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, 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
---------
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 -- 64,145,843 shares as of February 10, 1999
----------
This Report contains 18 pages.
--
INDEX
D.R. HORTON, INC.
PART I. FINANCIAL INFORMATION. Page
----
ITEM 1. Financial Statements.
Consolidated Balance Sheets--December 31, 1998
and September 30, 1998. 3
Consolidated Statements of Income--Three Months Ended
December 31, 1998 and 1997. 4
Consolidated Statement of Stockholders' Equity--Three
Months Ended December 31, 1998. 5
Consolidated Statements of Cash Flows--Three Months
Ended December 31, 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 6. Exhibits and Reports on Form 8-K. 15-17
SIGNATURES. 18
D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1998 1998
------------ --------------
(In thousands)
(Unaudited)
ASSETS
Homebuilding:
Cash $93,820 $76,754
Inventories:
Finished homes and construction in progress 758,019 717,709
Residential lots - developed and under development 703,528 630,252
Land held for development 5,734 10,072
---------- -----------
1,467,281 1,358,033
Property and equipment (net) 29,841 25,456
Earnest money deposits and other assets 74,808 74,827
Excess of cost over net assets acquired (net) 62,044 56,782
---------- -----------
1,727,794 1,591,852
---------- -----------
Financial Services:
Mortgage loans held for sale 64,576 72,325
Other assets 3,393 3,658
---------- -----------
67,969 75,983
---------- -----------
$1,795,763 $1,667,835
========== ===========
LIABILITIES
Homebuilding:
Accounts payable and other liabilities $256,816 $259,005
Notes payable:
Unsecured:
Revolving credit facility due 2002 535,000 455,000
8 3/8% senior notes due 2004, net 147,853 147,754
10% senior notes due 2006, net 147,187 147,156
6 7/8% convertible subordinated notes
due 2002, net - 58,794
Other secured 17,866 17,303
---------- -----------
847,906 826,007
---------- -----------
1,104,722 1,085,012
Financial Services:
Other liabilities 991 1,444
Notes payable to financial institutions 45,435 28,497
---------- -----------
46,426 29,941
---------- -----------
1,151,148 1,114,953
---------- -----------
Minority interest 3,534 3,446
---------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 30,000,000
shares authorized, no shares issued - -
Common stock, $.01 par value, 200,000,000
shares authorized, 61,484,982 at December 31,
1998 and 55,836,733 at September 30, 1998,
issued and outstanding. 615 558
Additional capital 361,708 301,503
Retained earnings 278,758 247,375
---------- -----------
641,081 549,436
---------- -----------
$1,795,763 $1,667,835
========== ===========
See accompanying notes to consolidatedfinancial statements.
-3-
D. R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months
Ended December 31,
--------------------------------
1998 1997
---------- ----------
(In thousands, except
net income per share)
(Unaudited)
Homebuilding:
Revenues
Home sales................................ $611,701 $417,836
Land/lot sales............................ 41,127 820
---------- ----------
652,828 418,656
---------- ----------
Cost of sales
Home sales................................ 497,375 341,945
Land/lot sales............................ 36,777 592
---------- ----------
534,152 342,537
---------- ----------
Gross profit
Home sales................................ 114,326 75,891
Land/lot sales............................ 4,350 228
---------- ----------
118,676 76,119
Selling, general and administrative expense... 65,571 45,727
Interest expense.............................. 2,793 2,475
Other (income)................................ (990) (1,043)
---------- ----------
51,302 28,960
---------- ----------
Financial Services:
Revenues...................................... 7,802 4,541
Selling, general and administrative expense... 4,974 3,297
Interest expense.............................. 743 317
Other (income)................................ (879) (531)
---------- ----------
2,964 1,458
---------- ----------
INCOME BEFORE INCOME TAXES................ 54,266 30,418
Provision for income taxes.................... 21,571 12,094
---------- ----------
NET INCOME................................ $32,695 $18,324
========== ==========
Net income per share:
Basic..................................... $0.54 $0.35
Diluted................................... $0.52 $0.31
========== ==========
Weighted average number of shares of
stock outstanding:
Basic..................................... 60,011 52,779
Diluted................................... 62,378 62,131
========== ==========
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, 1998 $558 $301,503 $247,375 $549,436
Net income - - 32,695 32,695
Issuance under D.R. Horton, Inc.
