FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. (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, 1998 ---------------- 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 -- 55,613,693 shares as of July 31, 1998 ---------- This Report contains 18 pages. ----
INDEX D.R. HORTON, INC. PART I. FINANCIAL INFORMATION. Page ITEM 1. Financial Statements. Consolidated Balance Sheets--June 30, 1998 and September 30, 1997. 3 Consolidated Statements of Income--Three Months and Nine Months Ended June 30, 1998 and 1997. 4 Consolidated Statement of Stockholders' Equity--Nine Months Ended June 30, 1998. 5 Consolidated Statements of Cash Flows--Nine Months Ended June 30, 1998 and 1997. 6 Notes to Consolidated Financial Statements. 7-9 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. 10-14 PART II. OTHER INFORMATION. ITEM 2. Changes in Securities. 15 ITEM 4. Submission of Matters to a Vote of Security Holders. 15 ITEM 5. Other Information. 16 ITEM 6. Exhibits and Reports on Form 8-K. 16-17 SIGNATURES. 18
D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, September 30, 1998 1997 ---------- ------------- (In thousands) (Unaudited) ASSETS Homebuilding: Cash.............................................. $ 112,747 $ 78,228 Inventories....................................... 1,291,283 1,024,268 Property and equipment (net)...................... 24,264 16,988 Other assets...................................... 66,473 56,420 Excess of cost over net assets acquired (net)..... 57,509 37,717 ---------- ---------- 1,552,276 1,213,621 ---------- ---------- Financing: Mortgage loans held for sale...................... 66,308 34,072 Other assets...................................... 3,284 630 ---------- ---------- 69,592 34,702 ---------- ---------- $1,621,868 $1,248,323 ========== ========== LIABILITIES Homebuilding: Accounts payable and other liabilities............ $ 214,274 $ 165,309 ---------- ---------- Notes payable: Financial institutions......................... 523,438 231,500 8 3/8% senior notes due 2004, net.............. 147,655 147,370 10% senior notes due 2006, net................. 147,112 148,462 6 7/8% convertible subordinated notes due 2002, net................................ 82,684 86,250 Other.......................................... 4,997 18,970 ---------- ---------- 905,886 632,552 ---------- ---------- 1,120,160 797,861 ---------- ---------- Financing: Other liabilities................................. 5,509 506 Notes payable to financial institutions........... - 18,188 ---------- ---------- 5,509 18,694 ---------- ---------- 1,125,669 816,555 ---------- ---------- Minority interest................................. 3,632 3,902 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued............. - - Common stock, $.01 par value, 100,000,000 shares authorized, 53,349,785 at June 30, 1998 and 52,749,527 at September 30, 1997, issued and outstanding..................................... 533 527 Additional capital................................ 275,886 268,631 Retained earnings................................. 216,148 158,708 ---------- ---------- 492,567 427,866 ---------- ---------- $1,621,868 $1,248,323 ========== ========== See accompanying notes to consolidated financial statements. -3-
D. R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Nine Months Ended June 30, Ended June 30, ------------------- ---------------------- 1998 1997 1998 1997 -------- -------- ---------- ---------- (In thousands, except net income per share) (Unaudited) Homebuilding: Revenues Home sales.................... $606,161 $416,923 $1,472,591 $1,056,086 Land/lot sales................ 2,183 18,140 3,266 34,007 -------- -------- ---------- ---------- 608,344 435,063 1,475,857 1,090,093 -------- -------- ---------- ---------- Cost of sales Home sales.................... 497,568 344,208 1,207,713 868,744 Land/lot sales................ 1,568 17,915 2,404 32,666 -------- -------- ---------- ---------- 499,136 362,123 1,210,117 901,410 -------- -------- ---------- ---------- Gross profit Home sales.................... 108,593 72,715 264,878 187,342 Land/lot sales................ 615 225 862 1,341 -------- -------- ---------- ---------- 109,208 72,940 265,740 188,683 Selling, general and administrative expense......... 58,360 45,537 152,517 114,691 Interest expense................ 4,136 2,976 9,204 7,587 Other (income).................. (2,413) (981) (4,466) (2,757) -------- -------- ---------- ---------- 49,125 25,408 108,485 69,162 -------- -------- ---------- ---------- Financing: Revenues........................ 5,520 3,249 14,163 9,165 Selling, general and administrative expense......... 3,900 2,586 9,690 7,087 Interest expense................ 648 157 1,293 373 Other (income).................. (704) (323) (1,758) (897) -------- -------- ---------- ---------- 1,676 829 4,938 2,602 -------- -------- ---------- ---------- Merger costs.................... 11,917 - 11,917 - ======== ======== ========== ========== INCOME BEFORE INCOME TAXES.... 38,884 26,237 101,506 71,764 Provision for income taxes...... 15,796 10,614 40,602 28,552 -------- -------- ---------- ---------- NET INCOME.................. $ 23,088 $ 15,623 $ 60,904 $ 43,212 ======== ======== ========== ========== Net income per share: Basic....................... $0.44 $0.30 $1.15 $0.87 Diluted..................... $0.39 $0.27 $1.02 $0.78 ======== ======== ========== ========== Weighted average number of shares of stock outstanding: Basic....................... 53,066 52,621 52,897 49,864 Diluted..................... 62,241 61,199 62,178 58,504 ======== ======== ========== ========== See accompanying notes to consolidated financial statements. -4-
