10-Q 1 dhi10q3q2003.txt 10Q FILING FOR 3RD QUARTER 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 June 30, 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 -- 157,195,345 shares as of August 8, 2003 ----------------- This report contains 35 pages. INDEX D.R. HORTON, INC.
PART I. FINANCIAL INFORMATION. Page ------ ---------------------- ---- ITEM 1. Financial Statements. Consolidated Balance Sheets-- June 30, 2003 and September 30, 2002. 3 Consolidated Statements of Income-- Three Months and Nine Months Ended June 30, 2003 and 2002. 4 Consolidated Statements of Cash Flows-- Nine Months Ended June 30, 2003 and 2002. 5 Notes to Consolidated Financial Statements. 6-19 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. 20-28 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. 29 ITEM 4. Controls and Procedures. 30 PART II. OTHER INFORMATION. -------- ------------------ ITEM 2. Changes in Securities and Use of Proceeds. 31 ITEM 5. Other Information. 32 ITEM 6. Exhibits and Reports on Form 8-K. 33-34 SIGNATURES. 35 -----------
ITEM 1. FINANCIAL STATEMENTS
D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, September 30, 2003 2002 --------- -------- (In thousands) (Unaudited) ASSETS Homebuilding: Cash and cash equivalents................................................................. $ 264,158 $ 92,106 Inventories: Finished homes and construction in progress........................................... 2,651,045 2,035,221 Residential lots - developed and under development................................... 2,335,681 2,297,545 Land held for development ............................................................ 10,570 10,303 ------------ ------------- 4,997,296 4,343,069 Property and equipment (net).............................................................. 75,689 71,895 Earnest money deposits and other assets................................................... 418,600 430,415 Excess of cost over net assets acquired................................................... 581,230 579,230 ------------ ------------- 6,336,973 5,516,715 ------------ ------------- Financial Services: Cash and cash equivalents................................................................. 32,084 12,238 Mortgage loans held for sale.............................................................. 525,475 464,088 Other assets.............................................................................. 21,527 24,486 ------------ ------------- 579,086 500,812 ------------ ------------- $ 6,916,059 $ 6,017,527 ------------ ------------- LIABILITIES Homebuilding: Accounts payable and other liabilities.................................................... $ 918,128 $ 834,048 Notes payable............................................................................. 2,666,990 2,486,976 ------------ ------------ 3,585,118 3,321,024 ------------ ------------ Financial Services: Accounts payable and other liabilities.................................................... 12,147 14,340 Notes payable to financial institutions................................................... 414,042 391,355 ------------ ------------ 426,189 405,695 ------------ ------------ 4,011,307 3,726,719 ------------ ------------ Minority interests........................................................................ 69,450 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, 157,131,997 shares at June 30, 2003 and 146,505,091 shares at September 30, 2002, issued and outstanding................................................................ 1,571 1,465 Additional capital........................................................................ 1,576,738 1,349,630 Unearned compensation..................................................................... (2,707) (4,453) Retained earnings......................................................................... 1,289,222 923,221 Treasury stock, 1,672,500 shares at June 30, 2003 and no shares at September 30, 2002, at cost........................................................... (29,522) -- ------------ ------------ 2,835,302 2,269,863 ------------ ------------ $ 6,916,059 $ 6,017,527 ============ ============ See accompanying notes to consolidated financial statements.
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D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Nine Months Ended June 30, Ended June 30, ----------------- ------------------ 2003 2002 2003 2002 -------- -------- -------- -------- (In thousands, except per share data) (Unaudited) Homebuilding: Revenues Home sales................................................ $ 2,108,899 $ 1,750,189 $ 5,553,177 $ 4,410,284 Land/lot sales............................................ 57,869 29,426 189,065 80,499 ----------- ------------ ----------- ------------ 2,166,768 1,779,615 5,742,242 4,490,783 ----------- ------------ ----------- ------------ Cost of sales Home sales................................................ 1,676,326 1,416,050 4,429,621 3,573,790 Land/lot sales............................................ 50,505 25,938 162,155 70,048 ----------- ------------ ----------- ------------ 1,726,831 1,441,988 4,591,776 3,643,838 ----------- ------------ ----------- ------------ Gross profit Home sales................................................ 432,573 334,139 1,123,556 836,494 Land/lot sales............................................ 7,364 3,488 26,910 10,451 ----------- ------------ ----------- ------------ 439,937 337,627 1,150,466 846,945 Selling, general and administrative expense.................... 207,971 177,020 574,437 444,931 Interest expense............................................... 1,703 1,465 2,057 5,224 Other expense.................................................. 3,330 3,842 3,054 3,988 ----------- ------------ ----------- ------------ 226,933 155,300 570,918 392,802 ----------- ------------ ----------- ------------ Financial Services: Revenues....................................................... 45,619 28,864 123,626 77,651 General and administrative expense............................. 25,344 18,220 69,586 48,261 Interest expense............................................... 1,732 1,155 5,281 3,490 Other (income)................................................. (5,434) (4,714) (16,344) (10,576) ----------- ------------ ----------- ------------ 23,977 14,203 65,103 36,476 ----------- ------------ ----------- ------------ INCOME BEFORE INCOME TAXES................................ 250,910 169,503 636,021 429,278 Provision for income taxes..................................... 95,345 63,563 240,793 160,979 ----------- ------------ ----------- ------------ NET INCOME................................................ $ 155,565 $ 105,940 $ 395,228 $ 268,299 =========== ============ =========== ============ Net income per share: Basic..................................................... $ 1.07 $ 0.72 $ 2.70 $ 2.06 Diluted................................................... $ 0.99 $ 0.67 $ 2.62 $ 1.94 =========== ============ =========== ============ Weighted average number of shares of stock: Basic..................................................... 145,996 146,331 146,283 130,174 Diluted................................................... 157,476 158,957 151,400 139,263 =========== ============ =========== ============ Cash dividends per share....................................... $ 0.07 $ 0.06 $ 0.20 $ 0.17 =========== ============ =========== ============
See accompanying notes to consolidated financial statements. -4-
D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended June 30, -------------- 2003 2002 ---- ---- (In thousands) (Unaudited) OPERATING ACTIVITIES Net income............................................................................. $ 395,228 $ 268,299 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.......................................................... 30,041 18,621 Amortization of debt premiums and fees................................................. 5,848 5,991 Changes in operating assets and liabilities: Increase in inventories............................................................. (545,754) (311,773) Decrease (increase) in earnest money deposits and other assets...................... 20,961 (38,274) Increase in mortgage loans held for sale............................................ (61,387) (65,660) Increase (decrease) in accounts payable and other liabilities....................... 88,915 (110,590) ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES....................................................... (66,148) (233,386) ----------- ----------- INVESTING ACTIVITIES Net purchases of property and equipment................................................ (31,245) (28,155) Distributions from venture capital entities............................................ -- 250 Net cash paid for acquisitions......................................................... -- (152,662) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES....................................................... (31,245) (180,567) ----------- ----------- FINANCING ACTIVITIES Proceeds from notes payable............................................................ 1,507,421 2,439,106 Issuance of senior notes payable....................................................... 512,556 247,928 Repayment of notes payable............................................................. (1,679,582) (2,451,496) Proceeds from stock associated with certain employee benefit plans..................... 7,645 12,380 Purchase of treasury stock............................................................. (29,522) -- Payment of cash dividends.............................................................. (29,227) (17,318) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES................................................... 289,291 230,600 ----------- ----------- INCREASE (DECREASE) IN CASH................................................................. 191,898 (183,353) Cash at beginning of period............................................................ 104,344 239,280 ----------- ----------- Cash at end of period.................................................................. $ 296,242 $ 55,927 =========== ============
