FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the Quarterly Period Ended March 31, 2003
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the Transition Period From To
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Commission file number 1-14122
D.R. Horton, Inc.
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(Exact name of registrant as specified in its charter)
DELAWARE 75-2386963
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1901 Ascension Blvd., Suite 100, Arlington, Texas 76006
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(Address of principal executive offices) (Zip Code)
(817) 856-8200
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.01 par value -- 146,915,960 shares as of May 6, 2003
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This report contains 37 pages.
INDEX
D.R. HORTON, INC.
PART I. FINANCIAL INFORMATION. Page
- ------- ---------------------- ------
ITEM 1. Financial Statements.
Consolidated Balance Sheets-- March 31, 2003 and September 30, 2002. 3
Consolidated Statements of Income-- Three Months and Six Months
Ended March 31, 2003 and 2002. 4
Consolidated Statements of Cash Flows-- Six Months Ended March 31,
2003 and 2002. 5
Notes to Consolidated Financial Statements. 6-18
ITEM 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition. 19-27
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. 28
ITEM 4. Controls and Procedures. 29
PART II. OTHER INFORMATION.
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ITEM 2. Changes in Securities and Use of Proceeds. 30
ITEM 4. Submission of Matters to a Vote of Security Holders. 30
ITEM 5. Other Information. 31
ITEM 6. Exhibits and Reports on Form 8-K. 32
SIGNATURES. 33
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CERTIFICATIONS.
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Certification of Chief Executive Officer Pursuant to Section 302 (a)
of the Sarbanes-Oxley Act of 2002. 34-35
Certification of Chief Financial Officer Pursuant to Section 302 (a)
of the Sarbanes-Oxley Act of 2002. 36-37
ITEM 1. FINANCIAL STATEMENTS
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
2003 2002
------------ ------------
(In thousands)
(Unaudited)
ASSETS
Homebuilding:
Cash and cash equivalents .................................... $ 161,139 $ 92,106
Inventories:
Finished homes and construction in progress ................. 2,407,594 2,035,221
Residential lots - developed and under development .......... 2,321,784 2,297,545
Land held for development ................................... 6,801 10,303
---------- ----------
4,736,179 4,343,069
Property and equipment (net) ................................. 77,035 71,895
Earnest money deposits and other assets ...................... 371,891 430,415
Excess of cost over net assets acquired ...................... 581,230 579,230
---------- ----------
5,927,474 5,516,715
---------- ----------
Financial Services:
Cash and cash equivalents .................................... 26,339 12,238
Mortgage loans held for sale ................................. 424,674 464,088
Other assets ................................................. 20,462 24,486
---------- ----------
471,475 500,812
---------- ----------
$6,398,949 $6,017,527
========== ==========
LIABILITIES
Homebuilding:
Accounts payable and other liabilities ....................... $ 803,555 $ 834,048
Notes payable ................................................ 2,763,264 2,486,976
---------- ----------
3,566,819 3,321,024
---------- ----------
Financial Services:
Accounts payable and other liabilities ....................... 14,442 14,340
Notes payable to financial institutions ...................... 325,613 391,355
---------- ----------
340,055 405,695
---------- ----------
3,906,874 3,726,719
---------- ----------
Minority interests ........................................... 26,039 20,945
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 30,000,000 shares authorized,
no shares issued ............................................ -- --
Common stock, $.01 par value, 400,000,000 shares authorized,
146,874,543 shares at March 31, 2003 and 146,505,091 shares
at September 30, 2002, issued and outstanding ............... 1,469 1,465
Additional capital ........................................... 1,353,537 1,349,630
Unearned compensation ........................................ (3,273) (4,453)
Retained earnings ............................................ 1,143,825 923,221
Treasury stock, 1,672,500 shares at March 31, 2003 and no
shares at September 30, 2002, at cost ....................... (29,522) --
---------- ---------
2,466,036 2,269,863
---------- ---------
$6,398,949 $6,017,527
========== ==========
See accompanying notes to consolidated financial statements.
-3-
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Six Months
Ended March 31, Ended March 31,
---------------------- ----------------------
2003 2002 2003 2002
---------------------- ----------------------
(In thousands, except per share data)
(Unaudited)
Homebuilding:
Revenues
Home sales ...................................... $1,777,829 $1,534,357 $3,444,278 $2,660,095
Land/lot sales .................................. 90,952 41,843 131,196 51,073
---------- ---------- ---------- ----------
1,868,781 1,576,200 3,575,474 2,711,168
---------- ---------- ---------- ----------
Cost of sales
Home sales ...................................... 1,419,537 1,258,842 2,753,295 2,157,740
Land/lot sales .................................. 76,868 36,203 111,650 44,110
---------- ---------- ---------- ----------
1,496,405 1,295,045 2,864,945 2,201,850
---------- ---------- ---------- ----------
Gross profit
Home sales ...................................... 358,292 275,515 690,983 502,355
Land/lot sales .................................. 14,084 5,640 19,546 6,963
---------- ---------- ---------- ----------
372,376 281,155 710,529 509,318
Selling, general and administrative expense ...... 187,285 149,494 366,466 267,911
Interest expense ................................. 7 2,563 354 3,759
Other (income)/expense ........................... (71) (2,426) (276) 146
---------- ---------- ---------- ----------
185,155 131,524 343,985 237,502
---------- ---------- ---------- ----------
Financial Services:
Revenues ......................................... 39,766 23,865 78,007 48,787
General and administrative expense ............... 22,235 14,918 44,242 30,041
Interest expense ................................. 1,482 999 3,549 2,335
Other (income) ................................... (4,982) (2,818) (10,910) (5,862)
---------- ---------- ---------- ----------
21,031 10,766 41,126 22,273
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ..................... 206,186 142,290 385,111 259,775
Provision for income taxes ....................... 78,351 53,359 145,448 97,416
---------- ---------- ---------- ----------
NET INCOME ..................................... $ 127,835 $ 88,931 $ 239,663 $ 162,359
========== ========== ========== ==========
Net income per share:
Basic .......................................... $ 0.87 $ 0.69 $ 1.64 $ 1.33
Diluted ........................................ $ 0.86 $ 0.64 $ 1.62 $ 1.26
========== ========== ========== ==========
Weighted average number of shares of stock
Basic .......................................... 146,327 128,897 146,426 122,095
Diluted ........................................ 148,218 141,473 148,362 129,415
========== ========== ========== ==========
Cash dividends per share ....................... $ 0.07 $ 0.06 $ 0.13 $ 0.11
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
-4-
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months
Ended March 31,
-----------------------
2003 2002
---------- ----------
(In thousands)
(Unaudited)
OPERATING ACTIVITIES
Net income ............................................................... $ 239,663 $ 162,359
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................ 18,784 11,024
Amortization of debt premiums and fees ................................... 3,559 4,476
Changes in operating assets and liabilities:
Increase in inventories ................................................. (358,234) (116,046)
Decrease (increase) in earnest money deposits and other assets .......... 62,164 (45,592)
Decrease in mortgage loans held for sale ................................ 39,414 20,495
Decrease in accounts payable and other liabilities ...................... (25,045) (97,586)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES ..................................... (19,695) (60,870)
---------- ----------
INVESTING ACTIVITIES
Net purchases of property and equipment .................................. (22,199) (15,725)
Distributions from venture capital entities .............................. -- 500
Net cash paid for acquisitions ........................................... -- (152,573)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ..................................... (22,199) (167,798)
---------- ----------
FINANCING ACTIVITIES
Proceeds from notes payable .............................................. 1,066,160 1,555,000
Issuance of senior notes payable ......................................... 214,206 --
Repayment of notes payable ............................................... (1,110,417) (1,377,974)
Proceeds from stock associated with certain employee benefit plans ....... 3,660 10,564
Purchase of treasury stock ............................................... (29,522) --
Payment of cash dividends ................................................ (19,059) (8,476)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................................. 125,028 179,114
---------- ----------
INCREASE (DECREASE) IN CASH ............................................... 83,134 (49,554)
Cash at beginning of period .............................................. 104,344 239,280
---------- ----------
Cash at end of period .................................................... $ 187,478 $ 189,726
========== ==========
See accompanying notes to consolidated financial statements.
-5-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements include the
accounts of D.R. Horton, Inc. and its subsidiaries (the "Company"). Intercompany
accounts and transactions have been eliminated in consolidation. The statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three-month and six-month periods ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending September 30,
2003.
Business - The Company is a national builder that is engaged primarily in the
construction and sale of single-family housing in 44 markets and 20 states in
the United States. The Company designs, builds and sells detached and attached
single-family houses on lots developed by the Company and on finished lots which
it purchases, ready for home construction. Periodically, the Company sells lots
it has developed. The Company also provides title agency and mortgage brokerage
services to its home buyers. The Company does not retain or service the
mortgages that it originates but, rather, sells the mortgages and related
servicing rights to investors.
NOTE B - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation No. 46 provides guidance for the
financial accounting and reporting of certain variable interest entities. The
Interpretation clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements", to certain business entities that either
have equity investors with no voting rights or have equity investors that do not
provide sufficient financial resources for the entities to support their
activities. The Interpretation requires consolidation of such entities by any
company that is subject to a majority of the risk of loss from the entities'
activities or is entitled to receive a majority of the entities' residual
returns or both. Furthermore, disclosures about significant variable interest
entities are required even if the company is not required to consolidate them.
The Interpretation applies to all variable interest entities created after
January 31, 2003, and the consolidation requirements apply to older entities in
the first fiscal year or interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply in all financial statements filed after
January 31, 2003. The Company has reviewed all of its unconsolidated business
relationships and believes that it has no significant investments in variable
interest entities at March 31, 2003. Moreover, the Company believes that full
adoption of Interpretation No. 46 as required in fiscal 2003 will not have a
material effect on its financial position, results of operations or cash flows.
NOTE C - SEGMENT INFORMATION
The Company's financial reporting segments consist of homebuilding and financial
services. The Company's homebuilding operations comprise the most substantial
part of its business, with approximately 98% of consolidated revenues for the
three-months and six-months ended March 31, 2003 and 2002. The homebuilding
reporting segment is comprised of the aggregate of the Company's regional
homebuilding operating segments and generates the majority of its revenues from
the sale of completed homes, with a lesser amount from the sale of land and
lots. Approximately 92% of its home sales revenues were generated from the sale
of detached homes for the three and six months ended March 31, 2003. The
financial services segment generates its revenues from originating and selling
mortgages and collecting fees for title insurance agency and closing services.
