FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the Quarterly Period Ended June 30, 1998
----------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period From To
------------------ --------------------
Commission file number 1-14122
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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)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $.01 par value -- 55,613,693 shares as of July 31, 1998
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This Report contains 18 pages.
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INDEX
D.R. HORTON, INC.
PART I. FINANCIAL INFORMATION. Page
ITEM 1. Financial Statements.
Consolidated Balance Sheets--June 30, 1998 and September 30, 1997. 3
Consolidated Statements of Income--Three Months and Nine Months
Ended June 30, 1998 and 1997. 4
Consolidated Statement of Stockholders' Equity--Nine Months
Ended June 30, 1998. 5
Consolidated Statements of Cash Flows--Nine Months Ended
June 30, 1998 and 1997. 6
Notes to Consolidated Financial Statements. 7-9
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition. 10-14
PART II. OTHER INFORMATION.
ITEM 2. Changes in Securities. 15
ITEM 4. Submission of Matters to a Vote of Security Holders. 15
ITEM 5. Other Information. 16
ITEM 6. Exhibits and Reports on Form 8-K. 16-17
SIGNATURES. 18
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
1998 1997
---------- -------------
(In thousands)
(Unaudited)
ASSETS
Homebuilding:
Cash.............................................. $ 112,747 $ 78,228
Inventories....................................... 1,291,283 1,024,268
Property and equipment (net)...................... 24,264 16,988
Other assets...................................... 66,473 56,420
Excess of cost over net assets acquired (net)..... 57,509 37,717
---------- ----------
1,552,276 1,213,621
---------- ----------
Financing:
Mortgage loans held for sale...................... 66,308 34,072
Other assets...................................... 3,284 630
---------- ----------
69,592 34,702
---------- ----------
$1,621,868 $1,248,323
========== ==========
LIABILITIES
Homebuilding:
Accounts payable and other liabilities............ $ 214,274 $ 165,309
---------- ----------
Notes payable:
Financial institutions......................... 523,438 231,500
8 3/8% senior notes due 2004, net.............. 147,655 147,370
10% senior notes due 2006, net................. 147,112 148,462
6 7/8% convertible subordinated notes
due 2002, net................................ 82,684 86,250
Other.......................................... 4,997 18,970
---------- ----------
905,886 632,552
---------- ----------
1,120,160 797,861
---------- ----------
Financing:
Other liabilities................................. 5,509 506
Notes payable to financial institutions........... - 18,188
---------- ----------
5,509 18,694
---------- ----------
1,125,669 816,555
---------- ----------
Minority interest................................. 3,632 3,902
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 30,000,000
shares authorized, no shares issued............. - -
Common stock, $.01 par value, 100,000,000 shares
authorized, 53,349,785 at June 30, 1998 and
52,749,527 at September 30, 1997, issued and
outstanding..................................... 533 527
Additional capital................................ 275,886 268,631
Retained earnings................................. 216,148 158,708
---------- ----------
492,567 427,866
---------- ----------
$1,621,868 $1,248,323
========== ==========
See accompanying notes to consolidated financial statements.
-3-
D. R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Nine Months
Ended June 30, Ended June 30,
------------------- ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
(In thousands, except net income per share)
(Unaudited)
Homebuilding:
Revenues
Home sales.................... $606,161 $416,923 $1,472,591 $1,056,086
Land/lot sales................ 2,183 18,140 3,266 34,007
-------- -------- ---------- ----------
608,344 435,063 1,475,857 1,090,093
-------- -------- ---------- ----------
Cost of sales
Home sales.................... 497,568 344,208 1,207,713 868,744
Land/lot sales................ 1,568 17,915 2,404 32,666
-------- -------- ---------- ----------
499,136 362,123 1,210,117 901,410
-------- -------- ---------- ----------
Gross profit
Home sales.................... 108,593 72,715 264,878 187,342
Land/lot sales................ 615 225 862 1,341
-------- -------- ---------- ----------
109,208 72,940 265,740 188,683
Selling, general and
administrative expense......... 58,360 45,537 152,517 114,691
Interest expense................ 4,136 2,976 9,204 7,587
Other (income).................. (2,413) (981) (4,466) (2,757)
-------- -------- ---------- ----------
49,125 25,408 108,485 69,162
-------- -------- ---------- ----------
Financing:
Revenues........................ 5,520 3,249 14,163 9,165
Selling, general and
administrative expense......... 3,900 2,586 9,690 7,087
Interest expense................ 648 157 1,293 373
Other (income).................. (704) (323) (1,758) (897)
-------- -------- ---------- ----------
1,676 829 4,938 2,602
-------- -------- ---------- ----------
Merger costs.................... 11,917 - 11,917 -
======== ======== ========== ==========
INCOME BEFORE INCOME TAXES.... 38,884 26,237 101,506 71,764
Provision for income taxes...... 15,796 10,614 40,602 28,552
-------- -------- ---------- ----------
NET INCOME.................. $ 23,088 $ 15,623 $ 60,904 $ 43,212
======== ======== ========== ==========
Net income per share:
Basic....................... $0.44 $0.30 $1.15 $0.87
Diluted..................... $0.39 $0.27 $1.02 $0.78
======== ======== ========== ==========
Weighted average number of
shares of stock outstanding:
Basic....................... 53,066 52,621 52,897 49,864
Diluted..................... 62,241 61,199 62,178 58,504
======== ======== ========== ==========
See accompanying notes to consolidated financial statements.