See accompanying notes to consolidated financial statements. -5- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 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 (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended June 30, 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 - SEGMENT INFORMATION The Company's financial reporting segments consist of homebuilding and financial services. The Company's homebuilding operations comprise the most substantial part of its business, with approximately 98% of consolidated revenues for the three-months and nine-months ended June 30, 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 home sales revenues were generated from the sale of detached homes for the three months and nine months ended June 30, 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 June 30, 2003, the mortgage subsidiary's total equity was $133.2 million. NOTE C - CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 provides guidance for the financial accounting and reporting of interests in certain variable interest entities. FIN 46 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. FIN 46 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 interests in variable interest entities are required even if the company is not required to consolidate them. The consolidation requirements of FIN 46 are currently effective for all interests in variable interest entities created after January 31, 2003, and will be effective for all interests in variable interest entities created before February 1, 2003 in the first fiscal year or interim period beginning after June 15, 2003. In the ordinary course of its business the Company enters into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Under such option purchase contracts the Company will fund a stated deposit in consideration for the right to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase -6- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 contracts, most of the Company's option deposits are non-refundable.Certain non- refundable deposits are deemed to create a variable interest in a variable interest entity under the requirements of FIN 46. As such, certain of the Company's option purchase contracts result in the acquisition of a variable interest in the entity holding the land parcel under option. The Company's maximum exposure to loss associated with such variable interest entities is limited to the amount of the Company's option deposit. In accordance with the implementation requirements of FIN 46, the Company has evaluated all of its interests in variable interest entities created after January 31, 2003 and has begun its evaluation of its variable interests created prior to February 1, 2003. Based upon its evaluations to date, the Company has consolidated certain variable interest entities from which the Company is purchasing lots under option contracts.The consolidation of these entities added $41.7 million in inventory and minority interests to the Company's balance sheet at June 30, 2003. The Company's obligations related to these lot option contracts are guaranteed by performance letters of credit totaling $17.3 million. Creditors, if any, of these variable interest entities have no recourse against the Company. The Company will complete the evaluations of all of its interests in variable interest entities by September 30, 2003. Based on the results of evaluations completed through June 30, 2003, the Company believes that FIN 46 will not materially affect its financial position, results of operations or cash flows. NOTE D - EARNINGS PER SHARE Basic earnings per share for the three months and nine months ended June 30, 2003 and 2002 is based on the weighted average number of shares of common stock outstanding. Diluted earnings per share is based on the weighted average number of shares of common stock and dilutive securities outstanding. The following table sets forth the 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 Nine Months Ended June 30, June 30, ------------------- ------------------ 2003 2002 2003 2002 ---- ---- ---- ---- Numerator: Net income..................................................... $155,565 $105,940 $395,228 $268,299 Effect of dilutive securities: Interest expense and amortization of issuance costs associated with zero coupon convertible senior notes, net of applicable income taxes................................. 993 1,054 993 2,096 -------- -------- -------- -------- Numerator for diluted earnings per share after assumed conversions................................................ $156,558 $106,994 $396,221 $270,395 ======== ======== ======== ======== Denominator: Denominator for basic earnings per share-- weighted average shares.................................... 145,996 146,331 146,283 130,174 Effect of dilutive securities: Zero coupon convertible senior notes........................... 9,086 10,000 3,029 6,667 Employee stock options......................................... 2,394 2,626 2,088 2,422 -------- -------- -------- -------- Denominator for diluted earnings per share-- adjusted weighted average shares........................... 157,476 158,957 151,400 139,263 ======== ======== ======== ========
-7- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 NOTE E - DEBT The Company's notes payable consist of the following (in thousands):
June 30, September 30, 2003 2002 ----------- -------------- Homebuilding: Unsecured: Revolving credit facility due 2006.............................. $ -- $ -- 8 3/8% Senior notes due 2004, net............................... 149,637 149,339 10 1/2% Senior notes due 2005, net.............................. 199,657 199,559 10% Senior notes due 2006, net.................................. -- 147,802 7 1/2% Senior notes due 2007, net............................... 215,000 -- 9% Senior notes due 2008, net................................... 102,023 102,427 8% Senior notes due 2009, net................................... 383,584 383,438 9 3/8% Senior notes due 2009, net............................... 244,437 246,057 9 3/4% Senior subordinated notes due 2010, net.................. 149,059 148,994 9 3/8% Senior subordinated notes due 2011, net.................. 199,727 199,710 7 7/8% Senior notes due 2011, net............................... 198,532 198,437 10 1/2% Senior subordinated notes due 2011, net................. 152,152 153,284 8 1/2% Senior notes due 2012, net............................... 248,101 247,995 6 7/8% Senior notes due 2013, net............................... 200,000 -- 5 7/8% Senior notes due 2013, net............................... 100,000 -- Zero coupon convertible senior notes due 2021, net.............. -- 209,144 Other secured........................................................ 125,081 100,790 ---------- ---------- $2,666,990 $2,486,976 ========== ========== Financial Services: Mortgage warehouse facility due 2003................................. $ 214,042 $ 242,355 Commercial paper conduit facility due 2005........................... 200,000 149,000 ---------- ---------- $ 414,042 $ 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. On August 5, 2003, the facility was amended and the amount available for use for letters of credit was increased to $250 million. The interest rate applicable to the revolving credit facility at June 30, 2003 was 2.7%. 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 June 30, 2003, these covenants limit the additional homebuilding debt the Company could incur to $1,601.1 million, which included $694.7 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%. -8- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 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 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 May 23, 2003, the Company redeemed its 10% Senior Notes due 2006 at an aggregate redemption price of approximately $150.1 million, including accrued interest. The Company used part of the proceeds of the 6 7/8% Senior Notes to redeem the called notes. Concurrent with the redemption, the Company recorded interest expense of approximately $1.3 million, representing unamortized discount and unamortized debt issuance costs associated with the redeemed notes. On June 18, 2003, the Company issued $100 million principal amount of 5 7/8% Senior Notes. The notes, which are due July 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 105.875% of the principal amount through July 1, 2006, plus accrued interest. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs, is 5.9%. On May 27, 2003, the Company called all of its zero coupon convertible senior notes for redemption. The call for redemption gave note holders the right to convert their notes into shares of D.R. Horton common stock. As a result, all of the notes were presented for conversion into D.R. Horton common stock, and accordingly the Company issued approximately 10 million shares of common stock in exchange for the notes. As a result of the conversion, common stock increased $0.1 million and additional capital increased $219.2 million. On July 25, 2003, the Company redeemed its 9% Senior Notes due April 15, 2008 at an aggregate redemption price of $107.0 million, including accrued interest. The Company used the proceeds of the 5 7/8% Senior Notes and available cash to redeem the called notes. Concurrent with the redemption, the Company recorded interest expense of approximately $2.5 million, representing the difference between the redemption premium and the unamortized premium associated with the redeemed notes. Financial Services: The Company's mortgage subsidiary has a $230 million, one-year mortgage warehouse line payable to financial institutions, maturing February 12, 2004,at the 30-day LIBOR rate plus a fixed premium. The Company's mortgage subsidiary also has a $300 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 $530 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 June 30, 2003 was 2.2%. The interest rate on the commercial paper conduit facility at June 30, 2003 was 1.9%. -9- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 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 Nine Months Ended June 30, June 30, ------------------------ --------------------------- 2003 2002 2003 2002 -------- ---------- --------- ---------- Capitalized interest, beginning of period........... $180,954 $ 124,652 $ 153,536 $ 96,910 Interest incurred - homebuilding.................... 62,354 58,349 179,354 141,596 Interest expensed: Directly - homebuilding........................ (1,703) (1,465) (2,057) (5,224) Amortized to cost of sales..................... (55,487) (37,811) (144,715) (89,557) -------- --------- --------- ---------- Capitalized interest, end of period................. $186,118 $ 143,725 $ 186,118 $ 143,725 ======== ========= ========= =========
