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FORM 10-K

Commission File Number 1-14122

D.R. HORTON, INC.

Securities registered pursuant to Section 12(b) of the Act:

Securities registered Pursuant to Section 12(g) of the Act:

     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 þ     No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K     o.

      As of November 14, 2001, there were 76,909,368 shares of Common Stock, par value $.01 per share, issued and outstanding, and the aggregate market value of these shares held by non-affiliates of the registrant was approximately $1,647,739,000. Solely for purposes of this calculation, all directors and executive officers were excluded as affiliates of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s definitive Proxy Statement for the 2002 Annual Meeting of Stockholders are incorporated herein by reference in Part III.

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PART 1

ITEM 1.     BUSINESS

      D.R. Horton, Inc. (the “Company”) is a national homebuilder. As such, we construct and sell single-family homes in metropolitan areas of the Mid-Atlantic, Midwest, Southeast, Southwest and West regions of the United States. We offer high quality homes, designed principally for first-time and move-up home buyers. Our homes generally range in size from 1,000 to 5,000 square feet and range in price from $80,000 to $900,000. For the year ended September 30, 2001, we closed 21,371 homes with an average sales price approximating $200,700.

      We are one of the largest and most geographically diversified homebuilders in the United States, with operating divisions in 20 states and 38 markets as of September 30, 2001. The markets we operate in include: Albuquerque, Atlanta, Austin, Birmingham, Charleston, Charlotte, Chicago, Columbia, Dallas, Denver, Fort Myers/ Naples, Fort Worth, Greensboro, Greenville, Hilton Head, Houston, Jacksonville, Killeen, Las Vegas, Los Angeles, Louisville, Maryland-D.C., Miami/ West Palm Beach, Minneapolis/ St. Paul, Myrtle Beach, New Jersey, Orlando, Phoenix, Portland, Raleigh/ Durham, Richmond, Sacramento, Salt Lake City, San Antonio, San Diego, Tucson, Virginia-D.C. and Williamsburg.

      We build homes under the following names: D.R. Horton, Arappco, Cambridge, Continental, Dietz Crane, Dobson, Emerald, Mareli, Milburn, Regency, SGS, Torrey and Trimark.

      Our financial reporting segments consist of homebuilding and financial services. Our homebuilding operations comprise the most substantial part of our business, with more than 98% of consolidated revenues in fiscal 1999, 2000 and 2001. The homebuilding operations segment generates the majority of its revenues from the sale of completed homes with a lesser amount from the sale of land and lots. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance and closing services. Financial information, including revenue, pre-tax income and identifiable assets of both of our reporting segments are included in the consolidated financial statements.

      We were incorporated in Delaware on July 1, 1991, to acquire all of the assets and businesses of 25 predecessor companies, which were residential home construction and development companies owned or controlled by Donald R. Horton.

      Our principal executive offices are located at 1901 Ascension Blvd., Suite 100, Arlington, Texas 76006, our telephone number is (817) 856-8200, and our Internet website address is www.drhorton.com.

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Operating Strategy

      We believe that the following operating strategies have enabled us to achieve consistent growth and profitability:

      From 1978 to late 1987, excluding locations acquired in our 1998 merger with Continental Homes, our homebuilding activities were conducted in the Dallas/ Fort Worth area. We then instituted a policy of diversifying geographically, entering the following of our current markets, both through startup operations and acquisitions, in the years shown:

      We continually monitor the sales and margins achieved in each of the subdivisions in which we operate as part of our evaluation of the use of our capital. While we believe there are significant growth opportunities in our existing markets, we also intend to continue our policy of diversification by seeking to enter new markets. We believe our diversification strategy mitigates the effects of local and regional economic cycles and enhances our growth potential. Typically, we will not invest material amounts in real estate, including raw land, developed lots, models and speculative homes, or overhead in start-up operations in new markets, until such markets demonstrate significant growth potential and acceptance of our products.

      As an integral component of our operational strategy of continued expansion, we continually evaluate opportunities for strategic acquisitions. We believe that expanding our operations through the acquisition of existing homebuilding companies affords us several benefits not found in start-up operations. Such benefits include:

	•	Established land positions and inventories;
	•	Existing relationships with land owners, developers, subcontractors and suppliers;
	•	Brand name recognition; and
	•	Proven product acceptance by home buyers in the market.

      In evaluating potential acquisition candidates, we seek homebuilding companies that have an excellent reputation, a track record of profitability and a strong management team with an entrepreneurial orientation.

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      We decentralize our homebuilding activities to give more operating flexibility to our local division presidents. We have 45 separate operating divisions, some of which are in the same market area. Generally, each operating division consists of a division president, an office manager and staff, a sales manager and sales personnel, and a construction manager and construction superintendents. We believe that division presidents, who are intimately familiar with local conditions, make better decisions regarding local operations. Our division presidents receive performance bonuses based upon achieving targeted operating levels in their operating divisions.

      Each operating division is responsible for:

	•	Site selection, which involves

	—	A feasibility study;
	—	Soil and environmental reviews;
	—	Review of existing zoning and other governmental requirements; and
	—	Review of the need for and extent of offsite work required to meet local building codes.

	•	Negotiating lot option or similar contracts;
	•	Overseeing land development;
	•	Planning its homebuilding schedule;
	•	Selecting building plans and architectural schemes;
	•	Obtaining all necessary building approvals; and
	•	Developing a marketing plan.

