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, 2001 --------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the Transition Period From To ------------------- ------------------- Commission file number 1-14122 ----------- D.R. HORTON, INC. ------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 75-2386963 ------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1901 Ascension Blvd., Suite 100, Arlington, Texas 76006 ------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (817)856-8200 ------------------------------------------------------------------- (Registrant's telephone number, including area code) ------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $.01 par value -- 76,845,107 shares as of August 7, 2001 -------------- This Report contains 29 pages. 1
INDEX D.R. HORTON, INC. <TABLE> <S> <C> <C> PART I. FINANCIAL INFORMATION. Page - ------- ---------------------- ---- ITEM 1. Financial Statements. Consolidated Balance Sheets --- June 30, 2001 and September 30, 2000. 3 Consolidated Statements of Income-- Three Months and Nine Months Ended June 30, 2001 and 2000. 4 Consolidated Statement of Stockholders' Equity-- Nine Months Ended June 30, 2001. 5 Consolidated Statements of Cash Flows-- Nine Months Ended June 30, 2001 and 2000. 6 Notes to Consolidated Financial Statements. 7-17 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. 18-24 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. 25 PART II. OTHER INFORMATION. - -------- ------------------ ITEM 2. Changes in Securities 26 ITEM 5. Other Information 27 ITEM 6. Exhibits and Reports on Form 8-K 28 SIGNATURES. 29 - ---------- </TABLE> 2
D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30, September 30, 2001 2000 ----------- ------------- (In thousands) (Unaudited) ASSETS <S> <C> <C> Homebuilding: Cash ....................................................... $ 60,439 $ 61,798 Inventories: Finished homes and construction in progress ........... 1,472,240 1,095,636 Residential lots - developed and under development ... 1,240,610 1,092,571 Land held for development ............................. 2,824 2,824 ---------- ---------- 2,715,674 2,191,031 Property and equipment (net) ............................... 49,124 38,960 Earnest money deposits and other assets .................... 184,728 148,983 Excess of cost over net assets acquired (net) .............. 119,851 115,966 ---------- ---------- 3,129,816 2,556,738 Financial Services: Cash ....................................................... 20,964 10,727 Mortgage loans held for sale ............................... 170,197 119,581 Other assets ............................................... 13,991 7,531 ---------- ---------- 205,152 137,839 ---------- ---------- $3,334,968 $2,694,577 ========== ========== LIABILITIES Homebuilding: Accounts payable and other liabilities ..................... $ 400,802 $ 370,389 Notes payable: Unsecured: Revolving credit facility due 2002 ............... 144,000 192,000 8 3/8% senior notes due 2004, net ................ 148,844 148,547 10 1/2% senior notes due 2005, net ............... 199,412 199,343 10% senior notes due 2006, net ................... 147,550 147,398 8% senior notes due 2009, net .................... 383,214 383,089 9 3/4% senior subordinated notes due 2010, net ... 148,899 148,821 9 3/8% senior subordinated notes due 2011, net ... 199,683 -- Zero coupon convertible senior notes due 2021, net 200,884 -- Other secured ......................................... 53,438 26,388 ---------- ---------- 1,625,924 1,245,586 ---------- ---------- 2,026,726 1,615,975 ---------- ---------- Financial Services: Accounts payable and other liabilities ..................... 4,928 4,958 Notes payable to financial institutions .................... 155,237 98,817 ---------- ---------- 160,165 103,775 ---------- ---------- 2,186,891 1,719,750 ---------- ---------- Minority interests ......................................... 8,356 5,264 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued ......................................... -- -- Common stock, $.01 par value, 200,000,000 shares authorized, 75,689,624 at June 30, 2001 and 70,074,110 at September 30, 2000, issued and outstanding ............................. 757 701 Additional capital ......................................... 677,248 537,145 Retained earnings .......................................... 461,716 468,664 Treasury stock, no shares at June 30, 2001 and 2,589,200 shares at September 30, 2000, at cost. ................... -- (36,947) ---------- ---------- 1,139,721 969,563 ---------- ---------- $3,334,968 $2,694,577 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 3
D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Nine Months Ended June 30, Ended June 30, ----------------------- ---------------------- 2001 2000 2001 2000 ----------- ---------- ---------- ---------- (In thousands, except per share data) (Unaudited) Homebuilding: Revenues <S> <C> <C> <C> <C> Home sales ............................... $1,090,242 $ 930,786 $2,799,894 $2,493,314 Land/lot sales ........................... 11,724 15,630 68,033 38,780 ---------- ---------- ---------- ---------- 1,101,966 946,416 2,867,927 2,532,094 ---------- ---------- ---------- ---------- Cost of sales Home sales ............................... 872,095 755,527 2,244,754 2,028,349 Land/lot sales ........................... 10,712 18,387 54,791 36,524 ---------- ---------- ---------- ---------- 882,807 773,914 2,299,545 2,064,873 ---------- ---------- ---------- ---------- Gross profit Home sales ............................... 218,147 175,259 555,140 464,965 Land/lot sales ........................... 1,012 (2,757) 13,242 2,256 ---------- ---------- ---------- ---------- 219,159 172,502 568,382 467,221 Selling, general and administrative expense . 109,085 97,243 295,084 262,073 Interest expense ............................ 2,089 2,339 6,618 7,195 Other expense (income) ...................... 5,040 (747) 14,038 (1,472) ---------- ---------- ---------- ---------- 102,945 73,667 252,642 199,425 ---------- ---------- ---------- ---------- Financial Services: Revenues .................................... 19,015 12,800 47,553 34,926 Selling, general and administrative expense . 12,540 9,155 32,507 25,152 Interest expense ............................ 1,575 1,485 3,582 4,191 Other (income) .............................. (2,240) (1,700) (4,869) (4,723) ---------- ---------- ---------- ---------- 7,140 3,860 16,333 10,306 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES ............... 110,085 77,527 268,975 209,731 Provision for income taxes .................. 41,282 29,460 100,866 79,698 ---------- ---------- ---------- ---------- Income before cumulative effect of change in accounting principle ................. 68,803 48,067 168,109 130,033 Cumulative effect of change in accounting principle, net of income taxes .......... -- -- 2,136 -- ---------- ---------- ---------- ---------- NET INCOME ............................... $ 68,803 $ 48,067 $ 170,245 $ 130,033 ========== ========== ========== ========== Basic earnings per common share: Income before cumulative effect of change in accounting principle ................. $ 0.91 $ 0.64 $ 2.23 $ 1.73 Cumulative effect of change in accounting principle, net of income taxes .......... -- -- 0.03 -- ---------- ---------- ---------- ---------- Net income ............................... $ 0.91 $ 0.64 $ 2.26 $ 1.73 ========== ========== ========== ========== Diluted earnings per common share: Income before cumulative effect of change in accounting principle ................. $ 0.89 $ 0.64 $ 2.19 $ 1.72 Cumulative effect of change in accounting principle, net of income taxes .......... -- -- 0.03 -- ---------- ---------- ---------- ---------- Net income ............................... $ 0.89 $ 0.64 $ 2.22 $ 1.72 ========== ========== ========== ========== Cash dividends per share .................... $ 0.05 $ 0.04 $ 0.14 $ 0.11 ========== ========== ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 4
D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Total Common Additional Retained Treasury Stockholders' Stock Capital Earnings Stock Equity ---------- ---------- ---------- ---------- ---------- (In thousands, except common stock share data) (Unaudited) <S> <C> <C> <C> <C> <C> Balances at September 30, 2000 .............. $ 701 $ 537,145 $ 468,664 $ (36,947) $ 969,563 Net income .................................. -- -- 170,245 -- 170,245 Issuances under D.R. Horton, Inc. ........... employee benefit plans (6,540 shares) ..... -- 106 -- -- 106 Exercise of stock options (719,046 shares) .. 7 9,685 -- -- 9,692 Cash dividends paid ......................... -- -- (9,885) -- (9,885) Stock dividend paid (4,889,928 shares) ...... 49 130,312 (167,308) 36,947 -- ---------- ---------- ---------- ---------- ---------- Balances at June 30, 2001 ................... $ 757 $ 677,248 $ 461,716 $ -- $1,139,721 ========== ========== ========== ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 5
D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Nine Months Ended June 30, ---------------------- 2001 2000 ---------- ---------- (In thousands) (Unaudited) OPERATING ACTIVITIES <S> <C> <C> Net income ............................................... $ 170,245 $ 130,033 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization ............................ 18,463 15,899 Amortization of debt premiums and fees ................... 2,645 1,830 Changes in operating assets and liabilities: Increase in inventories ............................ (416,639) (305,929) Increase in earnest money deposits and other assets (33,649) (32,477) (Increase)/decrease in mortgage loans held for sale (50,616) 13,857 Increase/(decrease) in accounts payable and other liabilities ...................................... 26,608 (2,563) ---------- ---------- NET CASH USED IN OPERATING ACTIVITIES ...................... (282,943) (179,350) ---------- ---------- INVESTING ACTIVITIES Net purchase of property and equipment ................... (21,807) (14,674) Net investment in venture capital entities ............... (1,970) (18,311) Net cash paid for acquisitions ........................... (49,009) (5,016) ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES ...................... (72,786) (38,001) ---------- ---------- FINANCING ACTIVITIES Proceeds from notes payable .............................. 891,420 570,000 Repayment of notes payable ............................... (920,630) (580,213) Issuance of senior and senior subordinated notes payable . 393,904 197,897 Purchase of treasury stock ............................... -- (14,543) Proceeds from issuance of common stock associated with certain employee benefit plans ......................... 9,798 1,599 Payment of cash dividends ................................ (9,885) (6,813) ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 364,607 167,927 ---------- ---------- INCREASE / (DECREASE) IN CASH .............................. 8,878 (49,424) Cash at beginning of period ........................ 72,525 128,568 ---------- ---------- Cash at end of period .............................. $ 81,403 $ 79,144 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. 6