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. Changes in the Company's warranty liability are as follows (in thousands):
Three Months Ended Nine Months Ended June 30, 2003 June 30, 2003 ------------------ ----------------- Warranty liability, beginning of period................... $46,122 $39,471 Warranties issued.................................... 10,480 27,647 Settlements made..................................... (6,313) (16,829) ------ ------- Warranty liability, end of period......................... $50,289 $50,289 ======= =======
-10- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 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 Nine Months Ended June 30, June 30, -------------------------- ------------------------ 2003 2002 2003 2002 ---- ---- ---- ---- Net income, as reported........................................ $155,565 $105,940 $395,228 $268,299 Pro forma effect of expensing stock options (net of related tax effects)................. (1,068) (568) (3,204) (1,704) -------- -------- -------- -------- Pro forma net income........................................... $154,497 $105,372 $392,024 $266,595 ======== ======== ======== ======== Reported basic net income per share............................ $ 1.07 $ 0.72 $ 2.70 $ 2.06 Pro forma effect of expensing stock options.................... (0.01) -- (0.02) (0.01) -------- -------- --------- ----- Pro forma basic net income per share........................... $ 1.06 $ 0.72 $ 2.68 $ 2.05 ======== ======== ========= ======== Reported diluted net income per share.......................... $ 0.99 $ 0.67 $ 2.62 $ 1.94 Pro forma effect of expensing stock options.................... -- -- (0.02) (0.01) -------- -------- --------- -------- Pro forma diluted net income per share......................... $ 0.99 $ 0.67 $ 2.60 $ 1.93 ======== ======== ========= ========
NOTE I - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 30, 2003. The Company does not believe that the implementation of SFAS No. 149 will have a material impact on the Company's financial position, results of operations or cash flows. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The Company does not believe that the implementation of SFAS No. 150 will have a material impact on the Company's financial position, results of operations or cash flows. -11- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 NOTE J - SUMMARIZED FINANCIAL INFORMATION The 5 7/8%, 6 7/8%, 7 1/2%, 7 7/8%, 8%, 8 3/8%, 8 1/2%, 9%, 9 3/8%, and 10 1/2% Senior Notes, and the 9 3/8%, 9 3/4% and 10 1/2% Senior Subordinated 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 June 30, 2003 Non-Guarantor Subsidiaries ---------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ --------- -------- ------------ ---------- ASSETS (In thousands) Homebuilding: Cash and cash equivalents ............................ $ -- $ 244,810 $ -- $ 19,348 $ -- $ 264,158 Advances to/investments in unconsolidated subsidiaries ........................................ 4,716,250 307,858 -- -- (5,024,108) -- Inventories .......................................... 874,740 4,004,432 -- 118,326 (202) 4,997,296 Property and equipment (net) ......................... 12,420 57,099 -- 6,170 -- 75,689 Earnest money deposits and other assets .............. 158,364 247,959 -- 12,277 -- 418,600 Excess of cost over net assets acquired .............. -- 581,230 -- -- -- 581,230 --------- --------- ----- ------- --------- --------- 5,761,774 5,443,388 -- 156,121 (5,024,310) 6,336,973 --------- --------- ----- ------- --------- --------- Financial Services: Cash and cash equivalents ............................ -- -- 32,084 -- -- 32,084 Mortgage loans held for sale ......................... -- -- 525,475 -- -- 525,475 Other assets ......................................... -- -- 21,527 -- -- 21,527 ---------- ---------- ------- ------- ---------- --------- -- 579,086 -- -- 579,086 ---------- ---------- -------- -------- ----------- ---------- Total Assets ........................................ $5,761,774 $5,443,388 $579,086 $156,121 $(5,024,310) $6,916,059 ========== ========== ======== ======== =========== ========== LIABILITIES & EQUITY Homebuilding: Accounts payable and other liabilities ............... $ 324,377 $ 576,195 $ -- $ 17,556 $ -- $ 918,128 Advances from parent/unconsolidated subsidiaries ........................................ -- 3,034,144 -- 33,708 (3,067,852) -- Notes payable ........................................ 2,602,095 38,707 -- 26,188 -- 2,666,990 --------- ------ ---- ------ ---------- --------- 2,926,472 3,649,046 -- 77,452 (3,067,852) 3,585,118 --------- --------- ---- ------ ---------- --------- Financial Services: Accounts payable and other liabilities ............... -- -- 12,147 -- -- 12,147 Advances from parent/unconsolidated subsidiaries ......................................... -- -- 29,417 -- (29,417) -- Notes payable ........................................ -- -- 414,042 -- -- 414,042 --------- --------- ------- ------ --------- --------- -- -- 455,606 -- (29,417) 426,189 --------- --------- ------- ------ --------- --------- Total Liabilities .................................... 2,926,472 3,649,046 455,606 77,452 (3,097,269) 4,011,307 --------- --------- ------- ------ ---------- --------- Minority interests ................................... -- -- 23 69,427 -- 69,450 --------- ---------- -------- ------ ---------- --------- Stockholders' Equity ................................. 2,835,302 1,794,342 123,457 9,242 (1,927,041) 2,835,302 --------- --------- ------- ----- ---------- --------- Total Liabilities & Equity ........................... $5,761,774 $5,443,388 $579,086 $156,121 $(5,024,310) $6,916,059 ========== ========== ======== ======== =========== ==========
-12- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 NOTE J - 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 ========== ========== ======== ======== =========== ==========
-13- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 NOTE J - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income Three Months Ended June 30, 2003 Non-Guarantor Subsidiaries ------------------ D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total -------------- ------------ --------- --------- ------------ ---------- (In thousands) Homebuilding: Revenues: Home sales ....................................... $ 311,161 $ 1,733,481 $ -- $ 64,257 $ -- $2,108,899 Land/lot sales ................................... 8,896 48,973 -- -- -- 57,869 --------- --------- ------ ------- --------- --------- 320,057 1,782,454 -- 64,257 -- 2,166,768 --------- --------- ------ ------- --------- --------- Cost of sales: Home sales ....................................... 248,997 1,380,022 -- 47,351 (44) 1,676,326 Land/lot sales .. ................................ 5,472 45,033 -- -- -- 50,505 --------- --------- ------ ------- --------- --------- 254,469 1,425,055 -- 47,351 (44) 1,726,831 --------- --------- ------ ------- --------- --------- Gross profit: Home sales ....................................... 62,164 353,459 -- 16,906 44 432,573 Land/lot sales ................................... 3,424 3,940 -- -- -- 7,364 --------- --------- ------ ------- --------- --------- 65,588 357,399 -- 16,906 44 439,937 Selling, general and administrative expense ............................................ 61,353 135,236 -- 8,381 3,001 207,971 Interest expense .................................... 1,088 847 -- 630 (862) 1,703 Other expense (income) .............................. (247,763) (2,836) -- 1,916 252,013 3,330 --------- --------- ------ ------- --------- --------- 250,910 224,152 -- 5,979 (254,108) 226,933 --------- --------- ------ ------- --------- --------- Financial services: Revenues ............................................ -- -- 45,619 -- -- 45,619 General and administrative expense .................. -- -- 28,345 -- (3,001) 25,344 Interest expense .................................... -- -- 1,732 -- -- 1,732 Other (income) ...................................... -- -- (5,434) -- -- (5,434) --------- --------- ------ ------- --------- --------- -- -- 20,976 -- 3,001 23,977 --------- --------- ------ ------- --------- --------- Income before income taxes .......................... 250,910 224,152 20,976 5,979 (251,107) 250,910 Provision for income taxes .......................... 95,345 85,174 7,975 2,272 (95,421) 95,345 --------- --------- ------ ------- --------- --------- Net income .......................................... $ 155,565 $ 138,978 $ 13,001 $ 3,707 $ (155,686) $ 155,565 =========== ========== ======== ======== =========== ==========
