SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
June 5, 1998
---------------------------------------
(Date of Report--Date of Earliest Event
Reported)
D.R. Horton, Inc.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 1-14122 75-2386963
- ---------------------------- ------------ -------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
1901 Ascension Boulevard, Suite 100, Arlington, Texas 76006
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(817) 856-8200
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
--------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
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Item 5.
The acquisition on April 20, 1998, by D.R. Horton, Inc. (the "Company") of
Continental Homes Holding Corp. ("Continental") has been accounted for as a
pooling of interests. The Company is filing this report on Form 8-K to provide
an updated description of its business as combined with Continental, as well as
the supplemental consolidated financial statements of D.R. Horton, Inc. for the
three years ended September 30, 1997, the related report of its independent
auditors, and a copy of the Annual Report on Form 10-K of Continental for the
year ended May 31, 1997. This information is provided for the purpose of
incorporation into certain prior and future filings by the Company under the
Securities Act of 1933 and the Securities Exchange Act of 1934.
These supplemental consolidated financial statements of the Company will
become the historical financial statements of the Company upon issuance of
financial statements for the period that includes the date of the merger.
Certain exhibits labeled below as "restated" have been restated to reflect the
combined operations of the Company and Continental.
Item 7. Financial Statements and Exhibits.
The Company files the following exhibits as part of this Report:
Exhibit 23.1 Consent of Ernst & Young LLP, Fort Worth, Texas.
Exhibit 23.2 Consent of Whittington, McLemore, Land, Davis &
White, P.C., Rome, Georgia.
Exhibit 23.3 Consent of Arthur Andersen LLP, Phoenix, Arizona.
Exhibit 27 Financial Data Schedule (Restated).
Exhibit 99.1 Description of Business (Restated).
Exhibit 99.2 Selected Financial Data (Restated).
Exhibit 99.3 Management's Discussion and Analysis of Financial
Condition and Results of Operations (Restated).
The Company's Supplemental Consolidated Financial
Statements for the three years ended September 30, 1997,
with Report of Independent Auditors, Ernst & Young LLP.
Exhibit 99.4 Annual Report on Form 10-K for Continental for the year
ended May 31, 1997 (incorporating by reference the filing
by Continental of its Annual Report on Form 10-K for the
fiscal year ended May 31, 1997, Commission File No.
001-10700).
2
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: June 5, 1998
D.R. Horton, Inc.
Registrant
By: /s/ David J. Keller
----------------------------
David J. Keller
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
Exhibit 23.1 Consent of Ernst & Young LLP, Fort Worth, Texas.
Exhibit 23.2 Consent of Whittington, McLemore, Land, Davis &
White, P.C., Rome, Georgia.
Exhibit 23.3 Consent of Arthur Andersen LLP, Phoenix, Arizona.
Exhibit 27 Financial Data Schedule (Restated).
Exhibit 99.1 Description of Business (Restated).
Exhibit 99.2 Selected Financial Data (Restated).
Exhibit 99.3 Management's Discussion and Analysis of Financial
Condition and Results of Operations (Restated).
The Company's Supplemental Consolidated Financial
Statements for the three years ended September 30, 1997,
with Report of Independent Auditors, Ernst & Young LLP.
Exhibit 99.4 Annual Report on Form 10-K for Continental for the year
ended May 31, 1997 (incorporating by reference the filing
by Continental of its Annual Report on Form 10-K for the
fiscal year ended May 31, 1997, Commission File No.
001-10700).
CONSENT OF INDEPENDENT AUDITORS
Exhibit 23.1
We consent to the incorporation by reference in the following registration
statement on Form S-3 and related prospectus and in the following registration
statements on Form S-8 of D.R. Horton, Inc., of our report dated May 12, 1998,
with respect to the supplemental consolidated financial statements of D.R.
Horton, Inc. included in its Current Report on Form 8-K dated June 5, 1998,
filed with the Securities and Exchange Commission.
Form S-3 Registration No. 333-27521
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
Fort Worth, Texas
June 3, 1998 Ernst & Young LLP
4
CONSENT OF INDEPENDENT AUDITORS
Exhibit 23.2
We consent to the use of our report dated February 7, 1997, with respect to
the combined financial statements as of and for the year ended December 31,
1996, of S.G. Torrey, Atlanta, Ltd. and Affiliates, included by reference in
D.R. Horton, Inc.'s Report on Form 8-K, dated June 5, 1998, filed with the
Securities and Exchange Commission.
Form S-3 Registration No. 333-27521
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
Rome, Georgia
June 4, 1998 Whittington, McLemore, Land, Davis & White, P.C.
Exhibit 23.3
As independent public accountants, we hereby consent to the incorporation
of our reports included (or incorporated by reference) in this Form 8-K, into
the Company's previously filed Registration Statement as follows:
Form S-3 Registration No. 333-27521
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
Phoenix, Arizona
June 2, 1998 Arthur Andersen LLP
5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Consolidated Statements of Income found on
pages 28 and 29 of the Company's Form 8-K for the audited fiscal-year-end
and unaudited year-to-date periods, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1998
<PERIOD-START> OCT-01-1996 OCT-01-1997
<PERIOD-END> SEP-30-1997 MAR-31-1998
<CASH> 78,228 91,278
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 1,024,268 1,229,412
<CURRENT-ASSETS> 1,102,496 1,320,690
<PP&E> 16,988 24,679
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 1,248,323 1,507,994
<CURRENT-LIABILITIES> 165,309 189,777
<BONDS> 0 0
0 0
0 0
<COMMON> 527 529
<OTHER-SE> 427,339 464,572
<TOTAL-LIABILITY-AND-EQUITY> 1,248,323 1,507,994
<SALES> 1,567,455 867,513
<TOTAL-REVENUES> 1,578,422 876,156
<CGS> 1,292,584 710,981
<TOTAL-COSTS> 1,292,584 710,981
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10,898 5,713
<INCOME-PRETAX> 109,105 62,622
<INCOME-TAX> 43,821 24,806
<INCOME-CONTINUING> 65,284 37,816
<DISCONTINUED> 0 0
<EXTRAORDINARY> 322 0
<CHANGES> 0 0
<NET-INCOME> 64,962 37,816
<EPS-PRIMARY> 1.28 .72
<EPS-DILUTED> 1.15 .64
</TABLE>
BUSINESS Exhibit 99.1
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 8.7 million shares. The Merger has
been 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. The combination of
Horton and Continental described is referred to as the "Company".
The Company is engaged primarily in the construction and sale of
single-family homes in metropolitan areas of the Mid-Atlantic, Midwest,
Southeast, Southwest, and West regions of the United States. The Company offers
high-quality homes, designed principally for the entry-level and move-up market
segments. The Company's homes generally range in size from 1,000 to 5,000 square
feet and range in price from $80,000 to $600,000. For the year ended September
30, 1997, the Company closed homes with an average sales price approximating
$152,600. Historically, Horton has attempted to position itself as a custom
builder, whereas certain recent acquisitions have been more volume building
oriented.
The Company is one of the most geographically diversified homebuilders in
the United States, with operating divisions in 21 states and 36 markets as of
March 31, 1998. These markets include: Albuquerque, Atlanta, Austin, Birmingham,
Charleston, S.C., Charlotte, Chicago, Cincinnati, Dallas/Fort Worth, Denver,
Greensboro, Greenville, Hilton Head, S.C., Houston, Jacksonville, Kansas City,
Las Vegas, Los Angeles, Minneapolis/St. Paul, Myrtle Beach, S.C., Nashville, New
Jersey, Newport News, Orlando, Pensacola, Phoenix, Raleigh/Durham, Richmond,
Salt Lake City, San Antonio, San Diego, South Florida, St. Louis, Tucson,
Suburban Washington, D.C. and Wilmington, N.C.
Horton was incorporated in Delaware on July 1, 1991, to acquire all of the
assets and businesses of 25 predecessor companies, which were residential home
construction and development companies owned or controlled by Donald R. Horton.
The Company's principal executive offices are located at 1901 Ascension
Blvd., Suite 100, Arlington, Texas 76006, and its telephone number is (817)
856-8200.
Operating Strategy
The Company believes that there are several important elements to its
operating strategy which have enabled it to achieve consistent growth and
profitability. The following are important elements of this strategy:
Geographic Diversification. From 1978 to late 1987, the Company's
homebuilding activities were conducted exclusively in the Dallas/Fort Worth
area. The Company then instituted a policy of diversifying geographically,
entering the following markets in the years indicated:
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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 S.C., Nashville, New Jersey, Tucson
1998. . . . . . . . .Charleston, Hilton Head, Jacksonville, Myrtle
Beach, Newport News, Richmond, Wilmington
The Company continually monitors the sales and margins achieved in each of
the subdivisions in which it operates as part of an overall evaluation of the
employment of its capital. While the Company believes there are significant
growth opportunities in its existing markets, it intends to continue its policy
of diversification by seeking to enter new markets. The Company believes that
its diversification strategy mitigates the effects of local and regional
economic cycles and enhances its growth potential. Typically, the Company will
not invest material amounts in real estate, including raw land, developed lots,
models and speculative homes, or overhead in start-up operations in new markets
until such markets demonstrate significant growth potential and acceptance of
the Company and its products.
Acquisitions. As an integral component of the Company's operational
strategy of continued expansion, the Company continually evaluates opportunities
for strategic acquisitions. The Company believes that expansion of its
operations through the acquisition of existing homebuilding companies affords it
several benefits not found in start-up operations. Such benefits include
established land positions and inventories; existing relationships with land
owners, developers, subcontractors and suppliers; brand name recognition; and
proven product acceptance by homebuyers in the market. In evaluating potential
acquisition candidates, the Company seeks homebuilding companies that have an
excellent reputation, a track record of profitability and a strong management
team with an entrepreneurial orientation. The Company has limited the risks
associated with acquiring a going concern by conducting extensive operational,
financial and legal due diligence on each acquisition and by only acquiring
homebuilding companies that the Company believes should have an immediate
positive impact on the Company's earnings.
Including the Merger, the Company has acquired twelve homebuilding
companies since 1994:
Acquired Entities Acquired Markets
- -------- ----------------- -------
January 1994 Aspen Homes San Antonio
April 1994 Joe Miller Homes, Inc. and Minneapolis/St. Paul
Argus Development, Inc.