Effective with its fiscal year beginning October 1, 2002, the Company's
wholly-owned mortgage subsidiary is required by Statement of Position 01-6 (SOP
01-6), of the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants, to disclose the minimum net worth requirements
by regulatory agencies, secondary market investors and states in which it
conducts business. Currently, the largest of these minimum net worth
requirements is $1.0 million, which is insignificant compared to the $35 million
minimum net worth required by the mortgage subsidiary's warehouse credit line.
At March 31, 2003, the mortgage subsidiary's total equity was $115.6 million.
NOTE D - EARNINGS PER SHARE
Basic earnings per share for the three months and six months ended March 31,
2003 and 2002 is based on the weighted
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D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
average number of shares of common stock outstanding. Diluted earnings per share
is based on the weighted average number of shares of common stock and dilutive
securities outstanding.
The following table sets forth the weighted average number of shares of common
stock and dilutive securities outstanding used in the computation of basic and
diluted earnings per share (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- ---------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Numerator:
Net income ................................................ $ 127,835 $ 88,931 $ 239,663 $ 162,359
Effect of dilutive securities:
Interest expense and amortization of issuance costs
associated with zero coupon convertible senior notes,
net of applicable income taxes ............................ -- 1,042 -- 1,042
---------- ---------- ---------- ----------
Numerator for diluted earnings per share after assumed
conversions ............................................... $ 127,835 $ 89,973 $ 239,663 $ 163,401
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share--
weighted average shares .................................. 146,327 128,897 146,426 122,095
Effect of dilutive securities:
Zero coupon convertible senior notes ...................... -- 10,000 -- 5,000
Employee stock options .................................... 1,891 2,576 1,936 2,320
---------- ---------- ---------- ----------
Denominator for diluted earnings per share--
adjusted weighted average shares ......................... 148,218 141,473 148,362 129,415
========== ========== ========== ==========
Options to purchase approximately 2,723,000 and 2,709,000 shares of common stock
at various prices were outstanding during the three months and six months ended
March 31, 2003, respectively, but were not included in the computation of
diluted earnings per share because the exercise prices were greater than the
average market price of the common shares and, therefore, their effect would be
antidilutive. All options outstanding during the three months and six months
ended March 31, 2002 were included in the computation of diluted earnings per
share.
-7-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
NOTE E - DEBT
The Company's notes payable consist of the following (in thousands):
March 31, September 30,
2003 2002
---------- -------------
Homebuilding:
Unsecured:
Revolving credit facility due 2006 ....................... $ 50,000 $ --
8 3/8% Senior notes due 2004, net ........................ 149,538 149,339
10 1/2% Senior notes due 2005, net ....................... 199,623 199,559
10% Senior notes due 2006, net ........................... 147,903 147,802
7 1/2% Senior notes due 2007, net ........................ 215,000 --
9% Senior notes due 2008, net ............................ 102,155 102,427
8% Senior notes due 2009, net ............................ 383,535 383,438
9 3/8% Senior notes due 2009, net ........................ 244,965 246,057
9 3/4% Senior subordinated notes due 2010, net ........... 149,037 148,994
9 3/8% Senior subordinated notes due 2011, net ........... 199,721 199,710
7 7/8% Senior notes due 2011, net ........................ 198,499 198,437
10 1/2% Senior subordinated notes due 2011, net .......... 152,520 153,284
8 1/2% Senior notes due 2012, net ........................ 248,065 247,995
Zero coupon convertible senior notes due 2021, net ....... 212,548 209,144
Other secured .............................................. 110,155 100,790
---------- ----------
$2,763,264 $2,486,976
========== ==========
Financial Services:
Mortgage warehouse facility due 2003 ...................... $ 155,613 $ 242,355
Commercial paper conduit facility due 2005 ................ 170,000 149,000
---------- ----------
$ 325,613 $ 391,355
========== ==========
Homebuilding:
The Company has an $805 million unsecured revolving credit facility, including
$125 million which may be used for letters of credit. The facility matures in
January 2006, and is guaranteed by substantially all of the Company's
subsidiaries other than its financial services subsidiaries. Borrowings bear
daily interest at rates based upon the London Interbank Offered Rate (LIBOR)
plus a spread based upon the Company's ratio of debt to tangible net worth. The
interest rate applicable to the revolving credit facility at March 31, 2003 was
2.9%. In addition to the stated interest rates, the revolving credit facility
requires the Company to pay certain fees.
The revolving credit facility and the indentures related to the Company's Senior
and Senior Subordinated Notes contain covenants which, taken together, limit
amounts of debt that may be incurred, investments in inventory, stock
repurchases, cash dividends and other restricted payments, asset dispositions
and creation of liens, and require certain levels of tangible net worth. At
March 31, 2003, these covenants limit the additional homebuilding debt the
Company could incur to $1,327.5 million, which included $633.3 million available
under the revolving credit facility.
On December 3, 2002, the Company issued $215 million principal amount of 7 1/2%
Senior Notes. The notes, which are due December 1, 2007, with interest payable
semi-annually, represent unsecured obligations of the Company. The Company may
redeem up to 35% of the amount originally issued with the proceeds of public
offerings at a redemption price equal to 107.5% of the principal amount through
December 1, 2005, plus accrued interest. The annual effective interest rate of
the notes, after giving effect to the amortization of deferred financing costs,
is 7.6%.
On April 17, 2003, the Company issued $200 million principal amount of 6 7/8%
Senior Notes. The notes, which are due May 1, 2013, with interest payable
semi-annually, represent unsecured obligations of the Company. The Company may
redeem up to 35% of the amount originally issued with the proceeds of public
offerings at a redemption price equal to 106.875% of the principal amount
-8-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
through May 1, 2006, plus accrued interest. The annual effective interest rate
of the notes, after giving effect to the amortization of deferred financing
costs, is 7.0%.
On April 18, 2003, the Company called for full redemption of the 10% Senior
Notes due 2006 at an aggregate redemption price of approximately $150.1 million,
including accrued interest. The Company will use a part of the proceeds of the 6
7/8% Senior Notes to redeem the called notes. Concurrent with the redemption,
the Company will record interest expense of approximately $1.3 million,
representing unaccreted discount and unamortized debt issuance costs associated
with the redeemed notes.
Financial Services:
The Company's mortgage subsidiary has a $190 million, one-year mortgage
warehouse line payable to financial institutions, maturing August 12, 2003, at
the 30-day LIBOR rate plus a fixed premium. The Company's mortgage subsidiary
also has a $200 million commercial paper conduit credit facility which expires
in July 2005, the terms of which are renewable annually by the sponsoring bank.
The current total borrowing capacity of our mortgage subsidiary under these two
credit facilities is $390 million. These two credit facilities are secured by
mortgage loans held for sale and are not guaranteed by D.R. Horton, Inc. or any
of the guarantors of the Senior and Senior Subordinated Notes. The interest
rates of the mortgage warehouse line payable at March 31, 2003 and 2002 were
2.4% and 2.9%, respectively. The interest rate on the commercial paper conduit
facility at March 31, 2003 was 1.9%.
NOTE F - INTEREST
The Company capitalizes interest during development and construction.
Capitalized interest is charged to cost of sales as the related inventory is
delivered to the home buyer. Homebuilding interest costs are (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ---------------------
2003 2002 2003 2002
--------- --------- -------- ---------
Capitalized interest, beginning of period..... $170,405 $ 110,126 $153,536 $ 96,910
Interest incurred - homebuilding.............. 60,265 46,535 117,000 83,247
Interest expensed:
Directly - homebuilding...................... (7) (2,563) (354) (3,759)
Amortized to cost of sales................... (49,709) (29,446) (89,228) (51,746)
-------- --------- -------- ---------
Capitalized interest, end of period........... $180,954 $ 124,652 $180,954 $ 124,652
======== ========= ======== =========
NOTE G - WARRANTY
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", which is effective as to disclosure requirements for
all financial statements for periods ending after December 15, 2002. With
respect to the product warranty disclosure requirements contained therein, the
Company provides its home buyers a one-year comprehensive limited warranty for
all parts and labor and a ten-year limited warranty for major construction
defects. Since the Company subcontracts its homebuilding work to subcontractors
who provide it with an indemnity and a certificate of insurance prior to
receiving payments for their work, claims relating to workmanship and materials
are generally the primary responsibility of the subcontractors. Warranty
reserves have been established by charging cost of sales and crediting a
warranty liability for each home delivered. The amounts charged are estimated by
management to be adequate to cover expected warranty- related costs under all
unexpired warranty obligation periods. The Company's warranty cost accruals are
based upon historical warranty cost experience in each market in which it
operates and are adjusted as appropriate to reflect qualitative risks associated
with the types of homes built and the geographic areas in which they are built.
