10-Q 1 drh10q3q2002.txt D.R. HORTON, INC. 10Q 3RD QUARTER 2002 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ---ACT OF 1934 For the Quarterly Period Ended June 30, 2002 -------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ---ACT OF 1934 For the Transition Period From To ------------------- ------------------- Commission file number 1-14122 ----------- D.R. Horton, Inc. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 75-2386963 -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1901 Ascension Blvd., Suite 100, Arlington, Texas 76006 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (817) 856-8200 ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $.01 par value -- 146,490,625 shares as of August 8, 2002 ------------- This report contains 30 pages. INDEX D.R. HORTON, INC.
PART I. FINANCIAL INFORMATION. Page ------- ---------------------- ---- ITEM 1. Financial Statements. Consolidated Balance Sheets-- June 30, 2002 and September 30, 2001. 3 Consolidated Statements of Income-- Three Months and Nine Months Ended June 30, 2002 and 2001. 4 Consolidated Statements of Cash Flows-- Nine Months Ended June 30, 2002 and 2001. 5 Notes to Consolidated Financial Statements. 6-18 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. 19-27 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. 28 PART II. OTHER INFORMATION. -------- ----------------- ITEM 6 Exhibits and Reports on Form 8-K. 29 SIGNATURES. 30 ----------
ITEM 1. FINANCIAL STATEMENTS D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, September 30, 2002 2001 -------------- -------------- (In thousands) (Unaudited) ASSETS Homebuilding: Cash ................................................................. $ 42,758 $ 232,305 Inventories: Finished homes and construction in progress ........................ 2,069,731 1,424,101 Residential lots - developed and under development ................. 2,301,671 1,377,452 Land held for development .......................................... 10,251 2,824 ---------- ---------- 4,381,653 2,804,377 Property and equipment (net) ......................................... 73,338 53,096 Earnest money deposits and other assets .............................. 347,331 181,659 Excess of cost over net assets acquired .............................. 586,390 136,223 ---------- ---------- 5,431,470 3,407,660 ---------- ---------- Financial Services: Cash ................................................................. 13,169 6,975 Mortgage loans held for sale ......................................... 288,478 222,818 Other assets ......................................................... 17,611 14,737 ---------- ---------- 319,258 244,530 ---------- ---------- $5,750,728 $3,652,190 ========== ========== LIABILITIES Homebuilding: Accounts payable and other liabilities ............................... $ 625,225 $ 498,576 Notes payable ........................................................ 2,750,333 1,701,689 ---------- ---------- 3,375,558 2,200,265 ---------- ---------- Financial Services: Accounts payable and other liabilities ............................... 10,847 10,173 Notes payable to financial institutions .............................. 204,630 182,641 ---------- ---------- 215,477 192,814 ---------- ---------- 3,591,035 2,393,079 ---------- ---------- Minority interests ................................................... 20,370 8,864 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued ................................................... -- -- Common stock, $.01 par value, 200,000,000 shares authorized, 146,445,994 shares at June 30, 2002 and 76,901,511 shares at September 30, 2001, issued and outstanding ......................... 1,464 769 Additional capital ................................................... 1,349,142 704,842 Unearned compensation ................................................ (6,963) -- Retained earnings .................................................... 795,680 544,636 ---------- ---------- 2,139,323 1,250,247 ---------- ---------- $5,750,728 $3,652,190 ========== ==========
See accompanying notes to consolidated financial statements. -3- D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Nine Months Ended June 30, Ended June 30, ------------------------ ----------------------- 2002 2001 2002 2001 ------------ ----------- ----------- ----------- (In thousands, except per share data) ----------------------------------- (Unaudited) ----------- Homebuilding: Revenues Home sales ..................................... $1,750,189 $1,090,242 $4,410,284 $2,799,894 Land/lot sales ................................. 29,426 11,724 80,499 68,033 ---------- ---------- ---------- ---------- 1,779,615 1,101,966 4,490,783 2,867,927 ---------- ---------- ---------- ---------- Cost of sales Home sales ..................................... 1,416,050 872,095 3,573,790 2,244,754 Land/lot sales ................................. 25,938 10,712 70,048 54,791 ---------- ---------- ---------- ---------- 1,441,988 882,807 3,643,838 2,299,545 ---------- ---------- ---------- ---------- Gross profit Home sales ..................................... 334,139 218,147 836,494 555,140 Land/lot sales ................................. 3,488 1,012 10,451 13,242 ---------- ---------- ---------- ---------- 337,627 219,159 846,945 568,382 Selling, general and administrative expense ...... 177,020 109,085 444,931 295,084 Interest expense ................................. 1,465 2,089 5,224 6,618 Other expense .................................... 3,842 5,040 3,988 14,038 ---------- ---------- ---------- ---------- 155,300 102,945 392,802 252,642 ---------- ---------- ---------- ---------- Financial Services: Revenues ......................................... 28,864 19,015 77,651 47,553 Selling, general and administrative expense ...... 18,220 12,540 48,261 32,507 Interest expense ................................. 1,155 1,575 3,490 3,582 Other (income) ................................... (4,714) (2,240) (10,576) (4,869) ---------- ---------- ---------- ---------- 14,203 7,140 36,476 16,333 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES ..................... 169,503 110,085 429,278 268,975 Provision for income taxes ....................... 63,563 41,282 160,979 100,866 ---------- ---------- ---------- ---------- Income before cumulative effect of change in accounting principle ........................... 105,940 68,803 268,299 168,109 Cumulative effect of change in accounting principle, net of income taxes of $1,282 ....... -- -- -- 2,136 ---------- ---------- ---------- ---------- NET INCOME ..................................... $ 105,940 $ 68,803 $ 268,299 $ 170,245 ========== ========== ========== ========== Basic earnings per common share: Income before cumulative effect of change in accounting principle ...................... $ 0.72 $ 0.61 $ 2.06 $ 1.49 Cumulative effect of change in accounting principle, net of income taxes ............... -- -- -- 0.02 ---------- ---------- ---------- ---------- Net income ..................................... $ 0.72 $ 0.61 $ 2.06 $ 1.51 ========== ========== ========== ========== Diluted earnings per common share: Income before cumulative effect of change in in accounting principle ...................... $ 0.67 $ 0.60 $ 1.94 $ 1.46 Cumulative effect of change in accounting principle, net of income taxes ............... -- -- -- 0.02 ---------- ---------- ---------- ---------- Net income ..................................... $ 0.67 $ 0.60 $ 1.94 $ 1.48 ========== ========== ========== ========== Cash dividends per share ......................... $ 0.06 $ 0.05 $ 0.17 $ 0.14 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. -4- D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, ------------------- 2002 2001 ------ ------ (In thousands) (Unaudited) OPERATING ACTIVITIES Net income .............................................................. $ 268,299 $ 170,245 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ........................................... 18,621 18,463 Amortization of debt premiums and fees .................................. 5,991 2,645 Changes in operating assets and liabilities: Increase in inventories ............................................... (311,773) (416,639) Increase in earnest money deposits and other assets ................... (38,274) (33,649) Increase in mortgage loans held for sale .............................. (65,660) (50,616) (Decrease) increase in accounts payable and other liabilities ......... (110,590) 26,608 ---------- ---------- NET CASH USED IN OPERATING ACTIVITIES ..................................... (233,386) (282,943) ---------- ---------- INVESTING ACTIVITIES Net purchases of property and equipment ................................. (28,155) (21,807) Distributions from (investments in) venture capital entities ............ 250 (1,970) Net cash paid for acquisitions .......................................... (152,662) (49,009) ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES ..................................... (180,567) (72,786) ---------- ---------- FINANCING ACTIVITIES Proceeds from notes payable ............................................. 2,439,106 891,420 Repayment of notes payable .............................................. (2,451,496) (920,630) Issuance of senior and senior subordinated notes payable ................ 247,928 393,904 Proceeds from issuance of common stock associated with certain employee benefit plans ................................................ 12,380 9,798 Payment of cash dividends ............................................... (17,318) (9,885) ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES ................................. 230,600 364,607 ---------- ---------- (DECREASE) INCREASE IN CASH ............................................... (183,353) 8,878 Cash at beginning of period ............................................. 239,280 72,525 ---------- ---------- Cash at end of period ................................................... $ 55,927 $ 81,403 ========== ==========
See accompanying notes to consolidated financial statements. -5- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2002 NOTE A - BASIS OF PRESENTATION The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. and its subsidiaries (the "Company"). Intercompany accounts and transactions have been eliminated in consolidation. The statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending September 30, 2002. Business - The Company is a national builder that is engaged primarily in the construction and sale of single 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 land or lots it has developed. The Company also provides title agency and mortgage brokerage services to its home buyers. NOTE B - CHANGES IN ACCOUNTING PRINCIPLES Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998, and was later amended by SFAS 137 and 138, which were issued in June 1999 and June 2000, respectively. Pursuant to the implementation requirements of SFAS No. 133, the Company adopted it on October 1, 2000, the first day of the Company's fiscal year ending September 30, 2001. The Company's interest rate swaps, the terms of which are more fully described in Item 3, were not designated as hedges under the provisions of SFAS No. 133. The Statement requires such swaps to be recorded in the consolidated balance sheet at fair value. Changes in their fair value must be recorded in the consolidated statements of income. Accordingly, the Company recorded a cumulative effect of a change in accounting principle amounting to $2.1 million, net of income taxes of $1.3 million, as an adjustment to net income in the nine months ended June 30, 2001. The fair value of the Company's interest rate swaps at June 30, 2002 and September 30, 2001 is recorded in homebuilding other assets, and the changes in their fair value during the three months and nine months ended June 30, 2002 and 2001 are recorded in homebuilding other income. SFAS No. 133 was also implemented on October 1, 2000 for the hedging activities of the Company's financial services segment. The effects of doing so were not significant. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". Under Statement No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The Company early-adopted the new rules on accounting for goodwill and other intangible assets beginning October 1, 2001. The Company performed the required impairment tests at October 31, 2001 and determined that no goodwill or other intangible asset impairments exist. The following summarizes the pro forma impact of the non-amortization approach for the three months and nine months ended June 30, 2001 as if these Statements had been adopted on October 1, 2000:
