BUSINESS Exhibit 99.1
On April 20, 1998, D.R. Horton, Inc. ("Horton") acquired Continental Homes
Holding Corp. ("Continental"), a geographically diversified homebuilder, through
the merger of Continental into Horton (the "Merger"). In the Merger, Horton
issued approximately 15.5 million shares of its common stock, and Continental's
outstanding convertible securities and options became convertible into or
exercisable for an additional approximately 8.7 million shares. The Merger has
been accounted for as a pooling of interests. Accordingly, Horton's financial
information for prior periods has been restated to show the combined results of
Horton and Continental. In the description of business that follows, the
business of Continental has been combined with Horton as though Continental had
been a part of Horton throughout the periods described. The combination of
Horton and Continental described is referred to as the "Company".
The Company is engaged primarily in the construction and sale of
single-family homes in metropolitan areas of the Mid-Atlantic, Midwest,
Southeast, Southwest, and West regions of the United States. The Company offers
high-quality homes, designed principally for the entry-level and move-up market
segments. The Company's homes generally range in size from 1,000 to 5,000 square
feet and range in price from $80,000 to $600,000. For the year ended September
30, 1997, the Company closed homes with an average sales price approximating
$152,600. Historically, Horton has attempted to position itself as a custom
builder, whereas certain recent acquisitions have been more volume building
oriented.
The Company is one of the most geographically diversified homebuilders in
the United States, with operating divisions in 21 states and 36 markets as of
March 31, 1998. These markets include: Albuquerque, Atlanta, Austin, Birmingham,
Charleston, S.C., Charlotte, Chicago, Cincinnati, Dallas/Fort Worth, Denver,
Greensboro, Greenville, Hilton Head, S.C., Houston, Jacksonville, Kansas City,
Las Vegas, Los Angeles, Minneapolis/St. Paul, Myrtle Beach, S.C., Nashville, New
Jersey, Newport News, Orlando, Pensacola, Phoenix, Raleigh/Durham, Richmond,
Salt Lake City, San Antonio, San Diego, South Florida, St. Louis, Tucson,
Suburban Washington, D.C. and Wilmington, N.C.
Horton was 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.
The Company's principal executive offices are located at 1901 Ascension
Blvd., Suite 100, Arlington, Texas 76006, and its telephone number is (817)
856-8200.
Operating Strategy
The Company believes that there are several important elements to its
operating strategy which have enabled it to achieve consistent growth and
profitability. The following are important elements of this strategy:
Geographic Diversification. From 1978 to late 1987, the Company's
homebuilding activities were conducted exclusively in the Dallas/Fort Worth
area. The Company then instituted a policy of diversifying geographically,
entering the following markets in the years indicated:
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Year Entered Markets
------------ -------
1987. . . . . . . . .Phoenix
1988. . . . . . . . .Atlanta, Orlando
1989. . . . . . . . .Charlotte
1990. . . . . . . . .Houston
1991. . . . . . . . .Suburban Washington D.C.
1992. . . . . . . . .Chicago, Cincinnati, Raleigh/Durham, South Florida
1993. . . . . . . . .Austin, Los Angeles, Salt Lake City, San Diego
1994. . . . . . . . .Minneapolis/St. Paul, Kansas City, Las Vegas,
San Antonio
1995. . . . . . . . .Birmingham, Denver, Greensboro, St. Louis
1996. . . . . . . . .Albuquerque, Pensacola
1997. . . . . . . . .Greenville S.C., Nashville, New Jersey, Tucson
1998. . . . . . . . .Charleston, Hilton Head, Jacksonville, Myrtle
Beach, Newport News, Richmond, Wilmington
The Company continually monitors the sales and margins achieved in each of
the subdivisions in which it operates as part of an overall evaluation of the
employment of its capital. While the Company believes there are significant
growth opportunities in its existing markets, it intends to continue its policy
of diversification by seeking to enter new markets. The Company believes that
its diversification strategy mitigates the effects of local and regional
economic cycles and enhances its growth potential. Typically, the Company 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
the Company and its products.