-9-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
Changes in the Company's warranty liability are as follows (in thousands):
Three Months Ended Six Months Ended
March 31, 2003 March 31, 2003
------------------ ----------------
Warranty liability, beginning of period.... $42,349 $39,471
Warranties issued......................... 8,970 17,167
Settlements made.......................... (5,197) (10,516)
------- -------
Warranty liability, end of period.......... $46,122 $46,122
======= =======
NOTE H - STOCK-BASED COMPENSATION
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," which amended the disclosure requirements of SFAS
No. 123, "Accounting for Stock-Based Compensation," to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company has elected to follow APB Opinion No. 25
in accounting for its employee stock options. The exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, and therefore no compensation expense is recognized for
the initial grants. If compensation cost for the Company's stock-based
compensation plan had been determined based on the fair value method at the
grant date, as prescribed in SFAS No. 123, the Company's net income and net
earnings per share would have been as follows (in thousands, except per-share
amounts):
Three Months Ended Six Months Ended
March 31, March 31,
---------------------- ----------------------
2003 2002 2003 2002
----------- ---------- ---------- ----------
Net income, as reported .......................... $ 127,835 $ 88,931 $ 239,663 $ 162,359
Pro forma effect of expensing
stock options (net of related tax effects) ...... (1,060) (567) (2,137) (1,136)
---------- ---------- ---------- ----------
Pro forma net income ............................. $ 126,775 $ 88,364 $ 237,526 $ 161,223
========== ========== ========== ==========
Reported basic net income per share .............. $ 0.87 $ 0.69 $ 1.64 $ 1.33
Pro forma effect of expensing stock options ...... -- -- (0.02) (0.01)
---------- ---------- ---------- ----------
Pro forma basic net income per share ............. $ 0.87 $ 0.69 $ 1.62 $ 1.32
========== ========== ========== ==========
Reported diluted net income per share ............ $ 0.86 $ 0.64 $ 1.62 $ 1.26
Pro forma effect of expensing stock options ...... -- (0.01) (0.02) (0.01)
---------- ---------- ---------- ----------
Pro forma diluted net income per share ........... $ 0.86 $ 0.63 $ 1.60 $ 1.25
========== ========== ========== ==========
-10-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
NOTE I - SUMMARIZED FINANCIAL INFORMATION
The 7 1/2%, 7 7/8%, 8%, 8 3/8%, 8 1/2%, 9%, 9 3/8%, 10% and 10 1/2% Senior
Notes, the 9 3/8%, 9 3/4% and 10 1/2% Senior Subordinated Notes, and the Zero
Coupon Convertible Senior Notes are fully and unconditionally guaranteed, on a
joint and several basis, by all of the Company's direct and indirect
subsidiaries (Guarantor Subsidiaries), other than financial services
subsidiaries and certain other inconsequential subsidiaries (collectively,
Non-Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is wholly-owned.
In lieu of providing separate audited financial statements for the Guarantor
Subsidiaries, consolidated condensed financial statements are presented below.
Separate financial statements and other disclosures concerning the Guarantor
Subsidiaries are not presented because management has determined that they are
not material to investors.
Consolidating Balance Sheet
March 31, 2003
Non-Guarantor
Subsidiaries
----------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------ ------------ ----------- --------- ------------ -----------
ASSETS (In thousands)
Homebuilding:
Cash and cash equivalents ........................ $ -- $ 149,836 $ -- $ 11,303 $ -- $ 161,139
Advances to/investments in unconsolidated
subsidiaries .................................... 4,486,565 190,734 -- -- (4,677,299) --
Inventories ...................................... 808,364 3,838,807 -- 89,254 (246) 4,736,179
Property and equipment (net) ..................... 12,186 58,694 -- 6,155 -- 77,035
Earnest money deposits and other assets .......... 155,136 207,866 -- 8,889 -- 371,891
Excess of cost over net assets acquired .......... -- 581,230 -- -- -- 581,230
----------- ----------- ----------- --------- ------------ -----------
5,462,251 5,027,167 -- 115,601 (4,677,545) 5,927,474
----------- ----------- ----------- --------- ------------ -----------
Financial Services:
Cash and cash equivalents ........................ -- -- 26,339 -- -- 26,339
Mortgage loans held for sale ..................... -- -- 424,674 -- -- 424,674
Other assets ..................................... -- -- 20,462 -- -- 20,462
----------- ----------- ----------- --------- ------------ -----------
-- -- 471,475 -- -- 471,475
----------- ----------- --------- ------------ ----------- -----------
Total Assets ...................................... $ 5,462,251 $ 5,027,167 $ 471,475 $ 115,601 $ (4,677,545) $ 6,398,949
=========== =========== =========== ========= ============ ===========
LIABILITIES & EQUITY
Homebuilding:
Accounts payable and other liabilities ........... $ 288,324 $ 501,251 $ -- $ 13,980 $ -- $ 803,555
Advances from parent/unconsolidated subsidiaries . -- 2,832,135 -- 52,082 (2,884,217) --
Notes payable .................................... 2,707,891 33,734 -- 21,639 -- 2,763,264
----------- ----------- ----------- --------- ------------ -----------
2,996,215 3,367,120 -- 87,701 (2,884,217) 3,566,819
----------- ----------- ----------- --------- ------------ -----------
Financial Services:
Accounts payable and other liabilities ........... -- -- 14,442 -- -- 14,442
Advances from parent/unconsolidated subsidiaries . -- -- 20,938 -- (20,938) --
Notes payable .................................... -- -- 325,613 -- -- 325,613
----------- ----------- ----------- --------- ------------ -----------
-- -- 360,993 -- (20,938) 340,055
----------- ----------- ----------- --------- ------------ -----------
Total Liabilities ................................ 2,996,215 3,367,120 360,993 87,701 (2,905,155) 3,906,874
----------- ----------- ----------- --------- ------------ -----------
Minority interests ............................... -- -- 28 26,011 -- 26,039
----------- ----------- ----------- --------- ------------ -----------
Stockholders' Equity ............................. 2,466,036 1,660,047 110,454 1,889 (1,772,390) 2,466,036
----------- ----------- ----------- --------- ------------ -----------
Total Liabilities & Equity ....................... $ 5,462,251 $ 5,027,167 $ 471,475 $ 115,601 $ (4,677,545) $ 6,398,949
=========== =========== =========== ========= ============ ===========
-11-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Balance Sheet
September 30, 2002
Non-Guarantor
Subsidiaries
----------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------- ------------ ----------- --------- ------------- -----------
(In thousands)
ASSETS
Homebuilding:
Cash and cash equivalents ........................ $ -- $ 80,273 $ -- $ 11,833 $ -- $ 92,106
Advances to/investments in unconsolidated
subsidiaries .................................... 4,126,233 260,725 -- 68 (4,387,026) --
Inventories ...................................... 689,111 3,566,280 -- 88,048 (370) 4,343,069
Property and equipment (net) ..................... 10,826 55,424 -- 5,645 -- 71,895
Earnest money deposits and other assets .......... 209,990 212,685 -- 12,408 (4,668) 430,415
Excess of cost over net assets acquired .......... -- 579,230 -- -- -- 579,230
----------- ----------- ----------- --------- ------------ -----------
5,036,160 4,754,617 -- 118,002 (4,392,064) 5,516,715
----------- ----------- ----------- --------- ------------ -----------
Financial services:
Cash and cash equivalents ........................ -- -- 12,238 -- -- 12,238
Mortgage loans held for sale ..................... -- -- 464,088 -- -- 464,088
Other assets ..................................... -- -- 24,486 -- -- 24,486
----------- ----------- ----------- --------- ------------ -----------
-- -- 500,812 -- -- 500,812
----------- ----------- ----------- --------- ------------ -----------
Total Assets ...................................... $ 5,036,160 $ 4,754,617 $ 500,812 $ 118,002 $ (4,392,064) $ 6,017,527
=========== =========== =========== ========= ============ ===========
LIABILITIES & EQUITY
Homebuilding:
Accounts payable and other liabilities ........... $ 341,405 $ 483,252 $ -- $ 9,415 $ (24) $ 834,048
Advances from parent/unconsolidated subsidiaries . -- 3,019,521 -- 50,370 (3,069,891) --
Notes payable .................................... 2,424,892 30,491 -- 36,237 (4,644) 2,486,976
----------- ----------- ----------- --------- ------------ -----------
2,766,297 3,533,264 -- 96,022 (3,074,559) 3,321,024
----------- ----------- ----------- --------- ------------ -----------
Financial services:
Accounts payable and other liabilities ........... -- -- 14,340 -- -- 14,340
Advances from parent/unconsolidated subsidiaries . -- -- 25,386 -- (25,386) --
Notes payable .................................... -- -- 391,355 -- -- 391,355
----------- ----------- ----------- --------- ------------ -----------
-- -- 431,081 -- (25,386) 405,695
----------- ----------- ----------- --------- ------------ -----------
Total Liabilities ................................. 2,766,297 3,533,264 431,081 96,022 (3,099,945) 3,726,719
----------- ----------- ----------- --------- ------------ -----------
Minority interests ................................ -- -- 26 20,919 -- 20,945
----------- ----------- ----------- --------- ------------ -----------
Stockholders' Equity .............................. 2,269,863 1,221,353 69,705 1,061 (1,292,119) 2,269,863
----------- ----------- ----------- --------- ------------ -----------
Total Liabilities & Equity ........................ $ 5,036,160 $ 4,754,617 $ 500,812 $ 118,002 $ (4,392,064) $ 6,017,527
=========== =========== =========== ========= ============ ===========
-12-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income
Three Months Ended March 31, 2003
Non-Guarantor
Subsidiaries
---------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------ ------------ ---------- --------- ------------ -----------
(In thousands)
Homebuilding:
Revenues:
Home sales ....................................... $ 256,090 $ 1,469,744 $ -- $ 51,995 $ -- $ 1,777,829
Land/lot sales ................................... 2,519 88,433 -- -- -- 90,952
----------- ------------ --------- --------- ----------- -----------
258,609 1,558,177 -- 51,995 -- 1,868,781
----------- ------------ --------- --------- ----------- -----------
Cost of sales:
Home sales ....................................... 200,810 1,179,041 -- 39,773 (87) 1,419,537
Land/lot sales ................................... 6,912 69,956 -- -- -- 76,868
----------- ------------ --------- --------- ----------- -----------
207,722 1,248,997 -- 39,773 (87) 1,496,405
----------- ------------ --------- --------- ----------- -----------
Gross profit:
Home sales ....................................... 55,280 290,703 -- 12,222 87 358,292
Land/lot sales ................................... (4,393) 18,477 -- -- -- 14,084
----------- ------------ --------- --------- ----------- -----------
50,887 309,180 -- 12,222 87 372,376
Selling, general and administrative expense ....... 54,118 127,491 -- 3,060 2,616 187,285
Interest expense .................................. -- (480) -- 487 -- 7