Three Months Ended Nine Months Ended June 30, 2001 June 30, 2001 ----------------- ------------------ (In thousands, except per share data) Net income, as previously reported ............... $ 68,803 $ 170,245 Amortization of goodwill, net of income taxes of $789 and $2,328, respectively ............... 1,316 3,880 --------------- --------------- Net income, as adjusted .......................... $ 70,119 $ 174,125 =============== =============== Net income per share, as adjusted: Basic ........................................ $ 0.62 $ 1.54 =============== =============== Diluted ...................................... $ 0.61 $ 1.52 =============== ===============
-6- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2002 NOTE C - SEGMENT INFORMATION The Company's financial reporting segments consist of homebuilding and financial services. The Company's homebuilding operations comprise the most substantial part of its business, with approximately 98% of consolidated revenues for the three months and nine months ended June 30, 2002 and 2001. The homebuilding segment generates the majority of its revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services. NOTE D - EARNINGS PER SHARE Basic earnings per share for the three months and nine months ended June 30, 2002 and 2001 is based on the weighted average number of shares of common stock outstanding. Diluted earnings per share is based on the weighted average number of shares of common stock and dilutive securities outstanding. The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Nine Months Ended June 30, June 30, ---------------------- --------------------- 2002 2001 2002 2001 --------- -------- --------- ------- (In thousands) Numerator: Net income............................................... $105,940 $68,803 $268,299 $170,245 Effect of dilutive securities: Interest expense and amortization of issuance costs associated with zero coupon convertible senior notes, net of applicable income taxes................. 1,054 -- 2,096 -- -------- ------- -------- -------- Numerator for diluted earnings per share after assumed conversions................................... $106,994 $68,803 $270,395 $170,245 ======== ======= ======== ======== Denominator: Denominator for basic earnings per share-- weighted average shares............................... 146,331 113,390 130,174 112,994 Effect of dilutive securities: Zero coupon convertible senior notes..................... 10,000 -- 6,667 -- Employee stock options................................... 2,626 1,958 2,422 1,874 -------- ------- --------- -------- Denominator for diluted earnings per share-- adjusted weighted average shares and assumed conversions................................... 158,957 115,348 139,263 114,868 ======== ======= ========= ========
In March 2002, the Company's Board of Directors declared a three-for-two stock split (effected as a 50% stock dividend), payable on April 9, 2002 to common stockholders of record on March 26, 2002. All average share amounts presented above have been restated to reflect the effects of the three-for-two stock split. On February 5, 2002, each of the Company's 381,113 zero coupon convertible senior notes outstanding first became eligible for conversion into 26.2391 shares of the Company's common stock. These convertible senior notes are convertible on any date as of which the average closing price of the Company's common stock for the twenty preceding trading days exceeds the specified threshold of 110% of the accreted value of each note, divided by the conversion rate. The twenty-day average closing price of the Company's common stock exceeded the specified threshold on June 30, 2002, which had the effect of increasing the denominator for diluted earnings per share by 10 million shares for the three months ended June 30, 2002 and 6.67 million shares for the nine -7- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2002 months ended June 30, 2002. Also, the numerator for diluted earnings per share was increased by tax-effected interest expense and amortization of issuance costs associated with the convertible senior notes for the three months and nine months ended June 30, 2002. NOTE E - DEBT The Company's homebuilding notes payable consist of the following:
June 30, September 30, 2002 2001 ----------- ----------- (In thousands) Unsecured: Revolving credit facility due 2006............................... $ 255,000 $ -- 8.375% Senior notes due 2004, net................................ 149,240 148,943 10.5% Senior notes due 2005, net................................. 199,528 199,439 10% Senior notes due 2006, net................................... 147,752 147,600 9% Senior notes due 2008, net.................................... 102,565 -- 8% Senior notes due 2009, net.................................... 383,392 383,257 9.375% Senior notes due 2009, net................................ 246,609 -- 9.75% Senior subordinated notes due 2010, net.................... 148,974 148,917 9.375% Senior subordinated notes due 2011, net................... 199,704 199,688 7.875% Senior notes due 2011, net................................ 198,406 198,319 10.5% Senior subordinated notes due 2011, net.................... 153,672 -- 8.5% Senior notes due 2012, net.................................. 247,961 -- Zero coupon convertible senior notes due 2021, net............... 207,465 202,509 Other secured.......................................................... 110,065 73,017 ---------- ---------- $2,750,333 $1,701,689 ========== ==========
On January 31, 2002, the Company refinanced its existing unsecured revolving credit facility with a new, replacement facility. The new $805 million facility includes $125 million which may be used for letters of credit. The new facility matures in January 2006, and is guaranteed by substantially all of the Company's wholly-owned subsidiaries other than its financial services subsidiaries. Borrowings bear daily interest at rates based upon the London Interbank Offered Rate (LIBOR) plus a spread based upon the Company's ratio of debt to tangible net worth. In addition to stated interest rates, the revolving credit facility requires the Company to pay certain fees. The new credit facility contains covenants which are essentially the same as those that existed under the old facility. The revolving credit facility and the indentures related to the Company's Senior and Senior Subordinated Notes contain covenants which, taken together, limit amounts of debt that may be incurred, investments in inventory, stock repurchases, cash dividends and other restricted payments, asset dispositions and creation of liens, and require certain levels of tangible net worth. At June 30, 2002, these covenants limit the additional homebuilding debt the Company could incur to $1,251.3 million, which included $464.9 million available under the revolving credit facility. On February 21, 2002, the Company assumed the outstanding debt of Schuler Homes, Inc. ("Schuler") as part of Schuler's merger into the Company. The debt assumed included the 9% senior notes due 2008, the 9.375% senior notes due 2009 and the 10.5% senior subordinated notes due 2011, all of which were recorded by the Company at their market values as of February 21, 2002. The Company repaid $20.2 million, in principal amount, of the Schuler senior and senior subordinated notes as part of the Company's change of control offer in connection with the merger. On April 11, 2002, the Company issued $250 million of 8.5% Senior notes due 2012. The net proceeds from this offering were used to repay borrowings under the unsecured revolving credit facility. These notes are guaranteed by substantially all of the Company's wholly-owned subsidiaries other than its financial services subsidiaries. -8- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2002 NOTE F - 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. Homebuilding interest costs are:
Three Months Ended Nine Months Ended June 30, June 30, ------------------------- ------------------------- 2002 2001 2002 2001 --------- ------------ ---------- ----------- (In thousands) Capitalized interest, beginning of period........ $ 124,652 $ 85,579 $ 96,910 $ 66,092 Interest incurred - homebuilding................. 58,349 34,133 141,596 94,861 Interest expensed: Directly - homebuilding.................... (1,465) (2,089) (5,224) (6,618) Amortized to cost of sales................. (37,811) (24,012) (89,557) (60,724) --------- ----------- --------- ----------- Capitalized interest, end of period.............. $ 143,725 $ 93,611 $ 143,725 $ 93,611 ========= =========== ========= ===========
NOTE G - ACQUISITIONS On February 21, 2002, Schuler Homes, Inc. merged with and into D.R. Horton, Inc., with D.R. Horton the surviving corporation. At the time of the merger, Schuler's assets amounted to $1,364.4 million, mostly inventory. The total merger consideration consisted of the issuance of 20,079,532 shares of D.R. Horton, Inc. common stock, valued at $30.93 per share (the average closing price of D.R. Horton common stock for a period of ten trading days from December 4, 2001 to December 17, 2001); the payment of $168.7 million in cash; the assumption of $802.2 million of Schuler's debt, $238.2 million of which was paid at closing; the assumption of trade payables and other liabilities amounting to $209.1 million; and the assumption of $10.8 million of obligations to the Schuler entities' minority interest holders. Also, D.R. Horton issued options to purchase approximately 527,000 shares of D.R. Horton common stock to Schuler employees to replace outstanding Schuler stock options. The fair value of the options issued was $10.4 million and was recorded as additional capital. The fair value of the unvested options issued was $7.8 million and was recorded as unearned compensation The unearned compensation is being amortized over the remaining vesting period of the stock options. The merger was treated as a purchase of Schuler by D.R. Horton for accounting purposes. Under this method, Schuler assets acquired and liabilities assumed were recorded on the Company's balance sheet at their fair market values as of February 21, 2002. Schuler's results of operations for the three months ended June 30, 2002 and from February 22, 2002 to June 30, 2002, are included in the Company's results of operations for the three months and nine months ended June 30, 2002, respectively. The following unaudited pro forma combined condensed financial data for the nine-month periods ending June 30, 2002 and 2001 are derived from the historical financial statements of D.R. Horton, Inc., Schuler, Fortress-Florida (acquired in May 2001), and Emerald Builders (acquired in July 2001). The unaudited pro forma combined condensed financial data give effect to the merger with Schuler and the acquisitions of Fortress-Florida and Emerald as if they had occurred at the beginning of each period presented. Pro forma adjustments to the historical financial data reflect those that we deem appropriate and are factually supported based upon currently available information. The only pro forma adjustment that significantly affected the combined historical financial data for the nine-month periods ended June 30, 2001 and 2002 was the pro forma effect of recording Schuler's inventories at fair value at the beginning of the nine months ended June 30, 2001. Such pro forma adjustment would have reduced net income for that period by $15.8 million. -9- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2002 NOTE G - ACQUISITIONS - (Continued) The unaudited pro forma combined condensed financial data have been included for comparative purposes only and do not purport to show what the operating results would have been if the merger had been consummated as of the dates indicated and should not be construed as representative of future operating results.