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2001 NOTE A - BASIS OF PRESENTATION The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. and its subsidiaries (the "Company"). Intercompany accounts and transactions have been eliminated in consolidation. The statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Certain reclassifications have been made in prior years' financial statements to conform to classifications used in the current year. Operating results for the three-month and nine-month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending September 30, 2001. Business - The Company is a national builder that is engaged primarily in the construction and sale of single-family housing in the United States. The Company designs, builds and sells single-family houses on lots developed by the Company and on finished lots which it purchases, ready for home construction. Periodically, the Company sells land or lots it has developed. The Company also provides title agency and mortgage brokerage services to its home buyers. NOTE B - CHANGES IN ACCOUNTING PRINCIPLES Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998, and was later amended by SFAS 137 and 138, which were issued in June 1999 and June 2000, respectively. Pursuant to the implementation requirements of SFAS No. 133, the Company adopted it on October 1, 2000, the first day of the Company's fiscal year ending September 30, 2001. The Company's interest rate swaps, the terms of which are more fully described in Item 3, were not designated as hedges under the provisions of SFAS No. 133. The Statement requires such swaps to be recorded in the consolidated balance sheet at fair value. Changes in their fair value must be recorded in the consolidated statements of income. Accordingly, the Company recorded a cumulative effect of a change in accounting principle amounting to $2.1 million, net of income taxes of $1.3 million, as an adjustment to net income in the nine months ended June 30, 2001. The fair value of the Company's interest rate swaps at June 30, 2001 is recorded in homebuilding other assets, and the change in their fair value during the three and nine months ended June 30, 2001 is recorded in homebuilding other expense. SFAS No. 133 was also implemented on October 1, 2000 for the hedging activities of the Company's financial services segment. The effects of doing so were not significant. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to periodic tests for impairment of recorded values. In accordance with the terms of SFAS No. 142 that permit its early adoption, the Company plans to apply the new rules for goodwill and other intangible assets beginning October 1, 2001. Application of the provision prohibiting the amortization of goodwill is expected to result in an increase in income before income taxes of approximately $9.0 million in the fiscal year ended September 30, 2002. During the year, the Company will perform the required tests for impairment of goodwill. The Company does not believe that such tests will have a significant, adverse effect on its results of operations or financial position. 7
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2001 NOTE C - SEGMENT INFORMATION The Company's financial reporting segments consist of homebuilding and financial services. The Company's homebuilding operations comprise the most substantial part of its business, with more than 98% of consolidated revenues for the three months and nine months ended June 30, 2001 and 2000. The homebuilding operations segment generates the majority of its revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services. NOTE D - NET INCOME PER SHARE Basic net income per share for the three and nine months ended June 30, 2001 and 2000 is based on the weighted average number of shares of common stock outstanding. Diluted net income 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): <TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, June 30, ------------------ ----------------- 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Denominator for basic earnings per share--weighted average shares ............ 75,594 74,799 75,329 75,142 Employee stock options ...................... 1,305 603 1,250 575 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share--adjusted weighted average shares ... 76,899 75,402 76,579 75,717 ========== ========== ========== ========== </TABLE> In February, 2001, the Company's Board of Directors declared an 11% stock dividend, payable on March 23, 2001 to stockholders of record on March 9, 2001. All average share amounts presented above for the three and nine month periods ended June 30, 2000 have been restated to reflect the effects of the 11% stock dividend. NOTE E - DEBT On May 11, 2001 the Company issued, for gross proceeds of approximately $200 million, Zero Coupon Convertible Senior Notes due 2021 ("Notes") with a face amount at maturity of approximately $381.1 million. The Notes were issued at a price of $524.78 per $1,000 face amount at maturity, which equates to an annual yield to maturity over the life of the Notes of 3.25%. Proceeds from the offering, after underwriting discount, were approximately $195.5 million, and were used to repay amounts outstanding under the Company's revolving credit facility. The Notes are convertible into the Company's common stock at any time, if the sale price of the common stock exceeds specified thresholds or in other specified instances, at the rate of approximately 17.5 shares per $1,000 face amount at maturity. The conversion ratio equates to an initial conversion price of $30.00 per share. Holders have the option to require the Company to repurchase the Notes on any of the second, seventh or twelfth anniversary dates from the issue date for the initial issue price plus accrued yield to the purchase date. The Company must satisfy any Notes submitted for repurchase on the second anniversary date in cash. Any Notes submitted for repurchase on the seventh or twelfth anniversary dates may be settled in any combination of cash and/or the Company's common stock, at the Company's option. The Company will have the option to redeem the Notes, in cash, at any time after the second anniversary date of the Notes for the initial issue price plus accrued yield to redemption. The Company will pay contingent interest on the Notes during specified six-month periods beginning on May 12, 2003, if the market price of the Notes exceeds specified levels. 8
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2001 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): <TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Capitalized interest, beginning of period ... $ 85,579 $ 55,148 $ 66,092 $ 41,525 Interest incurred - homebuilding ............ 34,133 29,310 94,861 76,382 Interest expensed: Directly - homebuilding ................ (2,089) (2,339) (6,618) (7,195) Amortized to cost of sales ............. (24,012) (18,631) (60,724) (47,224) ---------- ---------- ---------- ---------- Capitalized interest, end of period ......... $ 93,611 $ 63,488 $ 93,611 $ 63,488 ========== ========== ========== ========== </TABLE> NOTE G - ACQUISITIONS On May 1, 2001, the Company acquired the assets of Fortress-Florida, Inc. (Fortress), a wholly owned subsidiary of The Fortress Group, Inc., for $28.7 million. Fortress assets, primarily inventories, amounted to approximately $47.1 million. Total liabilities assumed amounted to approximately $24.3 million, including notes payable of $17.5 million, which were paid at closing. The Fortress acquisition was treated as a purchase for accounting purposes. Pro forma results of operations had the Fortress acquisition occurred on the first day of our fiscal year are not materially different from historical results and are not presented. On July 17, 2001, the Company completed the acquisition of the assets of Emerald Builders (Emerald), a privately held homebuilder based in Houston, Texas. In the transaction, the Company issued approximately 1.0 million shares of common stock, paid $30.7 million in cash and assumed debt of approximately $115.3 million, including notes payable of $109.6 million, which were paid at closing. The final number of shares issued is subject to adjustment, based on a final determination of the book value of the assets acquired. The Emerald acquisition will be treated as a purchase for accounting purposes. 9
