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 March 31, 1999 ------------------ 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 -- 64,201,548 shares as of May 10, 1999 ------------ This Report contains 20 pages. -- INDEX D.R. HORTON, INC. PART I. FINANCIAL INFORMATION. Page ---- ITEM 1. Financial Statements. Consolidated Balance Sheets--March 31, 1999 and September 30, 1998. 3 Consolidated Statements of Income--Three Months and Six Months Ended March 31, 1999 and 1998. 4 Consolidated Statement of Stockholders' Equity--Six Months Ended March 31, 1999. 5 Consolidated Statements of Cash Flows--Six Months Ended December 31, 1999 and 1998. 6 Notes to Consolidated Financial Statements. 7-9 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. 10-16 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 17 PART II. OTHER INFORMATION. ITEM 4. Submission of Matters to a Vote of Security Holders. 18 ITEM 6. Exhibits and Reports on Form 8-K. 19 SIGNATURES. 20 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, September 30, 1999 1998 ------------------------------ (In thousands) (Unaudited) ASSETS Homebuilding: Cash $54,693 $76,754 Inventories: Finished homes and construction in progress 911,666 717,709 Residential lots - developed and under development 785,694 630,252 Land held for development 9,154 10,072 ----------- ---------- 1,706,514 1,358,033 Property and equipment (net) 35,765 25,456 Earnest money deposits and other assets 109,730 74,827 Excess of cost over net assets acquired (net) 113,344 56,782 ----------- ---------- 2,020,046 1,591,852 ----------- ---------- Financial Services: Mortgage loans held for sale 78,963 72,325 Other assets 3,763 3,658 ----------- ---------- 82,726 75,983 ----------- ---------- $2,102,772 $1,667,835 =========== ========== LIABILITIES Homebuilding: Accounts payable and other liabilities $301,462 $259,005 Notes payable: Unsecured: Revolving credit facility due 2002 300,000 455,000 8% senior notes due 2009, net 382,915 - 8 3/8% senior notes due 2004, net 147,952 147,754 10% senior notes due 2006, net 147,217 147,156 6 7/8% convertible subordinated notes due 2002, net - 58,794 Other secured 24,962 17,303 ----------- ---------- 1,003,046 826,007 ----------- ---------- 1,304,508 1,085,012 Financial Services: Other liabilities 1,901 1,444 Notes payable to financial institutions 64,214 28,497 ----------- ---------- 66,115 29,941 ----------- ---------- 1,370,623 1,114,953 ----------- ---------- Minority interest 3,548 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, 64,170,878 at March 31, 1999 and 55,836,733 at September 30, 1998, issued and outstanding 642 558 Additional capital 418,243 301,503 Retained earnings 310,252 247,375 Treasury stock, 33,000 shares at cost (536) - ----------- ---------- 728,601 549,436 ----------- ---------- $2,102,772 $1,667,835 =========== ========== See accompanying notes to consolidated financial statements. -3- D. R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Six Months Ended March 31, Ended March 31, ------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (In thousands, except net income per share) (Unaudited) Homebuilding: Revenues Home sales................. $683,174 $448,594 $1,294,875 $866,430 Land/lot sales............. 7,426 263 48,553 1,083 --------- --------- ----------- --------- 690,600 448,857 1,343,428 867,513 --------- --------- ----------- --------- Cost of sales Home sales................. 564,165 368,200 1,061,540 710,145 Land/lot sales............. 6,154 244 42,931 836 --------- --------- ----------- --------- 570,319 368,444 1,104,471 710,981 --------- --------- ----------- --------- Gross profit Home sales................. 119,009 80,394 233,335 156,285 Land/lot sales............. 1,272 19 5,622 247 --------- --------- ----------- --------- 120,281 80,413 238,957 156,532 Selling, general and administrative expense......... 66,621 48,430 132,192 94,157 Interest expense............... 3,088 2,593 5,881 5,068 Other (income)................. (734) (1,010) (1,724) (2,053) --------- --------- ----------- --------- 51,306 30,400 102,608 59,360 --------- --------- ----------- --------- Financial Services: Revenues....................... 8,481 4,102 16,283 8,643 Selling, general and administrative expense......... 5,229 2,493 10,203 5,790 Interest expense............... 669 328 1,412 645 Other (income)................. (760) (523) (1,639) (1,054) --------- --------- ----------- --------- 3,343 1,804 6,307 3,262 --------- --------- ----------- --------- INCOME BEFORE INCOME TAXES. 