D. R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Total Common Additional Retained Stockholders' Stock Capital Earnings Equity ------------------------------------------ (In thousands) (Unaudited) Balances at October 1, 1997 $527 $268,631 $158,708 $427,866 Net income......................... - - 60,904 60,904 Issuance under D.R. Horton, Inc. employee benefit plans........... - 480 - 480 Exercise of stock options ......... 2 1,906 - 1,908 Issuances pursuant to conversion of 6 7/8% convertible debt....... 3 3,745 - 3,748 Issuance as partial consideration for acquisition.................. 1 1,124 - 1,125 Cash dividends..................... - - (3,464) (3,464) ------------------------------------------ Balances at June 30, 1998 $533 $275,886 $216,148 $492,567 ========================================== See accompanying notes to consolidated financial statements. -5-
D. R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended June 30, ---------------------- 1998 1997 -------- -------- (In thousands) (Unaudited) OPERATING ACTIVITIES Net income.......................................... $ 60,904 $ 43,212 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 6,970 5,255 Expense associated with issuance of stock under employee benefit plans.................... 328 224 Changes in operating assets and liabilities: Increase in inventories........................ (195,030) (154,472) Increase in other assets....................... (8,829) (5,774) Increase in mortgage loans held for sale....... (32,236) (8,353) Increase in accounts payable and other liabilities......................... 47,970 3,751 -------- -------- NET CASH USED IN OPERATING ACTIVITIES (119,923) (116,157) -------- -------- INVESTING ACTIVITIES Purchase of property and equipment.................. (8,725) (6,016) Net cash paid for acquisitions...................... (33,091) (43,498) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (41,816) (49,514) -------- -------- FINANCING ACTIVITIES Proceeds from notes payable......................... 356,901 211,905 Repayment of notes payable.......................... (159,317) (218,576) Issuance of senior notes payable.................... - 167,546 Repurchase of stock................................. - (2,519) Issuance of common stock............................ - 39,979 Proceeds from issuance of stock under employee benefit plans....................... 2,388 1,297 Cash dividends paid................................. (3,464) (2,434) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 196,508 197,198 -------- -------- INCREASE (DECREASE) IN CASH 34,769 31,527 Cash at beginning of period.......................... 78,228 58,011 -------- -------- Cash at end of period................................ $112,997 $89,538 ======== ======== Supplemental cash flow information: Interest paid...................................... $ 11,712 $ 8,394 ======== ======== Income taxes paid.................................. $ 41,020 $30,713 ======== ======== See accompanying notes to consolidated financial statements. -6-
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 1998 NOTE A - BASIS OF PRESENTATION The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. (the "Company") and its subsidiaries. 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 only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended June 30, 1998, are not necessarily indicative of the results that may be expected for the year ending September 30, 1998. 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 lots it has developed. The Company also provides title agency and mortgage brokerage services to its homebuyers. Merger - On April 20, 1998, the Company and Continental Homes Holding Corp. (Continental) consummated a merger pursuant to which Continental was merged into the Company, with 2.25 shares of the Company common shares exchanged for each outstanding share of Continental. Approximately 15,459,500 Horton common shares were issued to effect the merger. The merger with Continental was treated as a pooling of interests for accounting purposes. Therefore, all financial amounts have been presented as if Continental and the Company had been combined at the earliest period presented. Results of operation - The results of operations for the separate companies and the combined amounts prior to combination that are included in the consolidated financial statements are: Six months ended March 31, ---------------------- 1998 1997 -------- -------- (In thousands) Revenue (homebuilding activities): D.R. Horton, Inc. $508,603 $303,977 Continental 358,910 351,053 -------- -------- Combined 867,513 655,030 -------- -------- Net income: D.R. Horton, Inc. 22,574 13,498 Continental 15,242 14,091 -------- -------- Combined $ 37,816 $ 27,589 ======== ======== NOTE B - MERGER COSTS Costs associated with the merger with Continental have been charged to the results of operations and consist primarily of fees to third party investment, accounting and legal advisors. NOTE C - NET INCOME PER SHARE Basic net income per share for the three and nine month periods ended June 30, 1998 and 1997, 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 common stock equivalents outstanding. -7-
