D.R. Horton Inc Form 10-K
Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

     
(Mark One)
   
x
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended September 30, 2001
 
    OR
 
o
  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 incorporation or organization)   (I.R.S. Employer Identification No.)
 
1901 Ascension Blvd., Suite 100
Arlington, Texas
(Address of principal executive offices)
  76006
(Zip Code)
 
(817) 856-8200
(Registrant’s telephone number, including area code)
   

Securities registered pursuant to Section 12(b) of the Act:

         
Name of each exchange on
Title of each Class which registered


Common Stock, par value $.01 per share
    The New York Stock Exchange  
8 3/8% Senior Notes due 2004
    The New York Stock Exchange  
10% Senior Notes due 2006
    The New York Stock Exchange  
8% Senior Notes due 2009
    The New York Stock Exchange  
10 1/2% Senior Notes due 2005
    The New York Stock Exchange  
9 3/4% Senior Subordinated Notes due 2010
    The New York Stock Exchange  
9 3/8% Senior Subordinated Notes due 2011
    The New York Stock Exchange  
Zero Coupon Convertible Senior Notes due 2021
    The New York Stock Exchange  
7 7/8% Senior Notes due 2011
    The New York Stock Exchange  

Securities registered Pursuant to Section 12(g) of the Act:

None
(Title of Class)

     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 þ     No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K     o.

      As of November 14, 2001, there were 76,909,368 shares of Common Stock, par value $.01 per share, issued and outstanding, and the aggregate market value of these shares held by non-affiliates of the registrant was approximately $1,647,739,000. Solely for purposes of this calculation, all directors and executive officers were excluded as affiliates of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s definitive Proxy Statement for the 2002 Annual Meeting of Stockholders are incorporated herein by reference in Part III.




TABLE OF CONTENTS

PART II
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
PART III
PART IV
SIGNATURES
EXHIBIT INDEX
EX-10.24 Agmt. for Termination & Withdrawal
EX-10.25 Summary of Advisory Arrangement
Ex-21.1 Subsidiaries of the Registrant
EX-23.1 Consent of Ernst & Young LLP


Table of Contents

PART 1

ITEM 1.     BUSINESS

      D.R. Horton, Inc. (the “Company”) is a national homebuilder. As such, we construct and sell single-family homes in metropolitan areas of the Mid-Atlantic, Midwest, Southeast, Southwest and West regions of the United States. We offer high quality homes, designed principally for first-time and move-up home buyers. Our homes generally range in size from 1,000 to 5,000 square feet and range in price from $80,000 to $900,000. For the year ended September 30, 2001, we closed 21,371 homes with an average sales price approximating $200,700.

      We are one of the largest and most geographically diversified homebuilders in the United States, with operating divisions in 20 states and 38 markets as of September 30, 2001. The markets we operate in include: Albuquerque, Atlanta, Austin, Birmingham, Charleston, Charlotte, Chicago, Columbia, Dallas, Denver, Fort Myers/ Naples, Fort Worth, Greensboro, Greenville, Hilton Head, Houston, Jacksonville, Killeen, Las Vegas, Los Angeles, Louisville, Maryland-D.C., Miami/ West Palm Beach, Minneapolis/ St. Paul, Myrtle Beach, New Jersey, Orlando, Phoenix, Portland, Raleigh/ Durham, Richmond, Sacramento, Salt Lake City, San Antonio, San Diego, Tucson, Virginia-D.C. and Williamsburg.

      We build homes under the following names: D.R. Horton, Arappco, Cambridge, Continental, Dietz Crane, Dobson, Emerald, Mareli, Milburn, Regency, SGS, Torrey and Trimark.

      Our financial reporting segments consist of homebuilding and financial services. Our homebuilding operations comprise the most substantial part of our business, with more than 98% of consolidated revenues in fiscal 1999, 2000 and 2001. The homebuilding operations segment generates the majority of its revenues from the sale of completed homes with a lesser amount from the sale of land and lots. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance and closing services. Financial information, including revenue, pre-tax income and identifiable assets of both of our reporting segments are included in the consolidated financial statements.

      We were incorporated in Delaware on July 1, 1991, to acquire all of the assets and businesses of 25 predecessor companies, which were residential home construction and development companies owned or controlled by Donald R. Horton.

      Our principal executive offices are located at 1901 Ascension Blvd., Suite 100, Arlington, Texas 76006, our telephone number is (817) 856-8200, and our Internet website address is www.drhorton.com.

1


Table of Contents

Operating Strategy

      We believe that the following operating strategies have enabled us to achieve consistent growth and profitability:

 
Geographic Diversity

      From 1978 to late 1987, excluding locations acquired in our 1998 merger with Continental Homes, our homebuilding activities were conducted in the Dallas/ Fort Worth area. We then instituted a policy of diversifying geographically, entering the following of our current markets, both through startup operations and acquisitions, in the years shown:

     
Years Entered Markets


1987
  Phoenix
1988
  Atlanta, Orlando
1989
  Charlotte
1990
  Houston
1991
  Maryland-D.C., Virginia-D.C.
1992
  Chicago, Raleigh/Durham
1993
  Austin, Los Angeles, Salt Lake City, San Diego
1994
  Minneapolis/St. Paul, Las Vegas, San Antonio
1995
  Birmingham, Denver, Greensboro, Miami/West Palm Beach
1996
  Albuquerque
1997
  Greenville, New Jersey, Tucson
1998
  Charleston, Hilton Head, Jacksonville, Killeen, Louisville, Myrtle Beach, Portland, Richmond, Sacramento, Williamsburg
1999
  Columbia
2001
  Fort Myers/Naples

      We continually monitor the sales and margins achieved in each of the subdivisions in which we operate as part of our evaluation of the use of our capital. While we believe there are significant growth opportunities in our existing markets, we also intend to continue our policy of diversification by seeking to enter new markets. We believe our diversification strategy mitigates the effects of local and regional economic cycles and enhances our growth potential. Typically, we will not invest material amounts in real estate, including raw land, developed lots, models and speculative homes, or overhead in start-up operations in new markets, until such markets demonstrate significant growth potential and acceptance of our products.

 
Acquisitions

      As an integral component of our operational strategy of continued expansion, we continually evaluate opportunities for strategic acquisitions. We believe that expanding our operations through the acquisition of existing homebuilding companies affords us several benefits not found in start-up operations. Such benefits include:

  •  Established land positions and inventories;
 
  •  Existing relationships with land owners, developers, subcontractors and suppliers;
 
  •  Brand name recognition; and
 
  •  Proven product acceptance by home buyers in the market.

      In evaluating potential acquisition candidates, we seek homebuilding companies that have an excellent reputation, a track record of profitability and a strong management team with an entrepreneurial orientation.

2


Table of Contents

We limit the risks associated with acquiring a going concern by conducting extensive operational, financial and legal due diligence on each acquisition and by only acquiring homebuilding companies that we believe will have an immediate positive impact on our earnings. During the last eight fiscal years, we have made 16 acquisitions, including the assets of Fortress-Florida, Inc. (Fortress) and Emerald Builders (Emerald) in May and July, 2001, respectively. For the year ended December 31, 2000, Fortress, which operates in the Jacksonville, Florida market, closed 711 homes, generating revenues of approximately $99 million. For the year ended December 31, 2000, Emerald, with operations primarily in Houston, Texas and Phoenix, Arizona, closed 1,394 homes, generating revenues of approximately $236 million. In October, 2001, we signed a definitive agreement under which Schuler Homes (NASDAQ:SHLR) will merge into D.R. Horton, Inc., through a cash and stock transaction valued at approximately $1.2 billion, including the assumption of debt. We will continue to evaluate potential future acquisition opportunities that satisfy our acquisition criteria in both existing and new markets.
 
Decentralized Operations

      We decentralize our homebuilding activities to give more operating flexibility to our local division presidents. We have 45 separate operating divisions, some of which are in the same market area. Generally, each operating division consists of a division president, an office manager and staff, a sales manager and sales personnel, and a construction manager and construction superintendents. We believe that division presidents, who are intimately familiar with local conditions, make better decisions regarding local operations. Our division presidents receive performance bonuses based upon achieving targeted operating levels in their operating divisions.

 
Operating Division Responsibilities

      Each operating division is responsible for:

  •  Site selection, which involves

  —  A feasibility study;
 
  —  Soil and environmental reviews;
 
  —  Review of existing zoning and other governmental requirements; and
 
  —  Review of the need for and extent of offsite work required to meet local building codes.

  •  Negotiating lot option or similar contracts;
 
  •  Overseeing land development;
 
  •  Planning its homebuilding schedule;
 
  •  Selecting building plans and architectural schemes;
 
  •  Obtaining all necessary building approvals; and
 
  •  Developing a marketing plan.
 
Corporate Office Controls

      The corporate office controls key risk elements through centralized:

  •  Financing;
 
  •  Cash management;
 
  •  Risk management;
 
  •  Accounting and management reporting;
 
  •  Payment of subcontractors’ invoices;

3


Table of Contents

  •  Administration of payroll and employee benefits;
 
  •  Final approval of land and lot acquisitions;
 
  •  Capital allocation; and
 
  •  Oversight of inventory levels.
 
Cost Management

      We control our overhead costs by centralized administrative and accounting functions and by limiting the number of field administrative personnel and middle level management positions. We also minimize advertising costs by participating in promotional activities, publications and newsletters sponsored by local real estate brokers, mortgage companies, utility companies and trade associations.

      We control construction costs through the efficient design of our homes and by obtaining favorable pricing from certain subcontractors and national vendors based on the high volume of services and products they provide us. We also control construction costs by monitoring expenses on each house through our purchase order system. We control capital and overhead costs by monitoring our inventory levels through our management information systems.

Markets

      We conduct homebuilding activities in five geographic regions, consisting of:

     
Geographic Region Markets


Mid-Atlantic
  Charleston, Charlotte, Columbia, Greensboro, Greenville, Hilton Head, Maryland-D.C., Myrtle Beach, New Jersey, Raleigh/Durham, Richmond, Virginia-D.C., Williamsburg
Midwest
  Chicago, Louisville, Minneapolis/St. Paul
Southeast
  Atlanta, Birmingham, Fort Myers/Naples, Jacksonville, Miami/West Palm Beach, Orlando
Southwest
  Albuquerque, Austin, Dallas, Fort Worth, Houston, Killeen, Phoenix, San Antonio, Tucson
West
  Denver, Las Vegas, Los Angeles, Portland, Sacramento, Salt Lake City, San Diego

      When entering new markets or conducting operations in existing markets, among the things we consider are:

  •  Regional economic conditions;
 
  •  Job growth;
 
  •  Land availability;
 
  •  Local land development process;
 
  •  Consumer tastes;
 
  •  Competition; and
 
  •  Secondary home sales activity.

4


Table of Contents

      Our homebuilding revenues by geographic region are:

                           
Year Ended September 30,

1999 2000 2001



(In millions)
Mid-Atlantic
  $ 540.6     $ 614.5     $ 615.6  
Midwest
    347.1       451.0       457.6  
Southeast
    429.6       491.5       518.2  
Southwest
    1,068.0       1,176.7       1,489.5  
West
    733.7       870.5       1,302.7  
     
     
     
 
 
Total
  $ 3,119.0     $ 3,604.2     $ 4,383.6  
     
     
     
 

Land Policies

      Typically, we acquire land and enter into lot option contracts to acquire developed building lots only after necessary “entitlements” have been obtained, i.e., when we have the right to begin development or construction. Before we acquire lots or tracts of land, we will, among other things, complete a feasibility study, which includes soil tests, independent environmental studies and other engineering work, and determine that all necessary zoning and other governmental entitlements required to develop and use the property for home construction have been acquired. Although we purchase and develop land primarily to support our own homebuilding activities, occasionally we sell lots and land to other developers and homebuilders.

      We also use lot option contracts, in which we purchase the right, but not the obligation, to buy building lots at predetermined prices on a takedown schedule commensurate with anticipated home closings. Lot option contracts generally are on a nonrecourse basis, thereby limiting our financial exposure to earnest money deposits given to property sellers. This enables us to control significant lot positions with a minimal capital investment and substantially reduces the risks associated with land ownership and development. At September 30, 2001, about 46% of our total lot position of 115,655 lots was under option contracts.

      A summary of our land/lot position at September 30, 2001 is:

         
Finished lots we own
    15,831  
Lots under development we own
    46,263  
     
 
Total lots owned
    62,094  
Lots available under lot option and similar contracts
    53,561  
     
 
Total land/lot positions
    115,655  
     
 

      We limit our exposure to real estate inventory risks by:

  •  Generally commencing construction of homes under contract only after receipt of a satisfactory down payment and, where applicable, the buyer’s receipt of mortgage approval;
 
  •  Limiting the number of speculative homes (homes started without an executed sales contract) built in each subdivision;
 
  •  Closely monitoring local market and demographic trends, housing preferences and related economic developments, such as new job opportunities, local growth initiatives and personal income trends;
 
  •  Utilizing lot option contracts, where possible; and
 
  •  Limiting the size of acquired land parcels to smaller tracts of land.

5


Table of Contents

Construction

      Our home designs are prepared by architects in each of our markets to appeal to local tastes and preferences of the community. We also offer optional interior and exterior features to enhance the basic home design and to promote our sales efforts.

      Substantially all of our construction work is performed by subcontractors. Our construction supervisors monitor the construction of each home, participate in material design and building decisions, coordinate the activities of subcontractors and suppliers, subject the work of subcontractors to quality and cost controls and monitor compliance with zoning and building codes. Subcontractors typically are retained for a specific subdivision pursuant to a contract that obligates the subcontractor to complete construction at a fixed price. Agreements with our subcontractors and suppliers generally are negotiated for each subdivision. We compete with other homebuilders for qualified subcontractors, raw materials and lots in the markets where we operate.

      Construction time for our homes depends on the weather, availability of labor, materials and supplies, size of the home, and other factors. We typically complete the construction of a home within four months.

      We do not maintain significant inventories of construction materials, except for work in process materials for homes under construction. Typically, the construction materials used in our operations are readily available from numerous sources. We have contracts exceeding one year with certain suppliers of our building materials that are cancellable at our option with a 30 day notice. In recent years, we have not experienced any significant delays in construction due to shortages of materials or labor.

Marketing and Sales

      We market and sell our homes through commissioned employees and independent real estate brokers. We typically conduct home sales from sales offices located in furnished model homes in each subdivision. At September 30, 2001, we owned 942 model homes, which we generally do not offer for sale until the completion of a subdivision. Our sales personnel assist prospective home buyers by providing them with floor plans, price information, tours of model homes and the selection of options and other custom features. We train and inform our sales personnel as to the availability of financing, construction schedules, and marketing and advertising plans.

      In addition to using model homes, we typically build a limited number of speculative homes in each subdivision to enhance our marketing and sales activities. Construction of these speculative homes also is necessary to satisfy the requirements of relocated personnel and independent brokers, who often represent home buyers requiring a completed home within 60 days. We sell a majority of these speculative homes while they are under construction or immediately following completion. The number of speculative homes is influenced by local market factors, such as new employment opportunities, significant job relocations, growing housing demand and the length of time we have built in the market. Depending upon the seasonality of each market, we attempt to limit our speculative homes in each subdivision. At September 30, 2001, we averaged less than five speculative homes, in various stages of construction, in each subdivision.

      We advertise on a limited basis in newspapers and in real estate broker, mortgage company and utility publications, brochures, newsletters and on billboards. In addition, we use our Internet web site to market the location, price range, and availability of our homes. To minimize advertising costs, we attempt to operate in subdivisions in conspicuous locations that permit us to take advantage of local traffic patterns. We also believe that model homes play a significant role in our marketing efforts. Consequently, we expend significant effort in creating an attractive atmosphere in our model homes.