54,649 32,204 108,915 62,622 Provision for income taxes..... 21,229 12,712 42,800 24,806 --------- --------- ----------- --------- NET INCOME................. $33,420 $19,492 $66,115 $37,816 ========= ========= =========== ========= Net income per share: Basic...................... $0.53 $0.37 $1.08 $0.72 Diluted.................... $0.52 $0.33 $1.05 $0.64 ========= ========= =========== ========= Weighted average number of shares of stock outstanding: Basic...................... 63,334 52,847 61,367 52,812 Diluted.................... 64,251 62,260 62,960 62,193 ========= ========= =========== ========= Cash dividends per share....... $0.03 $0.0225 $0.0525 $0.0425 ========= ========= =========== ========= See accompanying notes to consolidated financial statements. -4- D. R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Total Common Additional Retained Treasury Stockholders' Stock Capital Earnings Stock Equity -------------------------------------------------------------------------- (In thousands) (Unaudited) Balances at October 1, 1998 $558 $301,503 $247,375 $0 $549,436 Net income - - 66,115 - 66,115 Stock issued as partial consideration for acquisition (2,555,911 shares) 26 54,974 - - 55,000 Issuance under D.R. Horton, Inc. employee benefit plans (4,341 shares) - 59 - - 59 Exercise of stock options (204,550 shares) 2 2,436 - - 2,438 Conversion of convertible subordinated notes (5,569,343 shares) 56 59,271 - - 59,327 Purchase of treasury stock (33,000 shares) - - - (536) (536) Cash dividends - - (3,238) - (3,238) -------------------------------------------------------------------------- Balances at March 31, 1999 $642 $418,243 $310,252 ($536) $728,601 ========================================================================== See accompanying notes to consolidated financial statements. -5- D. R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended March 31, ---------------------- 1999 1998 --------- ---------- (In thousands) (Unaudited) OPERATING ACTIVITIES Net income $66,115 $37,816 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 9,017 4,856 Changes in operating assets and liabilities: Increase in inventories (238,421) (146,724) Increase in earnest money deposits and other assets (28,744) (13,548) Increase in mortgage loans held for sale (6,638) (4,825) Increase in accounts payable, accrued expenses and customer deposits 24,624 23,527 --------- ---------- NET CASH USED IN OPERATING ACTIVITIES (174,047) (98,898) --------- ---------- INVESTING ACTIVITIES Net purchase of property and equipment (13,336) (8,131) Net cash paid for acquisitions (1,300) (25,575) --------- ---------- NET CASH USED IN INVESTING ACTIVITIES (14,636) (33,706) --------- ---------- FINANCING ACTIVITIES Net increase in notes payable 167,899 146,366 Proceeds from exercise of stock options 2,497 1,561 Purchase of treasury shares (536) - Payment of cash dividends (3,238) (2,273) --------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 166,622 145,654 --------- ---------- INCREASE (DECREASE) IN CASH (22,061) 13,050 Cash at beginning of period 76,754 78,228 --------- ---------- Cash at end of period $54,693 $91,278 ========= ========== Supplemental cash flow information: Interest paid $6,868 $5,801 ========= ========== Income taxes paid $47,000 $29,716 ========= ========== Supplemental disclosures of noncash activities: Notes payable assumed related to acquisitions $103,384 $49,333 ========= ========== Conversion of subordinated notes to common stock $59,327 $127 ========= ========== Issuance of common stock related to acquisition $55,000 $0 ========= ========== See accompanying notes to consolidated financial statements. -6- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 1999 NOTE A - BASIS OF PRESENTATION The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. and its subsidiaries (the "Company"). 