OVER $2 BILLION IN REVENUES
Dear Stockholders:
New records in revenues and earnings allowed the Company to achieve its
21st consecutive year of growth and profitability, and made D.R. Horton the 3rd
largest homebuilder in the United States.
1998 WAS AN EXCEPTIONAL YEAR IN WHICH WE:
o Merged with Continental Homes Holding Corp. and acquired three companies:
C. Richard Dobson Builders, Inc. on the southeastern seaboard
(February 1998)
Mareli Development and Construction in Louisville (May 1998)
RMP Properties, Inc. in Portland (June 1998).
o Restructured our homebuilding bank credit facilities to aggregate $825
million with terms up to 4 years at reduced borrowing rates. Further, we
entered into an additional $200 million in interest rate swap agreements
to fix the interest rate on a portion of this debt.
o Increased our quarterly cash dividend by 12 1/2%.
o Expanded mortgage services to our homebuyers, through our wholly-owned
subsidiary, CH Mortgage, Ltd. We established a separate $75 million
warehouse bank credit line to finance this activity.
o Commenced startup operations in Sacramento and initiated title agency
operations in Miami and Minneapolis.
o Provided stockholders with a 22% return on beginning stockholders' equity.
ADDITIONALLY, IN 1998 WE INCREASED:
o Pre-tax income 47% to $159 million
o Revenues 38% to $2.2 billion (13,944 homes)
o New sales orders 59% to $2.5 billion (15,952 homes)
o Year end sales backlog 73% to $1.1 billion (6,341 homes)
o Stockholders' equity 28% to $549 million
o Total assets 34% to $1.7 billion
ANNUAL AWARDS
Each year, D.R. Horton formally recognizes outstanding achievements through
its individual and divisional awards. We congratulate our 1998 recipients of
these awards, who were:
o The Los Angeles Division managed by Gerald Nordeman, was named "Division
of the Year" by the managers of the Company's other divisions.
o Cesi Pagano, of our Los Angeles Division, led the Company by selling the
highest dollar volume of homes and is our "Sales Person of the Year".
o Don Rampy, of our Continental Denver Division, is our "Construction Person
of the Year" for supervising construction of the most homes in 1998.
<PAGE>
Since September 30 (year end) we:
Converted the remaining outstanding convertible notes to common stock
increasing our stockholders' equity by $58 million, to more than $600
million.
Announced the promotions of Donald J. Tomnitz to Vice Chairman and
Chief Executive Officer and Richard Beckwitt to President.
Approved programs to repurchase up to $100 million each of common
stock and senior debt securities, if market conditions warrant.
1999 AND BEYOND
More important than our past, we have set the stage for continued success
in 1999 and beyond.
We look forward to a highly successful year ahead and anticipate D.R.
Horton will enjoy its 22nd year of growth and profitability. Some of our goals
for 2000 are to exceed $4 billion in revenues, and we plan to continue to be one
of the most profitable companies in the homebuilding industry. We invite you to
follow our progress and become more familiar with our Company by accessing our
website at http://www.DRHORTON.com.
Our rapid growth requires that we attract, develop and retain very talented
personnel. Effective January 1, 1999, we will enhance our overall Company-wide
employee benefits to reward our existing employees and to help attract future
talent to the Company. We commend all our employees for their assistance in
making 1998 an exceptional year and ask their help in making 1999 even better.
We also extend thanks to our shareholders and customers for their continued
investment and interest in D.R. Horton, Inc.
Our history demonstrates not only our ability to grow by initiating
operations in new markets, but also our success in acquiring companies that make
immediate contributions to our earnings. We continuously explore acquisition
candidates and new markets and plan to enter new markets annually. Additionally,
we see significant opportunities to expand our mortgage services to a larger
number of our homebuyers. The continuous growth of our Company through
geographic expansion is unmatched by anyone in the industry.
/s/ DONALD R. HORTON
Donald R. Horton
Chairman of the Board
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File number 1-14122
----------
D.R. HORTON, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2386963
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1901 Ascension Blvd, Suite 100 76006
Arlington, Texas (Zip Code)
(Address of principal executive offices)
(817) 856-8200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $.01 per share The New York Stock Exchange
8 3/8% Senior Notes due 2004 The New York Stock Exchange
10 % Senior Notes due 2006 The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of November 30, 1998, there were 61,410,148 shares of Common Stock, par
value $.01 per share, issued and outstanding, and the aggregate market value of
these shares held by non-affiliates of the registrant was approximately
$894,285,000. Solely for purposes of this calculation, all directors and
executive officers were excluded as affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 15, 1999, are incorporated herein by
reference in Part III.
================================================================================
<PAGE>
PART I
ITEM 1. BUSINESS
D.R. Horton, Inc. (the "Company" or "Horton") constructs and sells
single-family homes in metropolitan areas of the Mid-Atlantic, Midwest,
Southeast, Southwest, and West regions of the United States. We offer
high-quality homes, designed principally for first time and move up homebuyers.
Our homes generally range in size from 1,000 to 5,000 square feet and range in
price from $80,000 to $600,000. For the year ended September 30, 1998, we closed
homes with an average sales price approximating $153,300. Although, we have
historically positioned ourselves as a custom builder, we have recently acquired
two volume building companies which will enable us to compete across a broader
product offering.
On April 20, 1998, we acquired Continental Homes Holding Corp.
("Continental"), a geographically diversified homebuilder, through the merger of
Continental into Horton (the "Merger"). In the Merger, Horton issued
approximately 15.5 million shares of its common stock, and Continental's
outstanding convertible securities and options became convertible into or
exercisable for an additional 8.2 million shares. The Merger was accounted for
as a pooling of interests. Accordingly, all information for prior periods has
been restated to show the combined results of Horton and Continental.
We are one of the most geographically diversified homebuilders in the
United States, with operating divisions in 23 states and 41 markets as of
September 30, 1998.
The markets we operate in include:
Albuquerque, Atlanta, Austin, Baltimore, Birmingham, Charleston, Charlotte,
Chicago, Cincinnati, Dallas/Fort Worth, Denver, Greensboro, Greenville,
Hilton Head, Houston, Jacksonville, Kansas City, Killeen, Las Vegas, Los
Angeles, Louisville, Minneapolis/St. Paul, Miami, Myrtle Beach, Nashville,
New Jersey, Newport News, Orlando, Pensacola, Phoenix, Portland,
Raleigh/Durham, Richmond, Sacramento, Salt Lake City, San Antonio, San
Diego, St. Louis, Tucson, Suburban Washington, D.C. and Wilmington.
We build homes under the following names: D.R. Horton, Joe Miller, Arappco,
Regency, Trimark, Torrey, SGS, Dobson, Continental, Milburn, RMP and Mareli.
We were incorporated in Delaware on July 1, 1991, to acquire all of the
assets and businesses of 25 predecessor companies, which were residential home
construction and development companies owned or controlled by Donald R. Horton.
Our principal executive offices are located at 1901 Ascension Blvd., Suite
100, Arlington, Texas 76006, and its telephone number is (817) 856-8200.
1
<PAGE>
Operating Strategy
We believe that the following operating strategies have enabled us to
achieve consistent growth and profitability:
Geographic Diversification
From 1978 to late 1987, excluding Continental locations, our homebuilding
activities were conducted in the Dallas/Fort Worth area. We then instituted a
policy of diversifying geographically, entering the following markets in the
years shown:
Year Entered Markets
------------ -------
1987.............. Phoenix
1988.............. Atlanta, Orlando
1989.............. Charlotte
1990.............. Houston
1991.............. Suburban Washington, D.C.
1992.............. Chicago, Cincinnati, Raleigh/Durham, South Florida
1993.............. Austin, Los Angeles, Salt Lake City, San Diego
1994.............. Minneapolis / St. Paul, Kansas City, Las Vegas,
San Antonio
1995.............. Birmingham, Denver, Greensboro, St. Louis
1996.............. Albuquerque, Pensacola
1997.............. Greenville, Nashville, New Jersey, Tucson
1998.............. Baltimore, Charleston, Hilton Head, Jacksonville,
Killeen, Louisville, Myrtle Beach, Newport News,
Portland, Richmond, Sacramento, Wilmington
We continually monitor the sales and margins achieved in each of the
subdivisions in which we operate as part of our evaluation of the use of our
capital. While we believe there are significant growth opportunities in our
existing markets, we intend to continue our policy of diversification by seeking
to enter new markets. We believe our diversification strategy mitigates the
effects of local and regional economic cycles and enhances our growth potential.
Typically, we will not invest material amounts in real estate, including raw
land, developed lots, models and speculative homes, or overhead in start-up
operations in new markets until such markets demonstrate significant growth
potential and acceptance of our products.
Acquisitions
As an integral component of our operational strategy of continued
expansion, we continually evaluate opportunities for strategic acquisitions. We
believe that expanding our operations through the acquisition of existing
homebuilding companies affords us several benefits not found in start-up
operations. Such benefits include:
o Established land positions and inventories
o Existing relationships with land owners, developers, subcontractors and
suppliers
o Brand name recognition
o Proven product acceptance by homebuyers in the market
In evaluating potential acquisition candidates, we seek homebuilding
companies that have an excellent reputation, a track record of profitability and
a strong management team with an entrepreneurial orientation. We limit the risks
associated with acquiring a going concern by conducting extensive operational,
financial and legal due diligence on each acquisition and by only acquiring
homebuilding companies that we believe will have an immediate positive impact on
our earnings.
2
<PAGE>
During the last five fiscal years, we have made the following acquisitions,
including those of Continental prior to the merger:
Date Acquired Entities Acquired Markets
------------- ----------------- -------
January 1994 Aspen Homes San Antonio
April 1994 Joe Miller Homes, Inc. Minneapolis
and Argus Development, Inc.
November 1994 Heftler Realty Company Miami
July 1995 Arappco, Inc. Greensboro
September 1995 Regency Development, Inc. Birmingham
June 1996 Westchester Homes Dallas
October 1996 Trimark Communities, L.L.C. Denver
December 1996 SGS Communities, Inc. New Jersey
February 1997 The Torrey Group Atlanta, Charlotte,
Greenville, and
Raleigh/Durham
February 1998 C. Richard Dobson Charleston, Charlotte,
Builders, Inc. Greensboro, Greenville,
Hilton Head,
Jacksonville, Myrtle
Beach, Newport News,
Raleigh, Richmond,
Wilmington
April 1998 Continental Homes Phoenix, Austin, San
Holding Corp. Diego, Dallas, Denver,
Miami, San Antonio
May 1998 Mareli Development & Louisville
Construction Company, LLC
June 1998 RMP Properties, Inc. Portland
We will continue to evaluate potential future acquisition opportunities
that satisfy our acquisition criteria in both existing and new markets.
Decentralized Operations
We decentralize our homebuilding activities to give more operating
flexibility to our local division managers. We have 53 separate operating
divisions, some of which are in the same market area. Generally, each operating
division consists of a vice president, an office manager and staff, a sales
manager and a construction manager. We believe 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 our competitors. Our division managers receive performance
bonuses based upon achieving targeted operating levels in their operating
divisions.
Each operating division is responsible for:
o Site selection which involves
-- A feasibility study
-- Soil and environmental reviews
-- Review of existing zoning and other governmental requirements
-- Review of the need for and extent of offsite work required to meet
local building codes
o Negotiating lot option or similar contracts
o Overseeing land development
3
<PAGE>
o Planning its homebuilding schedule
o Selecting building plans and architectural schemes
o Obtaining all necessary building approvals
o Developing a marketing plan
Corporate office controls
The corporate office controls key risk elements through centralized:
o Financing
o Cash management
o Risk management
o Accounting and management reporting
o Payment of subcontractor invoices
o Administration of payroll and employee benefits
o Final approval of land and lot acquisitions
o Capital allocation
o Oversight of inventory levels
Cost Management
We control our overhead costs by centralizing administrative and accounting
functions and by limiting the number of field administrative personnel and
middle level management positions. We also minimize advertising costs by
participating in promotional activities, publications and newsletters sponsored
by local real estate brokers, mortgage companies, utility companies and trade
associations.
We control construction costs through the efficient design of our homes and
by obtaining favorable pricing from certain subcontractors and national vendors
based on the high volume of services they perform for us. We also control
construction costs by monitoring expenses on each house through our purchase
order system. We control capital and overhead costs by monitoring our inventory
levels through our management information systems.
Markets
Homebuilding activities are conducted in five geographic regions,
consisting of:
Geographic Region Markets
----------------- -------
Mid-Atlantic........... Baltimore, Charleston, Charlotte, Greensboro,
Greenville, Hilton Head, Myrtle Beach, New Jersey,
Newport News, Raleigh/Durham, Richmond, Suburban
Washington, D.C. and Wilmington
Midwest................ Chicago, Cincinnati, Kansas City, Louisville,
Minneapolis/St. Paul, St. Louis
Southeast.............. Atlanta, Birmingham, Jacksonville, Nashville,
Orlando, Pensacola, South Florida
Southwest.............. Albuquerque, Austin, Dallas/Fort Worth, Houston,
Killeen, Phoenix, San Antonio, Tucson
West................... Denver, Las Vegas, Los Angeles, Portland,
Sacramento, Salt Lake City, San Diego
4
<PAGE>
When entering new markets or conducting operations in existing markets,
among the things we consider are:
o Regional economic conditions
o Job growth
o Land availability
o Local land development process
o Consumer tastes
o Competition
o Secondary home sales activity
Our homebuilding revenues by geographic region are:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1996 1997 1998
---------- ---------- ----------
(In millions)
<S> <C> <C> <C>
Mid-Atlantic..................... $ 116.4 $ 180.5 $ 372.2
Midwest.......................... 88.5 95.9 130.4
Southeast........................ 115.2 246.4 384.5
Southwest........................ 624.4 694.3 789.6
West............................. 191.8 350.4 478.3
-------- -------- --------
Total.......................... $ 1,136.3 $ 1,567.5 $ 2,155.0
======== ======== ========
</TABLE>
Land Policies
Typically, we acquire land and enter into lot option contracts to acquire
developed building lots only after necessary "entitlements" have been obtained,
i.e., when we have the right to begin development or construction. Before we
acquire lots or tracts of land, we will, among other things, complete a
feasibility study, which includes soil tests, independent environmental studies
and other engineering work, and determine that all necessary zoning and other
governmental entitlements required to develop and use the property for home
construction have been acquired. At September 30, 1998, about 60% of our total
lot position of 52,054 lots was being or had been developed by us. Although we
purchase and develop land primarily to support our own homebuilding activities,
occasionally we sell lots and land to other developers and homebuilders.
We also use lot option contracts, where we purchase the right, but not the
obligation, to buy building lots at predetermined prices on a takedown schedule
commensurate with anticipated home closings. Lot option contracts generally are
on a nonrecourse basis, thereby limiting our financial exposure to earnest money
deposits given to property sellers. This enables us to control significant lot
positions with minimal up front capital and substantially reduces the risks
associated with land ownership and development.
A summary of our land/lot position at September 30, 1998 is:
<TABLE>
<S> <C>
Finished lots we own.................................................. 5,735
Lots under development we own......................................... 25,620
------
Total lots owned..................................................... 31,355
Lots available under lot option and similar contracts................. 20,699
------
Total land/lot position.............................................. 52,054
======
</TABLE>
5
<PAGE>
We limit our exposure to real estate inventory risks by:
o 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
o Limiting the number of speculative homes (homes started without an
executed sales contract) built in each subdivision
o 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
o Utilizing lot option contracts, where possible
o Limiting the size of acquired land parcels to smaller tracts of land
Construction
Our home designs are prepared by architects in each of our markets to
appeal to local tastes and preferences of the community. We also offer optional
interior and exterior features to enhance the basic home design and to promote
our sales efforts.
Substantially all of our construction work is performed by subcontractors.
Our construction supervisors monitor the construction of each home, participate
in material design and building decisions, coordinate the activities of
subcontractors and suppliers, subject the work of subcontractors to quality and
cost controls and monitor compliance with zoning and building codes.
Subcontractors typically are retained for a specific subdivision pursuant to a
contract that obligates the subcontractor to complete construction at a fixed
price. Agreements with our subcontractors and suppliers generally are negotiated
for each subdivision. We compete with other homebuilders for qualified
subcontractors, raw materials and lots in the markets where we operate.
Construction time for our homes depends on the weather, availability of
labor, materials and supplies, size of the home, and other factors. We typically
complete the construction of a home within four months.
We do not maintain significant inventories of construction materials,
except for work in process materials for homes under construction. Typically,
the construction materials used in our operations are readily available from
numerous sources. We have contracts exceeding one year with certain suppliers of
our building materials that are cancellable at our option with a 30 day notice.
In recent years, we have not experienced any significant delays in construction
due to shortages of materials or labor.
Marketing and Sales
We market and sell our homes through commissioned employees and independent
real estate brokers. Home sales typically are conducted from sales offices
located in furnished model homes in each subdivision. At September 30, 1998, we
owned 532 model homes, which generally are not offered for sale until the
completion of a subdivision. Our 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. We train and inform our
sales personnel as to the availability of financing, construction schedules and
marketing and advertising plans.
In addition to using model homes, we typically build a limited number of
speculative homes in each subdivision to enhance our marketing and sales
activities. Construction of these speculative homes also is necessary to satisfy
the requirement 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 we have built in the
market. Depending upon the seasonality of each market, we attempt to limit our
speculative homes in each subdivision. At September 30, 1998, we operated in 540
subdivisions and averaged 5 speculative homes, in various stages of
construction, in each subdivision.
6
<PAGE>
We advertise on a limited basis in newspapers and in real estate broker,
mortgage company and utility publications, brochures, newsletters and
billboards. To minimize advertising costs, we attempt to operate in subdivisions
in conspicuous locations that permit us to take advantage of local traffic
patterns. We also believe that model homes play a significant role in our
marketing efforts. Consequently, we expend significant effort in creating an
attractive atmosphere in our model homes.
Our sales contracts require a down payment of at least $500. The contracts
include a financing contingency which permit customers to cancel if they cannot
obtain mortgage financing at prevailing interest rates within a specified
period, typically four to six weeks, and may include other contingencies, such
as the sale of an existing home. We include a home sale in our sales backlog
when the sales contract is signed and we have received the initial down payment.
We do not recognize revenue upon the sale of a home until it is closed and title
passes to the homebuyer. The average period between the signing of a sales
contract for a home and closing is approximately three to five months.
Customer Service and Quality Control
Our operating divisions are responsible for pre-closing, quality control
inspections and responding to customers' post-closing needs. We believe that
prompt and courteous response to homebuyers' needs during and after construction
reduces post-closing repair costs, enhances our reputation for quality and
service, and ultimately leads to significant repeat and referral business from
the real estate community and homebuyers. We provide our homebuyers with a
limited one-year warranty on workmanship and building materials. The
subcontractors who perform most of the actual construction also provide
warranties of workmanship to us and are generally prepared to respond to us and
the homeowner promptly upon request. In most cases, we supplement our one-year
warranty by purchasing a ten-year limited warranty from a third party. To cover
our potential warranty obligations, we accrue an estimated amount for future
warranty costs.
Customer Financing
We provide mortgage financing services principally to purchasers of homes
we build and sell. CH Mortgage, a wholly-owned subsidiary, provides mortgage
banking services in Arizona, Colorado, Kentucky, Nevada, North and South
Carolina, Minnesota, Texas and Florida. D.R. Horton Mortgage Company, Ltd., a
joint venture formed in 1998 with a third party, presently provides services in
California. On a combined basis, related mortgage banking entities provided
mortgage financing services for about 42% of the homes closed during the year
ended September 30, 1998. We anticipate expanding these mortgage activities to
other markets we serve.
In other markets where we currently do not provide mortgage financing, we
work with a variety of mortgage lenders that make available to 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, we are able to coordinate and expedite
the entire sales transaction by ensuring that mortgage commitments are received
and that closings take place on a timely and efficient basis.
Title Services
Through our wholly-owned subsidiaries, DRH Title Company of Texas, Ltd.,
DRH Title Company of Florida, Inc., DRH Title Company of Minnesota, Inc. and
Travis County Title Company, we serve as a title insurance agent by providing
title insurance policies and closing services to purchasers of homes we build
and sell in the Dallas/Fort Worth, Austin, Orlando, Miami, Minneapolis and San
Antonio markets. We assume no underwriting risk associated with these title
policies.