November 1994 Heftler Realty Co. South Florida
July 1995 Arappco, Inc. Greensboro
September 1995 Regency Development, Inc. Birmingham
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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,
and Raleigh/Durham Greenville S.C.,
February 1998 C. Richard Dobson Builders, Inc. Charleston, Charlotte,
Greensboro, Greenville,
Hilton Head, Jacksonville,
Myrtle Beach, Newport
News, Raleigh, Richmond,
Wilmington
April 1998 Continental Homes Holding Corp. Phoenix, Austin, California,
Dallas, Denver, Miami,
San Antonio
May 1998 Mareli Development & Construction Louisville, Kentucky
Company, LLC
In both existing and new markets, the Company anticipates that it will
continue to evaluate potential future acquisition opportunities that satisfy its
acquisition criteria.
The Company made three acquisitions during fiscal 1997. In October, 1996,
the Company completed the acquisition of the principal assets (approximately
$7.6 million, primarily inventories) of Trimark for $7.0 million in cash and the
assumption of approximately $1.0 million in trade accounts and notes payable
associated with the acquired assets. In December, 1996, the Company purchased
the principal assets (approximately $19.5 million, primarily inventories) of SGS
for $10.6 million in cash and the assumption of $10.1 million in accounts and
notes payable associated with the acquired assets. In February, 1997, the
Company completed the acquisition of all the outstanding capital stock of the
entities comprising Torrey and purchased assets from affiliated entities. The
Company paid consideration consisting of $37.6 million in cash, 844,444 newly
issued, restricted shares of the Company's common stock, valued at $9.2 million,
and assumed $90.0 million in accounts and notes payable.
Decentralized Operations. The Company's homebuilding activities are
decentralized to give more operating flexibility to its local division managers.
The Company's homebuilding activities are conducted through 42 operating
divisions, some of which are in the same general market area. Generally, each
operating division consists of a vice president, an office manager and staff, a
sales manager who oversees sales people, and a construction manager who oversees
construction supervisors. The Company believes that division managers, who are
intimately familiar with local conditions, make better decisions regarding local
operations than do the centralized, corporate management teams who make such
decisions for many of its competitors. Each operating division is responsible
for preliminary site selection, negotiation of option or similar contracts, and
overseeing land development activities. Site selection and lot acquisition
typically involve a feasibility study by the operating division, including soil
and environmental reviews, a review of existing zoning and other governmental
requirements, and a review of the need for and extent of offsite work and
additional lot preparation required to meet local building codes. Each operating
division also plans its homebuilding schedule, selects the building plans and
8
<PAGE>
architectural scheme for its subdivisions, obtains all necessary building
approvals, and develops a marketing plan for its homes. Division managers
receive performance bonuses based upon achieving targeted operating levels in
their operating divisions.
Corporate office controls. The Company's corporate office controls key risk
elements of the Company through centralized financing, cash management, risk
management, accounting and management reporting, payment of subcontractor
invoices, administration of payroll and employee benefits, and oversite and
responsibility for final approval of all land and lot acquisitions and inventory
levels.
Cost Management. The Company strives to control its overhead costs by
centralizing its administrative and accounting functions and by limiting the
number of field administrative personnel and middle level management positions.
The Company also attempts to minimize advertising costs by participating in
promotional activities, publications and newsletters sponsored by local real
estate brokers, mortgage companies, utility companies and trade associations,
and, in certain instances, by positioning its subdivisions in conspicuous
locations that permit it to take advantage of local traffic patterns.
The Company attempts to control construction costs through the efficient
design of its homes and by obtaining favorable pricing from certain
subcontractors and national vendors based on the high volume of services they
perform for the Company. The Company's management information systems, including
the purchase order system, also assist in controlling construction costs by
allowing corporate and division management to monitor expenditures on a
home-by-home basis. In addition, the Company's management information systems
allow the Company to monitor its inventory composition and levels, thereby
controlling capital and overhead costs.
Markets
The Company's homebuilding activities are conducted in five geographic
regions, comprised of the following markets:
Geographic Region Markets
----------------- -------
Mid-Atlantic . . . . . Charleston, Charlotte, Greensboro, Greenville S.C.,
Hilton Head and Myrtle Beach, S.C., New Jersey,
Newport News, Raleigh/Durham, Richmond, Suburban
Washington, D.C. and Wilmington, N.C.
Midwest. . . . . . . . Chicago, Cincinnati, Kansas City, Minneapolis/
St. Paul, St. Louis
Southeast. . . . . . . Atlanta, Birmingham, Jacksonville, Nashville,
Orlando, Pensacola, South Florida
Southwest. . . . . . . Albuquerque, Austin, Dallas/Fort Worth, Houston,
Phoenix, San Antonio, Tucson
West . . . . . . . . . Denver, Las Vegas, Los Angeles, Salt Lake City,
San Diego
The Company's operations in each of its markets differ based on a number of
market-specific factors. These factors include regional economic conditions and
job growth, land availability and the local land development process, consumer
tastes, competition from other builders of new homes and secondary home sales
activity. The Company considers each of these factors when entering new markets
or conducting operations in existing markets.
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Homebuilding revenues for the Company by geographic region are:
Six Months Ended
Year Ended September 30, March 31,
-------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(In millions)
Mid-Atlantic....... $ 113.3 $ 116.4 $ 180.5 $ 57.5 $ 120.5
Midwest............ 69.9 88.5 95.9 41.1 45.2
Southeast.......... 67.9 115.2 246.5 89.4 156.9
Southwest.......... 221.7 624.4 694.2 317.6 366.7
West............... 390.0 191.8 350.4 149.4 178.2
-------- -------- -------- -------- --------
Total............ $ 862.8 $1,136.3 $1,567.5 $ 655.0 $ 867.5
======== ======== ======== ======== ========
Land Policies
Typically, land acquired by the Company is purchased only after necessary
entitlements have been obtained so that the Company has the right to begin
development or construction. Before it acquires tracts of land, the Company
will, among other things, complete a feasibility study, which includes soil
tests, independent environmental studies and other engineering work, and
determine that all necessary zoning and other governmental entitlements required
to develop and use the property for home construction have been acquired. The
largest parcel the Company owns is a 670 acre property in Carlsbad, CA, which is
under development and when completed will have approximately 1,600 homesites.
The Company plans to build homes on a portion of these lots and to sell the
remainder to other homebuilders. Historically, Horton has relied on lot option
contracts to secure the major portion of its lots, and Continental has developed
most of its lots itself. At March 31, 1998, about 71% of the Company's total lot
position of 46,769 lots was being or had been developed by the Company. Although
the Company purchases land and engages in land development activities primarily
to support its own homebuilding activities, lots and land are occasionally sold
to other developers and homebuilders. Additionally, the Company expects to
continue to use lot option and similar contracts to secure developed lots.
A summary of the Company's land/lot positions at March 31, 1998 is:
Finished lots owned by the Company.................................... 8,055
Lots under development owned by the Company........................... 25,332
------
Total lots owned..................................................... 33,387
Lots available under lot option and similar contracts................. 13,382
------
Total land/lot position...............................................46,769
======
The Company also seeks to limit its exposure to real estate inventory risks
by (i) generally commencing construction of homes under contract only after
receipt of a satisfactory down payment and, where applicable, the buyer's
receipt of mortgage approval; (ii) limiting the number of speculative homes
(homes started without an executed sales contract) built in each subdivision;
and, (iii) closely monitoring local market and demographic trends, housing
preferences and related economic developments, such as new job opportunities,
local growth initiatives and personal income trends.
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Construction
The Company's home designs are prepared by architects in each of the
Company's markets to appeal to local tastes and preferences of the community.
Optional interior and exterior features also are offered by the Company to
enhance the basic home design and to promote the Company's sales efforts.
Substantially all of the Company's construction work is performed by
subcontractors. The Company's construction supervisors monitor the construction
of each home, participate in material design and building decisions, coordinate
the activities of subcontractors and suppliers, subject the work of
subcontractors to quality and cost controls and monitor compliance with zoning
and building codes. Subcontractors typically are retained for a specific
subdivision pursuant to a contract that obligates the subcontractor to complete
construction at a fixed price. Agreements with the Company's subcontractors and
suppliers generally are negotiated for each subdivision. The Company competes
with other homebuilders for qualified subcontractors, raw materials and lots in
the markets where it operates.
Construction time for the Company's homes depends on the weather,
availability of labor, materials and supplies, and other factors. The Company
typically completes the construction of a home within four months.
The Company does not maintain significant inventories of construction
materials, except for work in process materials for homes under construction.
Typically, the construction materials used in the Company's operations are
readily available from numerous sources. The Company does not have any long-term
contracts with suppliers of its building materials. In recent years, the Company
has not experienced any significant delays in construction due to shortages of
materials or labor.
Marketing and Sales
The Company markets and sells its homes through commissioned employees and
independent real estate brokers. Home sales are typically conducted from sales
offices located in furnished model homes used in each subdivision. At March 31,
1998, the Company owned 470 model homes. These models homes generally are not
offered for sale until the completion of the respective subdivision. The
Company's sales personnel assist prospective homebuyers by providing them with
floor plans, price information, tours of model homes and the selection of
options and other custom features. Such personnel are trained by the Company and
kept informed as to the availability of financing, construction schedules and
marketing and advertising plans.
In addition to using model homes, the Company typically builds a limited
number of speculative homes in each subdivision to enhance its marketing and
sales activities. Construction of these speculative homes also is necessary to
satisfy the 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 the Company has built
in the market. Depending upon the seasonality of each of its markets, the
Company seeks to limit its speculative homes in each subdivision. At March 31,
1998, the Company was operating in 486 subdivisions and averaged 5.2 speculative
homes in each subdivision.
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The Company advertises on a limited basis in newspapers and in real estate
broker, mortgage company and utility publications, brochures, newsletters and
billboards. To minimize advertising costs, the Company attempts to operate in
subdivisions in conspicuous locations that permit it to take advantage of local
traffic patterns. The Company also believes that model homes play a significant
role in its marketing efforts. Consequently, the Company expends significant
efforts in creating an attractive atmosphere in its model homes.