-4-
D. R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Total
Common Additional Retained Stockholders'
Stock Capital Earnings Equity
------------------------------------------
(In thousands)
(Unaudited)
Balances at October 1, 1997 $527 $268,631 $158,708 $427,866
Net income......................... - - 60,904 60,904
Issuance under D.R. Horton, Inc.
employee benefit plans........... - 480 - 480
Exercise of stock options ......... 2 1,906 - 1,908
Issuances pursuant to conversion
of 6 7/8% convertible debt....... 3 3,745 - 3,748
Issuance as partial consideration
for acquisition.................. 1 1,124 - 1,125
Cash dividends..................... - - (3,464) (3,464)
------------------------------------------
Balances at June 30, 1998 $533 $275,886 $216,148 $492,567
==========================================
See accompanying notes to consolidated financial statements.
-5-
D. R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months
Ended June 30,
----------------------
1998 1997
-------- --------
(In thousands)
(Unaudited)
OPERATING ACTIVITIES
Net income.......................................... $ 60,904 $ 43,212
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 6,970 5,255
Expense associated with issuance of stock
under employee benefit plans.................... 328 224
Changes in operating assets and liabilities:
Increase in inventories........................ (195,030) (154,472)
Increase in other assets....................... (8,829) (5,774)
Increase in mortgage loans held for sale....... (32,236) (8,353)
Increase in accounts payable
and other liabilities......................... 47,970 3,751
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (119,923) (116,157)
-------- --------
INVESTING ACTIVITIES
Purchase of property and equipment.................. (8,725) (6,016)
Net cash paid for acquisitions...................... (33,091) (43,498)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (41,816) (49,514)
-------- --------
FINANCING ACTIVITIES
Proceeds from notes payable......................... 356,901 211,905
Repayment of notes payable.......................... (159,317) (218,576)
Issuance of senior notes payable.................... - 167,546
Repurchase of stock................................. - (2,519)
Issuance of common stock............................ - 39,979
Proceeds from issuance of stock
under employee benefit plans....................... 2,388 1,297
Cash dividends paid................................. (3,464) (2,434)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 196,508 197,198
-------- --------
INCREASE (DECREASE) IN CASH 34,769 31,527
Cash at beginning of period.......................... 78,228 58,011
-------- --------
Cash at end of period................................ $112,997 $89,538
======== ========
Supplemental cash flow information:
Interest paid...................................... $ 11,712 $ 8,394
======== ========
Income taxes paid.................................. $ 41,020 $30,713
======== ========
See accompanying notes to consolidated financial statements.
-6-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements include the
accounts of D.R. Horton, Inc. (the "Company") and its subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation. The statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine month periods ended
June 30, 1998, are not necessarily indicative of the results that may be
expected for the year ending September 30, 1998.
Business - The Company is a national builder that is engaged primarily in the
construction and sale of single-family housing in the United States. The Company
designs, builds and sells single-family houses on lots developed by the Company
and on finished lots which it purchases, ready for home construction.
Periodically, the Company sells lots it has developed. The Company also provides
title agency and mortgage brokerage services to its homebuyers.
Merger - On April 20, 1998, the Company and Continental Homes Holding Corp.
(Continental) consummated a merger pursuant to which Continental was merged into
the Company, with 2.25 shares of the Company common shares exchanged for each
outstanding share of Continental. Approximately 15,459,500 Horton common shares
were issued to effect the merger. The merger with Continental was treated as a
pooling of interests for accounting purposes. Therefore, all financial amounts
have been presented as if Continental and the Company had been combined at the
earliest period presented.
Results of operation - The results of operations for the separate companies and
the combined amounts prior to combination that are included in the consolidated
financial statements are:
Six months ended
March 31,
----------------------
1998 1997
-------- --------
(In thousands)
Revenue (homebuilding activities):
D.R. Horton, Inc. $508,603 $303,977
Continental 358,910 351,053
-------- --------
Combined 867,513 655,030
-------- --------
Net income:
D.R. Horton, Inc. 22,574 13,498
Continental 15,242 14,091
-------- --------
Combined $ 37,816 $ 27,589
======== ========
NOTE B - MERGER COSTS
Costs associated with the merger with Continental have been charged to the
results of operations and consist primarily of fees to third party investment,
accounting and legal advisors.