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 1998 NOTE D - PROVISIONS FOR INCOME TAXES Deferred tax liabilities and assets, arising from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, consist primarily of differences in depreciation, warranty costs and inventory cost capitalization methods and were, as of June 30, 1998, not material. The provisions for income tax expense for the three and nine month periods ended June 30, 1998 and 1997, are based on the effective tax rates estimated to be in effect for the respective years. The deferred income tax provisions were not significant in either period. The difference between income tax expense and tax computed by applying the statutory Federal income tax rate to income before income taxes is due primarily to the effect of applicable state income taxes. NOTE E - INTEREST <TABLE> <CAPTION> Three months ended Nine months ended June 30, June 30, ------------------ ----------------- 1998 1997 1998 1997 ------- ------- ------- ------- (In thousands) <S> <C> <C> <C> <C> Capitalized interest, beginning of period $38,058 $22,601 $28,952 $17,846 Interest incurred 19,955 13,834 52,573 36,505 Interest expensed: Directly (4,784) (3,133) (10,497) (7,960) Amortized to cost of sales (11,396) (7,641) (29,195) (20,730) ------- ------- ------- ------- Capitalized interest, end of period $41,833 $25,661 $41,833 $25,661 ======= ======= ======= ======= </TABLE> NOTE F - ACQUISITIONS On February 14, 1998, D.R. Horton, Inc. closed the acquisition of the outstanding stock of C. Richard Dobson Builders, Inc. (Dobson), and certain of its affiliated companies, for $23.4 million. Dobson's assets (primarily inventories) on that date approximated $64.3 million; its liabilities, including $49.3 in notes payable paid at closing, approximated $52.4 million. In May and June, 1998, the Company completed the acquisition of the principal assets (approximately $16.4 million, primarily inventories) of Mareli Development & Construction Co., Inc. (Mareli), of Louisville, Kentucky, and RMP Properties, Inc. (RMP), of Portland, Oregon, for $7.8 million in cash, 70,249 shares of Horton common stock valued at $1.1 million, and the assumption of approximately $16.0 million in trade accounts and notes payable associated with the acquired assets. Mareli's and RMP's liabilities included $13.5 million in notes payable which were paid at closing. Operating results of the acquired entities since the respective dates of acquisition are included in the financial statements as of and for the periods ended June 30, 1998. The acquisitions were treated as purchases for accounting purposes. -8-
D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) June 30, 1998 NOTE G - SUMMARIZED FINANCIAL INFORMATION The 8 3/8% and 10% senior notes payable are fully and unconditionally guaranteed, on a joint and several basis, by all the Company's direct and indirect subsidiaries other than certain inconsequential subsidiaries. Each of the guarantors is a wholly-owned subsidiary of the Company. Summarized financial information of the Company and its subsidiaries is presented below. Separate financial statements and other disclosures concerning the guarantor subsidiaries are not presented because management has determined that they are not material to investors. As of and for the periods ended: (In thousands) <TABLE> <CAPTION> June 30, 1998 (Unaudited) D.R. Horton, Guarantor Nonguarantor Intercompany Inc. Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Total assets............... $1,206,583 $1,335,638 $110,484 ($1,030,837) $1,621,868 Total liabilities.......... 975,922 1,086,243 92,183 (1,025,047) 1,129,301 Revenues................... 239,556 1,226,200 24,264 - 1,490,020 Gross profit............... 32,913 230,939 1,888 - 265,740 Net income................. 1,657 57,287 1,960 - 60,904 <CAPTION> June 30, 1997 (Unaudited) D.R. Horton, Guarantor Nonguarantor Intercompany Inc. Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Total assets............... $612,306 $901,706 $61,063 ($369,358) $1,205,717 Total liabilities.......... 396,355 732,564 38,749 (368,473) 799,195 Revenues................... 194,219 891,871 13,168 - 1,099,258 Gross profit............... 38,534 149,380 769 - 188,683 Net income................. 4,615 39,122 (525) - 43,212 <CAPTION> September 30, 1997 D.R. Horton, Guarantor Nonguarantor Intercompany Inc. Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Total assets............... $620,636 $934,497 $66,666 ($373,476) $1,248,323 Total liabilities.......... 396,853 751,672 44,573 (372,641) 820,457 Revenues................... 286,568 1,269,391 24,750 - 1,580,709 Gross profit............... 51,484 222,040 1,347 - 274,871 Net income................. 