Employees
At September 30, 1998, we employed 2,465 persons, of whom 629 were sales
and marketing personnel, 757 were executive, administrative and clerical
personnel, 844 were involved in construction, and 235 worked in mortgage and
title operations. Fewer than 25 of our employees are covered by collective
7
<PAGE>
bargaining agreements. Some of the subcontractors which we use are represented
by labor unions or are subject to collective bargaining agreements. We believe
that our relations with our employees and subcontractors are good.
Competition
The single family residential housing industry is highly competitive, and
we compete in each of our markets with numerous other national, regional and
local homebuilders, often with larger subdivisions designed, planned and
developed by such homebuilders. Our homes compete on the basis of quality,
price, design, mortgage financing terms and location.
Governmental Regulation and Environmental Matters
The housing, mortgage and title insurance industries are subject to
extensive and complex regulations. We and our subcontractors must comply with
various federal, state and local laws and regulations including zoning, density
and development requirements, building, environmental, advertising and consumer
credit rules and regulations, as well as other rules and regulations in
connection with our development, homebuilding and sales activities. These
include requirements affecting the development process as well as building
materials to be used, building designs and minimum elevation of properties. Our
homes are inspected by local authorities where required, and homes eligible for
insurance or guarantees provided by the FHA and VA are subject to inspection by
them. These regulations often provide broad discretion to the administering
governmental authorities. This can delay or increase the cost of development or
homebuilding.
We also are subject to a variety of local, state and federal statutes,
ordinances, rules and regulations concerning protection of health and the
environment. The particular environmental laws for each site vary greatly
according to location, environmental condition and the present and former uses
of the site and adjoining properties. These environmental laws may result in
delays, may cause us to incur substantial compliance and other costs, and can
prohibit or severely restrict development and homebuilding activity in certain
environmentally sensitive regions or areas.
Our internal mortgage activities and title insurance agencies must also
comply with various federal and state laws, consumer credit rules and
regulations and rules and regulations unique to such activities. Additionally,
mortgage loans and title activities originated under the FHA, VA, FNMA and GNMA
are subject to rules and regulations imposed by those agencies.
ITEM 2. PROPERTIES
We own a 52,000 square foot office complex, consisting of three
single-story buildings of steel and brick construction, located in Arlington,
Texas, that serves as the principal executive offices and houses two of the
Dallas/Fort Worth divisions. We also lease approximately 213,000 square feet of
space for our operating divisions under leases expiring between October 1998 and
June 2006.
ITEM 3. LEGAL PROCEEDINGS
We are a party to routine litigation incidental to our business. Such
matters, if decided adversely to us, would not, in the opinion of management,
have a material adverse effect upon our financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock (the "Common Stock") is listed on the New York Stock
Exchange under the symbol "DHI". The following table sets forth the high and low
sales prices for the Common Stock for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1997 1998
------------------- --------------------
HIGH LOW HIGH LOW
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Quarter Ended December 31 . . . . . $ 11 3/8 $ 8 5/8 $ 21 $ 15
Quarter Ended March 31. . . . . . . 13 10 1/8 23 5/8 16 5/8
Quarter Ended June 30 . . . . . . . 12 1/2 9 24 16 5/8
Quarter Ended September 30 . . . . 17 1/4 10 3/16 24 15/16 15 1/4
</TABLE>
As of November 30, 1998, the closing price was $18 7/8, and there were
approximately 286 holders of record. We have declared quarterly cash dividends
of 2 cents per share for fiscal 1997 and 2 1/4 cents per share for fiscal 1998.
The declaration of cash dividends is at the discretion of our Board of
Directors and will depend upon, among other things, future earnings, cash flows,
capital requirements, our general financial condition and general business
conditions. We are required to comply with certain covenants contained in the
bank agreements and Senior Notes indentures. The most restrictive of these
requirements allows us to pay cash dividends on common stock in an amount, on a
cumulative basis, not to exceed 50% of consolidated net income, as defined,
subject to certain other adjustments. Pursuant to the most restrictive of these
requirements, we had approximately $65.6 million available for the payment of
dividends at September 30, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our
Consolidated Financial Statements. The data should be read in conjunction with
the Consolidated Financial Statements, related Notes thereto and other financial
data elsewhere herein. These historical results are not necessarily indicative
of the results to be expected in the future.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
Income Statement Data: (1) (2)
<S> <C> <C> <C> <C> <C>
Revenues ($ millions)................................. $ 741.4 $ 869.5 $1,147.7 $1,578.4 $2,176.9
Homebuilding revenues ($ millions).................... 734.4 862.8 1,136.3 1,567.5 2,155.0
Net income from continuing operations ($ millions).... 30.7 34.4 53.2 65.0 93.4
Net income per share from continuing operations:
Basic.............................................. .75 .80 1.15 1.28 1.75
Diluted............................................ .72 .77 1.07 1.15 1.56
Cash dividends declared per common share (3).......... -- -- -- .06 .09
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
As of September 30,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
($ millions)
Balance Sheet Data: (1) (2)
<S> <C> <C> <C> <C> <C>
Inventories........................................... $ 409.5 $ 574.2 $ 690.2 $1,024.3 $1,358.0
Total Assets.......................................... 536.4 705.6 841.3 1,248.3 1,667.8
Notes Payable......................................... 276.9 402.7 420.4 650.7 854.5
Stockholders' Equity.................................. 183.1 216.6 306.6 427.9 549.4
- ----------
<FN>
(1) See Note C to the audited financial statements for details concerning
acquisitions by the Company.
(2) On April 20, 1998, Horton and Continental consummated a merger pursuant to
which Continental was merged into the Company, with 2.25 shares of the
Company common shares being exchanged for each outstanding share of
Continental. Approximately 15.5 million Horton common shares were issued to
effect the merger. The merger with Continental was treated as a pooling of
interests for accounting purposes. Therefore, all financial amounts have
been restated as if Continental and the Company had been combined throughout
the periods presented.
Prior to the merger, Continental had a fiscal year end of May 31.
Accordingly, the Continental consolidated balance sheets as of May 31, 1994,
1995 and 1996 have been combined with the Company's balance sheets as of
September 30, 1994, 1995 and 1996, respectively. The related Continental
statements of income, stockholders' equity and cash flows for the years
ended May 31, 1994, 1995 and 1996 have been combined with the Company's
statements of income, stockholders' equity and cash flows for the fiscal
years ended September 30, 1994, 1995 and 1996, respectively. Continental's
balance sheet and the related statements of income, stockholders' equity and
cash flows have been restated to conform to the Company's fiscal year end of
September 30, 1997.
As permitted by regulations of the Securities and Exchange Commission,
Continental's four-month period ended September 30, 1996 has been omitted
from the financial statements. Continental's revenues, cost of sales, income
before taxes and net income for this four month period were $234.4 million,
$191.6 million, $18.8 million and $11.2 million, respectively.
(3) Cash dividends per common share represent those dividends declared to D.R.
Horton, Inc. shareholders, unadjusted for the merger.
(4) In 1998, net income includes the net effect of a $7.1 million, net of tax,
provision for costs associated with the merger with Continental. The
earnings per share effect was $0.13 basic and $0.11 diluted.
</FN>
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Results of Operations -- Consolidated
D.R. Horton, Inc. and subsidiaries (the "Company") provide homebuilding
activities in 23 states and 41 markets through its 53 homebuilding divisions.
Through its financial services activities, the Company also provides mortgage
banking and title agency services in many of these same markets.
On April 20, 1998, D.R. Horton, Inc. ("Horton") acquired Continental Homes
Holding Corp. ("Continental"), a geographically diversified homebuilder, through
the merger of Continental into Horton (the "Merger"). In the Merger, Horton
issued approximately 15.5 million shares of its common stock, and Continental's
outstanding convertible securities and options became convertible into or
exercisable for an additional approximately 8.2 million shares. The Merger was
accounted for as a pooling of interests. Accordingly, Horton's financial
information for prior periods has been restated to show the combined results of
Horton and Continental. In the description of business that follows, the
business of Continental has been combined with Horton as though Continental had
been a part of Horton throughout the periods described.
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Consolidated revenues increased 37.9% to $2,176.9 million in 1998 from
$1,578.4 million in 1997 due to increases in both homebuilding and financial
services revenues.
Consolidated selling, general and administrative (SG&A) expenses increased
34.9% to $231.7 million in 1998 from $171.8 million in 1997. As a percentage of
consolidated revenues, SG&A expenses decreased to 10.6% in 1998 from 10.9% in
1997. Consolidated 1998 SG&A expenses exclude $11.9 million in non-recurring
costs associated with the Merger with Continental. The merger costs consisted
primarily of fees to third party investment, accounting and legal advisors.
Consolidated interest expense increased to $16.2 million in 1998 from $10.9
million in 1997 due to the increased interest costs associated with the
Company's rapidly expanding financial services operations, increased debt levels
from acquisitions and expansion of homebuilding activities. Financial services
interest expense grew from $0.7 million in 1997 to $2.2 million in 1998. As a
percentage of consolidated revenues, interest expense was 0.7% in both 1998 and
1997.
Consolidated other income consists mainly of interest income on funds
temporarily invested and, for financial services operations, on mortgage loans
held for sale. In 1998, consolidated other income was $7.6 million, up $2.2
million from 1997, primarily due to larger amounts of temporarily investable
funds and mortgage loans held for sale.
Non-recurring merger costs associated with the Continental merger were
$11.9 million and consisted primarily of fees paid to third party investment,
accounting, and legal advisors.
The consolidated provision for income taxes increased 50.8%, to $65.7
million in 1998, from $43.6 million in 1997, due in part to the corresponding
increase in income before income taxes. As a percentage of consolidated
revenues, the income tax provision increased by 0.2% to 3.0% in 1998. The
increase as a percentage of revenues was due primarily to an increase in the
total effective income tax rate in 1998, from 40.2% to 41.3%, caused by the
non-deductibility of certain of the 1998 merger costs and increased earnings in
states with higher effective tax rates.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Consolidated revenues increased 37.5% to $1,578.4 million in 1997 from
$1,147.7 million in 1996 due to the increase in homebuilding revenues. Revenues
from financial services operations decreased by 4.5% in 1997 due to a 1996 sale
of servicing rights that resulted in recognition of $0.9 million of revenue in
1996.
11
<PAGE>
Consolidated SG&A expenses increased by 39.5% to $171.8 million in 1997
from $123.1 million in 1996. As a percentage of consolidated revenues,
consolidated SG&A expenses increased to 10.9% in 1997 from 10.7% in 1996 due in
part to startup expenses incurred in new financial services markets.
Consolidated interest expense increased to $10.9 million in 1997 from $9.2
million in 1996, primarily due to the corresponding increase in inventories and
acquisitions financed through available lines of credit. As a percentage of
consolidated revenues, interest expense decreased to 0.7% in 1997 from 0.8% in
1996.
Consolidated other income, which consists mainly of interest income on
funds temporarily invested and, for financial services operations, on mortgage
loans held for resale, increased to $5.4 million in 1997 from $4.5 million in
1996.
The consolidated provision for income taxes increased 18.9%, to $43.6
million in 1997 from $36.6 million in 1996, due in part to the corresponding
increase in income before income taxes. The effective tax rate decreased to
40.2% in 1997 from 40.8% in 1996, due to greater earnings in states with lower
tax rates.
Results of Operations -- Homebuilding
The following tables set forth certain operating and financial data for the
Company's homebuilding activities:
<TABLE>
<CAPTION>
Percentages of
Homebuilding Revenues
Years Ended September 30,
--------------------------
1996 1997 1998
------ ------ ------
Costs and expenses:
<S> <C> <C> <C>
Cost of sales................................. 81.8% 82.4% 81.9%
Selling, general and administrative expense... 10.2 10.4 10.0
Interest expense.............................. 0.7 0.7 0.7
------ ------ ------
Total costs and expenses........................ 92.7 93.5 92.6
Other (income).................................. (0.2) (0.2) (0.2)
------ ------ ------
Income before income taxes...................... 7.5% 6.7% 7.6%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------
1996 1997 1998
-------------- -------------- --------------
Homes Homes Homes
Homes Closed* Closed % Closed % Closed %
- ------------ ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Mid-Atlantic.................. 547 7.2% 843 8.4% 2,056 14.7%
Midwest....................... 457 6.0% 500 5.0% 701 5.0%
Southeast..................... 719 9.4% 1,583 15.8% 2,595 18.6%
Southwest..................... 4,915 64.2% 5,324 53.0% 6,145 44.1%
West.......................... 1,013 13.2% 1,788 17.8% 2,447 17.6%
------ ------- ------ ------- ------ -------
7,651 100.0% 10,038 100.0% 13,944 100.0%
====== ======= ====== ======= ====== =======
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------------
1996 1997 1998
--------------- ---------------- ----------------
Homes Homes Homes
Net New Sales Contracts* Sold $ Sold $ Sold $
- ----------------------- ----- -------- ------ -------- ------ --------
($ millions)
<S> <C> <C> <C> <C> <C> <C>
Mid-Atlantic................ 495 $ 106.9 849 $ 173.0 2,384 $ 440.6
Midwest..................... 527 101.0 496 96.6 888 169.5
Southeast................... 796 120.5 1,705 253.3 2,608 395.2
Southwest................... 5,254 660.8 5,571 709.9 7,161 952.6
West........................ 1,360 265.5 1,930 362.9 2,911 575.3
----- -------- ------ -------- ------ --------
8,432 $1,254.7 10,551 $1,595.7 15,952 $2,533.2
===== ======== ====== ======== ====== ========
<CAPTION>
Years Ended September 30,
--------------------------------------------------
1996 1997 1998
--------------- --------------- ----------------
Sales Backlog* Homes $ Homes $ Homes $
- ------------- ------ ------- ------ ------- ------ --------
($ millions)
<S> <C> <C> <C> <C> <C> <C>
Mid-Atlantic................ 146 $ 34.4 334 $ 68.9 932 $ 180.9
Midwest..................... 184 34.9 180 35.5 419 80.5
Southeast................... 353 51.1 697 101.2 733 116.3
Southwest................... 1,973 256.6 2,027 260.8 3,043 423.9
West........................ 618 127.4 723 142.8 1,214 251.3
------ ------- ------ ------- ------ --------
3,274 $ 504.4 3,961 $ 609.2 6,341 $1,052.9
====== ======= ====== ======= ====== ========
- ----------
<FN>
*- The Company's market regions consist of the following:
Mid-Atlantic Baltimore, Charleston, Charlotte, Greensboro, Greenville,
Hilton Head, Myrtle Beach, New Jersey, Newport News,
Raleigh/Durham, Richmond, Suburban Washington, D. C. and
Wilmington
Midwest Chicago, Cincinnati, Kansas City, Louisville,
Minneapolis/St. Paul and St. Louis
Southeast Atlanta, Birmingham, Jacksonville, Nashville, Orlando,
Pensacola and South Florida
Southwest Albuquerque, Austin, Dallas/Fort Worth, Houston, Killeen,
Phoenix, San Antonio and Tucson
West Denver, Las Vegas, Los Angeles, Portland, Sacramento,
Salt Lake City and San Diego
</FN>
</TABLE>
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Revenues from homebuilding activities increased 37.5% to $2,155.0 million
(13,944 homes closed) in 1998 from $1,567.5 million (10,038 homes closed) in
1997, despite a decrease in land sales from $34.8 million in 1997 to $16.8
million in 1998. The number of homes closed increased in all of the Company's
market regions, with percentage increases ranging from 143.9% in the
Mid-Atlantic region to 15.4% in the Southwest region. The increases in both
revenues and homes closed were due to strong housing demand, the Company's
entrance into new markets, and the home closings associated with the
acquisitions of C. Richard Dobson Builders, Inc. (Dobson), which was acquired in
February, 1998; Mareli Development & Construction Co. (Mareli) of Louisville,
Kentucky, acquired in May, 1998; and RMP Development, Inc. (RMP) of Portland,
Oregon, acquired in June, 1998. In markets in which the Company operated during
both fiscal years, revenues increased by 26.5% to $1,939.4 million (12,591 homes
closed). The average selling price of homes closed in 1998 was $153,300,
substantially unchanged from 1997.
New net sales contracts increased 51.2% to 15,952 homes in 1998 from 10,551
in 1997. Percentage increases in new net sales contracts ranging from 180.8% to
28.5% were achieved in the Company's market regions. The increases in new net
sales contracts were due in part to sales achieved by the 1998 acquisitions. In
markets in which the Company operated in both fiscal years, new net sales
contracts increased 37.2%, to 14,480 homes. The average amount of new net sales
contracts in 1998 was $158,800, up 5.0% from the $151,200 average in 1997.
13
<PAGE>
The Company was operating in 540 subdivisions at September 30, 1998,
compared to 377 at September 30, 1997. At September 30, 1998, the Company's
backlog of sales contracts was $1,052.9 million (6,341 homes), up 72.8% from the
comparable amount at September 30, 1997. In markets in which the Company
operated during both fiscal years, the sales contract backlog was $978.9 million
(5,850 homes), up 60.7% from 1997. The average sales price of homes in sales
backlog was $166,000 at September 30, 1998, up 7.9% from the $153,800 average at
September 30, 1997.
Cost of sales increased by 36.6%, to $1,765.6 million in 1998 from $1,292.6
million in 1997. The increase in cost of sales was attributable to the increase
in revenues. Cost of sales as a percentage of revenues decreased by 0.5%, to
81.9% in 1998 from 82.4% in 1997, due to excellent housing demand allowing
increases in selling prices in certain markets, efforts to enhance gross margins
through efficiencies and materials discounts and purchase accounting adjustments
in 1997 that required the Company to increase its basis in acquired inventory.
Selling, general and administrative (SG&A) expenses from homebuilding
activities increased by 32.8% to $216.4 million in 1998 from $163.0 million in
1997. As a percentage of revenues, SG&A expenses decreased to 10.0% in 1998 from
10.4% in 1997. The decrease in SG&A expenses as a percentage of revenues is
primarily due to the Company's cost containment efforts, the increased revenues
that absorb the fixed elements of overhead, and costs associated with
integrating the 1997 acquisitions into the Company.
Interest expense associated with homebuilding activities increased to $14.0
million in 1998 from $10.2 million in 1997 due to the increase in debt
associated with the growth of the Company both internally and through
acquisitions. As a percentage of homebuilding revenues, homebuilding interest
expense was 0.7% in both 1998 and 1997. The Company follows a policy of
capitalizing interest only on inventory under construction or development.
During both 1998 and 1997, the Company expensed the portion of incurred interest
and other financing costs which could not be charged to inventory. Capitalized
interest and other financing costs are included in cost of sales at the time of
home closings.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Revenues from homebuilding activities increased by 37.9% to $1,567.5
million in 1997 from $1,136.3 million in 1996. The number of homes closed by the
Company increased by 31.2% to 10,038 homes in 1997 from 7,651 in 1996. Home
closings increased in all of the Company's market regions, with percentage
increases ranging from 120.2% in the Southeast region to 8.3% in the Southwest
region. The increases in both revenues and homes closed were due in part to the
February 1997 acquisition of Torrey. From its acquisition through September 30,
1997, Torrey closed 962 homes, with revenues totalling $140.8 million. For 1997,
Torrey accounted for 9.6% of homes closed and 9.0% of the revenues generated.
Excluding Torrey, 1997 revenues increased by 25.6% to $1,426.7 million. The
average price of homes closed increased 3.9% to $152,600 in 1997 from $146,900
in 1996 due to changes in the geographic mix of homes closed within the Company
and different price points in certain markets.
New net sales contracts increased 25.1% to 10,551 homes in 1997 from 8,432
in 1996. Percentage increases in the dollar value of new net sales contracts
ranging from 110.2% to 7.4% were achieved in four of the Company's five market
regions, with a 4.4% decline experienced in the Midwest region. From its
acquisition through September 30, 1997, Torrey's new net sales contracts were
$153.8 million (1,049 homes). Excluding Torrey, the Company's new net sales
contracts were $1,441.9 million (9,502 homes), a 14.9% increase over 1996. The
average selling price of new sales contracts in 1997 was $151,200, up 1.6% from
the 1996 average selling price of $148,800.