-14- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 NOTE J - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income Nine Months Ended June 30, 2003 Non-Guarantor Subsidiaries ----------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ --------- -------- ------------ ---------- (In thousands) Homebuilding: Revenues: Home sales ....................................... $ 764,136 $ 4,650,213 $ -- $138,828 $ -- $5,553,177 Land/lot sales ................................... 14,680 174,385 -- -- -- 189,065 --------- --------- ------ ------- --------- --------- 778,816 4,824,598 -- 138,828 -- 5,742,242 --------- --------- ------ ------- --------- --------- Cost of sales: Home sales ....................................... 598,123 3,727,772 -- 103,960 (234) 4,429,621 Land/lot sales ................................... 15,733 146,422 -- -- -- 162,155 --------- --------- ------ ------- --------- --------- 613,856 3,874,194 -- 103,960 (234) 4,591,776 --------- --------- ------ ------- --------- --------- Gross profit: Home sales ....................................... 166,013 922,441 -- 34,868 234 1,123,556 Land/lot sales ................................... (1,053) 27,963 -- -- -- 26,910 --------- --------- ------ ------- --------- --------- 164,960 950,404 -- 34,868 234 1,150,466 Selling, general and administrative expense ............................................ 159,954 392,015 -- 14,285 8,183 574,437 Interest expense ................................. 1,088 384 -- 1,447 (862) 2,057 Other expense (income) ........................... (632,103) (6,075) -- 3,314 637,918 3,054 --------- --------- ------ ------- --------- --------- 636,021 564,080 -- 15,822 (645,005) 570,918 --------- --------- ------ ------- --------- --------- Financial services: Revenues ............................................ -- -- 123,626 -- -- 123,626 General and administrative expense .................. -- -- 77,769 -- (8,183) 69,586 Interest expense .................................... -- -- 5,281 -- -- 5,281 Other (income) ...................................... -- -- (16,344) -- -- (16,344) --------- --------- ------ ------- --------- --------- -- -- 56,920 -- 8,183 65,103 --------- --------- ------ ------- --------- --------- Income before income taxes .......................... 636,021 564,080 56,920 15,822 (636,822) 636,021 Provision for income taxes .......................... 240,793 213,557 21,550 5,990 (241,097) 240,793 --------- --------- ------ ------- --------- --------- Net income .......................................... $ 395,228 $ 350,523 $ 35,370 $ 9,832 $ (395,725) $ 395,228 ========== ========== ======== ======== ========== =========
-15- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 NOTE J - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income Three Months Ended June 30, 2002 Non-Guarantor Subsidiaries ------------------ D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ----------- ------------ ---------- -------- ------------ ---------- (In thousands) Homebuilding: Revenues: Home sales ....................................... $ 239,827 $ 1,498,052 $ -- $ 12,310 $ -- $1,750,189 Land/lot sales ................................... 2,106 27,320 -- -- -- 29,426 --------- --------- ------ ------- --------- --------- 241,933 1,525,372 -- 12,310 -- 1,779,615 --------- --------- ------ ------- --------- --------- Cost of sales: Home sales ....................................... 184,347 1,221,525 -- 10,237 (59) 1,416,050 Land/lot sales ................................... 2,129 23,809 -- -- -- 25,938 --------- --------- ------ ------- --------- --------- 186,476 1,245,334 -- 10,237 (59) 1,441,988 --------- --------- ------ ------- --------- --------- Gross profit: Home sales ....................................... 55,480 276,527 -- 2,073 59 334,139 Land/lot sales ................................... (23) 3,511 -- -- -- 3,488 --------- --------- ------ ------- --------- --------- 55,457 280,038 -- 2,073 59 337,627 Selling, general and administrative expense ............................................ 43,885 129,788 -- 1,465 1,882 177,020 Interest expense .................................... 1,018 446 -- 1 -- 1,465 Other expense (income) .............................. (158,949) (2,035) -- (132) 164,958 3,842 --------- --------- ------ ------- --------- --------- 169,503 151,839 -- 739 (166,781) 155,300 --------- --------- ------ ------- --------- --------- Financial services: Revenues ............................................ -- -- 28,864 -- -- 28,864 General and administrative expense .................. -- -- 20,102 -- (1,882) 18,220 Interest expense .................................... -- -- 1,155 -- -- 1,155 Other (income) ...................................... -- -- (4,714) -- -- (4,714) --------- --------- ------ ------- --------- --------- -- -- 12,321 -- 1,882 14,203 --------- --------- ------ ------- --------- --------- Income before income taxes .......................... 169,503 151,839 12,321 739 (164,899) 169,503 Provision for income taxes .......................... 63,563 56,939 4,621 276 (61,836) 63,563 --------- --------- ------ ------- --------- --------- Net income .......................................... $ 105,940 $ 94,900 $ 7,700 $ 463 $ (103,063) $ 105,940 =========== =========== ======== ======== =========== ==========
-16- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 NOTE J - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income Nine Months Ended June 30, 2002 Non-Guarantor Subsidiaries ----------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ----------- ------------ --------- ------- ------------ ---------- (In thousands) Homebuilding: Revenues: Home sales ....................................... $ 641,378 $ 3,720,591 $ -- $ 48,315 $ -- $4,410,284 Land/lot sales ................................... 3,566 76,933 -- -- -- 80,499 --------- --------- ------ ------- --------- --------- 644,944 3,797,524 -- 48,315 -- 4,490,783 --------- --------- ------ ------- --------- --------- Cost of sales: Home sales ....................................... 502,674 3,031,487 -- 39,903 (274) 3,573,790 Land/lot sales ................................... 2,634 67,414 -- -- -- 70,048 --------- --------- ------ ------- --------- --------- 505,308 3,098,901 -- 39,903 (274) 3,643,838 --------- --------- ------ ------- --------- --------- Gross profit: Home sales ....................................... 138,704 689,104 -- 8,412 274 836,494 Land/lot sales ................................... 932 9,519 -- -- -- 10,451 --------- --------- ------ ------- --------- --------- 139,636 698,623 -- 8,412 274 846,945 Selling, general and administrative expense ............................................ 116,930 318,241 -- 4,772 4,988 444,931 Interest expense .................................... 3,929 1,292 -- 13 (10) 5,224 Other expense (income) .............................. (410,501) (3,909) -- 6,257 412,141 3,988 --------- --------- ------ ------- --------- --------- 429,278 382,999 -- (2,630) (416,845) 392,802 --------- --------- ------ ------- --------- --------- Financial services: Revenues ............................................ -- -- 77,651 -- -- 77,651 General and administrative expense .................. -- -- 53,249 -- (4,988) 48,261 Interest expense .................................... -- -- 3,490 -- -- 3,490 Other (income) ...................................... -- -- (10,576) -- -- (10,576) --------- --------- ------ ------- --------- --------- -- -- 31,488 -- 4,988 36,476 --------- --------- ------ ------- --------- --------- Income before income taxes .......................... 429,278 382,999 31,488 (2,630) (411,857) 429,278 Provision for income taxes .......................... 160,979 143,624 11,809 (987) (154,446) 160,979 --------- --------- ------ ------- --------- --------- Net income .......................................... $ 268,299 $ 239,375 $ 19,679 $ (1,643) $ (257,411) $ 268,299 =========== ============ ========= ======== =========== ==========
-17- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 NOTE J - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Cash Flows Nine Months Ended June 30, 2003 Non-Guarantor Subsidiaries ---------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ --------- ------- ------------ --------- (In thousands) OPERATING ACTIVITIES Net income .......................................... $ 395,228 $ 350,523 $ 35,370 $ 9,832 $ (395,725) $ 395,228 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ...................... 5,592 21,764 1,317 1,368 -- 30,041 Amortization of debt premiums and fees ............. 5,848 -- -- -- -- 5,848 Changes in operating assets and liabilities: (Increase) decrease in inventories ................ (160,569) (396,464) -- 11,447 (168) (545,754) (Increase) decrease in earnest money deposits and other assets ........................ 55,911 (33,440) 3,027 131 (4,668) 20,961 Increase in mortgage loans held for sale ........... -- -- (61,387) -- -- (61,387) Increase (decrease) in accounts payable and other liabilities ............................ (16,780) 92,943 (2,196) 14,924 24 88,915 --------- --------- ------ ------- --------- --------- Net cash provided by (used in) operating activities ......................................... 285,230 35,326 (23,869) 37,702 (400,537) (66,148) --------- --------- ------ ------- --------- --------- INVESTING ACTIVITIES Net purchases of property and equipment ............. (4,528) (23,439) (1,385) (1,893) -- (31,245) --------- --------- ------ ------- --------- --------- Net cash used in investing activities ............... (4,528) (23,439) (1,385) (1,893) -- (31,245) --------- --------- ------ ------- --------- --------- FINANCING ACTIVITIES Net change in notes payable ......................... 339,422 (9,805) 22,687 (11,909) -- 340,395 Increase (decrease) in intercompany advances......... (569,020) 162,455 22,413 (16,385) 400,537 -- Purchase of treasury stock .......................... (29,522) -- -- -- -- (29,522) Proceeds from stock associated with certain employee benefit plans ............................. 7,645 -- -- -- -- 7,645 Cash dividends paid ................................. (29,227) -- -- -- -- (29,227) --------- --------- ------ ------- --------- --------- Net cash provided by (used in) financing activities ......................................... (280,702) 152,650 45,100 (28,294) 400,537 289,291 Increase in cash .................................... -- 164,537 19,846 7,515 -- 191,898 Cash at beginning of period ......................... -- 80,273 12,238 11,833 -- 104,344 --------- --------- ------ ------- --------- --------- Cash at end of period ............................... $ -- $ 244,810 $ 32,084 $ 19,348 $ -- $ 296,242 ========== ========== ======== ======== ========== ==========