employee benefit plans (466 shares) - 6 - 6
Exercise of stock options (78,440
shares) 1 928 - 929
Conversion of convertible
subordinated notes (5,569,343
shares) 56 59,271 - 59,327
Cash dividends - - (1,312) (1,312)
-------------------------------------------
Balances at December 31, 1998 $615 $361,708 $278,758 $641,081
===========================================
See accompanying notes to consolidated financial statements.
-5-
D. R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months
Ended December 31,
----------------------
1998 1997
-------- --------
(In thousands)
(Unaudited)
OPERATING ACTIVITIES
Net income $32,695 $18,324
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,836 2,360
Expense associated with issuance of stock
under employee benefit plans - 115
Changes in operating assets and liabilities:
Increase in inventories (109,248) (65,399)
Increase in earnest money deposits and
other assets (895) (3,633)
Decrease (increase) in mortgage loans held
for sale 7,749 (163)
Decrease in accounts payable, accrued
expenses and customer deposits (626) (14,582)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (66,489) (62,978)
---------- ----------
INVESTING ACTIVITIES
Net purchase of property and equipment (7,053) (1,157)
Net cash paid for acquisitions (6,300) (1,851)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (13,353) (3,008)
---------- ----------
FINANCING ACTIVITIES
Net increase in notes payable 97,285 61,478
Proceeds from issuance of stock associated
with certain employee benefit plans 6 -
Proceeds from exercise of stock options 929 444
Payment of cash dividends (1,312) (1,090)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 96,908 60,832
---------- ----------
INCREASE (DECREASE) IN CASH 17,066 (5,154)
Cash at beginning of period 76,754 78,228
---------- ----------
Cash at end of period $93,820 $73,074
========== ==========
Supplemental cash flow information:
Interest paid $5,302 $4,369
========== ==========
Income taxes paid $6,031 $13,952
========== ==========
See accompanying notes to consolidated financial statements.
-6-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 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-month period ended December
31, 1998, are not necessarily indicative of the results that may be expected for
the year ending September 30, 1999.
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 land or lots it has developed. The Company also
provides title agency and mortgage brokerage services to its homebuyers.
NOTE B - NET INCOME PER SHARE
Basic net income per share for the three month periods ended December 31, 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.
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, 1998, not significant.
The provisions for income tax expense for the three month periods ended December
31, 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 D - INTEREST
Three months ended
December 31,
--------------------------
1998 1997
---- ----
Interest costs are (in thousands):
Capitalized interest, beginning of period $35,153 $28,952
Interest incurred-homebuilding 15,283 15,049
Interest expensed:
Directly-homebuilding (2,793) (2,475)
Amortized to cost of sales (14,884) (8,237)
---------- ----------
Capitalized interest, end of period $32,759 $33,289
========== ==========
-7-
D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
December 31, 1998
NOTE E - EVENTS SUBSEQUENT TO QUARTER END
On January 28, 1999, the Company acquired the operating assets (primarily
inventories) of Cambridge Homes of Chicago. In the transaction, the Company
issued 2,555,911 shares of common stock, valued at $55 million, and assumed
debt, consisting primarily of notes payable associated with the acquired assets,
of approximately $103 million, which was paid with borrowings under our
revolving credit facility. The Cambridge acquisition will be treated as a
purchase for accounting purposes. At December 31, 1998, Cambridge had a backlog
of homes under contract of approximately $88 million (475 homes).