      Our sales contracts require a down payment of at least $500. The contracts include a financing contingency which permits customers to cancel if they cannot obtain mortgage financing at prevailing interest rates within a specified period, typically four to six weeks, and may include other contingencies, such as the sale of an existing home. We include a home sale in our sales backlog when the sales contract is signed and we have received the initial down payment. We do not recognize revenue upon the sale of a home until it is closed and title passes to the home buyer. The average period between the signing of a sales contract for a home and closing is approximately three to five months.

6


Table of Contents

Customer Service and Quality Control

      Our operating divisions are responsible for pre-closing, quality control inspections and responding to customers’ post-closing needs. We believe that prompt and courteous response to home buyers’ needs during and after construction reduces post-closing repair costs, enhances our reputation for quality and service, and ultimately leads to significant repeat and referral business from the real estate community and home buyers. We provide our home buyers with a limited one-year warranty on workmanship and building materials. The subcontractors who perform most of the actual construction also provide us with warranties on workmanship and are generally prepared to respond to us and the homeowner promptly upon request. In most cases, we supplement our one-year warranty by purchasing a ten-year limited warranty from a third party. To cover our potential warranty obligations, we accrue an estimated amount for future warranty costs.

Customer Financing

      We provide mortgage financing services principally to purchasers of homes we build and sell. CH Mortgage, a wholly-owned subsidiary, provides mortgage banking services in Arizona, Colorado, Florida, Georgia, Illinois, Maryland, Minnesota, Nevada, New Mexico, North and South Carolina, Texas, and Virginia. DRH Mortgage, LLC, a joint venture formed in 1998 with a third party, presently provides services in California. On a combined basis, our mortgage banking entities provided mortgage financing services for about 61% of the homes closed during the year ended September 30, 2001, in the markets served, compared to 51% during the year ended September 30, 2000. We anticipate expanding these mortgage activities to other markets in which we conduct homebuilding operations.

      In other markets where we currently do not provide mortgage financing, we work with a variety of mortgage lenders that make available to home buyers a range of conventional mortgage financing programs. By making information about these programs available to prospective home buyers and maintaining a relationship with such mortgage lenders, we are able to coordinate and expedite the entire sales transaction by ensuring that mortgage commitments are received and that closings take place on a timely and efficient basis.

Title Services

      Through our subsidiaries, Century Title, Custom Title, DRH Title Company of Texas, Ltd., DRH Title Company of Florida, Inc., DRH Title Company of Minnesota, Inc., Metro Title Company, Principal Title and Travis County Title Company, we serve as a title insurance agent by providing title insurance policies and closing services to purchasers of homes we build in the Austin, Dallas, Fort Worth, Houston, Maryland-D.C., Miami/ West Palm Beach, Minneapolis, Orlando, Phoenix, San Antonio and Virginia-D.C. markets. We assume no underwriting risk associated with these title policies.

Employees

      At September 30, 2001, we employed 4,342 persons, of whom 1,095 were sales and marketing personnel, 1,382 were executive, administrative and clerical personnel, 1,326 were involved in construction, and 539 worked in mortgage and title operations. The Company had fewer than 20 employees covered by collective bargaining agreements. Some of the subcontractors which we use are represented by labor unions or are subject to collective bargaining agreements. We believe that our relations with our employees and subcontractors are good.

Competition

      The single family residential housing industry is highly competitive and we compete in each of our markets with numerous other national, regional and local homebuilders, often with larger subdivisions designed, planned and developed by such homebuilders. Our homes compete on the basis of quality, price, design, mortgage financing terms and location.

7


Table of Contents

Governmental Regulation and Environmental Matters

      The housing, mortgage and title insurance industries are subject to extensive and complex regulations. We and our subcontractors must comply with various federal, state and local laws and regulations, including zoning, density and development requirements, building, environmental, advertising and consumer credit rules and regulations, as well as other rules and regulations in connection with our development, homebuilding, sales and financial services activities. These include requirements affecting the development process, as well as building materials to be used, building designs and minimum elevation of properties. Our homes are inspected by local authorities where required, and homes eligible for insurance or guarantees provided by the FHA and VA are subject to inspection by them. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding.

      We also are subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment. The particular environmental laws for each site vary greatly according to location, environmental condition and the present and former uses of the site and adjoining properties. These environmental laws may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in certain environmentally sensitive regions or areas.

      Our internal mortgage activities and title insurance agencies must also comply with various federal and state laws, consumer credit rules and regulations and other rules and regulations unique to such activities. Additionally, mortgage loans and title activities originated under the FHA, VA, FNMA and GNMA are subject to rules and regulations imposed by those agencies.

ITEM 2.     PROPERTIES

      We own a 52,000 square foot office complex, consisting of three single-story buildings of steel and brick construction, located in Arlington, Texas, that serves as the principal executive offices and houses one of the Dallas/ Fort Worth divisions. We also own a 37,000 square foot one-story building in Atlanta, Georgia; a 22,864 square foot building in Lakeville, Minnesota; two buildings in Englewood, Colorado totaling 28,217 square feet; and a 16,000 square foot building in The Woodlands, Texas, that serve as division offices for some of our operating divisions. We lease approximately 438,000 square feet of space for our other operating divisions under leases expiring between November 2001 and March 2011.

ITEM 3.     LEGAL PROCEEDINGS

      We are a party to routine litigation incidental to our business. Such matters, if decided adversely to us, would not, in the opinion of management, have a material adverse effect upon our financial condition.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

8


Table of Contents

PART II

 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Our common stock (the “Common Stock”) is listed on the New York Stock Exchange under the symbol “DHI”. The following table shows the high and low sales prices for the Common Stock for the periods indicated, as reported by the NYSE, adjusted for the 9% stock dividend of September 29, 2000, and the 11% stock dividend of March 23, 2001.

                                 
Year Ended September 30,

2000 2001


HIGH LOW HIGH LOW




Quarter Ended December 31
  $ 12.86     $ 8.26     $ 23.42     $ 13.74  
Quarter Ended March 31
    11.62       8.99       24.32       17.90  
Quarter Ended June 30
    12.09       10.07       25.99       19.25  
Quarter Ended September 30
    17.23       11.36       30.00       17.50  

      As of November 14, 2001, the closing price was $26.02, and there were approximately 334 holders of record. We have declared quarterly cash dividends of four cents per share for fiscal 2000 and five cents per share for fiscal 2001.

      The declaration of cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, future earnings, cash flows, capital requirements, our general financial condition and general business conditions. We are required to comply with certain covenants contained in the bank agreements and Senior Note and Senior Subordinated Note indentures. The most restrictive of these requirements allows us to pay cash dividends on common stock in an amount, on a cumulative basis, not to exceed 50% of consolidated net income, as defined, subject to certain other adjustments. Pursuant to the most restrictive of these requirements, we had approximately $392.5 million available for the payment of dividends and the acquisition of our common stock at September 30, 2001.

9


Table of Contents

ITEM 6.     SELECTED FINANCIAL DATA

      The following selected consolidated financial data are derived from our Consolidated Financial Statements. The data should be read in conjunction with the Consolidated Financial Statements, related Notes thereto and other financial data elsewhere herein. These historical results are not necessarily indicative of the results to be expected in the future.

                                           
Year Ended September 30,

1997 1998 1999 2000 2001





(In millions, except per share data)
Income Statement Data:(1)(2)
                                       
Revenues
  $ 1,578.4     $ 2,176.9     $ 3,156.2     $ 3,653.7     $ 4,455.5  
Homebuilding revenues
    1,567.5       2,155.0       3,119.0       3,604.2       4,383.6  
Income before cumulative effect of change in accounting principle
    65.0       93.4       159.8       191.7       254.9  
Income per share before cumulative effect of change in accounting principle:(4)(5)
                                       
 
Basic
    1.06       1.45       2.10       2.55       3.37  
 
Diluted
    .95       1.29       2.07       2.53       3.31  
Cash dividends declared per common share(3)
    .06       .09       .11       .15       .19  
                                         
As of September 30,

1997 1998 1999 2000 2001





(In millions)
Balance Sheet Data:(1)(2)
                                       
Inventories
  $ 1,024.3     $ 1,358.0     $ 1,866.1     $ 2,191.0     $ 2,804.4  
Total Assets
    1,248.3       1,667.8       2,361.8       2,694.6       3,652.2  
Notes Payable
    650.7       854.5       1,190.6       1,344.4       1,884.3  
Stockholders’ Equity
    427.9       549.4       797.6       969.6       1,250.2  

(1)  See Note C to the audited financial statements for details concerning acquisitions by the Company.
 
(2)  On April 20, 1998, D.R. Horton and Continental Homes Holding Corp. (“Continental”) consummated a merger pursuant to which Continental was merged into D.R. Horton, with 2.25 shares of D.R. Horton common shares being exchanged for each outstanding share of Continental. Approximately 15.5 million D.R. Horton common shares were issued to effect the merger. The merger with Continental was treated as a pooling of interests for accounting purposes. Therefore, all financial amounts have been restated as if Continental and D.R. Horton had been combined throughout the periods presented.
 
(3)  Cash dividends per common share represent those dividends declared to D.R. Horton shareholders, unadjusted for the merger with Continental.
 
(4)  In fiscal 1998, net income includes the net effect of a $7.1 million, net of tax, provision for costs associated with the merger with Continental. The earnings per share effects were $0.11 basic and $0.09 diluted.
 
(5)  All basic and diluted per share amounts have been restated to reflect the effects of the 9% stock dividend of September 29, 2000 and the 11% stock dividend of March 23, 2001.

10


Table of Contents

 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS— CONSOLIDATED

      D.R. Horton, Inc. and subsidiaries (the “Company”) provide homebuilding services in 20 states and 38 markets through its 45 homebuilding divisions. Through its financial services operations, the Company also provides mortgage banking and title agency services in many of these same markets.

 
Year Ended September 30, 2001 Compared to Year Ended September 30, 2000

      Consolidated revenues increased 21.9%, to $4,455.5 million in 2001 from $3,653.7 million in 2000, primarily due to increases in both home sales and financial services revenues. The increase in home sales revenues was attributable in part to $103.0 million in revenues generated by Fortress-Florida, acquired in May 2001, and Emerald Builders, acquired in July 2001.

      Income before income taxes increased 31.9%, to $407.8 million in 2001 from $309.2 million in 2000. As a percentage of revenues, income before income taxes increased 0.7 percentage points, to 9.2%, from 8.5% in 2000, primarily due to an increase in the gross profit percentage achieved by the homebuilding segment, which was offset in part by write-downs to estimated fair value of the carrying amounts of the Company’s investments in start-up and emerging growth companies and the decline in the fair value of the Company’s interest rate swap agreements during the year.

      The consolidated provision for income taxes increased 30.1%, to $152.9 million in 2001, from $117.5 million in 2000, due to the corresponding increase in income before income taxes. The effective income tax rate decreased 0.5 percentage points, to 37.5% in 2001, from 38.0% in 2000, primarily due to changes in the overall effective state income tax rate.

 
Year Ended September 30, 2000 Compared to Year Ended September 30, 1999

      Consolidated revenues increased 15.8%, to $3,653.7 million in 2000 from $3,156.2 million in 1999 due to increases in both home and land/lot sales revenues, as well as financial services revenues.

      Income before income taxes increased 17.2%, to $309.2 million in 2000 from $263.8 million in 1999. As a percentage of revenues, income before income taxes increased 0.1 percentage point, to 8.5% from 8.4% in 1999, primarily due to an increase in homebuilding gross profit as a percentage of revenues.

      The consolidated provision for income taxes increased 13.0%, to $117.5 million in 2000 from $104.0 million in 1999, primarily due to the corresponding increase in income before income taxes. The effective income tax rate decreased 1.4 percentage points, to 38.0% in 2000 from 39.4% in 1999, primarily due to changes in the overall effective state income tax rate.

RESULTS OF OPERATIONS— HOMEBUILDING

      The following tables set forth certain operating and financial data for the Company’s homebuilding activities:

                           
Percentages of Homebuilding Revenues

Year Ended September 30,

1999 2000 2001



Costs and expenses:
                       
 
Cost of sales
    81.7 %     81.6 %     80.4 %
 
Selling, general and administrative expense
    9.9       10.0       9.9  
 
Interest expense
    0.4       0.3       0.2  
     
     
     
 
Total costs and expenses
    92.0       91.9       90.5  
Other (income)/expense
          (0.1 )     0.8  
     
     
     
 
Income before income taxes
    8.0 %     8.2 %     8.7 %
     
     
     
 

11


Table of Contents

Homes Closed

                                                 
Year Ended September 30,

1999 2000 2001



Homes Homes Homes
Closed % Closed % Closed %






Mid-Atlantic
    2,986       16.2 %     3,042       15.9 %     2,757       12.9 %
Midwest
    1,733       9.4 %     1,951       10.2 %     1,833       8.6 %
Southeast
    2,648       14.4 %     2,755       14.4 %     2,882       13.5 %
Southwest
    7,640       41.6 %     7,721       40.3 %     8,902       41.6 %
West
    3,388       18.4 %     3,675       19.2 %     4,997       23.4 %
     
     
     
     
     
     
 
      18,395       100.0 %     19,144       100.0 %     21,371       100.0 %
     
     
     
     
     
     
 

Net New Sales Contracts

                                                 
Year Ended September 30,

1999 2000 2001



Homes Homes Homes
Sold $ Sold $ Sold $






($ millions)
Mid-Atlantic
    3,145     $ 602.0       2,774     $ 576.2       2,756     $ 590.0  
Midwest
    1,996       416.7       1,717       418.7       1,851       481.3  
Southeast
    2,751       452.5       2,906       501.8       3,007       530.8  
Southwest
    7,678       1,103.5       7,829       1,243.2       9,233       1,536.4  
West
    3,341       691.5       3,997       936.5       5,332       1,364.1  
     
     
     
     
     
     
 
      18,911     $ 3,266.2       19,223     $ 3,676.4       22,179     $ 4,502.6  
     
     
     
     
     
     
 

Sales Backlog

                                                 
September 30,

1999 2000 2001



Homes $ Homes $ Homes $






($ millions)
Mid-Atlantic
    1,091     $ 242.8       823     $ 207.6       822     $ 190.3  
Midwest
    1,134       247.2       900       225.4       918       262.8  
Southeast
    836       140.6       987       177.8       1,464       253.6  
Southwest
    3,081       472.9       3,189       551.5       4,235       738.0  
West
    1,167       253.0       1,489       374.6       1,824       489.1  
     
     
     
     
     
     
 
      7,309     $ 1,356.5       7,388     $ 1,536.9       9,263     $ 1,933.8  
     
     
     
     
     
     
 

      The Company’s market regions consist of the following markets:

     
Mid-Atlantic
  Charleston, Charlotte, Columbia, Greensboro, Greenville, Hilton Head, Maryland-D.C., Myrtle Beach, New Jersey, Raleigh/ Durham, Richmond, Virginia-D.C. and Williamsburg
Midwest
  Chicago, Louisville and Minneapolis/ St. Paul
Southeast
  Atlanta, Birmingham, Fort Myers/ Naples, Jacksonville, Miami/ West Palm Beach and Orlando
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
 
Year Ended September 30, 2001 Compared to Year Ended September 30, 2000

      Revenues from home sales increased 22.7%, to $4,289.8 million (21,371 homes closed) in 2001 from $3,496.1 million (19,144 homes closed) in 2000. Revenues from home sales increased in four of the

12


Table of Contents

Company’s five market regions, with percentage increases ranging from 0.8% in the Midwest region to 53.4% in the West region. Home sales revenues declined 0.7% in the Mid-Atlantic region. The increases in both revenues and homes closed were due to strong housing demand throughout the majority of the Company’s markets, and an increase in the average selling price of homes closed, as well as the increases attributable to the acquisition of Fortress-Florida in May 2001 and Emerald Builders in July 2001. In markets where the Company operated throughout both twelve-month periods, home sales revenues increased by 19.9%, to $4,188.7 million (20,748 homes closed) in 2001 from $3,494.9 million (19,138 homes closed) in 2000.