Nine Months Ended June 30, -------------------------------- 2002 2001 --------------- --------------- Revenues........................................................... $ 5,143,436 $ 4,312,414 -------------- -------------- Income before cumulative effect of change in accounting principle..................................................... 300,592 234,339 Cumulative effect of change in accounting principle, net of income taxes........................................... -- 2,136 -------------- -------------- Net income.................................................... $ 300,592 $ 236,475 ============== ============== Basic earnings per common share: Income before cumulative effect of change in accounting principle..................................... $ 2.01 $ 1.62 Cumulative effect of change in accounting principle, net of income taxes...................................... -- 0.02 -------------- -------------- Net income.................................................... $ 2.01 $ 1.64 ============== ============== Diluted earnings per common share: Income before cumulative effect of change in accounting principle.................................... $ 1.91 $ 1.61 Cumulative effect of change in accounting principle, net of income taxes..................................... -- 0.01 -------------- -------------- Net income.................................................... $ 1.91 $ 1.62 ============== ==============
-10- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2002 NOTE H - SUMMARIZED FINANCIAL INFORMATION The 7.875%, 8%, 8.375%, 8.5%, 9%, 9.375%, 10% and 10.5% Senior Notes, the 9.375%, 9.75% and 10.5% Senior Subordinated Notes, and the Zero Coupon Convertible Senior Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company's direct and indirect subsidiaries (Guarantor Subsidiaries), other than financial services subsidiaries and certain other inconsequential subsidiaries (collectively, Non-Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is wholly-owned. In lieu of providing separate financial statements for the Guarantor Subsidiaries, consolidated condensed financial statements are 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.
Consolidating Balance Sheet June 30, 2002 Non-Guarantor Subsidiaries ----------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total --------------- -------------- ---------- ------------ -------------- ------------ (In thousands) ASSETS Homebuilding: Cash and cash equivalents..................... $ -- $ 32,208 $ -- $ 10,550 $ -- $ 42,758 Advances to/investments in affiliates......... 4,238,009 217,422 -- 615 (4,456,046) -- Inventories................................... 676,894 3,617,996 -- 87,136 (373) 4,381,653 Property and equipment (net).................. 9,932 57,710 -- 5,696 -- 73,338 Earnest money deposits and other assets....... 88,113 250,352 -- 12,824 (3,958) 347,331 Excess of cost over net assets acquired (net). -- 586,390 -- -- -- 586,390 ----------- ----------- --------- ----------- ------------ ----------- 5,012,948 4,762,078 -- 116,821 (4,460,377) 5,431,470 ----------- ----------- --------- ----------- ------------ ----------- Financial services: Cash and cash equivalents..................... -- -- 13,169 -- -- 13,169 Mortgage loans held for sale.................. -- -- 288,478 -- -- 288,478 Other assets.................................. -- -- 17,611 -- -- 17,611 ----------- ----------- --------- ----------- ------------ ----------- -- -- 319,258 -- -- 319,258 ----------- ----------- --------- ----------- ------------ ----------- Total Assets $ 5,012,948 $ 4,762,078 $ 319,258 $ 116,821 $ (4,460,377) $ 5,750,728 =========== =========== ========= =========== ============ =========== LIABILITIES & EQUITY Homebuilding: Accounts payable and other liabilities........ $ 190,379 $ 427,614 $ -- $ 7,252 $ (20) $ 625,225 Advances from parent/affiliates............... -- 3,103,400 -- 50,424 (3,153,824) -- Notes payable................................. 2,683,246 30,199 -- 40,826 (3,938) 2,750,333 ----------- ----------- --------- ----------- ------------ ----------- 2,873,625 3,561,213 -- 98,502 (3,157,782) 3,375,558 ----------- ----------- --------- ----------- ------------ ----------- Financial services: Accounts payable and other liabilities........ -- -- 10,847 -- -- 10,847 Advances from parent/affiliates............... -- -- 36,760 -- (36,760) -- Notes payable................................. -- -- 204,630 -- -- 204,630 ----------- ----------- --------- ---------- ------------ ----------- -- -- 252,237 -- (36,760) 215,477 ----------- ----------- --------- ---------- ------------ ----------- Total Liabilities 2,873,625 3,561,213 252,237 98,502 (3,194,542) 3,591,035 ----------- ----------- --------- ---------- ------------ ----------- Minority interests............................ -- -- 18 20,352 -- 20,370 ----------- ----------- --------- ---------- ------------ ----------- Common stock.................................. 1,464 45 6 6,155 (6,206) 1,464 Additional capital............................ 1,349,142 352,295 2,885 28,434 (383,614) 1,349,142 Retained earnings............................. 795,680 848,525 64,112 (36,622) (876,015) 795,680 Unearned compensation......................... (6,963) -- -- -- -- (6,963) ----------- ----------- --------- ---------- ------------ ----------- 2,139,323 1,200,865 67,003 (2,033) (1,265,835) 2,139,323 ----------- ----------- --------- ---------- ------------ ----------- Total Liabilities & Equity $ 5,012,948 $ 4,762,078 $ 319,258 $ 116,821 $ (4,460,377) $ 5,750,728 =========== =========== ========= ========== ============ ===========
-11- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) NOTE H - SUMMARIZED FINANCIAL INFORMATION (Continued)
Consolidating Balance Sheet September 30, 2001 Non-Guarantor Subsidiaries -------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total -------------- ------------- ----------- -------- -------------- ------------ (In thousands) ASSETS Homebuilding: Cash and cash equivalents...................... $ -- $ 230,481 $ -- $ 1,824 $ -- $ 232,305 Advances to/investments in affiliates.......... 2,493,783 74,241 -- -- (2,568,024) -- Inventories.................................... 564,593 2,212,933 -- 27,230 (379) 2,804,377 Property and equipment (net)................... 8,114 39,823 -- 5,159 -- 53,096 Earnest money deposits and other assets........ 39,978 140,436 -- 10,793 (9,548) 181,659 Excess of cost over net assets acquired (net).. -- 136,223 -- -- -- 136,223 ------------ ----------- --------- -------- ------------ ----------- 3,106,468 2,834,137 -- 45,006 (2,577,951) 3,407,660 ------------ ----------- --------- -------- ------------ ----------- Financial services: Cash and cash equivalents...................... -- -- 6,975 -- -- 6,975 Mortgage loans held for sale................... -- -- 222,818 -- -- 222,818 Other assets................................... -- -- 14,737 -- -- 14,737 ------------ ----------- --------- -------- ------------ ----------- -- -- 244,530 -- -- 244,530 ------------ ----------- --------- -------- ------------ ----------- Total Assets $ 3,106,468 $ 2,834,137 $ 244,530 $ 45,006 $ (2,577,951) $ 3,652,190 ============ =========== ========= ======== ============ =========== LIABILITIES & EQUITY Homebuilding: Accounts payable and other liabilities......... $ 191,596 $ 304,486 $ -- $ 2,552 $ (58) $ 498,576 Advances from parent/affiliates................ -- 1,944,796 -- 28,367 (1,973,163) -- Notes payable.................................. 1,664,625 37,064 -- 9,489 (9,489) 1,701,689 ------------ ----------- --------- -------- ------------ ----------- 1,856,221 2,286,346 -- 40,408 (1,982,710) 2,200,265 ------------ ----------- --------- -------- ------------ ----------- Financial services: Accounts payable and other liabilities......... -- -- 10,173 -- -- 10,173 Advances from parent/affiliates................ -- -- 13,748 -- (13,748) -- Notes payable.................................. -- -- 182,641 -- -- 182,641 ------------ ----------- --------- -------- ------------ ----------- -- -- 206,562 -- (13,748) 192,814 ------------ ----------- --------- -------- ------------ ----------- Total Liabilities 1,856,221 2,286,346 206,562 40,408 (1,996,458) 2,393,079 ------------ ----------- --------- -------- ------------ ----------- Minority interests............................. -- -- 10 8,854 -- 8,864 ------------ ----------- --------- -------- ------------ ----------- Common stock................................... 769 1 6 6,155 (6,162) 769 Additional capital............................. 704,842 84,612 2,299 10,129 (97,040) 704,842 Retained earnings.............................. 544,636 463,178 35,653 (20,540) (478,291) 544,636 ------------ ----------- --------- -------- ------------ ----------- 1,250,247 547,791 37,958 ( 4,256) (581,493) 1,250,247 ------------ ----------- --------- -------- ------------ ----------- Total Liabilities & Equity $ 3,106,468 $ 2,834,137 $ 244,530 $ 45,006 $ (2,577,951) $ 3,652,190 ============ =========== ========= ======== ============ ===========
-12- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Unaudited) - (Continued) NOTE H - SUMMARIZED FINANCIAL INFORMATION (Continued)
Consolidating Statement of Income Three Months Ended June 30, 2002 Non-Guarantor Subsidiaries ---------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------- -------------- --------- ----------- -------------- ------------ (In thousands) Homebuilding: Revenues: Home sales............................... $ 239,827 $ 1,498,052 $ -- $ 12,310 $ -- $ 1,750,189 Land/lot sales........................... 2,106 27,320 -- -- -- 29,426 --------- ----------- -------- --------- ----------- ----------- 241,933 1,525,372 -- 12,310 -- 1,779,615 --------- ----------- -------- --------- ----------- ----------- Cost of sales: Home sales............................... 184,347 1,221,525 -- 10,237 (59) 1,416,050 Land/lot sales........................... 2,129 23,809 -- -- -- 25,938 --------- ----------- -------- --------- ----------- ----------- 186,476 1,245,334 -- 10,237 (59) 1,441,988 --------- ----------- -------- --------- ----------- ----------- Gross profit: Home sales............................... 55,480 276,527 -- 2,073 59 334,139 Land/lot sales........................... (23) 3,511 -- -- -- 3,488 --------- ----------- -------- --------- ----------- ----------- 55,457 280,038 -- 2,073 59 337,627 Selling, general and administrative expense... 43,885 129,788 -- 1,465 1,882 177,020 Interest expense.............................. 1,018 446 -- 1 -- 1,465 Other expense (income)........................ (158,949) (2,035) -- (132) 164,958 3,842 --------- ----------- -------- --------- ----------- ----------- 169,503 151,839 -- 739 (166,781) 155,300 --------- ----------- -------- --------- ----------- ----------- Financial services: Revenues...................................... -- -- 28,864 -- -- 28,864 Selling, general and administrative expense... -- -- 20,102 -- (1,882) 18,220 Interest expense.............................. -- -- 1,155 -- -- 1,155 Other (income)................................ -- -- (4,714) -- -- (4,714) --------- ----------- -------- --------- ----------- ----------- -- -- 12,321 -- 1,882 14,203 --------- ----------- -------- --------- ----------- ----------- Income before income taxes.................... 169,503 151,839 12,321 739 (164,899) 169,503 Provision for income taxes.................... 63,563 56,939 4,621 276 (61,836) 63,563 --------- ----------- -------- --------- ----------- ----------- Net income.................................... $ 105,940 $ 94,900 $ 7,700 $ 463 $ (103,063) $ 105,940 ========= =========== ======== ========= =========== ===========