Acquisitions. As an integral component of the Company's operational
strategy of continued expansion, the Company continually evaluates opportunities
for strategic acquisitions. The Company believes that expansion of its
operations through the acquisition of existing homebuilding companies affords it
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 homebuyers in the market. In evaluating potential
acquisition candidates, the Company seeks homebuilding companies that have an
excellent reputation, a track record of profitability and a strong management
team with an entrepreneurial orientation. The Company has limited the risks
associated with acquiring a going concern by conducting extensive operational,
financial and legal due diligence on each acquisition and by only acquiring
homebuilding companies that the Company believes should have an immediate
positive impact on the Company's earnings.
Including the Merger, the Company has acquired twelve homebuilding
companies since 1994:
Acquired Entities Acquired Markets
- -------- ----------------- -------
January 1994 Aspen Homes San Antonio
April 1994 Joe Miller Homes, Inc. and Minneapolis/St. Paul
Argus Development, Inc.
November 1994 Heftler Realty Co. South Florida
July 1995 Arappco, Inc. Greensboro
September 1995 Regency Development, Inc. Birmingham
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June 1996 Westchester Homes Dallas
October 1996 "Trimark" Communities, L.L.C. Denver
December 1996 "SGS" Communities, Inc. New Jersey
February 1997 The "Torrey" Group Atlanta, Charlotte,
and Raleigh/Durham Greenville S.C.,
February 1998 C. Richard Dobson Builders, Inc. Charleston, Charlotte,
Greensboro, Greenville,
Hilton Head, Jacksonville,
Myrtle Beach, Newport
News, Raleigh, Richmond,
Wilmington
April 1998 Continental Homes Holding Corp. Phoenix, Austin, California,
Dallas, Denver, Miami,
San Antonio
May 1998 Mareli Development & Construction Louisville, Kentucky
Company, LLC
In both existing and new markets, the Company anticipates that it will
continue to evaluate potential future acquisition opportunities that satisfy its
acquisition criteria.
The Company made three acquisitions during fiscal 1997. In October, 1996,
the Company completed the acquisition of the principal assets (approximately
$7.6 million, primarily inventories) of Trimark for $7.0 million in cash and the
assumption of approximately $1.0 million in trade accounts and notes payable
associated with the acquired assets. In December, 1996, the Company purchased
the principal assets (approximately $19.5 million, primarily inventories) of SGS
for $10.6 million in cash and the assumption of $10.1 million in accounts and
notes payable associated with the acquired assets. In February, 1997, the
Company completed the acquisition of all the outstanding capital stock of the
entities comprising Torrey and purchased assets from affiliated entities. The
Company paid consideration consisting of $37.6 million in cash, 844,444 newly
issued, restricted shares of the Company's common stock, valued at $9.2 million,
and assumed $90.0 million in accounts and notes payable.
Decentralized Operations. The Company's homebuilding activities are
decentralized to give more operating flexibility to its local division managers.
The Company's homebuilding activities are conducted through 42 operating
divisions, some of which are in the same general market area. Generally, each
operating division consists of a vice president, an office manager and staff, a
sales manager who oversees sales people, and a construction manager who oversees
construction supervisors. The Company believes that division managers, who are
intimately familiar with local conditions, make better decisions regarding local
operations than do the centralized, corporate management teams who make such
decisions for many of its competitors. Each operating division is responsible
for preliminary site selection, negotiation of option or similar contracts, and
overseeing land development activities. Site selection and lot acquisition
typically involve a feasibility study by the operating division, including soil
and environmental reviews, a review of existing zoning and other governmental
requirements, and a review of the need for and extent of offsite work and
additional lot preparation required to meet local building codes. Each operating
division also plans its homebuilding schedule, selects the building plans and
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architectural scheme for its subdivisions, obtains all necessary building
approvals, and develops a marketing plan for its homes. Division managers
receive performance bonuses based upon achieving targeted operating levels in
their operating divisions.
