10-Q 1 dhi10q2q2003.txt FORM 10-Q FOR 2ND QUARTER ENDED MARCH 31, 2003 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 March 31, 2003 ------------------ 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 ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 -- 146,915,960 shares as of May 6, 2003 -------------------- This report contains 37 pages. INDEX D.R. HORTON, INC. PART I. FINANCIAL INFORMATION. Page ------- ---------------------- ------ ITEM 1. Financial Statements. Consolidated Balance Sheets-- March 31, 2003 and September 30, 2002. 3 Consolidated Statements of Income-- Three Months and Six Months Ended March 31, 2003 and 2002. 4 Consolidated Statements of Cash Flows-- Six Months Ended March 31, 2003 and 2002. 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 ITEM 4. Controls and Procedures. 29 PART II. OTHER INFORMATION. -------- ----------------- ITEM 2. Changes in Securities and Use of Proceeds. 30 ITEM 4. Submission of Matters to a Vote of Security Holders. 30 ITEM 5. Other Information. 31 ITEM 6. Exhibits and Reports on Form 8-K. 32 SIGNATURES. 33 ----------- CERTIFICATIONS. --------------- Certification of Chief Executive Officer Pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002. 34-35 Certification of Chief Financial Officer Pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002. 36-37
ITEM 1. FINANCIAL STATEMENTS D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, September 30, 2003 2002 ------------ ------------ (In thousands) (Unaudited) ASSETS Homebuilding: Cash and cash equivalents .................................... $ 161,139 $ 92,106 Inventories: Finished homes and construction in progress ................. 2,407,594 2,035,221 Residential lots - developed and under development .......... 2,321,784 2,297,545 Land held for development ................................... 6,801 10,303 ---------- ---------- 4,736,179 4,343,069 Property and equipment (net) ................................. 77,035 71,895 Earnest money deposits and other assets ...................... 371,891 430,415 Excess of cost over net assets acquired ...................... 581,230 579,230 ---------- ---------- 5,927,474 5,516,715 ---------- ---------- Financial Services: Cash and cash equivalents .................................... 26,339 12,238 Mortgage loans held for sale ................................. 424,674 464,088 Other assets ................................................. 20,462 24,486 ---------- ---------- 471,475 500,812 ---------- ---------- $6,398,949 $6,017,527 ========== ========== LIABILITIES Homebuilding: Accounts payable and other liabilities ....................... $ 803,555 $ 834,048 Notes payable ................................................ 2,763,264 2,486,976 ---------- ---------- 3,566,819 3,321,024 ---------- ---------- Financial Services: Accounts payable and other liabilities ....................... 14,442 14,340 Notes payable to financial institutions ...................... 325,613 391,355 ---------- ---------- 340,055 405,695 ---------- ---------- 3,906,874 3,726,719 ---------- ---------- Minority interests ........................................... 26,039 20,945 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued ............................................ -- -- Common stock, $.01 par value, 400,000,000 shares authorized, 146,874,543 shares at March 31, 2003 and 146,505,091 shares at September 30, 2002, issued and outstanding ............... 1,469 1,465 Additional capital ........................................... 1,353,537 1,349,630 Unearned compensation ........................................ (3,273) (4,453) Retained earnings ............................................ 1,143,825 923,221 Treasury stock, 1,672,500 shares at March 31, 2003 and no shares at September 30, 2002, at cost ....................... (29,522) -- ---------- --------- 2,466,036 2,269,863 ---------- --------- $6,398,949 $6,017,527 ========== ==========
See accompanying notes to consolidated financial statements. -3- D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Six Months Ended March 31, Ended March 31, ---------------------- ---------------------- 2003 2002 2003 2002 ---------------------- ---------------------- (In thousands, except per share data) (Unaudited) Homebuilding: Revenues Home sales ...................................... $1,777,829 $1,534,357 $3,444,278 $2,660,095 Land/lot sales .................................. 90,952 41,843 131,196 51,073 ---------- ---------- ---------- ---------- 1,868,781 1,576,200 3,575,474 2,711,168 ---------- ---------- ---------- ---------- Cost of sales Home sales ...................................... 1,419,537 1,258,842 2,753,295 2,157,740 Land/lot sales .................................. 76,868 36,203 111,650 44,110 ---------- ---------- ---------- ---------- 1,496,405 1,295,045 2,864,945 2,201,850 ---------- ---------- ---------- ---------- Gross profit Home sales ...................................... 358,292 275,515 690,983 502,355 Land/lot sales .................................. 14,084 5,640 19,546 6,963 ---------- ---------- ---------- ---------- 372,376 281,155 710,529 509,318 Selling, general and administrative expense ...... 187,285 149,494 366,466 267,911 Interest expense ................................. 7 2,563 354 3,759 Other (income)/expense ........................... (71) (2,426) (276) 146 ---------- ---------- ---------- ---------- 185,155 131,524 343,985 237,502 ---------- ---------- ---------- ---------- Financial Services: Revenues ......................................... 39,766 23,865 78,007 48,787 General and administrative expense ............... 22,235 14,918 44,242 30,041 Interest expense ................................. 1,482 999 3,549 2,335 Other (income) ................................... (4,982) (2,818) (10,910) (5,862) ---------- ---------- ---------- ---------- 21,031 10,766 41,126 22,273 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES ..................... 206,186 142,290 385,111 259,775 Provision for income taxes ....................... 78,351 53,359 145,448 97,416 ---------- ---------- ---------- ---------- NET INCOME ..................................... $ 127,835 $ 88,931 $ 239,663 $ 162,359 ========== ========== ========== ========== Net income per share: Basic .......................................... $ 0.87 $ 0.69 $ 1.64 $ 1.33 Diluted ........................................ $ 0.86 $ 0.64 $ 1.62 $ 1.26 ========== ========== ========== ========== Weighted average number of shares of stock Basic .......................................... 146,327 128,897 146,426 122,095 Diluted ........................................ 148,218 141,473 148,362 129,415 ========== ========== ========== ========== Cash dividends per share ....................... $ 0.07 $ 0.06 $ 0.13 $ 0.11 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. -4- D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, ----------------------- 2003 2002 ---------- ---------- (In thousands) (Unaudited) OPERATING ACTIVITIES Net income ............................................................... $ 239,663 $ 162,359 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ............................................ 18,784 11,024 Amortization of debt premiums and fees ................................... 3,559 4,476 Changes in operating assets and liabilities: Increase in inventories ................................................. (358,234) (116,046) Decrease (increase) in earnest money deposits and other assets .......... 62,164 (45,592) Decrease in mortgage loans held for sale ................................ 39,414 20,495 Decrease in accounts payable and other liabilities ...................... (25,045) (97,586) ---------- ---------- NET CASH USED IN OPERATING ACTIVITIES ..................................... (19,695) (60,870) ---------- ---------- INVESTING ACTIVITIES Net purchases of property and equipment .................................. (22,199) (15,725) Distributions from venture capital entities .............................. -- 500 Net cash paid for acquisitions ........................................... -- (152,573) ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES ..................................... (22,199) (167,798) ---------- ---------- FINANCING ACTIVITIES Proceeds from notes payable .............................................. 1,066,160 1,555,000 Issuance of senior notes payable ......................................... 214,206 -- Repayment of notes payable ............................................... (1,110,417) (1,377,974) Proceeds from stock associated with certain employee benefit plans ....... 3,660 10,564 Purchase of treasury stock ............................................... (29,522) -- Payment of cash dividends ................................................ (19,059) (8,476) ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES ................................. 125,028 179,114 ---------- ---------- INCREASE (DECREASE) IN CASH ............................................... 83,134 (49,554) Cash at beginning of period .............................................. 104,344 239,280 ---------- ---------- Cash at end of period .................................................... $ 187,478 $ 189,726 ========== ==========
See accompanying notes to consolidated financial statements. -5- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 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 six-month periods ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending September 30, 2003. Business - The Company is a national builder that is engaged primarily in the construction and sale of single-family housing in 44 markets and 20 states in the United States. The Company designs, builds and sells detached and attached single-family houses on lots developed by the Company and on finished lots which it purchases, ready for home construction. Periodically, the Company sells lots it has developed. The Company also provides title agency and mortgage brokerage services to its home buyers. The Company does not retain or service the mortgages that it originates but, rather, sells the mortgages and related servicing rights to investors. NOTE B - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." Interpretation No. 46 provides guidance for the financial accounting and reporting of certain variable interest entities. The Interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain business entities that either have equity investors with no voting rights or have equity investors that do not provide sufficient financial resources for the entities to support their activities. The Interpretation requires consolidation of such entities by any company that is subject to a majority of the risk of loss from the entities' activities or is entitled to receive a majority of the entities' residual returns or both. Furthermore, disclosures about significant variable interest entities are required even if the company is not required to consolidate them. The Interpretation applies to all variable interest entities created after January 31, 2003, and the consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements filed after January 31, 2003. The Company has reviewed all of its unconsolidated business relationships and believes that it has no significant investments in variable interest entities at March 31, 2003. Moreover, the Company believes that full adoption of Interpretation No. 46 as required in fiscal 2003 will not have a material effect on its financial position, results of operations or cash flows. 