-13- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Unaudited) - (Continued) NOTE H - SUMMARIZED FINANCIAL INFORMATION (Continued)
Consolidating Statement of Income Nine Months Ended June 30, 2002 Non-Guarantor Subsidiaries -------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ --------- --------- ------------ ----------- (In thousands) Homebuilding: Revenues: Home sales ....................................... $ 641,378 $3,720,591 $ -- $ 48,315 $ -- $ 4,410,284 Land/lot sales ................................... 3,566 76,933 -- -- -- 80,499 ---------- ---------- --------- --------- ---------- ----------- 644,944 3,797,524 -- 48,315 -- 4,490,783 ---------- ---------- --------- --------- ---------- ----------- Cost of sales: Home sales ....................................... 502,674 3,031,487 -- 39,903 (274) 3,573,790 Land/lot sales ................................... 2,634 67,414 -- -- -- 70,048 ---------- ---------- --------- --------- ---------- ----------- 505,308 3,098,901 -- 39,903 (247) 3,643,838 ---------- ---------- --------- --------- ---------- ----------- Gross profit: Home sales ....................................... 138,704 689,104 -- 8,412 274 836,494 Land/lot sales ................................... 932 9,519 -- -- -- 10,451 ---------- ---------- --------- --------- ---------- ----------- 139,636 698,623 -- 8,412 274 846,945 Selling, general and administrative expense ........ 116,930 318,241 -- 4,772 4,988 444,931 Interest expense ................................... 3,929 1,292 -- 13 (10) 5,224 Other expense (income) ............................. (410,501) (3,909) -- 6,257 412,141 3,988 ---------- ---------- --------- ---------- --------- ----------- 429,278 382,999 -- (2,630) (416,845) 392,802 ---------- ---------- --------- ---------- --------- ----------- Financial services: Revenues ........................................... -- -- 77,651 -- -- 77,651 Selling, general and administrative expense ........ -- -- 53,249 -- (4,988) 48,261 Interest expense ................................... -- -- 3,490 -- -- 3,490 Other (income) ..................................... -- -- (10,576) -- -- (10,576) ---------- ---------- --------- ---------- ---------- ----------- -- -- 31,488 -- 4,988 36,476 ---------- ---------- --------- ---------- ---------- ----------- Income before income taxes ......................... 429,278 382,999 31,488 (2,630) (411,857) 429,278 Provision for income taxes ......................... 160,979 143,624 11,809 (987) (154,446) 160,979 ---------- ---------- --------- ---------- ---------- ----------- Net income ......................................... $ 268,299 $ 239,375 $ 19,679 $ (1,643) $ (257,411) $ 268,299 ========== ========== ========= ========== ========== ===========
-14- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Unaudited) - (Continued) NOTE H - SUMMARIZED FINANCIAL INFORMATION (Continued)
Consolidating Statement of Income Three Months Ended June 30, 2001 Non-Guarantor Subsidiaries --------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ --------- ---------- ------------ ----------- (In thousands) Homebuilding: Revenues: Home sales ..................................... $ 199,313 $ 887,058 $ -- $ 3,871 $ -- $ 1,090,242 Land/lot sales ................................. 6,267 5,457 -- -- -- 11,724 ---------- ---------- --------- --------- ---------- ----------- 205,580 892,515 -- 3,871 -- 1,101,966 ---------- ---------- --------- --------- ---------- ----------- Cost of sales: Home sales ..................................... 154,876 714,376 -- 2,985 (142) 872,095 Land/lot sales ................................. 5,502 5,210 -- -- -- 10,712 ---------- ---------- --------- --------- ---------- ----------- 160,378 719,586 -- 2,985 (142) 882,807 ---------- ---------- --------- --------- ---------- ----------- Gross profit: Home sales ..................................... 44,437 172,682 -- 886 142 218,147 Land/lot sales ................................. 765 247 -- -- -- 1,012 ---------- ---------- --------- --------- ---------- ----------- 45,202 172,929 -- 886 142 219,159 Selling, general and administrative expense ...... 28,294 77,838 -- 1,779 1,174 109,085 Interest expense ................................. 2,043 44 -- 14 (12) 2,089 Other expense (income) ........................... (95,220) (305) -- 6,895 93,670 5,040 ---------- ---------- --------- --------- ---------- ----------- 110,085 95,352 -- (7,802) (94,690) 102,945 ---------- ---------- --------- --------- ---------- ----------- Financial services: Revenues ......................................... -- -- 19,015 -- -- 19,015 Selling, general and administrative expense ...... -- -- 13,714 -- (1,174) 12,540 Interest expense ................................. -- -- 1,575 -- -- 1,575 Other (income) ................................... -- -- (2,240) -- -- (2,240) ---------- ---------- --------- --------- ---------- ----------- -- -- 5,966 -- 1,174 7,140 ---------- ---------- --------- --------- ---------- ----------- Income before income taxes ....................... 110,085 95,352 5,966 (7,802) (93,516) 110,085 Provision for income taxes ....................... 41,282 35,757 2,237 (2,925) (35,069) 41,282 ---------- ---------- --------- --------- ---------- ----------- Net income ....................................... $ 68,803 $ 59,595 $ 3,729 $ (4,877) $ (58,447) $ 68,803 ========== ========== ========= ========= ========== ===========
-15- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Unaudited) - (Continued) NOTE H - SUMMARIZED FINANCIAL INFORMATION (Continued)
Consolidating Statement of Income Nine Months Ended June 30, 2001 Non-Guarantor Subsidiaries -------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ ---------- --------- ------------ ----------- (In thousands) Homebuilding: Revenues: Home sales ..................................... $ 474,816 $2,309,055 $ -- $ 16,023 $ -- $ 2,799,894 Land/lot sales ................................. 22,876 45,157 -- -- -- 68,033 ---------- ---------- --------- --------- ---------- ----------- 497,692 2,354,212 -- 16,023 -- 2,867,927 ---------- ---------- --------- --------- ---------- ----------- Cost of sales: Home sales ..................................... 377,190 1,856,010 -- 11,953 (399) 2,244,754 Land/lot sales ................................. 17,776 37,015 -- -- -- 54,791 ---------- ---------- --------- --------- ---------- ----------- 394,966 1,893,025 -- 11,953 (399) 2,299,545 ---------- ---------- --------- --------- ---------- ----------- Gross profit: Home sales ..................................... 97,626 453,045 -- 4,070 399 555,140 Land/lot sales ................................. 5,100 8,142 -- -- -- 13,242 ---------- ---------- --------- --------- ---------- ----------- 102,726 461,187 -- 4,070 399 568,382 Selling, general and administrative expense ...... 70,449 215,610 -- 6,100 2,925 295,084 Interest expense ................................. 6,478 134 -- 196 (190) 6,618 Other expense (income) ........................... (243,176) (1,517) -- 10,456 248,275 14,038 ---------- ---------- --------- --------- ---------- ----------- 268,975 246,960 -- (12,682) (250,611) 252,642 ---------- ---------- --------- --------- ---------- ----------- Financial services: Revenues ......................................... -- -- 47,553 -- -- 47,553 Selling, general and administrative expense ...... -- -- 35,432 -- (2,925) 32,507 Interest expense ................................. -- -- 3,582 -- -- 3,582 Other (income) ................................... -- -- (4,869) -- -- (4,869) ---------- ---------- --------- --------- ---------- ----------- -- -- 13,408 -- 2,925 16,333 ---------- ---------- --------- --------- ---------- ----------- Income before income taxes ....................... 268,975 246,960 13,408 (12,682) (247,686) 268,975 Provision for income taxes ....................... 100,866 92,610 5,028 (4,755) (92,883) 100,866 ---------- ---------- --------- --------- ---------- ----------- Income before cumulative effect of change in accounting principle ......................... 168,109 154,350 8,380 (7,927) (154,803) 168,109 Cumulative effect of change in accounting principle, net of income taxes .................. 2,136 -- -- -- -- 2,136 ---------- ---------- --------- --------- ---------- ----------- Net income ....................................... $ 170,245 $ 154,350 $ 8,380 $ (7,927) $ (154,803) $ 170,245 ========== ========== ========= ========= ========== ===========
-16- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Unaudited) - (Continued) NOTE H - SUMMARIZED FINANCIAL INFORMATION (Continued)