      The average selling price of homes closed during 2001 was $200,700, up 9.9% from $182,600 in 2000. The increase in average selling price was due to changes in the mix of homes closed and, with the strong housing demand, the Company’s ability to sell more custom features with its homes and to raise prices in some of its markets.

      The value of new net sales contracts increased 22.5%, to $4,502.6 million (22,179 homes) in 2001 from $3,676.4 million (19,223 homes) in 2000. The value of new net sales contracts increased in all of the Company’s five market regions, with percentage increases ranging from 2.4% in the Mid-Atlantic to 45.7% in the West. The overall increase in the value of new net sales contracts was due to strong housing demand throughout the majority of the Company’s markets, as well as sales achieved by Fortress-Florida, acquired in May 2001, and Emerald Builders, acquired in July 2001. In markets where the Company operated throughout both fiscal years, the value of new net sales contracts increased 19.5%, to $4,391.0 million, and the number of new net sales contracts increased 12.0%, to 21,518 homes. The average price of a new net sales contract in 2001 was $203,000, up 6.1% over the $191,300 average in 2000. The increase in average selling price was due to changes in the mix of homes sold and, with the strong housing demand, the Company’s ability to sell more custom features with its homes and to raise prices in some of its markets.

      At September 30, 2001, the Company’s backlog of sales contracts was $1,933.8 million (9,263 homes), up 25.8% from $1,536.9 million (7,388 homes) at September 30, 2000. In markets where the Company operated at the end of both fiscal years, the Company’s backlog of sales contracts increased 14.4%, to $1,758.1 (8,229 homes). The average sales price of homes in backlog was $208,800 at September 30, 2001, up 0.4% from the $208,000 average at September 30, 2000.

      Cost of sales increased by 19.9%, to $3,527.1 million in 2001 from $2,941.1 million in 2000. 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 declined 1.0 percentage point, to 80.4% in 2001, from 81.4% in 2000, as the Company continued to benefit from increased prices, savings achieved in its national purchasing program and lower material costs. Total homebuilding cost of sales was 80.4% of total homebuilding revenue, down 1.2 percentage points from 81.6% in 2000.

      Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 19.9%, to $432.0 million in 2001 from $360.4 million in 2000. As a percentage of revenues, SG&A expenses decreased to 9.9% in 2001 from 10.0% in 2000, primarily as a result of a 0.2 percentage point decline in salaries and benefits expense as a percentage of revenues.

      Interest expense associated with homebuilding activities decreased to $8.8 million in 2001 from $10.2 million in 2000. As a percentage of homebuilding revenues, homebuilding interest expense decreased to 0.2% in 2001 from 0.3% in 2000. Throughout 2001, inventory under construction or development grew at a more rapid pace than interest-bearing debt. Therefore, a larger proportion of total interest incurred was capitalized to inventory than in 2000. 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.

      Other expense associated with homebuilding activities was $34.7 million in 2001, as compared to $2.1 million of other income in 2000. The expense in 2001 is primarily due to a $22.9 million write-down to estimated fair value of the carrying amounts of the Company’s investments in start-up and emerging growth companies and a $13.8 million decline in the fair value of the Company’s interest rate swap agreements.

13


Table of Contents

 
Year Ended September 30, 2000 Compared to Year Ended September 30, 1999

      Revenues from home sales increased 14.4%, to $3,496.1 million (19,144 homes closed) in 2000 from $3,055.0 million (18,395 homes closed) in 1999. Revenues from home sales increased in all of the Company’s market regions, with percentage increases ranging from 8.5% in the Southeast region to 28.7% in the Midwest region. The increases in both revenues and homes closed were due to strong housing demand and the increases attributable to the acquisition of Cambridge Homes in January 1999. In markets where the Company operated throughout both twelve-month periods, home sales revenues increased by 12.3%, to $3,426.6 million, and the number of homes closed increased 2.4%, to 18,826 homes.

      The average selling price of homes closed during 2000 was $182,600, up 9.9% from $166,100 in 1999. The increase in average selling price was due to changes in the mix of homes closed and, with the strong housing demand, the Company’s ability to sell more custom features with its homes and to raise prices to cover increased costs.

      The value of new net sales contracts increased 12.6%, to $3,676.4 million (19,223 homes) in 2000 from $3,266.2 million (18,911 homes) in 1999. The value of new net sales contracts increased in four of the Company’s five market regions, with percentage increases ranging from 0.5% in the Midwest to 35.4% in the West. The value of new net sales contracts declined 4.3% in the Mid-Atlantic region. The overall increase in the value of new net sales contracts was due in part to sales achieved by Cambridge Homes, acquired in January 1999. In markets where the Company operated throughout both fiscal years, the value of new net sales contracts increased 10.6%, to $3,607.7 million, and the number of new net sales contracts increased 0.4%, to 18,976 homes. The average price of a new net sales contract in 2000 was $191,300, up 10.8% over the $172,700 average in 1999. The increase in average selling price was due to changes in the mix of homes sold and, with the strong housing demand, the Company’s ability to sell more custom features with its homes and to raise prices to cover increased costs.

      At September 30, 2000, the Company’s backlog of sales contracts was $1,536.9 million (7,388 homes), up 13.3% from the comparable amount at September 30, 1999. The average sales price of homes in sales backlog was $208,000 at September 30, 2000, up 12.1% from the $185,600 average at September 30, 1999.

      Cost of sales increased by 15.4%, to $2,941.1 million in 2000 from $2,548.5 million in 1999. 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 declined 0.2 percentage points, to 81.4% in 2000 from 81.6% in 1999, as higher costs were more than offset by increased prices and savings achieved in our national purchasing program. Cost of land/lot sales decreased to 87.6% of land/lot sales revenues in 2000, from 88.2% in 1999. Total homebuilding cost of sales was 81.6% of total homebuilding revenue, down 0.1 percentage point from 81.7% in 1999.

      Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 16.4%, to $360.4 million in 2000 from $309.6 million in 1999. As a percentage of revenues, SG&A expenses increased to 10.0% in 2000 from 9.9% in 1999.

      Interest expense associated with homebuilding activities decreased to $10.2 million in 2000, from $12.0 million in 1999. As a percentage of homebuilding revenues, homebuilding interest expense decreased to 0.3% in 2000 from 0.4% in 1999. Throughout 2000, inventory under construction or development grew at a more rapid pace than interest-bearing debt. Therefore, a larger proportion of total interest incurred was capitalized to inventory than in 1999. The Company follows a policy of capitalizing interest only on inventory under construction or development. During both periods, we 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.

RESULTS OF OPERATIONS— FINANCIAL SERVICES

      Financial services include mortgage financing and title insurance agency and closing services, primarily related to purchases of homes built and sold by the Company. Mortgage services are provided in Arizona, California, Colorado, Florida, Georgia, Illinois, Maryland, Minnesota, Nevada, New Mexico, North and South Carolina, Texas and Virginia. Title agency and closing services are provided in Arizona, Florida,

14


Table of Contents

Maryland, Minnesota, Texas and Virginia. The following table summarizes financial and other information for the Company’s financial services operations:
                         
Year Ended September 30,

Financial Services: 1999 2000 2001




($ in thousands)
Number of loans originated
    8,528       9,151       13,347  
     
     
     
 
Loan origination fees
  $ 8,702     $ 9,981     $ 14,748  
Sale of servicing rights and gains from sale of mortgages
    16,632       21,271       32,905  
Other revenues
    4,154       4,529       7,711  
     
     
     
 
Total mortgage banking revenues
    29,488       35,781       55,364  
Title policy premiums, net
    7,763       13,741       16,598  
     
     
     
 
Total revenues
    37,251       49,522       71,962  
General and administrative expenses
    24,713       35,470       47,387  
Interest expense
    4,433       5,616       5,288  
Interest/other (income)
    (4,984 )     (6,257 )     (7,669 )
     
     
     
 
Income before income taxes
  $ 13,089     $ 14,693     $ 26,956  
     
     
     
 
 
Year Ended September 30, 2001 Compared to Year Ended September 30, 2000

      Revenues from the financial services segment increased 45.3%, to $72.0 million in 2001 from $49.5 million in 2000. The increase in financial services revenues was due to the continued expansion of the Company’s mortgage loan and title services provided to customers of the Company’s homebuilding segment. These activities are being expanded to additional markets served by the homebuilding segment. General and administrative expenses associated with financial services increased 33.6%, to $47.4 million in 2001 from $35.5 million in 2000. As a percentage of financial services revenues, general and administrative expenses decreased by 5.7 percentage points to 65.9% in 2001 from 71.6% in 2000, primarily from efficiencies realized with the increase in revenues generated in markets entered in 2000.

 
Year Ended September 30, 2000 Compared to Year Ended September 30, 1999

      Revenues from the financial services segment increased 32.9% to $49.5 million in 2000 from $37.3 million in 1999. The increase in financial services revenues was due to the continued expansion of the Company’s mortgage loan and title services provided to customers of the Company’s homebuilding segment. General and administrative expenses associated with financial services increased 43.5%, to $35.5 million in 2000 from $24.7 million in 1999. As a percentage of financial services revenues, general and administrative expenses increased by 5.3 percentage points to 71.6% in 2000 from 66.3% in 1999, due primarily to startup expenses in new markets with limited revenues.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

      At September 30, 2001, the Company had available cash and cash equivalents of $239.3 million. Inventories (including finished homes, construction in progress, and developed residential lots and other land) at September 30, 2001, had increased by $613.3 million from September 30, 2000, due to a general increase in business activity, the acquisitions of Fortress-Florida and Emerald Homes and the expansion of operations in the Company’s market areas. The inventory increase was financed largely by issuing senior notes, senior subordinated notes and senior convertible notes, and by retaining earnings. The amount outstanding on the revolving credit facility was reduced by $192 million during the year. The Company’s ratio of homebuilding notes payable to total capital at September 30, 2001, increased 1.4 percentage points, to 57.6% from 56.2% at September 30, 2000. After an assumed application of excess cash of $157.3 million to reduce debt, the ratio of homebuilding notes payable to total capital declined 0.9 percentage points, to 55.3%. The stockholders’ equity to total assets ratio decreased 1.8 percentage points, to 34.2% at September 30, 2001, from 36.0% at September 30, 2000.

15


Table of Contents

      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 April 2002. Additionally, the Company has another $45 million standby letter of credit agreement. The Company is currently negotiating the terms of a new four-year unsecured revolving credit facility that is expected to close in January 2002. At September 30, 2001, the Company had outstanding homebuilding debt of $1,701.7 million. Under the debt covenants associated with the revolving credit facility, at September 30, 2001, the Company had additional homebuilding borrowing capacity of $746.8 million. The Company has entered into multi-year interest rate swap agreements, aggregating a notional amount of $200 million, that fix the interest rate on a portion of the variable rate revolving credit facility.

      In April 2001, a universal shelf registration statement for an aggregate amount of $750 million was filed. It was declared effective by the Securities and Exchange Commission on April 20, 2001. Under the new shelf registration statement, on May 11, 2001, the Company issued $381.1 million (at maturity) in zero coupon convertible senior notes due May 11, 2021, for gross proceeds of $200 million. Each $1,000 note was sold for $524.78, providing a yield-to-maturity of 3.25% per year. The notes are convertible into the Company’s common stock at any time, if the sale price of the common stock exceeds specified thresholds or in other specified instances, at the rate of approximately 17.5 shares per $1,000 face amount at maturity. The conversion ratio equates to an initial conversion price of $30.00 per share. Holders have the option to require the Company to repurchase the notes on any of the second, seventh or twelfth anniversary dates from the issue date for the initial issue price plus accrued yield to the purchase date. The Company must satisfy any notes submitted for repurchase on the second anniversary date in cash. Any notes submitted for repurchase on the seventh or twelfth anniversary dates may be settled in any combination of cash and/or the Company’s common stock, at the Company’s option. The Company will have the option to redeem the notes, in cash, at any time after the second anniversary date of the notes for the initial issue price plus accrued yield to redemption. The Company will pay contingent interest on the notes during specified six-month periods beginning on May 12, 2003, if the market price of the notes exceeds specified levels.

      In March 2001, the Company issued $200 million 9 3/8% Senior Subordinated Notes, due March 15, 2011. In August 2001, the Company issued $200 million 7 7/8% Senior Notes due August 15, 2011. The Company used the proceeds from these notes and the zero coupon convertible senior notes to repay outstanding debt under its revolving credit facility and for general corporate purposes.

      In June 2001, the Company issued a post-effective amendment to an existing registration statement, which increased to 9.0 million the number of shares of the Company’s common stock available for issuance as consideration for acquisitions. The amendment was declared effective by the Securities and Exchange Commission on June 18, 2001.

      On May 1, 2001, the Company acquired the assets of Fortress-Florida, Inc. (Fortress), a wholly owned subsidiary of The Fortress Group, Inc., for $28.7 million. Fortress assets, primarily inventories, amounted to approximately $47.1 million. Total liabilities assumed amounted to approximately $24.3 million, including notes payable of $17.4 million, which were paid at closing. On July 17, 2001, the Company completed the acquisition of the assets of Emerald Builders (Emerald), a privately held homebuilder based in Houston, Texas. In the transaction, the Company issued approximately 1.0 million shares of common stock and paid $31.6 million in cash. Emerald’s assets, primarily inventories, amounted to approximately $170.4 million. Total liabilities assumed amounted to approximately $137.0 million, including notes payable of $110.6 million, most of which were paid at closing.

      The Company examines the carrying value of its excess cost over net assets acquired (goodwill) and other intangible assets as current events and circumstances warrant to determine whether there are any impairment losses. If indicators of impairment were present in intangible assets used in operations and future cash flows were not expected to be sufficient to recover the assets’ carrying amount, an impairment loss would be charged to expense in the period identified. No event has been identified that would indicate an impairment of the value of goodwill recorded in the consolidated financial statements.

      On October 23, 2001, the Company announced that it has signed a definitive agreement under which Schuler Homes, Inc. would merge into D. R. Horton, Inc. through a cash and stock transaction valued at

16


Table of Contents

approximately $1.2 billion, including the assumption of debt. At September 30, 2001, Schuler had consolidated assets, primarily inventories, of approximately $1.2 billion. On a pro-forma basis combining Schuler with Western Pacific, in the twelve-month period ended September 30, 2001, Schuler closed 5,254 homes, generating revenues of approximately $1.5 billion. This merger is expected to close in January or February 2002, pending approval by the shareholders of both companies. After the merger is completed, the holders of Schuler’s public debt, under change of control covenants thereof, will have the right to require the Company to redeem such debt at 101% of par, plus accrued interest. At September 30, 2001, Schuler’s public debt amounted to $499 million. The Company expects to finance the cash portion of the consideration, including any required redemptions of public debt, with existing cash resources and credit facilities. The Company’s assumption of Schuler’s public debt will have the additional effect of reducing the amount the Company has available for the payment of cash dividends and other restricted payments.

      At September 30, 2001, the financial services segment had mortgage loans held for sale of $222.8 million and loan commitments for $143.8 million at fixed rates. The Company hedges the interest rate market risk on these mortgage loans held for sale and loan commitments through the use of best-efforts whole loan delivery commitments, mandatory forward commitments to sell mortgage-backed securities and the purchase of options on financial instruments.

      The financial services segment has a $200 million, one-year bank warehouse facility that matures on August 13, 2002, and is secured by mortgage loans held for sale. The warehouse facility is not guaranteed by the parent company. As of September 30, 2001, $182.6 million had been drawn under this facility. All mortgage company activities are financed under the warehouse facility. The warehouse facility contains financial covenants relating to minimum net worth and maximum leverage with which the mortgage company is in compliance.

      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 existing and future credit facilities. At September 30, 2001, under the currently effective shelf registration statements, the Company has approximately 8.0 million shares issuable to effect, in whole or in part, possible future acquisitions and the capacity to issue new debt or equity securities amounting to $350 million. In the future, the Company intends to continue to maintain effective shelf registration statements that will facilitate access to the capital markets.