The Company was operating in 377 subdivisions at September 30, 1997,
compared to 253 at September 30, 1996. At September 30, 1997, the Company's
backlog of sales contracts was $609.2 million (3,961 homes), a 20.8% increase
over the comparable figure at September 30, 1996. At September 30, 1997, Torrey
14
<PAGE>
held a sales contract backlog of $61.8 million (413 homes). Excluding Torrey,
the Company's sales contract backlog at September 30, 1997, was $547.4 million
(3,548 homes), up 8.5% from the prior year. The average sales price of homes in
backlog was $153,800 at September 30, 1997, down 0.2% from $154,100 at September
30, 1996.
Cost of sales increased by 39.0% to $1,292.6 million in 1997 from $930.1
million in 1996. The increase in cost of sales accompanied the increase in
revenues. Cost of sales as a percentage of revenues increased by 0.6% to 82.4%
in 1997 from 81.8% in 1996, due to competitive pressures causing lower gross
margins in the Austin and California markets and the effects of purchase
accounting adjustments requiring the Company to increase its basis in inventory
acquired with Trimark, SGS and Torrey.
Total selling, general and administrative (SG&A) expenses from homebuilding
activities increased by 40.4% to $163.0 million in 1997 from $116.1 million in
1996. As a percentage of homebuilding revenues, SG&A expenses increased to 10.4%
in 1997 from 10.2% in 1996. Absent the SG&A costs associated with integrating
the three 1997 acquisitions, SG&A expenses as a percentage of homebuilding
revenues would have decreased by 0.2% to 10.0% in 1997.
Interest expense associated with homebuilding activities increased to $10.2
million in 1997 from $7.5 million in 1996 due to the corresponding increase in
homebuilding revenues. As a percentage of homebuilding revenues, homebuilding
interest expense was 0.7% in both 1997 and 1996. The Company follows a policy of
capitalizing interest only on inventory under construction or development.
During both 1997 and 1996, the Company expensed the portion of incurred interest
and other financing costs which could not be charged to inventory. Capitalized
interest and other financing costs are included in cost of sales at the time of
home closings.
Results of Operations -- Financial Services
Financial services include mortgage financing and title insurance agency
and closing services, primarily related to purchases of homes built and sold by
the Company. Mortgage services are provided in California, Nevada, Arizona,
Colorado, Texas, Florida, Kentucky, Minnesota and North and South Carolina.
Title agency and closing services are provided in Texas, Florida and Minnesota.
The following table summarizes financial and other information for the Company's
financial services operations:
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1996 1997 1998
-------- -------- --------
($ in thousands)
Financial Services:
<S> <C> <C> <C>
Number of loans originated..................... 2,916 3,157 5,875
-------- -------- --------
Loan acquisition fees.......................... $ 2,758 $ 3,174 $ 5,929
Sale of servicing rights and gains
from sale of mortgages....................... 6,177 4,666 9,276
Other revenues................................. 1,005 1,515 1,998
-------- -------- --------
Total mortgage banking revenues................ 9,940 9,355 17,203
Title policy premiums, net..................... 1,541 1,612 4,689
-------- -------- --------
Total revenues................................. 11,481 10,967 21,892
General and administrative expenses............ 7,028 8,733 15,244
Interest expense............................... 1,785 664 2,220
Interest/other (income)........................ (2,101) (1,396) (2,668)
-------- -------- --------
Income before income taxes..................... $ 4,769 $ 2,966 $ 7,096
======== ======== ========
</TABLE>
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Revenues from financial services operations increased 99.6% to $21.9
million in 1998 from $11.0 million in 1997. The increase in financial services
revenues was due to the rapid expansion of the Company's title agency and
mortgage loan services provided to the Company's homebuilding customers.
15
<PAGE>
Accordingly, SG&A expenses associated with financial services increased 74.6%,
to $15.2 million in 1998 from $8.7 million in 1997. As a percentage of financial
services revenues, SG&A expenses decreased by 10.0% to 69.6% in 1998 from 79.6%
in 1997 due primarily to higher than normal 1997 startup expenses in new
markets.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Revenues from financial services operations decreased by 4.5% to $11.0
million in 1997 from $11.5 million in 1996 due to a sale of servicing rights
that resulted in recognition of $0.9 million of revenues in 1996. SG&A expenses
associated with financial services increased by 24.3% to $8.7 million in 1997
from $7.0 million in 1996 due to startup expenses in new markets. This increase
caused financial services SG&A expenses as a percentage of revenues to increase
to 79.6% in 1997 from 61.2% in 1996.
Financial Condition, Liquidity and Capital Resources
At September 30, 1998, the Company had available cash and cash equivalents
of $76.8 million. Inventories (including finished homes, construction in
progress, and developed residential lots and other land) at September 30, 1998
had increased by $333.8 million since September 30, 1997, partly due to the
acquisitions of the assets (primarily inventories) of Dobson, Mareli, and RMP.
Inventories also increased due to a general increase in business activity and
the expansion of operations in all of the Company's market areas. Although the
inventory increase and the acquisitions of Dobson, Mareli and RMP were financed
primarily by borrowing under the revolving credit facility, the increased
borrowing was partially offset by the conversion of $27.5 million of 6 7/8%
convertible subordinated notes to common stock. As a result, the Company's ratio
of notes payable to total capital at September 30, 1998 was 60.9%, an increase
of only 0.6% over the September 30, 1997 level of 60.3%.
During fiscal 1998, the Company's Board of Directors declared four
quarterly cash dividends of $.0225 per common share, the last of which is
payable on October 23, 1998, to stockholders of record on October 16, 1998.
On April 20, 1998, the Company closed its merger with Continental. In
accordance with the terms of the merger agreement, a total of 15.5 million
shares of D.R. Horton, Inc. common stock were exchanged for all of the
Continental common stock outstanding, based upon an exchange ratio of 2.25. At
the time of the merger, the Company assumed Continental's existing public debt,
consisting of $150 million in 10% senior notes due April 15, 2006 and $86.1
million (convertible into 8.2 million shares of Horton common stock) in 6 7/8%
convertible subordinated notes due November 1, 2002. Of the convertible notes,
$27.5 million have been converted to common stock as of September 30, 1998, and
the remainder were converted in October 1998.
At September 30, 1998, the Company had outstanding debt of $854.5 million,
of which $455.0 million represented advances under the bank credit facility. On
April 21, 1998, the Company increased and restructured its unsecured bank credit
facility to $825 million consisting of a $775 million four-year revolving loan
and a $50 million four-year letter of credit facility. At September 30, 1998,
under the debt covenants associated with the restructured bank credit facility,
the Company had additional borrowing capacity of $364.5 million. Because the
bank credit facility has a floating rate, the Company has entered into
multi-year fixed interest swap agreements with notional amounts aggregating $300
million.
The mortgage company has a $75 million, one-year maturity bank warehouse
facility that is secured by mortgage loans held for sale. The warehouse facility
is not guaranteed by the parent company. As of September 30, 1998, $28.5 million
had been drawn under this facility, with additional financing needs provided by
the Company. In the future, it is anticipated that all mortgage company
activities will be financed under the warehouse facility.
In February 1998, the Company completed the acquisition of all of the
outstanding stock of Dobson, and certain of its affiliated companies for $23.4
million. Dobson's assets, primarily inventories, amounted to approximately $64.3
million. Total liabilities assumed amounted to approximately $52.4 million,
including notes payable of $49.3 million, which were paid at closing. In May and
June 1998, the Company completed the acquisition of the principal assets
16
<PAGE>
(approximately $16.9 million, primarily inventories) of Mareli, of Louisville,
Kentucky, and RMP, of Portland, Oregon, for $8.1 million in cash, 70,249 shares
of Horton common stock valued at $1.1 million, and the assumption of
approximately $16.0 million in trade accounts and notes payable associated with
the acquired assets. Mareli's and RMP's liabilities included $13.3 million in
notes payable which were paid at closing. These acquisitions were accounted for
under the purchase method and funded through available lines of credit.
The Company's rapid growth and acquisition strategies require significant
amounts of cash. It is anticipated that future home construction, lot and land
purchases and acquisitions will be funded through internally generated funds and
new and existing credit facilities. The Company maintains a universal shelf
registration statement with a capacity of $400 million. Additionally, a shelf
registration has been filed for 10 million shares of common stock issuable to
effect, in whole or in part, possible future acquisitions. Market conditions
will determine when and whether the Company will issue additional securities
using the shelf registration statements. The Company continuously evaluates its
capital structure and, in the future, may seek to further increase unsecured
debt and obtain additional equity to fund ongoing operations as well as to
pursue additional growth opportunities.
At September 30, 1998, except for ordinary expenditures for the
construction of homes and the acquisition of land and lots for development and
sale of homes, the Company had no material commitments for capital expenditures.
Inflation
The Company and the homebuilding industry in general, may be adversely
affected during periods of high inflation, primarily because of higher land and
construction costs. Inflation also increases the Company's financing, labor and
material costs. In addition, higher mortgage interest rates significantly affect
the affordability of permanent mortgage financing to prospective homebuyers. The
Company attempts to pass through to its customers any increases in its costs
through increased sales prices and, to date, inflation has not had a material
adverse effect on the Company's results of operations. However, there is no
assurance that inflation will not have a material adverse impact on the
Company's future results of operations.
Year 2000
The "Year 2000" issue (Y2K) refers to potential complications that may be
caused by computer hardware and software that were not designed for the change
in the century. If not corrected, such computer hardware and software may cause
management information systems to fail or miscalculate data.
The Company has assessed (and continues to assess) its vulnerability to
Y2K, particularly in light of its merger with Continental. Modifications and
replacements of computer hardware and software to prepare for Y2K are ongoing.
The Company has assessed and tested its principal homebuilding hardware and
management information system used in homebuilding operations and believes them
to be Y2K compliant. Evaluation, modification and testing of non-principal
hardware and management information systems used in homebuilding operations are
in process and such systems are expected to be converted to the principal
management information system or Y2K modifications are expected to be completed
by June, 1999, at a cost of less than one million dollars.
Management information systems for the Company's financial services
activities also are being evaluated and will require modifications or upgraded
software packages that are expected to be completed by June, 1999, at minimal
costs.
As part of a program on continuous technology updates, for the past several
years, the Company has upgraded personal computers in its locations and this
process will continue. As this occurs during 1999, personal computers at each
company location will be tested for Y2K compliance. These personal computer
upgrades are considered to be ongoing and are not considered to be specifically
Y2K related. The Company expects to incur costs to replace or repair such
equipment, but has not presently determined the amount of these costs.
17
<PAGE>
The Company is presently evaluating other potential Y2K issues, including
non-management information systems. A Y2K coordinator is directing the Company's
overall effort to address these issues. As part of these reviews, the Company's
relationships with payroll service providers, vendors, contractors, financial
institutions and other third parties will be reviewed to determine the impact,
if any, Y2K will have on these relationships.
The Company expects to incur Y2K specific costs in the future, but does not
anticipate that these costs will be material. It is possible that the Company
could encounter disruptions to its business that could have a material adverse
effect on its results of operations if all systems are not Y2K compliant. Also,
the Company could be materially impacted by widespread economic or financial
market disruptions or by Y2K computer system failures at government agencies on
which the Company is dependent for utilities, zoning, building permits and
related matters. There can be no assurance that Y2K will not adversely affect
the Company and its operations.
A formal Y2K internal contingency plan has not been prepared at this time
due to the variety of alternatives available to the Company. Specifically, the
Company is presently evaluating a new management information system that, if
necessary, could potentially be installed by the end of 1999, or non-principal
homebuilding management information systems could be converted to the principal
homebuilding system before Y2K compliance became an issue.
Market Risk
The Company is subject to interest rate risk on its long term debt. The
Company manages its exposure to changes in interest rates by optimizing the use
of variable and fixed rate debt. In addition, the Company hedges its exposure to
changes in interest rates on its variable rate bank debt by entering into
interest rate swap agreements to lock in a fixed interest rate for a portion of
these borrowings.
The following table sets forth, as of September 30, 1998, the Company's
long term debt obligations, principal cash flows by scheduled maturity, weighted
average interest rates and estimated fair market value. In addition, the table
sets forth the notional amounts and weighted average interest rates of the
Company's interest rate swaps.
<TABLE>
<CAPTION>
Year Ended September 30,
($ in millions)
FMV @
1999 2000 2001 2002 2003 Thereafter Total 9/30/98
------ ------ ------ ------ ------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed rate.............. $ 63.5 $ 0.6 $ 0 $ 0.2 $ 0.4 $ 294.9 $ 359.6 $ 396.9
Average interest rate... 7.02% 8.80% -- 8.50% 8.50% 9.19% 8.80% --
Variable rate........... $ 39.9 $ 0 $ 0 $455.0 $ 0 $ 0 $ 494.9 $ 494.9
Average interest rate... 7.40% -- -- 6.06% -- -- 6.17% --
Interest Rate Swaps:
Variable to fixed....... $300.0 $300.0 $300.0 $200.0 $200.0 $ 200.0 -- $ (0.4)
Average pay rate........ 5.53% 5.53% 5.36% 5.10% 5.10% 5.09% -- --
Average receive rate.... 90 day LIBOR
</TABLE>
18
<PAGE>
Safe Harbor Statement
Certain statements contained herein, as well as statements made by the
Company in periodic press releases and oral statements made by the Company's
officials to analysts and stockholders in the course of presentations about the
Company may be construed as "Forward-Looking Statements" as defined in the
Private Securities Litigation Reform Act of 1995. Such statements may involve
unstated risks, uncertainties and other factors that may cause actual results to
differ materially from those initially anticipated. Such risks, uncertainties
and other factors include, but are not limited to:
o The Company's substantial leverage
o Changes in general economic and market conditions
o Changes in interest rates and the availability of mortgage financing
o Changes in costs and availability of material, supplies and labor
o General competitive conditions
o The availability of capital
o The ability to successfully effect acquisitions
19
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors............................................ 21
Consolidated Balance Sheets, September 30, 1997 and 1998.................. 22
Consolidated Statements of Income for the three years ended
September 30, 1998.................................................. 23
Consolidated Statements of Stockholders' Equity for the three years
ended September 30, 1998............................................ 24
Consolidated Statements of Cash Flows for the three years ended
September 30, 1998.................................................. 25
Notes to Consolidated Financial Statements................................ 26
20
<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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1998. These financial
statements are the responsibility of the management of D.R. Horton, Inc. and
subsidiaries. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1996 financial statements
of Continental Homes Holding Corp. ("Continental") which statements reflect
total revenues constituting 52% of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for Continental, is
based solely on the report of the other auditors.
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 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and, for 1996, the report of other
auditors, 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, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Fort Worth, Texas
November 12, 1998
21
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of September 30,
-------------------------
1997 1998
----------- -----------
ASSETS (In thousands)
<S> <C> <C>
Homebuilding:
Cash................................................. $ 78,228 $ 76,754
Inventories:
Finished homes and construction in progress...... 531,941 717,709
Residential lots - developed and
under development............................. 479,553 630,252
Land held for development........................ 12,774 10,072
----------- -----------
1,024,268 1,358,033
Property and equipment (net)......................... 16,988 25,456
Earnest money deposits and other assets.............. 56,420 74,827
Excess of cost over net assets acquired (net)........ 37,717 56,782
----------- -----------
1,213,621 1,591,852
----------- -----------
Financial Services:
Mortgage loans held for sale......................... 34,072 72,325
Other assets......................................... 630 3,658
----------- -----------
34,702 75,983
----------- -----------
$ 1,248,323 $ 1,667,835
=========== ===========
LIABILITIES
Homebuilding:
Accounts payable and other liabilities............... $ 165,309 $ 259,005
Notes payable:
Unsecured:
Revolving credit facility due 2002............ 227,275 455,000
8 3/8% senior notes due 2004, net............. 147,370 147,754
10% senior notes due 2006, net................ 148,462 147,156
6 7/8% convertible subordinated notes
due 2002, net.............................. 86,250 58,794
Other secured..................................... 23,195 17,303
----------- -----------
632,552 826,007
----------- -----------
797,861 1,085,012
----------- -----------
Financial Services:
Other liabilities.................................... 506 1,444
Notes payable to financial institutions.............. 18,188 28,497
----------- -----------
18,694 29,941
----------- -----------
816,555 1,114,953
----------- -----------
Minority interest.................................... 3,902 3,446
----------- -----------
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, 52,749,527 shares at September 30,
1997 and 55,836,733 at September 30, 1998,
issued and outstanding........................... 527 558
Additional capital................................... 268,631 301,503
Retained earnings.................................... 158,708 247,375
----------- -----------
427,866 549,436
----------- -----------
$ 1,248,323 $ 1,667,835
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
22
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1996 1997 1998
----------- ----------- -----------
(In thousands, except net income per share)
<S> <C> <C> <C>
Homebuilding:
Revenues
Home sales....................... $ 1,124,409 $ 1,532,691 $ 2,138,203
Land/lot sales................... 11,844 34,764 16,846
----------- ----------- -----------
1,136,253 1,567,455 2,155,049
Cost of sales
Home sales....................... 918,152 1,259,045 1,749,743
Land/lot sales................... 11,907 33,539 15,867
----------- ----------- -----------
930,059 1,292,584 1,765,610
Gross profit
Home sales....................... 206,257 273,646 388,460
Land/lot sales................... (63) 1,225 979
----------- ----------- -----------
206,194 274,871 389,439
Selling, general and
administrative expense............ 116,107 163,034 216,444
Interest expense.................... 7,456 10,234 14,020
Other (income)...................... (2,414) (3,981) (4,945)
----------- ----------- -----------
85,045 105,584 163,920
----------- ----------- -----------
Financial Services:
Revenues............................ 11,481 10,967 21,892
Selling, general and
administrative expense............ 7,028 8,733 15,244
Interest expense.................... 1,785 664 2,220
Other (income)...................... (2,101) (1,396) (2,668)
----------- ----------- -----------
4,769 2,966 7,096
----------- ----------- -----------
Merger costs........................ -- -- 11,917
----------- ----------- -----------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS........ 89,814 108,550 159,099
Provision for income taxes.......... 36,648 43,588 65,719
----------- ----------- -----------
Income from continuing operations... 53,166 64,962 93,380
----------- ----------- -----------
Extraordinary loss:
Loss on extinguishment of debt,
net of taxes of $4,807............ (6,918) -- --
----------- ----------- -----------
NET INCOME.................... $ 46,248 $ 64,962 $ 93,380
=========== =========== ===========
Basic earnings per common share:
Income from continuing operations. $ 1.15 $ 1.28 $ 1.75
Extraordinary loss ............... (0.15) -- --
Net income ....................... $ 1.00 $ 1.28 $ 1.75
=========== =========== ===========
Diluted earnings per common share:
Income from continuing operations. $ 1.07 $ 1.15 $ 1.56
Extraordinary loss ............... (0.14) -- --
Net income ..................... $ 0.93 $ 1.15 $ 1.56
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<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 common stock share data)
<S> <C> <C> <C> <C>
Balances at October 1, 1995............................ $ 411 $ 150,568 $ 65,573 $ 216,552
Net income........................................... -- -- 46,248 46,248
Stock sold through public offering
(4,375,000 shares)................................ 44 43,149 -- 43,193
Exercise of stock options (277,315 shares)........... 2 1,689 -- 1,691
Issuances under D.R. Horton, Inc. employee benefit
plans (29,300 shares)............................. -- 296 -- 296
Stock dividend....................................... 24 23,938 (23,963) (1)
Cash dividends paid to Continental stockholders...... -- -- (1,392) (1,392)
------ ---------- -------- -------------
Balances at September 30, 1996......................... 481 219,640 86,466 306,587
Continental's net income for the period from
June 1, 1996 through September 30, 1996........... -- -- 11,150 11,150
Net income........................................... -- -- 64,962 64,962
Stock sold through public offering
(3,838,800 shares)................................ 37 39,909 -- 39,946
Stock issued as partial consideration for
acquisition (844,444 shares)...................... 8 9,142 -- 9,150
Exercise of stock options (289,930 shares)........... 3 2,256 -- 2,259
Issuances under D.R. Horton, Inc. employee benefit
plans (33,350 shares)............................. -- 310 -- 310
Repurchase of common stock........................... (2) (2,626) -- (2,628)
Cash dividends paid
($.06 per share to D.R. Horton stockholders)...... -- -- (3,870) (3,870)
------ ---------- -------- -------------
Balances at September 30, 1997......................... 527 268,631 158,708 427,866
Net income........................................... -- -- 93,380 93,380
Stock issued as partial consideration for
acquisition (70,249 shares)....................... 1 1,124 -- 1,125
Issuances under D.R. Horton, Inc. employee
benefit plans (27,098 shares)..................... -- 483 -- 483
Exercise of stock options (374,514 shares)........... 4 4,429 -- 4,433
Conversion of convertible subordinated notes
(2,586,174 shares)................................ 26 26,836 -- 26,862
Cash dividends paid
($.0875 per share to D.R. Horton stockholders).... -- -- (4,713) (4,713)
------ ---------- -------- -------------
Balances at September 30, 1998......................... $ 558 $ 301,503 $247,375 $ 549,436
====== ========== ======== =============
</TABLE>
See accompanying notes to consolidated financial statements
24
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 46,248 $ 64,962 $ 93,380
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 5,773 7,660 9,828
Extraordinary loss on extinguishment of debt........... 11,725 -- --
Expense associated with issuance of stock under
employee benefit plans.............................. 229 306 999
Changes in operating assets and liabilities:
Increase in inventories............................. (110,879) (171,645) (261,189)
Decrease/(increase) in earnest money deposits
and other assets................................. 17,996 (11,071) (17,614)
Increase in mortgage loans held for sale............ (2,757) (14,789) (38,253)
Increase in accounts payable and other liabilities.. 23,859 22,572 87,552
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES....................... (7,806) (102,005) (125,297)
-------- -------- --------
INVESTING ACTIVITIES
Net purchase of property and equipment................. (3,248) (6,894) (11,582)
Net cash paid for acquisitions......................... (2,075) (53,950) (34,035)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES....................... (5,323) (60,844) (45,617)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from notes payable............................ 238,987 222,680 416,093
Repayment of notes and bonds payable................... (285,713) (242,946) (246,856)
Retirement of notes and bonds payable.................. (158,563) -- --
Issuance of Convertible Subordinated Notes............. 83,279 -- --
Issuance of Senior Notes payable....................... 125,925 167,416 --
Repurchase of stock.................................... -- (2,628) --
Proceeds from common stock offerings and stock
associated with certain employee benefit plans...... 43,260 39,950 483
Proceeds from exercise of stock options................ 1,690 2,117 4,433
Cash dividends paid.................................... (1,392) (3,523) (4,713)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 47,473 183,066 169,440
-------- -------- --------
INCREASE / (DECREASE) IN CASH............................... 34,344 20,217 (1,474)
Cash at beginning of year.............................. 33,720 58,011 78,228
-------- -------- --------
Cash at end of year.................................... $ 68,064 $ 78,228 $ 76,754
======== ======== ========
Supplemental cash flow information:
Interest paid.......................................... $ 9,221 $ 9,915 $ 15,937
======== ======== ========
Income taxes paid...................................... $ 32,573 $ 47,563 $ 65,863
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
25
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: D.R. Horton, Inc. (the Company) is a national builder that is
engaged primarily in the construction and sale of single-family housing in 41
markets and 23 states in the United States. The Company designs, builds and
sells single-family houses on lots developed by the Company and on finished lots
which it purchases, ready for home construction. Periodically, the Company sells
lots it has developed. The Company also provides title agency and mortgage
brokerage services to its homebuyers. The Company does not retain or service the
mortgages that it originates but, rather sells the mortgages and related
servicing rights to investors.