On February 4, 1999, the Company issued $385 million, 8% senior notes, due
February 1, 2009, and realized net proceeds of $377 million, which was used to
repay borrowings under the revolving credit facility. The notes contain
covenants similar to those of the 8 3/8% and 10% senior notes, the most
significant of which limit the Company's ability to incur additional debt, pay
dividends on or repurchase common stock, invest in subsidiaries which are not
guarantors of the notes, and enter into certain transactions with affiliates.
NOTE F - SUMMARIZED FINANCIAL INFORMATION
The 8%, 8 3/8%, 10% senior notes payable are fully and unconditionally
guaranteed, on a joint and several basis, by all direct and indirect
subsidiaries other than certain inconsequential subsidiaries. Each of the
guarantors is a wholly-owned subsidiary. Summarized financial information of the
Company and its subsidiaries, including the non-guarantor subsidiaries, is
presented below. Additional financial information relating to the non-guarantor
financial services subsidiaries is included in the accompanying primary
financial statements. 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, 1998 Nonguarantor Subsidiaries
D.R. ------------------------- Inter-
(Unaudited) Horton, Guarantor Financial company
Inc. Subsidiaries Services Other Eliminations Total
---------- ------------ --------- --------- ------------ ----------
Total assets............ $1,276,543 $1,446,602 $67,969 $39,898 ($1,035,249) $1,795,763
Total liabilities....... 931,953 1,091,345 46,426 40,219 (955,261) 1,154,682
Revenues................ 118,894 527,650 7,802 6,284 0 660,630
Gross profit............ 13,197 104,229 0 1,250 0 118,676
Net income.............. 5,174 25,875 1,785 (139) 0 32,695
December 31, 1997 Nonguarantor Subsidiaries
D.R. ------------------------- Inter-
(Unaudited) Horton, Guarantor Financial company
Inc. Subsidiaries Services Other Eliminations Total
---------- ------------ --------- --------- ------------ ----------
Total assets............ $ 663,954 $ 985,624 $36,202 $31,799 ($405,110) $1,312,469
Total liabilities....... 435,648 768,532 24,455 20,897 (382,667) 866,865
Revenues................ 68,336 347,047 4,541 3,273 0 423,197
Gross profit............ 10,490 64,977 0 652 0 76,119
Net income.............. 1,382 16,390 879 (327) 0 18,324
September 30, 1998 Nonguarantor Subsidiaries
D.R. ------------------------- Inter-
Horton, Guarantor Financial company
Inc. Subsidiaries Services Other Eliminations Total
---------- ------------ --------- --------- ------------ ----------
Total assets............ $1,169,347 $1,548,554 $89,097 $30,672 ($1,169,835) $1,667,835
Total liabilities....... 906,014 1,272,398 81,820 19,301 (1,161,134) 1,118,399
Revenues................ 362,847 1,777,833 21,892 14,369 0 2,176,941
Gross profit............ 44,553 342,300 0 2,586 0 389,439
Net income.............. 2,140 88,128 4,418 (1,306) 0 93,380
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - CONSOLIDATED
D. R. Horton, Inc. and subsidiaries (the "Company") provide homebuilding
activities in 24 states and 41 markets through its 53 homebuilding divisions.
Through its financial services activities, the Company also provides mortgage
banking and title agency services in many of these same markets.
Three Months Ended December 31, 1998 Compared to Three Months Ended December 31,
1997
Consolidated revenues for the three months ended December 31, 1998, increased
56.1%, to $660.6 million, from $423.2 million for the comparable period of 1997,
primarily due to increases in both home and land/lot sales revenues.
Income before income taxes for the three months ended December 31, 1998,
increased 78.4%, to $54.3 million, from $30.4 million for the comparable period
of 1997. As a percentage of revenues, income before income taxes for the three
months ended December 31, 1998, increased 1.0%, to 8.2%, from 7.2% for the
comparable period of 1997 primarily due to the overall reduction in selling,
general and administrative expenses as a percentage of revenues.
The consolidated provision for income taxes increased 78.4%, to $21.6 million
for the three months ended December 31, 1998, from $12.1 million for the same
period of 1997, due to the corresponding increase in income before income taxes.