Sales of the Company's homes generally are made pursuant to a standard
sales contract which requires a down payment of a minimum of $500. The contract
includes a financing contingency which permits the customer to cancel in the
event mortgage financing at prevailing interest rates is unobtainable within a
specified period, typically four to six weeks, and may include other
contingencies, such as the sale of an existing home. The Company includes a home
sale in its sales backlog upon execution of the sales contract and receipt of
the initial down payment. The Company does not recognize revenue upon the sale
of a home until it is closed and title passes. The Company estimates that the
average period between the execution of a sales contract for a home and closing
is approximately three to five months.
Customer Service and Quality Control
The Company's operating divisions are responsible for pre-closing, quality
control inspections and responding to customers' post-closing needs. The Company
believes that prompt and courteous response to homebuyers' needs during and
after construction reduces post-closing repair costs, enhances the Company's
reputation for quality and service, and ultimately leads to significant repeat
and referral business from the real estate community and homebuyers. The Company
provides its homebuyers with a limited one-year warranty on workmanship and
building materials. The subcontractors who perform most of the actual
construction also provide warranties of workmanship to the Company and,
generally, are prepared to respond to the Company and homeowner promptly upon
request. In most cases, the Company supplements its one-year warranty by
purchasing a ten-year limited warranty from a third party. To cover its
potential warranty obligations, the Company accrues an estimated amount for
future warranty costs.
Customer Financing
The Company, through two entities, provides mortgage financing services
principally to purchasers of homes built and sold by the Company. D.R. Horton
Mortgage Company, Ltd., a joint venture formed in 1996 with a third party,
presently provides services in Texas, Arizona, North Carolina, South Carolina,
Nevada, Colorado and Florida. CH Mortgage, a wholly-owned subsidiary, provides
mortgage banking services in Arizona, Colorado, California, Texas and Florida.
On a combined basis, related mortgage banking entities provided mortgage
financing services for about 35% of the homes closed during the six months ended
March 31, 1998. The Company anticipates expanding these mortgage activities to
other markets the Company serves.
In its other markets, the Company currently does not provide mortgage
financing, but works with a variety of mortgage lenders that make available to
homebuyers a range of conventional mortgage financing programs. By making
information about these programs available to prospective homebuyers and
maintaining a relationship with such mortgage lenders, the Company is able to
coordinate and expedite the entire sales transaction by ensuring that mortgage
commitments are received and that closings take place on a timely and efficient
basis.
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Title Services
Through its wholly-owned subsidiaries, DRH Title Company of Texas, Ltd.,
DRH Title Company of Florida, Inc. and Travis County Title Company, the Company
serves as a title insurance agent by providing title insurance policies and
closing services to purchasers of homes built and sold by the Company in the
Dallas/Fort Worth, Austin and Orlando markets. The Company assumes no
underwriting risk associated with these title policies.
Employees
At March 31, 1998, the Company employed 2,199 persons, of whom 608 were
sales and marketing personnel, 709 were executive, administrative and clerical
personnel, 712 were involved in construction, and 170 worked in mortgage and
title operations. Fewer than 25 of the Company's employees are covered by
collective bargaining agreements. Some of the subcontractors which the Company
uses are represented by labor unions or are subject to collective bargaining
agreements. The Company believes that its relations with its employees and
subcontractors are good.
Competition
The single family residential housing industry is highly competitive, and
the Company competes in each of its markets with numerous other national,
regional and local homebuilders, some of which have greater resources than the
Company. The Company's homes compete on the basis of quality, price, design,
mortgage financing terms and location.
Regulation and Environmental Matters
The housing, mortgage and title insurance industries are subject to
extensive and complex regulations. The Company and its subcontractors must
comply with various federal, state and local laws and regulations including
zoning and density requirements, building, environmental, advertising and
consumer credit rules and regulations, as well as other rules and regulations in
connection with its homebuilding and sales activities. These include
requirements as to building materials to be used, building designs and minimum
elevation of properties. The Company's homes are inspected by local authorities
where required, and homes eligible for insurance or guarantees provided by the
FHA and VA, respectively, are subject to inspection by the FHA or VA.
The Company is also subject to a variety of local, state and federal
statutes, ordinances, rules and regulations concerning protection of health and
the environment ("environmental laws"). The particular environmental laws, which
apply to any given homebuilding site, vary greatly according to the site's
location, the site's environmental condition and the present and former uses of
the site. These environmental laws may result in delays, may cause the Company
to incur substantial compliance and other costs, and can prohibit or severely
restrict homebuilding activity in certain environmentally sensitive regions or
areas.
The Company's 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.
13
Exhibit 99.2
SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company are
qualified by reference to and should be read in conjunction with the
supplemental 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.
In 1993, the Company changed its fiscal year end to September 30, thus
operating information for the nine months then ended represents the Company's
fiscal period.
<TABLE>
<CAPTION>
Six Months Ended
Periods Ended September 30, March 31,
-------------------------------------------------------------------- --------------------
Nine
Months Years
-------- -------------------------------------------------------- --------------------
(In millions, except per share amounts)
(Unaudited)
1993 1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- -------- --------
Income Statement
Data: (1) (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 345.5 $ 452.3 $ 734.4 $ 862.8 $1,136.2 $1,567.5 $ 655.0 $ 867.5
Net income from
continuing operations.. 14.0 19.3 30.7 34.4 53.2 65.3 27.6 37.8
Net income per share
from continuing
operations
Basic.............. .36 .50 .75 .80 1.15 1.29 .57 .72
Diluted............ .36 .49 .72 .77 1.07 1.16 .51 .64
Cash dividends declared
per common share (3).... -- -- -- -- -- .06 .02 .04
<CAPTION>
As of September 30, As of March 31,
-------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
Balance Sheet Data: (1) (2) (In millions)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Inventories................ $ 271.6 $ 409.5 $ 574.2 $ 690.2 $1,024.3 $ 935.8 $1,229.4
Total Assets............... 346.2 536.4 705.6 841.3 1,248.3 1,133.2 1,508.0
Notes Payable.............. 177.0 276.9 402.7 420.2 650.7 591.2 846.1
Stockholders' Equity....... 117.4 183.1 216.6 306.6 427.9 388.4 465.1
<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 15,459,500 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 restated as if Continental and the Company had been combined.
Prior to the merger, Continental had a fiscal year end of May 31.
Accordingly, the Continental consolidated balance sheets as of May 31, 1993,
1994, 1995 and 1996 have been combined with the Company's balance sheets as
of September 30, 1993, 1994, 1995 and 1996, respectively. The related
Continental statements of income, stockholders' equity and cash flows for
the years ended May 31, 1993, 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, 1993, 1994, 1995 and 1996,
respectively. Continental's balance sheet and the related statement 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.
</FN>
</TABLE>
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Introduction
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 8.7 million shares. The Merger has
been 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. The combination of
Horton and Continental described is referred to as the "Company".
Results of Operations
The following tables set forth certain information regarding the Company's
homebuilding operations.
Percentages of Revenue
Six Months Ended
Year Ended September 30, March 31,
------------------------ ----------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
Activities:
Cost of sales...................... 82.3 81.8 82.4 82.3 81.9
Selling, general and
administrative expenses.......... 10.5 10.2 10.4 10.6 10.9
Interest expense................... 0.8 0.7 0.7 0.7 0.6
---- ---- ---- ---- ----
Total costs and expenses............. 93.6 92.7 93.5 93.6 93.4
Other (income)....................... (0.2) (0.2) (0.3) (0.3) (0.2)
---- ---- ---- ---- ----
Income before income taxes
- homebuilding..................... 6.6 7.5 6.8 6.7 6.8
==== ==== ==== ==== ====
15
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
Homes Homes Homes
Homes Closed Closed Percent Closed Percent Closed Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Mid-Atlantic (Charlotte, Greensboro,
Greenville S.C., New Jersey, Raleigh/
Durham, Suburban Washington D.C.)...... 436 7.7 % 547 7.2 % 843 8.4 %
Midwest (Chicago, Cincinnati,
Kansas City, Minneapolis/St. Paul,
St. Louis)............................. 348 6.1 457 6.0 500 5.0
Southeast (Atlanta, Birmingham,
Nashville, Orlando, Pensacola,
South Florida)......................... 436 7.7 719 9.4 1,583 15.8
Southwest (Albuquerque, Austin,
Dallas/Fort Worth, Houston,
Phoenix, San Antonio, Tucson).......... 3,913 68.9 4,915 64.2 5,324 53.0
West (Denver, Las Vegas, Los
Angeles, Salt Lake City, San Diego).... 543 9.6 1,013 13.2 1,788 17.8
----- ----- ----- ----- ------ -----
5,676 100.0 % 7,651 100.0 % 10,038 100.0 %
===== ===== ===== ===== ====== =====
<CAPTION>
Six Months Ended March 31,
-------------------------------------
1997 1998
---------------- ----------------
Homes Homes
Homes Closed Closed Percent Closed Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Mid-Atlantic (Charleston, S.C.; Charlotte;
Greensboro; Greenville, Hilton Head and Myrtle
Beach, S.C.; New Jersey; Newport News;
Raleigh/Durham; Richmond; Suburban
Washington D.C. and Wilmington, N.C.)........... 267 6.4 % 672 11.6 %
Midwest (Chicago, Cincinnati,
Kansas City, Minneapolis/St. Paul,
St. Louis)...................................... 211 5.0 240 4.1