      The corporate office controls key risk elements through centralized:

	•	Financing;
	•	Cash management;
	•	Risk management;
	•	Accounting and management reporting;
	•	Payment of subcontractors’ invoices;

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	•	Administration of payroll and employee benefits;
	•	Final approval of land and lot acquisitions;
	•	Capital allocation; and
	•	Oversight of inventory levels.

      We control our overhead costs by centralized administrative and accounting functions and by limiting the number of field administrative personnel and middle level management positions. We also minimize advertising costs by participating in promotional activities, publications and newsletters sponsored by local real estate brokers, mortgage companies, utility companies and trade associations.

      We control construction costs through the efficient design of our homes and by obtaining favorable pricing from certain subcontractors and national vendors based on the high volume of services and products they provide us. We also control construction costs by monitoring expenses on each house through our purchase order system. We control capital and overhead costs by monitoring our inventory levels through our management information systems.

Markets

      We conduct homebuilding activities in five geographic regions, consisting of:

      When entering new markets or conducting operations in existing markets, among the things we consider are:

	•	Regional economic conditions;
	•	Job growth;
	•	Land availability;
	•	Local land development process;
	•	Consumer tastes;
	•	Competition; and
	•	Secondary home sales activity.

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      Our homebuilding revenues by geographic region are:

Land Policies

      Typically, we acquire land and enter into lot option contracts to acquire developed building lots only after necessary “entitlements” have been obtained, i.e., when we have the right to begin development or construction. Before we acquire lots or tracts of land, we will, among other things, complete a feasibility study, which includes soil tests, independent environmental studies and other engineering work, and determine that all necessary zoning and other governmental entitlements required to develop and use the property for home construction have been acquired. Although we purchase and develop land primarily to support our own homebuilding activities, occasionally we sell lots and land to other developers and homebuilders.

      We also use lot option contracts, in which we purchase the right, but not the obligation, to buy building lots at predetermined prices on a takedown schedule commensurate with anticipated home closings. Lot option contracts generally are on a nonrecourse basis, thereby limiting our financial exposure to earnest money deposits given to property sellers. This enables us to control significant lot positions with a minimal capital investment and substantially reduces the risks associated with land ownership and development. At September 30, 2001, about 46% of our total lot position of 115,655 lots was under option contracts.

      A summary of our land/lot position at September 30, 2001 is:

      We limit our exposure to real estate inventory risks by:

	•	Generally commencing construction of homes under contract only after receipt of a satisfactory down payment and, where applicable, the buyer’s receipt of mortgage approval;
	•	Limiting the number of speculative homes (homes started without an executed sales contract) built in each subdivision;
	•	Closely monitoring local market and demographic trends, housing preferences and related economic developments, such as new job opportunities, local growth initiatives and personal income trends;
	•	Utilizing lot option contracts, where possible; and
	•	Limiting the size of acquired land parcels to smaller tracts of land.

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Construction

      Our home designs are prepared by architects in each of our markets to appeal to local tastes and preferences of the community. We also offer optional interior and exterior features to enhance the basic home design and to promote our sales efforts.

      Substantially all of our construction work is performed by subcontractors. Our construction supervisors monitor the construction of each home, participate in material design and building decisions, coordinate the activities of subcontractors and suppliers, subject the work of subcontractors to quality and cost controls and monitor compliance with zoning and building codes. Subcontractors typically are retained for a specific subdivision pursuant to a contract that obligates the subcontractor to complete construction at a fixed price. Agreements with our subcontractors and suppliers generally are negotiated for each subdivision. We compete with other homebuilders for qualified subcontractors, raw materials and lots in the markets where we operate.

      Construction time for our homes depends on the weather, availability of labor, materials and supplies, size of the home, and other factors. We typically complete the construction of a home within four months.

      We do not maintain significant inventories of construction materials, except for work in process materials for homes under construction. Typically, the construction materials used in our operations are readily available from numerous sources. We have contracts exceeding one year with certain suppliers of our building materials that are cancellable at our option with a 30 day notice. In recent years, we have not experienced any significant delays in construction due to shortages of materials or labor.

Marketing and Sales

      We market and sell our homes through commissioned employees and independent real estate brokers. We typically conduct home sales from sales offices located in furnished model homes in each subdivision. At September 30, 2001, we owned 942 model homes, which we generally do not offer for sale until the completion of a subdivision. Our sales personnel assist prospective home buyers by providing them with floor plans, price information, tours of model homes and the selection of options and other custom features. We train and inform our sales personnel as to the availability of financing, construction schedules, and marketing and advertising plans.

      In addition to using model homes, we typically build a limited number of speculative homes in each subdivision to enhance our marketing and sales activities. Construction of these speculative homes also is necessary to satisfy the requirements of relocated personnel and independent brokers, who often represent home buyers requiring a completed home within 60 days. We sell a majority of these speculative homes while they are under construction or immediately following completion. The number of speculative homes is influenced by local market factors, such as new employment opportunities, significant job relocations, growing housing demand and the length of time we have built in the market. Depending upon the seasonality of each market, we attempt to limit our speculative homes in each subdivision. At September 30, 2001, we averaged less than five speculative homes, in various stages of construction, in each subdivision.