Consolidating Statement of Cash Flows Nine Months Ended June 30, 2002 Non-Guarantor Subsidiaries -------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ ---------- --------- ------------ --------- (In thousands) OPERATING ACTIVITIES Net income ........................................... $ 268,299 $ 239,375 $ 19,679 $ (1,643) $(257,411) $ 268,299 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ....................... 3,065 14,075 1,102 379 -- 18,621 Amortization of debt premiums and fees .............. 5,991 -- -- -- -- 5,991 Changes in operating assets and liabilities: Increase in inventories ............................ (115,340) (150,207) -- (46,220) (6) (311,773) Increase in earnest money deposits and other assets ......................... (19,419) (8,916) (2,068) (2,281) (5,590) (38,274) Increase in mortgage loans held for sale ........... -- -- (65,660) -- -- (65,660) Increase (decrease) in accounts payable and other liabilities ............................. (30,740) (96,768) 682 16,198 38 (110,590) ---------- ---------- --------- -------- --------- ---------- Net cash provided by (used in) operating activities .......................................... 111,856 (2,441) (46,265) (33,567) (262,969) (233,386) ---------- ---------- --------- -------- --------- ---------- INVESTING ACTIVITIES Net (purchases) dispositions of property and equipment ........................................... (4,014) (21,317) (1,908) (916) -- (28,155) Distributions from venture capital entities .......... -- -- -- 250 -- 250 Net cash paid for acquisitions ....................... -- (152,662) -- -- -- (152,662) ---------- ---------- --------- -------- --------- ---------- Net cash provided by (used in) investing activities .......................................... (4,014) (173,979) (1,908) (666) -- (180,567) ---------- ---------- --------- -------- --------- ---------- FINANCING ACTIVITIES Net change in notes payable .......................... 478,331 (266,436) 21,989 (3,897) 5,551 235,538 Increase (decrease) in intercompany payables ......... (581,235) 469,448 32,378 46,856 32,553 -- Proceeds from issuance of common stock associated with certain employee benefit plans ...... 12,380 -- -- -- -- 12,380 Cash dividends/distributions paid .................... (17,318) (224,865) -- -- 224,865 (17,318) ---------- ---------- --------- -------- --------- ---------- Net cash provided by (used in) financing activities .......................................... (107,842) (21,853) 54,367 42,959 262,969 230,600 ---------- ---------- --------- -------- --------- ---------- Increase (decrease) in cash .......................... -- (198,273) 6,194 8,726 -- (183,353) Cash at beginning of period .......................... -- 230,481 6,975 1,824 -- 239,280 ---------- ---------- --------- -------- --------- ---------- Cash at end of period ................................ $ -- $ 32,208 $ 13,169 $ 10,550 $ -- $ 55,927 ========== ========== ========= ======== ========= ==========
-17- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENT (Unaudited) - (Continued) NOTE H - SUMMARIZED FINANCIAL INFORMATION (Continued)
Consolidating Statement of Cash Flows Nine Months Ended June 30, 2001 Non-Guarantor Subsidiaries -------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ --------- --------- ------------ --------- (In thousands) OPERATING ACTIVITIES Net income ........................................... $ 170,245 $ 154,350 $ 8,380 $ (7,927) $(154,803) $ 170,245 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ....................... 1,418 15,711 955 379 -- 18,463 Amortization of debt premiums and fees .............. 2,645 -- -- -- -- 2,645 Changes in operating assets and liabilities: (Increase) decrease in inventories ................. (141,521) (269,505) -- (5,683) 70 (416,639) (Increase) decrease in earnest money deposits and other assets ......................... (5,522) (48,394) (5,555) 5,323 20,499 (33,649) Increase in mortgage loans held for sale ........... -- -- (50,616) -- -- (50,616) Increase (decrease) in accounts payable and other liabilities ............................. 15,490 (11,378) 569 (369) 22,296 26,608 ---------- ---------- --------- -------- --------- ---------- Net cash provided by (used in) operating activities ......................................... 42,755 (159,216) (46,267) (8,277) (111,938) (282,943) ---------- ---------- --------- -------- --------- ---------- INVESTING ACTIVITIES Net purchases of property and equipment .............. (7,213) (12,333) (1,860) (401) -- (21,807) Net investments in venture capital entities .......... -- -- -- (1,970) -- (1,970) Net cash paid for acquisitions ....................... -- (49,009) -- -- -- (49,009) ---------- ---------- --------- -------- --------- ---------- Net cash used in investing activities ................ (7,213) (61,342) (1,860) (2,371) -- (72,786) ---------- ---------- --------- -------- --------- ---------- FINANCING ACTIVITIES Net change in notes payable .......................... 357,174 (48,899) 56,420 356 (357) 364,694 Increase (decrease) in intercompany payables ......... (413,026) 449,761 6,444 10,526 (53,705) -- Proceeds from issuance of common stock associated with certain employee benefit plans ...... 9,798 -- -- -- -- 9,798 Cash dividends/distributions paid .................... (9,885) (161,500) (4,500) -- 166,000 (9,885) ---------- ---------- --------- -------- --------- ---------- Net cash provided by (used in) financing activities .......................................... (55,939) 239,362 58,364 10,882 111,938 364,607 ---------- ---------- --------- -------- --------- ---------- Increase (decrease) in cash .......................... (20,397) 18,804 10,237 234 -- 8,878 Cash at beginning of period .......................... 20,397 40,349 10,727 1,052 -- 72,525 ---------- ---------- --------- -------- --------- ---------- Cash at end of period ................................ $ -- $ 59,153 $ 20,964 $ 1,286 $ -- $ 81,403 ========== ========== ========= ======== ========= ==========
-18- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - CONSOLIDATED D. R. Horton, Inc. and subsidiaries (the "Company") conduct homebuilding activities in 20 states and 44 markets through its 50 homebuilding divisions. Through its financial services segment, the Company also provides mortgage banking and title agency services in many of these same markets. Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Consolidated revenues for the three months ended June 30, 2002, increased 61.3%, to $1,808.5 million, from $1,121.0 million for the comparable period of 2001, due to increases in both homebuilding and financial services revenues. Approximately $447 million of the increase in homebuilding revenues was attributable to revenues generated by Fortress- Florida, acquired in May 2001, Emerald Builders, acquired in July 2001, and Schuler Homes, acquired in February 2002. Income before income taxes for the three months ended June 30, 2002, increased 54.0%, to $169.5 million, from $110.1 million for the comparable period of 2001. As a percentage of revenues, income before income taxes for the three months ended June 30, 2002, decreased 0.4 percentage points, to 9.4%, from 9.8% for the comparable period of 2001, primarily due to the effects of purchase accounting adjustments related to the Schuler acquisition. The consolidated provision for income taxes increased 54.0%, to $63.6 million for the three months ended June 30, 2002, from $41.3 million for the same period of 2001, due to the corresponding increase in income before income taxes. The effective income tax rate was 37.5% for both periods. Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001 Consolidated revenues for the nine months ended June 30, 2002, increased 56.7%, to $4,568.4 million, from $2,915.5 million for the comparable period of 2001, primarily due to increases in home sales revenues. Approximately $1,069 million of the increase in homebuilding revenues was attributable to revenues generated by Fortress-Florida, Emerald Builders and Schuler. Income before income taxes for the nine months ended June 30, 2002, increased 59.6%, to $429.3 million, from $269.0 million for the comparable period of 2001. As a percentage of revenues, income before income taxes for the nine months ended June 30, 2002, increased 0.2 percentage points, to 9.4%, from 9.2% for the comparable period of 2001, primarily due to the increase in financial services pre-tax income as a percentage of consolidated revenues. The consolidated provision for income taxes increased 59.6%, to $161.0 million for the nine months ended June 30, 2002, from $100.9 million for the same period of 2001, due to the corresponding increase in income before income taxes. The effective income tax rate was 37.5% for both periods. The cumulative effect of a change in accounting principle was an increase in income of $2.1 million, net of income taxes of $1.3 million, for the nine months ended June 30, 2001. This accounting change is the result of the Company's October 1, 2000 adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires the Company to recognize its interest rate swap agreements in the consolidated balance sheet at fair value. -19- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - HOMEBUILDING The following tables set forth certain operating and financial data for the Company's homebuilding activities:
Percentages of Homebuilding Revenues ----------------------------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------------ ------------------------ 2002 2001 2002 2001 ------ ------ ------ ----- Costs and expenses: Cost of sales................................. 81.0% 80.1% 81.2% 80.2% Selling, general and administrative expense... 9.9 9.9 9.9 10.3 Interest expense.............................. 0.1 0.2 0.1 0.2 ------ ------ ------ ----- Total costs and expenses........................... 91.0 90.2 91.2 90.7 Other (income) expense............................. 0.3 0.5 0.1 0.5 ------ ------ ------ ----- Income before income taxes......................... 8.7% 9.3% 8.7% 8.8% ====== ====== ====== =====
Homes Closed Three Months Ended June 30, Nine Months Ended June 30, -------------------------------------- ------------------------------------------- 2002 2001 2002 2001 ------------------ ------------------ ------------------- --------------------- Homes Homes Homes Homes Closed Revenues Closed Revenues Closed Revenues Closed Revenues ------- -------- ------- -------- ------- --------- --------- --------- ($'s in millions) ($'s in millions) Mid-Atlantic ............... 788 $ 167.3 725 $ 158.8 2,016 $ 431.0 1,950 $ 432.3 Midwest .................... 472 119.4 437 105.2 1,323 333.5 1,311 313.6 Southeast .................. 838 139.1 818 143.6 2,516 429.7 1,976 348.3 Southwest .................. 3,062 516.4 2,277 378.9 7,971 1,352.9 5,955 981.7 West ....................... 2,717 808.0 1,210 303.7 6,381 1,863.2 2,895 724.0 ------- -------- ------- -------- ------- --------- --------- --------- 7,877 $1,750.2 5,467 $1,090.2 20,207 $ 4,410.3 14,087 $ 2,799.9 ======= ======== ======= ======== ======= ========= ========= =========