Merger: On April 20, 1998, the Company and Continental Homes Holding Corp.
(Continental) consummated a merger pursuant to which Continental was merged into
the Company, with 2.25 shares of the Company common shares exchanged for each
outstanding share of Continental. Approximately 15,459,500 Horton common shares
were issued to effect the merger. The merger with Continental was treated as a
pooling of interests for accounting purposes. Therefore, all financial amounts
have been presented as if Continental and the Company had been combined at the
earliest period presented.
Prior to the merger, Continental had a fiscal year end of May 31, and
accordingly, the Continental statements of income, stockholders' equity and cash
flows for the year ended May 31, 1996 have been combined with the Company's
statements of income, stockholders' equity and cash flows for the fiscal year
ended September 30, 1996. Continental's 1997 balance sheet and the related
statements of income and cash flows have been conformed to the Company's fiscal
year end of September 30, 1997.
As permitted by regulations of the Securities and Exchange Commission,
Continental's operations for the four-month period ended September 30, 1996 have
been omitted from the statements of income, and cash flows. Continental's
revenues, cost of sales, income before taxes and net income for this four month
period were $234.4 million, $191.6 million, $18.8 million and $11.2 million,
respectively.
The results of operations for the separate companies prior to combination
and the combined amounts presented in the consolidated financial statements are:
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended September 30, March 31,
------------------------ ----------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenue
D.R. Horton, Inc................... $ 547,336 $ 837,280 $ 508,603
Continental........................ 588,917 730,175 358,910
---------- ---------- ----------
Combined........................... $1,136,253 $1,567,455 $ 867,513
========== ========== ==========
Net income
D.R. Horton, Inc................... $ 27,379 $ 36,204 $ 22,574
Continental........................ 18,869 28,758 15,242
---------- ---------- ----------
Combined........................... $ 46,248 $ 64,962 $ 37,816
========== ========== ==========
Extraordinary loss, net
D.R. Horton, Inc................... $ -- $ -- $ --
Continental........................ (6,918) -- --
---------- ---------- ----------
Combined........................... $ (6,918) $ -- $ --
========== ========== ==========
</TABLE>
26
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
Accounting Principles: The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
Statements of Financial Accounting Standards: Statement of Financial
Accounting Standards (SFAS) No. 131 "Disclosure about Segments of an Enterprise
and Related Information", issued in June 1997, establishes annual and interim
reporting requirements for an enterprise's operating segments and related
disclosures about its products and services, geographical areas in which it
operates and major customers. SFAS 131 is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. Adoption of SFAS
131 is not expected to materially impact the Company.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued with adoption required in fiscal year 2000, when
the Company plans to adopt the Statement. At the time of adoption, the Company
must recognize all derivatives on the balance sheet at fair value with
adjustments recorded through income in certain situations. The Company has not
yet determined what the effect of SFAS 133 will be on earnings and the financial
position of the Company at the time of adoption.
Cash: The Company considers all highly liquid investments with an initial
maturity of three months or less when purchased to be cash equivalents. Amounts
in transit from title companies for home closings are included in cash.
Cost of Sales: Cost of sales includes home warranty costs, purchased
discounts for customer financing, and sales commissions paid to third parties.
Excess of Cost Over Net Assets Acquired: The excess of amounts paid for
business acquisitions over the net fair value of the assets acquired and
liabilities assumed is amortized using the straight-line method over periods
ranging from five to twenty five years. Additional consideration paid in
subsequent periods under the terms of purchase agreements are included as
acquisition costs. Amortization expense was $1,589,000, $2,296,000 and
$3,427,000 in fiscal 1996, 1997 and 1998, respectively. Accumulated amortization
was $9,545,000 and $11,635,000 at September 30, 1997 and 1998, respectively.
Interest. The Company capitalizes interest during development and
construction. Capitalized interest is charged to cost of sales as the related
inventory is delivered to the home buyer. Interest costs are (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Capitalized interest, beginning of year...... $ 13,873 $ 18,004 $ 28,952
Interest incurred - homebuilding............. 37,257 50,505 68,216
Interest expensed:
Directly-homebuilding...................... (7,456) (10,234) (14,020)
Amortized to cost of sales................. (25,670) (29,323) (47,995)
------- ------- -------
Capitalized interest, end of year............ $ 18,004 $ 28,952 $ 35,153
======= ======= =======
</TABLE>
27
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories: Finished inventories are stated at the lower of accumulated
cost or fair value less costs to sell. Inventories under development or held for
development are stated at accumulated costs, unless such costs would not be
recovered from the cash flows generated by future disposition. In this instance,
such inventories are measured at fair value, less costs of disposal.
Sold units are expensed on a specific identification basis as cost of
sales. Included in inventories are related interest and property taxes which are
capitalized in inventory during the development and construction periods.
Residential lots are transferred to construction in progress when building
permits are requested. Land and development costs are allocated to individual
lots on a prorata basis.
Earnings Per Share: The Company adopted SFAS 128, "Earnings Per Share"
during fiscal 1998 and restated earnings per share amounts for all periods in
conformity with the Statement.
Basic earnings per share is based upon the weighted average number of
shares of common stock outstanding during each year.
Diluted earnings per share is based upon the weighted average number of
shares of common stock outstanding during each year, adjusted for the effects of
dilutive securities.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Income from continuing operations............ $ 53,166 $ 64,962 $ 93,380
Effect of dilutive securities:
Interest expense associated with 6 7/8%
convertible subordinated notes, net..... 2,778 3,498 3,322
-------- -------- --------
Numerator for diluted earnings per
share after assumed conversions........... $ 55,944 $ 68,460 $ 96,702
======== ======== ========
Denominator:
Denominator for basic earnings per
share - weighted-average shares........... 46,398 50,580 53,328
Effect of dilutive securities:
6 7/8% convertible subordinated
notes................................... 5,603 8,172 7,633
Employee stock options.................... 528 568 1,125
-------- -------- --------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions.............................. 52,529 59,320 62,086
======== ======== ========
</TABLE>
Minority Interest: The Company has a joint venture arrangement on a land
project whereby the Company is entitled to 55% of the profits and/or losses and
is the managing partner. The financial position and results of operations of the
joint venture are consolidated for financial statement purposes and the
partners' equity position is disclosed as a minority interest.
Property and Equipment: Property and equipment, including model home
furniture, are stated on the basis of cost. Major renewals and improvements are
capitalized. Repairs and maintenance are expensed as incurred. Depreciation
generally is provided using the straight-line method over the estimated useful
life of the asset. Accumulated depreciation was $12,847,000 and $18,944,000 as
of September 30, 1997 and 1998, respectively.
28
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications: Certain financial statement amounts in 1996 and 1997
have been reclassified to conform with the 1998 presentation.
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.
Mortgage loans: Mortgage loans held for sale are reported net of discounts
and are stated at the lower of cost or market on an aggregate basis which
approximates the fair value. Any gain or loss on the sale of loans is recognized
at the time of sale. Loan origination fees, net of the related direct
origination costs, are deferred as an adjustment to the carrying value of the
related mortgage loans held for sale and are recognized in income upon the sale
of the mortgage loans.
NOTE B -- NOTES PAYABLE
In June, 1998, the Company filed a universal shelf registration statement
with the Securities and Exchange Commission for up to $400 million of the
Company's debt and equity securities. The universal shelf registration provides
that securities may be offered from time to time in one or more series and in
the form of senior, senior subordinated or subordinated debt, preferred stock
and/or common stock.
Homebuilding:
The Company has a $825 million unsecured revolving bank credit facility
maturing in April, 2002, of which $50 million is reserved for use as standby
letters of credit. The revolving credit facility was increased from $625 million
during 1998. Borrowings bear daily interest at rates based upon federal funds or
the London Interbank Offered Rate (LIBOR) plus a spread based upon the Company's
ratio of debt to tangible net worth. In addition to the stated interest rates,
the revolving credit facility requires the Company to pay certain fees. The
weighted average interest rates of the unsecured bank debt at September 30, 1997
and 1998 were 7.2% and 6.2%, respectively.
In April 1996, the Company issued $130,000,000 principal amount of 10%
Senior Notes due April 15, 2006. In January 1997, the Company issued an
additional $20,000,000 principal amount of its 10% Senior Notes due April 15,
2006. The 10% Senior Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after April 15, 2001 at redemption prices
decreasing from 105%.
In June, 1997 the Company issued $150 million of 8 3/8% Senior Unsecured
Notes. The 8 3/8% Senior Notes, which are due June 15, 2004, with interest
payable semi-annually, represent unsecured obligations of the Company. The 8
3/8% Senior Notes are not redeemable except that 35% of the amount originally
issued can be redeemed with proceeds of a public equity offering by the Company
at a redemption price of 108.375% through June 15, 2000.
Both series of the Senior Notes are senior obligations of the Company and
rank pari passu in right of payment to all existing and future unsecured
indebtedness of the Company. These Notes are guaranteed by the majority of the
Company subsidiaries. Upon a change of control of the Company, holders of both
the 8 3/8% and 10% Senior Notes have the right to require the Company to redeem
the Senior Notes at a price of 101% of the par amount, along with accrued and
unpaid interest.
The bank credit facilities and the Senior Notes indentures contain
covenants which, taken together, limit investments in inventory, stock
repurchases, cash dividends and other restricted payments, incurrence of
indebtedness, asset dispositions and creation of liens, and require certain
levels of tangible net worth. At September 30, 1998, these covenants limit the
additional debt the Company could incur to $364.5 million.
29
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is required to comply with certain covenants contained in its
bank agreements and its Senior Notes indentures. The most restrictive of these
requirements allows the Company to pay cash dividends on its common stock in an
amount not to exceed, on a cumulative basis, 50% of consolidated net income, as
defined, subject to certain other adjustments. Pursuant to the most restrictive
of these requirements, the Company had approximately $65.6 million available for
the payment of dividends and for the acquisition by the Company of its common
stock at September 30, 1998.
The Company uses interest rate swap agreements to help manage a portion of
its interest rate exposure. The agreements convert a notional amount of $300
million from a variable rate to a fixed rate. $200 million of these agreements
are cancellable by a third party during periods where LIBOR exceeds 7%. The
agreements expire at dates through September, 2008. The Company does not expect
non-performance by the counterparty, a major U.S. bank, and any losses incurred
in the event of non-performance would not be expected to be material. Net
payments or receipts under the Company's interest rate swap agreements are
recorded as adjustments to interest incurred. As a result of these agreements,
the Company incurred additional net interest cost of $0.7 million and $0.3
million during 1997 and 1998, respectively.
In November and December 1995, the Company issued $86,250,000 principal
amount of 6 7/8% Convertible Subordinated Notes due November 1, 2002. The Notes
are convertible at a rate of 94.73625 shares of Common Stock per $1,000
principal amount of Notes at any time prior to maturity. The Notes are
redeemable in whole or in part at the option of the Company at any time on or
after November 1, 1998, at redemption prices decreasing from 103.438%. The Notes
are subordinated to all senior indebtedness of the Company. During fiscal 1998,
conversions of these securities for common stock reduced the amount outstanding
at September 30, 1998 to $58.8 million. Subsequent to September 30, 1998,
essentially all the principal amount of these notes were converted by the
holders to 5.6 million shares of common stock.
Maturities of notes payable, excluding the convertible debt and assuming
the revolving bank facility is not extended, are $16.1 million in 1999, $0.6
million in 2000, $455.2 million in 2002, $0.4 million in 2003, and $294.9
million thereafter.
Financial Services:
The Company has a $75 million mortgage warehouse line payable to financial
institutions, secured by mortgage loans held for sale, maturing August 1999 at
LIBOR + 1%. These notes payable enable the Company's wholly-owned subsidiary, CH
Mortgage Company I, Ltd., to perform its loan origination and warehousing
functions.
30
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE C -- ACQUISITIONS
In fiscal 1996, 1997 and 1998, the Company made the following acquisitions:
<TABLE>
<CAPTION>
Company Acquired Date Acquired Consideration
---------------- ---------------------- ---------------
<S> <C> <C>
Westchester Homes
(Dallas)............................ June 1996 $ 9.1 million
Trimark Communities, L.L.C. (Denver) and
SGS Communities, Inc. (New Jersey).. October, December 1996 $ 28.8 million
Torrey Group (Atlanta, Raleigh,
Charlotte, Greenville S.C.)......... February 1997 $136.7 million
C. Richard Dobson Builders, Inc.
(Southeastern seaboard)............. February 1998 $ 75.8 million
Mareli Construction and Development,
L.L.C. (Louisville) and
RMP Properties, Inc. (Portland)..... May, June 1998 $ 25.2 million
</TABLE>
Consideration includes cash paid, Company stock issued, and assumption of
certain accounts payable and notes payable, which were repaid subsequent to the
acquisitions.
Except for the Torrey Group and Dobson Builders, the above acquisitions
contain provisions for additional consideration to be paid annually for up to
four years subsequent to the acquisition date. The additional consideration is
based upon subsequent pretax income, adjusted for a preferential return to the
Company. Such additional consideration will be recorded when paid as excess of
cost over net assets acquired, which is amortized using the straight line method
over a period ranging from 5 to 25 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.
The following unaudited pro forma summaries of combined operations were
prepared to illustrate the estimated effects of the 1997 acquisitions of
Trimark, SGS and Torrey as if such acquisitions had occurred on the first day of
the respective periods presented. Pro forma information for the 1998
acquisitions of Dobson, Mareli and RMP is not significantly different from
historical results and is not presented. The pro forma information should be
read in conjunction with the historical financial statements and notes thereto.
The pro forma financial information is provided for comparative purposes only
and is not necessarily indicative of the results which would have been obtained
if the acquisitions had been effected throughout the period. The pro forma
financial information is based upon the purchase method of accounting.
<TABLE>
<CAPTION>
Year ended
September 30, 1997
---------------------
(In thousands, except
earnings per share)
<S> <C>
Revenues.................................................. $ 1,656,530
Income from continuing operations......................... 66,188
Net income................................................ 65,866
Basic earnings per common share:
Net income from continuing operations.................. 1.30
Diluted earnings per common share:
Net income from continuing operations.................. 1.17
</TABLE>
31
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE D -- STOCKHOLDERS' EQUITY
On April 22, 1996, the Board of Directors declared an 8% common stock
dividend. Since this stock dividend occurred prior to the merger with
Continental, only D.R. Horton, Inc. stockholders at the time of the transaction
participated in it.
In June 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission to issue, from time to time, up to 10 million
shares of registered common stock in connection with future acquisitions.
Subsequent to year end, the Board of Directors authorized the repurchase of
up to $100 million each of the Company's common stock and senior debt
securities, as market conditions warrant.
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 (4% to 6%) and, in 1998, certain
non-deductible merger costs (1%).
Income tax expense from continuing operations was:
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current:
Federal................................. $ 35,134 $ 45,318 $ 61,897
State................................... 3,845 5,113 6,938
------- ------- -------
38,979 50,431 68,835
------- ------- -------
Deferred:
Federal................................. (2,117) (6,195) (2,788)
State................................... (214) (648) (328)
------- ------- -------
(2,331) (6,843) (3,116)
------- ------- -------
$ 36,648 $ 43,588 $ 65,719
======= ======= =======
</TABLE>
NOTE F -- EMPLOYEE BENEFIT PLANS
The Company has 401(k) plans for Company employees. The Company matches
portions of employees' voluntary contributions. Additional employer
contributions in the form of profit sharing are at the discretion of the
Company. Expenses for these Plans were $1,023,000, $1,200,000 and $1,977,000 for
1996, 1997 and 1998, respectively.
32
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, or termination of
employment with the Company. Under one SERP, the Company accrues an unfunded
benefit, as well as an interest factor based upon a predetermined formula. The
Company recorded $313,000, $543,000 and $573,000 of expense for this plan in
1996, 1997 and 1998, 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 the stock option or SERP benefit plans.
Contributions are made at the discretion of the Company. Expenses related to
Company contributions of common stock to the Plan of $229,000, $309,000 and
$999,000 were recognized for 1996, 1997 and 1998, respectively.
The Company Stock Incentive Plans provide 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. Options vest over periods of 3
to 10 years. There were 264,007 and 635,848 shares available for future grants
under the Plans at September 30, 1997 and 1998, respectively.
Activity under the plan is:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Prices Options Prices Options Prices
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Stock Options
Outstanding at be-
ginning of year.. 2,332,946 $ 6.31 2,825,501 $ 7.09 3,544,295 $ 8.16
Transitional
period........... 126,234 -- -- -- -- --
Granted........... 637,750 9.90 1,106,500 10.05 1,075,000 22.06
Exercised......... (277,315) 3.57 (268,904) 4.30 (388,857) 6.46
Cancelled......... (140,022) 8.36 (118,802) 8.54 (112,824) 7.83
Effects of stock
dividends........ 145,908 6.69 -- -- -- --
------- ----- --------- ----- --------- -----
Outstanding at
end of year...... 2,825,501 $ 7.09 3,544,295 $ 8.16 4,747,614 $13.30
========= ===== ========= ===== ========= =====
Exercisable at
end of year...... 887,079 $ 4.99 961,718 $ 5.98 968,608 $ 6.80
========= ===== ========= ===== ========= =====
</TABLE>
Exercise prices for options outstanding at September 30, 1998, ranged from
$1.804 to $22.6875.