Southeast (Atlanta, Birmingham, Jacksonville,
Nashville, Orlando, Pensacola, South Florida)... 539 12.8 1,067 18.5
Southwest (Albuquerque, Austin,
Dallas/Fort Worth, Houston,
Phoenix, San Antonio, Tucson)................... 2,438 58.0 2,867 49.6
West (Denver, Las Vegas, Los
Angeles, Salt Lake City, San Diego)............. 750 17.8 937 16.2
----- ----- ----- -----
4,205 100.0 % 5,783 100.0 %
===== ===== ===== =====
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------
1995 1996 1997
----------------- ----------------- ----------------
Homes Homes Homes
New Sales Contracts Sold $ Sold $ Sold $
----- -------- ----- -------- ----- --------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Mid-Atlantic (Charlotte, Greensboro,
Greenville S.C., New Jersey, Raleigh/
Durham, Suburban Washington D.C.)...... 403 $ 103.9 495 $ 106.9 849 $ 173.0
Midwest (Chicago, Cincinnati,
Kansas City, Minneapolis/St. Paul,
St. Louis)............................. 339 68.7 527 101.0 496 96.6
Southeast (Atlanta, Birmingham,
Nashville, Orlando, Pensacola,
South Florida)......................... 458 77.5 796 120.5 1,705 253.3
Southwest (Albuquerque, Austin,
Dallas/Fort Worth, Houston,
Phoenix, San Antonio, Tucson).......... 4,140 506.8 5,254 660.8 5,571 709.9
West (Denver, Las Vegas, Los
Angeles, Salt Lake City, San Diego).... 640 133.7 1,360 265.5 1,930 362.9
----- -------- ----- -------- ------ --------
5,980 $ 890.6 8,432 $1,254.7 10,551 $1,595.7
===== ======== ===== ======== ====== ========
<CAPTION>
Six Months Ended March 31,
--------------------------------------
1997 1998
----------------- -----------------
Homes Homes
New Sales Contracts Sold $ Sold $
------ -------- ------ --------
($ in millions)
<S> <C> <C> <C> <C>
Mid-Atlantic (Charleston, S.C.; Charlotte;
Greensboro; Greenville, Hilton Head and Myrtle
Beach, S.C.; New Jersey; Newport News;
Raleigh/Durham; Richmond; Suburban
Washington D.C. and Wilmington, N.C.)........... 300 $ 65.8 947 $ 167.7
Midwest (Chicago, Cincinnati,
Kansas City, Minneapolis/St. Paul,
St. Louis)...................................... 229 44.4 425 81.1
Southeast (Atlanta, Birmingham, Jacksonville,
Nashville, Orlando, Pensacola, South Florida)... 537 81.1 1,346 198.3
Southwest (Albuquerque, Austin,
Dallas/Fort Worth, Houston,
Phoenix, San Antonio, Tucson)................... 2,500 320.3 3,288 432.1
West (Denver, Las Vegas, Los
Angeles, Salt Lake City, San Diego)............. 806 151.4 1,521 295.7
----- -------- ----- --------
4,372 $ 663.0 7,527 $1,174.9
===== ======== ===== ========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------
1995 1996 1997
----------------- ----------------- ----------------
Year End Sales Backlog Homes $ Homes $ Homes $
----- -------- ----- -------- ----- --------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Mid-Atlantic (Charlotte, Greensboro,
Greenville S.C., New Jersey, Raleigh/
Durham, Suburban Washington D.C.)...... 198 $ 43.9 146 $ 34.4 334 $ 68.9
Midwest (Chicago, Cincinnati,
Kansas City, Minneapolis/St. Paul,
St. Louis)............................. 114 22.3 184 34.9 180 35.5
Southeast (Atlanta, Birmingham,
Nashville, Orlando, Pensacola,
South Florida)......................... 276 45.8 353 51.1 697 101.3
Southwest (Albuquerque, Austin,
Dallas/Fort Worth, Houston,
Phoenix, San Antonio, Tucson).......... 1,634 203.7 1,973 256.6 2,027 260.7
West (Denver, Las Vegas, Los
Angeles, Salt Lake City, San Diego).... 271 53.1 618 127.4 723 142.8
----- -------- ----- -------- ----- --------
2,493 $ 368.8 3,274 $ 504.4 3,961 $ 609.2
===== ======== ===== ======== ===== ========
<CAPTION>
Six Months Ended March 31,
--------------------------------------
1997 1998
----------------- -----------------
Sales Backlog Homes $ Homes $
------ -------- ------ --------
($ in millions)
<S> <C> <C> <C> <C>
Mid-Atlantic (Charleston, S.C.; Charlotte;
Greensboro; Greenville, Hilton Head and Myrtle
Beach, S.C.; New Jersey; Newport News;
Raleigh/Durham; Richmond; Suburban
Washington D.C. and Wilmington, N.C.)........... 361 $ 84.7 879 $ 159.7
Midwest (Chicago, Cincinnati,
Kansas City, Minneapolis/St. Paul,
St. Louis)...................................... 202 38.2 365 71.4
Southeast (Atlanta, Birmingham, Jacksonville,
Nashville, Orlando, Pensacola, South Florida)... 573 83.0 999 147.0
Southwest (Albuquerque, Austin,
Dallas/Fort Worth, Houston,
Phoenix, San Antonio, Tucson)................... 1,842 242.9 2,448 326.7
West (Denver, Las Vegas, Los
Angeles, Salt Lake City, San Diego)............. 637 120.7 1,307 260.2
----- -------- ----- --------
3,615 $ 569.5 5,998 $ 965.0
===== ======== ===== ========
</TABLE>
18
<PAGE>
Six Months Ended March 31, 1998 Compared to Six Months Ended March 31, 1997
Revenues from homebuilding activities increased by 32.4% to $867.5 million
for the six months ended March 31, 1998 from $655.0 million for the six months
ended March 31, 1997. For the same period, the number of homes closed by the
Company increased by 37.5% to 5,783 homes in 1998 from 4,205 homes in 1997. Home
closings increased in all of the Company's market regions, with percentage
increases ranging from 151.7% in the Mid-Atlantic region to 13.7% in the Midwest
region. During the six months ended March 31, 1998 for which virtually no
comparable activity occurred in the prior year, Torrey and Dobson together
provided $122.6 million in revenues, with 828 homes closed. Excluding Torrey and
Dobson, revenues for the six months ended March 31, 1998, increased 15.1% to
$744.9 million. The average price of homes closed decreased 1.4% to $149,800 in
1998 from $152,000 in 1997 due partially to Torrey and Dobson, whose combined
average home closing price was $147,600 for the 1998 period.
New net sales contracts increased 72.2% to 7,527 homes for the six months
ended March 31, 1998 from 4,372 for the six months ended March 31, 1997. The
dollar amounts of new net sales contracts increased 77.2% to $1,174.9 million
from $663.0 million for the six months ended March 31, 1997. Percentage
increases in new net sales contracts ranging from 31.5% to 215.7% were achieved
in the Company's market regions. New net sales for Torrey and Dobson during that
part of the current six month period with no activity in the comparable year
earlier period, amounted to $148.3 million (1,014 homes). Net of their effect,
the dollar value of new net sales contracts increased by 56.0% to $1,026.6
million (6,513 homes) in the six months ended March 31, 1998. The average
selling price of new sales contracts in 1998 was $156,100, up 3.0% from $151,600
in 1997.
At March 31, 1998, the Company's backlog of sales contracts was $965.0
million (5,998 homes), a 69.4% increase over the comparable figure at March 31,
1997. The average price of homes in backlog was $160,900 at March 31, 1998, up
2.2% from $157,500 at March 31, 1997. The increase in the backlog was due in
part to Dobson's backlog of 293 home sales contracts ($48.0 million), purchased
in February, 1998.
Cost of sales increased by 31.8% to $711.0 million for the six months ended
March 31, 1998 from $539.3 million for the same period in 1997. Cost of sales as
a percentage of total revenues decreased by 0.5%, to 81.1% in 1998, from 81.6%
in 1997, due to improved gross margins in the Austin and California markets.
Total selling, general and administrative (SG&A) expenses from homebuilding
activities increased by 36.2%, to $94.2 million for the six months ended March
31, 1998, from $69.2 million for the same period in 1997. As a percentage of
revenues, SG&A expenses increased to 10.9% in 1998 from 10.6% in 1997, due to
increases in marketing costs and professional fees in the Continental Homes
division.
Interest expense increased to $5.7 million in 1998 from $4.8 million in
1997. The Company follows a policy of capitalizing interest only on inventory
under construction or development. During the six months ended March 31, 1998,
the Company expensed a greater portion of incurred interest and other financing
costs due to increased levels of finished lots and homes. Capitalized interest
and other financing costs are included in costs of sales at the time of home
closings.
Revenues from financing activities increased by 46.1%, to $8.6 million for
the six months ended March 31, 1998, from $5.9 million for the same period in
1997, due to an increased volume of mortgage banking services. Selling, general,
and administrative expenses from financing activities increased by 28.6%, to
$5.8 million in 1998 from $4.5 million in 1997, due to the increase in volume.
19
<PAGE>
SG&A expenses as a percent of financing revenues decreased to 67.0% in 1998 from
76.1% in 1997.
Other income, which consists primarily of interest income associated with
investment of temporary excess cash, increased to $3.1 million in 1998 from $2.4
million in 1997.
The provision for income taxes increased 38.3%, to $24.8 million in 1998
from $17.9 million in 1997, corresponding to the increase in income before
income taxes. The effective tax rate increased to 39.6% in 1998 from 39.4% in
1997 due primarily to an increase in the state income tax rates anticipated to
be in effect in the current fiscal year.
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 homes 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. Since the date of the acquisition, Torrey
closed 962 homes, with revenues totaling $140.8 million. For the year, Torrey
comprised 9.6% of homes closed and 9.0% of the revenues generated. Excluding
Torrey, 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. Since the date
of its acquisition, Torrey's new net sales contracts amounted to $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
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.
20
<PAGE>
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 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
acquisitions in 1997, SG&A costs would have decreased by 0.2% of revenues to
10.0% in 1997.
Interest expense from homebuilding and financing activities increased to
$10.9 million in 1997 from $9.2 million in 1996, primarily due to average
interest-bearing debt growing at a faster pace than average amounts of inventory
under construction and development. This is partially due to the three
acquisitions during the year. The increased interest expense occurred despite a
12 basis point decline in the effective interest rate during the year, but was
offset by a decrease in interest expense related to financing activities. 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 costs of sales at the time of home closings.
Revenues from financing activities 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 income in 1996. Selling, general, &
administrative expenses from financing activities 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 expenses as a percent of financing revenues to
increase to 79.6% in 1997 from 61.2% in 1996.
Other income, which consists primarily of interest income associated with
investment of temporary excess cash, increased to $5.9 million in 1997 from $4.5
million in 1996.
The provision for income taxes increased 19.6% to $43.8 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 structures.