Net New Sales Contracts Three Months Ended June 30, Nine Months Ended June 30, -------------------------------------- ------------------------------------------- 2002 2001 2002 2001 ------------------ ----------------- ------------------- --------------------- Homes Homes Homes Homes Sold $ Sold $ Sold $ Sold $ ------- -------- ------- -------- ------- --------- --------- --------- ($'s in millions) ($'s in millions) Mid-Atlantic ............... 960 $ 201.3 674 $ 146.7 2,471 $ 512.0 2,084 $ 459.4 Midwest .................... 543 126.8 520 139.2 1,394 341.1 1,441 374.8 Southeast .................. 976 161.9 868 152.9 2,680 438.6 2,266 404.8 Southwest .................. 3,520 590.5 2,453 411.0 9,537 1,583.7 6,927 1,142.2 West ....................... 3,066 954.1 1,499 364.7 6,744 2,014.1 4,237 1,089.4 ------- -------- ------- -------- ------- --------- --------- --------- 9,065 $2,034.6 6,014 $1,214.5 22,826 $ 4,889.5 16,955 $ 3,470.6 ======= ======== ======= ======== ======= ========= ========= =========
Sales Contract Backlog June 30, 2002 June 30, 2001 ---------------------- -------------------- Homes $ Homes $ -------- --------- ------- --------- ($'s in millions) Mid-Atlantic....................................... 1,277 $ 271.3 957 $ 234.7 Midwest............................................ 989 270.4 1,030 286.6 Southeast.......................................... 1,628 262.4 1,629 288.2 Southwest.......................................... 5,868 984.4 4,161 711.9 West............................................... 3,824 1,159.7 2,831 740.0 -------- -------- ------- -------- 13,586 $2,948.2 10,608 $2,261.4 ======== ======== ======= ========
-20- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's market regions consist of the following markets: Mid-Atlantic Charleston, Charlotte, Columbia, Greensboro, Greenville, Hilton Head, Maryland-D.C., Myrtle Beach, New Jersey, Raleigh/Durham and Virginia-D.C. Midwest Chicago and Minneapolis/St. Paul Southeast Atlanta, Birmingham, Fort Myers/Naples, Jacksonville, Miami/ West Palm Beach and Orlando Southwest Albuquerque, Austin, Dallas, Fort Worth, Houston, Killeen, Phoenix, San Antonio and Tucson West Colorado Springs, Denver, Fort Collins, Hawaii, Inland Empire, Las Vegas, Los Angeles, Oakland, Orange County, Portland, Sacramento, San Francisco, Salt Lake City, San Diego, Seattle/Tacoma and Ventura County Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Revenues from homebuilding activities increased 61.5%, to $1,779.6 million (7,877 homes closed) for the three months ended June 30, 2002, from $1,102.0 million (5,467 homes closed) for the comparable period of 2001. Revenues from home sales increased in four of the Company's five market regions, with percentage increases ranging from 5.4% in the Mid-Atlantic region to 166.1% in the West. Home sales revenues declined 3.1% in the Southeast region. The increases in total homebuilding revenues and revenues from home sales were due to strong housing demand throughout the majority of the Company's markets, the acquisitions of Fortress-Florida and Emerald Builders during fiscal 2001, and the merger with Schuler in February 2002. In divisions where the Company operated throughout both periods, home sales revenues increased 20.6%, to $1,310.2 million (6,295 homes closed) for the three months ended June 30, 2002, from $1,086.1 million (5,452 homes closed) for the comparable period of 2001. The average selling price of homes closed during the three months ended June 30, 2002 was $222,200, up 11.4% from $199,400 for the same period in 2001. The increase in average selling price was due primarily to the Schuler acquisition. Schuler's operations are concentrated on the West Coast and in Hawaii, where average home selling prices are significantly higher than in the rest of the United States. The value of net new sales contracts increased 67.5% to $2,034.6 million (9,065 homes) for the three months ended June 30, 2002, from $1,214.5 million (6,014 homes) for the same period of 2001. The number of net new sales contracts increased in all of the Company's five market regions, with percentage increases ranging from 4.4% in the Midwest region to 104.5% in the West region. In divisions where the Company operated throughout both periods, the value of net new sales contracts increased 22.2%, to $1,481.8 million (7,047 homes) for the three months ended June 30, 2002, from $1,213.0 million (6,009 homes) for the comparable period of 2001. The average price of a net new sales contract in the three months ended June 30, 2002 was $224,500, up 11.2% from the $201,900 average in the comparable period of 2001. The increase in average selling price was primarily due to the effect of the Schuler acquisition. At June 30, 2002, the value of the Company's backlog of sales contracts was $2,948.2 million (13,586 homes), up 30.4% from $2,261.4 million (10,608 homes) at June 30, 2001. In divisions where the Company operated throughout both periods, the value of the Company's backlog of sales contracts increased 3.0%, to $2,328.4 million (11,171 homes), from $2,261.1 million (10,606 homes) at June 30, 2001. The average sales price of homes in sales backlog was $217,000 at June 30, 2002, up 1.8% from the average price of $213,200 at June 30, 2001. Cost of sales increased by 63.3%, to $1,442.0 million for the three months ended June 30, 2002, from $882.8 million for the comparable period of 2001. The increase in cost of sales was primarily attributable to the increase in revenues. Cost of home sales as a percentage of home sales revenues increased 0.9 percentage points, to 80.9% for the three months ended June 30, 2002, from 80.0% for the comparable period of 2001, due primarily to $14.0 million in charges related to the Schuler acquisition, the majority of which was a result of recording Schuler's inventory at fair value on the acquisition date. The increase in cost of home sales as a percentage of revenues was also the cause of the 0.9 percentage point increase in total homebuilding cost of sales as a percentage of total homebuilding revenues, to 81.0% in the three months ended June 30, 2002, from 80.1% in the comparable period of 2001. -21- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 62.3%, to $177.0 million in the three months ended June 30, 2002, from $109.1 million in the comparable period of 2001. As a percentage of homebuilding revenues, SG&A expenses remained unchanged at 9.9% for the three months ended June 30, 2002 and 2001. Interest expense associated with homebuilding activities decreased to $1.5 million in the three months ended June 30, 2002, from $2.1 million in the comparable period of 2001. As a percentage of homebuilding revenues, homebuilding interest expense was 0.1% for the three months ended June 30, 2002, a decline of 0.1 percentage points from 0.2% in the comparable period of 2001. During both periods, the Company expensed the portion of incurred interest and other financing costs which could not be charged to inventory. The Company follows a policy of capitalizing interest only on inventory under construction or development. Capitalized interest and other financing costs are included in cost of sales at the time of home closings. Other expense associated with homebuilding activities was $3.8 million in the three months ended June 30, 2002, compared to $5.0 million in the comparable period of 2001. The expense in the three months ended June 30, 2002 is primarily due to a decrease in the fair value of the Company's interest rate swap agreements during the quarter. During the year-ago quarter, the expense was primarily due to write-downs to estimated fair value of the carrying amounts of the Company's investments in venture capital entities, offset in part by an increase in the fair value of the Company's interest rate swap agreements during the quarter. Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001 Revenues from homebuilding activities increased 56.6%, to $4,490.8 million (20,207 homes closed) for the nine months ended June 30, 2002, from $2,867.9 million (14,087 homes closed) for the comparable period of 2001. Revenues from home sales increased in four of the Company's five market regions, with percentage increases ranging from 6.3% in the Midwest region to 157.3% in the West region. Revenues from homebuilding activities declined 0.3% in the Mid-Atlantic region. The increases in total homebuilding revenues and revenues from home sales were due to strong housing demand throughout the majority of the Company's markets, and the acquisitions of Fortress-Florida, Emerald Builders and Schuler. In divisions where the Company operated throughout both periods, home sales revenues increased 21.1% to $3,378.5 million (16,368 homes closed) for the nine months ended June 30, 2002, from $2,790.0 million (14,048 homes closed) for the comparable period of 2001. The average selling price of homes closed during the nine months ended June 30, 2002 was $218,300, up 9.8% from $198,800 for the same period in 2001. The increase in average selling price was primarily due to the Schuler acquisition. Schuler's operations are concentrated on the West Coast and in Hawaii, where average home selling prices are significantly higher than in the rest of the United States. The value of net new sales contracts increased 40.9%, to $4,889.5 million (22,826 homes) for the nine months ended June 30, 2002, from $3,470.6 million (16,955 homes) for the same period of 2001. The value of net new sales contracts increased in four of the Company's five market regions, with percentage increases ranging from 8.3% in the Southeast region to 84.9% in the West region. The value of net new sales contracts declined 9.0% in the Midwest region. In divisions where the Company operated throughout both periods, the value of net new sales contracts increased 10.8%, to $3,838.0 million (18,585 homes) for the nine months ended June 30, 2002, from $3,464.3 million (16,928 homes) for the comparable period of 2001. The average price of a net new sales contract in the nine months ended June 30, 2002 was $214,200, up 4.6% over the $204,700 average in the nine months ended June 30, 2001. Cost of sales increased 58.5%, to $3,643.8 million for the nine months ended June 30, 2002, from $2,299.5 million for the comparable period of 2001. The increase in cost of sales was primarily attributable to the increase in revenues. Cost of home sales as a percentage of home sales revenues increased 0.8 percentage points, to 81.0% for the nine months ended June 30, 2002, from 80.2% for the comparable period of 2001, due primarily to $47.6 million in charges related to the Schuler acquisition, the majority of which was a result of recording Schuler's inventory at fair value on the acquisition date. The increase in cost of home sales as a percentage of revenues was the primary -22- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS cause of the 1.0 percentage point increase in total homebuilding cost of sales as a percentage of total homebuilding revenues, to 81.2% in the nine months ended June 30, 2002, from 80.2% in the comparable period of 2001. Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 50.8%, to $444.9 million in the nine months ended June 30, 2002, from $295.1 million in the comparable period of 2001. As a percentage of homebuilding revenues, SG&A expenses decreased to 9.9% for the nine months ended June 30, 2002, from 10.3% for the comparable period of 2001, due primarily to the fixed costs leverage achieved by the large amount of home closings revenues generated by the Schuler operating divisions between the Schuler acquisition date, February 21, 2002, and the end of the quarter ended March 31, 2002. Interest expense associated with homebuilding activities decreased to $5.2 million in the nine months ended June 30, 2002, from $6.6 million in the comparable period of 2001. As a percentage of homebuilding revenues, homebuilding interest expense decreased 0.1 percentage points to 0.1% for the nine months ended June 30, 2002, from 0.2% for the comparable period of 2001. During both periods, the Company expensed the portion of incurred interest and other financing costs which could not be charged to inventory. The Company follows a policy of capitalizing interest only on inventory under construction or development. Capitalized interest and other financing costs are included in cost of sales at the time of home closings. Other expense associated with homebuilding activities was $4.0 million in the nine months ended June 30, 2002, compared to $14.0 million in the comparable period of 2001. The expense in 2002 is primarily due to the change in fair value of the Company's interest rate swap agreements during the period. The expense in 2001 is primarily due to write-downs to estimated fair value of the carrying amounts of the Company's investments in start-up and emerging growth companies and the decline in the fair value of the Company's interest rate swap agreements during the period. -23- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - FINANCIAL SERVICES The following table summarizes financial and other information for the Company's financial services operations:
Three Months Ended Nine Months Ended June 30, June 30, ----------------------- --------------------- 2002 2001 2002 2001 -------- -------- -------- -------- ($ in thousands) Number of loans originated.................................... 5,134 3,658 13,581 8,733 -------- -------- -------- -------- Loan origination fees......................................... $ 5,884 $ 3,969 $ 14,702 $ 9,695 Sale of servicing rights and gains from sale of mortgages..... 13,485 8,326 37,785 21,512 Other revenues................................................ 2,144 2,130 6,777 4,952 -------- -------- -------- -------- Total mortgage banking revenues............................... 21,513 14,425 59,264 36,159 Title policy premiums, net.................................... 7,351 4,590 18,387 11,394 -------- -------- -------- -------- Total revenues................................................ 28,864 19,015 77,651 47,553 Selling, general and administrative expense................... 18,220 12,540 48,261 32,507 Interest expense.............................................. 1,155 1,575 3,490 3,582 Interest/other (income)....................................... (4,714) (2,240) (10,576) (4,869) -------- -------- -------- -------- Income before income taxes.................................... $ 14,203 $ 7,140 $ 36,476 $ 16,333 ======== ======== ======== ========
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001 Revenues from the financial services segment increased 51.8%, to $28.9 million in the three months ended June 30, 2002, from $19.0 million in the comparable period of 2001. The increase in financial services revenues was due to the rapid expansion of the Company's mortgage loan and title services provided to customers of the Company's homebuilding segment and the effects of the Emerald Builders acquisition. Selling, general and administrative expenses associated with financial services increased 45.3%, to $18.2 million in the three months ended June 30, 2002, from $12.5 million in the comparable period of 2001. As a percentage of financial services revenues, selling, general and administrative expenses decreased by 2.8 percentage points, to 63.1% in the three months ended June 30, 2002, from 65.9% in the comparable period in 2001, due primarily to the increase in revenues absorbing fixed costs. Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001 Revenues from the financial services segment increased 63.3%, to $77.7 million in the nine months ended June 30, 2002, from $47.6 million in the comparable period of 2001. The increase in financial services revenues was due to the rapid expansion of the Company's mortgage loan and title services provided to customers of the Company's homebuilding segment and the effects of the Fortress-Florida and Emerald Builders acquisitions. Selling, general and administrative expenses associated with financial services increased 48.5%, to $48.3 million in the nine months ended June 30, 2002, from $32.5 million in the comparable period of 2001. As a percentage of financial services revenues, general and administrative expenses decreased by 6.2 percentage points, to 62.2% in the nine months ended June 30, 2002, from 68.4% in the comparable period in 2001, due primarily to the increase in revenues absorbing fixed costs. -24- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002, the Company had available cash and cash equivalents of $55.9 million. Inventories (including finished homes, construction in progress, and developed residential lots and other land) at June 30, 2002, had increased by $1,577.3 million since September 30, 2001, due to the acquisition of Schuler, a general increase in business activity and the expansion of operations in the Company's market areas. Net of homebuilding cash, the Company's ratio of homebuilding notes payable to total capital at June 30, 2002, increased 1.9 percentage points, to 55.9% from 54.0% at September 30, 2001. The stockholders' equity to total assets ratio increased 3.0 percentage points, to 37.2% at June 30, 2002, from 34.2% at September 30, 2001. At June 30, 2002, the Company has an $805 million, unsecured revolving credit facility, including $125 million which may be used for letters of credit. The facility matures in January 2006, and is guaranteed by substantially all of the Company's wholly-owned subsidiaries other than its financial services subsidiaries. The revolving credit facility and the indentures related to the Company's Senior and Senior Subordinated Notes contain covenants which, taken together, limit amounts of debt that may be incurred, investments in inventory, stock repurchases, cash dividends and other restricted payments, asset dispositions and creation of liens, and require certain levels of tangible net worth. At June 30, 2002, these covenants limit the additional homebuilding debt the Company could incur to $1,251.3 million, which included $464.9 million available under the revolving credit facility. The Company has entered into multi-year interest rate swap agreements, aggregating a notional amount of $200 million, that fix the interest rate on a portion of the variable rate revolving credit facility. In the normal course of business, the Company provides standby letters of credit and performance bonds, issued by third parties, to secure performance under various contracts. At June 30, 2002, outstanding standby letters of credit and performance bonds, the majority of which mature in less than one year, were $122.5 million and $632.1 million, respectively. At June 30, 2002, the financial services segment had mortgage loans held for sale of $288.5 million and loan commitments for $266.3 million at fixed rates. The Company hedges the interest rate market risk on these mortgage loans held for sale and loan commitments through the use of best-efforts whole loan delivery commitments, mandatory forward commitments to sell mortgage-backed securities and the purchase of options on financial instruments. The financial services segment has a $205 million, one-year bank warehouse facility that matures on August 13, 2002, and is secured by mortgage loans held for sale. The warehouse facility is not guaranteed by the parent company. As of June 30, 2002, $204.6 million had been drawn under this facility. Substantially all of the mortgage company activities have been financed under the warehouse facility. To supplement the warehouse facility, a new $100 million credit facility for financial services was finalized in July 2002. The new facility will mature on July 9, 2003, and is also secured by mortgage loans held for sale. On February 21, 2002, Schuler Homes, Inc. merged with and into D.R. Horton, Inc., with D.R. Horton the surviving corporation. At the time of the merger, Schuler's assets amounted to $1,364.4 million, mostly inventory. The total merger consideration consisted of the issuance of 20,079,532 shares of D.R. Horton, Inc. common stock, valued at $30.93 per share (the average closing price of D.R. Horton common stock for a period of ten trading days from December 4, 2001 to December 17, 2001); the payment of $168.7 million in cash; the assumption of $802.2 million of Schuler's debt, $238.2 million of which was paid at closing; the assumption of trade payables and other liabilities amounting to $209.1 million; and the assumption of $10.8 million of obligations to the Schuler entities' minority interest holders. Also, D.R. Horton issued options to purchase approximately 527,000 shares of D.R. Horton common stock to Schuler employees to replace outstanding Schuler stock options. The fair value of the options issued was $10.4 million and was recorded as additional capital. The fair value of the unvested options issued was $7.8 million and was recorded as unearned compensation. The unearned compensation is being amortized over the remaining vesting period of the stock options. The fair value of the options was estimated using the Black-Scholes option pricing model. The Schuler merger was accounted for as a purchase. Accordingly, Schuler's assets and liabilities, including identifiable intangibles, were initially recorded at their fair values as of the date of the merger. The excess of the total consideration paid over the net assets' fair value (approximately $447.5 million) was recorded as an addition to goodwill. -25- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's rapid growth and acquisition strategy require significant amounts of cash. It is anticipated that future home construction, lot and land purchases and acquisitions will