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2001 NOTE H - SUMMARIZED FINANCIAL INFORMATION The 8%, 8 3/8%, 10% and 10 1/2% Senior Notes, the 9 3/8% and 9 3/4% Senior Subordinated Notes, and the Zero Coupon Convertible Senior Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company's direct and indirect subsidiaries (Guarantor Subsidiaries), other than financial services subsidiaries and certain other inconsequential subsidiaries (collectively, Non-Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is wholly-owned. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, consolidated condensed financial statements are presented below. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that they are not material to investors. <TABLE> <CAPTION> Consolidating Balance Sheet June 30, 2001 Non-Guarantor Subsidiaries ---------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ ---------- ---------- ------------ ---------- (In thousands) ASSETS Homebuilding: <S> <C> <C> <C> <C> <C> <C> Cash and cash equivalents ................. $ -- $ 59,154 $ -- $ 1,285 $ -- $ 60,439 Advances to/investments in subsidiaries ... 2,264,397 92,513 -- 4,673 (2,361,583) -- Inventories ............................... 558,432 2,130,803 -- 26,798 (359) 2,715,674 Property and equipment (net) .............. 8,826 34,992 -- 5,306 -- 49,124 Earnest money deposits and other assets ... 55,283 134,910 -- 25,420 (30,885) 184,728 Excess of cost over net assets acquired (net) -- 119,851 -- -- -- 119,851 ---------- ---------- ---------- ---------- ---------- ---------- 2,886,938 2,572,223 -- 63,482 (2,392,827) 3,129,816 ---------- ---------- ---------- ---------- ---------- ---------- Financial services: Cash and cash equivalents ................. -- -- 20,964 -- -- 20,964 Mortgage loans held for sale .............. -- -- 170,197 -- -- 170,197 Other assets .............................. -- -- 13,991 -- -- 13,991 ---------- ---------- ---------- ---------- ---------- ---------- -- -- 205,152 -- -- 205,152 ---------- ---------- ---------- ---------- ---------- ---------- Total Assets .............................. $2,886,938 $2,572,223 $ 205,152 $ 63,482 $(2,392,827) $3,334,968 ========== ========== ========== ========== =========== ========== LIABILITIES & EQUITY Homebuilding: Accounts payable and other liabilities .... $ 140,313 $ 350,821 $ -- $ 2,457 $ (92,789) $ 400,802 Advances from parent/subsidiaries ......... -- 1,680,710 -- 43,118 (1,723,828) -- Notes payable ............................. 1,606,904 19,020 -- 10,578 (10,578) 1,625,924 ---------- ---------- ---------- ---------- ---------- ---------- 1,747,217 2,050,551 -- 56,153 (1,827,195) 2,026,726 ---------- ---------- ---------- ---------- ---------- ---------- Financial services: Accounts payable and other liabilities .... -- -- 9,956 -- (5,028) 4,928 Advances from parent/subsidiaries ......... -- -- 7,657 -- (7,657) -- Notes payable ............................. -- -- 155,237 -- -- 155,237 ---------- ---------- ---------- ---------- ---------- ---------- -- -- 172,850 -- (12,685) 160,165 ---------- ---------- ---------- ---------- ---------- ---------- Total Liabilities ......................... 1,747,217 2,050,551 172,850 56,153 (1,839,880) 2,186,891 ---------- ---------- ---------- ---------- ---------- ---------- Minority interest ......................... -- 3,672 11 4,673 -- 8,356 ---------- ---------- ---------- ---------- ---------- ---------- Common stock .............................. 757 1 6 6,155 (6,162) 757 Additional capital ........................ 677,248 84,611 2,299 10,129 (97,039) 677,248 Retained earnings ......................... 461,716 433,388 29,986 (13,628) (449,746) 461,716 ---------- ---------- ---------- ---------- ---------- ---------- 1,139,721 518,000 32,291 2,656 (552,947) 1,139,721 ---------- ---------- ---------- ---------- ---------- ---------- Total Liabilities & Equity ................ $2,886,938 $2,572,223 $ 205,152 $ 63,482 $(2,392,827) $ 3,334,968 ========== ========== ========== ========== =========== =========== </TABLE> 10
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2001 NOTE H - SUMMARIZED FINANCIAL INFORMATION - (Continued) <TABLE> <CAPTION> Consolidating Balance Sheet September 30, 2000 Non-Guarantor Subsidiaries --------------------- D.R. Guarantor Financial Intercompany Horton,Inc. Subsidiaries Services Other Eliminations Total ----------- ------------ ----------- --------- -------------- ---------- (In thousands) ASSETS Homebuilding: <S> <C> <C> <C> <C> <C> <C> Cash and cash equivalents ................. $ 20,397 $ 40,349 $ -- $ 1,052 $ -- $ 61,798 Advances to/investments in subsidiaries ... 1,862,988 14,653 -- -- (1,877,641) -- Inventories ............................... 395,848 1,774,357 -- 21,115 (289) 2,191,031 Property and equipment (net) .............. 3,031 30,645 -- 5,284 -- 38,960 Earnest money deposits and other assets ... 44,463 86,134 -- 28,773 (10,387) 148,983 Excess of cost over net assets acquired (net) -- 115,966 -- -- -- 115,966 ---------- ---------- ---------- ---------- ---------- ---------- 2,326,727 2,062,104 -- 56,224 (1,888,317) 2,556,738 ---------- ---------- ---------- ---------- ---------- ---------- Financial services: Cash and cash equivalents ................. -- -- 10,727 -- -- 10,727 Mortgage loans held for sale .............. -- -- 119,581 -- -- 119,581 Other assets .............................. -- -- 7,531 -- -- 7,531 ---------- ---------- ---------- ---------- ---------- ---------- -- -- 137,839 -- -- 137,839 ---------- ---------- ---------- ---------- ---------- ---------- Total Assets .............................. $2,326,727 $2,062,104 $ 137,839 $ 56,224 $(1,888,317) $2,694,577 ========== ========== ========== ========== =========== ========== LIABILITIES & EQUITY Homebuilding: Accounts payable and other liabilities .... $ 124,823 $ 359,004 $ -- $ 2,246 $ (115,684) $ 370,389 Advances from parent/subsidiaries ......... 11,617 1,268,266 -- 27,547 (1,307,430) -- Notes payable ............................. 1,220,724 24,861 -- 10,222 (10,221) 1,245,586 ---------- ---------- ---------- ---------- ---------- ---------- 1,357,164 1,652,131 -- 40,015 (1,433,335) 1,615,975 ---------- ---------- ---------- ---------- ---------- ---------- Financial services: Accounts payable and other liabilities .... -- -- 9,388 -- (4,430) 4,958 Advances from parent/subsidiaries ......... -- -- 5,653 -- (5,653) -- Notes payable ............................. -- -- 98,817 -- -- 98,817 ---------- ---------- ---------- ---------- ---------- ---------- -- -- 113,858 -- (10,083) 103,775 ---------- ---------- ---------- ---------- ---------- ---------- Total Liabilities ......................... 1,357,164 1,652,131 113,858 40,015 (1,443,418) 1,719,750 ---------- ---------- ---------- ---------- ---------- ---------- Minority interest ......................... -- -- 10 5,254 -- 5,264 ---------- ---------- ---------- ---------- ---------- ---------- Common stock .............................. 701 1 6 6,155 (6,162) 701 Additional capital ........................ 537,145 84,795 2,299 10,128 (97,222) 537,145 Retained earnings ......................... 468,664 325,177 21,666 (5,328) (341,515) 468,664 Treasury stock ............................ (36,947) -- -- -- -- (36,947) ---------- ---------- ---------- ---------- ---------- ---------- 969,563 409,973 23,971 10,955 (444,899) 969,563 ---------- ---------- ---------- ---------- ---------- ---------- Total Liabilities & Equity ................ $2,326,727 $2,062,104 $ 137,839 $ 56,224 $(1,888,317) $2,694,577 ========== ========== ========== ========== =========== ========== </TABLE> 11
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2001 NOTE H - SUMMARIZED FINANCIAL INFORMATION - (Continued) <TABLE> <CAPTION> Consolidating Statement of Income Three Months Ended June 30, 2001 Non-Guarantor Subsidiaries --------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ ----------- --------- --------------- ----------- (In thousands) Homebuilding: Revenues: <S> <C> <C> <C> <C> <C> <C> Home sales .............................. $ 199,313 $ 887,058 $ -- $ 3,871 $ -- $1,090,242 Land/lot sales .......................... 6,267 5,457 -- -- -- 11,724 ---------- ---------- ---------- ---------- ---------- ---------- 205,580 892,515 -- 3,871 -- 1,101,966 ---------- ---------- ---------- ---------- ---------- ---------- Cost of Sales: Home sales .............................. 154,876 714,376 -- 2,985 (142) 872,095 Land/lot sales .......................... 5,502 5,210 -- -- -- 10,712 ---------- ---------- ---------- ---------- ---------- ---------- 160,378 719,586 -- 2,985 (142) 882,807 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit: Home sales .............................. 44,437 172,682 -- 886 142 218,147 Land/lot sales .......................... 765 247 -- -- -- 1,012 ---------- ---------- ---------- ---------- ---------- ---------- 45,202 172,929 -- 886 142 219,159 Selling, general and administrative expense ................................. 28,294 77,838 -- 1,779 1,174 109,085 Interest expense .......................... 2,043 44 -- 14 (12) 2,089 Other expense (income) .................... (95,220) (305) -- 6,895 93,670 5,040 ---------- ---------- ---------- ---------- ---------- ---------- 110,085 95,352 -- (7,802) (94,690) 102,945 ---------- ---------- ---------- ---------- ---------- ---------- Financial services: Revenues .................................. -- -- 19,015 -- -- 19,015 Selling, general and administrative expense ................................. -- -- 13,714 -- (1,174) 12,540 Interest expense .......................... -- -- 1,575 -- -- 1,575 Other (income) ............................ -- -- (2,240) -- -- (2,240) ---------- ---------- ---------- ---------- ---------- ---------- -- -- 5,966 -- 1,174 7,140 ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes ................ 110,085 95,352 5,966 (7,802) (93,516) 110,085 Provision for income taxes ................ 41,282 35,757 2,237 (2,925) (35,069) 41,282 ---------- ---------- ---------- ---------- ---------- ---------- Net income ................................ $ 68,803 $ 59,595 $ 3,729 $ (4,877) $ (58,447) $ 68,803 ========== ========== ========== ========== ========== ========== </TABLE> 12