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 six-months ended March 31, 2003 and 2002. The homebuilding reporting segment is comprised of the aggregate of the Company's regional homebuilding operating segments and generates the majority of its revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. Approximately 92% of its home sales revenues were generated from the sale of detached homes for the three and six months ended March 31, 2003. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services. Effective with its fiscal year beginning October 1, 2002, the Company's wholly-owned mortgage subsidiary is required by Statement of Position 01-6 (SOP 01-6), of the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants, to disclose the minimum net worth requirements by regulatory agencies, secondary market investors and states in which it conducts business. Currently, the largest of these minimum net worth requirements is $1.0 million, which is insignificant compared to the $35 million minimum net worth required by the mortgage subsidiary's warehouse credit line. At March 31, 2003, the mortgage subsidiary's total equity was $115.6 million. NOTE D - EARNINGS PER SHARE Basic earnings per share for the three months and six months ended March 31, 2003 and 2002 is based on the weighted -6- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 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 weighted average number of shares of common stock and dilutive securities outstanding used in the computation of basic and diluted earnings per share (in thousands):
Three Months Ended Six Months Ended March 31, March 31, --------------------- --------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Numerator: Net income ................................................ $ 127,835 $ 88,931 $ 239,663 $ 162,359 Effect of dilutive securities: Interest expense and amortization of issuance costs associated with zero coupon convertible senior notes, net of applicable income taxes ............................ -- 1,042 -- 1,042 ---------- ---------- ---------- ---------- Numerator for diluted earnings per share after assumed conversions ............................................... $ 127,835 $ 89,973 $ 239,663 $ 163,401 ========== ========== ========== ========== Denominator: Denominator for basic earnings per share-- weighted average shares .................................. 146,327 128,897 146,426 122,095 Effect of dilutive securities: Zero coupon convertible senior notes ...................... -- 10,000 -- 5,000 Employee stock options .................................... 1,891 2,576 1,936 2,320 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share-- adjusted weighted average shares ......................... 148,218 141,473 148,362 129,415 ========== ========== ========== ==========
Options to purchase approximately 2,723,000 and 2,709,000 shares of common stock at various prices were outstanding during the three months and six months ended March 31, 2003, respectively, but were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common shares and, therefore, their effect would be antidilutive. All options outstanding during the three months and six months ended March 31, 2002 were included in the computation of diluted earnings per share. -7- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 NOTE E - DEBT
The Company's notes payable consist of the following (in thousands): March 31, September 30, 2003 2002 ---------- ------------- Homebuilding: Unsecured: Revolving credit facility due 2006 ....................... $ 50,000 $ -- 8 3/8% Senior notes due 2004, net ........................ 149,538 149,339 10 1/2% Senior notes due 2005, net ....................... 199,623 199,559 10% Senior notes due 2006, net ........................... 147,903 147,802 7 1/2% Senior notes due 2007, net ........................ 215,000 -- 9% Senior notes due 2008, net ............................ 102,155 102,427 8% Senior notes due 2009, net ............................ 383,535 383,438 9 3/8% Senior notes due 2009, net ........................ 244,965 246,057 9 3/4% Senior subordinated notes due 2010, net ........... 149,037 148,994 9 3/8% Senior subordinated notes due 2011, net ........... 199,721 199,710 7 7/8% Senior notes due 2011, net ........................ 198,499 198,437 10 1/2% Senior subordinated notes due 2011, net .......... 152,520 153,284 8 1/2% Senior notes due 2012, net ........................ 248,065 247,995 Zero coupon convertible senior notes due 2021, net ....... 212,548 209,144 Other secured .............................................. 110,155 100,790 ---------- ---------- $2,763,264 $2,486,976 ========== ========== Financial Services: Mortgage warehouse facility due 2003 ...................... $ 155,613 $ 242,355 Commercial paper conduit facility due 2005 ................ 170,000 149,000 ---------- ---------- $ 325,613 $ 391,355 ========== ==========
Homebuilding: 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 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. The interest rate applicable to the revolving credit facility at March 31, 2003 was 2.9%. In addition to the stated interest rates, the revolving credit facility requires the Company to pay certain fees. 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 March 31, 2003, these covenants limit the additional homebuilding debt the Company could incur to $1,327.5 million, which included $633.3 million available under the revolving credit facility. On December 3, 2002, the Company issued $215 million principal amount of 7 1/2% Senior Notes. The notes, which are due December 1, 2007, with interest payable semi-annually, represent unsecured obligations of the Company. The Company may redeem up to 35% of the amount originally issued with the proceeds of public offerings at a redemption price equal to 107.5% of the principal amount through December 1, 2005, plus accrued interest. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs, is 7.6%. On April 17, 2003, the Company issued $200 million principal amount of 6 7/8% Senior Notes. The notes, which are due May 1, 2013, with interest payable semi-annually, represent unsecured obligations of the Company. The Company may redeem up to 35% of the amount originally issued with the proceeds of public offerings at a redemption price equal to 106.875% of the principal amount -8- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 through May 1, 2006, plus accrued interest. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs, is 7.0%. On April 18, 2003, the Company called for full redemption of the 10% Senior Notes due 2006 at an aggregate redemption price of approximately $150.1 million, including accrued interest. The Company will use a part of the proceeds of the 6 7/8% Senior Notes to redeem the called notes. Concurrent with the redemption, the Company will record interest expense of approximately $1.3 million, representing unaccreted discount and unamortized debt issuance costs associated with the redeemed notes. Financial Services: The Company's mortgage subsidiary has a $190 million, one-year mortgage warehouse line payable to financial institutions, maturing August 12, 2003, at the 30-day LIBOR rate plus a fixed premium. The Company's mortgage subsidiary also has a $200 million commercial paper conduit credit facility which expires in July 2005, the terms of which are renewable annually by the sponsoring bank. The current total borrowing capacity of our mortgage subsidiary under these two credit facilities is $390 million. These two credit facilities are secured by mortgage loans held for sale and are not guaranteed by D.R. Horton, Inc. or any of the guarantors of the Senior and Senior Subordinated Notes. The interest rates of the mortgage warehouse line payable at March 31, 2003 and 2002 were 2.4% and 2.9%, respectively. The interest rate on the commercial paper conduit facility at March 31, 2003 was 1.9%. 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 (in thousands):
Three Months Ended Six Months Ended March 31, March 31, ------------------------ --------------------- 2003 2002 2003 2002 --------- --------- -------- --------- Capitalized interest, beginning of period..... $170,405 $ 110,126 $153,536 $ 96,910 Interest incurred - homebuilding.............. 60,265 46,535 117,000 83,247 Interest expensed: Directly - homebuilding...................... (7) (2,563) (354) (3,759) Amortized to cost of sales................... (49,709) (29,446) (89,228) (51,746) -------- --------- -------- --------- Capitalized interest, end of period........... $180,954 $ 124,652 $180,954 $ 124,652 ======== ========= ======== =========
NOTE G - WARRANTY In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", which is effective as to disclosure requirements for all financial statements for periods ending after December 15, 2002. With respect to the product warranty disclosure requirements contained therein, the Company provides its home buyers a one-year comprehensive limited warranty for all parts and labor and a ten-year limited warranty for major construction defects. Since the Company subcontracts its homebuilding work to subcontractors who provide it with an indemnity and a certificate of insurance prior to receiving payments for their work, claims relating to workmanship and materials are generally the primary responsibility of the subcontractors. Warranty reserves have been established by charging cost of sales and crediting a warranty liability for each home delivered. The amounts charged are estimated by management to be adequate to cover expected warranty- related costs under all unexpired warranty obligation periods. The Company's warranty cost accruals are based upon historical warranty cost experience in each market in which it operates and are adjusted as appropriate to reflect qualitative risks associated with the types of homes built and the geographic areas in which they are built. -9- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 Changes in the Company's warranty liability are as follows (in thousands): Three Months Ended Six Months Ended March 31, 2003 March 31, 2003 ------------------ ---------------- Warranty liability, beginning of period.... $42,349 $39,471 Warranties issued......................... 8,970 17,167 Settlements made.......................... (5,197) (10,516) ------- ------- Warranty liability, end of period.......... $46,122 $46,122 ======= ======= NOTE H - STOCK-BASED COMPENSATION On January 1, 2003, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amended the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has elected to follow APB Opinion No. 25 in accounting for its employee stock options. The exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, and therefore no compensation expense is recognized for the initial grants. If compensation cost for the Company's stock-based compensation plan had been determined based on the fair value method at the grant date, as prescribed in SFAS No. 123, the Company's net income and net earnings per share would have been as follows (in thousands, except per-share amounts):