-18- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2003 NOTE J - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Cash Flows Nine Months Ended June 30, 2002 Non-Guarantor Subsidiaries ----------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ----------- ------------ --------- -------- ------------ -------- (In thousands) Net income ........................................... $ 268,299 $ 239,375 $ 19,679 $ (1,643) $(257,411) $ 268,299 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ...................... 3,065 14,075 1,102 379 -- 18,621 Amortization of debt premiums and fees ............. 5,991 -- -- -- -- 5,991 Changes in operating assets and liabilities: Increase in inventories .......................... (115,340) (150,207) -- (46,220) (6) (311,773) Increase in earnest money deposits and other assets ................................ (19,419) (8,916) (2,068) (2,281) (5,590) (38,274) Increase in mortgage loans held for sale ......... -- -- (65,660) -- -- (65,660) Increase (decrease) in accounts payable and other liabilities ........................... (30,740) (96,768) 682 16,198 38 (110,590) --------- --------- ------ ------- --------- --------- Net cash provided by (used in) operating activities ........................................ 111,856 (2,441) (46,265) (33,567) (262,969) (233,386) --------- --------- ------ ------- --------- --------- INVESTING ACTIVITIES Net purchases of property and equipment ............ (4,014) (21,317) (1,908) (916) -- (28,155) Distributions from venture capital entities ........ -- -- -- 250 -- 250 Net cash paid for acquisitions ..................... -- (152,662) -- -- -- (152,662) --------- --------- ------ ------- --------- --------- Net cash used in investing activities .............. (4,014) (173,979) (1,908) (666) -- (180,567) --------- --------- ------ ------- --------- --------- FINANCING ACTIVITIES Net change in notes payable ........................ 478,331 (266,436) 21,989 (3,897) 5,551 235,538 Increase (decrease) in intercompany advances........ (581,235) 469,448 32,378 46,856 32,553 -- Proceeds from stock associated with certain employee benefit plans ........................... 12,380 -- -- -- -- 12,380 Cash dividends/distributions paid .................. (17,318) (224,865) -- -- 224,865 (17,318) --------- --------- ------ ------- --------- --------- Net cash provided by (used in) financing activities ....................................... (107,842) (21,853) 54,367 42,959 262,969 230,600 --------- --------- ------ ------- --------- --------- Increase (decrease) in cash ........................ -- (198,273) 6,194 8,726 -- (183,353) Cash at beginning of period ........................ -- 230,481 6,975 1,824 -- 239,280 --------- --------- ------ ------- --------- --------- Cash at end of period .............................. $ -- $ 32,208 $ 13,169 $ 10,550 $ -- $ 55,927 =========== =========== ======== ======== ========== =========
-19- 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 nine months ended June 30, 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 47 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 continuing as the surviving corporation. Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002 Consolidated revenues for the three months ended June 30, 2003, increased 22.3%, to $2,212.4 million, from $1,808.5 million for the comparable period of 2002, due to increases in both homebuilding and financial services revenues. Income before income taxes for the three months ended June 30, 2003, increased 48.0%, to $250.9 million, from $169.5 million for the comparable period of 2002. As a percentage of revenues, income before income taxes for the three months ended June 30, 2003, increased 1.9 percentage points, to 11.3% 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 three months ended June 30, 2002. The consolidated provision for income taxes increased 50.0%, to $95.3 million for the three months ended June 30, 2003, from $63.6 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 June 30, 2003 increased to 38.0%, from 37.5% for the comparable period of 2002, due primarily to increases in pre-tax income in states with higher tax rates. Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 2002 Consolidated revenues for the nine months ended June 30, 2003, increased 28.4%, to $5,865.9 million, from $4,568.4 million for the comparable period of 2002, due to increases in both homebuilding and financial services revenues. Approximately $498.8 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 nine months ended June 30, 2003, increased 48.2%, to $636.0 million, from $429.3 million for the comparable period of 2002. As a percentage of revenues, income before income taxes for the nine months ended June 30, 2003, increased 1.4 percentage points, to 10.8% 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 nine months ended June 30, 2002. The consolidated provision for income taxes increased 49.6%, to $240.8 million for the nine months ended June 30, 2003, from $161.0 million for the same period of 2002, due to the corresponding increase in income before income taxes and an increase in the effective income tax rate. The effective income tax rate for the nine months ended June 30, 2003 increased to 37.9%, from 37.5% for the comparable period of 2002, due primarily to increases in pre-tax income in states with higher tax rates. -20- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - HOMEBUILDING The following tables set forth certain operating and financial data for our homebuilding activities ($ in millions):
Percentages of Homebuilding Revenues --------------------------------------- Three Months Ended Nine Months Ended June 30, June 30, ------------------ ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- Costs and expenses: Cost of sales ................ 79.7% 81.0% 80.0% 81.2% Selling, general and administrative expense..... 9.6 9.9 10.0 9.9 Interest expense ............. 0.1 0.1 -- 0.1 --- --- ---- --- Total costs and expenses ..... 89.4 91.0 90.0 91.2 Other expense ................ 0.1 0.3 0.1 0.1 --- --- --- --- Income before income taxes ... 10.5% 8.7% 9.9% 8.7% ==== === === ===
Homes Closed Three Months Ended June 30, Nine Months Ended June 30, ------------ --------------------------- -------------------------- 2003 2002 2003 2002 ----------------- ------------------ ------------------- ------------------- Homes Homes Homes Homes Closed Revenues Closed Revenues Closed Revenues Closed Revenues ------ -------- ------ -------- ------ -------- ------ -------- Mid-Atlantic ............... 833 $ 175.0 788 $ 167.3 2,241 $ 463.7 2,016 $ 431.0 Midwest .................... 468 118.2 472 119.4 1,335 335.3 1,323 333.5 Southeast .................. 1,099 194.8 838 139.1 3,025 519.8 2,516 429.7 Southwest .................. 3,581 607.7 3,062 516.4 9,938 1,677.9 7,971 1,352.9 West ....................... 3,024 1,013.2 2,717 808.0 7,868 2,556.5 6,381 1,863.2 ----- -------- ----- -------- ----- ------- ----- ------- 9,005 $2,108.9 7,877 $1,750.2 24,407 $ 5,553.2 20,207 $ 4,410.3 ===== ======== ===== ======== ====== ========= ====== =========
Net New Sales Orders Three Months Ended June 30, Nine Months Ended June 30, -------------------- --------------------------- -------------------------- 2003 2002 2003 2002 --------------- ------------------ ------------------ ------------------ Homes Homes Homes Homes Sold $ Sold $ Sold $ Sold $ ------ -------- ------- ------- ------- -------- ------- -------- Mid-Atlantic ............... 952 $ 216.1 960 $ 201.3 2,666 $ 577.1 2,471 $ 512.0 Midwest .................... 503 138.0 543 126.8 1,454 385.6 1,394 341.1 Southeast .................. 1,213 237.7 976 161.9 3,314 623.0 2,680 438.6 Southwest .................. 4,317 715.5 3,520 590.5 11,561 1,924.6 9,537 1,583.7 West ....................... 3,826 1,311.1 3,066 954.1 9,616 3,246.0 6,744 2,014.1 ----- ------- ----- ------- ------ ------- ----- ------- 10,811 $2,618.4 9,065 $2,034.6 28,611 $ 6,756.3 22,826 $ 4,889.5 ====== ======== ===== ======== ====== ========= ====== =========
Sales Backlog June 30, 2003 June 30, 2002 -------------- --------------------- --------------------- Homes $ Homes $ ------- ---------- ------- --------- Mid-Atlantic.............................. 1,678 $ 378.3 1,277 $ 271.3 Midwest................................... 1,035 288.9 989 270.4 Southeast................................. 1,958 377.9 1,628 262.4 Southwest................................. 6,809 1,134.4 5,868 984.4 West...................................... 5,421 1,848.9 3,824 1,159.7 ----- ------- ----- ------- 16,901 $4,028.4 13,586 $2,948.2 ====== ======== ====== ========