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 six month periods ended March 31, 1999, 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 and six month periods ended March 31, 1999 and 1998, 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. The following table sets forth the computation of basic and diluted earnings per share (in thousands): Three months ended Six months ended March 31, March 31, ------------------- ----------------- 1999 1998 1999 1998 Numerator: Net income $33,420 $19,492 $66,115 $37,816 Effect of dilutive securities: Interest expense associated with 6 7/8% convertible subordinated notes, net - 873 - 1,748 -------- -------- ------- ------- Numerator for diluted earnings per share after assumed conversions $33,420 $20,365 $66,115 $39,564 ======== ======== ======= ======= Denominator: Denominator for basic earnings per share---weighted average shares 63,334 52,847 61,367 52,812 Effect of dilutive securities: 6 7/8% convertible subordinated notes - 8,163 659 8,264 Employee stock options 917 1,250 934 1,117 -------- -------- ------- ------- Denominator for diluted earnings per share---adjusted weighted average shares and assumed conversions 64,251 62,260 62,960 62,193 ======== ======== ======= ======= -7- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 1999 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 March 31, 1999, not significant. The provisions for income tax expense for the three and six month periods ended March 31, 1999 and 1998, 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 Six months ended March 31, March 31, ------------------- ------------------- 1999 1998 1999 1998 (In thousands) Capitalized interest, beginning of period $32,759 $33,289 $35,153 $28,952 Capitalized interest in Cambridge inventory 4,120 - 4,120 - Interest incurred 18,748 16,924 34,031 31,973 Interest expensed: Directly (3,088) (2,593) (5,881) (5,068) Amortized to cost of sales (12,956) (9,562) (27,840) (17,799) --------- -------- --------- -------- Capitalized interest, end of period $39,583 $38,058 $39,583 $38,058 ========= ======== ========= ======== NOTE E - ACQUISITIONS 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 the revolving credit facility. The Cambridge acquisition was treated as a purchase for accounting purposes. At May 11, 1999, the determination of the final valuation of the Cambridge acquisition had not been completed. Any subsequent adjustments to the beginning balance sheet amounts estimated herein will be recorded in future periods as adjustments to the excess of cost over net assets acquired. -8- D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued) March 31, 1999 NOTE F - SUMMARIZED FINANCIAL INFORMATION The 8%, 8 3/8%, and 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 periods ended: (In thousands) March 31, 1999 - 6 months Nonguarantor Subsidiaries (Unaudited) D.R. ------------------------- Inter- Horton, Guarantor Financial company Inc. Subsidiaries Services Other Eliminations Total ---------- -------------- ----------- --------- ------------- ---------- Total assets............. $1,515,871 $1,759,925 $87,213 $31,602 ($1,291,839) $2,102,772 Total liabilities........ 1,081,135 1,405,400 78,893 20,593 (1,211,850) 1,374,171 Revenues................. 261,060 1,070,182 16,283 12,186 0 1,359,711 Gross profit............. 34,402 202,052 0 2,503 0 238,957 Net income............... 12,683 49,861 3,829 (258) 0 66,115 March 31, 1998 - 6 months Nonguarantor Subsidiaries (Unaudited) D.R. ------------------------- Inter- Horton, Guarantor Financial company Inc. Subsidiaries Services Other Eliminations Total ---------- -------------- ----------- --------- ------------- ----------- Total assets............. $803,290 $1,212,939 $45,884 $30,427 ($584,546) $1,507,994 Total liabilities........ 572,806 978,781 30,365 17,601 (556,660) 1,042,893 Revenues................. 151,933 709,040 8,643 6,540 0 876,156 Gross profit............. 24,413 130,783 0 1,336 0 156,532 Net income............... 3,150 33,278 1,936 (548) 0 37,816 September 30, 1998 - year 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 -9- 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 23 states and 40 markets through its 50 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 March 31, 1999 Compared to Three Months Ended March 31, 1998 Consolidated revenues for the three months ended March 31, 1999, increased 54.3%, to $699.1 million, from $453.0 million for the comparable period of 1998, primarily due to increases in both home and land/lot sales revenues. Income before income taxes for the three months ended March 31, 1999, increased 69.7%, to $54.6 million, from $32.2 million for the comparable period of 1998. As a percentage of revenues, income before income taxes for the three months ended March 31, 1999, increased 0.7%, to 7.8%, from 7.1% for the comparable period of 1998 primarily due to the overall reduction in selling, general and administrative expenses as a percentage of revenues. The consolidated provision for