      During fiscal 2001, the Company’s Board of Directors declared one quarterly cash dividend of $0.04 per common share and three quarterly cash dividends of $0.05 per common share, the last of which was paid on August 22, 2001 to stockholders of record on August 8, 2001. At September 30, 2001, the Company has $63.1 million authorized for stock repurchases and $100.0 million authorized for dept repurchases.

      In 1999 and 2000, the Company entered into three separate limited partnership agreements with the purpose of investing in start-up and emerging growth companies whose technology and business plans have the potential of permitting the Company to leverage its size, expertise and customer base in the homebuilding industry. The Company originally authorized investment of up to $125 million in such companies over a four-year period. In January 2001, the original $125 million authorization was reduced to the $31.3 million that had been invested in such companies as of that date. The investments are concentrated in e-commerce businesses that serve the homebuilding, real estate and financial service industries, as well as in businesses whose strategic focus allows for the diversification of the Company’s operations. As of September 30, 2001, the carrying value of the Company’s investments in such companies, reported in homebuilding other assets, amounted to $10.2 million.

      Except for the Schuler merger, ordinary expenditures for the construction of homes, the acquisition of land and lots for development and sale of homes, at September 30, 2001, the Company had no material commitments for capital expenditures.

17


Table of Contents

INFLATION

      The Company and the homebuilding industry in general, may be adversely affected during periods of high inflation, primarily because of higher land and construction costs. Inflation also increases the Company’s financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. The Company attempts to pass through to its customers any increases in its costs through increased sales prices and, to date, inflation has not had a material adverse effect on the Company’s results of operations. However, there is no assurance that inflation will not have a material adverse impact on the Company’s future results of operations.

SAFE HARBOR STATEMENT

      Certain statements contained in this report, as well as in other materials we have filed or will file with the Securities and Exchange Commission, statements made by us in periodic press releases and oral statements made by Company officials to analysts, stockholders and the press 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. Any or all of the forward-looking statements included in this report and in any other reports or public statements of the Company may turn out to be inaccurate due to known or unknown risks and uncertainties. As a result, actual results may differ materially from the results discussed in and anticipated by the forward-looking statements. The following cautionary discussion of risks and uncertainties relevant to our business includes factors we believe could adversely affect us. Other factors beyond those listed below could also adversely affect us.

  •  General Economic, Real Estate and Other Conditions—The homebuilding industry is cyclical and is significantly affected by changes in general and local economic conditions, such as employment levels, availability of financing for home buyers, interest rates, consumer confidence and housing demand. Any oversupply of alternatives to new homes, such as rental properties and used homes, could depress new home prices and reduce our margins on the sale of new homes. Homebuilders are also subject to risks related to the availability and cost of land suitable for homebuilding, the availability and cost of materials and labor, adverse weather conditions which can cause delays in construction schedules and cost overruns.
 
  •  Increases in Interest Rates or Decreases in Mortgage Availability—Virtually all of our customers finance their homes through lenders providing mortgage financing. Any future increases in interest rates or decreases in the availability of mortgage financing could depress the market for new homes by making our homes less affordable.
 
  •  Governmental Regulations and Environmental Matters—We are subject to extensive and complex regulations that affect the development and homebuilding process, including zoning, density and building standards. Such regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the costs of development or homebuilding. Laws and regulations relating to the protection of the environment can cause delays, increased costs of compliance and prohibitions or restrictions of development and homebuilding activity in environmentally sensitive areas.
 
  •  Substantial Debt—We have a significant amount of debt. The amount of our debt could limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service requirements or other requirements. It could also limit our flexibility in planning for, or reacting to, changes in our business and make us more vulnerable in the event of a downturn in our business or in general economic conditions.
 
  •  Competitive Conditions—The homebuilding industry is very competitive. In each of the markets we serve, we compete with other homebuilders for home buyers, desirable properties, financing, raw materials and skilled labor. Competitive conditions in the homebuilding industry could result in difficulty in acquiring suitable land at acceptable prices, the need for increased selling incentives, lower sales or delays in construction.

18


Table of Contents

  •  Availability of Capital—Our ability to grow our business and operations profitably is substantially dependent upon our ability to obtain capital from the sale of equity or debt or additional bank borrowings. Increases in interest rates, changes in our debt ratings by the national credit rating agencies, concerns by potential investors about the market or the economy, changing lending objectives of financial institutions, or further consolidation of financial institutions that lend to the homebuilding industry could increase our costs of borrowing or reduce the availability of funds necessary for us to achieve our strategic growth objectives. Moreover, the indentures for our outstanding debt contain provisions that may restrict the debt we may incur in the future.
 
  •  Growth Strategies—Since 1993, we have acquired and successfully integrated many homebuilding companies. In the future, we may acquire additional companies. Our prospects may be affected by our ability to successfully identify and integrate future acquisitions. Our prospects may also be affected by our ability to implement successfully our growth strategies in the markets we currently serve.

We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.

19


Table of Contents

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company is subject to interest rate risk on its long term debt. The Company monitors its exposure to changes in interest rates and utilizes both fixed and variable rate debt. For fixed rate debt, changes in interest rates generally affect the value of the debt instrument, but not the Company’s earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact the fair value of the debt instrument, but may affect the Company’s future earnings and cash flows. The Company has mitigated 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 the variable rate borrowings. The Company generally does not have an obligation to prepay fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value would not have a significant impact on the Company’s fixed-rate debt until such time as the Company is required to refinance, repurchase or repay such debt.

      The Company’s interest rate swaps were not designated as hedges under Statement of Financial Accounting Standards No. 133 when it was adopted on October 1, 2000. Since their maturities and other terms did not match the related debt, they were determined to be ineffective hedges (as defined by the Statement). Therefore, the Company is exposed to market risk associated with changes in the fair values of the swaps, since any such changes must be reflected in the Company’s income statements.

      The Company’s financial services segment is exposed to interest rate risk associated with its mortgage loan production activities. Mortgage loans are funded at fixed interest rates before they are committed to specific investors and interest rate lock commitments (IRLC’s) are extended to borrowers who have applied for loan funding and who meet certain defined credit and underwriting criteria. Forward commitments to sell mortgage-backed securities are designated as fair value hedges of the risk of changes in the overall fair value of funded loans. The effectiveness of the fair value hedge is continuously monitored and any ineffectiveness, which for the year ended September 30, 2001, was not significant, is recognized in current earnings. The IRLC’s are classified and accounted for as non-designated derivative instruments with gains and losses recorded in current earnings. Interest rate risk associated with IRLC’s is managed through the use of best-efforts whole loan delivery commitments, forward commitments to sell mortgage-backed securities and the purchase of options on financial instruments. These instruments are considered non-designated derivatives and are accounted for at fair market value with gains and losses recorded in current earnings. At September 30, 2001, total forward commitments to mitigate interest rate risk related to funded loans and IRLC’s were approximately $160.5 million, the duration of which was less than six months.

      The following table sets forth, as of September 30, 2001, 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 sets forth the notional amounts, weighted average interest rates and estimated fair market value of the Company’s interest rate swaps.

                                                                   
Year Ended September 30,

($ in millions)
Fair
market
value @
2002 2003 2004 2005 2006 Thereafter Total 9/30/01








Debt:
                                                               
 
Fixed rate
  $ 52.0     $ 15.3     $ 152.8     $ 201.1     $ 148.5     $ 1,317.9     $ 1,887.6     $ 1,619.3  
 
Average interest rate
    7.63 %     6.67 %     8.71 %     10.83 %     10.21 %     7.80 %     8.43 %      
 
Variable rate
  $ 182.6     $     $     $     $     $     $ 182.6     $ 182.6  
 
Average interest rate
    3.63 %                                   3.63 %      
Interest Rate Swaps:
                                                               
 
Variable to fixed
  $ 200.0     $ 200.0     $ 200.0     $ 200.0     $ 200.0     $ 200.0     $     $ (10.4 )
 
Average pay rate
    5.10 %     5.10 %     5.10 %     5.10 %     5.10 %     5.07 %            
 
Average receive rate
  90-day LIBOR                                                

20


Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

         
Page

Report of Independent Auditors
    22  
 
Consolidated Balance Sheets, September 30, 2000 and 2001
    23  
 
Consolidated Statements of Income for the three years ended September 30, 2001
    24  
 
Consolidated Statements of Stockholders’ Equity for the three years ended September 30, 2001
    25  
 
Consolidated Statements of Cash Flows for the three years ended September 30, 2001
    26  
 
Notes to Consolidated Financial Statements
    27  

21


Table of Contents

REPORT OF INDEPENDENT AUDITORS

The Board of Directors

D.R. Horton, Inc.

      We have audited the accompanying consolidated balance sheets of D.R. Horton, Inc. and subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of D.R. Horton, Inc. and subsidiaries at September 30, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States.

(-s- Ernest + Young LLP)

Fort Worth, Texas

November 9, 2001

22


Table of Contents

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

D.R. HORTON, INC. AND SUBSIDIARIES

 
CONSOLIDATED BALANCE SHEETS
                   
As of September 30,

2000 2001


(In thousands)
ASSETS
               
 
Homebuilding:
               
Cash
  $ 61,798     $ 232,305  
Inventories:
               
 
Finished homes and construction in progress
    1,095,636       1,424,101  
 
Residential lots—developed and under development
    1,092,571       1,377,452  
 
Land held for development
    2,824       2,824  
     
     
 
      2,191,031       2,804,377  
Property and equipment (net)
    38,960       53,096  
Earnest money deposits and other assets
    148,983       181,659  
Excess of cost over net assets acquired (net)
    115,966       136,223  
     
     
 
      2,556,738       3,407,660  
     
     
 
Financial Services:
               
Cash
    10,727       6,975  
Mortgage loans held for sale
    119,581       222,818  
Other assets
    7,531       14,737  
     
     
 
      137,839       244,530  
     
     
 
    $ 2,694,577     $ 3,652,190  
     
     
 
 
LIABILITIES
               
 
Homebuilding:
               
Accounts payable and other liabilities
  $ 370,389     $ 498,576  
Notes payable
    1,245,586       1,701,689  
     
     
 
      1,615,975       2,200,265  
     
     
 
Financial Services:
               
Accounts payable and other liabilities
    4,958       10,173  
Notes payable to financial institutions
    98,817       182,641  
     
     
 
      103,775       192,814  
     
     
 
      1,719,750       2,393,079  
     
     
 
Minority interests
    5,264       8,864  
     
     
 
 
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, 70,074,110 shares at September 30, 2000 and 76,901,511 shares at September 30, 2001, issued and outstanding
    701       769  
Additional capital
    537,145       704,842  
Retained earnings
    468,664       544,636  
Treasury stock, 2,589,200 shares at September 30, 2000 and no shares at September 30, 2001, at cost
    (36,947 )      
     
     
 
      969,563       1,250,247  
     
     
 
    $ 2,694,577     $ 3,652,190  
     
     
 

See accompanying notes to consolidated financial statements

23


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

 
CONSOLIDATED STATEMENTS OF INCOME
                             
Year Ended September 30,

1999 2000 2001



(In thousands, except per share data)
Homebuilding:
                       
Revenues
                       
 
Home sales
  $ 3,055,032     $ 3,496,091     $ 4,289,826  
 
Land/lot sales
    63,928       108,082       93,726  
     
     
     
 
      3,118,960       3,604,173       4,383,552  
Cost of sales
                       
 
Home sales
    2,492,113       2,846,407       3,450,805  
 
Land/lot sales
    56,383       94,702       76,337  
     
     
     
 
      2,548,496       2,941,109       3,527,142  
Gross profit
                       
 
Home sales
    562,919       649,684       839,021  
 
Land/lot sales
    7,545       13,380       17,389  
     
     
     
 
      570,464       663,064       856,410  
Selling, general and administrative expense
    309,598       360,404       432,013  
Interest expense
    12,018       10,227       8,809  
Other (income) expense
    (1,889 )     (2,098 )     34,747  
     
     
     
 
      250,737       294,531       380,841  
     
     
     
 
Financial Services:
                       
Revenues
    37,251       49,522       71,962  
General and administrative expense
    24,713       35,470       47,387  
Interest expense
    4,433       5,616       5,288  
Other (income)
    (4,984 )     (6,257 )     (7,669 )
     
     
     
 
      13,089       14,693       26,956  
     
     
     
 
   
INCOME BEFORE INCOME TAXES
    263,826       309,224       407,797  
Provision for income taxes
    103,999       117,505       152,924  
     
     
     
 
 
Income before cumulative effect of change in accounting principle
    159,827       191,719       254,873  
 
Cumulative effect of change in accounting principle, net of income taxes of $1,282
                2,136  
     
     
     
 
   
NET INCOME
  $ 159,827     $ 191,719     $ 257,009  
     
     
     
 
Basic earnings per common share:
                       
 
Income before cumulative effect of change in accounting principle
  $ 2.10     $ 2.55     $ 3.37  
 
Cumulative effect of change in accounting principle, net of income taxes
                0.03  
     
     
     
 
 
Net Income
  $ 2.10     $ 2.55     $ 3.40  
     
     
     
 
Earnings per common share assuming dilution:
                       
 
Income before cumulative effect of change in accounting principle
  $ 2.07     $ 2.53     $ 3.31  
 
Cumulative effect of change in accounting principle, net of income taxes
                0.03  
     
     
     
 
 
Net Income
  $ 2.07     $ 2.53     $ 3.34  
     
     
     
 
Cash dividends per share
  $ 0.1125     $ 0.15     $ 0.19  
     
     
     
 

See accompanying notes to consolidated financial statements.