      We advertise on a limited basis in newspapers and in real estate broker, mortgage company and utility publications, brochures, newsletters and on billboards. In addition, we use our Internet web site to market the location, price range, and availability of our homes. To minimize advertising costs, we attempt to operate in subdivisions in conspicuous locations that permit us to take advantage of local traffic patterns. We also believe that model homes play a significant role in our marketing efforts. Consequently, we expend significant effort in creating an attractive atmosphere in our model homes.

      Our sales contracts require a down payment of at least $500. The contracts include a financing contingency which permits customers to cancel if they cannot obtain mortgage financing at prevailing interest rates within a specified period, typically four to six weeks, and may include other contingencies, such as the sale of an existing home. We include a home sale in our sales backlog when the sales contract is signed and we have received the initial down payment. We do not recognize revenue upon the sale of a home until it is closed and title passes to the home buyer. The average period between the signing of a sales contract for a home and closing is approximately three to five months.

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Customer Service and Quality Control

      Our operating divisions are responsible for pre-closing, quality control inspections and responding to customers’ post-closing needs. We believe that prompt and courteous response to home buyers’ needs during and after construction reduces post-closing repair costs, enhances our reputation for quality and service, and ultimately leads to significant repeat and referral business from the real estate community and home buyers. We provide our home buyers with a limited one-year warranty on workmanship and building materials. The subcontractors who perform most of the actual construction also provide us with warranties on workmanship and are generally prepared to respond to us and the homeowner promptly upon request. In most cases, we supplement our one-year warranty by purchasing a ten-year limited warranty from a third party. To cover our potential warranty obligations, we accrue an estimated amount for future warranty costs.

Customer Financing

      We provide mortgage financing services principally to purchasers of homes we build and sell. CH Mortgage, a wholly-owned subsidiary, provides mortgage banking services in Arizona, Colorado, Florida, Georgia, Illinois, Maryland, Minnesota, Nevada, New Mexico, North and South Carolina, Texas, and Virginia. DRH Mortgage, LLC, a joint venture formed in 1998 with a third party, presently provides services in California. On a combined basis, our mortgage banking entities provided mortgage financing services for about 61% of the homes closed during the year ended September 30, 2001, in the markets served, compared to 51% during the year ended September 30, 2000. We anticipate expanding these mortgage activities to other markets in which we conduct homebuilding operations.

      In other markets where we currently do not provide mortgage financing, we work with a variety of mortgage lenders that make available to home buyers a range of conventional mortgage financing programs. By making information about these programs available to prospective home buyers and maintaining a relationship with such mortgage lenders, we are able to coordinate and expedite the entire sales transaction by ensuring that mortgage commitments are received and that closings take place on a timely and efficient basis.

Title Services

      Through our subsidiaries, Century Title, Custom Title, DRH Title Company of Texas, Ltd., DRH Title Company of Florida, Inc., DRH Title Company of Minnesota, Inc., Metro Title Company, Principal Title and Travis County Title Company, we serve as a title insurance agent by providing title insurance policies and closing services to purchasers of homes we build in the Austin, Dallas, Fort Worth, Houston, Maryland-D.C., Miami/ West Palm Beach, Minneapolis, Orlando, Phoenix, San Antonio and Virginia-D.C. markets. We assume no underwriting risk associated with these title policies.

Employees

      At September 30, 2001, we employed 4,342 persons, of whom 1,095 were sales and marketing personnel, 1,382 were executive, administrative and clerical personnel, 1,326 were involved in construction, and 539 worked in mortgage and title operations. The Company had fewer than 20 employees covered by collective bargaining agreements. Some of the subcontractors which we use are represented by labor unions or are subject to collective bargaining agreements. We believe that our relations with our employees and subcontractors are good.

Competition

      The single family residential housing industry is highly competitive and we compete in each of our markets with numerous other national, regional and local homebuilders, often with larger subdivisions designed, planned and developed by such homebuilders. Our homes compete on the basis of quality, price, design, mortgage financing terms and location.

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Governmental Regulation and Environmental Matters

      The housing, mortgage and title insurance industries are subject to extensive and complex regulations. We and our subcontractors must comply with various federal, state and local laws and regulations, including zoning, density and development requirements, building, environmental, advertising and consumer credit rules and regulations, as well as other rules and regulations in connection with our development, homebuilding, sales and financial services activities. These include requirements affecting the development process, as well as building materials to be used, building designs and minimum elevation of properties. Our homes are inspected by local authorities where required, and homes eligible for insurance or guarantees provided by the FHA and VA are subject to inspection by them. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.

      We also are subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment. The particular environmental laws for each site vary greatly according to location, environmental condition and the present and former uses of the site and adjoining properties. These environmental laws may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in certain environmentally sensitive regions or areas.

      Our internal mortgage activities and title insurance agencies must also comply with various federal and state laws, consumer credit rules and regulations and other rules and regulations unique to such activities. Additionally, mortgage loans and title activities originated under the FHA, VA, FNMA and GNMA are subject to rules and regulations imposed by those agencies.

ITEM 2.     PROPERTIES

      We own a 52,000 square foot office complex, consisting of three single-story buildings of steel and brick construction, located in Arlington, Texas, that serves as the principal executive offices and houses one of the Dallas/ Fort Worth divisions. We also own a 37,000 square foot one-story building in Atlanta, Georgia; a 22,864 square foot building in Lakeville, Minnesota; two buildings in Englewood, Colorado totaling 28,217 square feet; and a 16,000 square foot building in The Woodlands, Texas, that serve as division offices for some of our operating divisions. We lease approximately 438,000 square feet of space for our other operating divisions under leases expiring between November 2001 and March 2011.