Year Ended September 30, 1996 Compared to Year Ended September 30, 1995
Revenues from homebuilding activities increased by 31.7% to $1,136.3
million in 1996 from $862.8 million in 1995. The number of homes closed by the
Company increased by 34.8% to 7,651 homes in 1996 from 5,676 homes in 1995. Home
closings increased in all of the Company's market regions, with percentage
increases ranging from 25.5% in the Mid-Atlantic region to 86.6% in the West
region. Of the 34.8% increase in 1996 home closings, 5.7% was the result of
acquisitions made in Greensboro and Birmingham in the last quarter of 1995. The
1996 increase in revenues was achieved in spite of a 1.3% decrease in the
average price of homes closed, to $146,900 in 1996 from $148,800 in 1995. The
decrease was 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 41.0% to 8,432 homes in 1996 from 5,980
in 1995. Percentage increases in the dollar value of new net sales contracts
ranging from 98.6% to 2.9% were achieved in the Company's market regions. The
1996 average sales price was $148,800 compared to $148,900 in 1995.
21
<PAGE>
The Company was operating in 253 subdivisions at September 30, 1996,
compared to 239 at September 30, 1995. At September 30, 1996, the Company's
backlog of sales contracts was 3,274 homes, a 31.3% increase over the comparable
figure at September 30, 1995. The average sales price of homes in backlog
increased to $154,100 at September 30, 1996, from $147,900 at September 30,
1995.
Cost of sales increased by 31.0% to $930.1 million in 1996 from $710.0
million in 1995. As a percentage of homebuilding revenues, cost of sales
decreased by 0.5% to 81.8% in 1996 from 82.3% in 1995. This improvement resulted
from good market conditions during the year, proactive efforts to maintain sales
prices and control costs, and higher margins on homes closed on internally
developed lots.
Total selling, general and administrative (SG&A) expense from homebuilding
activities increased by 27.8% to $116.1 million in 1996 from $90.9 million in
1995. The increase in SG&A expense was due largely to the increases in sales and
construction activity required to sustain the higher levels of revenues. SG&A
expense as a percentage of revenues decreased by 0.3% to 10.2% in 1996 from
10.5% in 1995, as the Company was successful in controlling its variable
overhead costs while the revenue increase offset more fixed costs.
Total interest expense from homebuilding and financing activities increased
to $9.2 million in 1996, from $8.9 million in 1995, caused by average
interest-bearing debt growing at a slightly faster pace than the average amount
of inventory under construction and development. The Company follows a policy of
capitalizing interest only on inventory under construction or development.
During both 1996 and 1995, a portion of incurred interest and other financing
costs could not be charged to inventory and was expensed. Capitalized interest
and other financing costs are included in cost of sales at the time of home
closings.
Revenues from financing activities increased by 71.2% to $11.5 million in
1996 from $6.7 million in 1995. This increase was due in part to a sale of
servicing rights that resulted in recognition of $0.9 million of income in 1996,
as well as increases in the percentage of customers utilizing the Company's
mortgage banking services. Selling, general, and administrative expenses from
financing activities increased by 24.6% to $7.0 million in 1996 from $5.6
million in 1995 due to the increase in volume. Efficiencies were realized that
caused expenses as a percent of financing revenues to decrease to 61.2% in 1996
from 84.1% in 1995.
Other income, which consists primarily of interest income associated with
investment of temporary excess cash, increased to $4.5 million in 1996, from
$4.0 million in 1995.
In the fourth quarter of 1996, the Company recorded an extraordinary loss,
net of taxes, of approximately $6.9 million related to the repurchase of 12%
Senior Notes due in 1999. The loss related primarily to the tender offer
premium.
The provision for income taxes increased 54.9% to $36.6 million in 1996
from $23.7 million in 1995, due in part to the corresponding increase in income
before income taxes. The effective tax rate remained at 40.8% in both 1996 and
1995.
22
<PAGE>
Financial Condition, Liquidity and Capital Resources
At March 31, 1998 the Company had available cash and cash equivalents of
$91.3 million. Inventories (including finished homes and construction in
progress, developed residential lots and other land) at March 31, 1998 increased
by $205.1 million from September 30, 1997, partially due to the acquisition of
C. Richard Dobson Builders, Inc. ("Dobson"), whose assets consisted primarily of
inventories. Inventories also increased due to a general increase in business
activity and the expansion of operations in all of the Company's market areas.
The inventory increase and the acquisition of Dobson were financed by borrowing
under the revolving credit facility. As a result, the Company's ratio of notes
payable to total capital increased to 64.5% at March 31, 1998, from 60.3% at
September 30, 1997. The stockholders' equity to total assets ratio decreased
during the six months, to 30.8% at March 31, 1998, from 34.3% at September 30,
1997.
During fiscal 1998, the Company's Board of Directors has declared two
quarterly cash dividends of $ .0225 per common share, the last of which was paid
on May 15, 1998, to stockholders of record on April 29, 1998.
In February, 1998, the Company completed the acquisition of all of the
outstanding capital stock of Dobson, and certain of its affiliated companies,
for $23.4 million. Dobson's assets, primarily inventories, amounted to
approximately $64.9 million. Total liabilities assumed amounted to approximately
$52.5 million, including notes payable of $49.0 million, which were paid at
closing. The Dobson acquisition was accounted for as a purchase.
On April 20, 1998, in the Merger, approximately 15.5 million shares of
Horton common stock were exchanged for all of the Continental common stock
outstanding, based upon an exchange ratio of 2.25. As restated at March 31,
1998, combined consolidated stockholders' equity is $465.1 million. At time of
the Merger, the Company assumed Continentals' existing public debt, consisting
of $150 million 10% senior notes due 2006, and $86.1 million in 6 7/8%
convertible subordinated notes due 2002. As a result of the Merger, the $150
million 10% senior notes may be put to the Company at 101% of par value through
June 18, 1998, under terms of the change of control provisions in the indenture
for the notes. Should these notes be submitted for redemption, they would be
repaid with borrowings under the revolving credit facility. The convertible
notes may be exchanged for Horton common stock at the rate of 94.73625 shares
for each $1,000 principal amount at any time prior to maturity. The convertible
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%.
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 March
31, 1998, the Company had outstanding debt of $846.1 million, of which $437.1
million represented advances under the bank credit facilities that existed at
that time. After giving effect to the Continental merger, and under the debt
covenants associated with the restructured credit facility, the Company had
additional borrowing capacity approximating $300 million at March 31, 1998. The
Company has entered into multi-year interest rate swap agreements totaling $200
million that fix the interest rate on a portion of the variable rate bank debt.
In May, 1998, the Company purchased the principal assets (approximately
$5.3 million, primarily inventories) of Mareli Development and Construction,
L.L.C., for $1.1 million in cash and the assumption of $4.7 million in trade
accounts and notes payable associated with the acquired assets. The Mareli
acquisition is being accounted for as a purchase.
23
<PAGE>
The Company's rapid growth and acquisition strategy require significant
amounts of capital. It is anticipated that future home construction, lot and
land purchases and acquisitions will be funded through internally generated
funds and new and existing borrowing relationships. The Company has a currently
effective shelf registration statement for debt securities and common and
preferred stock with a remaining capacity of $100 million. Market conditions
will determine when and whether the Company sells any securities using the
balance of this registration statement. 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.
Except for ordinary expenditures for the construction of homes, the
acquisition of land and lots for development and sale of homes, at March 31,
1998, the Company had no material commitments for capital expenditures.
Inflation
The Company, as well as 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.
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, changes in general economic
conditions, fluctuations in interest rates, increases in costs of material,
supplies and labor and general competitive conditions.
24
<PAGE>
SUPPLEMENTAL FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Auditors .............................................. 26
Supplemental Consolidated Balance Sheets, September 30, 1996
and 1997 and March 31, 1998.................................................. 28
Supplemental Consolidated Statements of Income for the three
years ended September 30, 1997, and the six months ended
March 31, 1997 and 1998...................................................... 29
Supplemental Consolidated Statements of Stockholders' Equity
for the three years ended September 30, 1997, and the six months
ended March 31, 1998......................................................... 30
Supplemental Consolidated Statements of Cash Flows for the
three years ended September 30, 1997, and the six months ended
March 31, 1997 and 1998 ..................................................... 31
Notes to Supplemental Consolidated Financial Statements...................... 32
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
D.R. Horton, Inc.
We have audited the supplemental consolidated balance sheets of D.R.
Horton, Inc. and subsidiaries (formed as a result of the consolidation of D.R.
Horton, Inc. and subsidiaries ("Horton") and Continental Homes Holding Corp.
("Continental")) as of September 30, 1997 and 1996 and the related supplemental
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1997. The supplemental
consolidated financial statements give retroactive effect to the merger of
Horton and Continental on April 20, 1998, which has been accounted for using the
pooling of interests method as described in the notes to the supplemental
consolidated financial statements. These supplemental financial statements are
the responsibility of the management of D.R. Horton, Inc. and subsidiaries. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits. We did not audit the financial statements of
Continental for the fiscal years ended May 31, 1996 and 1995, included in the
September 1996 and 1995 supplemental consolidated financial statements, which
statements reflect total assets constituting 52% of the related 1996
supplemental consolidated financial statement total, and which reflect net
income constituting approximately 41% and 40% of the related supplemental
consolidated financial statement totals for the fiscal years ended in 1996 and
1995, respectively. 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 the report of other auditors, the
supplemental 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, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1997, after giving retroactive effect to the merger of
Continental, as described in the notes to the supplemental consolidated
financial statements, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Fort Worth, Texas
May 12, 1998
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Continental Homes Holding Corp.:
We have audited the accompanying consolidated balance sheet of Continental
Homes Holding Corp. (a Delaware corporation) and subsidiaries (the Company) as
of May 31, 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the two years in the period
ended May 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Continental Homes Holding
Corp. and subsidiaries as of May 31, 1996, and the results of their operations
and their cash flows for each of the two years in the period ended May 31, 1996,
in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Phoenix, Arizona
June 19, 1996
27
<PAGE>
<TABLE>
D.R. HORTON, INC. & SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, March 31,
----------------------- ----------
1996 1997 1998
---------- ---------- ----------
(In thousands)
(Unaudited)
ASSETS
<S> <C> <C> <C>
Homebuilding:
Cash..................................................... $ 68,064 $ 78,228 $ 91,278
Inventories..............................................