The effective income tax rate was 39.8% for both periods.
RESULTS OF OPERATIONS - HOMEBUILDING
The following tables set forth certain operating and financial data for the
Company's homebuilding activities:
Percentages of Homebuilding Revenues
Three Months Ended December 31,
1998 1997
----------- -----------
Cost and expenses:
Cost of sales 81.8 % 81.8 %
Selling, general and administrative expense 10.0 10.9
Interest expense 0.5 0.6
----------- -----------
Total costs and expenses 92.3 93.3
Other (income) (0.2) (0.2)
----------- -----------
Income before income taxes 7.9 % 6.9 %
=========== ===========
Three Months Ended December 31,
1998 1997
---------- -----------
Homes Homes
Homes Closed Closed Revenues Closed Revenues
------ -------- ------ --------
($'s in millions)
Mid-Atlantic............... 632 $113.4 250 $ 48.0
Midwest.................... 246 46.2 106 20.3
Southeast.................. 595 93.8 513 74.6
Southwest.................. 1,645 218.8 1,498 191.1
West....................... 728 139.5 454 84.2
------ -------- ------ -------
3,846 $611.7 2,821 $418.2
====== ======== ====== =======
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended December 31,
1998 1997
---------- -----------
Homes Homes
New Sales Contracts (net of cancellations) Sold $ Sold $
------ -------- ------ --------
($'s in millions)
Mid-Atlantic............... 571 $111.6 296 $ 52.6
Midwest.................... 228 45.5 131 24.7
Southeast.................. 545 84.9 558 80.8
Southwest.................. 1,645 229.6 1,274 164.5
West....................... 548 109.1 621 122.5
------ -------- ------ -------
3,537 $580.7 2,880 $445.1
====== ======== ====== =======
December 31,
1998 1997
---------- -----------
Sales Backlog Homes $ Homes $
----- ------- ----- -------
($'s in millions)
Mid-Atlantic............... 871 $ 179.1 380 $ 73.5
Midwest.................... 401 79.8 205 40.0
Southeast.................. 683 107.4 742 107.3
Southwest.................. 3,043 434.7 1,803 234.2
West....................... 1,034 220.9 890 181.1
----- --------- ------ -------
6,032 $1,021.9 4,020 $ 636.1
===== ======== ====== =======
- ----------
The Company's market regions consist of the following markets:
Mid-Atlantic Baltimore, Charleston, Charlotte, Greensboro, Greenville,
Hilton Head, Myrtle Beach, New Jersey, Newport News,
Raleigh/Durham, Richmond, Suburban Washington D.C. and
Wilmington
Midwest Chicago, Cincinnati, Kansas City, Louisville,
Minneapolis/St. Paul and St. Louis
Southeast Atlanta, Birmingham, Jacksonville, Nashville, Orlando,
Pensacola and South Florida
Southwest Albuquerque, Austin, Dallas/Fort Worth, Houston, Killeen,
Phoenix, San Antonio and Tucson
West Denver, Las Vegas, Los Angeles, Portland, Sacramento, Salt
Lake City and San Diego
Three Months Ended December 31, 1998 Compared to Three Months Ended December 31,
1997
Revenues from homebuilding activities increased 55.9%, to $652.8 million (3,846
homes closed) for the three months ended December 31, 1998, from $418.7 million
(2,821 homes closed) for the comparable period of 1997. Increased land/lot sales
accounted for 17.2% of the revenue increase. The number of homes closed
increased in all of the Company's market regions, with percentage increases
ranging from 152.8% in the Mid-Atlantic region to 9.8% in the Southwest region.
The increases in both revenues and homes closed were due to strong housing
demand, the Company's entrance into new markets, and the increases attributable
to the acquisition of C. Richard Dobson Builders, Inc. (February, 1998); Mareli
Development & Construction Co. (May, 1998); and RMP Development, Inc. (June,
1998). In markets where the Company operated during both fiscal years, revenues
increased by 36.8%, to $572.2 million (3,588 homes closed).