Corporate office controls. The Company's corporate office controls key risk
elements of the Company through centralized financing, cash management, risk
management, accounting and management reporting, payment of subcontractor
invoices, administration of payroll and employee benefits, and oversite and
responsibility for final approval of all land and lot acquisitions and inventory
levels.
Cost Management. The Company strives to control its overhead costs by
centralizing its administrative and accounting functions and by limiting the
number of field administrative personnel and middle level management positions.
The Company also attempts to minimize advertising costs by participating in
promotional activities, publications and newsletters sponsored by local real
estate brokers, mortgage companies, utility companies and trade associations,
and, in certain instances, by positioning its subdivisions in conspicuous
locations that permit it to take advantage of local traffic patterns.
The Company attempts to control construction costs through the efficient
design of its homes and by obtaining favorable pricing from certain
subcontractors and national vendors based on the high volume of services they
perform for the Company. The Company's management information systems, including
the purchase order system, also assist in controlling construction costs by
allowing corporate and division management to monitor expenditures on a
home-by-home basis. In addition, the Company's management information systems
allow the Company to monitor its inventory composition and levels, thereby
controlling capital and overhead costs.
Markets
The Company's homebuilding activities are conducted in five geographic
regions, comprised of the following markets:
Geographic Region Markets
----------------- -------
Mid-Atlantic . . . . . Charleston, Charlotte, Greensboro, Greenville S.C.,
Hilton Head and Myrtle Beach, S.C., New Jersey,
Newport News, Raleigh/Durham, Richmond, Suburban
Washington, D.C. and Wilmington, N.C.
Midwest. . . . . . . . Chicago, Cincinnati, Kansas City, Minneapolis/
St. Paul, St. Louis
Southeast. . . . . . . Atlanta, Birmingham, Jacksonville, Nashville,
Orlando, Pensacola, South Florida
Southwest. . . . . . . Albuquerque, Austin, Dallas/Fort Worth, Houston,
Phoenix, San Antonio, Tucson
West . . . . . . . . . Denver, Las Vegas, Los Angeles, Salt Lake City,
San Diego
The Company's operations in each of its markets differ based on a number of
market-specific factors. These factors include regional economic conditions and
job growth, land availability and the local land development process, consumer
tastes, competition from other builders of new homes and secondary home sales
activity. The Company considers each of these factors when entering new markets
or conducting operations in existing markets.
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Homebuilding revenues for the Company by geographic region are:
Six Months Ended
Year Ended September 30, March 31,
-------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(In millions)
Mid-Atlantic....... $ 113.3 $ 116.4 $ 180.5 $ 57.5 $ 120.5
Midwest............ 69.9 88.5 95.9 41.1 45.2
Southeast.......... 67.9 115.2 246.5 89.4 156.9
Southwest.......... 221.7 624.4 694.2 317.6 366.7
West............... 390.0 191.8 350.4 149.4 178.2
-------- -------- -------- -------- --------
Total............ $ 862.8 $1,136.3 $1,567.5 $ 655.0 $ 867.5
======== ======== ======== ======== ========
Land Policies
Typically, land acquired by the Company is purchased only after necessary
entitlements have been obtained so that the Company has the right to begin
development or construction. Before it acquires tracts of land, the Company
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. The
largest parcel the Company owns is a 670 acre property in Carlsbad, CA, which is
under development and when completed will have approximately 1,600 homesites.
The Company plans to build homes on a portion of these lots and to sell the
remainder to other homebuilders. Historically, Horton has relied on lot option
contracts to secure the major portion of its lots, and Continental has developed
most of its lots itself. At March 31, 1998, about 71% of the Company's total lot
position of 46,769 lots was being or had been developed by the Company. Although
the Company purchases land and engages in land development activities primarily
to support its own homebuilding activities, lots and land are occasionally sold
to other developers and homebuilders. Additionally, the Company expects to
continue to use lot option and similar contracts to secure developed lots.