33
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average remaining contractual lives of those options are:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------ -----------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Price Exercise Maturity Exercise Maturity
Range Options Price (Years) Options Price (Years)
- --------------- --------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Less than $9... 1,371,937 $ 6.21 5.4 702,056 $ 5.59 4.8
$9 - $18....... 1,690,677 10.25 8.0 266,552 9.99 7.4
More than $18.. 1,685,000 22.12 9.8 -- -- --
--------- ----- ---- ------- ----- ----
Total........ 4,747,614 $13.30 7.9 968,608 $ 6.80 5.5
========= ===== ==== ======= ===== ====
</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. SFAS
No. 123 requires disclosure of pro forma income and pro forma income per share
as if the fair value based method had been applied in measuring compensation
expense for option awards granted in fiscal 1996, 1997 and 1998. Management
believes the fiscal 1996, 1997 and 1998 pro forma amounts may not be
representative of the effects of option awards on future pro forma net income
and pro forma net income per share because options granted before 1996 are not
considered in these calculations. Application of the fair value method, as
specified by SFAS 123, would decrease net income by $118,000 ($0.01 per diluted
share), $398,000 ($0.01 per diluted share) and $815,000 ($0.01 per diluted
share) in 1996, 1997 and 1998, respectively.
The weighted average fair value of grants made in 1998 was $10.09.
The fair values of the options granted were estimated on the date of their
grant using the Black-Scholes option pricing model based on the following
weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Risk free interest rate............................... 6.16% 4.82%
Expected life (in years).............................. 6.7 7.0
Expected volatility................................... 34.69% 36.71%
Expected dividend yield............................... .59% .38%
</TABLE>
NOTE G -- FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments are based on quoted
market prices, where available, or are estimated. Fair value estimates are made
at a specific point in time based on relevant market information and information
about the financial instrument. These estimates are subjective in nature,
involve matters of judgment and therefore, cannot be determined with precision.
Estimated fair values are significantly affected by the assumptions used.
34
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below sets for the carrying values and estimated fair values of
the Company's financial instruments (in thousands).
<TABLE>
<CAPTION>
1997 1998
-------------------- --------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
HOMEBUILDING:
Liabilities
8 3/8% Senior notes............. $147,370 $151,500 $147,754 $147,375
10% Senior notes................ 148,462 159,000 147,156 154,467
6 7/8% Convertible subordinated
notes........................ 86,250 101,775 58,794 89,119
Off-balance sheet financial
instruments
Interest rate swaps............. -0- 1,914 -0- (422)
FINANCIAL SERVICES:
Assets
Mortgage loans held for sale.... 34,072 34,806 72,261 73,013
</TABLE>
The Company used the following methods and assumptions in estimating fair
values:
For cash and cash equivalents, the revolving credit facility, other notes
payable, and standby letters of credit the carrying amounts reported in the
balance sheet approximate fair values due to their short maturity or floating
interest rate terms, as applicable.
For senior notes, convertible subordinated notes, mortgage loans held for
sale, interest rate swaps and mortgage loans held for sale, the fair values of
these financial instruments are estimated based on quoted market prices for
similar financial instruments.
NOTE H -- 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. At September 30, 1998, cash
deposits of approximately $16.4 million and promissory notes approximating $2.3
million secured the Company's performance under these agreements.
Additionally, in the normal course of its business activities, the Company
provides standby letters of credit and performance bonds, issued by third
parties, to secure performance under various contracts. At September 30, 1998,
outstanding standby letters of credit were $19.8 million and performance bonds
were $140.1 million. The Company has an additional capacity of $30.2 million for
standby letters of credit under its revolving credit facility.
35
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company leases office space under noncancelable operating leases.
Minimum annual lease payments under these leases at September 30, 1998
approximate:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1999......................................... $ 2,607
2000......................................... 2,230
2001......................................... 1,529
2002......................................... 997
2003......................................... 730
Thereafter................................... 1,440
---------
$ 9,533
=========
</TABLE>
Rent expense approximated $2,594,000, $3,177,000 and $4,674,000 for 1996,
1997 and 1998, respectively.
NOTE I -- SUMMARIZED FINANCIAL INFORMATION
The 8 3/8% and the 10% Senior Notes are fully and unconditionally
guaranteed, on a joint and several basis, by all of the Company's direct and
indirect subsidiaries other than certain inconsequential subsidiaries. Each of
the guarantors is a wholly-owned subsidiary of the Company. Summarized financial
information of the Company and its subsidiaries is presented below. Separate
financial statements and other disclosures concerning the guarantor subsidiaries
are not presented because management has determined that they are not material
to investors.
As of and for the periods ended (in thousands):
<TABLE>
<CAPTION>
September 30, 1998
D.R. Horton, Guarantor Nonguarantor Intercompany
Inc. Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Total assets...... $1,169,347 $1,548,554 $ 119,769 $(1,169,835) $1,667,835
Total liabilities. 906,014 1,272,398 101,121 (1,161,134) 1,118,399
Revenues.......... 362,847 1,777,833 36,261 -- 2,176,941
Gross profit...... 44,553 342,300 2,586 -- 389,439
Net income........ 2,140 88,128 3,112 -- 93,380
<CAPTION>
September 30, 1997
D.R. Horton, Guarantor Nonguarantor Intercompany
Inc. Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Total assets...... $ 620,636 $ 934,497 $ 66,666 $ (373,476) $1,248,323
Total liabilities. 396,853 751,672 44,573 (372,641) 820,457
Revenues.......... 286,568 1,269,391 22,463 -- 1,578,422
Gross profit...... 51,484 222,040 1,347 -- 274,871
Net income........ 4,248 59,373 1,341 -- 64,962
<CAPTION>
September 30, 1996
D.R. Horton, Guarantor Nonguarantor Intercompany
Inc. Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Total assets...... $ 353,363 $ 598,441 $ 30,513 $ (140,970) $ 841,347
Total liabilities. 197,055 464,004 8,999 (140,095) 529,963
Revenues.......... 269,853 866,400 11,481 -- 1,147,734
Gross profit...... 47,346 158,873 (25) -- 206,194
Net income........ 4,747 38,715 2,786 -- 46,248
</TABLE>
36
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE J -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations are (in thousands, except for per share
amounts):
<TABLE>
<CAPTION>
1998
--------------------------------------------------
Three Months Ended
--------------------------------------------------
September 30 June 30 March 31 December 31
------------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues.................... $686,921 $613,864 $452,959 $423,197
Gross margin................ 123,699 109,208 80,413 76,119
Net income.................. 32,476 23,088 19,492 18,324
Net income per common share. 0.59 0.44 0.37 0.35
Diluted net income per
common share.............. 0.53 0.39 0.33 0.31
<CAPTION>
1997
--------------------------------------------------
Three Months Ended
--------------------------------------------------
September 30 June 30 March 31 December 31
------------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues.................... $480,868 $437,631 $326,190 $333,733
Gross margin................ 86,188 72,940 56,871 58,872
Net income.................. 21,750 15,623 12,184 15,405
Net income per share........ 0.41 0.30 0.25 0.32
Diluted net income per
common share.............. 0.37 0.27 0.23 0.29
</TABLE>
37
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth under the caption
"Election of Directors" at pages 2 through 5, and the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" at page 16, of the registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on January 15, 1999
and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation" at page 8 through "Compensation Committee Interlocks
and Insider Participation" at page 11 of the registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held on January 15, 1999 and
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Beneficial Ownership of Common Stock" at pages 6 and 7 of the registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on January 15,
1999 and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Executive Compensation--Transactions with Management" at pages 10 and 11 of the
registrant's Proxy Statement for the Annual Meeting of Stockholders to be held
on January 15, 1999 and incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
See Item 8 above.
2. Financial Statement Schedules:
Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission (the "Commission") are not
required under the related instructions or are not applicable, and therefore
have been omitted.
38
<PAGE>
3. Exhibits:
Exhibit
Number Exhibit
- ------- -------
2.1 -- Agreement and Plan of Merger, dated as of December 18, 1997, by and
between the Registrant and Continental Homes Holding Corp. The
Registrant agrees to furnish supplementally a copy of omitted
schedules to the Commission upon request (1)
3.1 -- Amended and Restated Certificate of Incorporation, as amended (2)
3.2 -- Amended and Restated Bylaws (3)
4.1 -- See Exhibits 3.1 and 3.2
4.2 -- Indenture, dated as of June 9, 1997, among the Registrant, the
guarantors named therein and American Stock Transfer & Trust
Company, as Trustee (4)
4.3 -- First Supplemental Indenture, dated as of June 9, 1997, among the
the Registrant, the guarantors named therein and American Stock
Transfer & Trust Company, as Trustee (5)
4.4 -- Second Supplemental Indenture, dated as of September 30, 1997,
among the Registrant, the guarantors named therein and American
Stock Transfer & Trust Company, as Trustee (6)
4.5 -- Third Supplemental Indenture, dated as of April 17, 1998, among the
Registrant, the guarantors named therein and American Stock
Transfer & Trust Company, as Trustee (7)
4.6 -- Fourth Supplemental Indenture, dated as of April 20, 1998, among
the Registrant, the guarantors named therein and American Stock
Transfer & Trust Company, as Trustee (8)
4.7 -- Fifth Supplemental Indenture, dated as of August 31, 1998, among
the Registrant, the guarantors named therein and American Stock
Transfer & Trust Company, as Trustee (9)
4.8 -- Indenture dated as of April 15, 1996 between Continental and First
Union National Bank, as Trustee (10)
4.9 -- First Supplemental Indenture, dated as of April 20, 1998, among the
Registrant, the guarantors named therein and First Union National
Bank, as Trustee (11)
4.10 -- Second Supplemental Indenture, dated as of August 31, 1998, among
the Registrant, the guarantors named therein and First Union
National Bank, as Trustee (9)
4.11 -- Indenture dated as of November 1, 1995 between Continental and
Manufacturers and Traders Trust Company, as Trustee (12)
4.12 -- First Supplemental Indenture, dated as of April 20, 1998, between
the Registrant and Manufacturers and Traders Trust Company, as
Trustee (13)
10.1 -- Form of Indemnification Agreement between the Registrant and each
of its directors and executive officers and schedules of
substantially identical documents (14)
10.2 -- D.R. Horton, Inc. 1991 Stock Incentive Plan (15)(16)
10.2a -- Amendment No. 1 to 1991 Stock Incentive Plan (15)(16)
10.2b -- Amendment No. 2 to 1991 Stock Incentive Plan (15)(16)
10.2c -- Amendment No. 3 to 1991 Stock Incentive Plan (16)(17)
10.2d -- Amendment No. 4 to 1991 Stock Incentive Plan (16)(17)
10.2e -- Amendment No. 5 to 1991 Stock Incentive Plan (16)(18)
10.2f -- Amendment No. 6 to 1991 Stock Incentive Plan(16)(19)
10.3 -- Form of Non-Qualified Stock Option Agreement (Term Vesting)(20)
10.4 -- Form of Non-Qualified Stock Option Agreement (Performance Vesting)
(21)
39
<PAGE>
Exhibit
Number Exhibit
- ------- -------
10.5 -- Form of Incentive Stock Option (Term Vesting)(21)
10.6 -- Form of Incentive Stock Option (Performance Vesting)(21)
10.7 -- Form of Restricted Stock Agreement (Term Vesting)(21)
10.8 -- Form of Restricted Stock Agreement (Performance Vesting)(21)
10.9 -- Form of Stock Appreciation Right Agreement (Term Vesting)(21)
10.10 -- Form of Stock Appreciation Right Agreement (Performance Vesting)
(21)
10.11 -- Form of Stock Appreciation Right Notification (Tandem)(21)
10.12 -- Form of Performance Share Notification (21)
10.13 -- Form of Performance Unit Notification (21)
10.14 -- D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 1(16)
(22)
10.15 -- D.R. Horton, Inc. Supplemental Executive Retirement Trust No. 1(16)
(22)
10.16 -- D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 2(16)
(22)
10.17 -- Continental Homes Holding Corp. 1988 Stock Incentive Plan (as
amended and restated June 20, 1997)(16)(23)
10.18 -- Restated Continental Homes Holding Corp. 1986 Stock Incentive Plan,
and the First Amendment thereto dated June 17, 1987(16)(24)
10.19 -- Form of Stock Option Agreement pursuant to Continental's 1986 and
1988 Stock Incentive Plans (25)
10.20 -- Employment Agreement dated as of December 1, 1997 between
Continental and W. Thomas Hickcox(9)(16)
10.20a -- Amendment No. 1 to Employment Agreement and Non - Competition
Agreement, dated December 18, 1997 between the Registrant and W.
Thomas Hickcox(16)(26)
10.21 -- Master Loan and Inter-Creditor Agreement dated as of April 21,
1998, among D.R. Horton, Inc., as a Borrower; NationsBank, N.A.,
Bank of America National Trust and Savings Association, Fleet
National Bank, Bank United, Comerica Bank, Credit Lyonnais New York
Branch, Soci t G n rale, Southwest Agency, The First National Bank
of Chicago, PNC Bank, National Association, Amsouth Bank, Bank One,
Arizona, NA, First American Bank Texas, SSB, Harris Trust and
Savings Bank, Sanwa Bank California, Norwest Bank Arizona, National
Association and Summit Bank, as Banks; and NationsBank, N.A., as
Administrative Agent (27)
21.1 -- Subsidiaries of D.R. Horton, Inc. (9)
23.1 -- Consent of Ernst & Young LLP, Fort Worth, Texas (9)
23.2 -- Consent of Arthur Andersen LLP, Phoenix, Arizona (9)
27 -- Financial Data Schedule for year ended September 30, 1998 (9)
99.1 -- Continental Homes Holding Corp. May 31, 1996 statements of income,
stockholders' equity and cash flows, with Report of Independent
Auditors, Arthur Andersen LLP (9)
- ----------
(1) Incorporated by reference from Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-44279), filed
with the Commission on January 15, 1998.
(2) Incorporated by reference from Exhibit 3.1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995, filed
with the Commission on November 22, 1995.
(3) Incorporated by reference from Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997, filed with the
Commission on May 14, 1997.
(4) Incorporated by reference from Exhibit 4.1(a) to the Registrant's
Registration Statement on Form S-3 (No. 333-27521), filed with the
Commission on May 21, 1997.
40
<PAGE>
(5) Incorporated by reference from Exhibit 4.1 to the Registrant's Form 8-K/A
dated April 1, 1997, filed with the Commission on June 6, 1997.
(6) Incorporated by reference from Exhibit 4.4 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1997, filed
with the Commission on December 8, 1997.
(7) Incorporated by reference from Exhibit 4.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, filed with
Commission on May 14, 1998.
(8) Incorporated by reference from Exhibit 4.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, filed with
Commission on May 14, 1998.
(9) Filed herewith.
(10) Incorporated herein by reference from Exhibit 4.1 to Continental's Annual
Report on Form 10-K for the year ended May 31, 1996. The Commission file
number for Continental is 1-10700.
(11) Incorporated by reference from Exhibit 4.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, filed with
Commission on May 14, 1998.
(12) Incorporated by reference from Exhibit 4.1 to Continental's Quarterly
Report on Form 10-Q for the quarter ended November 30, 1995. The
Commission file number for Continental is 1-10700.
(13) Incorporated by reference from Exhibit 4.6 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, filed with
Commission on May 14, 1998.
(14) Incorporated by reference from Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995, filed
with the Commission on November 22, 1995; and Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, filed with the Commission on August 6, 1998.
(15) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (No. 33-46554) declared effective by the Commission on June 4,
1992.
(16) Management contract or compensatory plan arrangement.
(17) Incorporated by reference from the Registrant's Annual Report Form 10-K
for the fiscal year ended September 30, 1994, filed with the Commission
on December 9, 1994.
(18) Incorporated by reference from Exhibit 10.2e to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995, filed
with the Commission on November 22, 1995.
(19) Incorporated by reference from Exhibit 10.2f to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30, 1997, filed
with the Commission on December 8, 1997.
(20) Incorporated by reference from Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1 (Registration No. 3-81856), filed with
the Commission on July 22, 1994.
(21) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1992, filed with the
Commission on March 29, 1993.
(22) Incorporated by reference from the Registrant's Transitional Report on
Form 10-K for the period from January 1, 1993 to September 30, 1993,
filed with the Commission on December 28, 1993.
(23) Incorporated by reference from Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998, filed with the
Commission on August 6, 1998.
(24) Incorporated by reference from Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998, filed with the
Commission on August 6, 1998.
(25) Incorporated by reference from Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998, filed with the
Commission on August 6, 1998.
(26) Incorporated by reference from Exhibit 10.3 to the Registrant's
Registration Statement on Form S-4 (Registration No. 333-44279), filed
with the Commission on January 15, 1998.
(27) Incorporated by reference from Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998, filed with the
Commission on August 6, 1998.
(b) The following reports were filed on Form 8-K by the Registrant during the
quarter ended September 30, 1998.
1. On September 23, 1998, the Registrant filed a Current Report on Form
8-K, dated September 23, 1998 (Item 5), which gave notice that on November
1, 1998, the Registrant would redeem all of its outstanding 6 7/8%
Convertible Subordinated Notes, due 2002.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: December 10, 1998 D.R. HORTON, INC.
By: /s/ Donald R. Horton
------------------------
Donald R. Horton,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ DONALD R. HORTON Chairman of the Board December 10, 1998
- -------------------------- (Principal Executive Officer)
Donald R. Horton
/s/ BRADLEY S. ANDERSON Director December 10, 1998
- --------------------------
Bradley S. Anderson
/s/ RICHARD BECKWITT Director December 10, 1998
- --------------------------
Richard Beckwitt
/s/ RICHARD I. GALLAND Director December 10, 1998
- --------------------------
Richard I. Galland
Director
- --------------------------
Thomas Hickcox
/s/ RICHARD L. HORTON Director December 10, 1998
- --------------------------
Richard L. Horton
/s/ TERRILL J. HORTON Director December 10, 1998
- --------------------------
Terrill J. Horton
/s/ DAVID J. KELLER Treasurer, Chief Financial December 10, 1998
- -------------------------- Officer and Director
David J. Keller (Principal Financial
Officer and Principal
Accounting Officer)
/s/ FRANCINE I. NEFF Director December 10, 1998
- --------------------------
Francine I. Neff
/s/ SCOTT J. STONE Director December 10, 1998
- --------------------------
Scott J. Stone
/s/ DONALD J. TOMNITZ Vice Chairman, Chief December 10, 1998
- -------------------------- Executive Officer, and
Donald J. Tomnitz Director
</TABLE>
42
<PAGE>
CORPORATE INFORMATION
D.R. Horton, Inc. (the "Company") is engaged primarily in the construction
and sale of single-family homes. The Company offers high-quality homes with
custom features, designed principally for the entry-level and move-up segments.
Horton has established a unique marketing niche, 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 than those charged by local custom builders. Horton homes range
in size from 1,000 to 5,000 square feet and are priced from $80,000 to $600,000.
For the year ended September 30, 1998, the Company closed 13,944 homes with an
average sales price of approximately $153,300.
The Company is geographically diversified, operating in 23 states and 41
markets. Plans call for continued expansion in current markets, as well as entry
into new markets that have significant entry-level and move-up market segments
consistent with the Company's product and pricing strategy.
THE BOARD OF DIRECTORS Transfer Agent and Registrar
Donald R. Horton American Stock Transfer & Trust Co.
Chairman (2) New York, NY
(800)937-5449
Bradley S. Anderson
First Vice President of Investor Relations
CB Richard Ellis, Inc. (1)
Richard Beckwitt
Richard Beckwitt D.R. Horton, Inc.
President (2) 1901 Ascension Blvd., Suite 100
Arlington, Texas 76006
Richard I. Galland
Former Chief Executive Officer and Annual Meeting
Chairman of Fina, Inc. (1)(2)
January 15, 1999 9:30 a.m. C.S.T.
Richard L. Horton
Former Vice President - At the Corporate Offices of
Dallas/Fort Worth East Division D.R. Horton, Inc.