ITEM 3.     LEGAL PROCEEDINGS

      We are a party to routine litigation incidental to our business. Such matters, if decided adversely to us, would not, in the opinion of management, have a material adverse effect upon our financial condition.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

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PART II

      Our common stock (the “Common Stock”) is listed on the New York Stock Exchange under the symbol “DHI”. The following table shows the high and low sales prices for the Common Stock for the periods indicated, as reported by the NYSE, adjusted for the 9% stock dividend of September 29, 2000, and the 11% stock dividend of March 23, 2001.

      As of November 14, 2001, the closing price was $26.02, and there were approximately 334 holders of record. We have declared quarterly cash dividends of four cents per share for fiscal 2000 and five cents per share for fiscal 2001.

      The declaration of cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, future earnings, cash flows, capital requirements, our general financial condition and general business conditions. We are required to comply with certain covenants contained in the bank agreements and Senior Note and Senior Subordinated Note indentures. The most restrictive of these requirements allows us to pay cash dividends on common stock in an amount, on a cumulative basis, not to exceed 50% of consolidated net income, as defined, subject to certain other adjustments. Pursuant to the most restrictive of these requirements, we had approximately $392.5 million available for the payment of dividends and the acquisition of our common stock at September 30, 2001.

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ITEM 6.     SELECTED FINANCIAL DATA

      The following selected consolidated financial data are derived from our Consolidated Financial Statements. The data should be read in conjunction with the Consolidated Financial Statements, related Notes thereto and other financial data elsewhere herein. These historical results are not necessarily indicative of the results to be expected in the future.

(1)	See Note C to the audited financial statements for details concerning acquisitions by the Company.
(2)	On April 20, 1998, D.R. Horton and Continental Homes Holding Corp. (“Continental”) consummated a merger pursuant to which Continental was merged into D.R. Horton, with 2.25 shares of D.R. Horton common shares being exchanged for each outstanding share of Continental. Approximately 15.5 million D.R. Horton common shares were issued to effect the merger. The merger with Continental was treated as a pooling of interests for accounting purposes. Therefore, all financial amounts have been restated as if Continental and D.R. Horton had been combined throughout the periods presented.
(3)	Cash dividends per common share represent those dividends declared to D.R. Horton shareholders, unadjusted for the merger with Continental.
(4)	In fiscal 1998, net income includes the net effect of a $7.1 million, net of tax, provision for costs associated with the merger with Continental. The earnings per share effects were $0.11 basic and $0.09 diluted.
(5)	All basic and diluted per share amounts have been restated to reflect the effects of the 9% stock dividend of September 29, 2000 and the 11% stock dividend of March 23, 2001.

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RESULTS OF OPERATIONS— CONSOLIDATED

      D.R. Horton, Inc. and subsidiaries (the “Company”) provide homebuilding services in 20 states and 38 markets through its 45 homebuilding divisions. Through its financial services operations, the Company also provides mortgage banking and title agency services in many of these same markets.

      Consolidated revenues increased 21.9%, to $4,455.5 million in 2001 from $3,653.7 million in 2000, primarily due to increases in both home sales and financial services revenues. The increase in home sales revenues was attributable in part to $103.0 million in revenues generated by Fortress-Florida, acquired in May 2001, and Emerald Builders, acquired in July 2001.

      Income before income taxes increased 31.9%, to $407.8 million in 2001 from $309.2 million in 2000. As a percentage of revenues, income before income taxes increased 0.7 percentage points, to 9.2%, from 8.5% in 2000, primarily due to an increase in the gross profit percentage achieved by the homebuilding segment, which was offset in part by write-downs to estimated fair value of the carrying amounts of the Company’s investments in start-up and emerging growth companies and the decline in the fair value of the Company’s interest rate swap agreements during the year.

      The consolidated provision for income taxes increased 30.1%, to $152.9 million in 2001, from $117.5 million in 2000, due to the corresponding increase in income before income taxes. The effective income tax rate decreased 0.5 percentage points, to 37.5% in 2001, from 38.0% in 2000, primarily due to changes in the overall effective state income tax rate.

      Consolidated revenues increased 15.8%, to $3,653.7 million in 2000 from $3,156.2 million in 1999 due to increases in both home and land/lot sales revenues, as well as financial services revenues.

      Income before income taxes increased 17.2%, to $309.2 million in 2000 from $263.8 million in 1999. As a percentage of revenues, income before income taxes increased 0.1 percentage point, to 8.5% from 8.4% in 1999, primarily due to an increase in homebuilding gross profit as a percentage of revenues.

      The consolidated provision for income taxes increased 13.0%, to $117.5 million in 2000 from $104.0 million in 1999, primarily due to the corresponding increase in income before income taxes. The effective income tax rate decreased 1.4 percentage points, to 38.0% in 2000 from 39.4% in 1999, primarily due to changes in the overall effective state income tax rate.

RESULTS OF OPERATIONS— HOMEBUILDING

      The following tables set forth certain operating and financial data for the Company’s homebuilding activities:

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Homes Closed

Net New Sales Contracts

Sales Backlog

      The Company’s market regions consist of the following markets:

      Revenues from home sales increased 22.7%, to $4,289.8 million (21,371 homes closed) in 2001 from $3,496.1 million (19,144 homes closed) in 2000. Revenues from home sales increased in four of the

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      The average selling price of homes closed during 2001 was $200,700, up 9.9% from $182,600 in 2000. The increase in average selling price was due to changes in the mix of homes closed and, with the strong housing demand, the Company’s ability to sell more custom features with its homes and to raise prices in some of its markets.