4,248 59,373 1,341 - 64,962 </TABLE> -9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The following tables set forth certain operating and financial data for the Company's homebuilding activities: Percentages of Homebuilding Revenue -------------------------------------- Three Nine Months Ended Months Ended June 30, June 30, --------------- -------------- 1998 1997 1998 1997 ------ ------ ------ ------ Cost and expenses: Cost of sales 82.0% 83.2% 82.0% 82.7% Selling, general and administrative expense 9.6 10.5 10.3 10.5 Interest expense 0.7 0.7 0.6 0.7 ------ ------ ------ ------ Total costs and expenses 92.3 94.4 92.9 93.9 Other (income) (0.4) (0.2) (0.3) (0.3) ------ ------ ------ ------ Income before income taxes 8.1% 5.8% 7.4% 6.4% ====== ====== ====== ====== <TABLE> <CAPTION> New sales contracts, net Homes in of cancellations Home closings sales backlog ------------------------------ ------------------------------ -------------- Three Nine Three Nine Months Ended Months Ended Months Ended Months Ended As of June 30, June 30, June 30, June 30, June 30, -------------- -------------- -------------- -------------- -------------- 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Mid-Atlantic (Maryland, New Jersey, North and South Carolina, Virginia) 748 272 1,695 572 595 280 1,267 547 1,032 353 Midwest (Illinois, Kansas, Kentucky, Minnesota, Missouri, Ohio) 227 143 652 372 188 125 428 336 456 220 Southeast (Alabama, Florida, Georgia) Tennessee) 658 561 2,004 1,098 743 487 1,810 1,026 914 647 Southwest (Arizona, New Mexico, Texas) 1,988 1,615 5,276 4,115 1,652 1,265 4,519 3,703 2,784 2,192 West (California, Colorado, Nevada, Oregon, Utah) 790 538 2,311 1,344 751 524 1,688 1,274 1,373 651 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Totals 4,411 3,129 11,938 7,501 3,929 2,681 9,712 6,886 6,559 4,063 ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== </TABLE> -10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997 Revenues from homebuilding activities in the three months ended June 30, 1998, increased by 39.8%, to $608.3 million, from $435.1 million in the comparable period of 1997, despite a decline in land sales from $18.1 million in the 1997 period to $2.2 million in 1998. The number of homes closed by the Company increased by 46.5%, to 3,929 homes in the three months ended June 30, 1998, from 2,681 in the same period of 1997. Percentage increases in the number of homes closed ranging from 30.6% to 112.5% were achieved in the Company's five market regions. The increases in both revenues and homes closed were due to strong housing demand, the Company's entrance into new markets, and the results achieved by C. Richard Dobson Builders, Inc. (Dobson), which was acquired in February, 1998; Mareli Development & Construction Co. (Mareli) of Louisville, Kentucky, acquired in May, 1998; and RMP Development, Inc., (RMP) of Portland, Oregon, acquired in June, 1998. In markets where the Company operated during the third fiscal quarters of both 1998 and 1997, home closings increased by 35.1%, to 3,621 homes in the 1998 period. The average selling price of homes closed in the three months ended June 30, 1998, was $154,300, down 0.8% over the $155,500 average selling price in the comparable period of 1997. The price mix of homes closed shifted downward during the current period, offset in part by increases in home selling prices made possible by favorable real estate market conditions. New net sales contracts increased 41.0%, to 4,411 homes in the three months ended June 30, 1998, from 3,129 homes in the three months ended June 30, 1997. In markets in which the Company operated during the third fiscal quarters of both 1998 and 1997, sales contracts were 4,126 homes in the current three-month period, a 31.9% increase over 1997. The Company was operating in 511 subdivisions at June 30, 1998, compared to 367 subdivisions at June 30, 1997. At June 30, 1998, the Company's backlog of sales contracts was 6,559 homes, a 61.4% increase over comparable figures at June 30, 1997. In markets in which the Company operated during the third fiscal quarters of both 1998 and 1997, the sales backlog at June 30, 1998, was 6,007 homes, a 47.8% increase over 1997. Cost of sales increased by 37.8%, to $499.1 million in the three months ended June 30, 1998, from $362.1 million in the comparable period of 1997. The increase was primarily attributable to the increase in revenues. As a percentage of revenues, cost of sales for the quarter decreased to 82.0% in 1998 from 83.2% in 1997, due primarily to increases in home selling prices beyond the increases in home construction costs. Selling, general and administrative (SG&A) expense increased by 28.2%, to $58.4 million in the three months ended June 30, 1998, from $45.5 million in the comparable period of 1997. As a percentage of revenues, SG&A expense for the quarter decreased 0.9%, to 9.6% in 1998 from 10.5% in 1997. The decrease in SG&A expenses as a percentage of revenues was primarily due to increased revenues to absorb the fixed elements of overhead and costs associated with integrating three 1997 acquisitions into the Company. Interest expense totalled $4.1 million in the three months ended June 30, 1998, compared to $3.0 million in the comparable period of 1997. The Company follows a policy of capitalizing interest only on inventory under construction or