be funded through internally generated funds, existing and future credit facilities and the issuance of new debt or equity securities. At June 30, 2002, under currently effective shelf registration statements, the Company has approximately 15 million shares issuable to effect, in whole or in part, possible future acquisitions and the capacity to issue new debt or equity securities amounting to $1.0 billion. In the future, the Company intends to continue to maintain effective shelf registration statements that will facilitate access to the capital markets. During the three months ended June 30, 2002, the Company's Board of Directors declared a quarterly cash dividend of $0.06 per common share, which was paid on May 21, 2002 to stockholders of record on May 14, 2002. On March 4, 2002, the Company's Board of Directors declared a three-for-two stock split (effected as a 50% stock dividend) which was paid on April 9, 2002, to stockholders of record on March 26, 2002. Cash was paid in lieu of fractional shares. On July 24, 2002, the Company's Board of Directors declared a cash dividend of $0.06 per common share, payable on August 23, 2002 to stockholders of record on August 9, 2002. On April 11, 2002, the Company issued $250 million of 8.5% Senior notes due 2012. The net proceeds from this offering were used to repay borrowings under the unsecured revolving credit facility. These notes are guaranteed by substantially all of the Company's wholly-owned subsidiaries other than its financial services subsidiaries. In 1999 and 2000, the Company entered into three separate limited partnership agreements with the purpose of investing in start-up and emerging growth companies whose technology and business plans have the potential of permitting the Company to leverage its size, expertise and customer base in the homebuilding industry. The Company originally authorized investment of up to $125 million in such companies over a four-year period. In January 2001, the original $125 million authorization was reduced to the $31.3 million that had been invested in such companies as of that date. The investments are concentrated in e-commerce businesses that serve the homebuilding, real estate and financial service industries, as well as in businesses whose strategic focus allows for the diversification of the Company's operations. As of June 30, 2002, the carrying value of the Company's investments in such companies, reported in homebuilding other assets, amounted to $5.0 million. Except for ordinary expenditures for the construction of homes and the acquisition of land and lots for development and sale of homes, at June 30, 2002, the Company had no material commitments for capital expenditures. -26- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT Certain statements contained in this report, as well as in other materials we have filed or will file with the Securities and Exchange Commission, statements made by us in periodic press releases and oral statements made by Company officials to analysts, stockholders and the press 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. Any or all of the forward-looking statements included in this report and in any other reports or public statements of the Company are subject to risks, uncertainties and other factors, many of which are outside of the Company's control, that could cause actual results to differ materially from the results discussed in and anticipated by the forward-looking statements. The following risks and uncertainties relevant to our business include factors we believe could adversely affect us. Other factors beyond those listed could also adversely affect us. - Changes in general economic, real estate and other business conditions - Changes in interest rates and the availability of mortgage financing - Governmental regulations and environmental matters - The Company's substantial leverage - Competitive conditions within the homebuilding industry - The availability of capital - The Company's ability to effect its growth strategies successfully We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 1 and 8-K should be consulted. Additional information about issues that could lead to material changes in performance is contained in the Company's annual report on Form 10-K, which is filed with the Securities and Exchange Commission. -27- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to interest rate risk on its long term debt. The Company monitors its exposure to changes in interest rates and utilizes both fixed and variable rate debt. For fixed rate debt, changes in interest rates generally affect the value of the debt instrument, but not the Company's earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the fair value of the debt instrument, but may affect the Company's future earnings and cash flows. The Company has mitigated its exposure to changes in interest rates on its variable rate bank debt by entering into interest rate swap agreements to obtain a fixed interest rate for a portion of the variable rate borrowings. The Company generally does not have an obligation to prepay fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value would not have a significant impact on the Company's fixed-rate debt until such time as the Company is required to refinance, repurchase or repay such debt. The Company's interest rate swaps were not designated as hedges under Statement of Financial Accounting Standards No. 133 when it was adopted on October 1, 2000. Since their maturities and other terms did not match the related debt, they were determined to be ineffective hedges (as defined by the Statement). Therefore, the Company is exposed to market risk associated with changes in the fair values of the swaps, since any such changes must be reflected in the Company's income statements. The Company's financial services segment is exposed to interest rate risk associated with its mortgage loan production activities. Mortgage loans are funded at fixed interest rates before they are committed to specific investors and interest rate lock commitments (IRLC's) are extended to borrowers who have applied for loan funding and who meet certain defined credit and underwriting criteria. Forward commitments to sell mortgage-backed securities are designated as fair value hedges of the risk of changes in the overall fair value of funded loans. The effectiveness of the fair value hedge is continuously monitored and any ineffectiveness, which for the three and nine months ended June 30, 2002, was not significant, is recognized in current earnings. The IRLC's are classified and accounted for as non-designated derivative instruments with gains and losses recorded in current earnings. Interest rate risk associated with IRLCs is managed through the use of best-efforts whole loan delivery commitments, forward commitments to sell mortgage-backed securities and the purchase of options on financial instruments. These instruments are considered non-designated derivatives and are accounted for at fair market value with gains and losses recorded in current earnings. At June 30, 2002, total forward commitments to mitigate interest rate risk related to funded loans and IRLC's were approximately $195.5 million, the duration of which was less than nine months. The following table shows, as of June 30, 2002, the Company's long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value. In addition, the table shows the notional amounts, weighted average interest rates and estimated fair market value of the Company's interest rate swaps.
Three Months Fair Ended market Sep. 30, Year ended September 30, value at --------- ------------------------------------------------------------- 2002 2003 2004 2005 2006 Thereafter Total 06/30/02 ------ ------ ------ ------- ------- ---------- -------- --------- ($'s in millions) Debt: Fixed rate............. $ 19.2 $ 20.0 $166.9 $210.7 $150.0 $2,047.1 $2,613.9 $2,543.9 Average interest rate.. 7.96% 6.62% 8.52% 10.69% 10.19% 8.15% 8.50% -- Variable rate.......... $210.8 $ 19.6 $ 8.7 -- $261.1 -- $500.2 $500.2 Average interest rate.. 2.92% 5.75% 3.83% -- 3.73% -- 3.47% -- Interest Rate Swaps: Variable to fixed...... $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 -- ($11.2) Average pay rate....... 5.10% 5.10% 5.10% 5.10% 5.10% 5.07% -- -- Average receive rate... 90-day LIBOR
-28- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 3.1 Amended and Restated Certificate of Incorporation, as amended, of the Company is incorporated herein by reference from Exhibit 4.2 to the Company's registration statement (No. 333-76175) on Form S-3, filed April 13, 1999. 3.2 Amended and Restated Bylaws of the Company are incorporated herein by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998. 10.1* D.R. Horton Deferred Compensation Plan, effective as of June 15, 2002. 10.2* D.R. Horton, Inc. 1991 Stock Incentive Plan, as amended and restated. 10.3* Amendment No. 1 to the D.R. Horton, Inc. 1991 Stock Incentive Plan, as amended and restated. ------------ *Filed herewith. (b) Reports on Form 8-K. 1. On April 3, 2002, the Company filed a Current Report on Form 8-K (Item 5), which included its press release of that date announcing the Company planned to sell approximately $250 million of senior notes to qualified institutional buyers in reliance upon Rule 144A. 2. On May 30, 2002, the Company filed a Current Report on Form 8-K (Item 5), which provided unaudited pro forma combined condensed statements of income of D.R. Horton, Inc. and Schuler Homes, Inc. for the six months ended March 31, 2002 and the year ended September 30, 2002. -29- SIGNATURES 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 thereunto duly authorized. D.R. HORTON, INC. Date: August 13, 2002 By /s/ Samuel R. Fuller ------------------------------------------ Samuel R. Fuller, on behalf of D.R. Horton, Inc. and as Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) -30- INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION -------- ----------- 3.1 Amended and Restated Certificate of Incorporation, as amended, of the Company is incorporated herein by reference from Exhibit 4.2 to the Company's registration statement (No. 333-76175) on Form S-3, filed April 13, 1999. 3.2 Amended and Restated Bylaws of the Company are incorporated herein by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998. 10.1* D.R. Horton Deferred Compensation Plan, effective as of June 15, 2002. 10.2* D.R. Horton, Inc. 1991 Stock Incentive Plan, as amended and restated. 10.3* Amendment No. 1 to the D.R. Horton, Inc. 1991 Stock Incentive Plan, as amended and restated. ------------ *Filed herewith.