-21- 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 June 30, 2003 Compared to Three Months Ended June 30, 2002 Revenues from homebuilding activities increased 21.8%, to $2,166.8 million (9,005 homes closed) for the three months ended June 30, 2003, from $1,779.6 million (7,877 homes closed) for the comparable period of 2002. Revenues from home sales increased in four of our five market regions, with percentage increases ranging from 4.6% in the Mid-Atlantic region to 40.1% in the Southeast region. Home sales revenues declined 1.0% in the Midwest region. The increases in both revenues and homes closed were due to strong housing demand throughout the majority of our markets. Revenues from the sale of land and lots increased by $28.4 million, to $57.9 million in the three months ended June 30, 2003. The average selling price of homes closed during the three months ended June 30, 2003 was $234,200, up 5.4% from $222,200 for the same period in 2002. The increase in average selling price was due primarily to increases in average selling prices of homes closed in the West and Southeast regions of 12.7% and 6.9%, respectively. The value of net new sales orders increased 28.7%, to $2,618.4 million (10,811 homes) for the three months ended June 30, 2003, from $2,034.6 million (9,065 homes) for the same period of 2002. The value of net new sales orders increased in all five market regions, with percentage increases ranging from 7.3% in the Mid-Atlantic region to 46.9% in the Southeast region. The increases in both net new sales orders and their value were due to strong housing demand throughout the majority of our markets. The average price of a net new sales order in the three months ended June 30, 2003 was $242,200, up 7.9% from the $224,400 average in the comparable period of 2002. Increases in the average amounts of new sales orders occurred in four of our five market regions, ranging from 8.2% in the Mid-Atlantic region to 18.2% in the Southeast region. In the Southwest region, we refocused our marketing efforts on entry-level home buyers in selected Texas markets and in Phoenix. As a result, we sold 22.6% more homes in the three months ended June 30, 2003, than in the comparable period of 2002, but the average amount of each sales order declined 1.2%, to $165,700. At June 30, 2003, the value of our backlog of sales orders was $4,028.4 million (16,901 homes), up 36.6% from $2,948.2 million (13,586 homes) at June 30, 2002. The value of our backlog of sales orders increased in all five of our market regions, with percentage increases ranging from 6.8% in the Midwest region to 59.4% in the West region. The average sales price of homes in sales backlog was $238,400 at June 30, 2003, up 9.9% from the average price of $217,000 at June 30, 2002. The West region, with the highest average prices in the Company, was the primary cause of the overall increase in average price of homes in backlog at June 30, 2003. Cost of sales increased by 19.8%, to $1,726.8 million for the three months ended June 30, 2003, from $1,442.0 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 1.4 percentage points to 79.5% for the three months ended June 30, 2003, from 80.9% 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 June 30, 2002. For the same reason, total homebuilding cost of sales as a percentage of total homebuilding revenues decreased 1.3 percentage points, to 79.7% in the three months ended June 30, 2003, from 81.0% in the comparable period of 2002. -22- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 17.5%, to $208.0 million in the three months ended June 30, 2003, from $177.0 million in the comparable period of 2002. As a percentage of homebuilding revenues, SG&A expenses decreased 0.3 percentage points, to 9.6% for the three months ended June 30, 2003, from 9.9% in the comparable period of 2002, due primarily to the continued success of our cost containment efforts and the increased revenues that absorb the fixed elements of overhead. Interest expense associated with homebuilding activities increased 16.2% , to $1.7 million in the three months ended June 30, 2003, from $1.5 million in the comparable period of 2002. During the three months ended June 30, 2003, average inventory under construction or development consistently exceeded the average amounts of interest-bearing debt. We follow a policy of capitalizing only the incurred interest and other financial costs that are associated with inventory under construction or development. Therefore, except for the $1.3 million in unamortized discount and issuance costs associated with the retire- ment of the 10% senior notes we redeemed in May 2003, we capitalized to inventory virtually all of the homebuilding interest and other financing costs we incurred in the three months ended June 30, 2003. Capitalized interest and other financing costs are included in cost of sales at the time homes are closed. Other expense associated with homebuilding activities was $3.3 million in the three months ended June 30, 2003, compared to $3.8 million in the comparable period of 2002. Other expense in both quarters was primarily due to decreases in the fair value of our interest rate swap agreements. Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 2002 Revenues from homebuilding activities increased 27.9%, to $5,742.2 million (24,407 homes closed) for the nine months ended June 30, 2003, from $4,490.8 million (20,207 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 0.5% in the Midwest region to 37.2% 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 15.1% to $5,075.1 million (22,883 homes closed) for the nine months ended June 30, 2003, from $4,410.3 million (20,207 homes closed) for the comparable period of 2002. Revenues from the sale of land and lots increased to $189.1 million, from $80.5 million in the nine months ended June 30, 2003. The average selling price of homes closed during the nine months ended June 30, 2003 was $227,500, up 4.2% from $218,300 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 38.2%, to $6,756.3 million (28,611 homes) for the nine months ended June 30, 2003, from $4,889.5 million (22,826 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 12.7% in the Mid-Atlantic region to 61.2% 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 23.7%, to $6,046.9 million (26,592 homes) for the nine months ended June 30, 2003, from $4,889.5 million (22,826 homes) for the comparable period of 2002. The average price of a net new sales orders in the nine months ended June 30, 2003 was $236,100, up 10.2% over the $214,200 average in the nine months ended June 30, 2002, due to increased sales orders in the West region, which has the highest average selling price of all our regions. Cost of sales increased 26.0%, to $4,591.8 million for the nine months ended June 30, 2003, from $3,643.8 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 79.8% for the nine months ended June 30, 2003, from 81.0% 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 -23- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS that increased the acquired inventory to its fair value as of the date of acquisition, was recognized in the nine months ended June 30, 2002. For the same reason, total homebuilding cost of sales as a percentage of total homebuilding revenues decreased 1.2 percentage points, to 80.0% in the nine months ended June 30, 2003, from 81.2% in the comparable period of 2002. Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 29.1%, to $574.4 million in the nine months ended June 30, 2003, from $444.9 million in the comparable period of 2002. As a percentage of homebuilding revenues, SG&A expenses for the nine months ended June 30, 2003 were consistent with the comparable period of 2002, increasing to 10.0% of revenues from 9.9% in the year earlier period. Interest expense associated with homebuilding activities decreased to $2.1 million in the nine months ended June 30, 2003, from $5.2 million in the comparable period of 2002. During the nine months ended June 30, 2003, average inventory under struction or development consistently exceeded the average amounts of interest-bearing debt. We follow a policy of capitalizing only the incurred interest and other financing costs that are associated with inventory under construction or development. Therefore, except for the $1.3 million in unamortized discount and issuance costs associated with the retirement of the 10% senior notes we redeemed in May 2003, we capitalized to inventory virtually all of the homebuilding interest and other financing costs we incurred in the nine months ended June 30, 2003. Capitalized interest and other financing costs are included in cost of sales at the time homes are closed. Other expense associated with homebuilding activities was $3.1 million in the nine months ended June 30, 2003, compared to $4.0 million in the comparable period of 2002. The expense in both periods was primarily due to write-downs to estimated fair value of the carrying amounts of our investments in start-up and emerging growth companies and the decline in the fair value of our interest rate swap agreements during the periods. RESULTS OF OPERATIONS - FINANCIAL SERVICES Financial services include mortgage financing and title insurance agency and closing services, primarily related to purchases of homes we build and sell. We provide mortgage services in Arizona, California, Colorado, Florida, Georgia, Illinois, Maryland, Minnesota, Nevada, New Mexico, North Carolina, Oregon, South Carolina, Texas, Virginia and Washington. We provide title agency and closing services in Arizona, Florida, Georgia, Maryland, Minnesota, Texas, Virginia and Washington. The following table summarizes financial and other information for our financial services operations:
Three Months Ended Nine Months Ended June 30, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- ($ in thousands) Number of loans originated.................................... 7,720 5,134 20,322 13,581 -------- -------- -------- -------- Loan origination fees......................................... $ 8,909 $ 5,884 $ 22,841 $ 14,702 Sale of servicing rights and gains from sale of mortgages..... 22,528 13,485 63,708 37,785 Other revenues................................................ 5,062 2,144 12,570 6,777 -------- -------- -------- -------- Total mortgage banking revenues............................... 36,499 21,513 99,119 59,264 Title policy premiums, net.................................... 9,120 7,351 24,507 18,387 -------- -------- -------- -------- Total revenues................................................ 45,619 28,864 123,626 77,651 General and administrative expense............................ 25,344 18,220 69,586 48,261 Interest expense.............................................. 1,732 1,155 5,281 3,490 Interest/other (income)....................................... (5,434) (4,714) (16,344) (10,576) -------- -------- -------- -------- Income before income taxes.................................... $ 23,977 $ 14,203 $ 65,103 $ 36,476 ======== ======== ======== ========