Finished homes and construction in progress............ 389,606 531,941 656,527
Residential lots - developed and under development..... 268,407 479,553 559,433
Land held for development.............................. 32,150 12,774 13,452
---------- ---------- ----------
690,163 1,024,268 1,229,412
Property and equipment (net)............................. 7,902 16,988 24,679
Earnest money deposits and other assets.................. 38,376 56,420 73,841
Excess of costs over assets acquired (net)............... 16,000 37,717 49,409
---------- ---------- ----------
820,505 1,213,621 1,468,619
Financing:
Mortgage loans held for sale............................. 20,350 34,072 38,897
Other assets............................................. 492 630 478
---------- ---------- ----------
20,842 34,702 39,375
---------- ---------- ----------
$ 841,347 $1,248,323 $1,507,994
========== ========== ==========
LIABILITIES
Homebuilding:
Accounts payable and other liabilities................... $ 108,878 $ 165,309 $ 189,777
Notes payable............................................ 414,872 632,552 828,855
---------- ---------- ----------
523,750 797,861 1,018,632
Financing:
Notes payable............................................ 5,359 18,188 17,291
Other liabilities........................................ 854 506 3,471
---------- ---------- ----------
6,213 18,694 20,762
---------- ---------- ----------
529,963 816,555 1,039,394
---------- ---------- ----------
Minority Interest.......................................... 4,797 3,902 3,499
---------- ---------- ----------
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, 48,095,465 shares at September 30, 1996,
52,749,527 at September 30, 1997 and 52,909,743
(unaudited) at March 31, 1998, issued and
outstanding............................................... 481 527 529
Additional capital......................................... 219,640 268,631 270,321
Retained earnings.......................................... 86,466 158,708 194,251
---------- ---------- ----------
306,587 427,866 465,101
---------- ---------- ----------
$ 841,347 $1,248,323 $1,507,994
========== ========== ==========
</TABLE>
See accompanying notes to supplemental consolidated financial statements
28
<PAGE>
<TABLE>
D.R. HORTON, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended
<CAPTION>
Year Ended September 30, March 31,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(In thousands, except earnings per share)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Homebuilding:
Revenues
Home sales............................ $ 852,106 $1,124,409 $1,532,691 $ 639,163 $ 866,430
Land/lot sales........................ 10,658 11,844 34,764 15,867 1,083
---------- ---------- ---------- ---------- ----------
862,764 1,136,253 1,567,455 655,030 867,513
Cost of Sales
Homes Sales........................... 699,030 918,152 1,259,045 524,536 710,145
Land/lot sales........................ 10,958 11,907 33,539 14,751 836
---------- ---------- ---------- ---------- ----------
709,988 930,059 1,292,584 539,287 710,981
Gross profit
Home Sales............................ 153,076 206,257 273,646 114,627 156,285
Land/lot sales........................ (300) (63) 1,225 1,116 247
---------- ---------- ---------- ---------- ----------
152,776 206,194 274,871 115,743 156,532
Selling, general and
administrative expense................. 90,857 116,107 163,034 69,154 94,157
---------- ---------- ---------- ---------- ----------
Operating income from homebuilding...... 61,919 90,087 111,837 46,589 62,375
Interest expense........................ 6,581 7,456 10,234 4,611 5,068
Other (income).......................... (1,417) (2,414) (4,536) (1,776) (2,053)
---------- ---------- ---------- ---------- ----------
Income before income
taxes - homebuilding .................. 56,755 85,045 106,139 43,754 59,360
Financing:
Fees.................................... 6,707 11,481 10,967 5,916 8,643
Selling, general and
administrative expense................. 5,639 7,028 8,733 4,501 5,790
---------- ---------- ---------- ---------- ----------
Operating income from financing......... 1,068 4,453 2,234 1,415 2,853
Interest expense........................ 2,360 1,785 664 216 645
Other (income).......................... (2,559) (2,101) (1,396) (574) (1,054)
---------- ---------- ---------- ---------- ----------
Income before income taxes - financing.. 1,267 4,769 2,966 1,773 3,262
---------- ---------- ---------- ---------- ----------
Income before income taxes &
extraordinary loss..................... 58,022 89,814 109,105 45,527 62,622
Provision for income taxes.............. 23,662 36,648 43,821 17,938 24,806
---------- ---------- ---------- ---------- ----------
Income from continuing operations....... 34,360 53,166 65,284 27,589 37,816
Extraordinary loss:
Loss on extinguishment of debt,
net of taxes of $4,807 in 1996
and $233 in 1997...................... -- (6,918) (322) -- --
---------- ---------- ---------- ---------- ----------
Net income.............................. $ 34,360 $ 46,248 $ 64,962 $ 27,589 $ 37,816
========== ========== ========== ========== ==========
Earnings per common share:
Income from continuing operations.... $ 0.80 $ 1.15 $ 1.29 $ 0.57 $ 0.72
Extraordinary loss................... $ -- $ (0.15) $ (0.01) $ -- $ --
Net income........................... $ 0.80 $ 1.00 $ 1.28 $ 0.57 $ 0.72
Earnings per common share assuming dilution:
Income from continuing operations.... $ 0.77 $ 1.07 $ 1.16 $ 0.51 $ 0.64
Extraordinary loss................... $ -- $ (0.14) $ (0.01) $ -- $ --
Net income........................... $ 0.77 $ 0.93 $ 1.15 $ 0.51 $ 0.64
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
29
<PAGE>
<TABLE>
D.R. HORTON, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Total
Common Additional Retained Stockholders'
Stock Capital Earnings Equity
--------- ------------ ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
Balances at October 1, 1994...................... $ 322 $ 132,988 $ 49,803 $ 183,113
Net income..................................... -- -- 34,360 34,360
Exercise of stock options (132,150 shares).... 1 820 -- 821
Repurchase of common stock.................... -- (556) -- (556)
Issuances under D.R. Horton, Inc.
employee benefit plans (20,549 shares)...... -- 208 -- 208
Stock dividend................................ 15 17,181 (17,196) --
Stock split................................... 73 (73) -- --
Cash dividends paid to Continental
stockholders................................ -- -- (1,394) (1,394)
--------- ------------ ------------ -------------
Balances at September 30, 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................................ -- -- (3,870) (3,870)
--------- ------------ ------------ -------------
Balances at September 30, 1997................... 527 268,631 158,708 427,866
Net income (unaudited)........................ -- -- 37,816 37,816
Exercise of stock options (142,424 shares)
(unaudited)................................... 2 1,539 -- 1,541
Issuances under D.R. Horton, Inc.
employee benefit plans (1,277 shares)
(unaudited)................................... -- 24 -- 24
Conversion of convertible subordinated notes
(unaudited)................................... -- 127 -- 127
Cash dividends (unaudited)..................... -- -- (2,273) (2,273)
--------- ------------ ------------ -------------
Balances at March 31, 1998 (unaudited)........... $ 529 $ 270,321 $ 194,251 $ 465,101
========= ============ ============ =============
</TABLE>
See accompanying notes to supplemental consolidated financial statements
30
<PAGE>
<TABLE>
D.R. HORTON, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended September 30, March 31,
----------------------------------------- --------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(In thousands, except earnings per share)
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................ $ 34,360 $ 46,248 $ 64,962 $ 27,589 $ 37,816
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 5,075 5,773 7,660 3,250 4,856
Extraordinary loss on extinguishment of debt.... -- 11,725 555 -- --
Expense associated with issuance of stock
under employee benefit plans................... 208 229 306 100 329
Changes in operating assets and liabilities:
Increase in inventories......................... (109,374) (110,879) (171,645) (111,257) (146,724)
(Increase) decrease in earnest money deposits
and other assets............................. (6,218) 15,239 (25,800) (20,076) (18,702)
Increase in accounts payable and other
liabilities.................................. 2,010 23,859 22,572 11,231 23,527
----------- ----------- ----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES............ (73,939) (7,806) (101,450) (89,163) (98,898)
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Net purchase of property and equipment.......... (3,452) (3,248) (6,894) (4,526) (8,131)
Net cash paid for acquisitions.................. (23,451) (2,075) (53,950) (42,860) (25,575)
----------- ----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES............. (26,903) (5,323) (60,844) (47,386) (33,706)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from notes payable..................... 282,816 238,987 222,680 160,157 178,151
Repayment of notes and bonds payable............ (188,857) (285,713) (231,944) (77,497) (31,785)
Retirement of notes and bonds payable........... (3,027) (158,563) (11,557) -- --
Issuance of Convertible Subordinated Notes...... -- 83,279 -- -- --
Issuance of Senior Notes payable................ -- 125,925 167,416 20,175 --
Repurchase of stock............................. (556) -- (2,628) (1,922) --
Proceeds from common stock offerings and stock
associated with certain employee benefit plans. -- 43,260 39,950 36,403 --
Proceeds from exercise of stock options......... 821 1,690 2,117 885 1,561
Cash dividends paid............................. (1,394) (1,392) (3,523) (1,344) (2,273)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 89,803 47,473 182,511 136,857 145,654
----------- ----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH....................... (11,039) 34,344 20,217 308 13,050
Cash at beginning of period..................... 44,759 33,720 58,011 58,011 78,228
----------- ----------- ----------- ----------- -----------
Cash at end of period........................... $ 33,720 $ 68,064 $ 78,228 $ 58,319 $ 91,278
=========== =========== =========== =========== ===========
Supplemental cash flow information:
Interest paid................................... $ 8,911 $ 9,221 $ 9,915 $ 4,558 $ 5,801
=========== =========== =========== =========== ===========
Income taxes paid............................... $ 27,875 $ 32,573 $ 47,563 $ 19,193 $ 29,716
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to supplemental consolidated financial statements
31
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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 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.
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. The supplemental consolidated financial statements
will become the historical consolidated financial statements of the Company upon
the issuance of financial statements for the period that includes the date of
the merger.