The average selling price of homes closed during the three months ended December
31, 1998 was $159,000, up from $148,100 for the same period in 1997. The
increase in average selling price was due an increase in the price mix of homes
closed and increased selling prices.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New net sales contracts increased 22.8%, to 3,537 homes for the three months
ended December 31, 1998, from 2,880 for the same period of 1997. Percentage
increases in new net sales contracts ranging from 92.9% to 29.1% were achieved
in three of the Company's five market regions, while the Southeast and West
declined 2.3% and 11.8%, respectively. The overall increase in new net sales
contracts was due in part to sales achieved by the 1998 acquisitions, while new
net sales contracts increased 12.2%, to 3,230 homes in markets where the Company
operated in both periods. The average amount of new net sales contracts in the
three months ended December 31, 1998 was $164,200, up 6.2% over the $154,600
average in the three months ended December 31, 1997. This increase was due to an
increase in the price mix of homes sold and increased selling prices.
The Company was operating in 595 subdivisions at December 31, 1998, compared to
390 at December 31, 1997. At December 31, 1998, the Company's backlog of sales
contracts was $1,021.9 million (6,032 homes), up 60.6% from the comparable
amount at December 31, 1997. In markets where the Company operated during both
quarters, the sales contract backlog was $977.9 million (5,756 homes), up 53.7%
from December 31, 1997. The average sales price of homes in sales backlog was
$169,400 at December 31, 1998, up 7.1% from the $158,200 average at December 31,
1997. The average sales price of homes in backlog typically is higher than the
sales price of closed homes because it takes longer to construct more expensive
homes.
Cost of sales increased by 55.9%, to $534.2 million for the three months ended
December 31, 1998, from $342.5 million for the comparable quarter in 1997. The
increase in cost of sales was primarily attributable to the increase in
revenues. Cost of home sales as a percentage of home sales revenues was down
0.5% to 81.3% for the three months ended December 31, 1998 from 81.8% for the
comparable period of 1997. Cost of land/lot sales increased to 89.4% of land/lot
sales revenues for the three months ended December 31, 1998 from 72.2% for the
comparable period of 1997. Total homebuilding cost of sales was 81.8% of total
homebuilding revenues in both periods.
Selling, general and administrative (SG&A) expenses from homebuilding activities
increased by 43.4%, to $65.6 million in the three months ended December 31, 1998
from $45.7 million in the comparable period of 1997. As a percentage of
revenues, SG&A expenses decreased to 10.0% for the three months ended December
31, 1998 from 10.9% for the comparable period of 1997. The decrease in SG&A
expenses as a percentage of revenue is primarily due to the Company's cost
containment efforts and the increased revenues that absorb the fixed elements of
overhead. Included in SG&A expenses for the three months ended December 31, 1998
is a $4.4 million charge for severance benefits associated with former
Continental executives.
