FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the Quarterly Period Ended December 31, 1997 ----------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the Transition Period From To ------------------ ------------------- Commission file number 1-14122 ------- D.R. HORTON, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 75-2386963 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1901 Ascension Blvd., Suite 100, Arlington, Texas 76006 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (817) 856-8200 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $.01 par value -- 37,352,713 shares as of January 26, 1998 This Report contains 14 pages. ---- INDEX D.R. HORTON, INC. PART I. FINANCIAL INFORMATION. Page ITEM 1. Financial Statements. Consolidated Balance Sheets--December 31, 1997 and September 30, 1997. 3 Consolidated Statements of Income--Three Months Ended December 31, 1997 and 1996. 4 Consolidated Statement of Stockholders' Equity--Three Months Ended December 31, 1997. 5 Consolidated Statements of Cash Flows--Three Months Ended December 31, 1997 and 1996. 6 Notes to Consolidated Financial Statements. 7-8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. 9-12 PART II. OTHER INFORMATION. Item 6. Exhibits and Reports on Form 8-K. 13 SIGNATURES. 14 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, September 30, 1997 1997 ------------ ------------- (In thousands) (Unaudited) ASSETS Cash $ 40,362 $ 43,984 Inventories: Finished homes and construction in progress 379,779 342,911 Residential lots - developed and under development 271,896 260,198 Land held for development 1,482 1,482 ------- -------- 653,157 604,591 Property and equipment (net) 12,892 13,124 Earnest money deposits and other assets 28,617 29,502 Excess of cost over net assets acquired (net) 30,049 28,593 ------- ------- $765,077 $719,794 ======= ======= LIABILITIES Accounts payable $ 53,640 $ 55,499 Accrued expenses and customer deposits 46,137 46,200 Notes payable 392,078 355,315 ------- ------- 491,855 457,014 STOCKHOLDERS' EQUITY Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued - - Common stock, $.01 par value, 100,000,000 shares authorized, 37,352,663 at December 31, 1997, and 37,319,184 at September 30, 1997, issued and outstanding. 374 373 Additional capital 211,096 210,742 Retained earnings 61,752 51,665 ------- ------- 273,222 262,780 ------- ------- $765,077 $719,794 ======= ======= See accompanying notes to consolidated financial statements. -3- D. R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Ended December 31, ----------------------- 1997 1996 -------- -------- (In thousands, except net income per share) (Unaudited) Revenues $231,152 $144,381 Cost of sales 187,212 118,036 ------- ------- 43,940 26,345 Selling, general and administrative expense 25,703 15,117 ------- ------- Operating income 18,237 11,228 Other: Interest expense (1,169) (784) Other income 726 715 ------- ------- (443) (69) ------- ------- INCOME BEFORE INCOME TAXES 17,794 11,159 Provision for income taxes 6,960 4,352 ------- ------- NET INCOME $ 10,834 $ 6,807 ======= ======= Net income per share Basic $ 0.29 $ 0.21 ======= ======= Diluted $ 0.28 $ 0.21 ======= ======= Weighted average number of shares of common stock and common stock equivalents outstanding Basic 37,337 32,375 ======= ======= Diluted 38,789 33,003 ======= ======= See accompanying notes to consolidated financial statements. -4- D. R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Total Common Additional Retained Stockholders' Stock Capital Earnings Equity ------------------------------------------ (In thousands) (Unaudited) Balances at October 1, 1997 $373 $210,742 $51,665 $262,780 Net income - - 10,834 10,834 Issuance under D.R. Horton, Inc. employee benefit plans - 2 - 2 Exercise of stock options 1 352 - 353 Cash dividends - - (747) (747) ------------------------------------------ Balances at December 31, 1997 $374 $211,096 $61,752 $273,222 ========================================== See accompanying notes to consolidated financial statements. -5- D. R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended December 31, ----------------------- 1997 1996 -------- -------- (In thousands) (Unaudited) OPERATING ACTIVITIES Net income $ 10,834 $ 6,807 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,559 739 Expense associated with issuance of stock under employee benefit plans 115 133 Changes in operating assets and liabilities: Increase in inventories (49,143) (30,262) Decrease (increase) in