24


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
                                         
Total
Common Additional Retained Treasury Stockholders’
Stock Capital Earnings Stock Equity





(In thousands, except common stock share data)
Balances at October 1, 1998
  $ 558     $ 301,503     $ 247,375     $     $ 549,436  
Net income
                159,827             159,827  
Stock issued as partial consideration for acquisition (2,555,911 shares)
    26       54,974                   55,000  
Issuances under D.R. Horton, Inc. employee benefit plans (11,217 shares)
          150                   150  
Exercise of stock options (293,869 shares)
    3       3,361                   3,364  
Conversion of convertible subordinated notes (5,569,343 shares)
    56       59,271                   59,327  
Purchase of treasury stock (1,484,300 shares)
                      (22,404 )     (22,404 )
Cash dividends declared ($.1125 per share)
                (7,091 )           (7,091 )
     
     
     
     
     
 
Balances at September 30, 1999
  $ 643     $ 419,259     $ 400,111     $ (22,404 )   $ 797,609  
Net income
                191,719             191,719  
Issuances under D.R. Horton, Inc. employee benefit plans (34,750 shares)
          380                   380  
Exercise of stock options (200,305 shares)
    2       3,684                   3,686  
Purchase of treasury stock (1,104,900 shares)
                      (14,543 )     (14,543 )
Cash dividends declared ($.15 per share)
                (9,288 )           (9,288 )
9% stock dividend (5,571,982 shares)
    56       113,822       (113,878 )            
     
     
     
     
     
 
Balances at September 30, 2000
  $ 701     $ 537,145     $ 468,664     $ (36,947 )   $ 969,563  
     
     
     
     
     
 
Net income
                257,009             257,009  
Issuances under D.R. Horton, Inc. employee benefit plans (7,450 shares)
          125                   125  
Exercise of stock options (917,098 shares)
    9       12,269                   12,278  
Cash dividends declared ($.19 per share)
                (13,728 )           (13,728 )
Stock issued as partial consideration for acquisition (1,012,925 shares)
    10       24,990                   25,000  
11% stock dividend (4,889,928 shares)
    49       130,313       (167,309 )     36,947        
     
     
     
     
     
 
Balances at September 30, 2001
  $ 769     $ 704,842     $ 544,636     $     $ 1,250,247  
     
     
     
     
     
 

See accompanying notes to consolidated financial statements

25


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
                             
Year Ended September 30,

1999 2000 2001



(In thousands)
OPERATING ACTIVITIES
                       
Net income
  $ 159,827     $ 191,719     $ 257,009  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                       
 
Depreciation and amortization
    20,293       21,960       31,184  
 
Amortization of debt premiums and fees
    1,601       2,532       4,878  
Changes in operating assets and liabilities:
                       
 
Increase in inventories
    (385,552 )     (299,931 )     (333,142 )
 
Increase in earnest money deposits and other assets
    (10,584 )     (21,126 )     (14,617 )
 
Increase in mortgage loans held for sale
    (41,461 )     (5,795 )     (103,237 )
 
Increase in accounts payable and other liabilities
    88,949       3,093       102,641  
     
     
     
 
NET CASH USED IN OPERATING ACTIVITIES
    (166,927 )     (107,548 )     (55,284 )
     
     
     
 
INVESTING ACTIVITIES
                       
 
Net purchases of property and equipment
    (19,610 )     (15,789 )     (33,368 )
 
Net investments in venture capital entities
    (250 )     (29,032 )     (1,988 )
 
Net cash paid for acquisitions
    (6,951 )     (11,559 )     (61,897 )
     
     
     
 
NET CASH USED IN INVESTING ACTIVITIES
    (26,811 )     (56,380 )     (97,253 )
     
     
     
 
FINANCING ACTIVITIES
                       
 
Proceeds from notes payable
    515,868       745,000       1,258,824  
 
Repayment of notes payable
    (621,469 )     (963,695 )     (1,530,211 )
 
Issuance of senior and senior subordinated notes payable
    377,134       346,345       592,004  
 
Repurchase of treasury stock
    (22,404 )     (14,543 )      
 
Proceeds from stock associated with certain employee benefit plans
    150       380       125  
 
Proceeds from exercise of stock options
    3,364       3,686       12,278  
 
Cash dividends paid
    (7,091 )     (9,288 )     (13,728 )
     
     
     
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
    245,552       107,885       319,292  
     
     
     
 
INCREASE (DECREASE) IN CASH
    51,814       (56,043 )     166,755  
 
Cash at beginning of year
    76,754       128,568       72,525  
     
     
     
 
 
Cash at end of year
  $ 128,568     $ 72,525     $ 239,280  
     
     
     
 
 
Supplemental cash flow information:
                       
   
Interest paid, net of amounts capitalized
  $ 16,279     $ 14,718     $ 14,127  
     
     
     
 
   
Income taxes paid
  $ 99,784     $ 126,964     $ 116,458  
     
     
     
 
 
Supplemental disclosures of noncash activities:
                       
   
Notes payable assumed related to acquisitions
  $ 103,780     $     $ 128,013  
     
     
     
 
   
Conversion of subordinated notes to common stock
  $ 59,327     $     $  
     
     
     
 
   
Issuance of common stock related to acquisitions
  $ 55,000     $     $ 25,000  
     
     
     
 
   
Notes payable issued for inventory
  $ 13,075     $ 24,992     $ 79,934  
     
     
     
 

See accompanying notes to consolidated financial statements

26


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Business: D.R. Horton, Inc. (the Company) is a national builder that is engaged primarily in the construction and sale of single-family housing in 38 markets and 20 states in the United States. The Company designs, builds and sells single-family houses on lots developed by the Company and on finished lots which it purchases, ready for home construction. Periodically, the Company sells lots it has developed. The Company also provides title agency and mortgage brokerage services to its homebuyers. The Company does not retain or service the mortgages that it originates but, rather, sells the mortgages and related servicing rights to investors.

      Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

      Accounting principles: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates.

      Cash: The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents. Amounts in transit from title companies for home closings are included in cash.

      Cost of sales: Cost of sales includes home warranty costs, purchased discounts for customer financing, and sales commissions paid to third parties.

      Excess of cost over net assets acquired: For business acquisitions consummated prior to July 1, 2001, the excess of amounts paid over the net fair value of the assets acquired and liabilities assumed is amortized using the straight-line method over the estimated benefit period, ranging from ten to twenty years. The Company plans to adopt Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets” on October 1, 2001, the first day of fiscal 2002. At that time, the consolidated goodwill will no longer be amortized but will be subject to periodic review for impairment.

      Additional consideration paid in subsequent periods under the terms of purchase agreements is included as acquisition costs. Amortization expense was $9,481,000, $8,193,000 and $9,567,000 in fiscal 1999, 2000 and 2001, respectively. Accumulated amortization was $29,309,000 and $38,876,000 at September 30, 2000 and 2001, respectively.

      Potential impairments of intangible assets are reviewed annually or when events and circumstances warrant an earlier review. Impairments are determined to exist when estimated future undiscounted cash flows associated with an intangible asset are less than the asset’s carrying value.

      Interest: The Company capitalizes interest during development and construction. Capitalized interest is charged to cost of sales as the related inventory is delivered to the home buyer. Interest costs are (in thousands):

                           
Year Ended September 30,

1999 2000 2001



Capitalized interest, beginning of year
  $ 35,153     $ 41,525     $ 66,092  
Interest incurred— homebuilding
    76,543       104,360       131,028  
Interest expensed
                       
 
Directly— homebuilding
    (12,018 )     (10,227 )     (8,809 )
 
Amortized to cost of sales
    (58,153 )     (69,566 )     (91,401 )
     
     
     
 
Capitalized interest, end of year
  $ 41,525     $ 66,092     $ 96,910  
     
     
     
 

27


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

      Inventories: Finished inventories are stated at the lower of accumulated cost or fair value less costs to sell. Inventories under development or held for development are stated at accumulated costs, unless such costs would not be recovered from the cash flows generated by future disposition. In this instance, such inventories are measured at fair value, less costs of disposal.

      Sold units are expensed on a specific identification basis as cost of sales. Included in inventories are related interest and property taxes which are capitalized in inventory during the development and construction periods. Residential lots are transferred to construction in progress when building permits are requested. Land and development costs are allocated to individual lots on a pro-rata basis.

      Minority interests: The Company has joint venture arrangements on two land projects whereby the Company is entitled to a percentage of the profits and/or losses and is the managing partner. The financial position and results of operations of the joint venture are consolidated for financial statement purposes and the partners’ equity positions are disclosed as minority interests.

      Property and equipment: Property and equipment, including model home furniture, is stated on the basis of cost. Major renewals and improvements are capitalized. Repairs and maintenance are expensed as incurred. Depreciation generally is provided using the straight-line method over the estimated useful life of the asset. Accumulated depreciation was $38,285,000 and $54,038,000 as of September 30, 2000 and 2001, respectively.

      Revenue recognition: Revenue is recognized at the time of the closing of a sale, when title to and possession of the property transfer to the buyer.

      Advertising cost: The Company expenses advertising costs as they are incurred. Advertising expense was approximately $22,182,000, $24,043,000, and $28,900,000 in fiscal 1999, 2000, and 2001, respectively.

      Earnings per share: Basic net income per share is based upon the weighted average number of shares of common stock outstanding during each year.

      Diluted earnings per share is based upon the weighted average number of shares of common stock and dilutive securities outstanding.

      The following table sets forth the weighted average number of shares of common stock and dilutive securities outstanding used in the computation of basic and diluted earnings per share (in thousands):

                             
Year Ended September 30,

1999 2000 2001



Numerator:
                       
 
Net income
  $ 159,827     $ 191,719     $ 257,009  
     
     
     
 
Denominator:
                       
 
Denominator for basic earnings per share— weighted-average shares
    75,954       75,068       75,677  
 
Effect of dilutive securities:
                       
   
6 7/8% convertible subordinated notes
    398              
   
Employee stock options
    1,027       654       1,276  
     
     
     
 
   
Denominator for diluted earnings per share— adjusted weighted average shares and assumed conversions
    77,379       75,722       76,953  
     
     
     
 

      In September 2000, the Board of Directors declared a 9% common stock dividend, payable on September 29, 2000, to stockholders of record on September 18, 2000. In February 2001, the Board of Directors declared an 11% common stock dividend , payable on March 23, 2001 to stockholders of record on

28


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

March 9, 2001. The dividends were accounted for based on the fair value of the Company’s stock on the date of declaration. The average share amounts presented above for 1999 and 2000 have been restated to reflect the effects of the stock dividends.

      Options to purchase 1,425,000 shares of common stock at various prices were outstanding during fiscal 2000 but were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common shares and, therefore, their effect would be antidilutive. All options outstanding during 2001 were included in the computation of diluted earnings per share.

      Segment information: Effective September 30, 1999, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 131 establishes new standards for segment reporting which is based on the way management organizes segments within a company for making operating decisions and assessing performance.

      The Company’s financial reporting segments consist of homebuilding and financial services. The Company’s homebuilding operations comprise the most substantial part of its business, with more than 98% of consolidated revenues in fiscal 1999, 2000 and 2001. The homebuilding operations segment generates the majority of its revenues from the sale of completed homes with a lesser amount from the sale of land and lots. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services. Expenditures for long-lived assets and depreciation and amortization related to the financial services segment for the years ended September 30, 1999, 2000 and 2001 were not significant.

      The accounting policies of the reportable segments are described throughout this note. Assets, revenues and operating income of the Company’s reportable segments are included in the consolidated balance sheets and consolidated statements of income.

      Long-lived assets: Potential impairments of long-lived assets are reviewed annually or when events and circumstances warrant an earlier review. In accordance with SFAS No. 121, impairment is determined when estimated future undiscounted cash flows associated with an asset are less than the asset’s carrying value.

      Stock-based compensation: The Company may, with the approval of its Board of Directors, grant stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and, accordingly, recognizes no compensation expense for the stock option grants. The Company has adopted the disclosure-only provisions as specified by the SFAS No. 123, “Accounting for Stock-Based Compensation.”

      Impact of recently issued accounting standards: Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, was issued in June 1998, and was later amended by SFAS 137 and 138, which were issued in June 1999 and June 2000, respectively. Pursuant to the implementation requirements of SFAS No. 133, the Company adopted it on October 1, 2000, the first day of the Company’s fiscal year ending September 30, 2001. The Company’s interest rate swaps, the terms of which are more fully described in Note B, were not designated as hedges under the provisions of SFAS No. 133. The Statement requires such swaps to be recorded in the consolidated balance sheet at fair value. Changes in their fair value must be recorded in the consolidated statements of income. Accordingly, the Company recorded a cumulative effect of a change in accounting principle amounting to $2.1 million, net of income taxes of $1.3 million, as an adjustment to net income in 2001. The fair value of the Company’s interest rate swaps is recorded in homebuilding other assets, and the change in their fair value is recorded in other expense. The impact of adoption of SFAS No. 133 relating to hedging activities for mortgage loans and loan commitments was not material.

29


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

      In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets”, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to periodic tests for impairment of recorded values.

      In accordance with the terms of SFAS No. 142 that permit its early adoption, the Company plans to apply the new rules for goodwill and other intangible assets beginning October 1, 2001. Application of the provision prohibiting the amortization of goodwill is expected to result in an increase in income before income taxes of approximately $9.0 million in the fiscal year ended September 30, 2002. During the year, the Company will perform the required tests for impairment of goodwill. The Company does not believe that such tests will have a significant, adverse effect on its results of operations or financial position.

      Mortgage loans: Mortgage loans held for sale are reported net of discounts and are stated at fair value as determined in the aggregate, based on sale commitments or current market quotes. Any gain or loss on the sale of loans is recognized at the time of sale. Loan origination fees, net of the related direct origination costs, are deferred as an adjustment to the carrying value of the related mortgage loans held for sale and are recognized in income upon the sale of the mortgage loans.

      The Company enters into forward commitments to sell mortgage-backed securities when loans are funded but not yet committed to a specific investor and designates the derivative instruments as fair value hedges of the risk of changes in the overall fair value of the loans. Accordingly, changes in the value of the derivative instruments are recognized in current earnings, as is the change in value of the loans. During the fiscal year ended September 30, 2001, the Company’s net gain related to the ineffective portion of its fair value hedging instruments was not material. The net gain is included in Financial Services Revenues in the Consolidated Statements of Income.

      Loan commitments: To meet the financing needs of its customers, the Company is party to interest rate lock commitments (“IRLCs”) which are extended to borrowers who have applied for loan funding and meet certain defined credit and underwriting criteria. In accordance with SFAS No. 133 and related Derivatives Implementation Group conclusions, the Company classifies and accounts for IRLCs as non-designated derivative instruments with gains and losses recorded to current earnings. At September 30, 2000 and 2001, the Company’s IRLCs totaled $75.6 million and $143.8 million, respectively.

      The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments, forward commitments to sell mortgage-backed securities and the infrequent purchase of options on financial instruments. These instruments are considered nondesignated derivatives and are accounted for at fair market value with gains and losses recorded to current earnings. As of September 30, 2001, the Company had approximately $160.5 million of forward commitments outstanding which were subject to interest rate risk.

30


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

NOTE B— NOTES PAYABLE

      The Company’s notes payable consist of the following (in thousands):

                   
As of September 30,

2000 2001


Unsecured:
               
 
Revolving credit facility due 2002
  $ 192,000     $  
 
8 3/8% Senior notes due 2004, net
    148,547       148,943  
 
10 1/2% Senior notes due 2005, net
    199,343       199,439  
 
10% Senior notes due 2006, net
    147,398       147,600  
 
8% Senior notes due 2009, net
    383,089       383,257  
 
9 3/4% Senior subordinated notes due 2010, net
    148,821       148,917  
 
9 3/8% Senior subordinated notes due 2011, net
          199,688  
 
7 7/8% Senior notes due 2011 net
          198,319  
 
Zero coupon convertible senior notes due 2021, net
          202,509  
Other secured
    26,388       73,017  
     
     
 
    $ 1,245,586     $ 1,701,689  
     
     
 

      In April 2001, the Company filed a universal shelf registration statement with the Securities and Exchange Commission for up to an aggregate amount of $750 million of the Company’s debt and equity securities. The universal shelf registration provides that securities may be offered from time to time in one or more series and in the form of senior, senior subordinated or subordinated debt, preferred stock and/or common stock. The Company has $350 million remaining on its currently effective universal shelf registration statement.

Homebuilding:

      The Company has an $825 million unsecured revolving bank credit facility, consisting of a $775 million four-year revolving loan and a $50 million four-year letter of credit facility that matures in April 2002. Additionally, the Company has another $45 million standby letter of credit agreement maturing in 2003. The Company is currently in negotiations to refinance the four-year revolving loan and letter of credit facilities. Borrowings bear daily interest at rates based upon federal funds or the London Interbank Offered Rate (LIBOR) plus a spread based upon the Company’s ratio of debt to tangible net worth. In addition to the stated interest rates, the revolving credit facility requires the Company to pay certain fees. Under the debt covenants associated with the revolving credit facility, at September 30, 2001, the Company had additional borrowing capacity of $746.8 million. The average interest rates of the unsecured bank debt at September 30, 2000 and 2001 were 7.4% and 3.3%, respectively.

      In August 2001, the Company issued $200 million principal amount of 7 7/8% Senior Notes. The notes, which are due August 15, 2011, with interest payable semi-annually, represent unsecured obligations of the Company. The 7 7/8% Senior Notes are not redeemable except that 35% of the amount originally issued can be redeemed with the proceeds of public equity offerings at a redemption price equal to 107.875% of the principal amount through August 15, 2004, plus accrued interest. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs and discount, is 8.0%.