development. As a percentage of revenues, interest expense remained constant, at 0.7%, in the three months ended June 30, 1998, compared to the comparable period of 1997. Capitalized interest and other financing costs are included in cost of sales at the time of home closings. Other income, which consists mainly of interest income on funds temporarily invested, increased to $2.4 million in the three months ended June 30, 1998, from $1.0 million in the same period of 1997, due primarily to larger investable balances. -11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenues from financing activities increased 69.9%, to $5.5 million in the three months ended June 30, 1998, from $3.2 million in the comparable period of 1997. Income before income taxes from financing activities increased 102.2%, to $1.7 million in the three months ended June 30, 1998, from $0.8 million in the comparable period of 1997. The increases in financing activity revenues and income before taxes were due primarily to the increased volume of mortgage and title services provided to the Company's homebuilding customers. In the three months ended June 30, 1998, the Company expensed $11.9 million in non-recurring costs associated with the merger with Continental. The costs consisted primarily of fees to third party investment, accounting and legal advisors. The provision for income taxes increased 48.8%, to $15.8 million in the three months ended June 30, 1998, from $10.6 million in the comparable period of 1997, due primarily to the increase in taxable income and an increase in the overall estimated income tax rate anticipated for fiscal 1998, caused by the non-deductibility of certain merger costs. Nine Months Ended June 30, 1998 Compared to Nine Months Ended June 30, 1997 Revenues from homebuilding activities in the nine months ended June 30, 1998, increased by 35.4%, to $1,475.9 million, from $1,090.1 million in the comparable period of 1997, despite a decline in land sales from $34.0 million in the 1997 period to $3.3 million in 1998. The number of homes closed by the Company increased by 41.0%, to 9,712 in the nine months ended June 30, 1998, from 6,886 in the same period of 1997. Percentage increases in homes closed ranging from 22.0% to 131.6% were achieved in the Company's market regions. In markets where the Company operated during both nine-month periods ended June 30, 1998 and 1997, home closings increased 26.3%, to 8,700 homes in the 1998 period. The average selling price of homes closed in the nine months ended June 30, 1998, was $151,600, a 1.2% decrease over the comparable period of 1997. The decrease in average sales price was attributable to differences in the geographic mix of markets in which homes were closed. Also, the price mix of homes closed decreased during the 1998 period, offset in part by increases in home selling prices made possible by favorable real estate market conditions. New net sales contracts increased 59.2%, to 11,938 homes for the nine months ended June 30, 1998, from 7,501 homes for the nine months ended June 30, 1997. Percentage increases in new net sales contracts ranging from 28.2% to 196.3% were achieved in the Company's market regions. In markets where the Company operated during both nine-month periods ended June 30, 1998 and 1997, sales contracts increased 43.3%, to 10,746 in the 1998 period. Cost of sales increased by 34.2%, to $1,210.1 million in the nine months ended June 30, 1998, from $901.4 million in the comparable period of 1997. The increase was partly attributable to the increase in revenues. As a percentage of revenues, cost of sales decreased to 82.0% in the nine months ended June 30, 1998, from 82.7% in the same period of 1997, due primarily to increases in home selling prices beyond the increase in home construction costs. Selling, general and administrative (SG&A) expense increased by 33.0%, to $152.5 million in the nine months ended June 30, 1998, from $114.7 million in the comparable period of 1997. As a percentage of revenues, SG&A expense decreased to 10.3% for the nine months ended June 30, 1998, from 10.5% for the same period of 1997. The decrease in SG&A expense as a percentage of revenues is partially due to increased revenues to absorb the fixed elements of overhead and the costs associated with integrating the 1997 acquisitions into the Company. Interest expense during the nine months ended June 30, 1998 amounted to $9.2 million, compared to $7.6 million in the comparable period of 1996. The Company follows a policy of capitalizing interest only on inventory under construction or development. As a percentage of revenues, interest expense declined slightly, to 0.6% in the nine months ended June 30, 1998, from 0.7% in the comparable -12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS period of 1997. Capitalized interest and other financing costs are included in cost of sales at the time of home closings. Other income, which consists mainly of interest income on funds temporarily invested, increased to $4.5 million in the nine months ended June 30, 1998, from $2.8 million in the same period of 1997, due primarily to larger investable balances. Revenues from financing activities increased 54.5%, to $14.2 million in the nine months