NOTE C - NET INCOME PER SHARE
Basic net income per share for the three and nine month periods ended June 30,
1998 and 1997, is based on the weighted average number of shares of common stock
outstanding. Diluted net income per share is based on the weighted average
number of shares of common stock and dilutive common stock equivalents
outstanding.
-7-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 1998
NOTE D - PROVISIONS FOR INCOME TAXES
Deferred tax liabilities and assets, arising from temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes, consist primarily of differences
in depreciation, warranty costs and inventory cost capitalization methods and
were, as of June 30, 1998, not material.
The provisions for income tax expense for the three and nine month periods ended
June 30, 1998 and 1997, are based on the effective tax rates estimated to be in
effect for the respective years. The deferred income tax provisions were not
significant in either period.
The difference between income tax expense and tax computed by applying the
statutory Federal income tax rate to income before income taxes is due primarily
to the effect of applicable state income taxes.
NOTE E - INTEREST
Three months ended Nine months ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- ------- -------
(In thousands)
Capitalized interest, beginning of period $38,058 $22,601 $28,952 $17,846
Interest incurred 19,955 13,834 52,573 36,505
Interest expensed:
Directly (4,784) (3,133) (10,497) (7,960)
Amortized to cost of sales (11,396) (7,641) (29,195) (20,730)
------- ------- ------- -------
Capitalized interest, end of period $41,833 $25,661 $41,833 $25,661
======= ======= ======= =======
NOTE F - ACQUISITIONS
On February 14, 1998, D.R. Horton, Inc. closed the acquisition of the
outstanding stock of C. Richard Dobson Builders, Inc. (Dobson), and certain of
its affiliated companies, for $23.4 million. Dobson's assets (primarily
inventories) on that date approximated $64.3 million; its liabilities, including
$49.3 in notes payable paid at closing, approximated $52.4 million. In May and
June, 1998, the Company completed the acquisition of the principal assets
(approximately $16.4 million, primarily inventories) of Mareli Development &
Construction Co., Inc. (Mareli), of Louisville, Kentucky, and RMP Properties,
Inc. (RMP), of Portland, Oregon, for $7.8 million in cash, 70,249 shares of
Horton common stock valued at $1.1 million, and the assumption of approximately
$16.0 million in trade accounts and notes payable associated with the acquired
assets. Mareli's and RMP's liabilities included $13.5 million in notes payable
which were paid at closing. Operating results of the acquired entities since the
respective dates of acquisition are included in the financial statements as of
and for the periods ended June 30, 1998. The acquisitions were treated as
purchases for accounting purposes.
-8-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
June 30, 1998
NOTE G - SUMMARIZED FINANCIAL INFORMATION
The 8 3/8% and 10% senior notes payable are fully and unconditionally
guaranteed, on a joint and several basis, by all the Company's direct and
indirect subsidiaries other than certain inconsequential subsidiaries. Each of
the guarantors is a wholly-owned subsidiary of the Company. Summarized financial
information of the Company and its subsidiaries is presented below. Separate
financial statements and other disclosures concerning the guarantor subsidiaries
are not presented because management has determined that they are not material
to investors.
As of and for the periods ended: (In thousands)
June 30, 1998 (Unaudited)
D.R. Horton, Guarantor Nonguarantor Intercompany
Inc. Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------ ------------ ------------
Total assets............... $1,206,583 $1,335,638 $110,484 ($1,030,837) $1,621,868
Total liabilities.......... 975,922 1,086,243 92,183 (1,025,047) 1,129,301
Revenues................... 239,556 1,226,200 24,264 - 1,490,020
Gross profit............... 32,913 230,939 1,888 - 265,740
Net income................. 1,657 57,287 1,960 - 60,904
June 30, 1997 (Unaudited)
D.R. Horton, Guarantor Nonguarantor Intercompany
Inc. Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------ ------------ ------------
Total assets............... $612,306 $901,706 $61,063 ($369,358) $1,205,717
Total liabilities.......... 396,355 732,564 38,749 (368,473) 799,195
Revenues................... 194,219 891,871 13,168 - 1,099,258
Gross profit............... 38,534 149,380 769 - 188,683
Net income................. 4,615 39,122 (525) - 43,212
September 30, 1997
D.R. Horton, Guarantor Nonguarantor Intercompany
Inc. Subsidiaries Subsidiaries Eliminations Total
------------ ------------ ------------ ------------ ------------
Total assets............... $620,636 $934,497 $66,666 ($373,476) $1,248,323
Total liabilities.......... 396,853 751,672 44,573 (372,641) 820,457
Revenues................... 286,568 1,269,391 24,750 - 1,580,709
Gross profit............... 51,484 222,040 1,347 - 274,871