1901 Ascension Blvd., Suite 100
Terrill J. Horton Arlington, Texas 76006
Former Vice President -
Dallas/Fort Worth North Division
David J. Keller
Executive Vice President, Treasurer
and Chief Financial Officer (2)
Francine I. Neff
Former Treasurer of
the United States (1)
Scott J. Stone
Former Vice President -
Eastern Region
Donald J. Tomnitz
Vice Chairman and
Chief Executive Officer (2)
- ----------
(1) Audit Committee Member
(2) Compensation Committee Member
43
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT 4.7
D.R. HORTON, INC. AND THE GUARANTORS PARTY HERETO
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as
Trustee
------------------
FIFTH SUPPLEMENTAL INDENTURE
Dated as of August 31, 1998
------------------
8 3/8% SENIOR NOTES
DUE 2004
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FIFTH SUPPLEMENTAL INDENTURE, dated as of August 31, 1998, and
effective as of the dates set forth in Articles I and II below, to the
Indenture, dated as of June 9, 1997 (as amended, modified or supplemented from
time to time in accordance therewith, the "Indenture"), by and among D.R.
HORTON, INC., a Delaware corporation (the "Company"), the ADDITIONAL GUARANTORS
(as defined herein), the EXISTING GUARANTORS (as defined herein) and AMERICAN
STOCK TRANSFER & TRUST COMPANY, as trustee (the "Trustee").
RECITALS
WHEREAS, the Company and the Trustee entered into the Indenture to
provide for the issuance from time to time of senior debt securities (the
"Securities") to be issued in one or more series as the Indenture provides;
WHEREAS, pursuant to the First Supplemental Indenture dated as of June
9, 1997 (the "First Supplemental Indenture"), among the Company, the guarantors
party thereto (with the guarantors party to subsequent supplemental indentures,
the "Existing Guarantors") and the Trustee, the Company issued a series of
Securities designated as its 8 3/8% Senior Notes due 2004 in the aggregate
principal amount of up to $250,000,000 (the "Notes");
WHEREAS, pursuant to Section 4.05 of the Indenture, if the Company
organizes, acquires or otherwise invests in another Subsidiary which becomes a
Restricted Subsidiary, then such Subsidiary shall execute and deliver a
supplemental indenture pursuant to which such Restricted Subsidiary shall
unconditionally guarantee all of the Company's obligations under the Notes on
the terms set forth in the Indenture;
WHEREAS, in accordance with Section 4.05 of the Indenture, the Company
desires to cause certain newly organized or acquired Subsidiaries who are deemed
to be Restricted Subsidiaries according to the Indenture to be bound by those
terms applicable to a Guarantor under the Indenture (as it applies to the
Securities);
WHEREAS, pursuant to Section 9.05 of the Indenture, a Guarantor may
merge with or into, or dissolve into, another Restricted Subsidiary and, upon
such merger or dissolution, the Guarantee given by such Guarantor shall no
longer have any force or effect;
WHEREAS, in accordance with Section 9.05 of the Indenture, the Company
has caused certain Guarantors to merge with and into, or have all their property
conveyed to, certain Restricted Subsidiaries (the "Merged Guarantors"),
whereupon the Guarantees given by such Guarantors shall no longer have any force
or effect;
WHEREAS, the execution of this Fifth Supplemental Indenture has been
duly authorized by the Boards of Directors of the Company and the Additional
Guarantors and all things necessary to make this Fifth Supplemental Indenture a
-1-
<PAGE>
valid, binding and legal instrument according to its terms have been done and
performed;
NOW THEREFORE, for and in consideration of the premises, the Company,
the Additional Guarantors and the Existing Guarantors covenant and agree with
the Trustee for the equal and ratable benefit of the respective holders of the
Securities as follows:
ARTICLE I.
ADDITIONAL GUARANTOR
1.1. As of May 1, 1998, and August 28, 1998, respectively, the
respective dates of their organization, and in accordance with Section 4.05 of
the Indenture, the following Restricted Subsidiaries (the "Additional
Guarantors") hereby unconditionally guarantee all of the Company's obligations
under the Securities of any Series that has the benefit of Guarantees of other
Subsidiaries of the Company and the Indenture (as it relates to all such Series)
on the terms set forth in the Indenture, including without limitation, Article
Nine thereof, and, in the case of the Notes, Article One of the First
Supplemental Indenture thereto and the Guarantees affixed thereto:
Name Jurisdiction of Organization
D.R. Horton, Inc. - Portland Delaware
Magnolia Homes Builders, Inc. Georgia
1.2 The Trustee is hereby authorized to add the above-named Additional
Guarantors to the list of Guarantors on the Guarantees affixed to the Notes.
ARTICLE II.
MERGED GUARANTORS
2.1 In accordance with Section 9.05 of the Indenture, the Company and
the Trustee acknowledge that the Guarantees previously given by the following
Merged Guarantors no longer have any force or effect by reason of the merger or
dissolution of the Merged Guarantors into the Restricted Subsidiaries as
indicated below:
(a) DRH New Mexico Construction, Inc. merged into D.R.
Horton, Inc. - Albuquerque, as of April 30, 1998, and
the name of D.R. Horton, Inc. - Albuquerque was
changed to D.R. Horton, Inc. - Louisville.
(b) The name of Continental Homes of Austin, L.P., was
changed to Continental Homes of Texas, L.P. and
Continental Homes of Dallas, L.P. and Continental
-2-
<PAGE>
Homes of San Antonio, L.P. merged into Continental
Homes of Texas, L.P. as of July 31, 1998.
(c) SGS Communities at West Windsor, LLC dissolved as of
July 31, 1998, and its assets were distributed to
Meadows IX, Inc.
ARTICLE III.
MISCELLANEOUS PROVISIONS
3.1 This Fifth Supplemental Indenture constitutes a supplement to the
Indenture, and the Indenture, the First Supplement Indenture, the Second
Supplemental Indenture, dated as of September 30, 1997, Third Supplemental
Indenture, dated as of April 17, 1998, and Fourth Supplemental Indenture, dated
as of April 20, 1998, by and among the Company, the guarantors thereto and the
Trustee, shall be read together and shall have the effect so far as practicable
as though all of the provisions thereof and hereof are contained in one
instrument.
3.2 The parties may sign any number of copies of this Fifth
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
3.3 In case any one or more of the provisions contained in this Fifth
Supplemental Indenture or in the Notes shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Fifth
Supplemental Indenture or of the Notes.
3.4 The article and section headings herein are for convenience only
and shall not affect the construction hereof.
3.5 Any capitalized term used in this Fifth Supplemental Indenture and
not defined herein that is defined in the Indenture shall have the meaning
specified in the Indenture, unless the context shall otherwise require.
3.6 All covenants and agreements in this Fifth Supplemental Indenture
by the Company, the Existing Guarantors and the Additional Guarantors shall bind
each of their successors and assigns, whether so expressed or not. All
agreements of the Trustee in this Fifth Supplemental Indenture shall bind its
successors and assigns.
3.7 The laws of the State of New York shall govern this Fifth
Supplemental Indenture, the Securities of each Series and the Guarantees.
3.8 Except as amended by this Fifth Supplemental Indenture, the terms
and provisions of the Indenture shall remain in full force and effect.
-3-
<PAGE>
3.9 This Fifth Supplemental Indenture may not be used to interpret
another indenture, loan or debt agreement of the Company or a Subsidiary. Any
such indenture, loan or debt agreement may not be used to interpret this Fifth
Supplemental Indenture.
3.10 All liability described in paragraph 12 of the Notes of any
director, officer, employee or stockholder, as such, of the Company is waived
and released.
3.11 The Trustee accepts the modifications of the trust effected by
this Fifth Supplemental Indenture, but only upon the terms and conditions set
forth in the Indenture. Without limiting the generality of the foregoing, the
Trustee assumes no responsibility for the correctness of the recitals herein
contained which shall be taken as the statements of the Company and the
Additional Guarantors, and the Trustee shall not be responsible or accountable
in any way whatsoever for or with respect to the validity or execution or
sufficiency of this Fifth Supplemental Indenture, and the Trustee makes no
representation with respect thereto.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, all as of the day and year first above written.
D.R. HORTON, INC.
By: /s/ David J. Keller
---------------------------------
David J. Keller
Executive Vice President,
Chief Financial Officer and Treasurer
ADDITIONAL GUARANTORS:
D.R. Horton, Inc. - Portland
Magnolia Homes Builders, Inc.
By: /s/ David J. Keller
---------------------------------
David J. Keller, Treasurer
-4-
<PAGE>
EXISTING GUARANTORS:
DRHI, Inc.
Meadows I, Ltd.
Meadows II, Ltd.
Meadows IX, Inc.
Meadows X, Inc.
D.R. Horton, Inc. - Minnesota
D.R. Horton, Inc. - Greensboro
D.R. Horton, Inc. - Birmingham
D.R. Horton, Inc. - New Jersey
D.R. Horton, Inc. - Torrey
DRH Construction, Inc.
D.R. Horton, Inc. - Louisville
D.R. Horton, Inc. - Denver
D.R. Horton Denver Management Company, Inc.
D.R. Horton San Diego Holding Company, Inc.
D.R. Horton San Diego Management Company, Inc.
D.R. Horton Los Angeles Holding Company, Inc.
D.R. Horton Los Angeles Management
Company, Inc.
S. G. Torrey Atlanta, Ltd.
D.R. Horton, Inc. - Sacramento
D.R. Horton Sacramento Management
Company, Inc.
C. Richard Dobson Builders, Inc.
Land Development, Inc.
DRH Tucson Construction, Inc.
Continental Homes, Inc.
KDB Homes, Inc.
L&W Investments, Inc.
Continental Ranch, Inc.
Continental Homes of Florida, Inc.
CHI Construction Company
CHTEX of Texas, Inc.
CH Investments of Texas, Inc.
By: /s/ David J. Keller
---------------------------------
David J. Keller, Treasurer
-5-
<PAGE>
SGS COMMUNITIES AT GRANDE QUAY, LLC
By Meadows IX, Inc., a member
By: /s/ Donald R. Horton
--------------------------------
Donald R. Horton
Chairman of the Board
and
By Meadows X, Inc., a member
By: /s/ Donald R. Horton
--------------------------------
Donald R. Horton
Chairman of the Board
D.R. HORTON MANAGEMENT COMPANY, LTD.
D.R. HORTON - TEXAS, LTD.
By Meadows I, Ltd., its general partner
By: /s/ Donald R. Horton
--------------------------------
Donald R. Horton
Chairman of the Board
CONTINENTAL HOMES OF TEXAS, L.P.
By CHTEX of Texas, Inc.
Its: General Partner
By: /s/ David J. Keller
--------------------------------
David J. Keller, Treasurer
AMERICAN STOCK TRANSFER & TRUST
COMPANY, as Trustee
By: /s/ Herbert J. Lemmer
--------------------------------
Name: Herbert J. Lemmer
Title: Vice President
-6-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT 4.10
D.R. HORTON, INC. AND THE GUARANTORS PARTY HERETO
AND
FIRST UNION NATIONAL BANK,
as
Trustee
------------------
SECOND SUPPLEMENTAL INDENTURE
Dated as of August 31, 1998
------------------
10% SENIOR NOTES
DUE 2006
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SECOND SUPPLEMENTAL INDENTURE, dated as of August 31, 1998, and
effective as of the dates set forth in Articles I and II below, to the
Indenture, dated as of April 15, 1996 (as amended, modified or supplemented from
time to time in accordance therewith, the "Indenture"), by and among D.R.
HORTON, INC., a Delaware corporation (the "Company"), the ADDITIONAL GUARANTORS
(as defined herein), the EXISTING GUARANTORS (as defined herein) and FIRST UNION
NATIONAL BANK, a national banking association organized and existing under the
laws of the United States of America, as trustee (the "Trustee").
RECITALS
WHEREAS, Continental Homes Holding Corp., a Delaware corporation
("Continental"), and the Trustee entered into the Indenture pursuant to which
Continental issued $150,000,000 principal amount of 10% Senior Notes due 2006
(the "Securities");
WHEREAS, on April 20, 1998, pursuant to the laws of the State of
Delaware and in accordance with the terms of the Agreement and Plan of Merger,
dated as of December 18, 1998, by and between the Company and Continental,
Continental was duly merged with and into the Company (the "Merger"), with the
Company continuing as the surviving corporation;
WHEREAS, as a result of the Merger, the Company succeeded to all
obligations, duties and liabilities of Continental under the Indenture as if
incurred or contracted by the Company;
WHEREAS, pursuant to Section 4.16 of the Indenture, the Company is
required to cause any Subsidiary with a net book value greater than $10,000,000
which is a Restricted Subsidiary to guarantee, simultaneously with its
designation as a Restricted Subsidiary, the payment of the Securities pursuant
to the terms of Article 10 and Exhibit B of the Indenture;
WHEREAS, in accordance with Section 4.16 of the Indenture, the Company
desires to cause certain newly organized or acquired Subsidiaries who are deemed
to be Restricted Subsidiaries according to the Indenture to guarantee the
payment of the Securities;
WHEREAS, pursuant to Section 10.04 of the Indenture, a Guarantor may
merge with or into, or dissolve into, another Restricted Subsidiary and, upon
such merger or dissolution, the Guarantee given by such Guarantor shall no
longer have any force or effect;
WHEREAS, in accordance with Section 10.04 of the Indenture, the Company
has caused certain Guarantors to merge with and into, or have all their property
conveyed to, certain Restricted Subsidiaries (the "Merged Guarantors"),
whereupon the Guarantees given by such Guarantors shall no longer have any force
or effect;
WHEREAS, the execution of this Second Supplemental Indenture has been
duly authorized by the Boards of Directors of the Company and the Additional
Guarantors and all things necessary to make this Second Supplemental Indenture a
-1-
<PAGE>
valid, binding and legal instrument according to its terms have been done and
performed;
NOW THEREFORE, for and in consideration of the premises, the Company,
the Additional Guarantors and the Existing Guarantors covenant and agree with
the Trustee for the equal and ratable benefit of the respective holders of the
Securities as follows:
ARTICLE I.
ADDITIONAL GUARANTOR
1.1. As of May 1, 1998, and August 28, 1998, respectively, the
respective dates of their organization, and in accordance with Sections 4.16 and
10.03 of the Indenture, the following Restricted Subsidiaries (the "Additional
Guarantors") hereby severally agree to be subject to and bound by the terms of
the Indenture applicable to a Guarantor and hereby jointly and severally
unconditionally and irrevocably guarantee on a senior basis the payment of the
Securities pursuant to the terms of Article 10 of, and Exhibit B to, the
Indenture:
Name Jurisdiction of Organization
D.R. Horton, Inc. - Portland Delaware
Magnolia Homes Builders, Inc. Georgia
1.2 The Additional Guarantors shall execute and deliver a Guarantee,
which shall be incorporated herein by reference in the form set forth in Exhibit
B to the Indenture.
ARTICLE II.
MERGED GUARANTORS
2.1 In accordance with Section 10.04 of the Indenture, the Company and
the Trustee acknowledge that the Guarantees previously given by the following
Merged Guarantors no longer have any force or effect by reason of the merger or
dissolution of the Merged Guarantors into the Restricted Subsidiaries as
indicated below:
(a) DRH New Mexico Construction, Inc. merged into D.R.
Horton, Inc. - Albuquerque, as of April 30, 1998, and
the name of D.R. Horton, Inc. - Albuquerque was
changed to D.R. Horton, Inc. - Louisville.
(b) The name of Continental Homes of Austin, L.P., was
changed to Continental Homes of Texas, L.P. and
Continental Homes of Dallas, L.P. and Continental
Homes of San Antonio, L.P. merged into Continental
Homes of Texas, L.P. as of July 31, 1998.
-2-
<PAGE>
(c) SGS Communities at West Windsor, LLC dissolved as of
July 31, 1998, and its assets were distributed to
Meadows IX, Inc.
ARTICLE III.
MISCELLANEOUS PROVISIONS
3.1 This Second Supplemental Indenture constitutes a supplement to the
Indenture, and the Indenture, the First Supplement Indenture thereto, and this
Second Supplemental Indenture shall be read together and shall have the effect
so far as practicable as though all of the provisions thereof and hereof are
contained in one instrument.
3.2 The parties may sign any number of copies of this Second
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
3.3 In the event that any provision in this Second Supplemental
Indenture shall be held to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
3.4 The article and section headings herein are for convenience only
and shall not affect the construction hereof.
3.5 Any capitalized term used in this Second Supplemental Indenture and
not defined herein that is defined in the Indenture shall have the meaning
specified in the Indenture, unless the context shall otherwise require.
3.6 All covenants and agreements in this Second Supplemental Indenture
by the Company, the Existing Guarantors and the Additional Guarantors shall bind
each of their successors and assigns, whether so expressed or not. All
agreements of the Trustee in this Second Supplemental Indenture shall bind its
successors and assigns.
3.7 The laws of the State of New York shall govern this Second
Supplemental Indenture, the Securities of each Series and the Guarantees.
3.8 Except as amended by this Second Supplemental Indenture, the terms
and provisions of the Indenture shall remain in full force and effect.
3.9 This Second Supplemental Indenture may not be used to interpret
another indenture, loan or debt agreement of the Company or a Subsidiary. Any
such indenture, loan or debt agreement may not be used to interpret this Second
Supplemental Indenture.
3.10 All liability described in paragraph 16 of the Notes of any
director, officer, employee or stockholder, as such, of the Company or any
Guarantor is waived and released.
-3-
<PAGE>
3.11 The Trustee accepts the modifications of the trust effected by
this Second Supplemental Indenture, but only upon the terms and conditions set
forth in the Indenture. Without limiting the generality of the foregoing, the
Trustee assumes no responsibility for the correctness of the recitals herein
contained which shall be taken as the statements of the Company and the
Additional Guarantors, and the Trustee shall not be responsible or accountable
in any way whatsoever for or with respect to the validity or execution or
sufficiency of this Second Supplemental Indenture, and the Trustee makes no
representation with respect thereto.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, all as of the day and year first above written.
D.R. HORTON, INC.
By: /s/ David J. Keller
---------------------------------
David J. Keller
Executive Vice President,
Chief Financial Officer and Treasurer
ADDITIONAL GUARANTORS:
D.R. Horton, Inc. - Portland
Magnolia Homes Builders, Inc.
By: /s/ David J. Keller
---------------------------------
David J. Keller, Treasurer
-4-
<PAGE>
EXISTING GUARANTORS:
DRHI, Inc.
Meadows I, Ltd.
Meadows II, Ltd.
Meadows IX, Inc.
Meadows X, Inc.
D.R. Horton, Inc. - Minnesota
D.R. Horton, Inc. - Greensboro
D.R. Horton, Inc. - Birmingham
D.R. Horton, Inc. - New Jersey
D.R. Horton, Inc. - Torrey
DRH Construction, Inc.
D.R. Horton, Inc. - Louisville
D.R. Horton, Inc. - Denver
D.R. Horton Denver Management Company, Inc.
D.R. Horton San Diego Holding Company, Inc.
D.R. Horton San Diego Management Company, Inc.
D.R. Horton Los Angeles Holding Company, Inc.
D.R. Horton Los Angeles Management
Company, Inc.
S. G. Torrey Atlanta, Ltd.
D.R. Horton, Inc. - Sacramento
D.R. Horton Sacramento Management
Company, Inc.
C. Richard Dobson Builders, Inc.
Land Development, Inc.
DRH Tucson Construction, Inc.
Continental Homes, Inc.
KDB Homes, Inc.
L&W Investments, Inc.
Continental Ranch, Inc.
Continental Homes of Florida, Inc.
CHI Construction Company
CHTEX of Texas, Inc.
CH Investments of Texas, Inc.
By: /s/ David J. Keller
---------------------------------
David J. Keller, Treasurer
-5-
<PAGE>
SGS COMMUNITIES AT GRANDE QUAY, LLC
By Meadows IX, Inc., a member
By: /s/ Donald R. Horton
---------------------------------
Donald R. Horton
Chairman of the Board
and
By Meadows X, Inc., a member
By: /s/ Donald R. Horton
---------------------------------
Donald R. Horton
Chairman of the Board
D.R. HORTON MANAGEMENT COMPANY, LTD.
D.R. HORTON - TEXAS, LTD.