Prior to the merger, Continental had a fiscal year end of May 31, and
accordingly, the Continental consolidated balance sheet as of May 31, 1996 has
been combined with the Company's balance sheet as of September 30, 1996. The
Continental statements of income, stockholders' equity and cash flows for the
years ended May 31, 1995 and 1996 have been combined with the Company's
statements of income, stockholders' equity and cash flows for the fiscal years
ended September 30, 1995 and 1996, respectively. Continental's 1997 balance
sheet and the related statements of income, stockholders' equity 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 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.
32
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements are:
Year Ended September 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
Revenue
D.R. Horton, Inc................... $ 437,388 $ 547,336 $ 837,280
Continental........................ 425,376 588,917 730,175
---------- ---------- ----------
Combined........................... $ 862,764 $1,136,253 $1,567,455
========== ========== ==========
Net Income
D.R. Horton, Inc................... $ 20,539 $ 27,379 $ 36,204
Continental........................ 13,821 18,869 28,758
---------- ---------- ----------
Combined........................... $ 34,360 $ 46,248 $ 64,962
========== ========== ==========
Extraordinary loss, net
D.R. Horton, Inc................... $ -- $ -- $ --
Continental........................ -- (6,918) (322)
---------- ---------- ----------
Combined........................... $ -- $ (6,918) $ (322)
========== ========== ==========
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.
Interim financial information: The financial information as of and for the
six months ended March 31, 1998 and 1997 is unaudited. This financial
information reflects all adjustments (including all normal recurring accruals)
which, in the opinion of management, are necessary to present fairly the
financial position, results of operations and cash flows of the Company for
these periods.
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 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. The Company adopted this
Standard in fiscal 1996. As permitted by FAS 123, the Company has elected to
continue to use Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related Interpretations, in accounting
for its Stock Incentive Plan. Refer to Note F.
FAS 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. FAS 131 is effective for fiscal years beginning after December
15, 1997, with earlier application permitted. Adoption of FAS 131 is not
expected to materially impact the Company.
33
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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 $1,573,000, $1,589,000 and
$2,296,000 in 1995, 1996 and 1997, respectively. Accumulated amortization was
$6,677,000 and $9,545,000 at September 30, 1996 and 1997, respectively.
Estimated Fair Value of Financial Instruments: The estimated fair value of
financial instruments is determined by reference to various market data and
other valuation techniques as appropriate. The carrying amounts of cash and cash
equivalents and trade payables approximate fair value because of the short
maturity of these financial instruments. At September 30, 1997, the estimated
fair value of the Company's debt approximated $662.7 million and the fair market
value of the net obligation under the interest rate swap agreement approximated
$1.9 million.
Fair value estimates are made at specific points in time based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature, involve matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect estimates.
Interest. The Company capitalizes interest during development and
construction. Capitalized interest is charged to cost of sales as the related
inventory is delivered to the home buyer. Interest costs are (in thousands):
Year Ended September 30,
--------------------------------
1995 1996 1997
-------- -------- --------
Capitalized interest, beginning of year.... $ 7,282 $ 13,661 $ 18,004
Interest incurred.......................... 31,695 37,257 50,505
Interest expensed
Directly - Homebuilding only............. (6,581) (7,456) (10,234)
Amortized to cost of sales............... (18,735) (25,670) (29,323)
-------- -------- --------
Capitalized interest, end of year.......... $ 13,661 $ 17,792 $ 28,952
======== ======== ========
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.
34
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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: In 1997, the Financial Accounting Standards Board
issued FAS 128 that replaced previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share.
Basic earnings per share is based upon the weighted average number of
shares of common stock outstanding during each year.
Diluted earnings per share is based upon the weighted average number of
shares of common stock outstanding during each year, adjusted for the effects of
dilutive securities.
Earnings per share amounts for all periods presented have been restated for
FAS 128.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Income from continuing operations......... $34,360 $53,166 $65,284 $27,589 $37,816
Effect of dilutive securities:
6 7/8% convertible subordinated
notes, net......................... 1,604 2,778 3,498 1,750 1,748
------- ------- ------- ------- -------
Numerator for diluted earnings per
share after assumed conversions.... $35,964 $55,944 $68,782 $29,339 $39,564
======= ======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share - weighted-average shares.... 42,973 46,398 50,580 48,486 52,812
Effect of dilutive securities:
6 7/8% convertible subordinated
notes.............................. 3,350 5,603 8,172 8,138 8,264
Employee stock options............. 378 528 568 536 1,117
------- ------- ------- ------- -------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions........................ 46,701 52,529 59,320 57,160 62,193
======= ======= ======= ======= =======
</TABLE>
35
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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 (primarily 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 operations of the joint
venture. The partners' equity position is disclosed as a minority interest in
the accompanying consolidated balance sheets.
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 $9,715,000 and $12,847,000 as of
September 30, 1996 and 1997, respectively.
Revenue Recognition: Revenue generally is recognized at the time of the
closing of a sale, when title to and possession of the property transfer to the
buyer.
Mortgage loans: Mortgage loans held for sale are stated at the lower of
cost or market which approximates the fair value. The mortgage banking notes
payable bear interest at a rate indexed to the prime rate, therefore, the
carrying amounts of the outstanding borrowings at September 30, 1997 and 1996
approximate fair value.
NOTE B - NOTES PAYABLE
<TABLE>
<CAPTION>
September 30,
----------------------
1996 1997
--------- ---------
(In thousands)
<S> <C> <C>
HOMEBUILDING:
Unsecured:
Banks:
$200 million syndicated term credit facility,
maturing June, 2002, variable rates..................... $ 100,000 $ 200,000
$400 million syndicated revolving credit facility,
maturing June, 2001, variable rates..................... 58,600 --
$25 million revolving line of credit, payable on demand
with six months notice, variable rates.................. 4,000 1,000
$140 million line of credit, maturing November 1999,
variable rates.......................................... -- 30,500
8 3/8% Senior Notes, due 2004, net........................ -- 147,370
10% Senior Notes, due 2006, net........................... 128,028 148,462
6 7/8% convertible subordinated notes, due 2002........... 86,250 86,250
Other secured................................................. 37,994 18,970
--------- ---------
$ 414,872 $ 632,552
========= =========
FINANCING:
Mortgage warehouse line payable to bank, secured............ $ 5,359 $ 18,188
========= =========
</TABLE>
36
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
On May 21, 1997, the Company filed a universal shelf registration statement
with the Securities and Exchange Commission for up to $250 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. On June 9, 1997, the Company utilized this universal shelf
registration to issue $150 million of 8 3/8% senior unsecured notes at 98.419%.
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.
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%.
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 essentially all of
the Company subsidiaries.
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, 1997, these covenants limit the
additional debt the Company could incur to $178.5 million.
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 $28.6 million available for
the payment of dividends and for the acquisition by the Company of its common
stock at September 30, 1997.
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.
In addition to the stated interest rates, various bank credit facilities
require the Company to pay certain fees. The syndicated revolving credit
facility also provides $25 million for use as standby letters of credit.
The Company uses an interest rate swap agreement to help manage a portion
of its interest rate exposure. The agreement converts from a variable rate to a
fixed rate on a notional amount of $100 million. The agreement expires April
2001. The Company does not expect non-performance by the counterparty, a major
U.S. bank, and any losses incurred in the event of non-performance would not be
37
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
material. Net payments or receipts under the Company's interest rate swap
agreement are recorded as adjustments to interest incurred. As a result of this
agreement, the Company incurred net interest expense of $0.4 million and $0.7
million during 1996 and 1997, 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
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.
Maturities of notes payable, assuming the revolving lines of credit are not
extended, are $13.2 million in 1998, $6.0 million in 1999, $31.2 million in
2000, $200 million in 2002, $86.3 million in 2003, $147.4 million in 2004, and
$148.5 million in 2006. The weighted average interest rates of the unsecured
bank debt at September 30, 1996 and 1997 were 7.6% and 7.2%, respectively. As a
result of the Merger, the $150 million 10% senior notes may be put to the
Company at 101% of par value through June 18, 1998, under the terms of the
change of control provisions in the indenture for the notes.
Mortgage warehousing notes payable enable CH Mortgage Company ("CHMC") to
perform its loan origination and warehousing functions. At September 30, 1997,
CHMC had a warehouse line of credit of $25,000,000 which is guaranteed by the
Company. Borrowings are secured by the mortgage loans held for sale, mature on
December 1, 1997, and bear interest at LIBOR plus 1 3/4%.
NOTE C - ACQUISITIONS
In fiscal 1995, 1996, and 1997, the Company made the following
acquisitions:
Company Acquired Date Acquired Consideration
- ----------------
Heftler Realty Co.
(South Florida) November 1994 $ 51.8 million
Westchester Homes
(Dallas) June 1996 $ 9.1 million
Arappco, Inc.
(Greensboro) July 1995 $ 12.2 million
Regency Development, Inc.
(Birmingham) September 1995 $ 12.3 million
38
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Trimark Communities, L.L.C.
(Denver) October 1996 $ 8.1 million
SGS Communities, Inc.
(New Jersey) December 1996 $ 20.7 million
Torrey Group
(Atlanta, Raleigh, Charlotte,
Greenville S.C.) February 1997 $ 136.7 million
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 Heftler Realty Co., 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 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. 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 affected throughout the period. The pro forma financial
information is based upon the purchase method of accounting.
39
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Year ended September 30,
---------------------------
1996 1997
----------- ----------
(In thousands, except
earnings per share)
Revenues................................... $1,369,355 $1,656,530
Income from continuing operations.......... 64,234 66,188
Extraordinary loss......................... (6,918) (322)
Net income................................. 57,316 65,866
Earnings per common share:
Income from continuing operations.......... 1.39 1.31
Extraordinary loss......................... (.15) (.01)
Net income................................. 1.24 1.30
Earnings per common share assuming dilution:
Income from continuing operations......... 1.28 1.18
Extraordinary loss........................ (.14) (.01)
Net income................................ . 1.14 1.17
NOTE D - STOCKHOLDERS' EQUITY
On April 20, 1995 and April 22, 1996, the Board of Directors declared
common stock dividends of 9% and 8%, respectively. On August 15, 1995, the Board
of Directors declared a seven-for-five stock split effected in the form of a 40%
stock dividend on its common stock. Accordingly, the $.01 par value for the
additional shares issued, in respect of the seven-for-five stock split, was
transferred from additional paid-in-capital to common stock. Net income per
share and weighted average shares outstanding for all periods presented have
been restated to reflect the stock dividends and the stock split. Since these
stock dividends occurred prior to the merger with Continental, only D.R. Horton
stockholders at the time of the transaction participated in the dividends.