Net income................. 4,248 59,373 1,341 - 64,962
-9-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following tables set forth certain operating and financial data for the
Company's homebuilding activities:
Percentages of Homebuilding Revenue
--------------------------------------
Three Nine
Months Ended Months Ended
June 30, June 30,
--------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
Cost and expenses:
Cost of sales 82.0% 83.2% 82.0% 82.7%
Selling, general and
administrative expense 9.6 10.5 10.3 10.5
Interest expense 0.7 0.7 0.6 0.7
------ ------ ------ ------
Total costs and expenses 92.3 94.4 92.9 93.9
Other (income) (0.4) (0.2) (0.3) (0.3)
------ ------ ------ ------
Income before income taxes 8.1% 5.8% 7.4% 6.4%
====== ====== ====== ======
New sales contracts, net Homes in
of cancellations Home closings sales backlog
------------------------------ ------------------------------ --------------
Three Nine Three Nine
Months Ended Months Ended Months Ended Months Ended As of
June 30, June 30, June 30, June 30, June 30,
-------------- -------------- -------------- -------------- --------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Mid-Atlantic (Maryland,
New Jersey, North and
South Carolina, Virginia) 748 272 1,695 572 595 280 1,267 547 1,032 353
Midwest (Illinois, Kansas,
Kentucky, Minnesota,
Missouri, Ohio) 227 143 652 372 188 125 428 336 456 220
Southeast (Alabama,
Florida, Georgia)
Tennessee) 658 561 2,004 1,098 743 487 1,810 1,026 914 647
Southwest (Arizona, New
Mexico, Texas) 1,988 1,615 5,276 4,115 1,652 1,265 4,519 3,703 2,784 2,192
West (California, Colorado,
Nevada, Oregon, Utah) 790 538 2,311 1,344 751 524 1,688 1,274 1,373 651
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Totals 4,411 3,129 11,938 7,501 3,929 2,681 9,712 6,886 6,559 4,063
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Revenues from homebuilding activities in the three months ended June 30, 1998,
increased by 39.8%, to $608.3 million, from $435.1 million in the comparable
period of 1997, despite a decline in land sales from $18.1 million in the 1997
period to $2.2 million in 1998. The number of homes closed by the Company
increased by 46.5%, to 3,929 homes in the three months ended June 30, 1998, from
2,681 in the same period of 1997. Percentage increases in the number of homes
closed ranging from 30.6% to 112.5% were achieved in the Company's five market
regions. The increases in both revenues and homes closed were due to strong
housing demand, the Company's entrance into new markets, and the results
achieved by C. Richard Dobson Builders, Inc. (Dobson), which was acquired in
February, 1998; Mareli Development & Construction Co. (Mareli) of Louisville,
Kentucky, acquired in May, 1998; and RMP Development, Inc., (RMP) of Portland,
Oregon, acquired in June, 1998. In markets where the Company operated during the
third fiscal quarters of both 1998 and 1997, home closings increased by 35.1%,
to 3,621 homes in the 1998 period.
The average selling price of homes closed in the three months ended June 30,
1998, was $154,300, down 0.8% over the $155,500 average selling price in the
comparable period of 1997. The price mix of homes closed shifted downward during
the current period, offset in part by increases in home selling prices made
possible by favorable real estate market conditions.
New net sales contracts increased 41.0%, to 4,411 homes in the three months
ended June 30, 1998, from 3,129 homes in the three months ended June 30, 1997.
In markets in which the Company operated during the third fiscal quarters of
both 1998 and 1997, sales contracts were 4,126 homes in the current three-month
period, a 31.9% increase over 1997.
The Company was operating in 511 subdivisions at June 30, 1998, compared to 367
subdivisions at June 30, 1997. At June 30, 1998, the Company's backlog of sales
contracts was 6,559 homes, a 61.4% increase over comparable figures at June 30,
1997. In markets in which the Company operated during the third fiscal quarters
of both 1998 and 1997, the sales backlog at June 30, 1998, was 6,007 homes, a
47.8% increase over 1997.
Cost of sales increased by 37.8%, to $499.1 million in the three months ended
June 30, 1998, from $362.1 million in the comparable period of 1997. The
increase was primarily attributable to the increase in revenues. As a percentage
of revenues, cost of sales for the quarter decreased to 82.0% in 1998 from 83.2%
in 1997, due primarily to increases in home selling prices beyond the increases
in home construction costs.
Selling, general and administrative (SG&A) expense increased by 28.2%, to $58.4
million in the three months ended June 30, 1998, from $45.5 million in the
comparable period of 1997. As a percentage of revenues, SG&A expense for the
quarter decreased 0.9%, to 9.6% in 1998 from 10.5% in 1997. The decrease in SG&A
expenses as a percentage of revenues was primarily due to increased revenues to
absorb the fixed elements of overhead and costs associated with integrating
three 1997 acquisitions into the Company.
