) (164) (7,534)
Increase (decrease)
in accounts payable,
accrued expenses and
customer deposits... (1,317) 2,197 12,567 942 13,951
-------- --------- --------- -------- ---------
NET CASH USED IN
OPERATING ACTIVITIES.. (43,981) (32,342) (23,888) (23,615) (88,413)
-------- --------- --------- -------- ---------
INVESTING ACTIVITIES
Net purchase of
property and
equipment........... (2,563) (2,414) (2,667) (1,819) (3,778)
Net cash paid for
acquisitions........ (3,583) (4,577) (1,370) (580) (44,560)
-------- --------- --------- -------- ---------
NET CASH USED IN
INVESTING ACTIVITIES.. (6,146) (6,991) (4,037) (2,399) (48,338)
-------- --------- --------- -------- ---------
FINANCING ACTIVITIES
Proceeds from notes
payable............. 133,297 232,964 238,987 51,093 160,157
Repayment of notes
payable............. (92,791) (188,857) (239,289) (63,721) (65,605)
Proceeds from common
stock offerings,
including stock
associated with
certain employee
benefit plans....... -- -- 43,260 43,260 36,403
Cash dividends paid.. -- -- -- -- (648)
Proceeds from
exercise of stock
options............. 907 773 697 543 791
-------- --------- --------- -------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES.. 41,413 44,880 43,655 31,175 131,098
-------- --------- --------- -------- ---------
INCREASE
(DECREASE) IN
CASH............ (8,714) 5,547 15,730 5,161 (5,653)
Cash at beginning of
period.............. 19,904 11,190 16,737 16,737 32,467
-------- --------- --------- -------- ---------
Cash at end of
period.............. $ 11,190 $ 16,737 $ 32,467 $ 21,898 $ 26,814
======== ========= ========= ======== =========
Supplemental cash
flow information:
Interest paid...... $ 7,059 $ 11,689 $ 14,628 $ 7,429 $ 8,130
======== ========= ========= ======== =========
Income taxes paid.. $ 11,561 $ 11,336 $ 16,143 $ 7,270 $ 10,920
======== ========= ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION PERTAINING TO MARCH 31, 1996 AND 1997
AND THE PERIODS THEN ENDED IS UNAUDITED
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. The Company is engaged primarily in the construction and sale of
single-family housing in 21 states in the United States. The Company designs,
builds and sells single-family houses on finished lots which it purchases
ready for home construction or which it develops. The Company purchases
undeveloped land to develop into finished lots for future construction of
single-family houses and for sale to others. The Company also provides title
agency and mortgage services in selected markets; however, such activities are
not material to the consolidated operating results of the Company.
Principles of Consolidation: The consolidated financial statements include
the accounts of D.R. Horton, Inc. (the Company) and its 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 from those
estimates.
Statements of Financial Accounting Standards: During the fourth quarter of
1996, the Company elected to adopt Statement of Financial Accounting Standards
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" ("FAS 121") retroactive to October 1, 1995. The
adoption of FAS 121 did not impact the Company's results of operations or
financial position and did not result in a restatement of any of the financial
results for fiscal 1996. The Company believes the adoption of FAS 121 would
not have had an effect on financial results in fiscal 1995 and 1994 had FAS
121 been adopted in those years.
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation" ("FAS 123"), issued in October 1995, establishes financial
accounting and reporting standards for stock-based employee compensation
plans. As permitted by FAS 123, the Company has elected to continue to use
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations, in accounting for its Stock
Incentive Plan. Refer to Note F.
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.
Fair Value of Financial Instruments: The fair value of financial instruments
is determined by reference to various market data and other valuation
techniques as appropriate. The carrying amounts of cash and cash equivalents
and trade payables approximate fair value because of the short maturity of
these financial instruments. Generally, the homebuilding notes payable bear
interest at rates indexed to LIBOR or the Federal Funds rate. Therefore, the
carrying amounts of the outstanding borrowings at September 30, 1996,
approximate fair value. At both September 30, 1996 and 1995, the estimated
fair value of the Company's debt, including the interest rate swap agreement
described in Note B, approximated its carrying value.