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.
40
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense from continuing operations consists of:
Year ended September 30,
---------------------------------
1995 1996 1997
-------- -------- --------
(In thousands)
Current:
Federal................................. $ 21,893 $ 35,134 $ 45,551
State................................... 4,001 3,845 5,113
-------- -------- --------
25,894 38,979 50,664
Deferred:
Federal................................. $ (1,875) $ (2,117) $ (6,195)
State................................... (357) (214) (648)
-------- -------- --------
(2,232) (2,331) (6,843)
-------- -------- --------
$ 23,662 $ 36,648 $ 43,821
======== ======== ========
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 $791,000, $1,023,000 and $1,200,000 for
1995, 1996 and 1997, respectively.
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. SERP No. 1 provides for voluntary deferral of
compensation which is invested under a trust agreement. All salary deferrals
under this Plan have been accrued and the investments are recorded as an other
asset. Under SERP No. 2, the Company accrues an unfunded benefit, as well as an
interest factor based upon a predetermined formula. The Company recorded
$347,000, $313,000 and $543,000 of expense for SERP No. 2 in 1995, 1996 and
1997, respectively.
Effective January 1, 1994, the Company adopted the D.R. Horton, Inc. Stock
Tenure Plan (an Employee Stock Ownership Plan), covering those employees
generally not participating in certain other D.R. Horton benefit plans.
Contributions are made at the discretion of the Company. Expenses related to
Company contributions of common stock to the plan of $106,000, $229,000 and
$309,000 were recognized for 1995, 1996 and 1997, respectively.
In 1996, the Company adopted the D.R. Horton, Inc. Employee Stock Purchase
Plan, which allows employees to purchase stock directly from the Company at
market value.
At September 30, 1997, 219,150 shares of common stock have been reserved
for future issuance under the stock tenure and stock purchase plans.
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
41
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
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. At September 30, 1997, 264,007 shares were available for future
grants under this plan. Activity under the plan is:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Stock Options Options Prices Options Prices Options Prices
--------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 1,455,392 $ 7.56 2,332,946 $ 6.31 2,825,501 $ 7.09
Transitional period................ -- -- 126,234 -- -- --
Granted............................ 416,500 10.64 637,750 9.90 1,106,500 10.05
Exercised.......................... (132,150) 3.75 (277,315) 3.57 (268,904) 4.30
Cancelled.......................... (19,940) 9.80 (140,022) 8.36 (118,802) 8.54
Effects of stock dividends......... 613,144 6.87 145,908 6.69 -- --
--------- -------- --------- --------- --------- ---------
Outstanding at end of year......... 2,332,946 $ 6.31 2,825,501 $ 7.09 3,544,295 $ 8.16
========= ======== ========= ========= ========= =========
Exercisable at end of year......... 830,342 $ 4.48 887,079 $ 4.99 961,718 $ 5.98
========= ======== ========= ========= ========= =========
</TABLE>
Exercise prices for options outstanding at September 30, 1997, ranged from
$1.804 to $10.6875.
The weighted average remaining contractual lives of those options are:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------- ------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Maturity Exercise Maturity
Exercise Price Range Options Prices (Years) Options Prices (Years)
- -------------------- --------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Less than $4 132,111 $ 2.41 3.8 132,111 $ 2.41 3.8
$4 - $8 1,463,954 6.27 6.3 642,827 5.75 5.4
More than $8 1,948,230 9.96 8.9 186,780 9.29 7.5
--------- ------ ---- ------- ------ ----
Total 3,544,295 $ 8.16 7.6 961,718 $ 5.98 5.6
========= ====== ==== ======= ====== ====
</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. FAS
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 and 1997. Management believes
the fiscal 1996 and 1997 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 FAS 123,
would decrease net income by $118,000 and $398,000 ($.01 per share) in 1996 and
1997, respectively.
42
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value of grants made in 1996 and 1997 was $4.45
and $4.52, respectively.
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:
1996 1997
--------------- ---------------
Risk free interest rate 6.27% 6.16%
Expected life (in years) 6.0 6.7
Expected volatility 36.21% 34.69%
Expected dividend yield .00% .59%
NOTE G - COMMITMENTS AND CONTINGENCIES
The Company is involved in lawsuits and other contingencies in the ordinary
course of business. Management believes that, while the ultimate outcome of the
contingencies cannot be predicted with certainty, the ultimate liability, if
any, will not have a material adverse effect on the Company's financial
position.
In the ordinary course of business, the Company enters into option
agreements to purchase land and developed lots. Cash deposits of approximately
$8.0 million, standby letters of credit approximating $2.5 million and
promissory notes approximating $1.7 million at September 30, 1997, secure the
Company's performance under these agreements.
The Company leases office space under noncancelable operating leases.
Minimum annual lease payments under these leases at September 30, 1997, are
approximately:
(In thousands)
1998 . . . . . . . . . . . . . . . . . . . . $ 1,949
1999 . . . . . . . . . . . . . . . . . . . . 1,741
2000 . . . . . . . . . . . . . . . . . . . . 1,562
2001 . . . . . . . . . . . . . . . . . . . . 984
2002 . . . . . . . . . . . . . . . . . . . . 595
Thereafter . . . . . . . . . . . . . . . . . 1,934
------
$ 8,765
Rent expense approximated $2,222,000, $2,594,000, and $3,177,000 for 1995,
1996 and 1997, respectively.
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, 1997, outstanding
standby letters of credit were $11.1 million and performance bonds were $126.0
million.
43
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - 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, 1997
D.R. Horton, Guarantor Nonguarantor Intercompany
Inc. Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Total assets....... $ 619,586 $ 938,397 $ 48,520 $ (358,180) $1,248,323
Total liabilities.. 395,803 751,845 26,252 (357,345) 816,555
Revenues........... 286,568 1,269,391 23,976 (1,513) 1,578,422
Gross profit....... 51,485 221,751 2,861 (1,226) 274,871
Net income......... 34,521 99,629 980 (70,168) 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....... $ 353,563 $ 590,630 $ 30,507 $ (133,353) $ 841,347
Total liabilities.. 197,255 456,092 8,894 (132,278) 529,963
Revenues........... 269,853 866,400 12,691 (1,210) 1,147,734
Gross profit....... 47,346 158,873 876 (901) 206,194
Net income......... 30,771 70,860 2,930 (58,313) 46,248
<CAPTION>
September 30, 1995
D.R. Horton, Guarantor Nonguarantor Intercompany
Inc. Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Total assets....... $ 277,131 $ 488,022 $ 50,952 $ (110,485) $ 705,620
Total liabilities.. 185,028 376,048 37,348 (109,356) 489,068
Revenues........... 259,165 603,599 7,283 (576) 869,471
Gross profit....... 44,274 108,502 444 (444) 152,776
Net income......... 18,281 48,491 871 (33,283) 34,360
</TABLE>
44
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations are: (In thousands, except for per share
amounts)
<TABLE>
<CAPTION>
1998
----------------------------
Three Months Ended
----------------------------
March 31 December 31
------------ ------------
<S> <C> <C>
Revenues..................................................... $448,857 $418,656
Gross margin................................................. 80,413 76,119
Income from continuing operations............................ 19,492 18,324
Net income................................................... 19,492 18,324
Earnings per common share from continuing operations......... 0.37 0.35
Earnings per common share from continuing operations
assuming dilution.......................................... 0.33 0.31
<CAPTION>
1997
------------------------------------------------------------
Three Months Ended
------------------------------------------------------------
September 30 June 30 March 31 December 31
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues.............................. $477,362 $435,063 $323,731 $331,299
Gross margin.......................... 86,188 72,940 56,871 58,872
Income from continuing operations..... 22,072 15,623 12,184 15,405
Net income............................ 21,750 15,623 12,184 15,405
Earnings per common share from
continuing operations................ 0.42 0.30 0.25 0.32
Earnings per common share from
continuing operations assuming
dilution............................. 0.37 0.27 0.23 0.29
<CAPTION>
1996 (1)
------------------------------------------------------------
Three Months Ended
------------------------------------------------------------
September 30 June 30 March 31 December 31
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenues.............................. $343,854 $284,227 $252,234 $267,421
Gross margin.......................... 63,893 51,151 45,112 46,037
Income from continuing operations..... 18,496 13,594 10,437 10,639
Net income............................ 12,437 12,735 10,437 10,639
Earnings per common share from
continuing operations................ 0.38 0.28 0.22 0.25
Earnings per common share from
continuing operations assuming
dilution............................. 0.34 0.25 0.21 0.23
- ----------
<FN>
(1) Due to different year ends, the quarterly information for 1996 combines
Continental and D.R. Horton quarters as they occurred in each Company's
respective fiscal year.
</FN>
</TABLE>
45
<PAGE>
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - SUBSEQUENT EVENTS (UNAUDITED)
In February, 1998, the Company closed the acquisition of the outstanding
stock of C. Richard Dobson Builders, Inc. (Dobson), and certain of its
affiliated companies, for $23.4 million. Dobson's assets (primarily inventories)
on that date approximated $64.9 million; its liabilities, including $49.0
million in notes payable paid at closing, approximated $52.5 million. Operating
results for Dobson since its acquisition are included in the financial
statements as of and for the periods ended March 31, 1998.
In May, 1998, the Company purchased the principal assets (approximately
$5.3 million, primarily inventories) of Mareli Developments and Construction,
L.L.C., for $1.1 million in cash and the assumption of $4.7 million in trade
accounts and notes payable associated with the acquired assets. There is also a
provision for additional consideration to be paid annually for up to four years
subsequent to the acquisition date, based upon income before income taxes. Such
additional consideration will be recorded when paid as excess cost over net
assets acquired, which is amortized using the straight line method over 20
years.
The final determination of the valuation of Dobson has not been completed.
Any subsequent adjustments to the beginning balance sheet valuation amounts
estimated herein will be recorded in future periods as adjustments to the excess
of cost over net assets acquired and amortized over 20 years.
These 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.