ended June 30, 1998, from $9.2 million in the comparable period of 1997. Income before income taxes from financing activities increased 89.8%, to $4.9 million in the nine months ended June 30, 1998, from $2.6 million in the comparable period of 1997. The increases in financing activity revenues and income before taxes were due primarily to the increased volume of mortgage and title services provided to the Company's homebuilding customers. In the nine months ended June 30, 1998, the Company expensed $11.9 million in non-recurring costs associated with the merger with Continental. The costs consisted primarily of fees to third party investment, accounting and legal advisors. The provision for income taxes increased by 42.2%, to $40.6 million in the nine months ended June 30, 1998, from $28.6 million in the comparable period of 1997, due primarily to the increase in taxable income and an increase in the overall estimated income tax rate anticipated for fiscal 1998, caused by the non-deductibility of certain merger costs. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At June 30, 1998, the Company had available cash and cash equivalents of $112.7 million. Inventories (including finished homes, construction in progress, and developed residential lots and other land) at June 30, 1998, had increased by $267.0 million since September 30, 1997, partly due to the acquisitions of the assets (primarily inventories) of Dobson, Mareli, and RMP. Inventories also increased due to a general increase in business activity and the expansion of operations in all of the Company's market areas. The inventory increase, the merger with Continental, and the acquisitions of Dobson, Mareli and RMP, were financed primarily by borrowing under the revolving credit facility. As a result, the Company's ratio of notes payable to total capital at June 30, 1998, increased to 64.8% at June 30, 1998, compared to the September 30, 1997 level of 60.3%. The stockholders' equity to total assets ratio decreased during the nine months to 30.4% at June 30, 1998, from 34.3% at September 30, 1997. During fiscal 1998, the Company's Board of Directors has declared three quarterly cash dividends of $.0225 per common share, the last of which is payable on August 14, 1998, to stockholders of record on August 3, 1998. In February, 1998, the Company completed the acquisition of all the outstanding capital stock of C. Richard Dobson Builders, Inc. (Dobson), and certain of its affiliated companies, for $23.4 million. Dobson's assets, primarily inventories, amounted to approximately $64.3 million. Total liabilities assumed amounted to approximately $52.4 million, including notes payable of $49.3 million, which were paid at closing. The Dobson acquisition was accounted for as a purchase. On April 20, 1998, the Company closed its merger with Continental Homes Holding Corp. (Continental). In accordance with the terms of the merger agreement, a total of 15,459,514 shares of D.R. Horton, Inc. common stock were exchanged for all of the Continental common stock outstanding, based upon an exchange ratio of 2.25. At the time of the merger, the Company assumed Continental's existing public debt, consisting of $150 million 10% senior notes due April 15, 2006, and $86.1 million in 6 7/8% convertible subordinated notes due November 1, 2002. The convertible notes may currently be exchanged for Horton common stock at the rate of 94.73625 shares for each $1,000 principal amount. The convertible notes are redeemable in whole or in part at the option of the Company at any time on or after November 1, 1998, at redemption prices decreasing from 103.438%. If -13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS current conditions prevail until November 1, 1998, the Company intends to call all the convertible notes outstanding at that time. As of June 30, 1998, approximately $3.7 million of convertible notes had been exchanged for common stock. On April 21, 1998, the Company increased and restructured its unsecured bank credit facility, to $825 million, consisting of a $775 million four-year revolving loan and a $50 million four-year letter of credit facility. At June 30, 1998, the Company had outstanding debt of $905.9 million, of which $515.0 million represented advances under the bank credit facility. Under the debt covenants associated with the restructured credit facility, at June 30, 1998, the Company had additional borrowing capacity of $345.2 million. Mortgage activities are presently being financed through borrowings under the bank revolving credit facility. It is contemplated that a separate warehouse financing facility for these activities will be in place in the future. In May and June, 1998, the Company completed the acquisition of the principal assets (approximately $16.4 million, primarily inventories) of Mareli Development & Construction Co., Inc. (Mareli), of Louisville, Kentucky, and RMP Properties, Inc. (RMP), of Portland, Oregon, for $7.8 million in cash, 70,249 shares of Horton common stock valued at $1.1 million, and the assumption of approximately $16.0 million in trade accounts and notes payable associated with the acquired assets. Mareli's and RMP's liabilities included $13.5 million in notes payable which were paid at closing. 