Three Months Ended Six Months Ended March 31, March 31, ---------------------- ---------------------- 2003 2002 2003 2002 ----------- ---------- ---------- ---------- Net income, as reported .......................... $ 127,835 $ 88,931 $ 239,663 $ 162,359 Pro forma effect of expensing stock options (net of related tax effects) ...... (1,060) (567) (2,137) (1,136) ---------- ---------- ---------- ---------- Pro forma net income ............................. $ 126,775 $ 88,364 $ 237,526 $ 161,223 ========== ========== ========== ========== Reported basic net income per share .............. $ 0.87 $ 0.69 $ 1.64 $ 1.33 Pro forma effect of expensing stock options ...... -- -- (0.02) (0.01) ---------- ---------- ---------- ---------- Pro forma basic net income per share ............. $ 0.87 $ 0.69 $ 1.62 $ 1.32 ========== ========== ========== ========== Reported diluted net income per share ............ $ 0.86 $ 0.64 $ 1.62 $ 1.26 Pro forma effect of expensing stock options ...... -- (0.01) (0.02) (0.01) ---------- ---------- ---------- ---------- Pro forma diluted net income per share ........... $ 0.86 $ 0.63 $ 1.60 $ 1.25 ========== ========== ========== ==========
-10- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 NOTE I - SUMMARIZED FINANCIAL INFORMATION The 7 1/2%, 7 7/8%, 8%, 8 3/8%, 8 1/2%, 9%, 9 3/8%, 10% and 10 1/2% Senior Notes, the 9 3/8%, 9 3/4% and 10 1/2% 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 audited 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 March 31, 2003 Non-Guarantor Subsidiaries ---------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ ----------- --------- ------------ ----------- ASSETS (In thousands) Homebuilding: Cash and cash equivalents ........................ $ -- $ 149,836 $ -- $ 11,303 $ -- $ 161,139 Advances to/investments in unconsolidated subsidiaries .................................... 4,486,565 190,734 -- -- (4,677,299) -- Inventories ...................................... 808,364 3,838,807 -- 89,254 (246) 4,736,179 Property and equipment (net) ..................... 12,186 58,694 -- 6,155 -- 77,035 Earnest money deposits and other assets .......... 155,136 207,866 -- 8,889 -- 371,891 Excess of cost over net assets acquired .......... -- 581,230 -- -- -- 581,230 ----------- ----------- ----------- --------- ------------ ----------- 5,462,251 5,027,167 -- 115,601 (4,677,545) 5,927,474 ----------- ----------- ----------- --------- ------------ ----------- Financial Services: Cash and cash equivalents ........................ -- -- 26,339 -- -- 26,339 Mortgage loans held for sale ..................... -- -- 424,674 -- -- 424,674 Other assets ..................................... -- -- 20,462 -- -- 20,462 ----------- ----------- ----------- --------- ------------ ----------- -- -- 471,475 -- -- 471,475 ----------- ----------- --------- ------------ ----------- ----------- Total Assets ...................................... $ 5,462,251 $ 5,027,167 $ 471,475 $ 115,601 $ (4,677,545) $ 6,398,949 =========== =========== =========== ========= ============ =========== LIABILITIES & EQUITY Homebuilding: Accounts payable and other liabilities ........... $ 288,324 $ 501,251 $ -- $ 13,980 $ -- $ 803,555 Advances from parent/unconsolidated subsidiaries . -- 2,832,135 -- 52,082 (2,884,217) -- Notes payable .................................... 2,707,891 33,734 -- 21,639 -- 2,763,264 ----------- ----------- ----------- --------- ------------ ----------- 2,996,215 3,367,120 -- 87,701 (2,884,217) 3,566,819 ----------- ----------- ----------- --------- ------------ ----------- Financial Services: Accounts payable and other liabilities ........... -- -- 14,442 -- -- 14,442 Advances from parent/unconsolidated subsidiaries . -- -- 20,938 -- (20,938) -- Notes payable .................................... -- -- 325,613 -- -- 325,613 ----------- ----------- ----------- --------- ------------ ----------- -- -- 360,993 -- (20,938) 340,055 ----------- ----------- ----------- --------- ------------ ----------- Total Liabilities ................................ 2,996,215 3,367,120 360,993 87,701 (2,905,155) 3,906,874 ----------- ----------- ----------- --------- ------------ ----------- Minority interests ............................... -- -- 28 26,011 -- 26,039 ----------- ----------- ----------- --------- ------------ ----------- Stockholders' Equity ............................. 2,466,036 1,660,047 110,454 1,889 (1,772,390) 2,466,036 ----------- ----------- ----------- --------- ------------ ----------- Total Liabilities & Equity ....................... $ 5,462,251 $ 5,027,167 $ 471,475 $ 115,601 $ (4,677,545) $ 6,398,949 =========== =========== =========== ========= ============ ===========
-11- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Balance Sheet September 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 ........................ $ -- $ 80,273 $ -- $ 11,833 $ -- $ 92,106 Advances to/investments in unconsolidated subsidiaries .................................... 4,126,233 260,725 -- 68 (4,387,026) -- Inventories ...................................... 689,111 3,566,280 -- 88,048 (370) 4,343,069 Property and equipment (net) ..................... 10,826 55,424 -- 5,645 -- 71,895 Earnest money deposits and other assets .......... 209,990 212,685 -- 12,408 (4,668) 430,415 Excess of cost over net assets acquired .......... -- 579,230 -- -- -- 579,230 ----------- ----------- ----------- --------- ------------ ----------- 5,036,160 4,754,617 -- 118,002 (4,392,064) 5,516,715 ----------- ----------- ----------- --------- ------------ ----------- Financial services: Cash and cash equivalents ........................ -- -- 12,238 -- -- 12,238 Mortgage loans held for sale ..................... -- -- 464,088 -- -- 464,088 Other assets ..................................... -- -- 24,486 -- -- 24,486 ----------- ----------- ----------- --------- ------------ ----------- -- -- 500,812 -- -- 500,812 ----------- ----------- ----------- --------- ------------ ----------- Total Assets ...................................... $ 5,036,160 $ 4,754,617 $ 500,812 $ 118,002 $ (4,392,064) $ 6,017,527 =========== =========== =========== ========= ============ =========== LIABILITIES & EQUITY Homebuilding: Accounts payable and other liabilities ........... $ 341,405 $ 483,252 $ -- $ 9,415 $ (24) $ 834,048 Advances from parent/unconsolidated subsidiaries . -- 3,019,521 -- 50,370 (3,069,891) -- Notes payable .................................... 2,424,892 30,491 -- 36,237 (4,644) 2,486,976 ----------- ----------- ----------- --------- ------------ ----------- 2,766,297 3,533,264 -- 96,022 (3,074,559) 3,321,024 ----------- ----------- ----------- --------- ------------ ----------- Financial services: Accounts payable and other liabilities ........... -- -- 14,340 -- -- 14,340 Advances from parent/unconsolidated subsidiaries . -- -- 25,386 -- (25,386) -- Notes payable .................................... -- -- 391,355 -- -- 391,355 ----------- ----------- ----------- --------- ------------ ----------- -- -- 431,081 -- (25,386) 405,695 ----------- ----------- ----------- --------- ------------ ----------- Total Liabilities ................................. 2,766,297 3,533,264 431,081 96,022 (3,099,945) 3,726,719 ----------- ----------- ----------- --------- ------------ ----------- Minority interests ................................ -- -- 26 20,919 -- 20,945 ----------- ----------- ----------- --------- ------------ ----------- Stockholders' Equity .............................. 2,269,863 1,221,353 69,705 1,061 (1,292,119) 2,269,863 ----------- ----------- ----------- --------- ------------ ----------- Total Liabilities & Equity ........................ $ 5,036,160 $ 4,754,617 $ 500,812 $ 118,002 $ (4,392,064) $ 6,017,527 =========== =========== =========== ========= ============ ===========
-12- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income Three Months Ended March 31, 2003 Non-Guarantor Subsidiaries --------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ ---------- --------- ------------ ----------- (In thousands) Homebuilding: Revenues: Home sales ....................................... $ 256,090 $ 1,469,744 $ -- $ 51,995 $ -- $ 1,777,829 Land/lot sales ................................... 2,519 88,433 -- -- -- 90,952 ----------- ------------ --------- --------- ----------- ----------- 258,609 1,558,177 -- 51,995 -- 1,868,781 ----------- ------------ --------- --------- ----------- ----------- Cost of sales: Home sales ....................................... 200,810 1,179,041 -- 39,773 (87) 1,419,537 Land/lot sales ................................... 6,912 69,956 -- -- -- 76,868 ----------- ------------ --------- --------- ----------- ----------- 207,722 1,248,997 -- 39,773 (87) 1,496,405 ----------- ------------ --------- --------- ----------- ----------- Gross profit: Home sales ....................................... 55,280 290,703 -- 12,222 87 358,292 Land/lot sales ................................... (4,393) 18,477 -- -- -- 14,084 ----------- ------------ --------- --------- ----------- ----------- 50,887 309,180 -- 12,222 87 372,376 Selling, general and administrative expense ....... 54,118 127,491 -- 3,060 2,616 187,285 Interest expense .................................. -- (480) -- 487 -- 7 Other expense (income) ............................ (209,417) (1,426) -- 894 209,878 (71) ----------- ------------ --------- --------- ----------- ----------- 206,186 183,595 -- 7,781 (212,407) 185,155 ----------- ------------ --------- --------- ----------- ----------- Financial services: Revenues .......................................... -- -- 39,766 -- -- 39,766 General and administrative expense ................ -- -- 24,851 -- (2,616) 22,235 Interest expense .................................. -- -- 1,482 -- -- 1,482 Other (income) .................................... -- -- (4,982) -- -- (4,982) ----------- ------------ --------- --------- ----------- ----------- -- -- 18,415 -- 2,616 21,031 ----------- ------------ --------- --------- ----------- ----------- Income before income taxes ........................ 206,186 183,595 18,415 7,781 (209,791) 206,186 Provision for income taxes ........................ 78,351 69,758 7,002 2,945 (79,705) 78,351 ----------- ------------ --------- --------- ----------- ----------- Net income ........................................ $ 127,835 $ 113,837 $ 11,413 $ 4,836 $ (130,086)$ 127,835 =========== ============ ========= ========= =========== ===========