      The value of new net sales contracts increased 22.5%, to $4,502.6 million (22,179 homes) in 2001 from $3,676.4 million (19,223 homes) in 2000. The value of new net sales contracts increased in all of the Company’s five market regions, with percentage increases ranging from 2.4% in the Mid-Atlantic to 45.7% in the West. The overall increase in the value of new net sales contracts was due to strong housing demand throughout the majority of the Company’s markets, as well as sales achieved by Fortress-Florida, acquired in May 2001, and Emerald Builders, acquired in July 2001. In markets where the Company operated throughout both fiscal years, the value of new net sales contracts increased 19.5%, to $4,391.0 million, and the number of new net sales contracts increased 12.0%, to 21,518 homes. The average price of a new net sales contract in 2001 was $203,000, up 6.1% over the $191,300 average in 2000. The increase in average selling price was due to changes in the mix of homes sold and, with the strong housing demand, the Company’s ability to sell more custom features with its homes and to raise prices in some of its markets.

      At September 30, 2001, the Company’s backlog of sales contracts was $1,933.8 million (9,263 homes), up 25.8% from $1,536.9 million (7,388 homes) at September 30, 2000. In markets where the Company operated at the end of both fiscal years, the Company’s backlog of sales contracts increased 14.4%, to $1,758.1 (8,229 homes). The average sales price of homes in backlog was $208,800 at September 30, 2001, up 0.4% from the $208,000 average at September 30, 2000.

      Cost of sales increased by 19.9%, to $3,527.1 million in 2001 from $2,941.1 million in 2000. The increase in cost of sales was primarily attributable to the increase in revenues. Cost of home sales as a percentage of home sales revenues declined 1.0 percentage point, to 80.4% in 2001, from 81.4% in 2000, as the Company continued to benefit from increased prices, savings achieved in its national purchasing program and lower material costs. Total homebuilding cost of sales was 80.4% of total homebuilding revenue, down 1.2 percentage points from 81.6% in 2000.

      Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 19.9%, to $432.0 million in 2001 from $360.4 million in 2000. As a percentage of revenues, SG&A expenses decreased to 9.9% in 2001 from 10.0% in 2000, primarily as a result of a 0.2 percentage point decline in salaries and benefits expense as a percentage of revenues.

      Interest expense associated with homebuilding activities decreased to $8.8 million in 2001 from $10.2 million in 2000. As a percentage of homebuilding revenues, homebuilding interest expense decreased to 0.2% in 2001 from 0.3% in 2000. Throughout 2001, inventory under construction or development grew at a more rapid pace than interest-bearing debt. Therefore, a larger proportion of total interest incurred was capitalized to inventory than in 2000. The Company follows a policy of capitalizing interest only on inventory under construction or development. During both periods, the Company expensed the portion of incurred interest and other financing costs which could not be charged to inventory. Capitalized interest and other financing costs are included in cost of sales at the time of home closings.

      Other expense associated with homebuilding activities was $34.7 million in 2001, as compared to $2.1 million of other income in 2000. The expense in 2001 is primarily due to a $22.9 million write-down to estimated fair value of the carrying amounts of the Company’s investments in start-up and emerging growth companies and a $13.8 million decline in the fair value of the Company’s interest rate swap agreements.

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      Revenues from home sales increased 14.4%, to $3,496.1 million (19,144 homes closed) in 2000 from $3,055.0 million (18,395 homes closed) in 1999. Revenues from home sales increased in all of the Company’s market regions, with percentage increases ranging from 8.5% in the Southeast region to 28.7% in the Midwest region. The increases in both revenues and homes closed were due to strong housing demand and the increases attributable to the acquisition of Cambridge Homes in January 1999. In markets where the Company operated throughout both twelve-month periods, home sales revenues increased by 12.3%, to $3,426.6 million, and the number of homes closed increased 2.4%, to 18,826 homes.

      The average selling price of homes closed during 2000 was $182,600, up 9.9% from $166,100 in 1999. The increase in average selling price was due to changes in the mix of homes closed and, with the strong housing demand, the Company’s ability to sell more custom features with its homes and to raise prices to cover increased costs.

      The value of new net sales contracts increased 12.6%, to $3,676.4 million (19,223 homes) in 2000 from $3,266.2 million (18,911 homes) in 1999. The value of new net sales contracts increased in four of the Company’s five market regions, with percentage increases ranging from 0.5% in the Midwest to 35.4% in the West. The value of new net sales contracts declined 4.3% in the Mid-Atlantic region. The overall increase in the value of new net sales contracts was due in part to sales achieved by Cambridge Homes, acquired in January 1999. In markets where the Company operated throughout both fiscal years, the value of new net sales contracts increased 10.6%, to $3,607.7 million, and the number of new net sales contracts increased 0.4%, to 18,976 homes. The average price of a new net sales contract in 2000 was $191,300, up 10.8% over the $172,700 average in 1999. The increase in average selling price was due to changes in the mix of homes sold and, with the strong housing demand, the Company’s ability to sell more custom features with its homes and to raise prices to cover increased costs.