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2001 NOTE H - SUMMARIZED FINANCIAL INFORMATION - (Continued) <TABLE> <CAPTION> Consolidating Statement of Income Nine Months Ended June 30, 2001 Non-Guarantor Subsidiaries -------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------- ----------- -------- --------------- ----------- (In thousands) Homebuilding: Revenues: <S> <C> <C> <C> <C> <C> <C> Home sales .............................. $ 474,816 $2,309,055 $ -- $ 16,023 $ -- $2,799,894 Land/lot sales .......................... 22,876 45,157 -- -- -- 68,033 ---------- ---------- ---------- ---------- ---------- ---------- 497,692 2,354,212 -- 16,023 -- 2,867,927 ---------- ---------- ---------- ---------- ---------- ---------- Cost of Sales: Home sales .............................. 377,190 1,856,010 -- 11,953 (399) 2,244,754 Land/lot sales .......................... 17,776 37,015 -- -- -- 54,791 ---------- ---------- ---------- ---------- ---------- ---------- 394,966 1,893,025 -- 11,953 (399) 2,299,545 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit: Home sales .............................. 97,626 453,045 -- 4,070 399 555,140 Land/lot sales .......................... 5,100 8,142 -- -- -- 13,242 ---------- ---------- ---------- ---------- ---------- ---------- 102,726 461,187 -- 4,070 399 568,382 Selling, general and administrative expense ................................. 70,449 215,610 -- 6,100 2,925 295,084 Interest expense .......................... 6,478 134 -- 196 (190) 6,618 Other expense (income) .................... (243,176) (1,517) -- 10,456 248,275 14,038 ---------- ---------- ---------- ---------- ---------- ---------- 268,975 246,960 -- (12,682) (250,611) 252,642 ---------- ---------- ---------- ---------- ---------- ---------- Financial services: Revenues .................................. -- -- 47,553 -- -- 47,553 Selling, general and administrative expense ................................. -- -- 35,432 -- (2,925) 32,507 Interest expense .......................... -- -- 3,582 -- -- 3,582 Other (income) ............................ -- -- (4,869) -- -- (4,869) ---------- ---------- ---------- ---------- ---------- ---------- -- -- 13,408 -- 2,925 16,333 ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes ................ 268,975 246,960 13,408 (12,682) (247,686) 268,975 Provision for income taxes ................ 100,866 92,610 5,028 (4,755) (92,883) 100,866 ---------- ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of change in accounting principle .......... 168,109 154,350 8,380 (7,927) (154,803) 168,109 Cumulative effect of change in accounting principle, net of income taxes ............................ 2,136 -- -- -- -- 2,136 ---------- ---------- ---------- ---------- ---------- ---------- Net income ................................ $ 170,245 $ 154,350 $ 8,380 $ (7,927) $ (154,803) $ 170,245 ========== ========== ========== ========== ========== ========== </TABLE> 13
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2001 NOTE H - SUMMARIZED FINANCIAL INFORMATION - (Continued) <TABLE> <CAPTION> Consolidating Statement of Income Three Months Ended June 30, 2000 Non-Guarantor Subsidiaries --------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ ---------- --------- ------------- ----------- (In thousands) Homebuilding: Revenues: <S> <C> <C> <C> <C> <C> <C> Home sales .............................. $ 150,081 $ 771,216 $ -- $ 9,489 $ -- $ 930,786 Land/lot sales .......................... 2,953 12,677 -- -- -- 15,630 ---------- ---------- ---------- ---------- ---------- ---------- 153,034 783,893 -- 9,489 -- 946,416 ---------- ---------- ---------- ---------- ---------- ---------- Cost of Sales: Home sales .............................. 126,903 621,548 -- 7,238 (162) 755,527 Land/lot sales .......................... 3,396 14,991 -- -- -- 18,387 ---------- ---------- ---------- ---------- ---------- ---------- 130,299 636,539 -- 7,238 (162) 733,914 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit: Home sales .............................. 23,178 149,668 -- 2,251 162 175,259 Land/lot sales .......................... (443) (2,314) -- -- -- (2,757) ---------- ---------- ---------- ---------- ---------- ---------- 22,735 147,354 -- 2,251 162 172,502 Selling, general and administrative expense ................................. 23,821 69,296 -- 2,192 1,934 97,243 Interest expense .......................... 2,287 52 -- 161 (161) 2,339 Other expense (income) .................... (80,900) 295 -- 178 79,680 (747) ---------- ---------- ---------- ---------- ---------- ---------- 77,527 77,711 -- (280) (81,291) 73,667 ---------- ---------- ---------- ---------- ---------- ---------- Financial services: Revenues .................................. -- -- 12,800 -- -- 12,800 Selling, general and administrative expense ................................. -- -- 11,089 -- (1,934) 9,155 Interest expense .......................... -- -- 1,485 -- -- 1,485 Other (income) ............................ -- -- (1,700) -- -- (1,700) ---------- ---------- ---------- ---------- ---------- ---------- -- -- 1,926 -- 1,934 3,860 ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes ................ 77,527 77,711 1,926 (280) (79,357) 77,527 Provision for income taxes ................ 29,460 29,534 728 (106) (30,156) 29,460 ---------- ---------- ---------- ---------- ---------- ---------- Net income ................................ $ 48,067 $ 48,177 $ 1,198 $ (174) $ (49,201) $ 48,067 ========== ========== ========== ========== ========== ========== </TABLE> 14
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2001 NOTE H - SUMMARIZED FINANCIAL INFORMATION - (Continued) <TABLE> <CAPTION> Consolidating Statement of Income Nine Months Ended June 30, 2000 Non-Guarantor Subsidiaries --------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ ---------- --------- ------------- ----------- (In thousands) Homebuilding: Revenues: <S> <C> <C> <C> <C> <C> <C> Home sales .............................. $ 386,111 $2,083,739 $ -- $ 23,464 $ -- $2,493,314 Land/lot sales .......................... 3,929 34,851 -- -- -- 38,780 ---------- ---------- ---------- ---------- ---------- ---------- 390,040 2,118,590 -- 23,464 -- 2,532,094 ---------- ---------- ---------- ---------- ---------- ---------- Cost of Sales: Home sales .............................. 324,387 1,686,854 -- 17,617 (509) 2,028,349 Land/lot sales .......................... 4,336 32,188 -- -- -- 36,524 ---------- ---------- ---------- ---------- ---------- ---------- 328,723 1,719,042 -- 17,617 (509) 2,064,873 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit: Home sales .............................. 61,724 396,885 -- 5,847 509 464,965 Land/lot sales .......................... (407) 2,663 -- -- -- 2,256 ---------- ---------- ---------- ---------- ---------- ---------- 61,317 399,548 -- 5,847 509 467,221 Selling, general and administrative expense ................................. 59,332 196,000 -- 4,811 1,930 262,073 Interest expense .......................... 7,078 117 -- 471 (471) 7,195 Other expense (income) .................... (214,824) (1,401) -- 615 214,138 (1,472) ---------- ---------- ---------- ---------- ---------- ---------- 209,731 204,832 -- (50) (215,088) 199,425 ---------- ---------- ---------- ---------- ---------- ---------- Financial services: Revenues .................................. -- -- 34,926 -- -- 34,926 Selling, general and administrative expense ................................. -- -- 27,082 -- (1,930) 25,152 Interest expense .......................... -- -- 4,191 -- -- 4,191 Other (income) ............................ -- -- (4,723) -- -- (4,723) ---------- ---------- ---------- ---------- ---------- ---------- -- -- 8,376 -- 1,930 10,306 ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes ................ 209,731 204,832 8,376 (50) (213,158) 209,731 Provision for income taxes ................ 79,698 77,840 3,179 (19) (81,000) 79,698 ---------- ---------- ---------- ---------- ---------- ---------- Net income ................................ $ 130,033 $ 126,992 $ 5,197 $ (31) $ (132,158) $ 130,033 ========== ========== ========== ========== ========== ========== </TABLE> 15
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2001 NOTE H - SUMMARIZED FINANCIAL INFORMATION - (Continued) <TABLE> <CAPTION> Consolidating Statement of Cash Flows Nine Months Ended June 30, 2001 Non-Guarantor Subsidiaries ----------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ------------ ----------- ----------- ------------- ----------- (In thousands) OPERATING ACTIVITIES <S> <C> <C> <C> <C> <C> <C> Net income ............................... $ 170,245 $ 154,350 $ 8,380 $ (7,927) $ (154,803) $ 170,245 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization .......... 1,418 15,711 955 379 -- 18,463 Amortization of debt premiums and fees . 2,645 -- -- -- -- 2,645 Changes in operating assets and liabilities: (Increase)/decrease in inventories ..... (141,521) (269,505) -- (5,683) 70 (416,639) (Increase)/decrease in earnest money deposits and other assets ............ (5,522) (48,394) (5,555) 5,323 20,499 (33,649) Increase in mortgage loans held for sale ................................. -- -- (50,616) -- -- (50,616) Increase/(decrease) in accounts payable and other liabilities ........ 15,490 (11,378) 569 (369) 22,296 26,608 ---------- ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities ............................... 42,755 (159,216) (46,267) (8,277) (111,938) (282,943) ---------- ---------- ---------- ---------- ---------- ---------- INVESTING ACTIVITIES Net purchases of property and equipment .. (7,213) (12,333) (1,860) (401) -- (21,807) Net investments in venture capital entities ................................ -- -- -- (1,970) -- (1,970) Net cash paid for acquisitions ........... -- (49,009) -- -- -- (49,009) ---------- ---------- ---------- ---------- ---------- ---------- Net cash used in investing activities ....... (7,213) (61,342) (1,860) (2,371) -- (72,786) ---------- ---------- ---------- ---------- ---------- ---------- FINANCING ACTIVITIES Net change in notes payable .............. 357,174 (48,899) 56,420 356 (357) 364,694 Increase/(decrease) in intercompany payables ................................ (413,026) 449,761 6,444 10,526 (53,705) -- Proceeds from stock associated with certain employee benefit plans .......... 9,798 -- -- -- -- 9,798 Cash dividends/distributions paid ........ (9,885) (161,500) (4,500) -- 166,000 (9,885) ---------- ---------- ---------- ---------- ---------- ---------- Net cash (used in) provided by financing activities ............................... (55,939) 239,362 58,364 10,882 111,938 364,607 ---------- ---------- ---------- ---------- ---------- ---------- Increase/(decrease) in cash ................. (20,397) 18,804 10,237 234 -- 8,878 Cash at beginning of period ................. 20,397 40,349 10,727 1,052 -- 72,525 ---------- ---------- ---------- ---------- ---------- ---------- Cash at end of period ....................... $ -- $ 59,153 $ 20,964 $ 1,286 $ -- $ 81,403 ========== ========== ========== ========== ========== ========== </TABLE> 16