A summary of the Company's land/lot positions at March 31, 1998 is:
Finished lots owned by the Company.................................... 8,055
Lots under development owned by the Company........................... 25,332
------
Total lots owned..................................................... 33,387
Lots available under lot option and similar contracts................. 13,382
------
Total land/lot position...............................................46,769
======
The Company also seeks to limit its exposure to real estate inventory risks
by (i) 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; (ii) limiting the number of speculative homes
(homes started without an executed sales contract) built in each subdivision;
and, (iii) 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.
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Construction
The Company's home designs are prepared by architects in each of the
Company's markets to appeal to local tastes and preferences of the community.
Optional interior and exterior features also are offered by the Company to
enhance the basic home design and to promote the Company's sales efforts.
Substantially all of the Company's construction work is performed by
subcontractors. The Company's 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 the Company's subcontractors and
suppliers generally are negotiated for each subdivision. The Company competes
with other homebuilders for qualified subcontractors, raw materials and lots in
the markets where it operates.
Construction time for the Company's homes depends on the weather,
availability of labor, materials and supplies, and other factors. The Company
typically completes the construction of a home within four months.
The Company does not maintain significant inventories of construction
materials, except for work in process materials for homes under construction.
Typically, the construction materials used in the Company's operations are
readily available from numerous sources. The Company does not have any long-term
contracts with suppliers of its building materials. In recent years, the Company
has not experienced any significant delays in construction due to shortages of
materials or labor.
Marketing and Sales
The Company markets and sells its homes through commissioned employees and
independent real estate brokers. Home sales are typically conducted from sales
offices located in furnished model homes used in each subdivision. At March 31,
1998, the Company owned 470 model homes. These models homes generally are not
offered for sale until the completion of the respective subdivision. The
Company's sales personnel assist prospective homebuyers by providing them with
floor plans, price information, tours of model homes and the selection of
options and other custom features. Such personnel are trained by the Company and
kept informed as to the availability of financing, construction schedules and
marketing and advertising plans.
In addition to using model homes, the Company typically builds a limited
number of speculative homes in each subdivision to enhance its marketing and
sales activities. Construction of these speculative homes also is necessary to
satisfy the requirement of relocated personnel and independent brokers, who
often represent homebuyers requiring a completed home within 60 days. A majority
of these speculative homes are sold while 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 the Company has built
in the market. Depending upon the seasonality of each of its markets, the
Company seeks to limit its speculative homes in each subdivision. At March 31,
1998, the Company was operating in 486 subdivisions and averaged 5.2 speculative
homes in each subdivision.
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The Company advertises on a limited basis in newspapers and in real estate
broker, mortgage company and utility publications, brochures, newsletters and
billboards. To minimize advertising costs, the Company attempts to operate in
subdivisions in conspicuous locations that permit it to take advantage of local
traffic patterns. The Company also believes that model homes play a significant
role in its marketing efforts. Consequently, the Company expends significant
efforts in creating an attractive atmosphere in its model homes.
Sales of the Company's homes generally are made pursuant to a standard
sales contract which requires a down payment of a minimum of $500. The contract
includes a financing contingency which permits the customer to cancel in the
event mortgage financing at prevailing interest rates is unobtainable within a
specified period, typically four to six weeks, and may include other
contingencies, such as the sale of an existing home. The Company includes a home
sale in its sales backlog upon execution of the sales contract and receipt of
the initial down payment. The Company does not recognize revenue upon the sale
of a home until it is closed and title passes. The Company estimates that the
average period between the execution of a sales contract for a home and closing
is approximately three to five months.