Fair value estimates are made at specific points in time based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve matters of
F-7
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION PERTAINING TO MARCH 31, 1996 AND 1997
AND THE PERIODS THEN ENDED IS UNAUDITED
significant judgment, and therefore, cannot be determined with precision.
Changes in assumptions could significantly affect estimates.
Inventories: Inventories are stated at the lower of cost (specific
identification method) or net realizable value. In addition to direct land
acquisition, land development and direct housing construction costs, inventory
costs include interest and real estate 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, capitalized interest and real estate
taxes incurred during land development are allocated to individual lots on a
prorata basis.
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. The summary of interest for 1994,
1995 and 1996 is:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Capitalized interest, beginning of period..... $ 1,581 $ 4,325 $ 7,118
Interest incurred............................. 7,269 12,002 14,835
Interest expensed.............................
Directly.................................... -- (1,161) (1,474)
Amortized to cost of sales.................. (4,525) (8,048) (9,437)
-------- -------- --------
Capitalized interest, end of period........... $ 4,325 $ 7,118 $ 11,042
======== ======== ========
</TABLE>
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 $3,481,000
and $5,000,000 as of September 30, 1995 and 1996, respectively.
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 twenty
years. Additional consideration paid in subsequent periods under the terms of
purchase agreements are included as acquisition costs. Amortization expense
was $42,000, $114,000 and $188,000, in 1994, 1995 and 1996, respectively.
Accumulated amortization was $156,000 and $344,000 at September 30, 1995 and
1996, respectively.
Revenue Recognition: Revenue generally is recognized at the time of the
closing of a sale, when title to and possession of the property transfer to
the buyer.
Net Income Per Share: Net income per share is based upon the average number
of shares of common stock outstanding during each year and the effect of
common stock equivalents related to dilutive stock options.
F-8
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION PERTAINING TO MARCH 31, 1996 AND 1997
AND THE PERIODS THEN ENDED IS UNAUDITED
NOTE B--NOTES PAYABLE
Notes payable (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1995 1996
-------- --------
<S> <C> <C>
Unsecured: Banks
$250,000 term and revolving credit facility, maturing
April, 1999 to April, 2001, rates range from Federal
Funds + 1.6% to LIBOR + 2%............................... $134,800 $158,600
$10,000 revolving line of credit, maturing March 1997,
LIBOR + 2%............................................... -- --
$20,000 revolving line of credit maturing September 1997,
LIBOR + 1 1/2%........................................... 7,000 --
$17,500 revolving line of credit, payable on demand with
six months' notice, LIBOR + 1 1/4%....................... 13,770 4,000
Other notes payable....................................... 14,309 7,273
-------- --------
Total notes payable..................................... $169,879 $169,873
======== ========
</TABLE>
Maturities of notes payable, assuming the revolving lines of credit are not
extended, are $10.3 million in 1997, $0.4 million in 1998, $59.2 million in
1999, and $100.0 million in 2001. The weighted average interest rates at
September 30, 1995 and 1996 were 7.9% and 7.5%, respectively.
In addition to the stated interest rates, various credit facilities require
the Company to pay certain fees. The $250 million credit facility also
provides $10 million for use as letters of credit. Effective October 1, 1996,
there was a reduction in the interest rate on the revolving portion of $250
million credit facility. Certain of the notes and loan agreements contain
financial covenants generally relating to cash dividends, minimum interest
coverage, net worth, leverage, inventory levels and other matters.
The Company uses an interest rate swap agreement to help manage a portion of
its interest rate exposure. The agreement converts from a variable rate to a
fixed rate on a notional amount of $100 million. The agreement expires April
2001. The Company does not expect non-performance by the counterparty, and any
losses incurred in the event of non-performance would not be material. As a
result of this agreement, the Company incurred net interest expense of $0.4
million during 1996. Net payments or receipts under the Company's interest
rate swap agreement are recorded as adjustments to interest expense.
NOTE C--ACQUISITIONS
In 1994 and 1995, the Company made the following acquisitions:
<TABLE>
<CAPTION>
COMPANY ACQUIRED DATE ACQUIRED CONSIDERATION
---------------- -------------- -------------
<S> <C> <C>
Regency Development, Inc. (Birmingham)........ September 1995 $12.3 million
Arappco, Inc. (Greensboro).................... July 1995 $12.2 million
Joseph M. Miller Construction, Inc./Argus
Development, Inc. (Minneapolis).............. April 1994 $16.6 million
</TABLE>
Consideration includes cash paid, promissory notes and assumption of certain
accounts payable and notes payable which were repaid subsequent to the
acquisitions.