Interest expense associated with homebuilding activities increased to $2.8
million in the three months ended December 31, 1998, from $2.5 million in the
comparable period of 1997. As a percentage of homebuilding revenues,
homebuilding interest expense decreased to 0.5% in the three months ended
December 31, 1998 from 0.6% in the comparable period of 1997 due to average
inventory increasing at a greater rate than average interest-bearing debt. The
Company follows a policy of capitalizing interest only on inventory under
construction or development. During both periods, the Company expensed the
portion of incurred interest and other financing costs which could not be
charged to inventory. Capitalized interest and other financing costs are
included in cost of sales at the time of home closings.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FINANCIAL SERVICES
The following table summarizes financial and other information for the Company's
financial services operations:
Three months ended
December 31,
1998 1997
------- -------
Number of loans originated........................ 1,757 1,173
------- -------
Loan acquisition fees............................. $1,742 $1,326
Sale of servicing and marketing gains............. 3,939 2,021
Other revenues.................................... 805 355
------- -------
Total mortgage banking revenues................... 6,486 3,702
Title policy premiums, net........................ 1,316 839
------- -------
Total financial services revenues................. 7,802 4,541
General and administrative expenses............... 4,974 3,297
Interest expense.................................. 743 317
Interest/other (income)........................... (879) (531)
------- -------
Income before income taxes........................ $2,964 $1,458
======= =======
Three Months Ended December 31, 1998 Compared to Three Months Ended December 31,
1997
Revenues from financial services operations increased 71.8%, to $7.8 million in
the three months ended December 31, 1998, from $4.5 million in the comparable
period of 1997. The increase in financial services revenues was due to the rapid
expansion of the Company's mortgage loan and title services provided to the
Company's homebuilding customers. These activities are being expanded to
additional markets served by the homebuilding operations. SG&A expenses
associated with financial services increased 50.9%, to $5.0 million in the three
months ended December 31, 1998, from $3.3 million in the comparable period of
1997. As a percentage of financial services revenues, SG&A expenses decreased by
8.8%, to 63.8% in the three months ended December 31, 1998, from 72.6% in the
comparable period in 1997, due primarily to 1997 startup expenses for new
markets with limited revenues in the 1997 period.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had available cash and cash equivalents of
$93.8 million. Inventories (including finished homes, construction in progress,
and developed residential lots and other land) at December 31, 1998, had
increased by $109.2 million since September 30, 1998, due to a general increase
in business activity and the expansion of operations in the Company's market
areas. The inventory increase was financed largely by borrowing an additional
$80 million under the revolving credit facility and retained earnings. The
increased borrowing was partially offset by the conversion of $58.8 million of 6
7/8% convertible subordinated notes to common stock. As a result, the Company's
ratio of notes payable to total capital at December 31, 1998, was 58.2%, a
decrease of 2.7% over the September 30, 1998 level of 60.9%. The stockholders'
equity to total assets ratio increased to 35.7% at December 31, 1998, from 32.9%
at September 30, 1998.
During the quarter, the Company's Board of Directors declared a cash dividend of
$.0225 per common share, which was paid on October 23, 1998, to stockholders of
record on October 16, 1998.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has an $825 million, unsecured revolving credit facility, consisting
of a $775 million four-year revolving loan and a $50 million four-year letter of
credit facility that matures in 2003. At December 31, 1998, the Company had
outstanding debt of $893.3 million, of which $535.0 million represented advances
under the revolving credit facility. Under the debt covenants associated with
the revolving credit facility, at December 31, 1998, the Company had additional
borrowing capacity of $266.6 million. The Company has entered into multi-year
interest rate swap agreements, aggregating $300 million, that fix the interest
rate on a portion of the variable rate revolving credit facility.
The mortgage company operations have a $75 million, one-year bank warehouse
facility that is secured by mortgage loans held for sale. The warehouse facility
is not guaranteed by the parent company. As of December 31, 1998, $45.4 million
had been drawn under this facility with additional financing needs provided by
the Company. In the future, it is anticipated that all mortgage company
activities will be financed under the warehouse facility.
On January 28, 1999, the Company acquired the operating assets of Cambridge
Properties, a partnership doing business as Cambridge Homes. In the transaction,
the Company issued 2,555,911 shares of our common stock under our shelf
registration statement, and assumed debt of approximately $103 million, which
was repaid with borrowings under our revolving credit facility.
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. Additionally, an effective shelf registration
contains about 7.4 million shares of common stock issuable to effect, in whole
or in part, possible future acquisitions. On February 4, 1999, under an existing
shelf registration statement, the Company issued $385 million aggregate
principal amount of 8% Senior Notes, due 2009. The proceeds of the notes were
used to repay outstanding debt under our revolving credit facility and for
general corporate purposes. In the future, the company intends to maintain
effective shelf registration statements that would facilitate access to the
capital markets.
In November, 1998, the Company's Board of Directors approved stock and debt
repurchase programs for up to $100 million each. These programs were intended to
allow the Company to take advantage of favorable market conditions, should they
occur.