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 2001 NOTE H - SUMMARIZED FINANCIAL INFORMATION - (Continued) <TABLE> <CAPTION> Consolidating Statement of Cash Flows Nine Months Ended June 30, 2000 Non-Guarantor Subsidiaries --------------------- D.R. Guarantor Financial Intercompany Horton, Inc. Subsidiaries Services Other Eliminations Total ------------ ----------- ---------- --------- ------------ ---------- (In thousands) OPERATING ACTIVITIES <S> <C> <C> <C> <C> <C> <C> Net income ............................... $ 130,033 $ 126,992 $ 5,197 $ (31) $ (132,158) $ 130,033 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization .......... 1,133 13,404 823 539 -- 15,899 Amortization of debt premiums and fees . 1,830 -- -- -- -- 1,830 Changes in operating assets and liabilities: (Increase)/decrease in inventories ... (82,053) (226,795) -- 2,827 92 (305,929) (Increase)/decrease in earnest money deposits and other assets ... 1,706 (24,976) (508) (2,541) (6,158) (32,477) Decrease in mortgage loans held for sale .......................... -- -- 13,857 -- -- 13,857 Increase/(decrease) in accounts payable and other liabilities ..... 7,853 (37,536) (1,156) 582 27,694 (2,563) ---------- ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities ............................... 60,502 (148,911) 18,213 1,376 (110,530) (179,350) ---------- ---------- ---------- ---------- ---------- ---------- INVESTING ACTIVITIES Net purchases of property and equipment .. (1,347) (12,394) (744) (189) -- (14,674) Net investments in venture capital entities ................................ -- -- -- (18,311) -- (18,311) Net cash paid for acquisitions ........... -- (5,091) 75 -- -- (5,016) ---------- ---------- ---------- ---------- ---------- ---------- Net cash used in investing activities ....... (1,347) (17,485) (669) (18,500) -- (38,001) ---------- ---------- ---------- ---------- ---------- ---------- FINANCING ACTIVITIES Net change in notes payable .............. 217,497 (7,666) (22,149) (3,949) 3,951 187,684 Increase/(decrease) in intercompany payables ................................ (254,019) 222,188 7,802 19,744 4,285 -- Repurchase of treasury stock ............. (14,543) -- -- -- -- (14,543) Proceeds from stock associated with certain employee benefit plans .......... 1,599 -- -- -- -- 1,599 Cash dividends/distributions paid ........ (6,813) (101,594) (700) -- 102,294 (6,813) ---------- ---------- ---------- ---------- ---------- ---------- Net cash (used in) provided by financing activities ............................... (56,279) 112,928 (15,047) 15,795 110,530 167,927 ---------- ---------- ---------- ---------- ---------- ---------- Increase/(decrease) in cash ................. 2,876 (53,468) 2,497 (1,329) -- (49,424) Cash at beginning of period ................. 66,777 53,468 6,360 1,963 -- 128,568 ---------- ---------- ---------- ---------- ---------- ---------- Cash at end of period ....................... $ 69,653 $ -- $ 8,857 $ 634 $ -- $ 79,144 ========== ========== ========== ========== ========== ========== </TABLE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - CONSOLIDATED D. R. Horton, Inc. and subsidiaries (the "Company") provide homebuilding activities in 22 states and 38 markets through its 45 homebuilding divisions. Through its financial services segment, the Company also provides mortgage banking and title agency services in many of these same markets. Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 Consolidated revenues for the three months ended June 30, 2001, increased 16.9%, to $1,121.0 million, from $959.2 million for the comparable period of 2000, primarily due to increases in home sales revenues. Income before income taxes for the three months ended June 30, 2001, increased 42.0%, to $110.1 million, from $77.5 million for the comparable period of 2000. As a percentage of revenues, income before income taxes for the three months ended June 30, 2001, increased 1.7 percentage points, to 9.8%, from 8.1% for the comparable period of 2000, primarily due to an increase in the gross profit percentage achieved by the homebuilding segment. The consolidated provision for income taxes increased 40.1%, to $41.3 million for the three months ended June 30, 2001, from $29.5 million for the same period of 2000, due to the corresponding increase in income before income taxes. The effective income tax rate decreased 0.5 percentage points, to 37.5%, from 38.0% for the comparable period of 2000, primarily due to changes in the estimated overall effective state income tax rate. Nine Months Ended June 30, 2001 Compared to Nine Months Ended June 30, 2000 Consolidated revenues for the nine months ended June 30, 2001, increased 13.6%, to $2,915.5 million, from $2,567.0 million for the comparable period of 2000, primarily due to increases in home sales revenues. Income before income taxes for the nine months ended June 30, 2001, increased 28.2%, to $269.0 million, from $209.7 million for the comparable period of 2000. As a percentage of revenues, income before income taxes for the nine months ended June 30, 2001, increased 1.0 percentage points, to 9.2%, from 8.2% for the comparable period of 2000, primarily due to an increase in the gross profit percentage achieved by the homebuilding segment. The consolidated provision for income taxes increased 26.6%, to $100.9 million for the nine months ended June 30, 2001, from $79.7 million for the same period of 2000, due to the corresponding increase in income before income taxes. The effective income tax rate decreased 0.5 percentage points, to 37.5%, from 38.0% for the comparable period of 2000, primarily due to changes in the estimated overall effective state income tax rate. The cumulative effect of a change in accounting principle was an increase in income of $2.1 million, net of income taxes, for the nine months ended June 30, 2001. This accounting change is the result of the Company's October 1, 2000 adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires the Company to recognize its interest rate swap agreements in the consolidated balance sheet at fair value. 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - HOMEBUILDING The following tables set forth certain operating and financial data for the Company's homebuilding activities: <TABLE> <CAPTION> Percentages of Homebuilding Revenues ------------------------------------ Three Months Ended Nine Months Ended June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Cost and expenses: <S> <C> <C> <C> <C> Cost of sales ............................. 80.1% 81.8% 80.2% 81.5% Selling, general and administrative expense ................................. 9.9 10.3 10.3 10.4 Interest expense .......................... 0.2 0.2 0.2 0.3 ---------- ---------- ---------- ---------- Total costs and expenses .................... 90.2 92.3 90.7 92.2 Other expense (income) ...................... 0.5 (0.1) 0.5 (0.1) ---------- ---------- ---------- ---------- Income before income taxes .................. 9.3% 7.8% 8.8% 7.9% ========== ========== ========== ========== </TABLE> <TABLE> <CAPTION> Homes Closed Three Months Ended June 30, Nine Months Ended June 30, ------------------------------------- ------------------------------------ 2001 2000 2001 2000 ----------------- ----------------- ----------------- ---------------- Homes Homes Homes Homes Closed Revenues Closed Revenues Closed Revenues Closed Revenues ------ -------- ------ -------- ------ -------- ------ -------- ($'s in millions) ($'s in millions) <S> <C> <C> <C> <C> <C> <C> <C> <C> Mid-Atlantic 725 $ 158.8 860 $178.5 1,950 $ 432.3 2,187 $ 436.1 Midwest 437 105.2 470 108.3 1,311 313.6 1,424 309.2 Southeast 818 143.6 767 129.7 1,976 348.3 2,015 337.1 Southwest 2,277 378.9 1,888 288.0 5,955 981.7 5,603 833.3 West 1,210 303.7 1,025 226.3 2,895 724.0 2,637 577.6 ----- -------- ----- ------ ------ -------- ------ -------- 5,467 $1,090.2 5,010 $930.8 14,087 $2,799.9 13,866 $2,493.3 ===== ======== ===== ====== ====== ======== ====== ======== </TABLE> <TABLE> <CAPTION> Net Sales Contracts Three Months Ended June 30, Nine Months Ended June 30, ------------------------------------ ----------------------------------- 2001 2000 2001 2000 ---------------- ---------------- ----------------- --------------- Homes Homes Homes Homes Sold $ Sold $ Sold $ Sold $ ----- ------- ----- -------- ------ -------- ------ ------- ($'s in millions) ($'s in millions) <S> <C> <C> <C> <C> <C> <C> <C> <C> Mid-Atlantic 674 $ 146.7 754 $ 159.1 2,084 $ 459.4 2,084 $ 434.4 Midwest 520 139.2 476 118.4 1,441 374.8 1,317 326.4 Southeast 868 152.9 718 126.5 2,266 404.8 2,160 369.8 Southwest 2,453 411.0 1,998 321.2 6,927 1,142.2 5,992 937.6 West 1,499 364.7 1,149 276.4 4,237 1,089.4 2,827 650.8 ----- -------- ----- -------- ------ -------- ------ -------- 6,014 $1,214.5 5,095 $1,001.6 16,955 $3,470.6 14,380 $2,719.0 ===== ======== ===== ======== ====== ======== ====== ======== </TABLE> <TABLE> <CAPTION> Sales Contract Backlog June 30, 2001 June 30, 2000 ----------------- --------------- Homes $ Homes $ ------ ------- ----- -------- ($'s in millions) <S> <C> <C> <C> <C> Mid-Atlantic 957 $ 234.7 988 $ 241.1 Midwest 1,030 286.6 1,027 264.4 Southeast 1,629 288.2 981 173.3 Southwest 4,161 711.9 3,470 577.3 West 2,831 740.0 1,357 326.1 ------ -------- ----- -------- 10,608 $2,261.4 7,823 $1,582.2 ====== ======== ===== ======== </TABLE> <TABLE> <S> <C> The Company's market regions consist of the following markets: Mid-Atlantic Charleston, Charlotte, Columbia, Greensboro, Greenville, Hilton Head, Myrtle Beach, New Jersey, Newport News, Raleigh/Durham, Richmond, Suburban Washington, D.C. and Wilmington Midwest Chicago, Cincinnati, Louisville, Minneapolis/St. Paul and St. Louis Southeast Atlanta, Birmingham, Jacksonville, Orlando and South Florida Southwest Albuquerque, Austin, Dallas/Fort Worth, Houston, Killeen, Phoenix, San Antonio and Tucson West Denver, Las Vegas, Los Angeles, Portland, Sacramento, Salt Lake City and San