Interest expense totalled $4.1 million in the three months ended June 30, 1998,
compared to $3.0 million in the comparable period of 1997. The Company follows a
policy of capitalizing interest only on inventory under construction or
development. As a percentage of revenues, interest expense remained constant, at
0.7%, in the three months ended June 30, 1998, compared to the comparable period
of 1997. Capitalized interest and other financing costs are included in cost of
sales at the time of home closings.
Other income, which consists mainly of interest income on funds temporarily
invested, increased to $2.4 million in the three months ended June 30, 1998,
from $1.0 million in the same period of 1997, due primarily to larger investable
balances.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues from financing activities increased 69.9%, to $5.5 million in the three
months ended June 30, 1998, from $3.2 million in the comparable period of 1997.
Income before income taxes from financing activities increased 102.2%, to $1.7
million in the three months ended June 30, 1998, from $0.8 million in the
comparable period of 1997. The increases in financing activity revenues and
income before taxes were due primarily to the increased volume of mortgage and
title services provided to the Company's homebuilding customers.
In the three months ended June 30, 1998, the Company expensed $11.9 million in
non-recurring costs associated with the merger with Continental. The costs
consisted primarily of fees to third party investment, accounting and legal
advisors.
The provision for income taxes increased 48.8%, to $15.8 million in the three
months ended June 30, 1998, from $10.6 million in the comparable period of 1997,
due primarily to the increase in taxable income and an increase in the overall
estimated income tax rate anticipated for fiscal 1998, caused by the
non-deductibility of certain merger costs.
Nine Months Ended June 30, 1998 Compared to Nine Months Ended June 30, 1997
Revenues from homebuilding activities in the nine months ended June 30, 1998,
increased by 35.4%, to $1,475.9 million, from $1,090.1 million in the comparable
period of 1997, despite a decline in land sales from $34.0 million in the 1997
period to $3.3 million in 1998. The number of homes closed by the Company
increased by 41.0%, to 9,712 in the nine months ended June 30, 1998, from 6,886
in the same period of 1997. Percentage increases in homes closed ranging from
22.0% to 131.6% were achieved in the Company's market regions. In markets where
the Company operated during both nine-month periods ended June 30, 1998 and
1997, home closings increased 26.3%, to 8,700 homes in the 1998 period.
The average selling price of homes closed in the nine months ended June 30,
1998, was $151,600, a 1.2% decrease over the comparable period of 1997. The
decrease in average sales price was attributable to differences in the
geographic mix of markets in which homes were closed. Also, the price mix of
homes closed decreased during the 1998 period, offset in part by increases in
home selling prices made possible by favorable real estate market conditions.
New net sales contracts increased 59.2%, to 11,938 homes for the nine months
ended June 30, 1998, from 7,501 homes for the nine months ended June 30, 1997.
Percentage increases in new net sales contracts ranging from 28.2% to 196.3%
were achieved in the Company's market regions. In markets where the Company
operated during both nine-month periods ended June 30, 1998 and 1997, sales
contracts increased 43.3%, to 10,746 in the 1998 period.
Cost of sales increased by 34.2%, to $1,210.1 million in the nine months ended
June 30, 1998, from $901.4 million in the comparable period of 1997. The
increase was partly attributable to the increase in revenues. As a percentage of
revenues, cost of sales decreased to 82.0% in the nine months ended June 30,
1998, from 82.7% in the same period of 1997, due primarily to increases in home
selling prices beyond the increase in home construction costs.
Selling, general and administrative (SG&A) expense increased by 33.0%, to $152.5
million in the nine months ended June 30, 1998, from $114.7 million in the
comparable period of 1997. As a percentage of revenues, SG&A expense decreased
to 10.3% for the nine months ended June 30, 1998, from 10.5% for the same period
of 1997. The decrease in SG&A expense as a percentage of revenues is partially
due to increased revenues to absorb the fixed elements of overhead and the costs
associated with integrating the 1997 acquisitions into the Company.
Interest expense during the nine months ended June 30, 1998 amounted to $9.2
million, compared to $7.6 million in the comparable period of 1996. The Company
follows a policy of capitalizing interest only on inventory under construction
or development. As a percentage of revenues, interest expense declined slightly,
to 0.6% in the nine months ended June 30, 1998, from 0.7% in the comparable
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
period of 1997. Capitalized interest and other financing costs are included in
cost of sales at the time of home closings.
Other income, which consists mainly of interest income on funds temporarily
invested, increased to $4.5 million in the nine months ended June 30, 1998, from
$2.8 million in the same period of 1997, due primarily to larger investable
balances.
Revenues from financing activities increased 54.5%, to $14.2 million in the nine
months ended June 30, 1998, from $9.2 million in the comparable period of 1997.