earnest money deposits and other assets 772 (1,750) Decrease in accounts payable, accrued expenses and customer deposits (2,037) (4,167) ------- ------- NET CASH USED IN OPERATING ACTIVITIES (37,900) (28,500) ------- ------- INVESTING ACTIVITIES Net purchase of property and equipment (830) (501) Net cash paid for acquisitions (1,851) (17,737) ------- ------- NET CASH USED IN INVESTING ACTIVITIES (2,681) (18,238) ------- ------- FINANCING ACTIVITIES Proceeds from notes payable 54,009 46,372 Repayment of notes payable (16,658) (17,178) Proceeds from exercise of stock options 355 202 Payment of cash dividends (747) - ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 36,959 29,396 ------- ------- INCREASE (DECREASE) IN CASH (3,622) (17,342) Cash at beginning of period 43,984 32,467 ------- ------- Cash at end of period $ 40,362 $ 15,125 ======= ======= Supplemental cash flow information: Interest paid $ 10,791 $ 3,578 ======= ======= Income taxes paid $ 6,273 $ 4,505 ======= ======= See accompanying notes to consolidated financial statements. -6- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) December 31, 1997 NOTE A - BASIS OF PRESENTATION The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. (the "Company") and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended December 31, 1997, are not necessarily indicative of the results that may be expected for the year ending September 30, 1998. NOTE B - NET INCOME PER SHARE Basic net income per share for the three month periods ended December 31, 1997 and 1996, is based on the weighted average number of shares of common stock outstanding. Diluted net income per share is based on the weighted average number of shares of common stock and dilutive common stock equivalents outstanding. NOTE C - PROVISIONS FOR INCOME TAXES Deferred tax liabilities and assets, arising from temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, consist primarily of differences in depreciation, warranty costs and inventory cost capitalization methods and were, as of December 31, 1997, not significant. The provisions for income tax expense for the three month periods ended December 31, 1997 and 1996, are based on the effective tax rates estimated to be in effect for the respective years. The deferred income tax provisions were not significant in either period. The difference between income tax expense and tax computed by applying the statutory Federal income tax rate to income before income taxes is due primarily to the effect of applicable state income taxes. NOTE D - INTEREST Three months ended December 31, ------------------ 1997 1996 -------- ------- Interest costs are (in thousands): Capitalized interest, beginning of period $17,995 $11,042 Interest incurred 8,292 3,872 Interest expensed: Directly (1,169) (784) Amortized to cost of sales (3,851) (2,057) ------ ------ Capitalized interest, end of period $21,267 $12,073 ======= ======= -7- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) December 31, 1997 NOTE E - PENDING ACQUISITIONS On December 18, 1997, D.R. Horton, Inc. and Continental Homes Holding Corp. announced that they had entered into a definitive agreement and plan of merger pursuant to which Continental would be merged into Horton. The ratio of Horton shares to be exchanged for Continental shares will be determined based on the average of Horton's closing stock prices for fifteen randomly selected trading days within the thirty consecutive trading days ending five days prior to the closing date. The merger with Continental will be treated as a pooling of interests for accounting purposes. On January 14, 1998, D.R. Horton, Inc. announced an agreement in principle to acquire the outstanding stock of C. Richard Dobson Builders, Inc. (Dobson), and certain of its affiliated companies, for the lesser of $22.9 million or 1.5 times Dobson's book value at the time of the acquisition. In addition, D.R. Horton will repay Dobson's net debt, which approximated $45.0 million at August 31, 1997. This transaction will be treated as a purchase for accounting purposes. Both these transactions are expected to close during the Company's second fiscal quarter. NOTE F - SUMMARIZED FINANCIAL INFORMATION The 8 3/8% senior notes payable, due June, 2004, in the aggregate principal amount of $150,000,000, are fully and unconditionally guaranteed, on a joint and several basis, by all the Company's direct and indirect subsidiaries other than certain inconsequential subsidiaries. Each of the guarantors is a wholly-owned subsidiary of the Company. Summarized financial information of the Company and its subsidiaries is presented below. Separate financial statements and other disclosures concerning the guarantor subsidiaries are not presented because management has determined that they are not material to investors. As of and for the period ended: (In thousands) December 31, 1997 (Unaudited) D.R. Horton, Guarantor Nonguarantor Intercompany Inc. Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------ ------------ ------------ Total assets............ $663,954 $470,890 $ 1,375 ($371,142) $765,077 Total liabilities....... 435,648 426,180 334 (370,307) 491,855 Revenues................ 68,336 162,816 418 (418) 231,152 Gross profit............ 10,490 33,450 342 (342) 43,940 Net income.............. 9,564 20,005 265 (19,000) 10,834 December 31, 1996 (Unaudited) D.R. Horton, Guarantor Nonguarantor Intercompany Inc. Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------ ------------ ------------ Total assets............ $383,090 $233,960 $ 1,648 ($172,844) $445,854 Total liabilities....... 226,083 206,361 599 (171,969) 261,074 Revenues................ 54,509 89,872 366 (366) 144,381 Gross profit............ 9,887 16,458 312 (312) 26,345 Net income.............. 3,614 11,307 230 (8,344) 6,807 September 30, 1997 D.R. Horton, Guarantor Nonguarantor Intercompany Inc. Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------ ------------ ------------ Total assets............ $619,586 $456,323 $ 2,065 ($358,180) $719,794 Total liabilities....... 395,803 417,284 1,272 (357,345) 457,014 Revenues................ 286,568 550,712 1,513 (1,513) 837,280 Gross profit............ 51,485 100,454 1,226 (1,226) 151,939 Net income.............. 34,521 70,942 909 (70,168) 36,204 -8- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The following tables set forth certain operating and financial data for the Company: Percentages of Revenue --------------- Three Months Ended December 31, --------------- 1997 1996 ---- ---- Costs and expenses: Cost of sales 81.0% 81.8% Selling, general and administrative expense 11.1 10.5 Interest expense 0.5 0.5 ---- ---- Total costs and expenses 92.6 92.8 Other (income) (0.3) (0.5) ---- ---- Income before income taxes 7.7 7.7 Income taxes 3.0 3.0 ---- ---- Net income 4.7% 4.7% ==== ==== New sales contracts, net Homes in of cancellations Home closings sales backlog ---------------- ------------- ------------- Three Three Months Ended Months Ended As of December 31, December 31, December 31, ---------------- ------------- ------------- 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- Mid-Atlantic (Maryland, New Jersey, North and South Carolina, Virginia) 296 108 250 116 380 214 Midwest (Illinois, Kansas, Minnesota, Missouri, Ohio) 131 89 106 105 205 168 Southeast (Alabama, Florida, Georgia, Tennessee) 425 100 436 130 403 134 Southwest (Arizona, New Mexico, Texas) 334 265 353 333 426 421 West (California, Colorado, Nevada, Utah) 354 189 285 171 489 271 ----- ----- ----- ----- ----- ----- Totals 1,540 751 1,430 855 1,903 1,208 ===== ===== ===== ===== ===== ===== -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Three Months Ended December 31, 1997 Compared to Three Months Ended December 31, 1996 Revenues for the three months ended December 31, 1997, increased by 60.1%, to $231.2 million, from $144.4 million for the comparable period of 1996. The number of homes closed by the Company increased by 67.3% to 1,430 homes in the three months ended December 31, 1997, from 855 homes in the same period of 1996. Percentage increases in home closings ranging from 1.0% to 260.8% were achieved in the Company's market regions. The increases in both revenues and homes closed were due in part to the Torrey Group (Torrey), which was acquired in February, 1997. In the three months ended December 31, 1997, Torrey closed 441 homes, with revenues totalling $64.2 million. Torrey comprised 30.8% of the homes closed in the period, and 27.8% of the revenues generated. Excluding Torrey, revenues increased by 15.6%, to $167.0 million in the three months ended December 31, 1997. The average selling price of homes closed in the three months ended December 31, 1997, was $161,400, a decrease of 4.3% from the $168,700 selling price in the comparable period of 1996. The decrease in the average home selling price was due primarily to Torrey, whose home closings were at lower price points. New net sales contracts increased 105.1%, to 1,540 homes for the three months ended