During the first six months of the 1997 fiscal year, three acquisitions were
made (unaudited):
In October, 1996, the Company completed the acquisition of the principal
assets (approximately $7.7 million, primarily inventories) of Trimark
Communities, L.L.C., of Denver, Colorado, for $6.8 million in
F-9
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION PERTAINING TO MARCH 31, 1996 AND 1997
AND THE PERIODS THEN ENDED IS UNAUDITED
cash and the assumption of approximately $1.0 million in trade accounts and
notes payable associated with the acquired assets.
In December, 1996, the Company purchased the principal assets
(approximately $19.5 million, primarily inventories) of SGS Communities,
Inc., of New Jersey (SGS), for $10.6 million in cash and the assumption of
$10.1 million in trade accounts and notes payable associated with the
acquired assets.
In February, 1997, the Company completed the acquisition of all of the
outstanding capital stock of the entities comprising the Torrey Group of
Atlanta, Georgia (Torrey) for $28.5 million in cash, 844,444 newly issued
shares of the Company's common stock, valued at $9.2 million, and a
contingent payment estimated at $1 million. In addition, $8.4 million was
paid to partnerships affiliated with the Torrey Group for real estate
assets of such partnerships. The estimated market value of all assets
acquired, less liabilities assumed, amounts to $24.4 million.
The final determination of the valuations of SGS and Torrey have not been
completed. Any subsequent adjustments to the beginning balance sheet
valuation amounts estimated herein will be recorded in future periods as
adjustments to the excess of cost over net assets acquired and amortized
over 20 years.
With the exception of Torrey, the above acquisitions contain provisions for
additional consideration to be paid annually for up to four years subsequent
to the acquisition date, based upon income before income taxes. Such
additional consideration will be recorded when paid as excess cost over net
assets acquired, which is amortized using the straight line method over 20
years.
All of the acquired companies are involved in homebuilding and land
development. The Company has accounted for these acquisitions under the
purchase method and has included the operations of the acquired businesses in
its Consolidated Statements of Income since their acquisition.
Presented below are the Company's unaudited pro forma summary consolidated
results of operations, as if the Arappco and Regency Development acquisitions
had occurred on October 1, 1994 and the Torrey acquisition had occurred on
October 1, 1996. In preparing the pro forma information, various assumptions
were made and this information does not purport to be indicative of what would
have occurred had the acquisitions been made as of the dates for which pro
formas were prepared.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 MARCH 31, 1997
----------------------- ---------------------
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE)
<S> <C> <C>
Revenues.................... $474,476 $383,821
Net income.................. $ 22,359 $ 13,666
Net income per share........ $ 0.80 $ 0.40
</TABLE>
NOTE D--STOCKHOLDERS' EQUITY
The Board of Directors of the Company declared the following common stock
dividends:
<TABLE>
<CAPTION>
DECLARED DATE AMOUNT PAID RECORD DATE
------------- ------ ------- -----------
<S> <C> <C> <C>
5/12/94........................................... 6% 6/30/94 5/31/94
4/20/95........................................... 9% 6/30/95 5/31/95
4/22/96........................................... 8% 5/24/96 5/08/96
</TABLE>
Stock Split: On August 15, 1995, the Board of Directors declared a seven-
for-five stock split effected in the form of a 40% stock dividend on its
common stock. Accordingly, the $.01 par value for the additional shares
F-10
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION PERTAINING TO MARCH 31, 1996 AND 1997
AND THE PERIODS THEN ENDED IS UNAUDITED
issued, in respect of the seven-for-five stock split, was transferred from
additional paid-in-capital to common stock.
Net income per share and weighted average shares outstanding for all periods
presented have been restated to reflect the stock dividends and the stock
split. Other than as required to maintain the financial ratios and net worth
requirements under the credit agreements, there are no restrictions on the
payment of cash dividends by the Company.