Diego </TABLE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 Revenues from homebuilding activities increased 16.4%, to $1,102.0 million (5,467 homes closed) for the three months ended June 30, 2001, from $946.4 million (5,010 homes closed) for the comparable period of 2000. Revenues from home sales increased in three of the Company's five market regions, with percentage increases ranging from 10.7% in the Southeast region to 34.2% in the West region. Home sales revenues declined 2.8% and 11.1% in the Midwest and Mid-Atlantic regions, respectively. The increases in total homebuilding revenues and revenues from home sales were due to strong housing demand throughout the majority of the Company's markets, and an increase in the average selling price of homes closed. The average selling price of homes closed during the three months ended June 30, 2001 was $199,400, up 7.3% from $185,800 for the same period in 2000. The increase in average selling price was due to changes in the mix of homes closed and, with the strong housing demand, the Company's ability to sell more custom features with its homes and to raise prices in some of its markets. The value of net sales contracts increased 21.3%, to $1,214.5 million (6,014 homes) for the three months ended June 30, 2001, from $1,001.6 million (5,095 homes) for the same period of 2000. The value of net sales contracts increased in four of the Company's five market regions, with percentage increases ranging from 17.6% in the Midwest region to 32.0% in the West region. The value of net sales contracts declined 7.8% in the Mid-Atlantic region. The average price of a net sales contract in the three months ended June 30, 2001 was $201,900, up 2.7% over the $196,600 average in the three months ended June 30, 2000. The increase in average selling price was due to changes in the mix of homes sold and, with the strong housing demand, the Company's ability to sell more custom features with its homes and to raise prices in some of its markets. At June 30, 2001, the Company's backlog of sales contracts was $2,261.4 million (10,608 homes), up 42.9% from $1,582.2 million (7,823 homes) at June 30, 2000. The average sales price of homes in sales backlog was $213,200 at June 30, 2001, up 5.4% from the $202,300 average at June 30, 2000. The average sales price of homes in backlog typically is higher than the average sales price of closed homes because it takes longer to construct more expensive homes. Cost of sales increased by 14.1%, to $882.8 million for the three months ended June 30, 2001, from $773.9 million for the comparable quarter of 2000. 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 declined 1.2 percentage points, to 80.0% for the three months ended June 30, 2001, from 81.2% for the comparable period of 2000, due to the increase in average selling price of homes closed, higher margins obtained from selling more custom features, and reduced material costs. Total homebuilding cost of sales was 80.1% of total homebuilding revenues, down 1.7 percentage points from 81.8% for the comparable period of 2000, primarily due to the decline in cost of home sales as a percentage of revenues. Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 12.2%, to $109.1 million in the three months ended June 30, 2001, from $97.2 million in the comparable period of 2000. As a percentage of homebuilding revenues, SG&A expenses decreased to 9.9% for the three months ended June 30, 2001, from 10.3% for the comparable period of 2000, due primarily to the large increase in revenues absorbing fixed costs. Interest expense associated with homebuilding activities decreased to $2.1 million in the three months ended June 30, 2001, from $2.3 million in the comparable period of 2000. As a percentage of homebuilding revenues, homebuilding interest expense was 0.2% for both three month periods. During both periods, the Company expensed the portion of incurred interest and other financing costs which could not be charged to inventory. The Company follows a policy of capitalizing interest only on inventory under construction or development. Capitalized interest and other financing costs are included in cost of sales at the time of home closings. Other expense associated with homebuilding activities was $5.0 million in the three months ended June 30, 2001, compared to $0.1 million of other income in the comparable period of 2000. The expense in 2001 is primarily due to write-downs to estimated fair value of the carrying amounts of the Company's investments in start-up and emerging growth companies, offset in part by an increase in the fair value of the Company's interest rate swap agreements during the quarter. 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine Months Ended June 30, 2001 Compared to Nine Months Ended June 30, 2000 Revenues from homebuilding activities increased 13.3%, to $2,867.9 million (14,087 homes closed) for the nine months ended June 30, 2001, from $2,532.1 million (13,866 homes closed) for the comparable period of 2000. Revenues from home sales increased in four of the Company's five market regions, with percentage increases ranging from 1.4% in the Midwest region to 25.4% in the West region. Revenues from homebuilding activities declined 0.9% in the Southeast region. The increases in total homebuilding revenues and revenues from home sales were due to strong housing demand throughout the majority of the Company's markets, and an increase in the average selling price of homes closed. The average selling price of homes closed during the nine months ended June 30, 2001 was $198,800, up 10.6% from $179,800 for the same period in 2000. The increase in average selling price was due to changes in the mix of homes closed and, with the strong housing demand, the Company's ability to sell more custom features with its homes and to raise prices in some of its markets. The value of net sales contracts increased 27.6%, to $3,470.6 million (16,955 homes) for the nine months ended June 30, 2001, from $2,719.0 million (14,380 homes) for the same period of 2000. The value of net sales contracts increased in all of the Company's five market regions, with percentage increases ranging from 5.8% in the Mid-Atlantic region to 67.4% in the West region. The average price of a net sales contract in the nine months ended June 30, 2001 was $204,700, up 8.2% over the $189,100 average in the nine months ended June 30, 2000. The increase in average selling price was due to changes in the mix of homes sold and, with the strong housing demand, the Company's ability to sell more custom features with its homes and to raise prices in some of its markets. Cost of sales increased by 11.4%, to $2,299.5 million for the nine months ended June 30, 2001, from $2,064.9 million for the comparable period of 2000. 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 declined 1.2 percentage points, to 80.2% for the nine months ended June 30, 2001, from 81.4% for the comparable period of 2000, due to the increase in average selling price of homes closed, higher margins obtained from selling more custom features, and reduced material costs. Total homebuilding cost of sales was 80.2% of total homebuilding revenues, down 1.3 percentage points from 81.5% for the comparable period of 2000, due primarily to the decline in cost of home sales as a percentage of revenues. Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 12.6%, to $295.1 million in the nine months ended June 30, 2001, from $262.1 million in the comparable period of 2000. As a percentage of homebuilding revenues, SG&A expenses decreased to 10.3% for the nine months ended June 30, 2001, from 10.4% for the comparable period of 2000, due primarily to the large increase in revenues absorbing fixed costs. Interest expense associated with homebuilding activities was $6.6 million in the nine months ended June 30, 2001, compared to $7.2 million in the comparable period of 2000. As a percentage of homebuilding revenues, homebuilding interest expense decreased to 0.2% for the nine months ended June 30, 2001, from 0.3% in the comparable period of 2000. During both periods, the Company expensed the portion of incurred interest and other financing costs which could not be charged to inventory. The Company follows a policy of capitalizing interest only on inventory under construction or development. Capitalized interest and other financing costs are included in cost of sales at the time of home closings. Other expense associated with homebuilding activities was $14.0 million in the nine months ended June 30, 2001, as compared to $1.5 million of other income in the comparable period of 2000. The expense in 2001 is primarily due to write-downs to estimated fair value of the carrying amounts of the Company's investments in start-up and emerging growth companies and the decline in the fair value of the Company's interest rate swap agreements during the period. 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - FINANCIAL SERVICES The following table summarizes financial and other information for the Company's financial services operations: <TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- --------- ---------- ($ in Thousands) <S> <C> <C> <C> <C> Number of loans originated .................. 3,658 2,384 8,733 6,470 ---------- ---------- ---------- ---------- Loan origination fees ....................... $ 3,969 $ 2,650 $ 9,695 $ 6,995 Sale of servicing rights and gains from sale of mortgages ........................... 8,326 5,428 21,512 14,695 Other revenues .............................. 2,130 1,142 4,952 3,344 ---------- ---------- ---------- ---------- Total mortgage banking revenues ............. 14,425 9,220 36,159 25,034 Title policy premiums, net .................. 4,590 3,580 11,394 9,892 ---------- ---------- ---------- ---------- Total revenues .............................. 19,015 12,800 47,553 34,926 General and administrative expense .......... 12,540 9,155 32,507 25,152 Interest expense ............................ 