      At September 30, 2000, the Company’s backlog of sales contracts was $1,536.9 million (7,388 homes), up 13.3% from the comparable amount at September 30, 1999. The average sales price of homes in sales backlog was $208,000 at September 30, 2000, up 12.1% from the $185,600 average at September 30, 1999.

      Cost of sales increased by 15.4%, to $2,941.1 million in 2000 from $2,548.5 million in 1999. The increase in cost of sales was primarily attributable to the increase in revenues. Cost of home sales as a percentage of home sales revenues declined 0.2 percentage points, to 81.4% in 2000 from 81.6% in 1999, as higher costs were more than offset by increased prices and savings achieved in our national purchasing program. Cost of land/lot sales decreased to 87.6% of land/lot sales revenues in 2000, from 88.2% in 1999. Total homebuilding cost of sales was 81.6% of total homebuilding revenue, down 0.1 percentage point from 81.7% in 1999.

      Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 16.4%, to $360.4 million in 2000 from $309.6 million in 1999. As a percentage of revenues, SG&A expenses increased to 10.0% in 2000 from 9.9% in 1999.

      Interest expense associated with homebuilding activities decreased to $10.2 million in 2000, from $12.0 million in 1999. As a percentage of homebuilding revenues, homebuilding interest expense decreased to 0.3% in 2000 from 0.4% in 1999. Throughout 2000, inventory under construction or development grew at a more rapid pace than interest-bearing debt. Therefore, a larger proportion of total interest incurred was capitalized to inventory than in 1999. The Company follows a policy of capitalizing interest only on inventory under construction or development. During both periods, we expensed the portion of incurred interest and other financing costs which could not be charged to inventory. Capitalized interest and other financing costs are included in cost of sales at the time of home closings.

RESULTS OF OPERATIONS— FINANCIAL SERVICES

      Financial services include mortgage financing and title insurance agency and closing services, primarily related to purchases of homes built and sold by the Company. Mortgage services are provided in Arizona, California, Colorado, Florida, Georgia, Illinois, Maryland, Minnesota, Nevada, New Mexico, North and South Carolina, Texas and Virginia. Title agency and closing services are provided in Arizona, Florida,

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      Revenues from the financial services segment increased 45.3%, to $72.0 million in 2001 from $49.5 million in 2000. The increase in financial services revenues was due to the continued expansion of the Company’s mortgage loan and title services provided to customers of the Company’s homebuilding segment. These activities are being expanded to additional markets served by the homebuilding segment. General and administrative expenses associated with financial services increased 33.6%, to $47.4 million in 2001 from $35.5 million in 2000. As a percentage of financial services revenues, general and administrative expenses decreased by 5.7 percentage points to 65.9% in 2001 from 71.6% in 2000, primarily from efficiencies realized with the increase in revenues generated in markets entered in 2000.

      Revenues from the financial services segment increased 32.9% to $49.5 million in 2000 from $37.3 million in 1999. The increase in financial services revenues was due to the continued 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 43.5%, to $35.5 million in 2000 from $24.7 million in 1999. As a percentage of financial services revenues, general and administrative expenses increased by 5.3 percentage points to 71.6% in 2000 from 66.3% in 1999, due primarily to startup expenses in new markets with limited revenues.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

      At September 30, 2001, the Company had available cash and cash equivalents of $239.3 million. Inventories (including finished homes, construction in progress, and developed residential lots and other land) at September 30, 2001, had increased by $613.3 million from September 30, 2000, due to a general increase in business activity, the acquisitions of Fortress-Florida and Emerald Homes and the expansion of operations in the Company’s market areas. The inventory increase was financed largely by issuing senior notes, senior subordinated notes and senior convertible notes, and by retaining earnings. The amount outstanding on the revolving credit facility was reduced by $192 million during the year. The Company’s ratio of homebuilding notes payable to total capital at September 30, 2001, increased 1.4 percentage points, to 57.6% from 56.2% at September 30, 2000. After an assumed application of excess cash of $157.3 million to reduce debt, the ratio of homebuilding notes payable to total capital declined 0.9 percentage points, to 55.3%. The stockholders’ equity to total assets ratio decreased 1.8 percentage points, to 34.2% at September 30, 2001, from 36.0% at September 30, 2000.

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      The Company has an $825 million, unsecured revolving credit facility, consisting of a $775 million four-year revolving loan and a $50 million four-year letter of credit facility that matures in April 2002. Additionally, the Company has another $45 million standby letter of credit agreement. The Company is currently negotiating the terms of a new four-year unsecured revolving credit facility that is expected to close in January 2002. At September 30, 2001, the Company had outstanding homebuilding debt of $1,701.7 million. Under the debt covenants associated with the revolving credit facility, at September 30, 2001, the Company had additional homebuilding borrowing capacity of $746.8 million. The Company has entered into multi-year interest rate swap agreements, aggregating a notional amount of $200 million, that fix the interest rate on a portion of the variable rate revolving credit facility.