NOTE E--PROVISION FOR INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. These differences
primarily relate to the capitalization of inventory costs, the accrual of
warranty costs, and depreciation. The Company's deferred tax assets and
liabilities are not significant.
The difference between income tax expense and tax computed by applying the
federal statutory income tax rate to income before taxes is due primarily to
the effect of applicable state income taxes. Income tax expense consists of:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal...................................... $10,477 $11,767 $17,650
State........................................ 963 1,274 1,829
-------- -------- --------
11,440 13,041 19,479
-------- -------- --------
Deferred:
Federal...................................... (468) (923) (2,198)
State........................................ (44) (100) (228)
-------- -------- --------
(512) (1,023) (2,426)
-------- -------- --------
$10,928 $12,018 $17,053
======== ======== ========
</TABLE>
NOTE F--EMPLOYEE BENEFIT PLANS
The D.R. Horton, Inc. Profit Sharing Plus plan is a 401(k) plan for Company
employees. The Company matches 50% of employees' voluntary contributions up to
a maximum of 3% of each participant's earnings. Additional employer
contributions in the form of profit sharing are at the discretion of the
Company. Expenses for this Plan were $158,000, $233,000 and $327,000 for 1994,
1995 and 1996, respectively.
Effective January 1, 1994, the Company adopted the D.R. Horton, Inc. Stock
Tenure Plan (an Employee Stock Ownership Plan), covering those employees
generally not participating in certain other D.R. Horton benefit plans.
Contributions are made at the discretion of the Company. Expenses of $110,000,
$106,000 and $229,000 were recognized for 1994, 1995 and 1996, respectively,
related to Company contributions of common stock to the Plan.
The Company's Supplemental Executive Retirement Plans (SERP's) are non-
qualified deferred compensation programs that provide benefits payable to
certain management employees upon retirement, death,
F-11
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION PERTAINING TO MARCH 31, 1996 AND 1997
AND THE PERIODS THEN ENDED IS UNAUDITED
or termination of employment with the Company. SERP No. 1 provides for
voluntary deferral of compensation which is invested under a trust agreement.
All salary deferrals under this Plan have been accrued and the investments are
recorded as an other asset. Under SERP No. 2, the Company accrues an unfunded
benefit, as well as an interest factor based upon a predetermined formula. The
Company recorded $231,000, $347,000 and $313,000 of expense for SERP No. 2 in
1994, 1995 and 1996, respectively.
In 1996, the Company approved the D.R. Horton, Inc. Employee Stock Purchase
Plan which allows employees to purchase stock directly from the Company at
market value.
At September 30, 1996, 237,500 shares of common stock have been reserved for
future issuance under the stock tenure and stock purchase plans.
The D.R. Horton, Inc. 1991 Stock Incentive Plan provides for the granting of
stock options to certain key employees of the Company to purchase shares of
common stock. Options are granted at exercise prices which approximate the
market value of the Company's common stock at the date of the grant. Options
generally expire 10 years after the dates on which they were granted and vest
evenly over the life of the option. At September 30, 1996, 3,034,250 shares of
common stock have been authorized for future issuance under this plan.
Activity under the plan is:
<TABLE>
<CAPTION>
1994 1995 1996
------------------ ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
STOCK OPTIONS OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
------------- -------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year. .............. 872,655 $ 7.32 992,713 $ 8.60 1,782,517 $ 6.56
Granted................. 185,700 13.98 313,000 12.15 559,000 10.15
Exercised............... (109,860) 3.62 (116,400) 3.84 (124,619) 3.24
Cancelled............... (6,500) 7.86 (19,940) 9.80 (122,022) 8.54
Effects of stock
dividends.............. 50,718 8.26 613,144 6.87 145,908 6.69
-------- ------ --------- ------ --------- ------
Outstanding at end of
year................... 992,713 $ 8.60 1,782,517 $ 6.56 2,240,784 $ 7.11
======== ====== ========= ====== ========= ======
Exercisable at end of
year................... 403,997 $ 5.55 565,551 $ 4.44 659,615 $ 4.74
======== ====== ========= ====== ========= ======
</TABLE>
Exercise prices for options outstanding at September 30, 1996, ranged from
$1.804 to $10.185. The weighted average remaining contractual lives of those
options are as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE MATURITY EXERCISE MATURITY
PRICE RANGE OPTIONS PRICE (YEARS) OPTIONS PRICE (YEARS)
----------- --------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Less than $4.......... 161,631 $1.89 5.0 161,631 $1.89 5.0
$4-$8................. 1,239,792 5.99 6.9 459,841 5.35 6.4
More than $8.......... 839,361 9.76 9.1 38,143 9.47 7.9
--------- ----- --- ------- ----- ---
Total................ 2,240,784 $7.11 7.6 659,615 $4.74 6.2
========= ===== === ======= ===== ===
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, in accounting for its employee stock options. The exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant and therefore, no compensation expense is
recognized.