Except for ordinary expenditures for the construction of homes, the acquisition
of land and lots for development and sale of homes, at September 30, 1998, the
Company had no material commitments for capital expenditures.
YEAR 2000
The "Year 2000" issue (Y2K) refers to potential complications that may be caused
by computer hardware and software that were not designed for the change in the
century. If not corrected, such computer hardware and software may cause
management information systems to fail or miscalculate data.
The Company has assessed (and continues to assess) its vulnerability to Y2K.
Modifications and replacements of computer hardware and software to prepare for
Y2K are ongoing. The Company has assessed and tested its principal homebuilding
hardware and management information system and believes them to be Y2K
compliant. Evaluation, modification and testing of non-principal homebuilder
hardware and management information systems are in process and such systems are
expected to be converted to the principal management information system or Y2K
modifications are expected to be completed by June, 1999, at a cost of less than
one million dollars.
Management information systems for the Company's financial services activities
also are being evaluated and will require modifications or upgraded software
packages that are expected to be completed by June, 1999, at minimal cost.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As part of a program on continuous technology updates, for the past several
years, the Company has upgraded personal computers in its locations and this
process will continue. As this occurs during 1999, personal computers at each
company location will be tested for Y2K compliance. These personal computer
upgrades are considered to be ongoing and are not considered to be specifically
Y2K related. The Company expects to incur costs to replace or repair such
equipment, but has not presently determined the amount of these costs.
The Company is presently evaluating other potential Y2K issues, including
non-management information systems. A Y2K coordinator is directing the Company's
overall effort to address these issues. As part of these reviews, the Company's
relationships with payroll service providers, vendors, contractors, financial
institutions and other third parties will be reviewed to determine the impact,
if any, Y2K will have on these relationships.
The Company expects to incur Y2K specific costs in the future, but does not
anticipate that these costs will be material. It is possible that the Company
could encounter disruptions to its business that could have a material adverse
effect on its results of operations if all systems are not Y2K compliant. Also,
the Company could be materially impacted by widespread economic or financial
market disruptions or by Y2K computer system failures at government agencies on
which the Company is dependent for utilities, zoning, building permits and
related matters. There can be no assurance that Y2K will not adversely affect
the Company and its operations.
A formal Y2K contingency plan has not been prepared at this time due to
alternatives available to the Company. For example, non-principal homebuilding
management information systems could be converted to the principal homebuilding
system before Y2K becomes an issue.
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.
-14-
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 February 4, 1999 offering and issuance of $385 million
principal amount of 8% Senior Notes, due 2009 (the "Notes"). As part of that
issuance, the Company executed a Sixth Supplemental Indenture, dated as of
February 4, 1999, among the Company, the Guarantors named therein and American
Stock Transfer & Trust Company, as Trustee, authorizing the Notes. The
Supplemental Indenture, and the Indenture to which it relates (dated June 9,
1997, among the Company, the Guarantors named therein and American Stock
Transfer & Trust Company, as Trustee), impose limitations on the ability of the
Company and its subsidiaries guaranteeing the 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 Dispositions" (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, 10% Senior Notes, due 2006, and the related Indentures and
Supplemental Indentures. Other information concerning the offering and issuance
of the Notes has previously been reported in, and is described in, Amendment No.
1 to the Company's Registration Statement on Form S-3 (Registration Number
333-57193) dated June 30, 1998, the Company's Prospectus Supplement, dated
February 1, 1999 and filed with the Securities Exchange Commission (the
"Commission") on February 2, 1999 pursuant to Rule 424(b), and the Company's
current report on Form 8-K, dated February 2, 1999 and filed with the Commission
on February 2, 1999, each of which is incorporated herein by reference.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1* Amended and Restated Bylaws.