Other expense (income) ............................ (209,417) (1,426) -- 894 209,878 (71)
----------- ------------ --------- --------- ----------- -----------
206,186 183,595 -- 7,781 (212,407) 185,155
----------- ------------ --------- --------- ----------- -----------
Financial services:
Revenues .......................................... -- -- 39,766 -- -- 39,766
General and administrative expense ................ -- -- 24,851 -- (2,616) 22,235
Interest expense .................................. -- -- 1,482 -- -- 1,482
Other (income) .................................... -- -- (4,982) -- -- (4,982)
----------- ------------ --------- --------- ----------- -----------
-- -- 18,415 -- 2,616 21,031
----------- ------------ --------- --------- ----------- -----------
Income before income taxes ........................ 206,186 183,595 18,415 7,781 (209,791) 206,186
Provision for income taxes ........................ 78,351 69,758 7,002 2,945 (79,705) 78,351
----------- ------------ --------- --------- ----------- -----------
Net income ........................................ $ 127,835 $ 113,837 $ 11,413 $ 4,836 $ (130,086)$ 127,835
=========== ============ ========= ========= =========== ===========
-13-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income
Six Months Ended March 31, 2003
Non-Guarantor
Subsidiaries
---------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------ ------------ --------- --------- ------------ -----------
(In thousands)
Homebuilding:
Revenues:
Home sales ....................................... $ 452,975 $ 2,916,732 $ -- $ 74,571 $ -- $ 3,444,278
Land/lot sales ................................... 5,784 125,412 -- -- -- 131,196
----------- ------------ --------- --------- ----------- -----------
458,759 3,042,144 -- 74,571 -- 3,575,474
----------- ------------ --------- --------- ----------- -----------
Cost of sales:
Home sales ....................................... 349,126 2,347,750 -- 56,609 (190) 2,753,295
Land/lot sales ................................... 10,261 101,389 -- -- -- 111,650
----------- ------------ --------- --------- ----------- -----------
359,387 2,449,139 -- 56,609 (190) 2,864,945
----------- ------------ --------- --------- ----------- -----------
Gross profit:
Home sales ....................................... 103,849 568,982 -- 17,962 190 690,983
Land/lot sales ................................... (4,477) 24,023 -- -- -- 19,546
----------- ------------ --------- --------- ----------- -----------
99,372 593,005 -- 17,962 190 710,529
Selling, general and administrative expense ....... 98,601 256,779 -- 5,904 5,182 366,466
Interest expense .................................. -- (463) -- 817 -- 354
Other expense (income) ............................ (384,340) (3,239) -- 1,398 385,905 (276)
----------- ------------ --------- --------- ----------- -----------
385,111 339,928 -- 9,843 (390,897) 343,985
----------- ------------ --------- --------- ----------- -----------
Financial services:
Revenues .......................................... -- -- 78,007 -- -- 78,007
General and administrative expense ................ -- -- 49,424 -- (5,182) 44,242
Interest expense .................................. -- -- 3,549 -- -- 3,549
Other (income) .................................... -- -- (10,910) -- -- (10,910)
----------- ------------ --------- --------- ----------- -----------
-- -- 35,944 -- 5,182 41,126
----------- ------------ --------- --------- ----------- -----------
Income before income taxes ........................ 385,111 339,928 35,944 9,843 (385,715) 385,111
Provision for income taxes ........................ 145,448 128,383 13,575 3,718 (145,676) 145,448
----------- ------------ --------- --------- ----------- -----------
Net income ........................................ $ 239,663 $ 211,545 $ 22,369 $ 6,125 $ (240,039)$ 239,663
=========== ============ ========= ========= =========== ===========
-14-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income
Three Months Ended March 31, 2002
Non-Guarantor
Subsidiaries
---------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------- ------------ --------- --------- ------------ -----------
(In thousands)
Homebuilding:
Revenues:
Home sales ....................................... $ 222,514 $ 1,284,294 $ -- $ 27,549 $ -- $ 1,534,357
Land/lot sales ................................... 799 41,044 -- -- -- 41,843
----------- ------------ --------- --------- ----------- -----------
223,313 1,325,338 -- 27,549 -- 1,576,200
----------- ------------ --------- --------- ----------- -----------
Cost of sales:
Home sales ....................................... 173,909 1,061,771 -- 23,201 (39) 1,258,842
Land/lot sales ................................... (254) 36,457 -- -- -- 36,203
----------- ------------ --------- --------- ----------- -----------
173,655 1,098,228 -- 23,201 (39) 1,295,045
----------- ------------ --------- --------- ----------- -----------
Gross profit:
Home sales ....................................... 48,605 222,523 -- 4,348 39 275,515
Land/lot sales ................................... 1,053 4,587 -- -- -- 5,640
----------- ------------ --------- --------- ----------- -----------
49,658 227,110 -- 4,348 39 281,155
Selling, general and administrative expense ....... 42,449 103,512 -- 2,012 1,521 149,494
Interest expense .................................. 1,873 689 -- 1 -- 2,563
Other expense (income) ............................ (136,954) (1,067) -- 1,598 133,997 (2,426)
----------- ------------ --------- --------- ----------- -----------
142,290 123,976 -- 737 (135,479) 131,524
----------- ------------ --------- --------- ----------- -----------
Financial services:
Revenues .......................................... -- -- 23,865 -- -- 23,865
General and administrative expense ................ -- -- 16,439 -- (1,521) 14,918
Interest expense .................................. -- -- 999 -- -- 999
Other (income) .................................... -- -- (2,818) -- -- (2,818)
----------- ------------ --------- --------- ----------- -----------
-- -- 9,245 -- 1,521 10,766
----------- ------------ --------- --------- ----------- -----------
Income before income taxes ........................ 142,290 123,976 9,245 737 (133,958) 142,290
Provision for income taxes ........................ 53,359 46,491 3,467 277 (50,235) 53,359
----------- ------------ --------- --------- ----------- -----------
Net income ........................................ $ 88,931 $ 77,485 $ 5,778 $ 460 $ (83,723)$ 88,931
=========== ============ ========= ========= =========== ===========
-15-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Income
Six Months Ended March 31, 2002
Non-Guarantor
Subsidiaries
---------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------ ------------- --------- --------- ------------ -----------
(In thousands)
Homebuilding:
Revenues:
Home sales ....................................... $ 401,551 $ 2,222,539 $ -- $ 36,005 $ -- $ 2,660,095
Land/lot sales ................................... 1,460 49,613 -- -- -- 51,073
----------- ------------ --------- --------- ----------- -----------
403,011 2,272,152 -- 36,005 -- 2,711,168
----------- ------------ --------- --------- ----------- -----------
Cost of sales:
Home sales ....................................... 318,327 1,809,962 -- 29,666 (215) 2,157,740
Land/lot sales ................................... 505 43,605 -- -- -- 44,110
----------- ------------ --------- --------- ----------- -----------
318,832 1,853,567 -- 29,666 (215) 2,201,850
----------- ------------ --------- --------- ----------- -----------
Gross profit:
Home sales ....................................... 83,224 412,577 -- 6,339 215 502,355
Land/lot sales ................................... 955 6,008 -- -- -- 6,963
----------- ------------ --------- --------- ----------- -----------
84,179 418,585 -- 6,339 215 509,318
Selling, general and administrative expense ....... 73,045 188,453 -- 3,307 3,106 267,911
Interest expense .................................. 2,911 846 -- 12 (10) 3,759
Other expense (income) ............................ (251,552) (1,874) -- 6,389 247,183 146
----------- ------------ --------- --------- ----------- -----------
259,775 231,160 -- (3,369) (250,064) 237,502
----------- ------------ --------- --------- ----------- -----------
Financial services:
Revenues .......................................... -- -- 48,787 -- -- 48,787
General and administrative expense ................ -- -- 33,147 -- (3,106) 30,041
Interest expense .................................. -- -- 2,335 -- -- 2,335
Other (income) .................................... -- -- (5,862) -- -- (5,862)
----------- ------------ --------- --------- ----------- -----------
-- -- 19,167 -- 3,106 22,273
----------- ------------ --------- --------- ----------- -----------
Income before income taxes ........................ 259,775 231,160 19,167 (3,369) (246,958) 259,775
Provision for income taxes ........................ 97,416 86,685 7,188 (1,263) (92,610) 97,416
----------- ------------ --------- --------- ----------- -----------
Net income ........................................ $ 162,359 $ 144,475 $ 11,979 $ (2,106) $ (154,348)$ 162,359
=========== ============ ========= ========= =========== ===========
-16-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Cash Flows
Six Months Ended March 31, 2003
Non-Guarantor
Subsidiaries
--------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------ ------------ ---------- --------- ------------ -----------
(In thousands)
OPERATING ACTIVITIES
Net income ............................................ $ 239,663 $ 211,545 $ 22,369 $ 6,125 $ (240,039) $ 239,663
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................ 2,592 14,625 854 713 -- 18,784
Amortization of debt premiums and fees ............... 3,559 -- -- -- -- 3,559
Changes in operating assets and liabilities:
Increase in inventories ............................. (106,422) (250,482) -- (1,206) (124) (358,234)
(Increase) decrease in earnest money
deposits and other assets .......................... 54,223 5,003 4,087 3,519 (4,668) 62,164
Decrease in mortgage loans held for sale ............ -- -- 39,414 -- -- 39,414
Increase (decrease) in accounts payable
and other liabilities .............................. (52,829) 17,999 104 9,657 24 (25,045)
----------- ------------ --------- -------- ----------- ----------
Net cash provided by (used in) operating
activities ............................................ 140,786 (1,310) 66,828 18,808 (244,807) (19,695)
----------- ------------ --------- -------- ----------- ----------
INVESTING ACTIVITIES
Net purchases of property and equipment ............... (2,773) (17,286) (917) (1,223) -- (22,199)
----------- ------------ --------- -------- ----------- ----------
Net cash used in investing activities ................. (2,773) (17,286) (917) (1,223) -- (22,199)
----------- ------------ --------- -------- ----------- ----------
FINANCING ACTIVITIES
Net change in notes payable ........................... 252,105 (6,516) (65,742) (9,898) -- 169,949
Increase (decrease) in intercompany advances .......... (345,197) 94,675 13,932 (8,217) 244,807 --
Purchase of treasury stock ............................ (29,522) -- -- -- -- (29,522)
Proceeds from stock associated with certain
employee benefit plans ............................... 3,660 -- -- -- -- 3,660