December 31, 1997, from 751 homes for the three months ended December 31, 1996. The dollar amount of new net sales contracts increased 98.8%, to $258.0 million. Percentage increases in new net sales contracts ranging from 26.0% to 325.0% were achieved in the Company's market regions. Torrey had 461 home sales contracts during the current period. Excluding Torrey, sales contracts were 1,079 homes in the current three-month period, a 43.7% increase over 1996. The Company was operating in 373 subdivisions at December 31, 1997, compared to 225 subdivisions at December 31, 1996. At December 31, 1997, the Company's backlog of sales contracts was 1,903 homes, a 57.5% increase over comparable figures at December 31, 1996. At December 31, 1997, Torrey had 433 homes in sales backlog. Excluding Torrey, the sales backlog at December 31, 1997, was 1,470 homes, a 21.7% increase over 1996. Cost of sales increased by 58.6%, to $187.2 million in the three months ended December 31, 1997, from $118.0 million in the comparable period of 1996. The increase was attributable to the increase in revenues. As a percentage of revenues, cost of sales for the quarter decreased to 81.0% in 1997 from 81.8% in 1996. The decrease in cost of sales as a percentage of revenues is due to an overall improved sales environment and the effect of purchase accounting adjustments requiring the Company to increase its basis in the inventories acquired with the Trimark Communities, L.L.C. (Trimark) and SGS Communities, Inc. (SGS) acquisitions in the 1996 period. Selling, general and administrative (SG&A) expense increased by 70.0%, to $25.7 million in the three months ended December 31, 1997, from $15.1 million in the comparable period of 1996. As a percentage of revenues, SG&A expense increased to 11.1% in 1997, from 10.5% in 1996. This increase was caused by the rapid growth of the Company and by continued absorption of overhead associated with Torrey. Interest expense amounted to $1.2 million in the three months ended December 31, 1997, compared to $0.8 million in the comparable period of 1996. The Company follows a policy of capitalizing interest only on inventory under construction or development. During the three months ended December 31, 1997 and 1996, the Company expensed a portion of incurred interest and other financing costs due to increased levels of developed lots and finished homes. Capitalized interest and other financing costs are included in cost of sales at the time of home closings. Other income, which consists mainly of interest income and the pre-tax earnings of the DRH Title Companies and DRH Mortgage Company, Ltd., increased to $726,000 in the three months ended December 31, 1997, from $715,000 for the comparable period of 1996. The provision for income taxes was $7.0 million in the three months ended December 31, 1997, up $2.6 million from the $4.4 million for the comparable quarter of 1996. The increase in income taxes was attributable to the increase in income before income taxes and an increase in the estimated effective income tax rate anticipated for fiscal 1998. -10- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had available cash and cash equivalents of $40.4 million. Inventories (including finished homes and construction in progress, developed residential lots and other land) at December 31, 1997, increased by $48.6 million from September 30, 1997, due to a general increase in business activity and the expansion of operations in the newer market areas. Because the inventory increase was financed largely by borrowing, the Company's ratio of notes payable to total capital increased to 58.9% at December 31, 1997, from 57.5% at September 30, 1997. The equity to total assets ratio decreased slightly during the three months, to 35.7% at December 31, 1997, from 36.5% at September 30, 1997. The Company's financing needs depend upon the results of its operations, sales volume, inventory levels, inventory turnover, and acquisitions. The Company has financed its operations through borrowings from financial institutions, through the sale of public debt securities, through funds from earnings, and, in 1992, 1996 and 1997, from the sale of common stock. At December 31, 1997, the Company has $625 million of unsecured borrowing capacity, consisting of a $200 million five-year term loan, a $400 million revolving loan, and a $25 million annual revolving loan. The Company's credit facilities also include $150,000,000 of 8 3/8% Senior Notes due 2004. At December 31, 1997, the