1,575 1,485 3,582 4,191 Interest/other (income) ..................... (2,240) (1,700) (4,869) (4,723) ---------- ---------- ---------- ---------- Income before income taxes .................. $ 7,140 $ 3,860 $ 16,333 $ 10,306 ========== ========== ========== ========== </TABLE> Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 Revenues from the financial services segment increased 48.6%, to $19.0 million in the three months ended June 30, 2001, from $12.8 million in the comparable period of 2000. 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 37.0%, to $12.5 million in the three months ended June 30, 2001, from $9.2 million in the comparable period of 2000. As a percentage of financial services revenues, general and administrative expenses decreased by 5.6 percentage points, to 65.9% in the three months ended June 30, 2001, from 71.5% in the comparable period in 2000, due primarily to fiscal year 2000 startup expenses in new markets with limited revenues. Nine Months Ended June 30, 2001 Compared to Nine Months Ended June 30, 2000 Revenues from the financial services segment increased 36.2%, to $47.6 million in the nine months ended June 30, 2001, from $34.9 million in the comparable period of 2000. 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 29.2%, to $32.5 million in the nine months ended June 30, 2001, from $25.2 million in the comparable period of 2000. As a percentage of financial services revenues, general and administrative expenses decreased by 3.6 percentage points, to 68.4% in the nine months ended June 30, 2001, from 72.0% in the comparable period in 2000, due primarily to fiscal year 2000 startup expenses in new markets with limited revenues. 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001, the Company had available cash and cash equivalents of $81.4 million. Inventories (including finished homes, construction in progress, and developed residential lots and other land) at June 30, 2001, had increased by $524.6 million since September 30, 2000, due to a general increase in business activity and the expansion of operations in the Company's market areas. The inventory increase was financed largely by issuing $200 million of senior subordinated notes, issuing for $200 million of zero coupon convertible senior notes and by retaining earnings. As a result, the Company's ratio of homebuilding notes payable to total capital at June 30, 2001, increased 2.6 percentage points to 58.8%, from 56.2% at September 30, 2000. The stockholders' equity to total assets ratio decreased 1.8 percentage points, to 34.2% at June 30, 2001, from 36.0% at September 30, 2000. The Company has an $825 million, unsecured revolving credit facility, consisting of a $775 million four-year revolving loan and a $50 million four-year letter of credit facility, that matures in 2002. Additionally, the Company has another $45 million standby letter of credit agreement maturing in 2003. The Company is currently in negotiations to refinance the four year revolving loan and letter of credit facilities. At June 30, 2001, the Company had outstanding homebuilding debt of $1,625.9 million, of which $144.0 million represented advances under the revolving credit facility. Under the debt covenants associated with the revolving credit facility, at June 30, 2001, the Company had additional homebuilding borrowing capacity of $631.0 million. The Company has entered into multi-year interest rate swap agreements with notional amounts aggregating $200 million that serve to fix the interest rate on a portion of the variable rate revolving credit facility. An additional interest rate swap agreement, with a notional amount of $148.5 million, was entered into in December 1999. It exchanged one of the Company's fixed rate obligations for a variable rate one. In accordance with its terms, it was canceled by the counterparty in April 2001. In April 2001, a universal shelf registration statement for an aggregate amount of $750 million was filed. It was declared effective by the Securities and Exchange Commission on April 20, 2001. Under the new shelf registration statement, on May 11, 2001, the Company issued $381.1 million (at maturity) in zero coupon convertible senior notes due May 11, 2021. Each $1,000 note was sold for $524.78, providing a yield-to-maturity of 3.25% per year. The notes are convertible into the Company's common stock at any time, if the sale price of the common stock exceeds specified thresholds or in other specified instances, at the rate of approximately 17.5 shares per $1,000 face amount at maturity. The conversion ratio equates to an initial conversion price of $30.00 per share. Holders have the option to require the Company to repurchase the notes on any of the second, seventh or twelfth anniversary dates from the issue date for the initial issue price plus accrued yield to the purchase date. The Company must satisfy any notes submitted for repurchase on the second anniversary date in cash. Any notes submitted for repurchase on the seventh or twelfth anniversary dates may be settled in any combination of cash and/or the Company's common stock, at the Company's option. The Company will have the option to redeem the notes, in cash, at any time after the second anniversary date of the notes for the initial issue price plus accrued yield to redemption. The Company will pay contingent interest on the notes during specified six-month periods beginning on May 12, 2003, if the market price of the notes exceeds specified levels. The Company expects to issue $200 million 7.875% Senior Notes due August 15, 2011 on or about August 15, 2001. The Company intends to use the proceeds from the offering of these notes to repay outstanding debt under our revolving credit facility and for general corporate purposes. In June 2001, the Company issued a post-effective amendment to an existing registration statement, which increased to 9.0 million the number of shares of the Company's common stock available for issuance as consideration for acquisitions. The amendment was declared effective by the Securities and Exchange Commission on June 18, 2001. At June 30, 2001, the financial services segment had mortgage loans held for sale of $170.2 million and loan commitments for $113.3 million at fixed rates. The Company hedges the interest rate market risk on these mortgage loans held for sale and loan commitments through the use of best-efforts whole loan delivery commitments, mandatory forward commitments to sell mortgage-backed securities and the purchase of options on financial instruments. The financial services segment has a $175 million, one-year bank warehouse facility that matures on August 13, 2001, and is secured by mortgage loans held for sale. The warehouse facility is not guaranteed by the parent company. As of June 30, 2001, $155.2 million had been drawn under this facility. All mortgage company activities are financed under the warehouse facility. 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On May 1, 2001, the Company acquired the assets of Fortress-Florida, Inc. (Fortress), a wholly owned subsidiary of The Fortress Group, Inc., for $28.7 million. Fortress assets, primarily inventories, amounted to approximately $47.1 million. Total liabilities assumed amounted to approximately $24.3 million, including notes payable of $17.5 million, which were paid at closing. On July 17, 2001, the Company completed the acquisition of the assets of Emerald Builders (Emerald), a privately held homebuilder based in Houston, Texas. In the transaction, the Company issued approximately 1.0 million shares of common stock, paid $30.7 million in cash and assumed debt of approximately $115.3 million, including notes payable of $109.6 million, which were paid at closing. The final number of shares issued is subject to adjustment, based on a final determination of the book value of the assets acquired. The Company's rapid growth and acquisition strategy require significant amounts of cash. It is anticipated that future home construction, lot and land purchases and acquisitions will be funded through internally generated funds and existing and future credit facilities. After giving effect to the Emerald acquisition, under the currently effective shelf registration statement, the Company has approximately 8.0 million shares issuable to effect, in whole or in part, possible future acquisitions. In the future, the Company intends to continue to maintain effective shelf registration statements that will facilitate access to the capital markets. During the three months ended June 30, 2001, the Company's Board of Directors declared a quarterly cash dividend of $0.05 per common share, which was paid on May 15, 2001 to stockholders of record on May 8, 2001. In 1999 and 2000, the Company entered into three separate limited partnership agreements with the purpose of investing in start-up and emerging growth companies whose technology and business plans have the potential of permitting the Company to leverage its size, expertise and customer base in the homebuilding industry. The Company originally authorized investment of up to $125 million in such companies over a four-year period. Since January, 2001, the original $125 million authorization was reduced to the $31.3 million that had been invested in such companies as of that date. The investments are concentrated in e-commerce businesses that serve the homebuilding, real estate and financial service industries, as well as in businesses whose strategic focus allows for the diversification of the Company's operations. As of June 30, 2001, the carrying value of the Company's investments in such companies, reported in homebuilding other assets, amounted to $22.0 million. Except for ordinary expenditures for the construction of homes, the acquisition of land and lots for development and sale of homes, at June 30, 2001, the Company had no material commitments for capital expenditures. SAFE HARBOR STATEMENT Certain statements contained herein, as well as statements made by the Company in periodic press releases and oral statements made by the Company's officials to analysts and stockholders in the course of presentations about the Company may be construed as "Forward-Looking Statements" as defined in the Private Securities Litigation Reform Act of 1995. Such statements may involve unstated risks, uncertainties and other factors that may cause actual results to differ materially from those initially anticipated. Such risks, uncertainties and other factors include, but are not limited to: - Changes in general economic, real estate and business conditions - Changes in interest rates and the availability of mortgage financing - Governmental regulations and environmental matters - The Company's substantial leverage - Competitive conditions within the homebuilding industry - The availability of capital - The Company's ability to effect its growth strategies successfully Additional information about issues that could lead to material changes in performance is contained in the Company's annual report on Form 10-K, which is filed with the Securities and Exchange Commission. 