      In May 2001, the Company issued, for gross proceeds of approximately $200 million, Zero Coupon Convertible Senior Notes due 2021 with a face amount at maturity of approximately $381.1 million. The notes were issued at a price of $524.78 per $1,000 face amount at maturity, which equates to an annual yield to maturity over the life of the notes of 3.25%. The notes are convertible into the Company’s common stock at any time, if the sale price of the common stock exceeds specified thresholds or in other specified instances, at

31


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

the rate of approximately 17.5 shares per $1,000 face amount at maturity. The conversion ratio equates to an initial conversion price of $30.00 per share. Holders have the option to require the Company to repurchase the notes on any of the second, seventh or twelfth anniversary dates from the issue date for the initial issue price plus accrued yield to the purchase date. The Company must satisfy any notes submitted for repurchase on the second anniversary date in cash. Any notes submitted for repurchase on the seventh or twelfth anniversary dates may be settled in any combination of cash and/or the Company’s common stock, at the Company’s option. The Company will have the option to redeem the notes, in cash, at any time after the second anniversary date of the notes for the initial issue price plus accrued yield to redemption. The Company will pay contingent interest on the Notes during specified six-month periods beginning on May 12, 2003, if the market price of the notes exceeds specified levels.

      In March 2001, the Company issued $200 million principal amount of 9 3/8% Senior Subordinated Notes. These notes, which are due March 15, 2011, with interest payable semi-annually, represent unsecured obligations of the Company. The 9 3/8% Senior Subordinated notes may be redeemed, in whole or in part, at any time on or after March 15, 2006 at a redemption price equal to 100% of the principal amount plus a premium declining ratably to par, plus accrued interest. The Company may also redeem up to 35% of the amount originally issued with the proceeds of public equity offerings at a redemption price equal to 109.375% of the principal amount, plus accrued interest through March 15, 2004. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs and discount, is 9.5%.

      In September 2000, the Company issued $150 million principal amount of 9 3/4% Senior Subordinated Notes. These notes, which are due September 15, 2010, with interest payable semi-annually, represent unsecured obligations of the Company. The 9 3/4% Senior Subordinated Notes are not redeemable except that 33.3% of the amount originally issued can be redeemed with proceeds of a public equity offering by the Company at a redemption price of 109.75% through September 15, 2003. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs and discount, is 9.9%.

      In March 2000, the Company issued $150 million principal amount of 10 1/2% Senior Notes due April 1, 2005. In June 2000, the Company issued an additional $50 million principal amount of its 10 1/2% Senior Notes due April 1, 2005. The notes bear interest payable semi-annually and represent unsecured obligations of the Company. The 10 1/2% Senior Notes are not redeemable except that 50% of the amount originally issued can be redeemed with proceeds of a public equity offering by the Company at a redemption price of 110.5% through April 1, 2003. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs and discount, is 10.9%.

      In February 1999, the Company issued $385 million principal amount of 8% Senior Notes. These notes, which are due February 1, 2009, with interest payable semi-annually, represent unsecured obligations of the Company. The 8% Senior Notes are not redeemable except that 35% of the amount originally issued can be redeemed with proceeds of a public equity offering by the Company at a redemption price of 108% through February 1, 2002. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs and discount, is 8.3%.

      In June 1997, the Company issued $150 million principal amount of 8 3/8% Senior Notes. These notes, which are due June 15, 2004, with interest payable semi-annually, represent unsecured obligations of the Company. The 8 3/8% Senior Notes are not redeemable. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs and discount, is 8.7%.

      In April 1996, the Company issued $130 million principal amount of 10% Senior Notes due April 15, 2006. In January 1997, the Company issued an additional $20 million principal amount of its 10% Senior Notes due April 15, 2006. The notes bear interest payable semi-annually and represent unsecured obligations of the Company. The 10% Senior Notes are redeemable at the option of the Company, in whole or in part, at

32


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

any time on or after April 15, 2001 at redemption prices decreasing from 105%. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs and discount, is 10.2%.

      All series of Senior Notes are senior obligations of the Company and rank pari passu in right of payment to all existing and future unsecured indebtedness of the Company, and senior to all existing and future indebtedness expressly subordinated to them. The Senior Subordinated Notes rank behind all existing and future Senior Notes and bank credit facilities. Both the Senior and Senior Subordinated Notes are guaranteed by the majority of the Company’s subsidiaries. Upon a change of control of the Company, holders of all series of the notes have the right to require the Company to redeem such notes at a price of 101% of the par amount, along with accrued and unpaid interest.

      The indentures of the bank credit facilities and the Senior and Senior Subordinated Notes contain covenants which, taken together, limit investments in inventory, stock repurchases, cash dividends and other restricted payments, incurrence of indebtedness, asset dispositions and creation of liens, and require certain levels of tangible net worth. At September 30, 2001, these covenants limit the additional debt the Company could incur to $746.8 million. Additionally, cash dividends paid on the Company’s common stock and other restricted payments are limited to an amount not to exceed, on a cumulative basis, 50% of consolidated net income, as defined, subject to certain other adjustments. Pursuant to the most restrictive of these requirements, the Company had approximately $392.5 million available for the payment of dividends and other restricted payments at September 30, 2001.

      The Company uses interest rate swap agreements to help manage a portion of its interest rate exposure. The agreements convert a notional amount of $200 million from a variable rate to a fixed rate. These agreements are cancellable by a third party during periods where LIBOR exceeds 7%. The agreements expire at dates through September, 2008. The Company does not expect non-performance by the counter-party, a major U.S. bank, and any losses incurred in the event of non-performance are not expected to be material. Net payments or receipts under these agreements are recorded as adjustments to interest incurred. As a result of these agreements, the Company’s net interest costs were reduced by $3.6 million and $1.5 million in fiscal 2000 and 2001, respectively.

      Maturities of consolidated notes payable, assuming the revolving bank facility is not extended, are $234.6 million in 2002, $15.3 million in 2003, $152.8 million in 2004, $201.1 million in 2005, $148.5 million in 2006 and $1,317.9 million thereafter.

Financial Services:

      The Company has a $200 million mortgage warehouse line payable to financial institutions, secured by mortgage loans held for sale, maturing August 13, 2002 at the 30-day LIBOR rate plus 1%. These notes payable enable the Company’s wholly-owned subsidiary, CH Mortgage Company I, Ltd. to perform its loan origination and warehousing functions. The interest rates of the mortgage warehouse line payable at September 30, 2000 and 2001 were 7.6% and 3.6%, respectively.

NOTE C— ACQUISITIONS

      On October 22, 2001, the Company entered into a definitive agreement under which Schuler Homes, Inc. would merge into D.R. Horton, Inc. through a cash and stock transaction valued at approximately $1.2 billion, including the assumption of debt. The transaction is conditioned upon obtaining the approvals of both D.R. Horton stockholders and Schuler Homes stockholders, including separate class votes by the Class A and Class B common stockholders of Schuler Homes, as well as other customary closing conditions. Under the terms of the transaction, each Schuler Homes stockholder will have the right to elect to receive a combination of cash and stock, or all cash or all stock. However, elections to receive either all cash or all stock will be subject to proration in order to limit the total amount of cash consideration to be paid by the Company to an

33


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

aggregate of $4.09 multiplied by the total Schuler Homes shares outstanding. The complete Agreement and Plan of Merger and subsequent amendment were included as exhibits to the Company’s Current Reports on Form 8-K, filed with the SEC on October 24, 2001, as amended on November 8, 2001.

      In fiscal 1999, 2000 and 2001, the Company made the following acquisitions:

                 
Company Acquired Date Acquired Consideration



Cambridge Properties, Century Title
    January, July 1999     $ 182.8  million  
Fortress-Florida
    May 2001     $ 53.0 million  
Emerald Builders
    July 2001     $ 193.6  million  

      Consideration includes cash paid and assumption of certain accounts payable and notes payable, which were repaid subsequent to the acquisitions. In addition, the Company issued 2,555,911 shares of common stock, valued at $55.0 million, as partial consideration for the acquisition of Cambridge Properties and 1,012,925 shares of common stock, valued at $25.0 million, as partial consideration for the acquisition of Emerald Builders.

      On May 1, 2001, the Company acquired the assets of Fortress-Florida, Inc. (Fortress), a wholly-owned subsidiary of The Fortress Group, Inc., for $28.7 million in cash. Fortress assets, primarily inventories, amounted to approximately $47.1 million. Total liabilities assumed amounted to approximately $24.3 million, including notes payable of $17.4 million, which were paid at closing. The Fortress acquisition was treated as a purchase for accounting purposes.

      On July 17, 2001, the Company completed the acquisition of the assets of Emerald Builders (Emerald), a privately held homebuilder based in Houston, Texas. In the transaction, the Company issued 1,012,925 shares of common stock valued at $25.0 million, paid $31.6 million in cash and assumed liabilities of approximately $137.0 million, including notes payable of $110.6 million, most of which were paid at closing. Emerald’s assets, primarily inventories, amounted to approximately $170.4 million. The Emerald acquisition was treated as a purchase for accounting purposes. Pro forma results of operations had the Fortress and Emerald acquisitions occurred on the first day of our fiscal year are not materially different from historical results and are not presented.

NOTE D— STOCKHOLDERS’ EQUITY

      On September 7, 2000, the Board of Directors declared a 9% common stock dividend, payable on September 29, 2000, to stockholders of record on September 18, 2000. The dividend was accounted for based on the fair value of the Company’s stock on the date of declaration.

      On February 27, 2001, the Board of Directors declared an 11% common stock dividend, payable on March 23, 2001, to stockholders of record on March 9, 2001. The dividend was accounted for based on the fair value of the Company’s stock on the date of declaration.

      The Company has a shelf registration statement with the Securities and Exchange Commission to issue, from time to time, up to 8.0 million shares of registered common stock in connection with future acquisitions.

      In November, 1998, the Board of Directors authorized the repurchase of up to $100 million each of the Company’s common stock and senior debt securities, as market conditions warrant. Through September 30, 2001, the Company had repurchased $36.9 million (2,589,200 shares) of common stock in open market purchases under the stock repurchase plan. All 2,589,200 shares were reissued in March 2001 as partial payment of the 11% stock dividend.

34


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

NOTE E—PROVISION FOR INCOME TAXES

      The provision for income taxes includes the following components (in thousands):

                           
Year ended September 30,

1999 2000 2001



Current provision:
                       
 
Federal
  $ 97,707     $ 109,584     $ 161,721  
 
State
    9,792       11,862       16,504  
     
     
     
 
      107,499       121,446       178,225  
     
     
     
 
Deferred provision (benefit):
                       
 
Federal
    (5,171 )     (1,912 )     (21,919 )
 
State
    1,671       (2,029 )     (2,100 )
     
     
     
 
      (3,500 )     (3,941 )     (24,019 )
     
     
     
 
Total provision for income taxes
    103,999       117,505       154,206  
(Provision) for cumulative effect of change in accounting principle
                (1,282 )
     
     
     
 
Provision for income taxes before cumulative effect of change in accounting principle
  $ 103,999     $ 117,505     $ 152,924  
     
     
     
 

      Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These differences primarily relate to the following (in thousands):

                   
September 30,

2000 2001


Deferred tax assets:
               
 
Capitalization of inventory costs
  $ 29,063     $ 36,752  
 
Warranty cost and other accruals
    9,457       17,053  
 
Venture capital investment valuation allowances
          6,908  
 
Change in value of interest rate swaps
          3,973  
 
Other
    3,636       7,503  
     
     
 
Total deferred tax assets
    42,156       72,189  
Deferred tax liabilities
    14,539       20,534  
     
     
 
Net deferred tax assets
  $ 27,617     $ 51,655  
     
     
 

      The difference between income tax expense and tax computed by applying the federal statutory income tax rate of 35% to income before taxes is due to the following (in thousands):

                           
Year ended September 30,

1999 2000 2001



Income taxes at federal statutory rate
  $ 92,339     $ 108,228     $ 142,729  
Increase in tax resulting from:
                       
 
State income taxes, net
    8,036       7,838       9,602  
 
Other
    3,624       1,439       593  
     
     
     
 
Provision for income taxes before cumulative effect of change in accounting principle
  $ 103,999     $ 117,505     $ 152,924  
     
     
     
 

35


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

NOTE F—EMPLOYEE BENEFIT PLANS

      The Company has 401(k) plans for all Company employees who have been with the Company for a period of six months or more. The Company matches portions of employees’ voluntary contributions. Additional employer contributions in the form of profit sharing are at the discretion of the Company. Expenses for these Plans were $2,272,000, $3,124,000 and $4,204,000 for 1999, 2000 and 2001, respectively.

      The Company’s Supplemental Executive Retirement Plans (SERP’s) are non-qualified deferred compensation programs that provide benefits payable to certain management employees upon retirement, death, or termination of employment with the Company. Under one SERP, the Company accrues an unfunded benefit based on a percentage of the eligible employees’ salaries, as well as an interest factor based upon a predetermined formula. The Company recorded $833,000, $972,000 and $1,265,000 of expense for this plan in 1999, 2000 and 2001, respectively.

      Effective January 15, 1999, the Company adopted the D.R. Horton, Inc. 1999 Employee Stock Purchase Plan which provides eligible employees the opportunity to purchase common stock of the Company at a discounted price of 85% of the fair market value of the stock on the date of purchase. Under the terms of the plan, the total fair market value of the common stock that an eligible employee may purchase each year is limited to the lesser of 15% of the employee’s annual compensation or $25,000. Under the plan, employees of the Company purchased 34,750 shares for $380,000 in 2000 and 7,450 shares for $125,000 in 2001.

      The Company Stock Incentive Plans provide for the granting of stock options to certain key employees of the Company to purchase shares of common stock. Options are granted at exercise prices which approximate the market value of the Company’s common stock at the date of the grant. Options generally expire 10 years after the dates on which they were granted. Options vest over periods of 4 to 10 years. There were 1,104,591 and 1,611,012 shares available for future grants under the Plans at September 30, 2000 and 2001, respectively. The Company issued a 9% stock dividend on September 18, 2000, and an 11% stock dividend on March 9, 2001. The net effects of the dividends were to increase options outstanding by 345,664 shares in September 2000 and 493,210 in March 2001.

      Activity under the Company Stock Incentive Plans are:

                                                 
1999 2000 2001



Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price






Stock Options
                                               
Outstanding at beginning of year
    4,747,614     $ 13.30       4,141,820     $ 13.44       4,133,373     $ 12.42  
Stock dividend
                345,664             493,210        
Granted
    152,500       16.19       592,500       13.63       933,680       16.69  
Exercised
    (293,869 )     7.04       (200,305 )     9.11       (917,098 )     8.09  
Canceled
    (464,425 )     16.91       (746,306 )     14.20       (302,671 )     16.83  
     
     
     
     
     
     
 
Outstanding at end of year
    4,141,820     $ 13.44       4,133,373     $ 12.42       4,340,494     $ 12.53  
     
     
     
     
     
     
 
Exercisable at end of year
    1,122,709     $ 9.23       1,408,631     $ 9.33       1,016,529     $ 10.20  
     
     
     
     
     
     
 

      Exercise prices for options outstanding at September 30, 2001, ranged from $3.7168 to $18.2350.

36


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

      The weighted average remaining contractual lives of those options are:

                                                   
Outstanding Exercisable


Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Maturity Exercise Maturity
Exercise Price Range Options Price (Years) Options Price (Years)







Less than $9
    1,560,510     $ 7.32       4.0       682,756     $ 6.78       3.4  
$9—$18
    1,675,928       13.63       8.6       57,215       12.25       7.8  
More than $18
    1,104,056       18.23       6.8       276,558       18.23       6.8  
     
     
     
     
     
     
 
 
Total
    4,340,494     $ 12.53       6.5       1,016,529     $ 10.20       4.6  
     
     
     
     
     
     
 

      The Company has elected to follow Accounting Principles Board Opinion No. 25, in accounting for its employee stock options. The exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, and therefore no compensation expense is recognized for the initial grants. SFAS No. 123 requires disclosure of pro forma income and pro forma income per share as if the fair value based method had been applied in measuring compensation expense for option awards granted in fiscal 1999, 2000 and 2001. Management believes the fiscal 1999, 2000 and 2001 pro forma amounts may not be representative of the effects of option awards on future pro forma net income and pro forma net income per share because options granted before 1996 are not considered in these calculations. Application of the fair value method, as specified by SFAS 123, would decrease net income by $1,648,000 ($0.02 per diluted share), $1,909,000 ($0.03 per diluted share) and $2,300,624 ($0.03 per diluted share) in 1999, 2000 and 2001, respectively.