      In April 2001, a universal shelf registration statement for an aggregate amount of $750 million was filed. It was declared effective by the Securities and Exchange Commission on April 20, 2001. Under the new shelf registration statement, on May 11, 2001, the Company issued $381.1 million (at maturity) in zero coupon convertible senior notes due May 11, 2021, for gross proceeds of $200 million. Each $1,000 note was sold for $524.78, providing a yield-to-maturity of 3.25% per year. The notes are convertible into the Company’s common stock at any time, if the sale price of the common stock exceeds specified thresholds or in other specified instances, at the rate of approximately 17.5 shares per $1,000 face amount at maturity. The conversion ratio equates to an initial conversion price of $30.00 per share. Holders have the option to require the Company to repurchase the notes on any of the second, seventh or twelfth anniversary dates from the issue date for the initial issue price plus accrued yield to the purchase date. The Company must satisfy any notes submitted for repurchase on the second anniversary date in cash. Any notes submitted for repurchase on the seventh or twelfth anniversary dates may be settled in any combination of cash and/or the Company’s common stock, at the Company’s option. The Company will have the option to redeem the notes, in cash, at any time after the second anniversary date of the notes for the initial issue price plus accrued yield to redemption. The Company will pay contingent interest on the notes during specified six-month periods beginning on May 12, 2003, if the market price of the notes exceeds specified levels.

      In March 2001, the Company issued $200 million 9 3/8% Senior Subordinated Notes, due March 15, 2011. In August 2001, the Company issued $200 million 7 7/8% Senior Notes due August 15, 2011. The Company used the proceeds from these notes and the zero coupon convertible senior notes to repay outstanding debt under its revolving credit facility and for general corporate purposes.

      In June 2001, the Company issued a post-effective amendment to an existing registration statement, which increased to 9.0 million the number of shares of the Company’s common stock available for issuance as consideration for acquisitions. The amendment was declared effective by the Securities and Exchange Commission on June 18, 2001.

      On May 1, 2001, the Company acquired the assets of Fortress-Florida, Inc. (Fortress), a wholly owned subsidiary of The Fortress Group, Inc., for $28.7 million. Fortress assets, primarily inventories, amounted to approximately $47.1 million. Total liabilities assumed amounted to approximately $24.3 million, including notes payable of $17.4 million, which were paid at closing. On July 17, 2001, the Company completed the acquisition of the assets of Emerald Builders (Emerald), a privately held homebuilder based in Houston, Texas. In the transaction, the Company issued approximately 1.0 million shares of common stock and paid $31.6 million in cash. Emerald’s assets, primarily inventories, amounted to approximately $170.4 million. Total liabilities assumed amounted to approximately $137.0 million, including notes payable of $110.6 million, most of which were paid at closing.

      The Company examines the carrying value of its excess cost over net assets acquired (goodwill) and other intangible assets as current events and circumstances warrant to determine whether there are any impairment losses. If indicators of impairment were present in intangible assets used in operations and future cash flows were not expected to be sufficient to recover the assets’ carrying amount, an impairment loss would be charged to expense in the period identified. No event has been identified that would indicate an impairment of the value of goodwill recorded in the consolidated financial statements.

      On October 23, 2001, the Company announced that it has signed a definitive agreement under which Schuler Homes, Inc. would merge into D. R. Horton, Inc. through a cash and stock transaction valued at

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      At September 30, 2001, the financial services segment had mortgage loans held for sale of $222.8 million and loan commitments for $143.8 million at fixed rates. The Company hedges the interest rate market risk on these mortgage loans held for sale and loan commitments through the use of best-efforts whole loan delivery commitments, mandatory forward commitments to sell mortgage-backed securities and the purchase of options on financial instruments.

      The financial services segment has a $200 million, one-year bank warehouse facility that matures on August 13, 2002, and is secured by mortgage loans held for sale. The warehouse facility is not guaranteed by the parent company. As of September 30, 2001, $182.6 million had been drawn under this facility. All mortgage company activities are financed under the warehouse facility. The warehouse facility contains financial covenants relating to minimum net worth and maximum leverage with which the mortgage company is in compliance.

      The Company’s rapid growth and acquisition strategy require significant amounts of cash. It is anticipated that future home construction, lot and land purchases and acquisitions will be funded through internally generated funds and existing and future credit facilities. At September 30, 2001, under the currently effective shelf registration statements, the Company has approximately 8.0 million shares issuable to effect, in whole or in part, possible future acquisitions and the capacity to issue new debt or equity securities amounting to $350 million. In the future, the Company intends to continue to maintain effective shelf registration statements that will facilitate access to the capital markets.

      During fiscal 2001, the Company’s Board of Directors declared one quarterly cash dividend of $0.04 per common share and three quarterly cash dividends of $0.05 per common share, the last of which was paid on August 22, 2001 to stockholders of record on August 8, 2001. At September 30, 2001, the Company has $63.1 million authorized for stock repurchases and $100.0 million authorized for dept repurchases.

      In 1999 and 2000, the Company entered into three separate limited partnership agreements with the purpose of investing in start-up and emerging growth companies whose technology and business plans have the potential of permitting the Company to leverage its size, expertise and customer base in the homebuilding industry. The Company originally authorized investment of up to $125 million in such companies over a four-year period. In January 2001, the original $125 million authorization was reduced to the $31.3 million that had been invested in such companies as of that date. The investments are concentrated in e-commerce businesses that serve the homebuilding, real estate and financial service industries, as well as in businesses whose strategic focus allows for the diversification of the Company’s operations. As of September 30, 2001, the carrying value of the Company’s investments in such companies, reported in homebuilding other assets, amounted to $10.2 million.

      Except for the Schuler merger, ordinary expenditures for the construction of homes, the acquisition of land and lots for development and sale of homes, at September 30, 2001, the Company had no material commitments for capital expenditures.