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to interest rate risk on its long term debt. The Company monitors its exposure to changes in interest rates and utilizes both fixed and variable rate debt. For fixed rate debt, changes in interest rates generally affect the value of the debt instrument, but not the Company's earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the fair value of the debt instrument, but may affect the Company's future earnings and cash flows. The Company has mitigated its exposure to changes in interest rates on its variable rate bank debt by entering into interest rate swap agreements to obtain a fixed interest rate for a portion of the variable rate borrowings. The Company generally does not have an obligation to prepay fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value would not have a significant impact on the Company's fixed-rate debt until such time as the Company is required to refinance, repurchase or repay such debt. The Company's interest rate swaps were not designated as hedges under Statement of Financial Accounting Standards No. 133 when it was adopted on October 1, 2000. Since their maturities and other terms did not match the related debt, they were determined to be ineffective hedges (as defined by the Statement). Therefore, the Company is exposed to market risk associated with changes in the fair values of the swaps, since any such changes must be reflected in the Company's income statements. The following table shows, as of June 30, 2001, the Company's long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value. In addition, the table shows the notional amounts, weighted average interest rates and estimated fair market value of the Company's interest rate swaps. <TABLE> <CAPTION> Three Months Ended Sept. 30, Year ended September 30, ------------ ----------------------------------------------- Fair ($ in millions) market value at 2001 2002 2003 2004 2005 Thereafter Total 06/30/01 ------ ------ ------ ------ ------ ----------- ------ -------- Debt: <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed rate $6.5 $24.4 $14.0 $157.4 $201.2 $1,264.6 $1,668.1 $1,486.9 Average interest rate 8.50% 6.98% 6.58% 8.71% 10.83% 8.10% 8.50% -- Variable rate $155.2 $144.0 -- -- -- -- $299.2 $299.2 Average interest rate 4.75% 5.65% -- -- -- -- 5.19% -- Interest Rate Swaps: Variable to fixed $200.0 $200.0 $200.0 $200.0 $200.0 $200.0 -- ($2.2) Average pay rate 5.10% 5.10% 5.10% 5.10% 5.10% 5.08% -- -- Average receive rate 90-day LIBOR </TABLE> 25
PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES On May 11, 2001, the Company issued $381,113,000 principal amount at maturity of its Zero Coupon Convertible Senior Notes due 2021 (the "Notes"). As part of that issuance, the Company executed an Eleventh Supplemental Indenture, dated as of May 11, 2001, among the Company, the Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, authorizing the Notes. 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), 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. Holders of the Notes may convert their Notes at any time on or before the maturity date, unless the Notes have been redeemed or purchased previously, into 17.4927 shares of the Company's common stock per $1,000 principal amount at maturity, if (1) the sale price of the common stock issuable upon conversion of a Note reaches a specified threshold, (2) the credit rating of the Notes is reduced to or below a specified level by the rating agencies, (3) the Notes are called for redemption or (4) specified corporate transactions have occurred. The conversion rate will be subject to adjustment in some events. Other information concerning the offering and issuance of the Notes has previously been reported in, and is described in, Amendment No. 1 to the Company's Registration Statement on Form S-3 (Registration Number 333-57388) dated April 18, 2001, the Company's Prospectus Supplement, dated May 4, 2001 and filed with the Securities and Exchange Commission (the "Commission") on May 9, 2001 pursuant to Rule 424(b), and the Company's current reports on Form 8-K, dated May 4, 2001 and filed with the Commission on May 10, 2001, and dated May 11, 2001 and filed with the Commission on May 14, 2001. 26
ITEM 5. OTHER INFORMATION The Company has executed the Third Supplemental Indenture, dated as of May 21, 2001, to the Indenture dated as of September 11, 2000, among the Company, the guarantors named therein and American Stock Transfer and Trust Company, as Trustee, relating to the Senior Subordinated Debt Securities of the Company; the Twelfth Supplemental Indenture, dated as of May 21, 2001, to the Indenture dated as of June 9, 1997, among the Company, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating to Senior Debt Securities of the Company; and the Fourth Supplemental Indenture, dated as of May 21, 2001, to the Indenture dated as of April 15, 1996, between Continental Homes Holding Corp. ("Continental") and First Union National Bank, as Trustee, relating to the 10% Senior Notes due 2006, of Continental, which have been assumed by the Company. The effect of these three supplemental indentures, dated as of May 21, 2001, is to include additional subsidiaries of the Company as "Restricted Subsidiaries" and " Guarantors" of the debt to which the related Indentures apply. The new Restricted Subsidiaries are as follows: <TABLE> <CAPTION> Jurisdiction Name of Organization ---- --------------- <S> <C> DRH Cambridge Homes, LLC Delaware DRH Southwest Construction, Inc. California DRH Title Company of Colorado, Inc. Colorado Meadows VIII, Ltd. Delaware D.R. Horton, Inc. - Dietz-Crane, (formerly DRH Regrem I, Inc.) Delaware DRH Regrem II, Inc. Delaware DRH Regrem III, Inc. Delaware DRH Regrem IV, Inc. Delaware DRH Regrem V, Inc. Delaware DRH Regrem VII, LP Texas D.R. Horton - Emerald, Ltd., (formerly DRH Regrem VI, LP) Texas DRH Regrem VIII, LLC Delaware </TABLE> The three supplemental indentures, dated as of May 21, 2001, are each attached hereto as exhibits. 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a)Exhibits. <TABLE> <S> <C> Exhibit No. Description 4.1 Indenture, dated as of September 11, 2000, among the Company, the guarantors named therein and American Stock Transfer and Trust Company, as Trustee, relating to the Senior Subordinated Debt Securities of the Company, is incorporated herein by reference from Exhibit 4.1(a) to the Company's Current Report on Form 8-K filed with the Commission on September 7, 2000. 4.2* Third Supplemental Indenture, dated as of May 21, 2001, among the Company, the guarantors named therein and American Stock Transfer and Trust Company, as Trustee. 4.3 Indenture, dated as of June 9, 1997, among the Company, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating to Senior Debt Securities, is incorporated herein by reference from Exhibit 4.1(a) to the Company's Registration Statement on Form S-3 (Registration No. 333-27521) filed with the Commission on May 21, 1997. 4.4 Eleventh Supplemental Indenture, dated as of May 11, 2001, among the Company, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee, relating to the Zero Coupon Convertible Senior Notes due 2021, incorporated herein by reference from Exhibit 4.1(a) to the Company's Form 8-K filed with the Commission on May 14, 2001. 4.5* Twelfth Supplemental Indenture, dated as of May 21, 2001, among the Company, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee. 4.6 Indenture dated as of April 15, 1996 between Continental Homes Holding Corp. ("Continental") and First Union National Bank, as Trustee, relating to the 10% Senior Notes due 2006, is incorporated herein by reference from Exhibit 4.1 to Continental's Annual Report on Form 10-K for the year ended May 31, 1996. The Commission file number for Continental is 1-10700. 4.7* Fourth Supplemental Indenture, dated as of May 21, 2001, among the Company, the guarantors named herein and First Union National Bank, as Trustee. </TABLE> - ------------------- * filed herewith (b) Reports on Form 8-K. On April 18, 2001, the Company filed a Current Report on Form 8-K (Item 5) announcing its financial results for its second quarter ended March 31, 2001. On May 10, 2001, the Company filed a Current Report on Form 8-K (Items 5 and 7), which filed an underwriting agreement and a form of supplemental indenture, both relating to the offering and issuance of $381,113,000 million principal amount at maturity of the Company's Zero Coupon Convertible Senior Notes due 2021. On May 14, 2001, the Company filed a Current Report on Form 8-K (Items 5 and 7), which filed a supplemental indenture and tax opinion, both relating to the offering and issuance of $381,113,000 million principal amount at maturity of the Company's Zero Coupon Convertible Senior Notes due 2021. 28
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, 2001 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) 29
INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION --------- ----------- 4.2* Third Supplemental Indenture, dated as of May 21, 2001, among the Company, the guarantors named therein and American Stock Transfer and Trust Company, as Trustee. 4.5* Twelfth Supplemental Indenture, dated as of May 21, 2001, among the Company, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee. 4.7* Fourth Supplemental Indenture, dated as of May 21, 2001, among the Company, the guarantors named herein and First Union National Bank, as Trustee. 30