      The weighted average fair value of grants made in 1999, 2000 and 2001 was $8.85, $7.14 and $7.78, respectively.

      The fair values of the options granted were estimated on the date of their grant using the Black-Scholes option pricing model based on the following weighted average assumptions:

                         
1999 2000 2001



Risk free interest rate
    5.78 %     6.00 %     5.83 %
Expected life (in years)
    7.0       7.0       7.0  
Expected volatility
    49.50 %     48.80 %     49.50 %
Expected dividend yield
    .70 %     1.10 %     1.26 %

NOTE G—FINANCIAL INSTRUMENTS

      The fair values of the Company’s financial instruments are based on quoted market prices, where available, or are estimated. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates are subjective in nature, involve matters of judgment and therefore, cannot be determined with precision. Estimated fair values are significantly affected by the assumptions used.

37


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

      The table below sets forth the carrying values and estimated fair values of the Company’s financial instruments (in thousands).

                                   
September 30, 2000 September 30, 2001


Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value




HOMEBUILDING:
                               
Liabilities
                               
 
8% Senior notes
  $ 383,089     $ 358,050     $ 383,257     $ 350,350  
 
8 3/8% Senior notes
    148,547       146,250       148,943       147,000  
 
9 3/4% Senior subordinated notes
    148,821       147,750       148,917       139,500  
 
10% Senior notes
    147,398       151,497       147,600       150,011  
 
10 1/2% Senior notes
    199,343       207,000       199,439       202,000  
 
9 3/8% Senior subordinated notes
                199,688       185,000  
 
Zero coupon convertible senior notes
                202,509       196,388  
 
7 7/8% Senior notes
                198,319       176,000  
 
Interest rate swaps
          (3,418 )     10,389       10,389  
FINANCIAL SERVICES:
                               
Assets
                               
 
Mortgage loans held for sale
    119,581       121,562       222,818       222,818  
 
Loan delivery and forward commitments
          1,300       (1,500 )     (1,500 )
 
Interest rate lock commitments
          2,600       1,600       1,600  

      The Company used the following methods and assumptions in estimating fair values:

      For cash and cash equivalents, the revolving credit facility, other notes payable, and standby letters of credit, the carrying amounts reported in the balance sheet or as reported in Note H approximate fair values due to their short maturity or floating interest rate terms, as applicable.

      For the senior and senior subordinated notes, fair values represent quoted market prices on the exchange on which the securities are traded. For interest rate swaps, mortgage loans held for sale, loan commitments and forward contracts, the fair values are estimated based on quoted market prices for similar financial instruments.

NOTE H— COMMITMENTS AND CONTINGENCIES

      The Company is involved in lawsuits and other contingencies in the ordinary course of business. Management believes that, while the ultimate outcome of the contingencies cannot be predicted with certainty, the ultimate liability, if any, will not have a material adverse effect on the Company’s financial position.

      In the ordinary course of business, the Company enters into option agreements to purchase land and developed lots. At September 30, 2001, cash deposits of approximately $41.8 million and promissory notes approximating $1.7 million secured the Company’s performance under these agreements.

      Additionally, in the normal course of its business activities, the Company provides standby letters of credit and performance bonds, issued by third parties, to secure performance under various contracts. At September 30, 2001, outstanding standby letters of credit were $74.9 million and performance bonds were $416.2 million. The Company has an additional capacity of $21.3 million for standby letters of credit under its revolving credit facility.

38


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

      The Company leases office space under noncancellable operating leases. Minimum annual lease payments under these leases at September 30, 2001 approximate (in thousands):

         
2002
  $ 5,224  
2003
    5,016  
2004
    4,352  
2005
    3,555  
2006
    2,767  
Thereafter
    10,260  
     
 
    $ 31,174  
     
 

      Rent expense approximated $8,456,000, $11,346,000 and $14,393,000 for fiscal 1999, 2000 and 2001, respectively.

39


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

NOTE I— SUMMARIZED FINANCIAL INFORMATION

      The 7 7/8%, 8%, 8 3/8%, 10% and 10 1/2% Senior Notes, the 9 3/8% and 9 3/4% Senior Subordinated Notes, and the Zero Coupon Convertible Senior Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s direct and indirect subsidiaries (Guarantor Subsidiaries), other than financial services subsidiaries and certain other inconsequential subsidiaries (collectively, Non-Guarantor Subsidiaries). Each of the Guarantor Subsidiaries is wholly-owned. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, consolidated condensed financial statements are presented below. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that they are not material to investors.

Consolidating Balance Sheet

September 30, 2001

                                                     
Non-Guarantor
Subsidiaries

D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total






(In thousands)
ASSETS
                                               
Homebuilding:
                                               
 
Cash & cash equivalents
  $     $ 230,481     $     $ 1,824     $     $ 232,305  
 
Advances to and investments in unconsolidated subsidiaries
    2,493,783       74,241                   (2,568,024 )      
 
Inventories
    564,593       2,212,933             27,230       (379 )     2,804,377  
 
Property & equipment (net)
    8,114       39,823             5,159             53,096  
 
Earnest money deposits & other assets
    39,978       140,436             10,793       (9,548 )     181,659  
 
Excess of cost over net assets acquired (net)
          136,223                         136,223  
     
     
     
     
     
     
 
      3,106,468       2,834,137             45,006       (2,577,951 )     3,407,660  
     
     
     
     
     
     
 
Financial services:
                                               
 
Cash & cash equivalents
                6,975                   6,975  
 
Mortgage loans held for sale
                222,818                   222,818  
 
Other assets
                14,737                   14,737  
     
     
     
     
     
     
 
                  244,530                   244,530  
     
     
     
     
     
     
 
   
Total Assets
  $ 3,106,468     $ 2,834,137     $ 244,530     $ 45,006     $ (2,577,951 )   $ 3,652,190  
     
     
     
     
     
     
 
 
LIABILITIES & EQUITY
                                               
Homebuilding:
                                               
 
Accounts payable and other liabilities
  $ 191,596     $ 304,486     $     $ 2,552     $ (58 )   $ 498,576  
 
Advances from parent/ unconsolidated subsidiaries
          1,944,796             28,367       (1,973,163 )      
 
Notes payable
    1,664,625       37,064             9,489       (9,489 )     1,701,689  
     
     
     
     
     
     
 
      1,856,221       2,286,346             40,408       (1,982,710 )     2,200,265  
     
     
     
     
     
     
 
Financial services:
                                               
 
Accounts payable and other liabilities
                10,173                   10,173  
 
Advances from parent/ unconsolidated subsidiaries
                13,748             (13,748 )      
 
Notes payable
                182,641                   182,641  
     
     
     
     
     
     
 
                  206,562             (13,748 )     192,814  
     
     
     
     
     
     
 
   
Total Liabilities
    1,856,221       2,286,346       206,562       40,408       (1,996,458 )     2,393,079  
     
     
     
     
     
     
 
 
Minority interests
                10       8,854             8,864  
     
     
     
     
     
     
 
 
Common stock
    769       1       6       6,155       (6,162 )     769  
 
Additional capital
    704,842       84,612       2,299       10,129       (97,040 )     704,842  
 
Retained earnings
    544,636       463,178       35,653       (20,540 )     (478,291 )     544,636  
     
     
     
     
     
     
 
      1,250,247       547,791       37,958       (4,256 )     (581,493 )     1,250,247  
     
     
     
     
     
     
 
   
Total Liabilities & Equity
  $ 3,106,468     $ 2,834,137     $ 244,530     $ 45,006     $ (2,577,951 )   $ 3,652,190  
     
     
     
     
     
     
 

40


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

Consolidating Balance Sheet

September 30, 2000

                                                     
Nonguarantor
Subsidiaries

D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total






(In thousands)
ASSETS
                                               
Homebuilding:
                                               
 
Cash & cash equivalents
  $ 20,397     $ 40,349     $     $ 1,052     $     $ 61,798  
 
Advances to and investments in unconsolidated subsidiaries
    1,862,988       14,653                   (1,877,641 )      
 
Inventories
    395,848       1,768,934             26,538       (289 )     2,191,031  
 
Property & equipment (net)
    3,031       30,645             5,284             38,960  
 
Earnest money deposits & other assets
    44,463       86,134             28,773       (10,387 )     148,983  
 
Excess of cost over net assets acquired (net)
          115,966                         115,966  
     
     
     
     
     
     
 
      2,326,727       2,056,681             61,647       (1,888,317 )     2,556,738  
     
     
     
     
     
     
 
Financial services:
                                               
 
Cash & cash equivalents
                10,727                   10,727  
 
Mortgage loans held for sale
                119,581                   119,581  
 
Other assets
                7,531                   7,531  
     
     
     
     
     
     
 
                  137,839                   137,839  
     
     
     
     
     
     
 
   
Total Assets
  $ 2,326,727     $ 2,056,681     $ 137,839     $ 61,647     $ (1,888,317 )   $ 2,694,577  
     
     
     
     
     
     
 
 
LIABILITIES & EQUITY
                                               
Homebuilding:
                                               
 
Accounts payable and other liabilities
  $ 124,823     $ 358,895     $     $ 2,355     $ (115,684 )   $ 370,389  
 
Advances from parent/unconsolidated subsidiaries
    11,617       1,263,038             32,775       (1,307,430 )      
 
Notes payable
    1,220,724       24,861             10,222       (10,221 )     1,245,586  
     
     
     
     
     
     
 
      1,357,164       1,646,794             45,352       (1,433,335 )     1,615,975  
     
     
     
     
     
     
 
Financial services:
                                               
 
Accounts payable and other liabilities
                9,388             (4,430 )     4,958  
 
Advances from parent/unconsolidated subsidiaries
                5,653             (5,653 )      
 
Notes payable
                98,817                   98,817  
     
     
     
     
     
     
 
                  113,858             (10,083 )     103,775  
     
     
     
     
     
     
 
   
Total Liabilities
    1,357,164       1,646,794       113,858       45,352       (1,443,418 )     1,719,750  
     
     
     
     
     
     
 
 
Minority interests
                10       5,254             5,264  
     
     
     
     
     
     
 
 
Common stock
    701       1       6       6,155       (6,162 )     701  
 
Additional capital
    537,145       84,794       2,299       10,129       (97,222 )     537,145  
 
Retained earnings
    468,664       325,092       21,666       (5,243 )     (341,515 )     468,664  
 
Treasury stock
    (36,947 )                             (36,947 )
     
     
     
     
     
     
 
      969,563       409,887       23,971       11,041       (444,899 )     969,563  
     
     
     
     
     
     
 
   
Total Liabilities & Equity
  $ 2,326,727     $ 2,056,681     $ 137,839     $ 61,647     $ (1,888,317 )   $ 2,694,577  
     
     
     
     
     
     
 

41


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

Consolidating Statement of Income

Year Ended September 30, 2001

                                                     
Nonguarantor
Subsidiaries

D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total






(In thousands)
Homebuilding:
                                               
 
Revenues:
                                               
   
Home sales
  $ 715,702     $ 3,549,644     $     $ 24,480     $     $ 4,289,826  
   
Land/lot sales
    28,509       65,217                         93,726  
     
     
     
     
     
     
 
      744,211       3,614,861             24,480             4,383,552  
 
Cost of sales:
                                               
   
Home sales
    581,341       2,851,674             18,379       (589 )     3,450,805  
   
Land/lot sales
    27,166       49,171                         76,337  
     
     
     
     
     
     
 
      608,507       2,900,845             18,379       (589 )     3,527,142  
 
Gross profit:
                                               
   
Home sales
    134,361       697,970             6,101       589       839,021  
   
Land/lot sales
    1,343       16,046                         17,389  
     
     
     
     
     
     
 
      135,704       714,016             6,101       589       856,410  
 
Selling, general & administrative expenses
    94,557       325,592             7,384       4,480       432,013  
 
Interest expense
    8,624       179             193       (187 )     8,809  
 
Other (income) expense
    (375,274 )     (2,380 )           22,268       390,133       34,747  
     
     
     
     
     
     
 
      407,797       390,625             (23,744 )     (393,837 )     380,841  
     
     
     
     
     
     
 
Financial services:
                                               
 
Revenues
                71,962                   71,962  
 
Selling, general & administrative expenses
                51,867             (4,480 )     47,387  
 
Interest expense
                5,288                   5,288  
 
Other (income)
                (7,669 )                 (7,669 )
     
     
     
     
     
     
 
                  22,476             4,480       26,956  
     
     
     
     
     
     
 
 
Income before income taxes
    407,797       390,625       22,476       (23,744 )     (389,357 )     407,797  
 
Provision for income taxes
    152,924       146,484       8,429       (8,904 )     (146,009 )     152,924  
     
     
     
     
     
     
 
 
Income before cumulative effect of change in accounting principle
    254,873       244,141       14,047       (14,840 )     (243,348 )     254,873  
 
Cumulative effect of change in accounting principle
    2,136                               2,136  
     
     
     
     
     
     
 
 
Net income
  $ 257,009     $ 244,141     $ 14,047     $ (14,840 )   $ (243,348 )   $ 257,009  
     
     
     
     
     
     
 

42


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

Consolidating Statement of Income

Year Ended September 30, 2000

                                                     
Nonguarantor
Subsidiaries

D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total






(In thousands)
Homebuilding:
                                               
 
Revenues:
                                               
   
Homes sales
  $ 548,963     $ 2,910,190     $     $ 36,938     $     $ 3,496,091  
   
Land/lot sales
    15,860       92,222                         108,082  
     
     
     
     
     
     
 
      564,823       3,002,412             36,938             3,604,173  
 
Cost of sales:
                                               
   
Home sales
    458,640       2,359,624             28,838       (695 )     2,846,407  
   
Land/lot sales
    19,590       75,112                         94,702  
     
     
     
     
     
     
 
      478,230       2,434,736             28,838       (695 )     2,941,109  
 
Gross profit:
                                               
   
Home sales
    90,323       550,566             8,100       695       649,684  
   
Land/lot sales
    (3,730 )     17,110                         13,380  
     
     
     
     
     
     
 
      86,593       567,676             8,100       695       663,064  
 
Selling, general & administrative expenses
    84,679       265,615             7,102       3,008       360,404  
 
Interest expense
    10,067       159             599       (598 )     10,227  
 
Other (income) expense
    (317,377 )     (3,241 )           1,373       317,147       (2,098 )
     
     
     
     
     
     
 
      309,224       305,143             (974 )     (318,862 )     294,531  
     
     
     
     
     
     
 
Financial services:
                                               
 
Revenues
                49,522                   49,522  
 
Selling, general & administrative expenses
                38,477             (3,007 )     35,470  
 
Interest expense
                5,616                   5,616  
 
Other (income)
                (6,257 )                 (6,257 )
     
     
     
     
     
     
 
                  11,686             3,007       14,693  
     
     
     
     
     
     
 
 
Income before income taxes
    309,224       305,143       11,686       (974 )     (315,855 )     309,224  
 
Provision for income taxes
    117,505       115,954       4,441       (370 )     (120,025 )     117,505  
     
     
     
     
     
     
 
 
Net income
  $ 191,719     $ 189,189     $ 7,245     $ (604 )   $ (195,830 )   $ 191,719  
     
     
     
     
     
     
 

43


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

Consolidating Statement of Income

Year Ended September 30, 1999

                                                     
Nonguarantor
Subsidiaries

D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total






(In thousands)
Homebuilding:
                                               
 
Revenues:
                                               
   
Homes sales
  $ 543,233     $ 2,484,612     $     $ 27,187     $     $ 3,055,032  
   
Land/lot sales
    8,463       55,465                         63,928  
     
     
     
     
     
     
 
      551,696       2,540,077             27,187             3,118,960  
 
Cost of sales:
                                               