Income before income taxes from financing activities increased 89.8%, to $4.9
million in the nine months ended June 30, 1998, from $2.6 million in the
comparable period of 1997. The increases in financing activity revenues and
income before taxes were due primarily to the increased volume of mortgage and
title services provided to the Company's homebuilding customers.
In the nine months ended June 30, 1998, the Company expensed $11.9 million in
non-recurring costs associated with the merger with Continental. The costs
consisted primarily of fees to third party investment, accounting and legal
advisors.
The provision for income taxes increased by 42.2%, to $40.6 million in the nine
months ended June 30, 1998, from $28.6 million in the comparable period of 1997,
due primarily to the increase in taxable income and an increase in the overall
estimated income tax rate anticipated for fiscal 1998, caused by the
non-deductibility of certain merger costs.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had available cash and cash equivalents of $112.7
million. Inventories (including finished homes, construction in progress, and
developed residential lots and other land) at June 30, 1998, had increased by
$267.0 million since September 30, 1997, partly due to the acquisitions of the
assets (primarily inventories) of Dobson, Mareli, and RMP. Inventories also
increased due to a general increase in business activity and the expansion of
operations in all of the Company's market areas. The inventory increase, the
merger with Continental, and the acquisitions of Dobson, Mareli and RMP, were
financed primarily by borrowing under the revolving credit facility. As a
result, the Company's ratio of notes payable to total capital at June 30, 1998,
increased to 64.8% at June 30, 1998, compared to the September 30, 1997 level of
60.3%. The stockholders' equity to total assets ratio decreased during the nine
months to 30.4% at June 30, 1998, from 34.3% at September 30, 1997.
During fiscal 1998, the Company's Board of Directors has declared three
quarterly cash dividends of $.0225 per common share, the last of which is
payable on August 14, 1998, to stockholders of record on August 3, 1998.
In February, 1998, the Company completed the acquisition of all the outstanding
capital stock of C. Richard Dobson Builders, Inc. (Dobson), and certain of its
affiliated companies, for $23.4 million. Dobson's assets, primarily inventories,
amounted to approximately $64.3 million. Total liabilities assumed amounted to
approximately $52.4 million, including notes payable of $49.3 million, which
were paid at closing. The Dobson acquisition was accounted for as a purchase.
On April 20, 1998, the Company closed its merger with Continental Homes Holding
Corp. (Continental). In accordance with the terms of the merger agreement, a
total of 15,459,514 shares of D.R. Horton, Inc. common stock were exchanged for
all of the Continental common stock outstanding, based upon an exchange ratio of
2.25. At the time of the merger, the Company assumed Continental's existing
public debt, consisting of $150 million 10% senior notes due April 15, 2006, and
$86.1 million in 6 7/8% convertible subordinated notes due November 1, 2002. The
convertible notes may currently be exchanged for Horton common stock at the rate
of 94.73625 shares for each $1,000 principal amount. The convertible notes are
redeemable in whole or in part at the option of the Company at any time on or
after November 1, 1998, at redemption prices decreasing from 103.438%. If
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
current conditions prevail until November 1, 1998, the Company intends to call
all the convertible notes outstanding at that time. As of June 30, 1998,
approximately $3.7 million of convertible notes had been exchanged for common
stock.
On April 21, 1998, the Company increased and restructured its unsecured bank
credit facility, to $825 million, consisting of a $775 million four-year
revolving loan and a $50 million four-year letter of credit facility. At June
30, 1998, the Company had outstanding debt of $905.9 million, of which $515.0
million represented advances under the bank credit facility. Under the debt
covenants associated with the restructured credit facility, at June 30, 1998,
the Company had additional borrowing capacity of $345.2 million. Mortgage
activities are presently being financed through borrowings under the bank
revolving credit facility. It is contemplated that a separate warehouse
financing facility for these activities will be in place in the future.
In May and June, 1998, the Company completed the acquisition of the principal
assets (approximately $16.4 million, primarily inventories) of Mareli
Development & Construction Co., Inc. (Mareli), of Louisville, Kentucky, and RMP
Properties, Inc. (RMP), of Portland, Oregon, for $7.8 million in cash, 70,249
shares of Horton common stock valued at $1.1 million, and the assumption of
approximately $16.0 million in trade accounts and notes payable associated with
the acquired assets. Mareli's and RMP's liabilities included $13.5 million in
notes payable which were paid at closing.
The Company's rapid growth and acquisition strategy require significant amounts
of cash. It is anticipated that future home construction, lot and land purchases
and acquisitions will be funded through internally generated funds and new and
existing credit facilities. The Company maintains a universal shelf registration
statement with a capacity of $400 million. Additionally, a shelf registration
has been filed for 10,000,000 shares of common stock issuable to effect, in
whole or in part, possible future acquisitions. Market conditions will determine
when and whether the Company will sell additional securities using the shelf
registration statements. The Company continuously evaluates its capital
structure and, in the future, may seek to further increase unsecured debt and
obtain additional equity to fund ongoing operations as well as to pursue
additional growth opportunities.