-24- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002 Revenues from financial services increased 58.0%, to $45.6 million in the three months ended June 30, 2003, from $28.9 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 39.1%, to $25.3 million in the three months ended June 30, 2003, from $18.2 million in the comparable period of 2002. As a percentage of financial services revenues, general and administrative expenses decreased 7.5 percentage points, to 55.6% in the three months ended June 30, 2003, from 63.1% in the comparable period in 2002, due primarily to efficiencies realized with the increase in revenues in markets entered in 2002. Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 2002 Revenues from financial services increased 59.2%, to $123.6 million in the nine months ended June 30, 2003, from $77.7 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 44.2%, to $69.6 million in the nine months ended June 30, 2003, from $48.3 million in the comparable period of 2002. As a percentage of financial services revenues, general and administrative expenses decreased by 5.9 percentage points, to 56.3% in the nine months ended June 30, 2003, from 62.2% 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 June 30, 2003, we had available cash and cash equivalents of $296.2 million. Inventories (including finished homes, construction in progress, and developed residential lots and other land), at June 30, 2003, had increased by $654.2 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 no amounts outstanding at either June 30, 2003 or September 30, 2002. Our ratio of homebuilding notes payable (net of cash) to total capital at June 30, 2003 decreased 5.4 percentage points, to 45.9% from 51.3% at September 30, 2002. The stockholders' equity to total assets ratio increased 3.3 percentage points, to 41.0% at June 30, 2003, from 37.7% at September 30, 2002. We have an $805 million, unsecured revolving credit facility, including $250 million which may be used for letters of credit. As of June 30, 2003, the letters of credit limit was $125 million and increased to $250 million on August 5, 2003. 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 June 30, 2003, we had outstanding homebuilding debt of $2,667.0 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, $694.7 million at June 30, 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 June 30, 2003, the borrowing base arrangement would have limited our additional borrowing capacity from any source to $1,601.1 million. At June 30, 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 June 30, 2003, outstanding standby letters of credit and performance bonds, the majority of which mature in less than one year, were $133.0 million and $1,074.1 million, respectively. -25- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS At June 30, 2003, our financial services segment had mortgage loans held for sale of $525.5 million and loan commitments for $480.7 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. Currently, our wholly-owned mortgage company has a mortgage warehouse loan facility in the amount of $230 million which matures on February 12, 2004, and which 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 June 30, 2003, $214.0 million had been drawn under the mortgage warehouse facility. Our wholly-owned mortgage company completed a $100 million mortgage-backed commercial paper conduit facility (the "CP conduit facility") in July 2002. The CP conduit facility was increased to $200 million in November 2002, and to $300 million on July 25, 2003. Although the current agreement governing the CP conduit facility expires on June 29, 2006, 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 June 30, 2003, $200.0 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 with the mortgage warehouse facility, the CP conduit facility or internally generated funds. 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 June 30, 2003, the capacity to issue new debt or equity securities amounting to $485 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 1/2% 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. The majority of the net proceeds from this offering were 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. These notes are guaranteed by substantially all of our wholly-owned subsidiaries other than our financial services subsidiaries. On June 18, 2003, we issued $100 million of 5 7/8% senior notes due 2013.The net proceeds from this offering were used to redeem the approximately $100 million aggregate principal amount outstanding of our 9% senior notes due 2008. These notes were called for full redemption on June 25, 2003 and redeemed on July 25, 2003, at a redemption price of 104.5% of the principal amount, together with accrued and unpaid interest thereon to the redemption date. The 5 7/8% senior notes due 2013 are guaranteed by substantially all of our wholly-owned subsidiaries other than our financial services subsidiaries. -26- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On May 27, 2003, we called the zero coupon convertible senior notes for redemption. The call for redemption gave the note holders the right to convert their notes into shares of our common stock. As a result, all of the notes were presented by June 26, 2003, for conversion into D.R. Horton common stock, and accordingly we issued approximately 10 million shares of common stock in exchange for the notes. In the nine months ended June 30, 2003, we repurchased 1,672,500 shares of our common stock in open market purchases at an aggregate purchase price of $29.5 million. In July 2003, we purchased an additional 173,000 shares at an aggregate price of $4.9 million. On July 31, 2003, our Board of Directors increased the authorizations for repurchases of our common stock to $200 million and of our outstanding debt securities to an additional $200 million. On April 28, 2003, we, at the direction of our Board of Directors, declared a quarterly cash dividend of $0.07 per common share, which was paid on May 20, 2003 to stockholders of record on May 13, 2003. At June 30, 2003, except for ordinary expenditures for the construction of homes and the acquisition and development of land and lots, we had no material commitments for capital expenditures. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 provides guidance for the financial accounting and reporting of interests in certain variable interest entities. FIN 46 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. FIN 46 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 interests in variable interest entities are required even if the company is not required to consolidate them. The consolidation requirements of FIN 46 are currently effective for all interests in variable interest entities created after January 31, 2003, and will be effective for all interests in variable interest entities created before February 1, 2003 in the first fiscal year or interim period beginning after June 15, 2003. In the ordinary course of our business we enter into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Under such option purchase contracts we will fund a stated deposit in consideration for the right to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, most of our option deposits are non-refundable. Certain non-refundable deposits are deemed to create a variable interest in a variable interest entity under the requirements of FIN 46. As such, certain of our option purchase contracts result in the acquisition of a variable interest in the entity holding the land parcel under option. Our maximum exposure to loss associated with such variable interest entities is limited to the amount of our option deposit. In accordance with the implementation requirements of FIN 46, we have evaluated all of our interests in variable interest entities created after January 31, 2003 and have begun our evaluation of our variable interests created prior to February 1, 2003. Based upon our evaluations to date, we have consolidated certain variable interest entities from which we are purchasing lots under option contracts. The consolidation of these entities added $41.7 million in inventory and minority interests to our balance sheet at June 30, 2003. Our obligations related to these lot option contracts are guaranteed by performance letters of credit totaling $17.3 million. Creditors, if any, of these variable interest entities have no recourse against us. We will complete the evaluations of all of our interests in variable interest entities by September 30, 2003. Based on the results of evaluations completed through June 30, 2003, we believe that FIN 46 will not materially affect our financial position, results of operations or cash flows. -27- 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. -28- 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 and any such changes are 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 nine month periods ended June 30, 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 June 30, 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 $284.0 million, the duration of which was less than nine months. The following table shows, as of June 30, 2003, our long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value. In addition, the table shows the notional amounts, weighted average interest rates and estimated fair market value of our interest rate swaps.