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 new and existing credit facilities. The Company maintains a universal shelf registration statement with a capacity of $400 million. Additionally, a shelf registration has been filed for 10,000,000 shares of common stock issuable to effect, in whole or in part, possible future acquisitions. Market conditions will determine when and whether the Company will sell additional securities using the shelf registration statements. The Company continuously evaluates its capital structure and, in the future, may seek to further increase unsecured debt and obtain additional equity to fund ongoing operations as well as to pursue additional growth opportunities. Except for ordinary expenditures for the construction of homes, the acquisition of land and lots for development and sale of homes, at June 30, 1998, the Company had no material commitments for capital expenditures. Inflation The Company, as well as the homebuilding industry in general, may be adversely affected during periods of high inflation, primarily because of higher land and construction costs. Inflation also increases the Company's financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. The Company attempts to pass through to its customers any increases in its costs through increased sales prices and, to date, inflation has not had a material adverse effect on the Company's results of operations. However, there is no assurance that inflation will not have a material adverse impact on the Company's future results of operations. Safe Harbor Statement Certain statements contained herein, as well as statements made by the Company in periodic press releases and oral statements made by the Company's officials to analysts and stockholders in the course of presentations about the Company may be construed as "Forward-Looking Statements" as defined in the Private Securities Litigation Reform Act of 1995. Such statements may involve unstated risks, uncertainties and other factors that may cause actual results to differ materially from those initially anticipated. Such risks, uncertainties and other factors include, but are not limited to, the Company's substantial leverage, changes in general economic and market conditions, changes in interest rates and the availability of mortgage financing, changes in costs and availability of material, supplies and labor, general competitive conditions, the availability of capital and the ability to successfully effect acquisitions. -14-
PART II. OTHER INFORMATION ITEM 2. Changes in Securities. Certain new indebtedness and limitations on payment of dividends or other distributions by the Company on its Common Stock were created in connection with its April 20, 1998 acquisition of Continental Homes Holding Corp. ("Continental"). As part of that acquisition, the Company executed (i) a First Supplemental Indenture, dated as of April 20, 1998, among the Company, the Guarantors named therein and First Union Bank, as Trustee, assuming an Indenture dated as of April 15, 1996, between Continental and First Union Bank, as Trustee, and Continental's related 10% Senior Notes, due 2006, and (ii) a First Supplemental Indenture, dated as of April 20, 1998, between the Company and Manufacturers and Traders Trust Company, as Trustee, assuming an Indenture dated as of November 1, 1995, between Continental and Manufacturers and Traders Trust Company, as Trustee, and Continental's related 6-7/8% Convertible Subordinated Notes, due 2002. The Indenture, and the Supplemental Indenture, related to the 10% Senior Notes impose limitations on the ability of the Company and its subsidiaries guaranteeing the assumed 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 Sales" (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 similar to limitations already existing by reason of the Company's 8-3/8% Senior Notes, due 2004, and the related Indenture. Other information concerning the acquisition of Continental has previously been reported in, and is described in, the Company's Registration Statement on Form S-4 (Registration Number 333- 44279) dated March 13, 1998 and the Company's current reports on Form 8-K, dated April 14, 1998, April 20, 1998 (filed on April 21, 1998), April 20, 1998 (filed on May 4, 1998) and June 5, 1998 (filed on June 8, 1998). On June 8, 1998, the Company issued 70,249 shares (the "Shares") of its Common Stock, $.01 par value, to RMP Properties, Inc. ("RMP"). The shares were valued at $1,250,000 and were issued to RMP as partial consideration for the assets of RMP. Roger M. Pollock ("Pollock") was the sole owner of RMP. The Shares were issued in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act of 1933, based on: the sophistication of Pollock; his experience in and knowledge of homebuilding; the fact that the Company provided Pollock with copies of its most recent Annual Report on Form 10-K and annual meeting proxy statement, a Joint Proxy Statement and Prospectus concerning the merger of Continental into the Company and all filings under the Securities Exchange Act of 1934 since the filing of the Form 10-K and provided Pollock access to the Company's executive officers to ask questions and receive answers concerning