F-12
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION PERTAINING TO MARCH 31, 1996 AND 1997
AND THE PERIODS THEN ENDED IS UNAUDITED
Application of the fair value method, as specified by FAS 123, had no
material impact on net income or net income per share amounts. However, such
pro forma effects are not indicative of future fair value effects until the
rules stipulated by FAS 123 are applied to all outstanding, nonvested awards.
NOTE G--COMMITMENTS AND CONTINGENCIES
The Company is involved in lawsuits and other contingencies in the ordinary
course of business. Management believes that, while the ultimate outcome of
the contingencies cannot be predicted with certainty, the ultimate liability,
if any, will not have a material adverse effect on the Company's financial
position.
In the ordinary course of business, the Company enters into option
agreements to purchase land and developed lots. Deposits of approximately $5.0
million at September 30, 1996, secure the Company's performance under these
agreements.
The Company leases office space under noncancelable operating leases.
Minimum annual lease payments under these leases at September 30, 1996, are
approximately:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997................. $342
1998................. 199
1999................. 46
2000................. 38
2001................. 33
----
$658
====
</TABLE>
Rent expense approximated $840,000, $989,000 and $1,140,000 for 1994, 1995
and 1996, respectively.
In the normal course of its business activities, the Company provides
letters of credit and performance bonds, issued by third parties, to secure
performance under various contracts. At September 30, 1996, outstanding
letters of credit totalled $5.2 million and performance bonds totalled $21.7
million.
NOTE H--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations are:
<TABLE>
<CAPTION>
1996
------------------------------------------
THREE MONTHS ENDED
------------------------------------------
SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31
------------ ------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues.......................... $168,943 $143,283 $114,042 $121,068
Gross margin...................... 30,677 25,897 20,175 21,533
Net income........................ 9,408 7,434 5,122 5,415
Net income per share(1)........... .29 .23 .16 .19
</TABLE>
F-13
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION PERTAINING TO MARCH 31, 1996 AND 1997
AND THE PERIODS THEN ENDED IS UNAUDITED
<TABLE>
<CAPTION>
1995
------------------------------------------
THREE MONTHS ENDED
------------------------------------------
SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31
------------ -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues.......................... $132,827 $120,529 $87,076 $96,956
Gross margin...................... 23,992 21,647 15,359 16,648
Net income........................ 6,681 6,090 3,948 3,820
Net income per share(1)........... .24 .22 .14 .14
<CAPTION>
1994
------------------------------------------
THREE MONTHS ENDED
------------------------------------------
SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31
------------ -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues.......................... $124,024 $107,782 $82,606 $78,905
Gross margin...................... 21,038 17,729 14,416 14,035
Net income........................ 5,679 4,690 3,698 3,596
Net income per share(1)........... .20 .17 .13 .13
</TABLE>
- ---------------------
(1) Net income per share differs from that previously reported due to the
effect of the 1996 eight percent stock dividend.
NOTE I--SUMMARIZED FINANCIAL INFORMATION
The securities that may be issued under a debt offering contemplated by the
Company will include full and unconditional guarantees by certain subsidiaries
of the Company. Summarized financial information of the Company and its
subsidiaries is presented below. It is not contemplated that all subsidiaries
will serve as guarantors. Management has determined that separate financial
statements and other disclosures concerning the subsidiaries are not material
to investors.