-13- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income Six Months Ended March 31, 2003 Non-Guarantor Subsidiaries --------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ --------- --------- ------------ ----------- (In thousands) Homebuilding: Revenues: Home sales ....................................... $ 452,975 $ 2,916,732 $ -- $ 74,571 $ -- $ 3,444,278 Land/lot sales ................................... 5,784 125,412 -- -- -- 131,196 ----------- ------------ --------- --------- ----------- ----------- 458,759 3,042,144 -- 74,571 -- 3,575,474 ----------- ------------ --------- --------- ----------- ----------- Cost of sales: Home sales ....................................... 349,126 2,347,750 -- 56,609 (190) 2,753,295 Land/lot sales ................................... 10,261 101,389 -- -- -- 111,650 ----------- ------------ --------- --------- ----------- ----------- 359,387 2,449,139 -- 56,609 (190) 2,864,945 ----------- ------------ --------- --------- ----------- ----------- Gross profit: Home sales ....................................... 103,849 568,982 -- 17,962 190 690,983 Land/lot sales ................................... (4,477) 24,023 -- -- -- 19,546 ----------- ------------ --------- --------- ----------- ----------- 99,372 593,005 -- 17,962 190 710,529 Selling, general and administrative expense ....... 98,601 256,779 -- 5,904 5,182 366,466 Interest expense .................................. -- (463) -- 817 -- 354 Other expense (income) ............................ (384,340) (3,239) -- 1,398 385,905 (276) ----------- ------------ --------- --------- ----------- ----------- 385,111 339,928 -- 9,843 (390,897) 343,985 ----------- ------------ --------- --------- ----------- ----------- Financial services: Revenues .......................................... -- -- 78,007 -- -- 78,007 General and administrative expense ................ -- -- 49,424 -- (5,182) 44,242 Interest expense .................................. -- -- 3,549 -- -- 3,549 Other (income) .................................... -- -- (10,910) -- -- (10,910) ----------- ------------ --------- --------- ----------- ----------- -- -- 35,944 -- 5,182 41,126 ----------- ------------ --------- --------- ----------- ----------- Income before income taxes ........................ 385,111 339,928 35,944 9,843 (385,715) 385,111 Provision for income taxes ........................ 145,448 128,383 13,575 3,718 (145,676) 145,448 ----------- ------------ --------- --------- ----------- ----------- Net income ........................................ $ 239,663 $ 211,545 $ 22,369 $ 6,125 $ (240,039)$ 239,663 =========== ============ ========= ========= =========== ===========
-14- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income Three Months Ended March 31, 2002 Non-Guarantor Subsidiaries --------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------- ------------ --------- --------- ------------ ----------- (In thousands) Homebuilding: Revenues: Home sales ....................................... $ 222,514 $ 1,284,294 $ -- $ 27,549 $ -- $ 1,534,357 Land/lot sales ................................... 799 41,044 -- -- -- 41,843 ----------- ------------ --------- --------- ----------- ----------- 223,313 1,325,338 -- 27,549 -- 1,576,200 ----------- ------------ --------- --------- ----------- ----------- Cost of sales: Home sales ....................................... 173,909 1,061,771 -- 23,201 (39) 1,258,842 Land/lot sales ................................... (254) 36,457 -- -- -- 36,203 ----------- ------------ --------- --------- ----------- ----------- 173,655 1,098,228 -- 23,201 (39) 1,295,045 ----------- ------------ --------- --------- ----------- ----------- Gross profit: Home sales ....................................... 48,605 222,523 -- 4,348 39 275,515 Land/lot sales ................................... 1,053 4,587 -- -- -- 5,640 ----------- ------------ --------- --------- ----------- ----------- 49,658 227,110 -- 4,348 39 281,155 Selling, general and administrative expense ....... 42,449 103,512 -- 2,012 1,521 149,494 Interest expense .................................. 1,873 689 -- 1 -- 2,563 Other expense (income) ............................ (136,954) (1,067) -- 1,598 133,997 (2,426) ----------- ------------ --------- --------- ----------- ----------- 142,290 123,976 -- 737 (135,479) 131,524 ----------- ------------ --------- --------- ----------- ----------- Financial services: Revenues .......................................... -- -- 23,865 -- -- 23,865 General and administrative expense ................ -- -- 16,439 -- (1,521) 14,918 Interest expense .................................. -- -- 999 -- -- 999 Other (income) .................................... -- -- (2,818) -- -- (2,818) ----------- ------------ --------- --------- ----------- ----------- -- -- 9,245 -- 1,521 10,766 ----------- ------------ --------- --------- ----------- ----------- Income before income taxes ........................ 142,290 123,976 9,245 737 (133,958) 142,290 Provision for income taxes ........................ 53,359 46,491 3,467 277 (50,235) 53,359 ----------- ------------ --------- --------- ----------- ----------- Net income ........................................ $ 88,931 $ 77,485 $ 5,778 $ 460 $ (83,723)$ 88,931 =========== ============ ========= ========= =========== ===========
-15- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income Six Months Ended March 31, 2002 Non-Guarantor Subsidiaries --------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------- --------- --------- ------------ ----------- (In thousands) Homebuilding: Revenues: Home sales ....................................... $ 401,551 $ 2,222,539 $ -- $ 36,005 $ -- $ 2,660,095 Land/lot sales ................................... 1,460 49,613 -- -- -- 51,073 ----------- ------------ --------- --------- ----------- ----------- 403,011 2,272,152 -- 36,005 -- 2,711,168 ----------- ------------ --------- --------- ----------- ----------- Cost of sales: Home sales ....................................... 318,327 1,809,962 -- 29,666 (215) 2,157,740 Land/lot sales ................................... 505 43,605 -- -- -- 44,110 ----------- ------------ --------- --------- ----------- ----------- 318,832 1,853,567 -- 29,666 (215) 2,201,850 ----------- ------------ --------- --------- ----------- ----------- Gross profit: Home sales ....................................... 83,224 412,577 -- 6,339 215 502,355 Land/lot sales ................................... 955 6,008 -- -- -- 6,963 ----------- ------------ --------- --------- ----------- ----------- 84,179 418,585 -- 6,339 215 509,318 Selling, general and administrative expense ....... 73,045 188,453 -- 3,307 3,106 267,911 Interest expense .................................. 2,911 846 -- 12 (10) 3,759 Other expense (income) ............................ (251,552) (1,874) -- 6,389 247,183 146 ----------- ------------ --------- --------- ----------- ----------- 259,775 231,160 -- (3,369) (250,064) 237,502 ----------- ------------ --------- --------- ----------- ----------- Financial services: Revenues .......................................... -- -- 48,787 -- -- 48,787 General and administrative expense ................ -- -- 33,147 -- (3,106) 30,041 Interest expense .................................. -- -- 2,335 -- -- 2,335 Other (income) .................................... -- -- (5,862) -- -- (5,862) ----------- ------------ --------- --------- ----------- ----------- -- -- 19,167 -- 3,106 22,273 ----------- ------------ --------- --------- ----------- ----------- Income before income taxes ........................ 259,775 231,160 19,167 (3,369) (246,958) 259,775 Provision for income taxes ........................ 97,416 86,685 7,188 (1,263) (92,610) 97,416 ----------- ------------ --------- --------- ----------- ----------- Net income ........................................ $ 162,359 $ 144,475 $ 11,979 $ (2,106) $ (154,348)$ 162,359 =========== ============ ========= ========= =========== ===========
-16- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Cash Flows Six Months Ended March 31, 2003 Non-Guarantor Subsidiaries -------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ ---------- --------- ------------ ----------- (In thousands) OPERATING ACTIVITIES Net income ............................................ $ 239,663 $ 211,545 $ 22,369 $ 6,125 $ (240,039) $ 239,663 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ........................ 2,592 14,625 854 713 -- 18,784 Amortization of debt premiums and fees ............... 3,559 -- -- -- -- 3,559 Changes in operating assets and liabilities: Increase in inventories ............................. (106,422) (250,482) -- (1,206) (124) (358,234) (Increase) decrease in earnest money deposits and other assets .......................... 54,223 5,003 4,087 3,519 (4,668) 62,164 Decrease in mortgage loans held for sale ............ -- -- 39,414 -- -- 39,414 Increase (decrease) in accounts payable and other liabilities .............................. (52,829) 17,999 104 9,657 24 (25,045) ----------- ------------ --------- -------- ----------- ---------- Net cash provided by (used in) operating activities ............................................ 140,786 (1,310) 66,828 18,808 (244,807) (19,695) ----------- ------------ --------- -------- ----------- ---------- INVESTING ACTIVITIES Net purchases of property and equipment ............... (2,773) (17,286) (917) (1,223) -- (22,199) ----------- ------------ --------- -------- ----------- ---------- Net cash used in investing activities ................. (2,773) (17,286) (917) (1,223) -- (22,199) ----------- ------------ --------- -------- ----------- ---------- FINANCING ACTIVITIES Net change in notes payable ........................... 252,105 (6,516) (65,742) (9,898) -- 169,949 Increase (decrease) in intercompany advances .......... (345,197) 94,675 13,932 (8,217) 244,807 -- Purchase of treasury stock ............................ (29,522) -- -- -- -- (29,522) Proceeds from stock associated with certain employee benefit plans ............................... 3,660 -- -- -- -- 3,660 Cash dividends paid ................................... (19,059) -- -- -- -- (19,059) ----------- ------------ --------- -------- ----------- ---------- Net cash provided by (used in) financing activities ........................................... (138,013) 88,159 (51,810) (18,115) 244,807 125,028 ----------- ------------ --------- -------- ----------- ---------- Increase (decrease) in cash ........................... -- 69,563 14,101 (530) -- 83,134 Cash at beginning of period ........................... -- 80,273 12,238 11,833 -- 104,344 ----------- ------------ --------- -------- ----------- ---------- Cash at end of period ................................. $ -- $ 149,836 $ 26,339 $ 11,303 $ -- $ 187,478 =========== ============ ========= ======== =========== ==========