Cash dividends paid ................................... (19,059) -- -- -- -- (19,059)
----------- ------------ --------- -------- ----------- ----------
Net cash provided by (used in) financing
activities ........................................... (138,013) 88,159 (51,810) (18,115) 244,807 125,028
----------- ------------ --------- -------- ----------- ----------
Increase (decrease) in cash ........................... -- 69,563 14,101 (530) -- 83,134
Cash at beginning of period ........................... -- 80,273 12,238 11,833 -- 104,344
----------- ------------ --------- -------- ----------- ----------
Cash at end of period ................................. $ -- $ 149,836 $ 26,339 $ 11,303 $ -- $ 187,478
=========== ============ ========= ======== =========== ==========
-17-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
March 31,2003
NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)
Consolidating Statement of Cash Flows
Six Months Ended March 31, 2002
Non-Guarantor
Subsidiaries
--------------------
D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total
------------ ------------ ---------- --------- ------------ ----------
(In thousands)
OPERATING ACTIVITIES
Net income ............................................ $ 162,359 $ 144,475 $ 11,979 $ (2,106) $ (154,348) $ 162,359
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................ 1,728 8,404 678 214 -- 11,024
Amortization of debt premiums and fees ............... 4,476 -- -- -- -- 4,476
Changes in operating assets and liabilities:
Increase in inventories ............................. (56,648) (18,539) -- (40,844) (15) (116,046)
(Increase) decrease in earnest money
deposits and other assets .......................... (24,378) (19,820) 2,716 379 (4,489) (45,592)
Decrease in mortgage loans held for sale ............ -- -- 20,495 -- -- 20,495
Increase (decrease) in accounts payable
and other liabilities .............................. (47,192) (67,646) (416) 17,637 31 (97,586)
----------- ------------ --------- -------- ----------- ----------
Net cash provided by (used in) operating
activities ........................................... 40,345 46,874 35,452 (24,720) (158,821) (60,870)
----------- ------------ --------- -------- ----------- ----------
INVESTING ACTIVITIES
Net (purchases) dispositions of property and
equipment ............................................ (3,055) (12,007) (699) 36 -- (15,725)
Distributions from venture capital entities ........... -- -- -- 500 -- 500
Net cash paid for acquisitions ........................ -- (152,573) -- -- -- (152,573)
----------- ------------ --------- -------- ----------- ----------
Net cash provided by (used in) investing
activities ........................................... (3,055) (164,580) (699) 536 -- (167,798)
----------- ------------ --------- -------- ----------- ----------
FINANCING ACTIVITIES
Net change in notes payable ........................... 472,144 (260,634) (34,484) (4,457) 4,457 177,026
Increase (decrease) in intercompany advances .......... (511,522) 450,349 6,241 40,458 14,474 --
Proceeds from stock associated with certain
employee benefit plans ............................... 10,564 -- -- -- -- 10,564
Cash dividends/distributions paid ..................... (8,476) (139,890) -- -- 139,890 (8,476)
----------- ------------ --------- -------- ----------- ----------
Net cash provided by (used in) financing
activities ........................................... (37,290) 49,825 (28,243) 36,001 158,821 179,114
----------- ------------ --------- -------- ----------- ----------
Increase (decrease) in cash ........................... -- (67,881) 6,510 11,817 -- (49,554)
Cash at beginning of period ........................... -- 230,481 6,975 1,824 -- 239,280
----------- ------------ --------- -------- ----------- ----------
Cash at end of period ................................. $ -- $ 162,600 $ 13,485 $ 13,641 $ -- $ 189,726
=========== ============ ========= ======== =========== ==========
-18-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
We believe that there have been no significant changes to our critical
accounting policies during the six months ended March 31, 2003, as compared to
those we disclosed in Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Annual Report on Form 10-K
for the year ended September 30, 2002.
RESULTS OF OPERATIONS - CONSOLIDATED
We provide homebuilding services in 20 states and 44 markets through our 48
homebuilding divisions. Through our financial services operations, we also
provide mortgage banking and title agency services in many of these same
markets. On February 21, 2002, Schuler Homes, Inc. ("Schuler") merged into D.R.
Horton, Inc., with D.R. Horton the surviving corporation.
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Consolidated revenues for the three months ended March 31, 2003, increased
19.3%, to $1,908.5 million, from $1,600.1 million for the comparable period of
2002, due to increases in both homebuilding and financial services revenues.
Approximately $142.5 million of the increase in homebuilding revenues was
attributable to revenues generated by Schuler prior to the February 21, 2003
anniversary date of the acquisition.
Income before income taxes for the three months ended March 31, 2003, increased
44.9%, to $206.2 million, from $142.3 million for the comparable period of 2002.
As a percentage of revenues, income before income taxes for the three months
ended March 31, 2003, increased 1.9 percentage points, to 10.8% from 8.9% for
the comparable period of 2002, primarily due to the effects of purchase
accounting adjustments related to the Schuler acquisition in the three months
ended March 31, 2002.
The consolidated provision for income taxes increased 46.8%, to $78.4 million
for the three months ended March 31, 2003, from $53.4 million for the same
period of 2002, due to the corresponding increase in income before income taxes
and an increase in the effective income tax rate. The effective income tax rate
for the three months ended March 31, 2003 increased to 38.0%, from 37.5% for the
comparable period of 2002, due to increases in pre-tax income in states with
higher tax rates.
Six Months Ended March 31, 2003 Compared to Six Months Ended March 31, 2002
Consolidated revenues for the six months ended March 31, 2003, increased 32.4%,
to $3,653.5 million, from $2,760.0 million for the comparable period of 2002,
due to increases in both homebuilding and financial services revenues.
Approximately $498.6 million of the increase in homebuilding revenues was
attributable to revenues generated by Schuler prior to the February 21, 2003
anniversary date of the acquisition.
Income before income taxes for the six months ended March 31, 2003, increased
48.2%, to $385.1 million, from $259.8 million for the comparable period of 2002.
As a percentage of revenues, income before income taxes for the six months ended
March 31, 2003, increased 1.1 percentage points, to 10.5% from 9.4% for the
comparable period of 2002, primarily due to the effects of purchase accounting
adjustments related to the Schuler acquisition in the six months ended March 31,
2002.
The consolidated provision for income taxes increased 49.3%, to $145.4 million
for the six months ended March 31, 2003, from $97.4 million for the same period
of 2002, due to the corresponding increase in income before income taxes and an
increase in the effective income tax rate. The effective income tax rate for the
six months ended March 31, 2003 increased to 37.8%, from 37.5% for the
comparable period of 2002, due to increases in pre-tax income in states with
higher tax rates.
-19-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - HOMEBUILDING
The following tables set forth certain operating and financial data for our
homebuilding activities ($ in millions):
Percentages of Homebuilding Revenues
----------------------------------------
Three Months Ended Six Months Ended
March 31, March 31,
------------------ --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Costs and expenses:
Cost of sales .................................... 80.1% 82.2% 80.1% 81.2%
Selling, general and administrative expense ...... 10.0 9.5 10.3 9.9
Interest expense ................................. -- 0.2 -- 0.1
-------- -------- -------- --------
Total costs and expenses ......................... 90.1 91.9 90.4 91.2
Other (income) expense ........................... -- (0.2) -- --
-------- -------- -------- --------
Income before income taxes ....................... 9.9% 8.3% 9.6% 8.8%
======== ======== ======== ========
Homes Closed Three Months Ended March 31, Six Months Ended March 31,
----------------------------------------- ------------------------------------------
2003 2002 2003 2002
------------------- -------------------- -------------------- -------------------
Homes Homes Homes Homes
Closed Revenues Closed Revenues Closed Revenues Closed Revenues
-------- -------- --------- -------- --------- -------- -------- --------
Mid-Atlantic ................. 743 $ 154.5 633 $ 138.6 1,408 $ 288.7 1,228 $ 263.7
Midwest ...................... 441 107.6 388 95.4 867 217.1 851 214.1
Southeast .................... 979 167.7 790 135.7 1,926 325.0 1,678 290.6
Southwest .................... 3,277 552.3 2,338 403.9 6,357 1,070.2 4,909 836.5
West ......................... 2,448 795.7 2,490 760.8 4,844 1,543.3 3,664 1,055.2
-------- -------- -------- -------- -------- -------- -------- --------
7,888 $1,777.8 6,639 $1,534.4 15,402 $3,444.3 12,330 $2,660.1
======== ======== ======== ======== ======== ======== ======== ========
Net New Sales Orders Three Months Ended March 31, Six Months Ended March 31,
----------------------------------------- -----------------------------------------
2003 2002 2003 2002
------------------- ------------------- ------------------- -------------------
Homes Homes Homes Homes
Sold $ Sold $ Sold $ Sold $
-------- -------- -------- -------- -------- -------- -------- --------
Mid-Atlantic ................. 993 $ 215.1 883 $ 182.6 1,714 $ 361.0 1,511 $ 310.7
Midwest ...................... 522 140.7 463 117.4 951 247.6 851 214.3
Southeast .................... 1,152 215.5 969 158.4 2,101 385.4 1,704 276.7
Southwest .................... 4,473 740.2 3,685 613.9 7,244 1,209.1 6,017 993.2
West ......................... 3,408 1,128.0 2,617 761.1 5,790 1,934.9 3,678 1,060.0
-------- -------- -------- -------- -------- -------- -------- --------
10,548 $2,439.5 8,617 $1,833.4 17,800 $4,138.0 13,761 $2,854.9
======== ======== ======== ======== ======== ======== ======== ========
Sales Backlog March 31, 2003 March 31, 2002
------------------ -------------------
Homes $ Homes $
-------- -------- -------- --------
Mid-Atlantic ..................................... 1,559 $ 337.2 1,105 $ 237.4
Midwest .......................................... 1,000 269.0 918 263.0
Southeast ........................................ 1,844 335.1 1,490 239.6
Southwest ........................................ 6,073 1,026.6 5,410 910.2
West ............................................. 4,619 1,551.0 3,475 1,013.5
-------- -------- -------- --------
15,095 $3,518.9 12,398 $2,663.7
======== ======== ======== ========
-20-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our market regions consist of the following markets:
Mid-Atlantic Charleston, Charlotte, Columbia, Greensboro, Greenville,
Hilton Head, Maryland-D.C., Myrtle Beach, New Jersey,
Raleigh/Durham and Virginia-D.C.