income taxes increased 67.0%, to $21.2 million for the three months ended March 31, 1999, from $12.7 million for the same period of 1998, due to the corresponding increase in income before income taxes. The effective income tax rate was down 0.7% to 38.8% for the three months ended March 31, 1999, compared to 39.5% for the same period of 1998. Six Months Ended March 31, 1999 Compared to Six Months Ended March 31, 1998 Consolidated revenues for the six months ended March 31, 1999, increased 55.2%, to $1,359.7 million, from $876.2 million for the comparable period of 1998, primarily due to increases in both home and land/lot sales revenues. Income before income taxes for the six months ended March 31, 1999, increased 73.9%, to $108.9 million, from $62.6 million for the comparable period of 1998. As a percentage of revenues, income before income taxes for the six months ended March 31, 1999, increased 0.9%, to 8.0%, from 7.1% for the comparable period of 1998 primarily due to the overall reduction in selling, general and administrative expenses as a percentage of revenues. The consolidated provision for income taxes increased 72.5%, to $42.8 million for the six months ended March 31, 1999, from $24.8 million for the same period of 1998, due to the corresponding increase in income before income taxes. The effective income tax rate was down 0.3% to 39.3% for the six months ended March 31, 1999, compared to 39.6% for the same period of 1998. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS - HOMEBUILDING The following tables summarize financial data for the Company's homebuilding activities: Percentages of Homebuilding Revenues Three Months Ended Six Months Ended March 31, March 31, ---------- ---------- 1999 1998 1999 1998 -------- -------- -------- -------- Cost and expenses: Cost of sales........................ 82.6% 82.1% 82.2% 81.9% Selling, general and administrative expense.............................. 9.6 10.8 9.8 10.9 Interest expense..................... 0.5 0.5 0.5 0.6 -------- -------- -------- -------- Total costs and expenses..................... 92.7 93.4 92.5 93.4 Other (income)............................... (0.1) (0.2) (0.1) (0.2) -------- -------- -------- -------- Income before income taxes................... 7.4% 6.8% 7.6% 6.8% ======== ======== ======== ======== Homes Closed Three Months Ended March 31, Six Months Ended March 31, 1999 1998 1999 1998 ---- ---- ---- ---- Homes Homes Homes Homes Closed Revenues Closed Revenues Closed Revenues Closed Revenues -------- -------- -------- -------- -------- --------- -------- -------- ($'s in millions) ($'s in millions) Mid-Atlantic............... 707 $130.0 422 $ 72.4 1,339 $ 243.4 672 $120.3 Midwest.................... 375 71.3 134 24.9 621 117.5 240 45.2 Southeast.................. 589 94.5 554 82.2 1,184 188.3 1,067 156.8 Southwest.................. 1,795 244.7 1,369 175.1 3,440 463.5 2,867 366.0 West....................... 697 142.7 483 94.0 1,425 282.2 937 178.1 -------- -------- -------- -------- -------- --------- -------- --------- 4,163 $683.2 2,962 $448.6 8,009 $1,294.9 5,783 $866.4 ======== ======== ======== ======== ======== ========= ======== ========= New Sales Contracts (net of cancellations) Three Months Ended March 31, Six Months Ended March 31, 1999 1998 1999 1998 ---- ---- ---- ---- Homes Homes Homes Homes Sold $ Sold $ Sold $ Sold $ -------- -------- -------- -------- -------- --------- -------- --------- ($'s in millions) ($'s in millions) Mid-Atlantic............... 930 $170.8 651 $115.1 1,501 $ 282.4 947 $ 167.7 Midwest.................... 566 111.6 294 56.4 794 157.1 425 81.1 Southeast.................. 813 131.3 788 117.5 1,358 216.3 1,346 198.3 Southwest.................. 2,289 324.3 2,014 267.6 3,934 553.9 3,288 432.1 West....................... 1,033 200.2 900 173.1 1,581 309.2 1,521 295.7 -------- -------- -------- -------- -------- --------- -------- --------- 5,631 $938.2 4,647 $729.7 9,168 $1,518.9 7,527 $1,174.9 ======== ======== ======== ======== ======== ========= ======== ========= Sales Backlog March 31, 1999 1998 ---- ---- Homes $ Homes $ ---------- ---------- --------- --------- ($'s in millions) Mid-Atlantic.................................. 1,094 $ 219.9 879 $159.7 Midwest....................................... 1,044 212.5 365 71.4 Southeast..................................... 907 144.3 999 147.0 Southwest..................................... 