-17- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31,2003 NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Cash Flows Six Months Ended March 31, 2002 Non-Guarantor Subsidiaries -------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ ---------- --------- ------------ ---------- (In thousands) OPERATING ACTIVITIES Net income ............................................ $ 162,359 $ 144,475 $ 11,979 $ (2,106) $ (154,348) $ 162,359 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ........................ 1,728 8,404 678 214 -- 11,024 Amortization of debt premiums and fees ............... 4,476 -- -- -- -- 4,476 Changes in operating assets and liabilities: Increase in inventories ............................. (56,648) (18,539) -- (40,844) (15) (116,046) (Increase) decrease in earnest money deposits and other assets .......................... (24,378) (19,820) 2,716 379 (4,489) (45,592) Decrease in mortgage loans held for sale ............ -- -- 20,495 -- -- 20,495 Increase (decrease) in accounts payable and other liabilities .............................. (47,192) (67,646) (416) 17,637 31 (97,586) ----------- ------------ --------- -------- ----------- ---------- Net cash provided by (used in) operating activities ........................................... 40,345 46,874 35,452 (24,720) (158,821) (60,870) ----------- ------------ --------- -------- ----------- ---------- INVESTING ACTIVITIES Net (purchases) dispositions of property and equipment ............................................ (3,055) (12,007) (699) 36 -- (15,725) Distributions from venture capital entities ........... -- -- -- 500 -- 500 Net cash paid for acquisitions ........................ -- (152,573) -- -- -- (152,573) ----------- ------------ --------- -------- ----------- ---------- Net cash provided by (used in) investing activities ........................................... (3,055) (164,580) (699) 536 -- (167,798) ----------- ------------ --------- -------- ----------- ---------- FINANCING ACTIVITIES Net change in notes payable ........................... 472,144 (260,634) (34,484) (4,457) 4,457 177,026 Increase (decrease) in intercompany advances .......... (511,522) 450,349 6,241 40,458 14,474 -- Proceeds from stock associated with certain employee benefit plans ............................... 10,564 -- -- -- -- 10,564 Cash dividends/distributions paid ..................... (8,476) (139,890) -- -- 139,890 (8,476) ----------- ------------ --------- -------- ----------- ---------- Net cash provided by (used in) financing activities ........................................... (37,290) 49,825 (28,243) 36,001 158,821 179,114 ----------- ------------ --------- -------- ----------- ---------- Increase (decrease) in cash ........................... -- (67,881) 6,510 11,817 -- (49,554) Cash at beginning of period ........................... -- 230,481 6,975 1,824 -- 239,280 ----------- ------------ --------- -------- ----------- ---------- Cash at end of period ................................. $ -- $ 162,600 $ 13,485 $ 13,641 $ -- $ 189,726 =========== ============ ========= ======== =========== ==========
-18- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES We believe that there have been no significant changes to our critical accounting policies during the six months ended March 31, 2003, as compared to those we disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Annual Report on Form 10-K for the year ended September 30, 2002. RESULTS OF OPERATIONS - CONSOLIDATED We provide homebuilding services in 20 states and 44 markets through our 48 homebuilding divisions. Through our financial services operations, we also provide mortgage banking and title agency services in many of these same markets. On February 21, 2002, Schuler Homes, Inc. ("Schuler") merged into D.R. Horton, Inc., with D.R. Horton the surviving corporation. Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 Consolidated revenues for the three months ended March 31, 2003, increased 19.3%, to $1,908.5 million, from $1,600.1 million for the comparable period of 2002, due to increases in both homebuilding and financial services revenues. Approximately $142.5 million of the increase in homebuilding revenues was attributable to revenues generated by Schuler prior to the February 21, 2003 anniversary date of the acquisition. Income before income taxes for the three months ended March 31, 2003, increased 44.9%, to $206.2 million, from $142.3 million for the comparable period of 2002. As a percentage of revenues, income before income taxes for the three months ended March 31, 2003, increased 1.9 percentage points, to 10.8% from 8.9% for the comparable period of 2002, primarily due to the effects of purchase accounting adjustments related to the Schuler acquisition in the three months ended March 31, 2002. The consolidated provision for income taxes increased 46.8%, to $78.4 million for the three months ended March 31, 2003, from $53.4 million for the same period of 2002, due to the corresponding increase in income before income taxes and an increase in the effective income tax rate. The effective income tax rate for the three months ended March 31, 2003 increased to 38.0%, from 37.5% for the comparable period of 2002, due to increases in pre-tax income in states with higher tax rates. Six Months Ended March 31, 2003 Compared to Six Months Ended March 31, 2002 Consolidated revenues for the six months ended March 31, 2003, increased 32.4%, to $3,653.5 million, from $2,760.0 million for the comparable period of 2002, due to increases in both homebuilding and financial services revenues. Approximately $498.6 million of the increase in homebuilding revenues was attributable to revenues generated by Schuler prior to the February 21, 2003 anniversary date of the acquisition. Income before income taxes for the six months ended March 31, 2003, increased 48.2%, to $385.1 million, from $259.8 million for the comparable period of 2002. As a percentage of revenues, income before income taxes for the six months ended March 31, 2003, increased 1.1 percentage points, to 10.5% from 9.4% for the comparable period of 2002, primarily due to the effects of purchase accounting adjustments related to the Schuler acquisition in the six months ended March 31, 2002. The consolidated provision for income taxes increased 49.3%, to $145.4 million for the six months ended March 31, 2003, from $97.4 million for the same period of 2002, due to the corresponding increase in income before income taxes and an increase in the effective income tax rate. The effective income tax rate for the six months ended March 31, 2003 increased to 37.8%, from 37.5% for the comparable period of 2002, due to increases in pre-tax income in states with higher tax rates. -19- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - HOMEBUILDING The following tables set forth certain operating and financial data for our homebuilding activities ($ in millions):
Percentages of Homebuilding Revenues ---------------------------------------- Three Months Ended Six Months Ended March 31, March 31, ------------------ -------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Costs and expenses: Cost of sales .................................... 80.1% 82.2% 80.1% 81.2% Selling, general and administrative expense ...... 10.0 9.5 10.3 9.9 Interest expense ................................. -- 0.2 -- 0.1 -------- -------- -------- -------- Total costs and expenses ......................... 90.1 91.9 90.4 91.2 Other (income) expense ........................... -- (0.2) -- -- -------- -------- -------- -------- Income before income taxes ....................... 9.9% 8.3% 9.6% 8.8% ======== ======== ======== ========
Homes Closed Three Months Ended March 31, Six Months Ended March 31, ----------------------------------------- ------------------------------------------ 2003 2002 2003 2002 ------------------- -------------------- -------------------- ------------------- Homes Homes Homes Homes Closed Revenues Closed Revenues Closed Revenues Closed Revenues -------- -------- --------- -------- --------- -------- -------- -------- Mid-Atlantic ................. 743 $ 154.5 633 $ 138.6 1,408 $ 288.7 1,228 $ 263.7 Midwest ...................... 441 107.6 388 95.4 867 217.1 851 214.1 Southeast .................... 979 167.7 790 135.7 1,926 325.0 1,678 290.6 Southwest .................... 3,277 552.3 2,338 403.9 6,357 1,070.2 4,909 836.5 West ......................... 2,448 795.7 2,490 760.8 4,844 1,543.3 3,664 1,055.2 -------- -------- -------- -------- -------- -------- -------- -------- 7,888 $1,777.8 6,639 $1,534.4 15,402 $3,444.3 12,330 $2,660.1 ======== ======== ======== ======== ======== ======== ======== ========
Net New Sales Orders Three Months Ended March 31, Six Months Ended March 31, ----------------------------------------- ----------------------------------------- 2003 2002 2003 2002 ------------------- ------------------- ------------------- ------------------- Homes Homes Homes Homes Sold $ Sold $ Sold $ Sold $ -------- -------- -------- -------- -------- -------- -------- -------- Mid-Atlantic ................. 993 $ 215.1 883 $ 182.6 1,714 $ 361.0 1,511 $ 310.7 Midwest ...................... 522 140.7 463 117.4 951 247.6 851 214.3 Southeast .................... 1,152 215.5 969 158.4 2,101 385.4 1,704 276.7 Southwest .................... 4,473 740.2 3,685 613.9 7,244 1,209.1 6,017 993.2 West ......................... 3,408 1,128.0 2,617 761.1 5,790 1,934.9 3,678 1,060.0 -------- -------- -------- -------- -------- -------- -------- -------- 10,548 $2,439.5 8,617 $1,833.4 17,800 $4,138.0 13,761 $2,854.9 ======== ======== ======== ======== ======== ======== ======== ========
Sales Backlog March 31, 2003 March 31, 2002 ------------------ ------------------- Homes $ Homes $ -------- -------- -------- -------- Mid-Atlantic ..................................... 1,559 $ 337.2 1,105 $ 237.4 Midwest .......................................... 1,000 269.0 918 263.0 Southeast ........................................ 1,844 335.1 1,490 239.6 Southwest ........................................ 6,073 1,026.6 5,410 910.2 West ............................................. 4,619 1,551.0 3,475 1,013.5 -------- -------- -------- -------- 15,095 $3,518.9 12,398 $2,663.7 ======== ======== ======== ========