Midwest Chicago and Minneapolis/St. Paul
Southeast Atlanta, Birmingham, Fort Myers/Naples, Jacksonville,
Miami/West Palm Beach and Orlando
Southwest Albuquerque, Austin, Dallas, Fort Worth, Houston, Killeen,
Phoenix, San Antonio and Tucson
West Colorado Springs, Denver, Fort Collins, Hawaii, Inland
Empire (Southern California), Las Vegas, Los Angeles,
Oakland, Orange County, Portland, Sacramento, Salt Lake
City, San Francisco, San Diego, Seattle/Tacoma and
Ventura County
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Revenues from homebuilding activities increased 18.6%, to $1,868.8 million
(7,888 homes closed) for the three months ended March 31, 2003, from $1,576.2
million (6,639 homes closed) for the comparable period of 2002. Revenues from
home sales increased in all five of our market regions, with percentage
increases ranging from 4.6% in the West region to 36.7% in the Southwest. The
increases in both revenues and homes closed were due to strong housing demand
throughout the majority of our markets, and the acquisition of Schuler.
Excluding the activities of Schuler prior to the February 21, 2003 anniversary
date of the acquisition, home sales revenues increased 6.9%, to $1,640.3 million
(7,441 homes closed) for the three months ended March 31, 2003, from $1,534.4
million (6,639 homes closed) for the comparable period of 2002. Revenues from
the sale of land and lots increased by $49.1 million, to $91.0 million in the
three months ended March 31, 2003.
The average selling price of homes closed during the three months ended March
31, 2003 was $225,400, down 2.5% from $231,100 for the same period in 2002. The
decrease in average selling price was primarily due to relatively fewer closings
in the West region, which has the highest average selling price.
The value of net new sales orders increased 33.1%, to $2,439.5 million (10,548
homes) for the three months ended March 31, 2003, from $1,833.4 million (8,617
homes) for the same period of 2002. The value of net new sales orders increased
in all of our five market regions, with percentage increases ranging from 17.8%
in the Mid-Atlantic region to 48.2% in the West region. The increases in both
net new sales orders and their value were due to strong housing demand
throughout the majority of our markets and the merger with Schuler in February
2002. On a consolidated basis, excluding the activities of Schuler prior to the
February 21, 2003 anniversary date of the acquisition, the value of net new
sales orders increased 18.9%, to $2,180.4 million (9,777 homes) for the three
months ended March 31, 2003, from $1,833.4 million (8,617 homes) for the
comparable period of 2002. The average price of a net new sales order in the
three months ended March 31, 2003 was $231,300, up 8.7% from the $212,800
average in the comparable period of 2002. The increase in average selling price
was primarily due to increased sales orders in the West region, which has the
highest average selling price.
At March 31, 2003, the value of our backlog of sales orders was $3,518.9 million
(15,095 homes), up 32.1% from $2,663.7 million (12,398 homes) at March 31, 2002.
The value of our backlog of sales orders increased in all five of our market
regions, with percentage increases ranging from 2.3% in the Midwest to region to
53.0% in the West region. The average sales price of homes in sales backlog was
$233,100 at March 31, 2003, up 8.5% from the average price of $214,800 at March
31, 2002 due to the increase in sales orders in the West region, which has the
highest average selling price.
Cost of sales increased by 15.5%, to $1,496.4 million for the three months ended
March 31, 2003, from $1,295.0 million for the comparable period of 2002. The
increase in cost of sales was primarily attributable to the increase in
revenues. Cost of home sales as a percentage of home sales revenues decreased
2.2 percentage points to 79.8% for the three months ended March 31, 2003, from
82.0% for the comparable period of 2002. A significant portion of costs
associated with the sales of inventory acquired in the Schuler acquisition, with
lower gross margins as a result of purchase accounting adjustments that
increased the acquired inventory to its fair value as of the date of
acquisition, was recognized in the three months ended March 31, 2002. For the
same reason, total homebuilding cost of sales as a percentage of total
homebuilding revenues decreased 2.1 percentage points, to 80.1% in the three
months ended March 31, 2003, from 82.2% in the comparable period of 2002.
-21-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, general and administrative (SG&A) expenses from homebuilding activities
increased by 25.3%, to $187.3 million in the three months ended March 31, 2003,
from $149.5 million in the comparable period of 2002. As a percentage of
homebuilding revenues, SG&A expenses increased 0.5 percentage point, to 10.0%
for the three months ended March 31, 2003, from 9.5% in the comparable period of
2002, due primarily to the fixed costs leverage achieved by the large amount of
home closings revenues generated by the Schuler operating divisions between the
Schuler acquisition date, February 21, 2002, and March 31, 2002.
Interest expense associated with homebuilding activities decreased to a
negligible amount in the three months ended March 31, 2003, from $2.6 million in
the comparable period of 2002. Due to the declining interest rate environment
experienced throughout fiscal 2003, our total interest costs as a percentage of
average interest-bearing debt declined. Also, throughout the three months ended
March 31, 2003, inventory under construction or development grew at a more rapid
pace than interest- bearing debt. Therefore, virtually all of the total
homebuilding interest incurred was capitalized to inventory in the current
quarter. During both periods, we expensed the portion of incurred interest and
other financing costs which could not be capitalized to inventory. Capitalized
interest and other financing costs are included in cost of sales at the time
homes are closed.
Other income associated with homebuilding activities was $0.1 million in the
three months ended March 31, 2003, compared to $2.4 million in the comparable
period of 2002. The income in both quarters was primarily due to increases in
the fair value of our interest rate swap agreements.
Six Months Ended March 31, 2003 Compared to Six Months Ended March 31, 2002
Revenues from homebuilding activities increased 31.9%, to $3,575.5 million
(15,402 homes closed) for the six months ended March 31, 2003, from $2,711.2
million (12,330 homes closed) for the comparable period of 2002. Revenues from
home sales increased in all of the Company's five market regions, with
percentage increases ranging from 1.4% in the Midwest region to 46.3% in the
West region. The increases in total homebuilding revenues and revenues from home
sales were due to strong housing demand throughout the majority of our markets,
and the acquisition of Schuler. Excluding the activities of Schuler prior to the
February 21, 2003 anniversary date of the acquisition, home sales revenues
increased 11.5% to $2,966.2 million (13,878 homes closed) for the six months
ended March 31, 2003, from $2,660.1 million (12,330 homes closed) for the
comparable period of 2002. Revenues from the sale of land and lots increased by
$80.1 million, to $131.2 million in the six months ended March 31, 2003.
The average selling price of homes closed during the six months ended March 31,
2003 was $223,600, up 3.7% from $215,700 for the same period in 2002. The
increase in average selling price was primarily due to the Schuler acquisition.
Schuler's operations are concentrated on the West Coast and in Hawaii, where
average home selling prices are significantly higher than in the rest of the
United States.
The value of net new sales orders increased 44.9%, to $4,138.0 million (17,800
homes) for the six months ended March 31, 2003, from $2,854.9 million (13,761
homes) for the same period of 2002. The value of net new sales orders increased
in all of the Company's five market regions, with percentage increases ranging
from 15.5% in the Mid-West region to 82.5% in the West region. Excluding the
activities of Schuler prior to the February 21, 2003 anniversary date of the
acquisition, the value of net new sales orders increased 20.1%, to $3,428.5
million (15,781 homes) for the six months ended March 31, 2003, from $2,854.9
million (13,761 homes) for the comparable period of 2002. The average price of a
net new sales orders in the six months ended March 31, 2003 was $232,500, up
12.0% over the $207,500 average in the six months ended March 31, 2002, due to
increased sales orders in the West region, which has the highest average selling
price.
Cost of sales increased 30.1%, to $2,864.9 million for the six months ended
March 31, 2003, from $2,201.9 million for the comparable period of 2002. The
increase in cost of sales was primarily attributable to the increase in
revenues. Cost of home sales as a percentage of home sales revenues decreased
1.2 percentage points, to 79.9% for the six months ended March 31, 2003, from
81.1% for the comparable period of 2002. A significant portion of costs
associated with the sales of inventory acquired in the Schuler acquisition, with
-22-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
lower gross margins as a result of purchase accounting adjustments that
increased the acquired inventory to its fair value as of the date of
acquisition, was recognized in the six months ended March 31, 2002. For the same
reason, total homebuilding cost of sales as a percentage of total homebuilding
revenues decreased 1.1 percentage points, to 80.1% in the six months ended March
31, 2003, from 81.2% in the comparable period of 2002.
Selling, general and administrative (SG&A) expenses from homebuilding activities
increased by 36.8%, to $366.5 million in the six months ended March 31, 2003,
from $267.9 million in the comparable period of 2002. As a percentage of
homebuilding revenues, SG&A expenses increased to 10.3% for the six months ended
March 31, 2003, from 9.9% for the comparable period of 2002, due primarily to
the fixed costs leverage achieved by the large amount of home closings revenues
generated by the Schuler operating divisions between the Schuler acquisition
date, February 21, 2002, and March 31, 2002.
Interest expense associated with homebuilding activities decreased to $0.4
million in the six months ended March 31, 2003, from $3.8 million in the
comparable period of 2002. Due to the declining interest rate environment
experienced throughout fiscal 2003, our total interest costs as a percentage of
average interest-bearing debt declined. Also, throughout the six months ended
March 31, 2003, inventory under construction or development grew at a more rapid
pace than interest-bearing debt. Therefore, virtually all of the total
homebuilding interest incurred was capitalized to inventory in the six months
ended March 31, 2003. During both periods, the Company expensed the portion of
incurred interest and other financing costs which could not be charged to
inventory. The Company follows a policy of capitalizing interest only on
inventory under construction or development. Capitalized interest and other
financing costs are included in cost of sales at the time of home closings.
Other income associated with homebuilding activities was $0.3 million in the six
months ended March 31, 2003, compared to other expense of $0.1 million in the
comparable period of 2002. The expense in 2002 was primarily due to write-downs
to estimated fair value of the carrying amounts of our investments in start-up
and emerging growth companies, offset in part by an increase in the fair value
of our interest rate swap agreements during the period.