3,537 514.3 2,448 326.7 West.......................................... 1,370 278.3 1,307 260.2 ---------- ---------- --------- --------- 7,952 $1,369.3 5,998 $965.0 ========== ========== ========= ========= <FN> - ---------- 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, 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 </FN> -11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Revenues from homebuilding activities increased 53.9%, to $690.6 million (4,163 homes closed) for the three months ended March 31, 1999, from $448.9 million (2,962 homes closed) for the comparable period of 1998. The Company periodically sells land or lots to others and revenues from these activities were $7.4 million in the three months ended March 31, 1999, compared to $0.3 million for the same quarter of 1998. The number of homes closed increased in all of the Company's market regions, with percentage increases ranging from 179.9% in the Midwest region to 6.3% in the Southeast 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 Cambridge Homes (January, 1999); 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, home sales revenues increased by 46.0%, to $655.1 million (3,989 homes closed). The average selling price of homes closed during the three months ended March 31, 1999 was $164,100, up from $151,400 for the same period of 1998. The increase in average selling price was due to changes in the mix of homes closed and increased selling prices. New net sales contracts increased 21.2%, to 5,631 homes ($938.2 million) for the three months ended March 31, 1999, from 4,647 ($729.7 million) for the same period of 1998. Percentage increases in new net sales contracts were achieved in all of the Company's market regions, with increases ranging from 92.5% in the Midwest region to 3.2% in the Southeast region. The overall increase in new net sales contracts was due in part to sales achieved by the Cambridge and the 1998 acquisitions, while new net sales contracts increased 12.4%, to 5,224 homes, in markets where the Company operated in both periods. The average amount of new net sales contracts in the three months ended March 31, 1999, was $166,600, up 6.1% over the $157,000 average in the three months ended March 31, 1998. This increase was due to changes in the mix of homes sold and increased selling prices. The Company was operating in 606 subdivisions at March 31, 1999, compared to 485 at March 31, 1998. At March 31, 1999, the Company's backlog of sales contracts was $1,369.3 million (7,952 homes), up 41.9% from the comparable amount at March 31, 1998. In markets where the Company operated during both quarters, the sales contract backlog was $1,330.5 million (7,712 homes), up 37.9% from March 31, 1998. The average sales price of homes in sales backlog was $172,200 at March 31, 1999, up 7.0% from the $160,900 average at March 31, 1998. 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 54.8%, to $570.3 million for the three months ended March 31, 1999, from $368.4 million for the comparable quarter of 1998. 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 up 0.5% to 82.6% for the three months ended March 31, 1999, from 82.1% for the comparable period of 1998, primarily due to the application of purchase accounting causing a $7.4 million inventory write-up associated with homes acquired with Cambridge and closed subsequent to the acquisition. Cost of land/lot sales decreased to 82.9% of land/lot sales revenues for the three months ended March 31, 1999, from 92.8% for the comparable period of 1998. Total homebuilding cost of sales increased to 82.6% for the three months ended March 31, 1999, from 82.1% for the comparable period of 1998, primarily due to the Cambridge inventory write-up. Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 37.6%, to $66.6 million in the three months ended March 31, 1999, from $48.4 million in the comparable period of 1998. As a percentage of revenues, SG&A expenses decreased to 9.6% for the three months ended March 31, 1999, from 10.8% for the comparable period of 1998. 