4.1 Indenture, dated as of June 9, 1997, among
the Company, the guarantors named therein
and American Stock Transfer & Trust Company,
as Trustee, relating to Senior Debt
Securities, is incorporated herein by
reference from Exhibit 4.1(a) to the
Company's Registration Statement on Form S-3
(Registration No. 333-27521), filed with the
Commission on May 21, 1997.
4.2 First Supplemental Indenture, dated as of
June 9, 1997, among the Company, the
guarantors named therein and American Stock
Transfer & Trust Company, as Trustee, is
incorporated by reference from Exhibit 4.1
to the Company's Form 8- K/A, dated April 1,
1997, filed with the Commission on June 6,
1997.
4.3 Second Supplemental Indenture, dated as of
September 30, 1997, among the Company, the
guarantors named therein and American Stock
Transfer & Trust Company, as Trustee, is
incorporated by reference from Exhibit 4.4
to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30,
1997, filed with the Commission on December
8, 1997.
4.4 Third Supplemental Indenture, dated as of
April 17, 1998, among the Company, the
guarantors named therein and American Stock
Transfer & Trust Company, as Trustee, is
incorporated by reference from Exhibit 4.3
to the Company's Quarterly
-15-
Report on Form 10-Q for the quarter ended
March 31, 1998, filed with Commission on May
14, 1998.
4.5 Fourth Supplemental Indenture, dated as of
April 20, 1998, among the Company, the
guarantors named therein and American Stock
Transfer & Trust Company, as Trustee, is
incorporated by reference from Exhibit 4.4
to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998,
filed with Commission on May 14, 1998.
4.6 Fifth Supplemental Indenture, dated as of
August 31, 1998, among the Company, the
guarantors named therein and American Stock
Transfer & Trust Company, as Trustee, is
incorporated herein by reference from
Exhibit 4.7 to the Company's Annual Report
on Form 10-K for the fiscal year ended
September 30, 1998, filed with the
Commission on December 10, 1998.
4.7 Sixth Supplemental Indenture, dated as of
February 4, 1999, among the Company, the
guarantors named therein and American Stock
Transfer & Trust Company, as Trustee,
relating to the 8% Senior Notes due 2009,
including the form of the Company's 8%
Senior Notes due 2009, is incorporated
herein by reference from Exhibit 4.1 to the
Company's Form 8-K, filed with the
Commission on February 2, 1999.
4.8 Indenture dated as of April 15, 1996 between
Continental Homes Holding Corp.
("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.
4.9 First Supplemental Indenture, dated as of
April 20, 1998, among the Company, the
guarantors named therein and First Union
National Bank, as Trustee, is incorporated
by reference from Exhibit 4.5 to the
Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, filed with
the Commission on May 14, 1998.
4.10 Second Supplemental Indenture, dated as of
August 31, 1998, among the Company, the
guarantors named therein and First Union
National Bank, as Trustee, is incorporated
herein by reference from Exhibit 4.10 to the
Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1998, filed
with the Commission on December 10, 1998.
4.11 Master Loan and Inter-Creditor Agreement
dated as of April 21, 1998, among D.R.
Horton, Inc., as a 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, is incorporated by
reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, filed with the
Commission on August 6, 1998. Sixth
Supplemental Indenture, dated as of February
4, 1999, among the Company, the guarantors
named therein and American Stock Transfer
-16-
and Trust Company, as Trustee, relating to
the Company's 8% Senior Notes, due 2009, is
incorporated herein by reference from
Exhibit 4.1 to the Company's Form 8-K dated
February 2, 1999, and filed with the
Commission on that date.
--------
*Filed herewith.
(b) The following report was filed on Form 8-K by the
Company during the quarter ended December 31, 1998.
1. On November 3, 1998, the Company filed a
Current Report on Form 8-K, dated November
1, 1998 (Item 5), in which it reported that
all but $6,000 principal amount of the
6-7/8% Convertible Subordinated Notes due
2002 had been converted into Common Stock of
the Company and that the remaining $6,000
principal amount of these notes had been
redeemed.
-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: February 12, 1999 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)
-18-