As of and for the periods ended: (In thousands)
MARCH 31, 1997--(UNAUDITED)
<TABLE>
<CAPTION>
D.R. HORTON, GUARANTOR NONGUARANTOR INTERCOMPANY
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Inventory............... $217,728 $323,716 $ -- $ -- $541,444
Total assets............ 550,920 384,537 1,669 (302,517) 634,609
Notes payable........... 311,703 6,847 -- -- 318,550
Total liabilities....... 343,400 355,018 659 (301,432) 397,645
Revenues................ 109,011 194,966 681 (681) 303,977
Gross profit............ 21,138 35,011 550 (550) 56,149
Net income.............. 11,042 24,157 216 (21,918) 13,497
</TABLE>
F-14
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION PERTAINING TO MARCH 31, 1996 AND 1997
AND THE PERIODS THEN ENDED IS UNAUDITED
MARCH 31, 1996---(UNAUDITED)
<TABLE>
<CAPTION>
D.R. HORTON, GUARANTOR NONGUARANTOR INTERCOMPANY
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Inventory............... $173,721 $145,615 $ -- $ -- $319,336
Total assets............ 318,158 162,359 621 (119,053) 362,085
Notes payable........... 149,404 8,137 -- -- 157,541
Total liabilities....... 173,566 145,794 112 (117,979) 201,493
Revenues................ 119,354 115,756 538 (538) 235,110
Gross profit............ 20,995 20,713 397 (397) 41,708
Net income.............. 12,366 20,781 197 (22,807) 10,537
SEPTEMBER 30, 1996
<CAPTION>
D.R. HORTON, GUARANTOR NONGUARANTOR INTERCOMPANY
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Inventory............... $180,061 $165,222 $ -- $ -- $345,283
Total assets............ 353,563 181,586 1,117 (133,353) 402,913
Notes payable........... 167,907 1,966 -- -- 169,873
Total liabilities....... 197,255 160,019 279 (132,278) 225,275
Revenues................ 269,853 277,483 1,210 (1,210) 547,336
Gross profit............ 47,346 50,936 901 (901) 98,282
Net income.............. 30,771 54,368 553 (58,313) 27,379
SEPTEMBER 30, 1995
<CAPTION>
D.R. HORTON, GUARANTOR NONGUARANTOR INTERCOMPANY
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Inventory............... $150,692 $132,216 $ -- $ -- $282,908
Total assets............ 277,131 151,761 380 (110,485) 318,787
Notes payable........... 157,544 12,335 -- -- 169,879
Total liabilities....... 185,028 137,013 29 (109,356) 212,714
Revenues................ 259,165 178,223 576 (576) 437,388
Gross profit............ 44,274 33,372 444 (444) 77,646
Net income.............. 18,281 35,336 205 (33,283) 20,539
</TABLE>
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
D.R. HORTON, GUARANTOR INTERCOMPANY
INC. SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Inventory.................... $170,834 $33,260 $ -- $204,094
Total assets................. 236,573 47,329 (53,004) 230,898
Notes payable................ 106,224 2,354 -- 108,578
Total liabilities............ 140,152 58,356 (52,163) 146,345
Revenues..................... 355,577 37,740 -- 393,317
Gross profit................. 60,305 6,913 -- 67,218
Net income................... 38,728 18,708 (39,773) 17,663
</TABLE>
F-15
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER
THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Supplement Summary.............................................. S-3
Risk Factors............................................................... S-8
Use of Proceeds............................................................ S-10
Capitalization............................................................. S-11
Business................................................................... S-12
Description of Notes....................................................... S-19
Underwriting............................................................... S-43
Legal Matters.............................................................. S-43
PROSPECTUS
Available Information...................................................... 2
Incorporation of Certain Information by Reference.......................... 2
The Company................................................................ 4
Use of Proceeds............................................................ 4
Ratio of Earnings to Fixed Charges......................................... 4
Description of Debt Securities............................................. 5
Description of Capital Stock............................................... 8
Plan of Distribution....................................................... 9
Legal Matters.............................................................. 10
Experts.................................................................... 10
Index to Consolidated Financial Statements................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$150,000,000
D.R. HORTON, INC.
8 3/8% SENIOR NOTES DUE 2004
---------------
PROSPECTUS SUPPLEMENT
---------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
JUNE 4, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