-20- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our 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 (Southern California), Las Vegas, Los Angeles, Oakland, Orange County, Portland, Sacramento, Salt Lake City, San Francisco, San Diego, Seattle/Tacoma and Ventura County Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 Revenues from homebuilding activities increased 18.6%, to $1,868.8 million (7,888 homes closed) for the three months ended March 31, 2003, from $1,576.2 million (6,639 homes closed) for the comparable period of 2002. Revenues from home sales increased in all five of our market regions, with percentage increases ranging from 4.6% in the West region to 36.7% in the Southwest. The increases in both revenues and homes closed were due to strong housing demand throughout the majority of our markets, and the acquisition of Schuler. Excluding the activities of Schuler prior to the February 21, 2003 anniversary date of the acquisition, home sales revenues increased 6.9%, to $1,640.3 million (7,441 homes closed) for the three months ended March 31, 2003, from $1,534.4 million (6,639 homes closed) for the comparable period of 2002. Revenues from the sale of land and lots increased by $49.1 million, to $91.0 million in the three months ended March 31, 2003. The average selling price of homes closed during the three months ended March 31, 2003 was $225,400, down 2.5% from $231,100 for the same period in 2002. The decrease in average selling price was primarily due to relatively fewer closings in the West region, which has the highest average selling price. The value of net new sales orders increased 33.1%, to $2,439.5 million (10,548 homes) for the three months ended March 31, 2003, from $1,833.4 million (8,617 homes) for the same period of 2002. The value of net new sales orders increased in all of our five market regions, with percentage increases ranging from 17.8% in the Mid-Atlantic region to 48.2% in the West region. The increases in both net new sales orders and their value were due to strong housing demand throughout the majority of our markets and the merger with Schuler in February 2002. On a consolidated basis, excluding the activities of Schuler prior to the February 21, 2003 anniversary date of the acquisition, the value of net new sales orders increased 18.9%, to $2,180.4 million (9,777 homes) for the three months ended March 31, 2003, from $1,833.4 million (8,617 homes) for the comparable period of 2002. The average price of a net new sales order in the three months ended March 31, 2003 was $231,300, up 8.7% from the $212,800 average in the comparable period of 2002. The increase in average selling price was primarily due to increased sales orders in the West region, which has the highest average selling price. At March 31, 2003, the value of our backlog of sales orders was $3,518.9 million (15,095 homes), up 32.1% from $2,663.7 million (12,398 homes) at March 31, 2002. The value of our backlog of sales orders increased in all five of our market regions, with percentage increases ranging from 2.3% in the Midwest to region to 53.0% in the West region. The average sales price of homes in sales backlog was $233,100 at March 31, 2003, up 8.5% from the average price of $214,800 at March 31, 2002 due to the increase in sales orders in the West region, which has the highest average selling price. Cost of sales increased by 15.5%, to $1,496.4 million for the three months ended March 31, 2003, from $1,295.0 million for the comparable period of 2002. 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 decreased 2.2 percentage points to 79.8% for the three months ended March 31, 2003, from 82.0% for the comparable period of 2002. A significant portion of costs associated with the sales of inventory acquired in the Schuler acquisition, with lower gross margins as a result of purchase accounting adjustments that increased the acquired inventory to its fair value as of the date of acquisition, was recognized in the three months ended March 31, 2002. For the same reason, total homebuilding cost of sales as a percentage of total homebuilding revenues decreased 2.1 percentage points, to 80.1% in the three months ended March 31, 2003, from 82.2% in the comparable period of 2002. -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 25.3%, to $187.3 million in the three months ended March 31, 2003, from $149.5 million in the comparable period of 2002. As a percentage of homebuilding revenues, SG&A expenses increased 0.5 percentage point, to 10.0% for the three months ended March 31, 2003, from 9.5% in the comparable period of 2002, 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 March 31, 2002. Interest expense associated with homebuilding activities decreased to a negligible amount in the three months ended March 31, 2003, from $2.6 million in the comparable period of 2002. Due to the declining interest rate environment experienced throughout fiscal 2003, our total interest costs as a percentage of average interest-bearing debt declined. Also, throughout the three months ended March 31, 2003, inventory under construction or development grew at a more rapid pace than interest- bearing debt. Therefore, virtually all of the total homebuilding interest incurred was capitalized to inventory in the current quarter. During both periods, we expensed the portion of incurred interest and other financing costs which could not be capitalized to inventory. Capitalized interest and other financing costs are included in cost of sales at the time homes are closed. Other income associated with homebuilding activities was $0.1 million in the three months ended March 31, 2003, compared to $2.4 million in the comparable period of 2002. The income in both quarters was primarily due to increases in the fair value of our interest rate swap agreements. Six Months Ended March 31, 2003 Compared to Six Months Ended March 31, 2002 Revenues from homebuilding activities increased 31.9%, to $3,575.5 million (15,402 homes closed) for the six months ended March 31, 2003, from $2,711.2 million (12,330 homes closed) for the comparable period of 2002. Revenues from home sales increased in all of the Company's five market regions, with percentage increases ranging from 1.4% in the Midwest region to 46.3% in the West region. The increases in total homebuilding revenues and revenues from home sales were due to strong housing demand throughout the majority of our markets, and the acquisition of Schuler. Excluding the activities of Schuler prior to the February 21, 2003 anniversary date of the acquisition, home sales revenues increased 11.5% to $2,966.2 million (13,878 homes closed) for the six months ended March 31, 2003, from $2,660.1 million (12,330 homes closed) for the comparable period of 2002. Revenues from the sale of land and lots increased by $80.1 million, to $131.2 million in the six months ended March 31, 2003. The average selling price of homes closed during the six months ended March 31, 2003 was $223,600, up 3.7% from $215,700 for the same period in 2002. 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 orders increased 44.9%, to $4,138.0 million (17,800 homes) for the six months ended March 31, 2003, from $2,854.9 million (13,761 homes) for the same period of 2002. The value of net new sales orders increased in all of the Company's five market regions, with percentage increases ranging from 15.5% in the Mid-West region to 82.5% in the West region. Excluding the activities of Schuler prior to the February 21, 2003 anniversary date of the acquisition, the value of net new sales orders increased 20.1%, to $3,428.5 million (15,781 homes) for the six months ended March 31, 2003, from $2,854.9 million (13,761 homes) for the comparable period of 2002. The average price of a net new sales orders in the six months ended March 31, 2003 was $232,500, up 12.0% over the $207,500 average in the six months ended March 31, 2002, due to increased sales orders in the West region, which has the highest average selling price. Cost of sales increased 30.1%, to $2,864.9 million for the six months ended March 31, 2003, from $2,201.9 million for the comparable period of 2002. 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 decreased 1.2 percentage points, to 79.9% for the six months ended March 31, 2003, from 81.1% for the comparable period of 2002. A significant portion of costs associated with the sales of inventory acquired in the Schuler acquisition, with -22- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS lower gross margins as a result of purchase accounting adjustments that increased the acquired inventory to its fair value as of the date of acquisition, was recognized in the six months ended March 31, 2002. For the same reason, total homebuilding cost of sales as a percentage of total homebuilding revenues decreased 1.1 percentage points, to 80.1% in the six months ended March 31, 2003, from 81.2% in the comparable period of 2002. Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 36.8%, to $366.5 million in the six months ended March 31, 2003, from $267.9 million in the comparable period of 2002. As a percentage of homebuilding revenues, SG&A expenses increased to 10.3% for the six months ended March 31, 2003, from 9.9% for the comparable period of 2002, 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 March 31, 2002. Interest expense associated with homebuilding activities decreased to $0.4 million in the six months ended March 31, 2003, from $3.8 million in the comparable period of 2002. Due to the declining interest rate environment experienced throughout fiscal 2003, our total interest costs as a percentage of average interest-bearing debt declined. Also, throughout the six months ended March 31, 2003, inventory under construction or development grew at a more rapid pace than interest-bearing debt. Therefore, virtually all of the total homebuilding interest incurred was capitalized to inventory in the six months ended March 31, 2003. 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 income associated with homebuilding activities was $0.3 million in the six months ended March 31, 2003, compared to other expense of $0.1 million in the comparable period of 2002. The expense in 2002 was primarily due to write-downs to estimated fair value of the carrying amounts of our investments in start-up and emerging growth companies, offset in part by an increase in the fair value of our interest rate swap agreements during the period. RESULTS OF OPERATIONS - FINANCIAL SERVICES Financial services include mortgage financing and title insurance agency and closing services, primarily related to purchases of homes we build and sell. We provide mortgage services in Arizona, California, Colorado, Florida, Georgia, Illinois, Maryland, Minnesota, Nevada, New Mexico, North Carolina, Oregon, South Carolina, Texas, Virginia and Washington. We provide title agency and closing services in Arizona, Florida, Georgia, Maryland, Minnesota, Texas, Virginia and Washington. The following table summarizes financial and other information for our financial services operations:
Three Months Ended Six Months Ended March 31, March 31, ------------------ ------------------ 2003 2002 2003 2002 -------- -------- -------- -------- ($ in thousands) Number of loans originated ................................. 6,374 4,024 12,602 8,447 -------- -------- -------- -------- Loan origination fees ...................................... $ 7,200 $ 4,175 $ 13,932 $ 8,818 Sale of servicing rights and gains from sale of mortgages .. 21,046 11,239 41,180 24,300 Other revenues ............................................. 3,873 2,894 7,508 4,633 -------- -------- -------- -------- Total mortgage banking revenues ............................ 32,119 18,308 62,620 37,751 Title policy premiums, net ................................. 7,647 5,557 15,387 11,036 -------- -------- -------- -------- Total revenues ............................................. 39,766 23,865 78,007 48,787 General and administrative expense ......................... 22,235 14,918 44,242 30,041 Interest expense ........................................... 1,482 999 3,549 2,335 Interest/other (income) .................................... (4,982) (2,818) (10,910) (5,862) -------- -------- -------- -------- Income before income taxes ................................. $ 21,031 $ 10,766 $ 41,126 $ 22,273 ======== ======== ======== ========
-23- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 Revenues from the financial services segment increased 66.6%, to $39.8 million in the three months ended March 31, 2003, from $23.9 million in the comparable period of 2002. The increase in financial services revenues was due to the rapid expansion of our mortgage loan and title services provided to customers of our homebuilding segment. General and administrative expenses associated with financial services increased 49.0%, to $22.2 million in the three months ended March 31, 2003, from $14.9 million in the comparable period of 2002. As a percentage of financial services revenues, general and administrative expenses decreased 6.6 percentage points, to 55.9% in the three months ended March 31, 2003, from 62.5% in the comparable period in 2002, due primarily to efficiencies realized with the increase in revenues in markets entered in 2002. Six Months Ended March 31, 2003 Compared to Six Months Ended March 31, 2002 Revenues from the financial services segment increased 59.9%, to $78.0 million in the six months ended March 31, 2003, from $48.8 million in the comparable period of 2002. 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. General and administrative expenses associated with financial services increased 47.3%, to $44.2 million in the six months ended March 31, 2003, from $30.0 million in the comparable period of 2002. As a percentage of financial services revenues, general and administrative expenses decreased by 4.9 percentage points, to 56.7% in the six months ended March 31, 2003, from 61.6% in the comparable period in 2002, due primarily to efficiencies realized with the increase in revenues in markets entered in 2002. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At March 31, 2003, we had available cash and cash equivalents of $187.5 million. Inventories (including finished homes, construction in progress, and developed residential lots and other land), at March 31, 2003, had increased by $393.1 million since September 30, 2002, due to a general increase in business activity and the expansion of operations in our market areas. The inventory increase was financed largely by issuing senior notes and by retaining earnings. Our revolving credit facility had $50 million outstanding at March 31, 2003 and no amount outstanding at September 30, 2002. Our ratio of homebuilding notes payable (net of cash) to total capital at March 31, 2003 and September 30, 2002, remained constant at 51.3%. The stockholders' equity to total assets ratio increased 0.8 percentage point, to 38.5% at March 31, 2003, from 37.7% at September 30, 2002. We have 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 our wholly-owned subsidiaries other than those that make up our financial services segment. At March 31, 2003, we had outstanding homebuilding debt of $2,763.3 million. Under the debt covenants associated with the revolving credit facility, our additional borrowing capacity under it is limited to the lesser of the unused portion of the facility, $633.3 million at March 31, 2003, or an amount determined under a borrowing base arrangement. Under the borrowing base limitation, the sum of our senior debt and the amount drawn under our revolving credit facility may not exceed certain percentages of the various categories of our unencumbered inventory. At March 31, 2003, the borrowing base arrangement would have limited our additional borrowing capacity from any source to $1,327.5 million. At March 31, 2003, we were in compliance with all of the covenants, limitations and restrictions that form a part of our public debt obligations and our bank revolving credit facility. We have entered into multi-year interest rate swap agreements, aggregating a notional amount of $200 million, that have the effect of fixing the interest rate on a portion of the variable rate revolving credit facility at 5.1%. In the normal course of business, we provide standby letters of credit and performance bonds, issued by third parties, to secure performance under various contracts. At March 31, 2003, outstanding standby letters of credit and performance bonds, the majority of which mature in less than one year, were $144.4 million and $1,044.2 million, respectively. -24- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS At March 31, 2003, our financial services segment had mortgage loans held for sale of $424.7 million and loan commitments for $387.3 million at fixed rates. We hedge the interest rate risk on these mortgage loans and mortgage loan commitments through the use of best-efforts whole loan delivery commitments, forward sales of mortgage-backed securities and the infrequent purchase of options on financial instruments. We record gains or losses related to such hedging instruments in other income as their market values change. Such gains and losses have not significantly affected our financial services results of operations. As of March 31, 2003, our financial services segment had a $190 million, one-year mortgage warehouse bank facility that matures on August 12, 2003, and is secured by certain mortgage loans held for sale. The mortgage warehouse facility is not guaranteed by either the parent company or any of the subsidiaries that guarantee our homebuilding debt and is expected to be renewed at maturity in the ordinary course of business. At March 31, 2003, $155.6 million had been drawn under the mortgage warehouse facility. Our wholly-owned mortgage company completed a new $100 million mortgage-backed commercial paper conduit facility ("CP conduit facility") in July 2002. The facility was increased to $200 million in November 2002. Although the agreement governing the CP conduit facility expires on July 3, 2005, maintenance of the facility beyond the first (and subsequent) anniversary date(s) must be annually approved by the sponsoring bank. The CP conduit facility is also secured by certain mortgage loans held for sale and is not guaranteed by either the parent company or any of the subsidiaries that guarantee our homebuilding debt. As of March 31, 2003, $170.0 million had been drawn under the CP conduit facility. The mortgage loans pledged to secure the CP conduit facility are used as collateral for mortgage-backed securities sold in the secondary commercial paper markets at rates that are more attractive than those applicable to the mortgage warehouse facility. All mortgage company activities are financed under the mortgage warehouse and CP conduit facilities. Both of the financial services' credit facilities contain financial covenants with which we are in compliance. Our historical strategy of internal growth and growth by acquisition has required 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. Under a currently effective shelf registration statement, we have approximately 15 million shares of common stock issuable to effect, in whole or in part, possible future acquisitions. Under another effective shelf registration statement, we have, at April 17, 2003, the capacity to issue new debt or equity securities amounting to $585 million. In the future, the Company intends to continue to maintain effective shelf registration statements that will facilitate access to the capital markets. On December 3, 2002, we issued $215 million of 7.5% Senior notes due 2007. 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 our wholly-owned subsidiaries other than our financial services subsidiaries. On April 17, 2003, we issued $200 million of 6 7/8% Senior notes due 2013. On May 23, 2003, the majority of the net proceeds from this offering will be used to redeem the approximately $148.5 million aggregate principal amount outstanding of our 10% senior notes due 2006, at a redemption price of 100% of the principal amount plus accrued interest. On May 12, 2003, the holders of our zero coupon convertible senior notes due 2021 had an opportunity to require us to purchase their notes for cash at their accreted value of $559.73 per note on that date. None of the note holders exercised this right, but if all of the note holders had elected to require us to purchase all of their notes, we would have been required to purchase notes having a total accreted value of $213.3 million on that date. A combination of cash resources available from operations and under our revolving bank credit facility would have been adequate to meet our obligations associated with any exercise of the rights of our convertible note holders to require us to redeem their notes on May 12, 2003. Also, repaying any notes submitted for redemption would not have had any significant adverse effects on our financial condition, operations or cash flows, except that we would have been required to write off a pro-rata portion of unamortized debt issuance costs that totaled approximately $4.8 million on that date. Beginning on May 12, 2003, and continuing until the notes maturity date on May 11, 2021, we will have the right to call the zero coupon convertible senior notes. To redeem any notes that may be called, we must pay the holder of each note, at the holder's option, either the note's accreted value at the date of redemption in cash, or 26.2391 shares of our common stock for each $1,000 note redeemed. -25- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In March 2003, we repurchased 1,672,500 shares of our common stock in open market purchases at an aggregate purchase price of $29.5 million. At March 31, 2003, the Company had $33.5 million remaining on a board of directors' authorization for repurchases of our common stock. During the three months ended March 31, 2003, our Board of Directors declared a quarterly cash dividend of $0.07 per common share, which was paid on February 14, 2003 to stockholders of record on February 3, 2003. Except for ordinary expenditures for