Company had outstanding debt under the unsecured bank facilities, senior notes, and other credit agreements, of $392.1 million, of which $240.0 million represented advances under existing bank credit facilities. Based upon the most restrictive existing debt covenants, at December 31, 1997, the Company had additional borrowing capacity of $120.0 million. On December 18, 1997, D.R. Horton, Inc. and Continental Homes Holding Corp. announced that they had entered into a definitive agreement and plan of merger pursuant to which Continental would be merged into Horton. The ratio of Horton shares to be exchanged for Continental shares will be determined based on the average of Horton's closing stock prices for fifteen randomly selected trading days within the thirty consecutive trading days ending five days prior to the closing date. The merger with Continental will be treated as a pooling of interests for accounting purposes. On January 14, 1998, D.R. Horton, Inc. announced an agreement in principle to acquire the outstanding stock of C. Richard Dobson Builders, Inc. (Dobson), and certain of its affiliated companies, for the lesser of $22.9 million or 1.5 times Dobson's book value. In addition, D.R. Horton will repay Dobson's net debt, which approximated $45.0 million at August 31, 1997. This transaction will be treated as a purchase for accounting purposes. Both the Continental merger and the purchase of Dobson are expected to close during the Company's second fiscal quarter. The Company's rapid growth requires significant amounts of cash. It is anticipated that future home construction, lot and land purchases and acquisitions will be funded through internally generated funds and new and existing borrowing relationships. The Company continuously evaluates its capital structure and, in the future, may seek to further increase unsecured debt and obtain additional equity to fund ongoing operations as well as to pursue additional growth opportunities. Except for ordinary expenditures for the construction of homes and, to a limited extent, the acquisition of land and lots for development and sale of homes, at December 31, 1997, the Company had no material commitments for capital expenditures. -11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Safe Harbor Statement Certain statements in this Quarterly Report on Form 10-Q, as well as statements made by the Company in periodic press releases, and oral statements made by the Company's officials to analysts and stockholders in the course of presentations about the Company, may be construed as "Forward-Looking Statements" as defined in the Private Securities Litigation Reform Act of 1995. Such statements may involve unstated risks, uncertainties and other factors that may cause actual results to differ materially from those initially anticipated. Such risks, uncertainties and other factors include, but are not limited to, changes in general economic conditions, fluctuations in interest rates, increases in costs of material, supplies and labor and general competitive conditions. -12- PART II. OTHER INFORMATION. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 2.1 Agreement and Plan of Merger, dated as of December 18, 1997, by and between the Registrant and Continental Homes Holding Corp. The Registrant agrees to furnish supplementally a copy of omitted schedules to the Commission upon request (1). 10.1 First Amended and Restated Master Loan and Intercreditor Agreement, dated as of December 19, 1997, among D.R. Horton, Inc., as Borrower, NationsBank, N.A., Bank of America National Trust and Savings Association, Fleet National Bank, Bank United, Comerica Bank, The First National Bank of Chicago, Credit Lyonnais New York Branch, PNC Bank, National Association, Amsouth Bank of Alabama, Bank One, Arizona, NA, Societe Generale, Southwest Agency, First American Bank Texas, SSB, Harris Trust and Savings Bank, and Sanwa Bank California as Banks; and NationsBank, N.A., as Administrative Agent (2). ------------ (1) Incorporated by reference from Exhibit 2.1 to the Registrant's Registration Statement on Form S-4, filed with the Commission on January 15, 1998. (2) Filed herewith. (b) Reports on Form 8-K. The Registrant filed a Current Report on Form 8-K dated December 19, 1997. -13- 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: January 27, 1998 By /s/ David J. Keller ---------------------- David J. Keller, on behalf of D.R. Horton, Inc. and as Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) -14-