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. Interest expense associated with homebuilding activities increased to $3.1 million in the three months ended March 31, 1999, from $2.6 million in the comparable period of 1998. As a percentage of homebuilding revenues, homebuilding interest expense was 0.5% in both periods. The Company follows a policy of capitalizing interest only on inventory under construction or development. -12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Six Months Ended March 31, 1999 Compared to Six Months Ended March 31, 1998 Revenues from homebuilding activities increased 54.9%, to $1,343.4 million (8,009 homes closed) for the six months ended March 31, 1999, from $867.5 million (5,783 homes closed) for the comparable period of 1998. The Company periodically sells land or lots to others and revenues from these activities were $48.6 million for the six months ended March 31, 1999, up from $1.1 million for the same period of 1998. The number of homes closed increased in all of the Company's market regions, with percentage increases ranging from 158.8% in the Midwest region to 11.0% in the Southeast 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 Cambridge Homes (January, 1999); 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 41.6%, to $1,227.3 million (7,577 homes closed). The average selling price of homes closed during the six months ended March 31, 1999 was $161,700, up from $149,800 for the same period of 1998. The increase in average selling price was due to changes in the mix of homes closed and increased selling prices. New net sales contracts increased 21.8%, to 9,168 homes ($1,518.9 million) for the six months ended March 31, 1999, from 7,527 homes ($1,174.9 million) for the same period of 1998. Percentage increases in new net sales contracts were achieved in all of the Company's market regions, with increases ranging from 86.8% in the Midwest region to 0.9% in the Southeast region. The overall increase in new net sales contracts was due in part to sales achieved by the Cambridge and the 1998 acquisitions, while new net sales contracts increased 12.3%, to 8,454 homes, in markets where the Company operated in both periods. The average amount of new net sales contracts in the six months ended March 31, 1999, was $165,700, up 6.1% over the $156,100 average in the six months ended March 31, 1998. This increase was due to changes in the mix of homes sold and increased selling prices. Cost of sales increased by 55.3%, to $1,104.5 million for the six months ended March 31, 1999, from $711.0 million for the comparable period of 1998. 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 82.0% for the both six-month periods, despite $7.4 million of increased costs of goods sold during the period from the Cambridge acquisition. Cost of land/lot sales increased to 88.4% of land/lot sales revenues for the six months ended March 31, 1999, from 77.2% for the comparable period of 1998. Total homebuilding cost of sales increased to 82.2% for the six months ended March 31, 1999, from 81.9% for the comparable period of 1998. Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 40.4%, to $132.2 million in the six months ended March 31, 1999, from $94.2 million in the comparable period of 1998. As a percentage of revenues, SG&A expenses decreased to 9.8% for the six months ended March 31, 1999, from 10.9% for the comparable period of 1998. 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 six months ended March 31, 1999, is a $6.4 million charge for severance benefits associated with former Continental executives. Interest expense associated with homebuilding activities increased to $5.9 million in the six months ended March 31, 1999, from $5.1 million in the comparable period of 1998. As a percentage of homebuilding revenues, homebuilding interest expense decreased to 0.5% in the six months ended March 31, 1999, from 0.6% in the comparable period of 1998. 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. -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - FINANCIAL SERVICES The following table summarizes financial data for the Company's financial services operations: Three months ended Six months ended March 31, March 31, ------------------- ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- Number of loans originated............ 1,911 1,285 3,668 2,458 ------- ------- ------- ------- Loan acquisition fees................. $2,030 $1,057 $3,772 $2,383 Sale of servicing and marketing gains. 4,025 1,780 7,964 3,801 Other revenues........................ 918 383 1,723 738 ------- ------- ------- ------- Total mortgage banking revenues....... 6,973 3,220 13,459 6,922 Title policy premiums, net............ 1,508 882 2,824 1,721 ------- ------- ------- ------- Total financial services revenues..... 8,481 4,102 16,283 8,643 General and administrative expenses... 5,229 2,493 10,203 5,790 Interest expense...................... 