By Meadows I, Ltd., its general partner
By: /s/ Donald R. Horton
---------------------------------
Donald R. Horton
Chairman of the Board
CONTINENTAL HOMES OF TEXAS, L.P.
By CHTEX of Texas, Inc.
Its: General Partner
By: /s/ David J. Keller
---------------------------------
David J. Keller, Treasurer
FIRST UNION NATIONAL BANK, as Trustee
By: /s/ George J. Rayzis
---------------------------------
Name: George J. Rayzis
Title: Vice President
-6-
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
AGREEMENT, made as of this 1st day of December, 1997, by and between
CONTINENTAL HOMES HOLDING CORP., a Delaware corporation (the "Company"), and W.
THOMAS HICKCOX (the "Employee").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Company has approved the
employment of the Employee on the terms and conditions set forth in this
Agreement; and
WHEREAS, the Employee is willing, for the consideration provided, to
continue in the employment of the Company on the terms and conditions set forth
in this Agreement;
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. Employment. The Company hereby agrees to continue to employ the
Employee, and the Employee hereby accepts such continued employment, upon the
terms and conditions set forth in this Agreement.
2. Term. The term (the "Term") of the Employee's employment under this
Agreement shall be the period commencing on December 1, 1997 and shall continue
until November 30, 1999, unless sooner terminated by termination of the
Employee's employment pursuant to Section 5, 6 or 7.
3. Position and Duties. During the Term, the Employee shall serve as
President, Chief Executive Officer and Chief Operating Officer of the Company,
and shall have such responsibilities and authority as commensurate with such
office and as may from time to time be prescribed by or pursuant to the
Company's By-laws. The Employee shall devote substantially all of his working
time and efforts to the business and affairs of the Company.
<PAGE>
4. Compensation. During the Term, the Company shall provide the
Employee with the following compensation and other benefits:
(a) Base Salary. The Company shall pay to the Employee base
salary at the initial rate of $300,000 per annum, which shall be payable in
accordance with the standard payroll practices of the Company. Such base salary
rate shall be reviewed annually in accordance with the Company's normal policies
beginning in calendar year 1998; provided, however, that at no time during the
Term shall the Employee's base salary be decreased from the rate then in effect
except with the written consent of the Employee.
(b) Bonus. The Employee shall participate in a bonus program
maintained by the Company.
(c) Other Benefits. In addition to the compensation and
benefits otherwise specified in this Agreement, the Employee (and, if provided
for under the applicable plan or program, his spouse) shall be entitled to
participate in, and to receive benefits under, the Company's employee benefit
plans and programs that are or may be available to senior executives generally
and on terms and conditions that are no less favorable than those generally
applicable to other senior executives of the Company. At no time during the Term
shall the Employee's participation in or benefits received under such plans and
programs be decreased except (i) in connection with across-the-board reductions
similarly affecting substantially all senior executives of the Company or (ii)
with the written consent of the Employee.
(d) Expenses. The Employee shall be entitled to prompt
reimbursement of all reasonable expenses incurred by him in performing services
hereunder, provided he properly accounts therefor in accordance with the
Company's policies.
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(e) Office and Services Furnished. The Company shall furnish
the Employee with office space, secretarial assistance and such other facilities
and services as shall be suitable to the Employee's position and adequate for
the performance of his duties hereunder.
5. Termination of Employment by the Company.
(a) Cause. The Company may terminate the Employee's employment
for Cause if (i) the Employee willfully engages in conduct which is or would
reasonably be expected to be materially and demonstrably injurious to the
Company, (ii) the Employee willfully engages in an act or acts of dishonesty
resulting in material personal gain to the Employee at the expense of the
Company, (iii) the Employee is convicted of a felony, (iv) the Employee engages
in an act or acts of gross malfeasance in connection with his employment
hereunder, (v) the Employee commits a material breach of the confidentiality
provision set forth in Section 10, or (vi) the Employee exhibits demonstrable
evidence of alcohol or drug abuse having a substantial adverse effect on his job
performance hereunder. The Company shall exercise its right to terminate the
Employee's employment for Cause by (i) giving him written notice of termination
at least 45 days before the date of such termination specifying in reasonable
detail the circumstances constituting such Cause; and (ii) delivering to the
Employee a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the entire membership of the Board of Directors (except the
Employee), after reasonable notice to the Employee and an opportunity for the
Employee and his counsel to be heard before the Board of Directors, finding that
the Employee has engaged in the conduct set forth in this subsection (a). In the
event of such termination of the Employee's employment for Cause, the Employee
shall be entitled to receive (i) his base salary pursuant to Section 4(a) and
any other compensation and benefits to the extent actually earned pursuant to
this Agreement or any benefit plan or program of the Company as of the date of
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<PAGE>
such termination at the normal time for payment of such salary, compensation or
benefits and (ii) any amounts owing under Section 4 (d). Except as provided in
Section 9, the Employee shall receive no other compensation or benefits from the
Company.
(b) Disability. If the Employee incurs a Permanent and Total
Disability, as defined below, the Company may terminate the Employee's
employment by giving him written notice of termination at least 45 days before
the date of such termination. In the event of such termination of the Employee's
employment because of Permanent and Total Disability, (i) the Employee shall be
entitled to receive his base salary pursuant to Section 4(a) and any other
compensation and benefits to the extent actually earned by the Employee pursuant
to this Agreement or any benefit plan or program of the Company as of the date
of such termination of employment at the normal time for payment of such salary,
compensation or benefits, and (ii) any amounts owing under Section 4 (d). For
purposes of this Agreement, the Employee shall be considered to have incurred a
Permanent and Total Disability if he is unable to engage in any substantial
gainful employment by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or can
be expected to last for a continuous period of not less than 12 months. The
existence of such Permanent and Total Disability shall be evidenced by such
medical certification as the Secretary of the Company shall require and shall be
subject to the approval of the Compensation Committee of the Board of Directors
of the Company.
(c) Without Cause. The Company may terminate the Employee's
employment at any time and for any reason, other than for Cause or because of
Permanent and Total Disability, by giving him a written notice of termination to
that effect at least 45 days before the date of termination. In the event of
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<PAGE>
such termination of the Employee's employment without Cause, the Employee shall
be entitled to the benefits described in Section 8.
6. Termination of Employment by the Employee.
Good Reason. The Employee may terminate his employment for Good Reason
by giving the Company a written notice of termination at least 45 days before
the date of such termination specifying in reasonable detail the circumstances
constituting such Good Reason. In the event of the Employee's termination of his
employment for Good Reason, the Employee shall be entitled to the benefits
described in Section 8. For purposes of this Agreement, Good Reason shall mean
(i) a significant reduction in the scope of the Employee's authority, functions,
duties or responsibilities from that which is contemplated by this Agreement,
(ii) the relocation of the Employee's office location to a location more than 50
miles away from the Employee's principal place of employment on December 1,
1997, (iii) any reduction in the Employee's base salary, (iv) a significant
change in the Company's annual bonus program adversely affecting the Employee,
or (v) a significant reduction in the other employee benefits provided to the
Employee (unless the Employee is fully compensated for the value of such
reduction through an increase in cash compensation); provided that, in the event
of a change of control of the Company involving D.R. Horton, Inc., a substantial
reduction in such employee benefits shall not be deemed to have occurred for the
purpose of clause (v) above after the expiration of the 6-month period beginning
on the date of such change of control if the Employee shall be entitled to
participate in and receive benefits under the Company's or its successor's
employee benefit plans and programs that are or may be available to senior
executives generally and on terms and conditions that are no less favorable than
those generally applicable to other senior executives of the Company or its
successor. A significant reduction within the meaning of clause (i) of the
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<PAGE>
preceding sentence shall not be deemed to have occurred merely because the
Company ceases to be a public company and the Employee ceases to report directly
to the Board of Directors or because the Employee's title is changed, provided
that the Employee's authority, functions, duties and responsibilities otherwise
remain substantially the same as the authority, functions, duties and
responsibilities of a person with the Employee's position (as specified in
Section 3 herein and as of the date hereof) within a comparably sized division
of a national homebuilding company. A significant reduction within the meaning
of clause (v) of the second preceding sentence shall not be deemed to have
occurred merely by reason of the termination of the Company's Equity Split
Dollar Plan, provided that the Company assigns to the Employee all rights which
the Company may have under any life insurance policy issued on the Employee's
life under said plan, including, without limitation, the right to reimbursement
for any premiums and administrative service fees paid by the Company (in which
event, subsection (f) of Section 8 of this Agreement shall have no further
applicability). If an event constituting a ground for termination of employment
for Good Reason occurs, and the Employee fails to give notice of termination
within 3 months after the occurrence of such event, the Employee shall be deemed
to have waived his right to terminate employment for Good Reason in connection
with such event (but not for any other event for which the 3-month period has
not expired).
(a) Other. The Employee may terminate his employment at any time and
for any reason, other than pursuant to subsection (a) above, by giving the
Company a written notice of termination to that effect at least 45 days before
the date of termination. In the event of the Employee's termination of his
employment pursuant to this subsection (b), the Employee shall be entitled to
receive (i) his base salary pursuant to Section 4(a) and any other compensation
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<PAGE>
and benefits to the extent actually earned by the Employee pursuant to this
Agreement or any benefit plan or program of the Company as of the date of such
termination at the normal time for payment of such salary, compensation or
benefits, and (ii) any amounts owing under Section 4(d). Except as provided in
Section 9, the Employee shall receive no other compensation or benefits from the
Company.
7. Termination of Employment By Death. In the event of the death of the
Employee during the course of his employment hereunder, the Employee's estate
shall be entitled to receive his base salary pursuant to Section 4(a) and any
other compensation and benefits to the extent actually earned by the Employee
pursuant to this Agreement or any other benefit plan or program of the Company
as of the date of such termination at the normal time for payment of such
salary, compensation or benefits, and any amounts owing under Section 4(d).
8. Benefits Upon Termination Without Cause or For Good Reason. If the
Employee's employment with the Company shall terminate (i) because of
termination by the Company pursuant to Section 5(c) other than for Cause or
because of Permanent and Total Disability, or (ii) because of termination by the
Employee for Good Reason pursuant to Section 6 (a), the Employee shall be
entitled to the following:
(a) The Company shall pay to the Employee his base salary
pursuant to Section 4(a) and any other compensation and benefits to the extent
actually earned by the Employee under this Agreement or any benefit plan or
program of the Company as of the date of such termination at the normal time for
payment of such salary, compensation or benefits.
(b) The Company shall pay the Employee any amounts owing
under Section 4(d).
(c) The Company shall pay to the Employee as a severance
benefit an amount equal to three times the sum of (i) his annual rate of base
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<PAGE>
salary immediately preceding his termination of employment, and (ii) the average
of his three highest annual bonuses awarded under the Company's regular annual
bonus program for any of the five calendar years preceding his termination of
employment (or, if he was not eligible for a bonus for at least three calendar
years in such five-year period, then the average of such bonuses for all of the
calendar years in such five-year period for which he was eligible), with any
deferred bonuses counting for the year earned rather than the year paid. Such
severance benefit shall be paid in a lump sum within 45 days after the date of
such termination of employment.
(d) The Company shall pay to the Employee as a bonus for the
year of termination of his employment an amount equal to a portion (determined
as provided in the next sentence) of the bonus awarded to him under the
Company's regular annual bonus program for the calendar year immediately
preceding the calendar year of the termination of his employment, with any
deferred bonuses counting for the year earned rather than the year paid. Such
portion shall be determined by dividing the number of days of the Employee's
employment during such calendar year up to his termination of employment by 365
(366 if a leap year). Such payment shall be made in a lump sum within 45 days
after the date of such termination of employment, and the Employee shall have no
right to any further bonuses under said program.
(e) During the period of 36 months beginning on the date of
the Employee's termination of employment, the Employee shall remain covered by
the medical, dental, vision, life insurance, and, if reasonably commercially
available through nationally reputable insurance carriers, long-term disability
plans of the Company that covered him immediately prior to his termination of
employment as if he had remained in employment for such period. In the event
that the Employee's participation in any such plan is barred, the Company shall
arrange to provide the Employee with substantially similar benefits (but, in the
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<PAGE>
case of long-term disability benefits, only if reasonably commercially
available). Any medical insurance coverage for such 36-month period pursuant to
this subsection (e) shall become secondary upon the earlier of (i) the date on
which the Employee begins to be covered by comparable medical coverage provided
by a new employer, or (ii) the earliest date upon which the Employee becomes
eligible for Medicare or a comparable Government insurance program.
(f) At the end of the 36-month period described in subsection
(e) above, the Company shall assign to the Employee all rights which the Company
may have under any life insurance policy issued on the Employee's life under the
Company's Equity Split Dollar Plan (including, without limitation, the right to
reimbursement for any premiums and administrative service fees paid by the
Company).
(g) The Company shall arrange for an outplacement assistance
firm to provide outplacement assistance services to the Employee at the
Company's expense for a period of twelve months beginning on the date of
termination of the Employee' s employment.
(h) If any payment or benefit received by or in respect of
the Employee under this Agreement or any other plan, arrangement or agreement
with the Company (determined without regard to any additional payments required
under this subsection (h) and Appendix A of this Agreement) (a "Payment") would
be subject to the excise tax imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be
imposed) or any interest or penalties are incurred by the Employee with respect
to such excise tax (such excise tax, together with any such interest and
penalties, being hereinafter collectively referred to as the "Excise Tax"), the
Company shall pay to the Employee with respect to such Payment at the time
specified in Appendix A an additional amount (the "Gross- up Payment") such that
the net amount retained by the Employee from the Payment and the Gross-up
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<PAGE>
Payment, after reduction for any Excise Tax upon the Payment and any Federal,
state and local income and employment tax and Excise Tax upon the Gross-up
Payment, shall be equal to the Payment. The calculation and payment of the
Gross-up Payment shall be subject to the provisions of Appendix A.
(i) Anything in this Agreement to the contrary
notwithstanding, if the Company approves any transaction with another business
entity which it wishes to qualify for "pooling of interests" accounting
treatment and, prior to the consummation of such transaction, the Company's
accountants advise that any benefits payable under this Agreement might
adversely affect the availability of such accounting treatment, such benefits
shall not be payable, and the Company and the Employee shall negotiate in good
faith to provide, if possible, an alternative way of giving substantially
equivalent economic benefits to the Employee that would not adversely affect
"pooling of interests" accounting treatment.
9. Entitlement To Other Benefits. Except as provided in this
Agreement, this Agreement shall not be construed as limiting in any way any
rights or benefits that the Employee or his spouse, dependents or beneficiaries
may have pursuant to any other plan or program of the Company.
10. Confidential Information. The Employee shall retain in confidence
any confidential information known to him concerning the Company, its
subsidiaries, and their respective businesses until such information is publicly
disclosed. This provision shall survive the termination of the Employee's
employment for any reason under this Agreement.
11. No Duty to Seek Employment. The Employee shall not be under any
any duty or obligation to seek or accept other employment following termination
10
<PAGE>
of employment, and no amount, payment or benefits due to the Employee hereunder
shall be reduced or suspended if the Employee accepts subsequent employment.
12. Non-Solicitation. The Employee agrees that, for a period of
eighteen months following the date of termination of his employment hereunder,
he will not solicit, directly or indirectly, any officer or employee of the
Company or any of its subsidiaries or affiliates to leave and work for any other
employer and, further, that he will not suggest to others that they approach or
solicit any officer or employee of the Company or any of its subsidiaries or
affiliates with respect to potential employment elsewhere. This provision shall
survive the termination of the Employee's employment for any reason under this
Agreement. If the Employee breaches this provision in any significant respect,
he shall forfeit his right to receive the payments and benefits described in
subsections (c) through (h) of Section 8 (including, without limitation,
payments and benefits already received). To the extent any payments and benefits
already received are so forfeited, the Employee shall promptly return such
payments and benefits to the Company. In addition, the Company may seek other
legal and equitable relief in the event of any breach by the Employee of this
Section 12.
13. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled by arbitration, conducted before
a panel of three arbitrators in Phoenix, Arizona in accordance with the
applicable rules and procedures of the American Arbitration Association then in
effect. Arbitration shall be the exclusive remedy for any such dispute or
controversy except only as to the failure to abide by an arbitration award
rendered hereunder. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction. Such arbitration shall be final and
binding on the parties. If the Employee is awarded more than an insignificant
amount compared with what the Company asserted was due him or otherwise
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<PAGE>
substantially prevails in the arbitration, the Company shall reimburse the
Employee for the costs incurred by the Employee in connection with such
arbitration, including without limitation reasonable attorneys' fees, and hereby
agrees to pay interest on any money award obtained by the Employee from the date
payment should have been made until the date payment is made, calculated at the
rate of 2% in excess of the LIBOR rate in effect from time to time from the date
that payment(s) to him should have been made under the Agreement. If the
Employee enforces the arbitration award in court, the Company shall reimburse
the Employee for the costs incurred in such enforcement, including without
limitation reasonable attorneys' fees.
14. Successors. This Agreement shall be binding upon and inure to
the benefit of the Employee and his estate and the Company and any successor of
the Company, but neither this Agreement nor any rights arising hereunder may be
assigned or pledged by the Employee.
15. Severability. Any provision in this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective only to the extent of such prohibition or unenforceability
without invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
16. Notices. All notices required or permitted to be given under this
Agreement shall be given in writing and shall be deemed sufficiently given if
delivered by hand or mailed by registered mail, return receipt requested, to his
residence in the case of the Employee and to its principal executive offices in
the case of the Company. Either party may by giving written notice to the other
party in accordance with this Section 16 change the address at which it is to
receive notices hereunder.
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17. Controlling Law. This Agreement shall in all respects be governed
by and construed in accordance with the laws of the State of Delaware (without
giving effect to principles of conflict of laws).
18. Changes to Agreement. This Agreement may not be changed orally but
only in a writing, signed by the party against whom enforcement is sought.
19. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed an original but all
of which together shall constitute one and the same instrument.
20. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties with respect to its subject matter and supersedes all prior
agreements, drafts, and written or oral representations of either party.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
____ day of December, 1997.
EMPLOYEE: CONTINENTAL HOMES HOLDING CORP.
/s/ W. Thomas Hickcox By:/s/ Timothy C. Westfall
- -------------------------- ---------------------------------
W. Thomas Hickox
ATTEST:
By:/s/ Bradley S. Anderson
---------------------------------
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<PAGE>
APPENDIX A
GROSS-UP PAYMENTS
The following provisions shall be applicable with respect to the
Gross-Up Payments described in Section 8(h) of this Agreement.
(a) For purposes of determining whether any of the Payments
will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of
the Payments received or to be received shall be treated as "parachute payments"
within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute
payments" within the meaning of Section 280G(b)(1) of the Code shall be treated
as subject to the Excise Tax unless, in the opinion of tax counsel selected by
the Company, the Payments (in whole or in part) do not constitute parachute
payments, including by reason of Section 280G(b)(4)(A) of the Code, or excess
parachute payments (as determined after application of Section 280G(b)(4)(B) of
the Code), and (ii) the value of any non-cash benefits or any deferred payment
or benefit shall be determined by independent auditors selected by the Company
in accordance with the principles of Sections 280G(d)(3) and (4) of the Code.
For purposes of determining the amount of the Gross-Up Payment, the Employee
shall be deemed to pay Federal income taxes at the highest marginal rate of
Federal income taxation in the calendar year in which the Gross-Up Payment is to
be made and state and local income taxes at the highest marginal rate of
taxation to which such payment could be subject based upon the state and
locality of the Employee's residence or employment, net of the maximum reduction
in Federal income taxes which could be obtained from deduction of such state and
local taxes. In addition, for purposes of determining the amount of the Gross-Up
Payment, the Company shall make a determination of the amount of any employment
taxes required to be paid on the Gross- Up Payment. In the event that the Excise
Tax is subsequently determined to be less than the amount taken into account
hereunder at the time the Gross-up Payment is made, the Employee shall repay the
Company, at the time that the amount of such reduction in Excise Tax is finally
determined, the portion of the Gross-up Payment attributable to such reduction
(plus the portion of the Gross-up Payment attributable to the Excise Tax and
Federal and state and local income and employment tax imposed on the portion of
the Gross-up Payment being repaid by the Employee if such repayment results in a
reduction in Excise Tax and/or a Federal and state and local income or
employment tax deduction), plus interest on the amount of such repayment at the
Federal short-term rate as defined in Section 1274 (d)(1)(C)(i) of the Code. In
the event that the Excise Tax is determined to exceed the amount taken into
account hereunder at the time the Gross-up Payment is made (including by reason
of any payments the existence or amount of which cannot be determined at the
time of the Gross-up Payment), the Company shall make an additional gross-up
payment in respect of such excess (plus any interest, penalties or additions
payable with respect to such excess) at the time that the amount of such excess
is finally determined. Notwithstanding the foregoing, the Company shall withhold
from any payment due to the Employee the amount required by law to be so
withheld under Federal, state or local wage or employment tax withholding
requirements or otherwise (including without limitation Section 4999 of the
Code), and shall pay over to the appropriate government authorities the amount
so withheld.