the Company; and the facts that Pollock gave the Company investment representations concerning the Shares and that the Shares are subject to transfer restrictions which are reflected in restrictive legends on the certificate for the Shares and stop transfer instructions with the Company's transfer agent for Common Stock. ITEM 4. Submission of Matters to a Vote of Security Holders. On April 20, 1998, the Company held a Special Meeting of Stockholders (the "Meeting"). At the Meeting, the stockholders considered and approved a proposal to approve and adopt the Agreement and Plan of Merger, dated as of December 18, 1997 (the "Merger Agreement"), between the Company and Continental, providing for, among other things, the merger of Continental into the Company (the "Proposal"). The number of votes cast for and against the Proposal and the number of abstentions were as follows: Votes For Votes Against Abstentions ----------- ------------- ----------- 32,142,409 229,081 9,641 15
ITEM 5. Other Information. In connection with the Company's acquisition of Continental, the Company assumed all of the outstanding stock options granted by Continental pursuant to Continental's 1986 and 1988 Stock Incentive Plans. On April 21, 1998, the Company increased and restructured its unsecured bank credit facility to $825 million, consisting of a $775 million four - year revolving loan and a $50 million four-year letter of credit facility. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 4.1 Indenture dated as of April 15, 1996 between Continental and First Union National Bank, as Trustee, 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. 4.2 Indenture dated as of November 1, 1995 between Continental and Manufacturers and Traders Trust Company, as Trustee, is incorporated by reference from Exhibit 4.1 to Continental's Quarterly Report on Form 10-Q for the quarter ended November 30, 1995. The Commission file number for Continental is 1-10700. 4.3 First Supplemental Indenture, dated as of April 20, 1998, among the Company, the guarantors named therein and First Union National Bank, as Trustee, relating to Continental's 10% Senior Notes, due 2006, is incorporated herein by reference from Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 4.4 First Supplemental Indenture, dated as of April 20, 1998, between the Company and Manufacturers and Traders Trust Company, as Trustee, relating to Continental's 6-7/8% Convertible Subordinated Notes, due 2002, is incorporated herein by reference from Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. 10.1* Master Loan and Inter-Creditor Agreement dated as of April 21, 1998, among D.R. Horton, Inc., as Borrower; NationsBank, N.A., Bank of America National Trust and Savings Association, Fleet National Bank, Bank United, Comerica Bank, Credit Lyonnais New York Branch, Societe Generale, Southwest Agency, The First National Bank of Chicago, PNC Bank, National Association, Amsouth Bank, Bank One, Arizona, NA, First American Bank Texas, SSB, Harris Trust and Savings Bank, Sanwa Bank California, Norwest Bank Arizona, National Association and Summit Bank, as Banks; and NationsBank, N.A., as Administrative Agent. 10.2* Indemnification Agreement for new Director, W. Thomas Hickcox. (On the same date, an Indemnification Agreement in substantially identical form was executed with Bradley S. Anderson, who was also elected a Director that day.) 10.3* Continental Homes Holding Corp. 1988 Stock Incentive Plan (as amended and restated June 20, 1997). 16
10.4* Restated Continental Homes Holding Corp. 1986 Stock Incentive Plan, and the First Amendment thereto dated June 17, 1987. 10.5* Form of Stock Option Agreement pursuant to Continental's 1986 and 1988 Stock Incentive Plans. - ---------- *Filed herewith. (b) Reports on Form 8-K. 1. On April 14, 1998, the Company filed a Current Report on Form 8-K (Item 5), which included its press release of that date announcing the exchange ratio for the merger of Continental into the Company. 2. On April 21, 1998, the Company filed a Current Report on Form 8-K, dated April 20, 1998 (Item 5), which included its April 21, 1998 press release announcing that the stockholders of the Company and Continental had approved the merger of Continental into the Company. 3. On May 4, 1998, the Company filed a Current Report on Form 8-K, dated April 20, 1998 (Item 2), which provided further information concerning the acquisition of Continental and incorporated by reference financial statements of Continental and pro forma combined financial information for the Company and Continental. 4. On June 8, 1998, the Company filed a Current Report on Form 8-K, dated June 5, 1998 (Items 5 and 7), which provided an updated description of the Company's business as combined with Continental, as well as supplemental consolidated financial statements of the Company for the three years ended September 30, 1997 and Management's Discussion and Analysis of Financial Condition and Results of Operations (Restated). 17
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 6, 1998 By /s/ David J. Keller ----------------------------------------------- David J. Keller, on behalf of D.R. Horton, Inc. and as Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) -18-