669 328 1,412 645 Interest/other (income)............... (760) (523) (1,639) (1,054) ------- ------- ------- ------- Income before income taxes............ $3,343 $1,804 $6,307 $3,262 ======= ======= ======= ======= Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Revenues from financial services operations increased 106.8%, to $8.5 million in the three months ended March 31, 1999, from $4.1 million in the comparable period of 1998. 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 and growth in the homebuilding operations. These mortgage and title activities continue to be expanded to additional homebuilding markets. SG&A expenses associated with financial services increased 109.7%, to $5.2 million in the three months ended March 31, 1999, from $2.5 million in the comparable period of 1998. As a percentage of financial services revenues, SG&A expenses increased by 0.9%, to 61.7% in the three months ended March 31, 1999, from 60.8% in the comparable period of 1998, due to startup expenses for the new markets. Six Months Ended March 31, 1999 Compared to Six Months Ended March 31, 1998 Revenues from financial services operations increased 88.4%, to $16.3 million in the six months ended March 31, 1999, from $8.6 million in the comparable period of 1998. 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 and growth in the homebuilding operations. These mortgage and title activities continue to be expanded to additional homebuilding markets. SG&A expenses associated with financial services increased 76.2%, to $10.2 million in the six months ended March 31, 1999, from $5.8 million in the comparable period of 1998. As a percentage of financial services revenues, SG&A expenses decreased by 4.3%, to 62.7% in the six months ended March 31, 1999, from 67.0% in the comparable period of 1998, due to 1998 startup expenses for new markets entered in the first quarter of 1998. -14- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Company had available cash and cash equivalents of $54.7 million. Inventories (including finished homes, construction in progress, and developed residential lots and other land) at March 31, 1999, had increased by $348.5 million since September 30, 1998, due to a general increase in business activity, the expansion of operations in the Company's market areas and the acquisition of Cambridge's $110.1 million inventory. The inventory increase was financed using the Company's credit agreement, issuing $55 million of common stock for the acquisition of Cambridge and by retaining 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 homebuilding notes payable to total homebuilding capital at March 31, 1999, was 57.9% and consolidated notes payable to total capital was 59.4%, decreases of 2.2% and 1.5% over the September 30, 1998 levels of 60.1% and 60.9%, respectively. The stockholders' equity to total assets ratio increased to 34.6% at March 31, 1999, from 32.9% at September 30, 1998. 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. The Company has filed a $600 million universal shelf registration statement that is presently effective and facilitates access to the capital markets. 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 March 31, 1999, the Company had outstanding homebuilding debt of $1,003.0 million, of which $300.0 million represented advances under the revolving credit facility. Under the debt covenants associated with the revolving credit facility, at March 31, 1999, the Company had additional borrowing capacity of $475.0 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 financial services activities have a $75 million, one-year mortgage warehouse facility with a bank that is secured by mortgage loans held for sale. The warehouse facility is not guaranteed by the parent company. As of March 31, 1999, $64.2 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. During fiscal 1999, the Company's Board of Directors has declared one quarterly cash dividend of $.0225 per common share and two quarterly cash dividends of $.03 per common share, the last of which is payable May 14, 1999, to stockholders of record on May 6, 1999. In November, 1998, the Company's Board of Directors approved stock and debt repurchase programs for up to $100 million each. These programs are intended to allow the Company to take advantage of favorable market conditions, should they occur. During the second fiscal quarter, the Company repurchased, in the open market, 33,000 shares of its common stock at an average cost of $16.24. -15- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for ordinary expenditures for the construction of homes, the acquisition of land and lots for development and sale of homes, at March 31, 1999, 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 August, 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 August, 1999, at minimal cost. 