Except for ordinary expenditures for the construction of homes, the acquisition
of land and lots for development and sale of homes, at June 30, 1998, the
Company had no material commitments for capital expenditures.
Inflation
The Company, as well as the homebuilding industry in general, may be adversely
affected during periods of high inflation, primarily because of higher land and
construction costs. Inflation also increases the Company's financing, labor and
material costs. In addition, higher mortgage interest rates significantly affect
the affordability of permanent mortgage financing to prospective homebuyers. The
Company attempts to pass through to its customers any increases in its costs
through increased sales prices and, to date, inflation has not had a material
adverse effect on the Company's results of operations. However, there is no
assurance that inflation will not have a material adverse impact on the
Company's future results of operations.
Safe Harbor Statement
Certain statements contained herein, as well as statements made by the Company
in periodic press releases and oral statements made by the Company's officials
to analysts and stockholders in the course of presentations about the Company
may be construed as "Forward-Looking Statements" as defined in the Private
Securities Litigation Reform Act of 1995. Such statements may involve unstated
risks, uncertainties and other factors that may cause actual results to differ
materially from those initially anticipated. Such risks, uncertainties and other
factors include, but are not limited to, the Company's substantial leverage,
changes in general economic and market conditions, changes in interest rates and
the availability of mortgage financing, changes in costs and availability of
material, supplies and labor, general competitive conditions, the availability
of capital and the ability to successfully effect acquisitions.
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PART II. OTHER INFORMATION
ITEM 2. Changes in Securities.
Certain new indebtedness and limitations on payment of dividends or
other distributions by the Company on its Common Stock were created in
connection with its April 20, 1998 acquisition of Continental Homes Holding
Corp. ("Continental"). As part of that acquisition, the Company executed (i) a
First Supplemental Indenture, dated as of April 20, 1998, among the Company, the
Guarantors named therein and First Union Bank, as Trustee, assuming an Indenture
dated as of April 15, 1996, between Continental and First Union Bank, as
Trustee, and Continental's related 10% Senior Notes, due 2006, and (ii) a First
Supplemental Indenture, dated as of April 20, 1998, between the Company and
Manufacturers and Traders Trust Company, as Trustee, assuming an Indenture dated
as of November 1, 1995, between Continental and Manufacturers and Traders Trust
Company, as Trustee, and Continental's related 6-7/8% Convertible Subordinated
Notes, due 2002. The Indenture, and the Supplemental Indenture, related to the
10% Senior Notes impose limitations on the ability of the Company and its
subsidiaries guaranteeing the assumed notes to, among other things, incur
indebtedness, make "Restricted Payments" (as defined, which includes payments of
dividends or other distributions on the Common Stock of the Company), effect
certain "Asset Sales" (as defined), enter into certain transactions with
affiliates, merge or consolidate with any person, or transfer all or
substantially all of their properties and assets. These limitations are similar
to limitations already existing by reason of the Company's 8-3/8% Senior Notes,
due 2004, and the related Indenture. Other information concerning the
acquisition of Continental has previously been reported in, and is described in,
the Company's Registration Statement on Form S-4 (Registration Number 333-
44279) dated March 13, 1998 and the Company's current reports on Form 8-K, dated
April 14, 1998, April 20, 1998 (filed on April 21, 1998), April 20, 1998 (filed
on May 4, 1998) and June 5, 1998 (filed on June 8, 1998).
On June 8, 1998, the Company issued 70,249 shares (the "Shares") of its
Common Stock, $.01 par value, to RMP Properties, Inc. ("RMP"). The shares were
valued at $1,250,000 and were issued to RMP as partial consideration for the
assets of RMP. Roger M. Pollock ("Pollock") was the sole owner of RMP. The
Shares were issued in reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act of 1933, based on: the sophistication of
Pollock; his experience in and knowledge of homebuilding; the fact that the
Company provided Pollock with copies of its most recent Annual Report on Form
10-K and annual meeting proxy statement, a Joint Proxy Statement and Prospectus
concerning the merger of Continental into the Company and all filings under the
Securities Exchange Act of 1934 since the filing of the Form 10-K and provided
Pollock access to the Company's executive officers to ask questions and receive
answers concerning the Company; and the facts that Pollock gave the Company
investment representations concerning the Shares and that the Shares are subject
to transfer restrictions which are reflected in restrictive legends on the
certificate for the Shares and stop transfer instructions with the Company's
transfer agent for Common Stock.
ITEM 4. Submission of Matters to a Vote of Security Holders.