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INFLATION

      The Company and the homebuilding industry in general, may be adversely affected during periods of high inflation, primarily because of higher land and construction costs. Inflation also increases the Company’s financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. The Company attempts to pass through to its customers any increases in its costs through increased sales prices and, to date, inflation has not had a material adverse effect on the Company’s results of operations. However, there is no assurance that inflation will not have a material adverse impact on the Company’s future results of operations.

SAFE HARBOR STATEMENT

      Certain statements contained 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 made by Company officials to analysts, stockholders and the press in the course of presentations about the Company, may be construed as “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Any or all of the forward-looking statements included in this report and in any other reports or public statements of the Company 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 cautionary discussion of risks and uncertainties relevant to our business includes factors we believe could adversely affect us. Other factors beyond those listed below could also adversely affect us.

	•	General Economic, Real Estate and Other Conditions—The homebuilding industry is cyclical and is significantly affected by changes in general and local economic conditions, such as employment levels, availability of financing for home buyers, interest rates, consumer confidence and housing demand. Any oversupply of alternatives to new homes, such as rental properties and used homes, could depress new home prices and reduce our margins on the sale of new homes. Homebuilders are also subject to risks related to the availability and cost of land suitable for homebuilding, the availability and cost of materials and labor, adverse weather conditions which can cause delays in construction schedules and cost overruns.
	•	Increases in Interest Rates or Decreases in Mortgage Availability—Virtually all of our customers finance their homes through lenders providing mortgage financing. Any future increases in interest rates or decreases in the availability of mortgage financing could depress the market for new homes by making our homes less affordable.
	•	Governmental Regulations and Environmental Matters—We are subject to extensive and complex regulations that affect the development and homebuilding process, including zoning, density and building standards. Such regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the costs of development or homebuilding. Laws and regulations relating to the protection of the environment can cause delays, increased costs of compliance and prohibitions or restrictions of development and homebuilding activity in environmentally sensitive areas.
	•	Substantial Debt—We have a significant amount of debt. The amount of our debt could limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service requirements or other requirements. It could also limit our flexibility in planning for, or reacting to, changes in our business and make us more vulnerable in the event of a downturn in our business or in general economic conditions.
	•	Competitive Conditions—The homebuilding industry is very competitive. In each of the markets we serve, we compete with other homebuilders for home buyers, desirable properties, financing, raw materials and skilled labor. Competitive conditions in the homebuilding industry could result in difficulty in acquiring suitable land at acceptable prices, the need for increased selling incentives, lower sales or delays in construction.

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	•	Availability of Capital—Our ability to grow our business and operations profitably is substantially dependent upon our ability to obtain capital from the sale of equity or debt or additional bank borrowings. Increases in interest rates, changes in our debt ratings by the national credit rating agencies, concerns by potential investors about the market or the economy, changing lending objectives of financial institutions, or further consolidation of financial institutions that lend to the homebuilding industry could increase our costs of borrowing or reduce the availability of funds necessary for us to achieve our strategic growth objectives. Moreover, the indentures for our outstanding debt contain provisions that may restrict the debt we may incur in the future.
	•	Growth Strategies—Since 1993, we have acquired and successfully integrated many homebuilding companies. In the future, we may acquire additional companies. Our prospects may be affected by our ability to successfully identify and integrate future acquisitions. Our prospects may also be affected by our ability to implement successfully our growth strategies in the markets we currently serve.

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.

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ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company is subject to interest rate risk on its long term debt. The Company monitors its exposure to changes in interest rates and utilizes both fixed and variable rate debt. For fixed rate debt, changes in interest rates generally affect the value of the debt instrument, but not the Company’s earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the fair value of the debt instrument, but may affect the Company’s future earnings and cash flows. The Company has mitigated its exposure to changes in interest rates on its variable rate bank debt by entering into interest rate swap agreements to obtain a fixed interest rate for a portion of the variable rate borrowings. The Company generally does not have an obligation to prepay fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value would not have a significant impact on the Company’s fixed-rate debt until such time as the Company is required to refinance, repurchase or repay such debt.

      The Company’s interest rate swaps were not designated as hedges under Statement of Financial Accounting Standards No. 133 when it was adopted on October 1, 2000. Since their maturities and other terms did not match the related debt, they were determined to be ineffective hedges (as defined by the Statement). Therefore, the Company is exposed to market risk associated with changes in the fair values of the swaps, since any such changes must be reflected in the Company’s income statements.

      The Company’s financial services segment is exposed to interest rate risk associated with its mortgage loan production activities. 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 commitments to sell mortgage-backed securities are designated as fair value hedges of the risk of changes in the overall fair value of funded loans. The effectiveness of the fair value hedge is continuously monitored and any ineffectiveness, which for the year ended September 30, 2001, 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 commitments to sell mortgage-backed securities and the 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 September 30, 2001, total forward commitments to mitigate interest rate risk related to funded loans and IRLC’s were approximately $160.5 million, the duration of which was less than six months.

      The following table sets forth, as of September 30, 2001, the Company’s long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value. In addition, the table sets forth the notional amounts, weighted average interest rates and estimated fair market value of the Company’s interest rate swaps.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors

      We have audited the accompanying consolidated balance sheets of D.R. Horton, Inc. and subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of D.R. Horton, Inc. and subsidiaries at September 30, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States.

Fort Worth, Texas

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ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

D.R. HORTON, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

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D.R. HORTON, INC. AND SUBSIDIARIES