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 continues. 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 is being 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. 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. -16- ITEM 3. Quantitative and Qualitative Disclosures about Market Risk The Company is subject to interest rate risk on its long term debt. The Company manages its exposure to changes in interest rates by optimizing the use of variable and fixed rate debt. In addition, the Company hedges its exposure to changes in interest rates on its variable rate bank debt by entering into interest rate swap agreements to obtain a fixed interest rate for a portion of these borrowings. The following table shows, as of March 31, 1999, the Company's long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value. In addition, the table shows the notional amounts and weighted average interest rates of the Company's interest rate swaps. Six Months Ended Sept. 30, Year ended September 30, --------- ------------------------------------------------------------------------ ($ in millions) FMV @ 1999 2000 2001 2002 2003 Thereafter Total 3/31/99 --------- --------- -------- --------- -------- ---------- -------- --------- Debt: Fixed rate....................... $ 6.7 $ 1.0 $ 0 $ 0 $ 0 $678.1 $685.8 $694.0 Average interest rate............ 8.27% 8.27% --- --- --- 8.81% 8.81% --- Variable rate.................... $ 81.5 $ 0 $ 0 $300.0 $ 0 $0 $381.5 $381.5 Average interest rate............ 5.95% --- --- 5.58% --- --- 5.64% --- Interest Rate Swaps: Variable to fixed................ $300.0 $300.0 $300.0 $200.0 $200.0 $200.0 --- ($ 3.1) Average pay rate................. 5.53% 5.53% 5.36% 5.10% 5.10% 5.09% --- --- Average receive rate............. 90 day LIBOR -17- PART II. OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders. (a) On January 15, 1999, the Company held its Annual Meeting of Stockholders (the "Meeting"). At the Meeting, the stockholders re-elected ten members of the Board of Directors of the Company to serve until the Company's next annual meeting of stockholders and until their respective successors are elected and qualified. The names of the ten directors, the votes cast for and the number of votes withheld were as follows: Name Votes For Votes Withheld ---- --------- -------------- Bradley S. Anderson 55,012,093 975,581 Richard Beckwitt 55,052,300 935,374 Richard I. Galland 55,051,175 936,499 Donald R. Horton 55,011,893 975,781 Richard L. Horton 55,012,093 975,581 Terrill J. Horton 55,012,093 975,581 David J. Keller 55,011,493 976,181 Francine I. Neff 55,010,768 976,906 Scott J. Stone 55,011,893 975,781 Donald J. Tomnitz 55,011,893 975,781 (b) At the Meeting, a vote also was taken for the approval and adoption of a proposal to amend the Company's Certificate of Incorporation to increase the number of authorized shares of Common Stock, $0.01 par value, from 100,000,000 shares to 200,000,000 shares. The following votes were cast upon this proposal: For: 51,979,353 Against: 3,978,060 Abstain: 30,259 (c) At the Meeting, a vote was taken for the approval and adoption of a proposal to adopt the D.R. Horton, Inc. 1999 Employee Stock Purchase Plan. The following votes were cast upon this proposal: For: 44,333,150 Against: 5,142,758 Abstain: 57,057 -18- ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 3.1 Amended and Restated Certificate of Incorporation, as amended, of the Company, is incorporated by reference from Exhibit 4.2 to the Company's registration statement (No. 333-76175) on Form S-3, filed April 13, 1999. (b) Reports on Form 8-K. On February 2, 1999, the Company filed a Current Report on Form 8-K (Items 5 and 7), which filed an underwriting agreement, a supplemental indenture and a statement of computation of ratio of earnings to fixed changes, all relating to the offering and issuance of $385 million principal amount of the Company's 8% Senior Notes, due 2009. -19- 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: May 11, 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) -20-