Customer Service and Quality Control
The Company's operating divisions are responsible for pre-closing, quality
control inspections and responding to customers' post-closing needs. The Company
believes that prompt and courteous response to homebuyers' needs during and
after construction reduces post-closing repair costs, enhances the Company's
reputation for quality and service, and ultimately leads to significant repeat
and referral business from the real estate community and homebuyers. The Company
provides its homebuyers with a limited one-year warranty on workmanship and
building materials. The subcontractors who perform most of the actual
construction also provide warranties of workmanship to the Company and,
generally, are prepared to respond to the Company and homeowner promptly upon
request. In most cases, the Company supplements its one-year warranty by
purchasing a ten-year limited warranty from a third party. To cover its
potential warranty obligations, the Company accrues an estimated amount for
future warranty costs.
Customer Financing
The Company, through two entities, provides mortgage financing services
principally to purchasers of homes built and sold by the Company. D.R. Horton
Mortgage Company, Ltd., a joint venture formed in 1996 with a third party,
presently provides services in Texas, Arizona, North Carolina, South Carolina,
Nevada, Colorado and Florida. CH Mortgage, a wholly-owned subsidiary, provides
mortgage banking services in Arizona, Colorado, California, Texas and Florida.
On a combined basis, related mortgage banking entities provided mortgage
financing services for about 35% of the homes closed during the six months ended
March 31, 1998. The Company anticipates expanding these mortgage activities to
other markets the Company serves.
In its other markets, the Company currently does not provide mortgage
financing, but works with a variety of mortgage lenders that make available to
homebuyers a range of conventional mortgage financing programs. By making
information about these programs available to prospective homebuyers and
maintaining a relationship with such mortgage lenders, the Company is 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.
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Title Services
Through its wholly-owned subsidiaries, DRH Title Company of Texas, Ltd.,
DRH Title Company of Florida, Inc. and Travis County Title Company, the Company
serves as a title insurance agent by providing title insurance policies and
closing services to purchasers of homes built and sold by the Company in the
Dallas/Fort Worth, Austin and Orlando markets. The Company assumes no
underwriting risk associated with these title policies.
Employees
At March 31, 1998, the Company employed 2,199 persons, of whom 608 were
sales and marketing personnel, 709 were executive, administrative and clerical
personnel, 712 were involved in construction, and 170 worked in mortgage and
title operations. Fewer than 25 of the Company's employees are covered by
collective bargaining agreements. Some of the subcontractors which the Company
uses are represented by labor unions or are subject to collective bargaining
agreements. The Company believes that its relations with its employees and
subcontractors are good.
Competition
The single family residential housing industry is highly competitive, and
the Company competes in each of its markets with numerous other national,
regional and local homebuilders, some of which have greater resources than the
Company. The Company's homes compete on the basis of quality, price, design,
mortgage financing terms and location.
Regulation and Environmental Matters
The housing, mortgage and title insurance industries are subject to
extensive and complex regulations. The Company and its subcontractors must
comply with various federal, state and local laws and regulations including
zoning and density requirements, building, environmental, advertising and
consumer credit rules and regulations, as well as other rules and regulations in
connection with its homebuilding and sales activities. These include
requirements as to building materials to be used, building designs and minimum
elevation of properties. The Company's homes are inspected by local authorities
where required, and homes eligible for insurance or guarantees provided by the
FHA and VA, respectively, are subject to inspection by the FHA or VA.
The Company is also subject to a variety of local, state and federal
statutes, ordinances, rules and regulations concerning protection of health and
the environment ("environmental laws"). The particular environmental laws, which
apply to any given homebuilding site, vary greatly according to the site's
location, the site's environmental condition and the present and former uses of
the site. These environmental laws may result in delays, may cause the Company
to incur substantial compliance and other costs, and can prohibit or severely
restrict homebuilding activity in certain environmentally sensitive regions or
areas.
The Company's internal mortgage activities and title insurance agencies
must also comply with various federal and state laws, consumer credit rules and
regulations and 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.
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