the construction of homes and the acquisition of land and lots for development and sale of homes, at March 31, 2003, we 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 we make to analysts, stockholders and the press in the course of presentations about us, may be construed as "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements typically include words such as "anticipate", "believe", "expect", "estimate", "project" and "future". Any or all of the forward-looking statements included in this report and in any other of our reports or public statements may turn out to be inaccurate due to known or unknown risks and uncertainties. As a result, actual results may 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. They include, but are not limited to: - changes in general economic, real estate and business conditions; - changes in interest rates and the availability of mortgage financing; - governmental regulations and environmental matters; - our substantial leverage; - competitive conditions within our industry; - the availability of capital; and - our ability to effect our 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, 10-Q and 8-K should be consulted. Additional information about issues that could lead to material changes in performance is contained in our 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 We are subject to interest rate risk on our long term debt. We monitor our exposure to changes in interest rates and utilize both fixed and variable rate debt. For fixed rate debt, changes in interest rates generally affect the value of the debt instrument, but not our 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 our future earnings and cash flows. We have mitigated our exposure to changes in interest rates on our 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. We generally do 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 our fixed-rate debt until such time as we are required to refinance, repurchase or repay such debt. Our interest rate swaps were not designated as hedges under Statement of Financial Accounting Standards No. 133 when it was adopted on October 1, 2000. We are exposed to market risk associated with changes in the fair values of the swaps, since any such changes must be reflected in our income statements. Our financial services segment is exposed to interest rate risk associated with its mortgage loan origination services. 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 sales of mortgage-backed securities are designated as fair value hedges of the risk of changes in the overall fair value of funded loans. Accordingly, changes in the value of the derivative instruments are recognized in current earnings, as are the changes in the value of the funded loans. The effectiveness of the fair value hedge is continuously monitored and any ineffectiveness, which for the three and six month periods ended March 31, 2003 and 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 IRLC's is managed through the use of best- efforts whole loan delivery commitments, forward sales of mortgage-backed securities and the infrequent 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 March 31, 2003, total forward sales of mortgage backed securities to mitigate interest rate risk related to uncommitted mortgage loans held for sale and IRLC's were approximately $237.0 million, the duration of which was less than nine months. The following table shows, as of March 31, 2003, our long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value. In addition, the table shows the notional amounts, weighted average interest rates and estimated fair market value of our interest rate swaps.
Six Months Fair Ended market September 30, Year ended September 30, value at ------------------------------------------------- 2003 2004 2005 2006 2007 Thereafter Total 3/31/03 --------- --------- --------- --------- --------- ---------- --------- --------- ($'s in millions) Debt: Fixed rate ................... $ 34.7 $ 172.8 $ 216.2 $ 153.9 $ 1.1 $2,265.9 $2,844.6 $2,800.8 Average interest rate ........ 7.56% 8.42% 10.59% 10.11% 4.78% 8.08% 8.41% -- Variable rate ................ $ 343.4 $ 7.2 -- $ 50.0 -- -- $ 400.6 $ 400.6 Average interest rate ........ 2.25% 3.95% -- 2.91% -- -- 2.36% -- Interest Rate Swaps: Variable to fixed ............ $ 200.0 $ 200.0 $ 200.0 $ 200.0 $ 200.0 $ 200.0 -- $ (22.1) Average pay rate ............. 5.10% 5.10% 5.10% 5.10% 5.10% 5.02% -- -- Average receive rate ......... 90-day LIBOR
-28- ITEM 4. CONTROLS AND PROCEDURES. The Company's management has long recognized its responsibilities for developing, implementing and monitoring effective and efficient controls and procedures. As part of those responsibilities, as of March 31, 2003, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a - 14(c) and Rule 15d - 14(c) under the Securities Exchange Act of 1934. Based on that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures were effective in timely alerting them to material information relating to the Company, including its consolidated subsidiaries, required to be included in the Company's periodic filings with the Securities and Exchange Commission. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to March 31, 2003. Accordingly, there have been no corrective actions taken as no significant deficiencies or material weaknesses were detected in these controls. -29- PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On January 30, 2003, the Company held its Annual Meeting of Stockholders (the "Annual Meeting"). At the Annual Meeting, the Company's stockholders approved an amendment to the Company's Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of Common Stock from 200 million to 400 million. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) At the Company's Annual Meeting, the stockholders re-elected eleven members of the Board of Directors of the Company to serve until the Company's next annual meeting of stockholders and until their respective successors are elected and qualified. The names of the eleven directors, the votes cast for and the number of votes withheld were as follows: Name Votes For Votes Withheld -------------------- ----------- -------------- Donald R. Horton 112,485,401 27,220,263 Bradley S. Anderson 133,533,061 6,172,603 Richard Beckwitt 133,331,981 6,373,682 Samuel R. Fuller 112,621,992 27,083,672 Richard I. Galland 133,528,499 6,177,165 Richard L. Horton 133,057,494 6,648,170 Terrill J. Horton 133,071,894 6,633,770 Francine I. Neff 133,569,536 6,136,128 James K. Schuler 112,071,930 27,633,734 Scott J. Stone 114,208,284 25,497,446 Donald J. Tomnitz 112,060,506 27,645,158 (b) At the Company's Annual Meeting, a vote was taken for the approval and adoption of a proposal to amend the Company's Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of Common Stock from 200 million to 400 million. The votes cast for this proposal were as follows: For: 130,984,786 Against: 8,436,988 Abstain: 283,639 -30- ITEM 5. OTHER INFORMATION. On May 12, 2003, the Company was advised by the paying agent, American Stock Transfer & Trust Company, that none of the holders of the Zero Coupon Convertible Senior Notes presented their notes for purchase by the Company pursuant to the holders' put option which commenced on March 31, 2003 and expired on May 12, 2003 at 5 p.m. New York City time. At expiration of the offer, $381,113,000 of the Zero Coupon Convertible Senior Notes at maturity in 2021 remain outstanding and subject to their existing terms. -31- 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 by reference from Exhibit 4.2 to the Company's registration statement (No. 333-76175) on Form S-3, filed with the Commission on April 13, 1999. 3.1(a) Amendment to Amended and Restated Certificate of Incorporation, as amended, of the Company, effective February 6, 2003, is incorporated by reference from Exhibit 3.1(a) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended December 31, 2002, filed with the Commission on February 18, 2003. 3.2 Amended and Restated Bylaws of the Company are incorporated by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998, filed with the Commission on February 16, 1999. 99.1 * Certificate provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Company's Chief Executive Officer. 99.2 * Certificate provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Company's Chief Financial Officer. ---------------- *Filed herewith. (b) Reports on Form 8-K. 1. On February 14, 2003, the Company filed a Current Report on Form 8-K (Item 9), dated February 14, 2003, which submitted to the Commission Section 906 certifications made by the Chief Executive Officer and Chief Financial Officer of the Company as required by the Sarbanes-Oxley Act of 2002. 2. On February 18, 2003, the Company filed a Current Report on Form 8-K (Item 9), dated February 18, 2003, which submitted to the Commission Section 906 certifications made by the Chief Executive Officer and Chief Financial Officer of the Company as required by the Sarbanes-Oxley Act of 2002. -32- 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: May 13, 2003 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) -33- CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Donald J. Tomnitz, certify that: 1. I have reviewed this quarterly report on Form 10-Q of D.R. Horton, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and -34- 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ Donald J. Tomnitz ------------------------------------ By: Donald J. Tomnitz Vice Chairman, Chief Executive Officer and President -35- I, Samuel R. Fuller, certify that: 1. I have reviewed this quarterly report on Form 10-Q of D.R. Horton, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and -36- 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ Samuel R. Fuller -------------------------------------- By: Samuel R. Fuller Executive Vice President, Treasurer and Chief Financial Officer -37- Index to Exhibits Exhibits. 3.1 Amended and Restated Certificate of Incorporation, as amended, of the Company is incorporated by reference from Exhibit 4.2 to the Company's registration statement (No. 333-76175) on Form S-3, filed with the Commission on April 13, 1999. 3.1(a) Amendment to Amended and Restated Certificate of Incorporation, as amended, of the Company, effective February 6, 2003, is incorporated by reference from Exhibit 3.1(a) to the Company's Quarterly Report on Form 10-Q/A for the quarter ended December 31, 2002, filed with the Commission on February 18, 2003. 3.2 Amended and Restated Bylaws of the Company are incorporated by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1998, filed with the Commission on February 16, 1999. 99.1 * Certificate provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Company's Chief Executive Officer. 99.2 * Certificate provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Company's Chief Financial Officer. *Filed herewith.