Three Months Year ended September 30, Fair ended ------------------------------------------------- market September 30, value at 2003 2004 2005 2006 2007 Thereafter Total 6/30/03 ---- ---- ---- ---- ---- ---------- ----- ------- ($'s in millions) Debt: Fixed rate ............... $ 117.1 $ 199.3 $ 220.5 $ 6.1 $ 1.9 $ 2,087.0 $ 2,631.9 $ 2,863.8 Average interest rate .... 8.34% 8.36% 10.51% 7.41% 6.15% 8.34% 8.52% -- Variable rate ............ $ 432.2 $ 4.7 -- -- -- -- $ 436.9 $ 436.9 Average interest rate .... 2.19% 3.40% -- -- -- -- 2.20% -- Interest Rate Swaps: Variable to fixed ........ $ 200.0 $ 200.0 $ 200.0 $ 200.0 $ 200.0 $ 200.0 -- $ (24.9) Average pay rate ......... 5.10% 5.10% 5.10% 5.10% 5.10% 5.02% -- -- Average receive rate ..... 90-day LIBOR
-29- 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 June 30, 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 pursuant to 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 June 30, 2003. Accordingly, there have been no corrective actions taken as no significant deficiencies or material weaknesses were detected in these controls. -30- PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 6.875% Senior Notes: On April 17, 2003, the Company issued $200,000,000 in principal amount of its 6.875% Senior Notes due 2013 (the "6.875% Notes"). The 6.875% Notes bear interest from April 17, 2003 at 6.875% per annum, payable semi-annually on May 1 and November 1 of each year commencing on November 1, 2003. As part of that issuance, the Company executed the Sixteenth Supplemental Indenture, dated as of April 17, 2003, among the Company, the Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, authorizing the 6.875% Notes. On May 23, 2003, the Company used part of the proceeds from the 6.875% offering to fully redeem the 10% Senior Notes due April 2006 at a redemption price of $1,010.56 per $1,000 face amount which included principal and accrued interest to May 23, 2003. The Supplemental Indenture, and the Indenture to which it relates (dated June 9, 1997, as supplemented), impose limitations on the ability of the Company and its subsidiaries guaranteeing the 6.875% Notes to, among other things, incur indebtedness, make "Restricted Payments" (as defined, which includes payments of dividends or other distributions on the Common Stock of the Company), effect certain "Asset Dispositions" (as defined therein), enter into certain transactions with affiliates, merge or consolidate with any person, or transfer all or substantially all of their properties and assets. These limitations are substantially similar to the limitations already existing with respect to the Company's other senior notes, and related indentures and supplemental indentures. Other information concerning the offering and issuance of the 6.875% Notes has previously been reported in, and is described in the Company's Prospectus Supplement, dated April 11, 2003 and filed with the Securities and Exchange Commission (the "Commission") on April 15, 2003 pursuant to Rule 424(b)(5), and the Company's current reports, on Form 8-K, dated April 15, 2003 and filed with the Commission on April 15, 2003 and, dated April 11, 2003 and filed with the Commission on April 17, 2003. 5.875% Senior Notes: On June 25, 2003, the Company issued $100,000,000 in principal amount of its 5.875% Senior Notes due 2013 (the "5.875% Notes"). The 5.875% Notes bear interest from June 25, 2003 at 5.875% per annum, payable semi-annually on each January 1 and July 1 of each year commencing on January 1, 2004. As part of that issuance, the Company executed the Seventeenth Supplemental Indenture, dated as of June 25, 2003, among the Company, the Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, authorizing the Notes. On July 25, 2003, the Company used the proceeds from the 5.875% offering to fully redeem the 9% Senior Notes due April 2008 at a redemption price of $1,070 per $1,000 face amount which included principal, premium and accrued interest to July 25, 2003. The Supplemental Indenture, and the Indenture to which it relates (dated June 9, 1997, as supplemented), impose limitations on the ability of the Company and its subsidiaries guaranteeing the Notes to, among other things, incur indebtedness, make "Restricted Payments" (as defined, which includes payments of dividends or other distributions on the Common Stock of the Company), effect certain "Asset Dispositions" (as defined therein), enter into certain transactions with affiliates, merge or consolidate with any person, or transfer all or substantially all of their properties and assets. These limitations are substantially similar to the limitations already existing with respect to the Company's other senior notes, and related indentures and supplemental indentures. Other information concerning the offering and issuance of the Notes has previously been reported in, and is described in the Company's Prospectus Supplement, dated June 18, 2003 and filed with the Commission on June 20, 2003 pursuant to Rule 424(b)(5), and the Company's current report, on Form 8-K, dated June 18, 2003 and filed with the Commission on June 24, 2003. Redemption of Zero Coupon Convertible Notes: On June 26, 2003, the Company announced the results of the call of its Zero Coupon Convertible Senior Notes due 2021. All of the Zero Coupon Convertible Senior Notes were presented for conversion into approximately 10 million shares of D.R. Horton, Inc. common stock. As a result, the Company decreased its debt account by approximately $214 million and increased its shareholders' equity account by approximately $219 million. -31- ITEM 5. OTHER INFORMATION Stock and Debt Repurchase Authorization and Stock Repurchase Activity. On July 31, 2003, the Company announced that its board of directors authorized the Company to repurchase up to $200 million of its common stock and up to $200 million of senior and senior subordinated debt securities. These repurchase programs replace the previous stock and debt repurchase authorizations. In July 2003, the Company repurchased approximately $4.9 million of its common stock (173,000 shares), for a 2003 fiscal year to date total of approximately $34.4 million (1,845,500 shares). -32- 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, 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. 4.1 Indenture, dated June 9, 1997, among the Company, the Guarantors named therein and American Stock Transfer & Trust Company, as trustee, is incorporated by reference from Exhibit 4.1(a) to the Company's Registration Statement on Form S-3 (No. 333-27521) and filed with the Commission on May 21, 1997. 4.2 Sixteenth Supplemental Indenture by and among the Company, the Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to the 6.875% Senior Notes due 2013 issued by the Company is incorporated by reference from Exhibit 4.1 to the Company's Form 8-K dated April 11, 2003 and filed with the Commission on April 17, 2003. 4.3 Seventeenth Supplemental Indenture by and among the Company, the Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to the 5.875% Senior Notes due 2013 issued by the Company is incorporated by reference from Exhibit 4.1 to the Company's Form 8-K dated June 18, 2003 and filed with the Commission on June 24, 2003. 10.1 Seventh Amendment to Credit Agreement, dated February 28, 2003, among CH Mortgage Company I, LTD., as Borrower, U.S. Bank National Association, as Agent, and Lenders referred to therein, is filed herewith. 10.2 Eighth Amendment to Credit Agreement, dated August 12, 2003, among CH Mortgage Company I, LTD., as Borrower, U.S. Bank National Association, as Agent, and Lenders referred to therein, is filed herewith. 10.3 Third Omnibus Amendment, dated April 18, 2003, among CH Funding, LLC, Atlantic Asset Securitization Corp., Credit Lyonnaise New York Branch, U.S. Bank National Association and CH Mortgage Company I LTD., is filed herewith. 10.4 Fourth Omnibus Amendment, dated July 25, 2003 among CH Funding, LLC, Atlantic Asset Securitization Corp., Credit Lyonnaise New York Branch, U.S. Bank National Association and CH Mortgage Company I, LTD., is filed herewith. 31.1 Certificate of Chief Executive Officer provided pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, is filed herewith. 31.2 Certificate of Chief Financial Officer provided pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, is filed herewith 32.1 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, is filed herewith. 32.2 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, is filed herewith. ------------ -33- (b) Reports on Form 8-K. 1. On April 8, 2003 the Company filed a Current Report on Form 8-K (Item 9 and Item 12), dated April 8, 2003, whereby it filed with the Commission its press release related to the Company's Net Sales Orders for the three and six-month periods ended March 31, 2003. 2. On April 15, 2003, the Company filed a Current Report on Form 8-K (Item 5), dated April 15, 2003, whereby it filed with the Commission unaudited pro forma combined condensed statements of income for the year ended September 30, 2002, reflecting the Company's acquisition of Schuler Homes, Inc.which occurred on February 21, 2002. 3. On April 17, the Company filed a Current Report on Form 8-K (Item 5, Item 7, Item 9 and Item 12), dated April 11, 2003 whereby the Company (i) announced its financial results for the three-month and six-month periods ended March 31, 2003, and issued a related press release and filed this press release as exhibit 99.1 to the Form 8-K, and (ii) filed with the Commission (a) an Underwriting Agreement, (b) the form of Sixteenth Supplemental Indenture, (c) legal opinion, and (d) statement of computation of ratios or earnings to fixed charges, all relating to the offering and issuance of $200,000,000 of the Company's 6.875% Senior Notes due 2013. 4. On June 24, 2003, the Company filed a Current Report on Form 8-K (Item 5 and Item 7), dated June 18, 2003, whereby the Company filed with the Commission (i) an Underwriting Agree- ment, (ii) the form of Seventeenth Supplemental Indenture, (iii) legal opinion, and (iv) statement of computation of ratios of earnings to fixed charges, all relating to the offering and issuance of $100,000,000 of the Company's 5.875% Senior Notes due 2013. -34- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. D.R. HORTON, INC. Date: August 14, 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) -35-