RESULTS OF OPERATIONS - FINANCIAL SERVICES
Financial services include mortgage financing and title insurance agency and
closing services, primarily related to purchases of homes we build and sell. We
provide mortgage services in Arizona, California, Colorado, Florida, Georgia,
Illinois, Maryland, Minnesota, Nevada, New Mexico, North Carolina, Oregon, South
Carolina, Texas, Virginia and Washington. We provide title agency and closing
services in Arizona, Florida, Georgia, Maryland, Minnesota, Texas, Virginia and
Washington. The following table summarizes financial and other information for
our financial services operations:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
2003 2002 2003 2002
-------- -------- -------- --------
($ in thousands)
Number of loans originated ................................. 6,374 4,024 12,602 8,447
-------- -------- -------- --------
Loan origination fees ...................................... $ 7,200 $ 4,175 $ 13,932 $ 8,818
Sale of servicing rights and gains from sale of mortgages .. 21,046 11,239 41,180 24,300
Other revenues ............................................. 3,873 2,894 7,508 4,633
-------- -------- -------- --------
Total mortgage banking revenues ............................ 32,119 18,308 62,620 37,751
Title policy premiums, net ................................. 7,647 5,557 15,387 11,036
-------- -------- -------- --------
Total revenues ............................................. 39,766 23,865 78,007 48,787
General and administrative expense ......................... 22,235 14,918 44,242 30,041
Interest expense ........................................... 1,482 999 3,549 2,335
Interest/other (income) .................................... (4,982) (2,818) (10,910) (5,862)
-------- -------- -------- --------
Income before income taxes ................................. $ 21,031 $ 10,766 $ 41,126 $ 22,273
======== ======== ======== ========
-23-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Revenues from the financial services segment increased 66.6%, to $39.8 million
in the three months ended March 31, 2003, from $23.9 million in the comparable
period of 2002. The increase in financial services revenues was due to the rapid
expansion of our mortgage loan and title services provided to customers of our
homebuilding segment. General and administrative expenses associated with
financial services increased 49.0%, to $22.2 million in the three months ended
March 31, 2003, from $14.9 million in the comparable period of 2002. As a
percentage of financial services revenues, general and administrative expenses
decreased 6.6 percentage points, to 55.9% in the three months ended March 31,
2003, from 62.5% in the comparable period in 2002, due primarily to efficiencies
realized with the increase in revenues in markets entered in 2002.
Six Months Ended March 31, 2003 Compared to Six Months Ended March 31, 2002
Revenues from the financial services segment increased 59.9%, to $78.0 million
in the six months ended March 31, 2003, from $48.8 million in the comparable
period of 2002. The increase in financial services revenues was due to the rapid
expansion of the Company's mortgage loan and title services provided to
customers of the Company's homebuilding segment. General and administrative
expenses associated with financial services increased 47.3%, to $44.2 million in
the six months ended March 31, 2003, from $30.0 million in the comparable period
of 2002. As a percentage of financial services revenues, general and
administrative expenses decreased by 4.9 percentage points, to 56.7% in the six
months ended March 31, 2003, from 61.6% in the comparable period in 2002, due
primarily to efficiencies realized with the increase in revenues in markets
entered in 2002.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, we had available cash and cash equivalents of $187.5 million.
Inventories (including finished homes, construction in progress, and developed
residential lots and other land), at March 31, 2003, had increased by $393.1
million since September 30, 2002, due to a general increase in business activity
and the expansion of operations in our market areas. The inventory increase was
financed largely by issuing senior notes and by retaining earnings. Our
revolving credit facility had $50 million outstanding at March 31, 2003 and no
amount outstanding at September 30, 2002. Our ratio of homebuilding notes
payable (net of cash) to total capital at March 31, 2003 and September 30, 2002,
remained constant at 51.3%. The stockholders' equity to total assets ratio
increased 0.8 percentage point, to 38.5% at March 31, 2003, from 37.7% at
September 30, 2002.
We have an $805 million, unsecured revolving credit facility, including $125
million which may be used for letters of credit. The facility matures in January
2006, and is guaranteed by substantially all of our wholly-owned subsidiaries
other than those that make up our financial services segment. At March 31, 2003,
we had outstanding homebuilding debt of $2,763.3 million. Under the debt
covenants associated with the revolving credit facility, our additional
borrowing capacity under it is limited to the lesser of the unused portion of
the facility, $633.3 million at March 31, 2003, or an amount determined under a
borrowing base arrangement. Under the borrowing base limitation, the sum of our
senior debt and the amount drawn under our revolving credit facility may not
exceed certain percentages of the various categories of our unencumbered
inventory. At March 31, 2003, the borrowing base arrangement would have limited
our additional borrowing capacity from any source to $1,327.5 million. At March
31, 2003, we were in compliance with all of the covenants, limitations and
restrictions that form a part of our public debt obligations and our bank
revolving credit facility. We have entered into multi-year interest rate swap
agreements, aggregating a notional amount of $200 million, that have the effect
of fixing the interest rate on a portion of the variable rate revolving credit
facility at 5.1%.
In the normal course of business, we provide standby letters of credit and
performance bonds, issued by third parties, to secure performance under various
contracts. At March 31, 2003, outstanding standby letters of credit and
performance bonds, the majority of which mature in less than one year, were
$144.4 million and $1,044.2 million, respectively.
-24-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At March 31, 2003, our financial services segment had mortgage loans held for
sale of $424.7 million and loan commitments for $387.3 million at fixed rates.
We hedge the interest rate risk on these mortgage loans and mortgage loan
commitments through the use of best-efforts whole loan delivery commitments,
forward sales of mortgage-backed securities and the infrequent purchase of
options on financial instruments. We record gains or losses related to such
hedging instruments in other income as their market values change. Such gains
and losses have not significantly affected our financial services results of
operations.
As of March 31, 2003, our financial services segment had a $190 million,
one-year mortgage warehouse bank facility that matures on August 12, 2003, and
is secured by certain mortgage loans held for sale. The mortgage warehouse
facility is not guaranteed by either the parent company or any of the
subsidiaries that guarantee our homebuilding debt and is expected to be renewed
at maturity in the ordinary course of business. At March 31, 2003, $155.6
million had been drawn under the mortgage warehouse facility. Our wholly-owned
mortgage company completed a new $100 million mortgage-backed commercial paper
conduit facility ("CP conduit facility") in July 2002. The facility was
increased to $200 million in November 2002. Although the agreement governing the
CP conduit facility expires on July 3, 2005, maintenance of the facility beyond
the first (and subsequent) anniversary date(s) must be annually approved by the
sponsoring bank. The CP conduit facility is also secured by certain mortgage
loans held for sale and is not guaranteed by either the parent company or any of
the subsidiaries that guarantee our homebuilding debt. As of March 31, 2003,
$170.0 million had been drawn under the CP conduit facility. The mortgage loans
pledged to secure the CP conduit facility are used as collateral for
mortgage-backed securities sold in the secondary commercial paper markets at
rates that are more attractive than those applicable to the mortgage warehouse
facility. All mortgage company activities are financed under the mortgage
warehouse and CP conduit facilities. Both of the financial services' credit
facilities contain financial covenants with which we are in compliance.
Our historical strategy of internal growth and growth by acquisition has
required significant amounts of cash. It is anticipated that future home
construction, lot and land purchases and acquisitions will be funded through
internally generated funds, existing and future credit facilities and the
issuance of new debt or equity securities. Under a currently effective shelf
registration statement, we have approximately 15 million shares of common stock
issuable to effect, in whole or in part, possible future acquisitions. Under
another effective shelf registration statement, we have, at April 17, 2003, the
capacity to issue new debt or equity securities amounting to $585 million. In
the future, the Company intends to continue to maintain effective shelf
registration statements that will facilitate access to the capital markets.
On December 3, 2002, we issued $215 million of 7.5% Senior notes due 2007. The
net proceeds from this offering were used to repay borrowings under the
unsecured revolving credit facility. These notes are guaranteed by substantially
all of our wholly-owned subsidiaries other than our financial services
subsidiaries.
On April 17, 2003, we issued $200 million of 6 7/8% Senior notes due 2013. On
May 23, 2003, the majority of the net proceeds from this offering will be used
to redeem the approximately $148.5 million aggregate principal amount
outstanding of our 10% senior notes due 2006, at a redemption price of 100% of
the principal amount plus accrued interest.
On May 12, 2003, the holders of our zero coupon convertible senior notes due
2021 had an opportunity to require us to purchase their notes for cash at their
accreted value of $559.73 per note on that date. None of the note holders
exercised this right, but if all of the note holders had elected to require us
to purchase all of their notes, we would have been required to purchase notes
having a total accreted value of $213.3 million on that date. A combination of
cash resources available from operations and under our revolving bank credit
facility would have been adequate to meet our obligations associated with any
exercise of the rights of our convertible note holders to require us to redeem
their notes on May 12, 2003. Also, repaying any notes submitted for redemption
would not have had any significant adverse effects on our financial condition,
operations or cash flows, except that we would have been required to write off a
pro-rata portion of unamortized debt issuance costs that totaled approximately
$4.8 million on that date. Beginning on May 12, 2003, and continuing until the
notes maturity date on May 11, 2021, we will have the right to call the zero
coupon convertible senior notes. To redeem any notes that may be called, we must
pay the holder of each note, at the holder's option, either the note's accreted
value at the date of redemption in cash, or 26.2391 shares of our common stock
for each $1,000 note redeemed.
-25-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In March 2003, we repurchased 1,672,500 shares of our common stock in open
market purchases at an aggregate purchase price of $29.5 million. At March 31,
2003, the Company had $33.5 million remaining on a board of directors'
authorization for repurchases of our common stock.
During the three months ended March 31, 2003, our Board of Directors declared a
quarterly cash dividend of $0.07 per common share, which was paid on February
14, 2003 to stockholders of record on February 3, 2003.
Except for ordinary expenditures for the construction of homes and the
acquisition of land and lots for development and sale of homes, at March 31,
2003, we had no material commitments for capital expenditures.