<PAGE>
(b) The Gross-up Payment with respect to a Payment shall be
paid not later than the forty-fifth day following the date of the Payment;
provided, however, that if the amount of such Gross-up Payment or portion
thereof cannot be finally determined on or before such day, the Company shall
pay to the Employee on such date an estimate, as determined in good faith by the
Company, of the amount of such payments and shall pay the remainder of such
payments (together with interest at the Federal short-term rate provided in
Section 1274(d)(1)(C)(i) of the Code) as soon as the amount thereof can be
determined. In the event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, such excess shall constitute a
loan by the Company to the Employee, payable on the fifth day after demand by
the Company (together with interest at the Federal short-term rate provided in
Section 1274(d)(1)(C)(i) of the Code). At the time that payments are made under
Section 8(h) and this Appendix A, the Company shall provide the Employee with a
written statement setting forth the manner in which such payments were
calculated and the basis for such calculations, including, without limitation,
any opinions or other advice the Company has received from outside counsel,
auditors or consultants (and any such opinions or advice which are in writing
shall be attached to the statement).
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EXHIBIT 21.1
SUBSIDIARIES OF D.R. HORTON, INC.
As of September 30, 1998
STATE OF
INCORPORATION DOING
NAME OR ORGANIZATION BUSINESS AS
- ----------------------------------- --------------- -------------------
DRHI, Inc. Delaware
Meadows I, Ltd. Delaware
Meadows II, Ltd. Delaware
Meadows IV, Inc. Texas
Meadows V, Ltd. Delaware
Meadows IX, Inc. New Jersey
Meadows X, Inc. New Jersey
D.R. Horton Management Company, Ltd. Texas Limited
Partnership
D.R. Horton - Texas, Ltd. Texas Limited D.R. Horton Custom
Partnership Homes
DHI Ranch, Ltd. Texas Limited
Partnership
DRH Construction, Inc. Delaware
DRH Land Company, Inc. California
DRH Properties, Inc. Arizona
DRH Title Company - Southeast, Inc. Delaware
DRH Title Company of Colorado, Inc. Colorado
DRH Title Company of Florida, Inc. Florida
DRH Title Company of Texas, Ltd. Texas Limited
Partnership
DRH Tucson Construction, Inc. Delaware
D.R. Horton, Inc. - Louisville Delaware Mareli Development
& Construction
D.R. Horton, Inc. - Birmingham Alabama Regency Homes
D.R. Horton, Inc. - Denver Delaware Trimark Communities
D.R. Horton Denver Management Colorado
Company, Inc.
D.R. Horton, Inc, - Greensboro Delaware Arappco Homes
D.R. Horton, Inc. - Los Angeles Delaware
<PAGE>
STATE OF
INCORPORATION DOING
NAME OR ORGANIZATION BUSINESS AS
- ----------------------------------- --------------- -------------------
D.R. Horton Los Angeles Holding California D.R. Horton Custom
Company, Inc. Homes
D.R. Horton Los Angeles Management California
Company, Inc.
D.R. Horton, Inc. - Minnesota Delaware Joe Miller Homes
D.R. Horton, Inc. - New Jersey Delaware SGS Communities
D.R. Horton, Inc. - Sacramento California D.R. Horton Custom
Homes
D.R. Horton Sacramento Management California
Company, Inc.
D.R. Horton, Inc. - San Diego Delaware
D.R. Horton San Diego Holding California D.R. Horton Custom
Company, Inc. Homes
D.R. Horton San Diego Management California
Company, Inc.
D.R. Horton, Inc. - Torrey Delaware Torrey Homes
Magnolia Homes Builders, Inc. Georgia Magnolia Homes
Grand Realty Incorporated New Jersey
SGS Communities at Grand Quay, LLC New Jersey SGS Communities
SGS Communities at Battleground, LLC New Jersey SGS Communities
S. G. Torrey Atlanta, Ltd. Georgia
C. Richard Dobson Builders, Inc. Virginia Dobson Builders
Land Development, Inc. Virginia
D.R. Horton, Inc.-Portland Delaware RMP Properties
DRH Title Company-Minnesota, Inc. Delaware
Continental Homes, Inc. Delaware
KDB Homes, Inc. Delaware Continental Homes
L&W Investments, Inc. California Continental Homes
Continental Ranch, Inc. Delaware Continental Homes
Continental Homes of Florida, Inc. Florida Continental Homes
<PAGE>
STATE OF
INCORPORATION DOING
NAME OR ORGANIZATION BUSINESS AS
- ----------------------------------- --------------- -------------------
CHI Construction Company Arizona
CHTEX of Texas, Inc. Delaware
CH Investments of Texas, Inc. Delaware
Continental Homes of Texas, L.P. Texas Milburn Homes
Continental Homes
Surprise Village North, LLC Arizona
Continental Traditions, LLC Arizona, LLC
CH Mortgage Company Colorado
CH Mortgage Company GP, Inc. Delaware
CH Mortgage Company LP, Inc. Delaware
CH Mortgage Company I, Ltd. Texas Limited
Partnership
Jefferson Creek, L.L.C. Virginia Limited
Liability Company
Millstream, L.L.C. Virginia Limited
Liability Company
Peaceford Meadows, L.L.C. Virginia Limited
Liability Company
Venture Management, L.L.C. Virginia Limited
Liability Company
Venture Management of South Carolina Limited
South Carolina, L.L.C. Liability Company
Summerwalk Associates, L.L.C. South Carolina Limited
Liabiity Company
Riverside Glen, L.L.C. South Carolina Limited
Liability Company
Oak Park, L.L.C. South Carolina Limited
Liability
<PAGE>
STATE OF
INCORPORATION DOING
NAME OR ORGANIZATION BUSINESS AS
- ----------------------------------- --------------- -------------------
Vinyard Green, L.L.C. North Carolina Limited
Liability Company
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following
registration statements on Forms S-3 and S-4 and related prospectuses and in the
following registration statements on Form S-8 of D.R. Horton, Inc., of our
report dated November 12, 1998, with respect to the consolidated financial
statements of D.R. Horton, Inc. included in this Annual Report (Form 10- K) for
the year ended September 30, 1998.
Form S-3 Registration No. 333-57193
Form S-4 Registration No. 333-56491
Form S-8 Registration No. 33-48874
Registration No. 33-83162
Registration No. 333-3570
Registration No. 333-3572
Registration No. 333-47767
Registration No. 333-51473
/s/ERNST & YOUNG LLP
Fort Worth, Texas
December 4, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included (or incorporated by reference) in this Form 10-K, into D.R.
Horton, Inc's previously filed Registration Statements as follows:
Form S-3 Registration No. 333-27521
Registration No. 333-57193
Form S-4 Registration No. 333-56491
Form S-8 Registration No. 33-48874
Registration No. 33-83162
Registration No. 333-3570
Registration No. 333-3572
Registration No. 333-47767
Registration No. 333-51473
/s/ARTHUR ANDERSEN LLP
Phoenix, Arizona,
December 4, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule Contains Summary Financial Information Extracted From The
Consolidated Balance Sheet and Consolidated Statement of Income found on
pages 22 and 23 of the Company's Form 10-K for the year ended September
30, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 76,754
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,358,033
<CURRENT-ASSETS> 1,507,112
<PP&E> 25,456
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,667,835
<CURRENT-LIABILITIES> 259,005
<BONDS> 826,007
0
0
<COMMON> 558
<OTHER-SE> 548,878
<TOTAL-LIABILITY-AND-EQUITY> 1,667,835
<SALES> 2,155,049
<TOTAL-REVENUES> 2,176,941
<CGS> 1,765,610
<TOTAL-COSTS> 1,765,610
<OTHER-EXPENSES> 11,917
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,240
<INCOME-PRETAX> 159,099
<INCOME-TAX> 65,719
<INCOME-CONTINUING> 93,380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93,380
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.56
</TABLE>
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Continental Homes Holding Corp.:
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows for the year ended May 31, 1996, of
Continental Homes Holding Corp. (a Delaware corporation) and subsidiaries (the
Company). 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the result of operations and cash flows of
Continental Homes Holding Corp. and subsidiaries for the year ended May 31,
1996, in conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Phoenix, Arizona
June 19, 1996
-1-
<PAGE>
CONTINENTAL HOMES HOLDING CORP.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended May 31, 1996
---------------------------------
(In thousands, except share data)
<S> <C>
Revenues:
Home sales.................................. $ 577,073
Land/lot sales.............................. 11,844
Mortgage banking and title operations
(Note B)................................. 11,481
Other income, net........................... 210
---------
Total revenues........................... 600,608
---------
Costs and Expenses:
Homebuilding:
Cost of home sales.......................... 469,098
Land/lot sales.............................. 11,907
Selling, general and
administrative expenses.................... 62,247
Interest, net (Note A)...................... 5,510
Minority interest (Note A).................. (248)
Mortgage Banking and Title Operations:
Selling, general and administrative
expenses................................... 7,028
Interest, net (Note A)...................... (316)
---------
Total costs and expenses................. 555,226
---------
Income before income taxes and
extraordinary loss......................... 45,382
Income taxes (Note D)....................... 19,595
---------
Income from operations...................... 25,787
Extraordinary loss:
Loss on extinguishment of debt; net of
income taxes of $4,807 in 1996 (Note C).. (6,918)
---------
Net income.................................. $ 18,869
=========
Earnings per common share (Note A)
Income from operations.................... $ 3.71
Net income................................ 2.71
Earnings per common share assuming full
dilution (Note A)
Income from operations.................... $ 3.00
Net income................................ 2.27
Cash dividends per share.................... $ .20
=========
Weighted average number of shares
outstanding................................ 6,959,736
=========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
-2-
<PAGE>
CONTINENTAL HOMES HOLDING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended May 31, 1996
--------------------------------------------------------------------
($ in thousands)
Capital in
Common Stock Treasury Excess of Retained
Shares Amount Stock Par Value Earnings Total
--------- ------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1995.................. 7,080,900 $ 71 $ (591) $ 59,610 $ 51,389 $ 110,479
Net income............................. -- -- -- -- 18,869 18,869
Cash dividends......................... -- -- -- -- (1,392) (1,392)
Exercise of employee stock options..... -- -- 207 786 -- 993
--------- ----- ------ --------- --------- ---------
Balance, May 31, 1996.................. 7,080,900 $ 71 $ (384) $ 60,396 $ 68,866 $ 128,949
========= ===== ====== ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
-3-
<PAGE>
CONTINENTAL HOMES HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31, 1996
-----------------------
(In thousands)
<S> <C>
Cash flows from operating activities:
Net income............................................... $ 18,869
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 3,190
Minority interest..................................... (248)
Increase in deferred income taxes..................... 95
Tax benefit of employee stock options exercised....... 404
Extraordinary loss on extinguishment of debt.......... 11,725
Decrease (increase) in assets:
Homes, lots and improvements in production............ (48,504)
Receivables........................................... 8,458
Prepaid expenses and other assets..................... 4,826
Increase in liabilities:
Accounts payable and other liabilities................ 11,445
--------
Net cash provided by operating activities................ 10,260
--------
Cash flows from financing activities:
Net additions to property and equipment............... (581)
Cash paid for acquisitions, net of cash acquired...... (705)
--------
Net cash used by investing activities................. (1,286)
--------
Cash flows from financing activities:
Increase in notes payable to
financial institutions............................... (46,424)
Retirement of Convertible Subordinated Notes.......... (33,250)
Retirement of 12% Senior Notes........................ (107,542)
Retirement of bonds payable........................... (17,771)
Issuance of Convertible Subordinated Notes............ 83,279
Issuance of 10% Senior Notes.......................... 125,925
Stock options exercised............................... 589
Dividends paid........................................ (1,392)
--------
Net cash provided by financing activities............. 3,414
--------
Net increase in cash and cash equivalents................ 12,388
Cash and cash equivalents at beginning of year........... 12,848
--------
Cash and cash equivalents at end of year................. $ 25,236
========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized.................. 7,767
Income taxes.......................................... 16,430
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
-4-
<PAGE>
CONTINENTAL HOMES HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Accounting Policies
NATURE OF OPERATIONS
The Company designs, constructs and sells high quality single-family
homes targeted primarily to entry-level and first-time move-up homebuyers. The
Company is geographically diversified, currently operating in Phoenix, Arizona,
Austin, San Antonio and Dallas, Texas; Denver, Colorado; South Florida; and
Southern California.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and all wholly-owned subsidiaries after elimination of all significant
intercompany balances and transactions.
INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). See Note
D.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of non-cash investing and financing activities:
During fiscal 1996, the Company entered into a joint venture whereby
the Company contributed cash and the joint venture partners contributed assets
(primarily land) valued at $5,045,000.
MINORITY INTEREST
During fiscal 1996, the Company entered into a joint venture to develop
an age restricted community. The Company contributed cash and the joint venture
partners contributed assets (primary land). The Company is entitled to 55% of
the profits and / or losses and is the managing partner of the joint venture.
Due to the control that the Company exercises, it has consolidated the financial
position and results of operation of the joint venture. The partners' equity
position is disclosed as a minority interest on the consolidated balance sheet.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists primarily of
office furniture and equipment. Depreciation expense is provided using the
straight-line method over the estimated useful lives (three to five years).
Depreciation expense was $773,000 in 1996. The costs of maintenance and repairs
are charged to expense as incurred.
-5-
<PAGE>
EXCESS OF COST OVER RELATED NET ASSETS ACQUIRED
The excess of costs over related net assets acquired is being amortized
over periods ranging from three to twenty years using the straight-line method.
Amortization expense was $1,401,000 in 1996.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reported periods. Actual results could differ from those estimates.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
During the fourth quarter of 1996, the Company elected to adopt early
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 June 1, 1995. The adoption of FAS 121 did not impact
the Company's results of operations or financial positions and did not result in
a restatement of any of the financial results for the prior three quarters of
fiscal 1996. Under FAS 121 real estate assets are to be reviewed for possible
impairment whenever events or circumstances indicate the carrying amount of an
asset may not be recoverable. If indications are that the carrying amount of the
assets may not be recoverable, FAS 121 requires an estimate of the future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition. If these cash flows are less than the carrying amount of
the asset, an impairment loss must be recognized to write down the asset to its
estimated fair value less costs to sell. The fair value calculation under FAS
121 would result in a lower valuation of the asset than under the net realizable
value method previously required.
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. FAS 123 requires either the recognition of compensation cost
in the financial statements for those companies that adopt the new fair value
based method or expanded disclosure of pro forma net income and earnings per
share information for those companies that retain the current method set forth
in APB Opinion 25, "Accounting for Stock Issued to Employees." FAS 123 will be
effective for the Company's fiscal year ending May 31, 1997. The Company plans
to retain the current method set forth in APB Opinion 25 and will present the
expanded disclosure in the fiscal 1997 financial statements.
SALES RECOGNITION
The Company recognizes income from home and land sales in accordance
with Statement of Financial Accounting Standards No. 66. The Company includes
the discounts incurred in obtaining permanent financing for its customers in
cost of home sales.
-6-
<PAGE>
MORTGAGE BANKING FEE RECOGNITION
Loan origination fees are recognized as income in accordance with
Statements of Financial Accounting Standards Nos. 65 and 91.
INTEREST, NET
The summary of the components of interest, net are as follows:
<TABLE>
<CAPTION>
Year Ended May 31, 1996
-----------------------
(In thousands)
<S> <C>
Interest expense, homebuilding......................... $ 5,982
Interest income, homebuilding.......................... (472)
-------
$ 5,510
=======
Interest expense, mortgage banking..................... $ 1,785
Interest income, mortgage banking...................... (2,101)
-------
$ (316)
=======
</TABLE>
In addition to the amounts above, the Company expensed interest as a
component of cost of homes sales of $16,233,000 in fiscal 1996.
EARNINGS PER COMMON SHARE
Earnings per common share has been computed using the weighted average
number of common shares outstanding during the period. Earnings per common share
assuming full dilution has been computed assuming the conversion of the
Convertible Subordinated Notes due November 2002.
B. Consolidated Mortgage Subsidiaries
The Company's consolidated financial statements of income include its
wholly-owned mortgage banking and finance subsidiaries. Financial data of the
mortgage banking and finance subsidiaries is summarized as follows:
<TABLE>
<CAPTION>
Year Ended May 31, 1996
-----------------------
(In thousands)
<S> <C>
Total revenues.......................................... $ 9,948
Net interest income..................................... 316
Net income.............................................. 2,596
</TABLE>
C. Extinguishment of Debt
In November 1995, the Company issued $86,250,000 principal amount of
6-7/8% Convertible Subordinated Notes due November 1, 2002. The net proceeds
were used to redeem the Company's 6-7/8% Convertible Subordinated Notes due
March 2002 and to reduce temporarily outstanding amounts under certain of the
-7-
<PAGE>
Company's revolving lines of credit (including the warehouse line of credit). In
connection with the redemption of the notes, the Company recorded an
extraordinary loss, net of taxes, of approximately $859,000 due to the writeoff
of unamortized discount and debt issuance costs.
D. Income Taxes
The Company will file a consolidated Federal income tax return which
will include all subsidiaries. Components of current and deferred income taxes
follow:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
(In thousands)
<S> <C> <C> <C>
Year Ended May 31, 1996
Federal....................................... $ 17,484 $ 81 $ 17,565
State and other............................... 2,016 14 2,030
------- ----- -------
$ 19,500 $ 95 $ 19,595
======= ===== =======
</TABLE>
The effective income tax rate differs from the Federal statutory tax
rate for the following reasons:
<TABLE>
<CAPTION>
Year Ended May 31, 1996
-----------------------
<S> <C>
U.S. statutory tax rate................................. 35%
State income taxes, net of Federal tax benefit.......... 6
Amortization and other, net............................. 2
--
43%
==
</TABLE>
E. Stock Options
The Company has two stock incentive plans (the "Plans"). The 1988 Stock
Incentive Plan was approved by the Board of Directors on July 29, 1988 and the
stockholders on August 26, 1998 and amended by the Board of Directors on July
23, 1992 and the stockholders on August 26, 1992. The 1986 Stock Incentive Plan
was approved by the Board of Directors and the stockholders of the Company on
July 26, 1986. The Plans are intended to provide an incentive to officers and
key employees of the Company and its subsidiaries to remain with the Company.
The Board of Directors has authorized the reservation of 700,000 shares of the
Company's common stock for issuance under the Plans. Options may be granted at a
price equal to the market value on the date of the grant (or 85% of market value
in the case of non-qualified options) and may not be exercised for one year (six
month in the case of non-qualified options) from the date of the grant. Under
the Plans, options must be exercised within 10 years (5 years for a 10% holder)
from the date the options were granted.
-8-
<PAGE>
The following summarizes the stock option transactions for the year
ended May 31, 1996:
<TABLE>
<CAPTION>
Number of
Shares Option Price
--------- ----------------
<S> <C> <C>
Outstanding at May 31, 1995.............. 244,635 $ 4.00 - $21.375
Granted............................... 35,000 $18.25
Canceled.............................. (8,000) $12.50 - $21.375
Exercised............................. (67,865) $ 4.00 - $21.375
-------
Outstanding at May 31, 1996.............. 203,770 $ 6.50 - $21.375
=======
Exercisable at May 31, 1996.............. 101,095 $ 6.50 - $21.375
=======
</TABLE>
At May 31, 1996, there were 162,995 shares reserved for future grants.
F. Contingencies
In management's opinion, the Company is not involved in any legal
proceedings which will have a material effect on the Company's financial
position or operating results.
-9-