On April 20, 1998, the Company held a Special Meeting of Stockholders
(the "Meeting"). At the Meeting, the stockholders considered and approved a
proposal to approve and adopt the Agreement and Plan of Merger, dated as of
December 18, 1997 (the "Merger Agreement"), between the Company and Continental,
providing for, among other things, the merger of Continental into the Company
(the "Proposal"). The number of votes cast for and against the Proposal and the
number of abstentions were as follows:
Votes For Votes Against Abstentions
----------- ------------- -----------
32,142,409 229,081 9,641
15
ITEM 5. Other Information.
In connection with the Company's acquisition of Continental, the
Company assumed all of the outstanding stock options granted by Continental
pursuant to Continental's 1986 and 1988 Stock Incentive Plans.
On April 21, 1998, the Company increased and restructured its unsecured
bank credit facility to $825 million, consisting of a $775 million four - year
revolving loan and a $50 million four-year letter of credit facility.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
4.1 Indenture dated as of April 15, 1996
between Continental and First Union
National Bank, as Trustee, is
incorporated herein by reference from
Exhibit 4.1 to Continental's Annual
Report on Form 10-K for the year ended
May 31, 1996. The Commission file number
for Continental is 1-10700.
4.2 Indenture dated as of November 1, 1995
between Continental and Manufacturers
and Traders Trust Company, as Trustee,
is incorporated by reference from
Exhibit 4.1 to Continental's Quarterly
Report on Form 10-Q for the quarter
ended November 30, 1995. The Commission
file number for Continental is 1-10700.
4.3 First Supplemental Indenture, dated as
of April 20, 1998, among the Company,
the guarantors named therein and First
Union National Bank, as Trustee,
relating to Continental's 10% Senior
Notes, due 2006, is incorporated herein
by reference from Exhibit 4.5 to the
Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
4.4 First Supplemental Indenture, dated as
of April 20, 1998, between the Company
and Manufacturers and Traders Trust
Company, as Trustee, relating to
Continental's 6-7/8% Convertible
Subordinated Notes, due 2002, is
incorporated herein by reference from
Exhibit 4.6 to the Company's Quarterly
Report on Form 10-Q for the quarter
ended March 31, 1998.
10.1* Master Loan and Inter-Creditor Agreement
dated as of April 21, 1998, among D.R.
Horton, Inc., as Borrower; NationsBank,
N.A., Bank of America National Trust and
Savings Association, Fleet National
Bank, Bank United, Comerica Bank, Credit
Lyonnais New York Branch, Societe
Generale, Southwest Agency, The First
National Bank of Chicago, PNC Bank,
National Association, Amsouth Bank, Bank
One, Arizona, NA, First American Bank
Texas, SSB, Harris Trust and Savings
Bank, Sanwa Bank California, Norwest
Bank Arizona, National Association and
Summit Bank, as Banks; and NationsBank,
N.A., as Administrative Agent.
10.2* Indemnification Agreement for new
Director, W. Thomas Hickcox. (On the
same date, an Indemnification Agreement
in substantially identical form was
executed with Bradley S. Anderson, who
was also elected a Director that day.)
10.3* Continental Homes Holding Corp. 1988
Stock Incentive Plan (as amended and
restated June 20, 1997).
16
10.4* Restated Continental Homes Holding Corp.
1986 Stock Incentive Plan, and the First
Amendment thereto dated June 17, 1987.
10.5* Form of Stock Option Agreement pursuant
to Continental's 1986 and 1988 Stock
Incentive Plans.
- ----------
*Filed herewith.
(b) Reports on Form 8-K.
1. On April 14, 1998, the Company filed a
Current Report on Form 8-K (Item 5), which
included its press release of that date
announcing the exchange ratio for the merger
of Continental into the Company.
2. On April 21, 1998, the Company filed a
Current Report on Form 8-K, dated April 20,
1998 (Item 5), which included its April 21,
1998 press release announcing that the
stockholders of the Company and Continental
had approved the merger of Continental into
the Company.
3. On May 4, 1998, the Company filed a Current
Report on Form 8-K, dated April 20, 1998
(Item 2), which provided further information
concerning the acquisition of Continental
and incorporated by reference financial
statements of Continental and pro forma
combined financial information for the
Company and Continental.
4. On June 8, 1998, the Company filed a Current
Report on Form 8-K, dated June 5, 1998
(Items 5 and 7), which provided an updated
description of the Company's business as
combined with Continental, as well as
supplemental consolidated financial
statements of the Company for the three
years ended September 30, 1997 and
Management's Discussion and Analysis of
Financial Condition and Results of
Operations (Restated).
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
D.R. HORTON, INC.
Date: August 6, 1998 By /s/ David J. Keller
-----------------------------------------------
David J. Keller, on behalf of D.R. Horton, Inc.
and as Executive Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting Officer)
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