-26-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
Certain statements contained in this report, as well as in other materials we
have filed or will file with the Securities and Exchange Commission, statements
made by us in periodic press releases and oral statements we make to analysts,
stockholders and the press in the course of presentations about us, may be
construed as "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. These forward-looking statements typically
include words such as "anticipate", "believe", "expect", "estimate", "project"
and "future". Any or all of the forward-looking statements included in this
report and in any other of our reports or public statements may turn out to be
inaccurate due to known or unknown risks and uncertainties. As a result, actual
results may differ materially from the results discussed in and anticipated by
the forward- looking statements. The following risks and uncertainties relevant
to our business include factors we believe could adversely affect us. They
include, but are not limited to:
- changes in general economic, real estate and business conditions;
- changes in interest rates and the availability of mortgage financing;
- governmental regulations and environmental matters;
- our substantial leverage;
- competitive conditions within our industry;
- the availability of capital; and
- our ability to effect our growth strategies successfully.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. However, any
further disclosures made on related subjects in subsequent reports on Forms
10-K, 10-Q and 8-K should be consulted. Additional information about issues that
could lead to material changes in performance is contained in our annual report
on Form 10-K, which is filed with the Securities and Exchange Commission.
-27-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to interest rate risk on our long term debt. We monitor our
exposure to changes in interest rates and utilize both fixed and variable rate
debt. For fixed rate debt, changes in interest rates generally affect the value
of the debt instrument, but not our earnings or cash flows. Conversely, for
variable rate debt, changes in interest rates generally do not impact the fair
value of the debt instrument, but may affect our future earnings and cash flows.
We have mitigated our exposure to changes in interest rates on our variable rate
bank debt by entering into interest rate swap agreements to obtain a fixed
interest rate for a portion of the variable rate borrowings. We generally do not
have an obligation to prepay fixed-rate debt prior to maturity and, as a result,
interest rate risk and changes in fair value would not have a significant impact
on our fixed-rate debt until such time as we are required to refinance,
repurchase or repay such debt.
Our interest rate swaps were not designated as hedges under Statement of
Financial Accounting Standards No. 133 when it was adopted on October 1, 2000.
We are exposed to market risk associated with changes in the fair values of the
swaps, since any such changes must be reflected in our income statements.
Our financial services segment is exposed to interest rate risk associated with
its mortgage loan origination services. Mortgage loans are funded at fixed
interest rates before they are committed to specific investors and interest rate
lock commitments (IRLC's) are extended to borrowers who have applied for loan
funding and who meet certain defined credit and underwriting criteria. Forward
sales of mortgage-backed securities are designated as fair value hedges of the
risk of changes in the overall fair value of funded loans. Accordingly, changes
in the value of the derivative instruments are recognized in current earnings,
as are the changes in the value of the funded loans. The effectiveness of the
fair value hedge is continuously monitored and any ineffectiveness, which for
the three and six month periods ended March 31, 2003 and 2002, was not
significant, is recognized in current earnings. The IRLC's are classified and
accounted for as non-designated derivative instruments with gains and losses
recorded in current earnings. Interest rate risk associated with IRLC's is
managed through the use of best- efforts whole loan delivery commitments,
forward sales of mortgage-backed securities and the infrequent purchase of
options on financial instruments. These instruments are considered
non-designated derivatives and are accounted for at fair market value with gains
and losses recorded in current earnings. At March 31, 2003, total forward sales
of mortgage backed securities to mitigate interest rate risk related to
uncommitted mortgage loans held for sale and IRLC's were approximately $237.0
million, the duration of which was less than nine months.
The following table shows, as of March 31, 2003, our long term debt obligations,
principal cash flows by scheduled maturity, weighted average interest rates and
estimated fair market value. In addition, the table shows the notional amounts,
weighted average interest rates and estimated fair market value of our interest
rate swaps.
Six Months Fair
Ended market
September 30, Year ended September 30, value at
-------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total 3/31/03
--------- --------- --------- --------- --------- ---------- --------- ---------
($'s in millions)
Debt:
Fixed rate ................... $ 34.7 $ 172.8 $ 216.2 $ 153.9 $ 1.1 $2,265.9 $2,844.6 $2,800.8
Average interest rate ........ 7.56% 8.42% 10.59% 10.11% 4.78% 8.08% 8.41% --
Variable rate ................ $ 343.4 $ 7.2 -- $ 50.0 -- -- $ 400.6 $ 400.6
Average interest rate ........ 2.25% 3.95% -- 2.91% -- -- 2.36% --
Interest Rate Swaps:
Variable to fixed ............ $ 200.0 $ 200.0 $ 200.0 $ 200.0 $ 200.0 $ 200.0 -- $ (22.1)
Average pay rate ............. 5.10% 5.10% 5.10% 5.10% 5.10% 5.02% -- --
Average receive rate ......... 90-day LIBOR
-28-
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management has long recognized its responsibilities for
developing, implementing and monitoring effective and efficient controls and
procedures. As part of those responsibilities, as of March 31, 2003, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
the Company's disclosure controls and procedures as defined in Rule 13a - 14(c)
and Rule 15d - 14(c) under the Securities Exchange Act of 1934. Based on that
evaluation, the CEO and CFO concluded that the Company's disclosure controls and
procedures were effective in timely alerting them to material information
relating to the Company, including its consolidated subsidiaries, required to be
included in the Company's periodic filings with the Securities and Exchange
Commission. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to March 31, 2003. Accordingly, there have been no corrective actions
taken as no significant deficiencies or material weaknesses were detected in
these controls.
-29-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 30, 2003, the Company held its Annual Meeting of Stockholders (the
"Annual Meeting"). At the Annual Meeting, the Company's stockholders approved an
amendment to the Company's Amended and Restated Certificate of Incorporation, as
amended, to increase the number of authorized shares of Common Stock from 200
million to 400 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) At the Company's Annual Meeting, the stockholders re-elected eleven
members of the Board of Directors of the Company to serve until the Company's
next annual meeting of stockholders and until their respective successors are
elected and qualified. The names of the eleven directors, the votes cast for and
the number of votes withheld were as follows:
Name Votes For Votes Withheld
- -------------------- ----------- --------------
Donald R. Horton 112,485,401 27,220,263
Bradley S. Anderson 133,533,061 6,172,603
Richard Beckwitt 133,331,981 6,373,682
Samuel R. Fuller 112,621,992 27,083,672
Richard I. Galland 133,528,499 6,177,165
Richard L. Horton 133,057,494 6,648,170
Terrill J. Horton 133,071,894 6,633,770
Francine I. Neff 133,569,536 6,136,128
James K. Schuler 112,071,930 27,633,734
Scott J. Stone 114,208,284 25,497,446
Donald J. Tomnitz 112,060,506 27,645,158
(b) At the Company's Annual Meeting, a vote was taken for the approval and
adoption of a proposal to amend the Company's Amended and Restated Certificate
of Incorporation, as amended, to increase the number of authorized shares of
Common Stock from 200 million to 400 million. The votes cast for this proposal
were as follows:
For: 130,984,786
Against: 8,436,988
Abstain: 283,639
-30-
ITEM 5. OTHER INFORMATION.
On May 12, 2003, the Company was advised by the paying agent, American Stock
Transfer & Trust Company, that none of the holders of the Zero Coupon
Convertible Senior Notes presented their notes for purchase by the Company
pursuant to the holders' put option which commenced on March 31, 2003 and
expired on May 12, 2003 at 5 p.m. New York City time. At expiration of the
offer, $381,113,000 of the Zero Coupon Convertible Senior Notes at maturity in
2021 remain outstanding and subject to their existing terms.
-31-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Amended and Restated Certificate of Incorporation, as
amended, of the Company is incorporated by reference
from Exhibit 4.2 to the Company's registration statement
(No. 333-76175) on Form S-3, filed with the Commission
on April 13, 1999.
3.1(a) Amendment to Amended and Restated Certificate of
Incorporation, as amended, of the Company, effective
February 6, 2003, is incorporated by reference from
Exhibit 3.1(a) to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended December 31, 2002,
filed with the Commission on February 18, 2003.
3.2 Amended and Restated Bylaws of the Company are
incorporated by reference from Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1998, filed with the Commission on
February 16, 1999.
99.1 * Certificate provided pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, by the Company's Chief Executive Officer.
99.2 * Certificate provided pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, by the Company's Chief Financial Officer.
- ----------------
*Filed herewith.
(b) Reports on Form 8-K.
1. On February 14, 2003, the Company filed a Current Report
on Form 8-K (Item 9), dated February 14, 2003, which
submitted to the Commission Section 906 certifications
made by the Chief Executive Officer and Chief Financial
Officer of the Company as required by the Sarbanes-Oxley
Act of 2002.
2. On February 18, 2003, the Company filed a Current Report
on Form 8-K (Item 9), dated February 18, 2003, which
submitted to the Commission Section 906 certifications
made by the Chief Executive Officer and Chief Financial
Officer of the Company as required by the Sarbanes-Oxley
Act of 2002.
-32-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
D.R. HORTON, INC.
Date: May 13, 2003 By /s/ Samuel R. Fuller
------------------------------------------
Samuel R. Fuller, on behalf of D.R. Horton,
Inc. and as Executive Vice President,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
-33-
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Donald J. Tomnitz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of D.R. Horton, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
-34-
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003 /s/ Donald J. Tomnitz
------------------------------------
By: Donald J. Tomnitz
Vice Chairman, Chief Executive
Officer and President
-35-
I, Samuel R. Fuller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of D.R. Horton, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
-36-
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 13, 2003 /s/ Samuel R. Fuller
--------------------------------------
By: Samuel R. Fuller
Executive Vice President,
Treasurer and Chief Financial
Officer
-37-
Index to Exhibits
Exhibits.
3.1 Amended and Restated Certificate of Incorporation, as amended,
of the Company is incorporated by reference from Exhibit 4.2 to
the Company's registration statement (No. 333-76175) on Form
S-3, filed with the Commission on April 13, 1999.
3.1(a) Amendment to Amended and Restated Certificate of Incorporation,
as amended, of the Company, effective February 6, 2003, is
incorporated by reference from Exhibit 3.1(a) to the Company's
Quarterly Report on Form 10-Q/A for the quarter ended December
31, 2002, filed with the Commission on February 18, 2003.
3.2 Amended and Restated Bylaws of the Company are incorporated by
reference from Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1998, filed with
the Commission on February 16, 1999.
99.1 * Certificate provided pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, by the Company's Chief Executive Officer.
99.2 * Certificate provided pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, by the Company's Chief Financial Officer.
*Filed herewith.