   
Home sales
    445,623       2,025,809             21,015       (334 )     2,492,113  
   
Land/lot sales
    8,374       48,009                         56,383  
     
     
     
     
     
     
 
      453,997       2,073,818             21,015       (334 )     2,548,496  
 
Gross profit:
                                               
   
Home sales
    97,610       458,803             6,172       334       562,919  
   
Land/lot sales
    89       7,456                         7,545  
     
     
     
     
     
     
 
      97,699       466,259             6,172       334       570,464  
 
Selling, general & administrative expenses
    74,016       230,910             4,654       18       309,598  
 
Interest expense
    11,551       145             1,074       (752 )     12,018  
 
Other (income)/expense
    (251,694 )     (1,443 )           316       250,932       (1,889 )
     
     
     
     
     
     
 
      263,826       236,647             128       (249,864 )     250,737  
     
     
     
     
     
     
 
Financial services:
                                               
 
Revenues
                37,251                   37,251  
 
Selling, general & administrative expenses
                24,731             (18 )     24,713  
 
Interest expense
                4,433                   4,433  
 
Other (income)
                (4,984 )                 (4,984 )
     
     
     
     
     
     
 
                  13,071             18       13,089  
     
     
     
     
     
     
 
 
Income before income taxes
    263,826       236,647       13,071       128       (249,846 )     263,826  
 
Provision for income taxes
    103,999       93,285       5,153       50       (98,488 )     103,999  
     
     
     
     
     
     
 
 
Net income
  $ 159,827     $ 143,362     $ 7,918     $ 78     $ (151,358 )   $ 159,827  
     
     
     
     
     
     
 

44


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

Consolidating Statement of Cash Flows

Year Ended September 30, 2001

                                                   
Nonguarantor
Subsidiaries

D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total






(In thousands)
OPERATING ACTIVITIES
                                               
Net income
  $ 257,009     $ 244,141     $ 14,047     $ (14,840 )   $ (243,348 )   $ 257,009  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
 
Depreciation and amortization
    3,417       25,935       1,338       494             31,184  
 
Amortization of debt premiums and fees
    4,878                               4,878  
Changes in operating assets and liabilities:
                                               
 
(Increase) decrease in inventories
    (124,424 )     (202,693 )           (6,404 )     379       (333,142 )
 
(Increase) decrease in earnest money deposits and other assets
    11,968       (49,837 )     (6,264 )     19,968       9,548       (14,617 )
 
Increase in mortgage loans held for sale
                (103,237 )                 (103,237 )
 
Increase (decrease) in accounts payable and other liabilities
    64,287       29,572       5,215       3,625       (58 )     102,641  
     
     
     
     
     
     
 
Net cash provided by (used in) operating activities
    217,135       47,118       (88,901 )     2,843       (233,479 )     (55,284 )
     
     
     
     
     
     
 
INVESTING ACTIVITIES
                                               
 
Net purchases of property and equipment
    (8,500 )     (22,218 )     (2,280 )     (370 )           (33,368 )
 
Net investments in venture capital entities
                      (1,988 )           (1,988 )
 
Net cash paid for acquisitions
          (61,897 )                       (61,897 )
     
     
     
     
     
     
 
Net cash used in investing activities
    (8,500 )     (84,115 )     (2,280 )     (2,358 )           (97,253 )
     
     
     
     
     
     
 
FINANCING ACTIVITIES
                                               
 
Net change in notes payable
    389,704       (152,911 )     83,824       9,489       (9,489 )     320,617  
 
Increase (decrease) in intercompany payables
    (617,411 )     601,540       8,105       (9,202 )     16,968        
 
Proceeds from stock associated with certain employee benefit plans
    12,403                               12,403  
 
Cash dividends/distributions paid
    (13,728 )     (221,500 )     (4,500 )           226,000       (13,728 )
     
     
     
     
     
     
 
Net cash (used in) provided by financing activities
    (229,032 )     227,129       87,429       287       233,479       319,292  
     
     
     
     
     
     
 
Increase (decrease) in cash
    (20,397 )     190,132       (3,752 )     772             166,755  
 
Cash at beginning of year
    20,397       40,349       10,727       1,052             72,525  
     
     
     
     
     
     
 
 
Cash at end of year
  $     $ 230,481     $ 6,975     $ 1,824     $     $ 239,280  
     
     
     
     
     
     
 

45


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

Consolidating Statement of Cash Flows

Year Ended September 30, 2000

                                                   
Nonguarantor
Subsidiaries

D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total






(In thousands)
OPERATING ACTIVITIES
                                               
Net income
  $ 191,719     $ 189,189     $ 7,245     $ (604 )   $ (195,830 )   $ 191,719  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
 
Depreciation and amortization
    1,535       18,527       1,141       757             21,960  
 
Amortization of debt premiums and fees
    2,532                               2,532  
Changes in operating assets and liabilities:
                                               
 
(Increase) decrease in inventories
    (71,419 )     (226,433 )           (2,181 )     102       (299,931 )
 
Increase in earnest money deposits and other assets
    (6,372 )     (11,800 )     (530 )     (1,487 )     (937 )     (21,126 )
 
Increase in mortgage loans held for sale
                (5,795 )                 (5,795 )
 
Increase (decrease) in accounts payable and other liabilities
    10,262       16,349       978       949       (25,445 )     3,093  
     
     
     
     
     
     
 
Net cash provided by (used in) operating activities
    128,257       (14,168 )     3,039       (2,566 )     (222,110 )     (107,548 )
     
     
     
     
     
     
 
INVESTING ACTIVITIES
                                               
 
Net purchases of property and equipment
    (2,143 )     (12,309 )     (1,106 )     (231 )           (15,789 )
 
Net investments in venture capital entities
                      (29,032 )           (29,032 )
 
Net cash paid for acquisitions
          (11,633 )     74                   (11,559 )
     
     
     
     
     
     
 
Net cash used in investing activities
    (2,143 )     (23,942 )     (1,032 )     (29,263 )           (56,380 )
     
     
     
     
     
     
 
FINANCING ACTIVITIES
                                               
 
Net change in notes payable
    141,552       (8,371 )     (5,533 )     (4,844 )     4,846       127,650  
 
Increase (decrease) in intercompany payables
    (294,281 )     221,156       8,593       35,762       28,770        
 
Repurchase of treasury stock
    (14,543 )                             (14,543 )
 
Proceeds from stock associated with certain employee benefit plans
    4,066                               4,066  
 
Cash dividends/distributions paid
    (9,288 )     (187,794 )     (700 )           188,494       (9,288 )
     
     
     
     
     
     
 
Net cash (used in) provided by financing activities
    (172,494 )     24,991       2,360       30,918       222,110       107,885  
     
     
     
     
     
     
 
Increase (decrease) in cash
    (46,380 )     (13,119 )     4,367       (911 )           (56,043 )
 
Cash at beginning of year
    66,777       53,468       6,360       1,963             128,568  
     
     
     
     
     
     
 
 
Cash at end of year
  $ 20,397     $ 40,349     $ 10,727     $ 1,052     $     $ 72,525  
     
     
     
     
     
     
 

46


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

Consolidating Statement of Cash Flows

Year Ended September 30, 1999

                                                   
Nonguarantor
Subsidiaries

D.R. Guarantor Financial Intercompany
Horton, Inc. Subsidiaries Services Other Eliminations Total






(In thousands)
OPERATING ACTIVITIES
                                               
Net income
  $ 159,827     $ 143,362     $ 7,918     $ 78     $ (151,358 )   $ 159,827  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
 
Depreciation and amortization
    1,856       17,029       714       694             20,293  
 
Amortization of debt premiums and fees
    1,601                               1,601  
Changes in operating assets and liabilities:
                                               
 
(Increase) decrease in inventories
    (35,674 )     (350,406 )           341       187       (385,552 )
 
(Increase) decrease in earnest money deposits and other assets
    (4,268 )     (18,358 )     (313 )     2,276       10,079       (10,584 )
 
Increase in mortgage loans held for sale
                (41,461 )                 (41,461 )
 
Increase (decrease) in accounts payable and other liabilities
    16,265       71,549       5,978       2,809       (7,652 )     88,949  
     
     
     
     
     
     
 
Net cash provided by (used in) operating activities
    139,607       (136,824 )     (27,164 )     6,198       (148,744 )     (166,927 )
     
     
     
     
     
     
 
INVESTING ACTIVITIES
                                               
 
Net purchases of property and equipment
    (1,656 )     (14,811 )     (1,702 )     (1,441 )           (19,610 )
 
Net investments in venture capital entities
                      (250 )           (250 )
 
Net cash paid for acquisitions
          (5,598 )     (1,353 )                 (6,951 )
     
     
     
     
     
     
 
Net cash used in investing activities
    (1,656 )     (20,409 )     (3,055 )     (1,691 )           (26,811 )
     
     
     
     
     
     
 
FINANCING ACTIVITIES
                                               
 
Net change in notes payable
    316,918       (109,790 )     75,457       4,015       (15,067 )     271,533  
 
Increase (decrease) in intercompany payables
    (425,329 )     461,491       (47,020 )     (7,078 )     17,936        
 
Repurchase of treasury stock
    (22,404 )                             (22,404 )
 
Proceeds from stock associated with certain employee benefit plans
    3,514                               3,514  
 
Cash dividends/distributions paid
    (7,091 )     (141,000 )     (4,875 )           145,875       (7,091 )
     
     
     
     
     
     
 
Net cash (used in) provided by financing activities
    (134,392 )     210,701       23,562       (3,063 )     148,744       245,552  
     
     
     
     
     
     
 
Increase (decrease) in cash
    3,559       53,468       (6,657 )     1,444             51,814  
 
Cash at beginning of year
    63,218             13,017       519             76,754  
     
     
     
     
     
     
 
 
Cash at end of year
  $ 66,777     $ 53,468     $ 6,360     $ 1,963     $     $ 128,568  
     
     
     
     
     
     
 

47


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)

NOTE J— QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

      Quarterly results of operations are (in thousands, except for per share amounts):

                                 
Fiscal 2001

Three Months Ended

September 30 June 30 March 31 December 31




Revenues
  $ 1,540,034     $ 1,120,981     $ 906,836     $ 887,663  
Gross profit
    288,028       219,159       179,000       170,223  
Income before cumulative effect of change in accounting principle
    86,764       68,803       51,581       47,725  
Net income
    86,764       68,803       51,581       49,861  
Basic earnings per common share before cumulative effect of change in accounting principle
    1.13       0.91       0.68       0.64  
Diluted earnings per common share before cumulative effect of change in accounting principle
    1.11       0.89       0.67       0.63  
                                 
Fiscal 2000

Three Months Ended

September 30 June 30 March 31 December 31




Revenues
  $ 1,086,675     $ 959,216     $ 798,864     $ 808,940  
Gross profit
    195,843       172,502       143,792       150,927  
Net income
    61,686       48,067       39,434       42,532  
Basic earnings per common share
    0.82       0.64       0.53       0.56  
Diluted earnings per common share
    0.81       0.64       0.52       0.56  

NOTE K— TRANSACTIONS WITH RELATED PARTIES

      One of the Company’s directors beneficially owns EVP Capital, L.P., (“EVP”), which was a general partner of Encore Venture Partners II (Texas), L.P. (“Encore”), a Company affiliate which, together with other Company affiliates, invested in technology start-up and emerging growth companies. During the term of EVP’s interest in Encore, such director advised and assisted the Company in its homebuilder acquisitions. In connection with the termination of the Company’s investment program through Encore, the existing agreement with EVP was terminated, along with EVP’s interests in Encore. Since such termination, through advisory arrangements with the Company, such director has continued to monitor Encore and affiliate investments and to advise and assist the Company in its homebuilder acquisitions, and the Company has paid fees to EVP. Under these advisory arrangements, such director has also been active in the process of integrating acquired homebuilding operations. For the years ended September 30, 2000 and 2001, the Company paid EVP approximately $677,000 and $1,724,000, respectively, excluding reimbursement of expenses, under the foregoing agreements and arrangements. For the first three quarters of fiscal 2002, the Company has agreed to pay EVP at a quarterly rate of $500,000, in addition to the reimbursement of expenses, in connection with such director’s continued advice and assistance.

48


Table of Contents

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

      None.

PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by this item is set forth under the caption “Additional Information About D.R. Horton—Directors and Executive Officers” and the caption “Additional Information About D.R. Horton—Section 16(a) Beneficial Ownership Reporting Compliance” of the registrant’s definitive Proxy Statement for the 2002 Annual Meeting of Stockholders and incorporated herein by reference.

ITEM 11.     EXECUTIVE COMPENSATION

      The information required by this item is set forth under the caption “Additional Information About D.R. Horton—Executive Compensation” through “Additional Information About D.R. Horton—Compensation Committee Interlocks and Insider Participation” of the registrant’s definitive Proxy Statement for the 2002 Annual Meeting of Stockholders and incorporated herein by reference.

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by this item is set forth under the caption “Additional Information About D.R. Horton—D.R. Horton’s Principal Stockholders” of the registrant’s definitive Proxy Statement for the 2002 Annual Meeting of Stockholders and incorporated herein by reference.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this item is set forth under the caption “Additional Information About D.R. Horton—Transactions with Management” of the registrant’s definitive Proxy Statement for the 2002 Annual Meeting of Stockholders and incorporated herein by reference.

49


Table of Contents

PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

      (a) The following documents are filed as part of this report:

        1. Financial Statements:
 
        See Item 8 above.
 
        2. Financial Statement Schedules:
 
        Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission (the “Commission”) are not required under the related instructions or are not applicable, and therefore have been omitted.
 
        3. Exhibits:
         
Exhibit
Number Exhibit


  2.1     Agreement and Plan of Merger, dated as of December 18, 1997, by and between the Registrant and Continental Homes Holding Corp. The Registrant agrees to furnish supplementally a copy of omitted schedules to the Commission upon request (1) 
  2.2     Agreement and Plan of Merger, dated as of October 22, 2001, as amended on November 8, 2001, by and between the Registrant and Schuler Homes, Inc. The Registrant agrees to furnish supplementally a copy of omitted schedules to the Commission upon request (2) 
  3.1     Amended and Restated Certificate of Incorporation, as amended (3) 
  3.2     Amended and Restated Bylaws (4)
  4.1     See Exhibits 3.1 and 3.2
  4.2     Indenture, dated as of June 9, 1997, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (5)
  4.3     First Supplemental Indenture, dated as of June 9, 1997, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (6)
  4.4     Second Supplemental Indenture, dated as of September 30, 1997, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (7)
  4.5     Third Supplemental Indenture, dated as of April 17, 1998, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (8)
  4.6     Fourth Supplemental Indenture, dated as of April 20, 1998, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (9) 
  4.7     Fifth Supplemental Indenture, dated as of August 31, 1998, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (10) 
  4.8     Sixth Supplemental Indenture, dated as of February 4, 1999, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (11) 
  4.9     Seventh Supplemental Indenture, dated as of August 31, 1999, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (12) 
  4.1 0   Eighth Supplemental Indenture, dated as of March 21, 2000, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (13) 
  4.1 1   Ninth Supplemental Indenture, dated as of March 31, 2000, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (14) 
  4.1 2   Tenth Supplemental Indenture, dated as of June 5, 2000, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (15) 

50


Table of Contents

         
Exhibit
Number Exhibit


  4.1 3   Eleventh Supplemental Indenture, dated as of May 11, 2001, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (16) 
  4.1 4   Twelfth Supplemental Indenture, dated as of May 21, 2001, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (17) 
  4.1 5   Thirteenth Supplemental Indenture, dated as of August 15, 2001, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (18) 
  4.1 6   Indenture, dated as of September 11, 2000, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (19) 
  4.1 7   First Supplemental Indenture, dated as of September 11, 2000, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (20) 
  4.1 8   Second Supplemental Indenture, dated as of March 12, 2001, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (21)
  4.1 9   Third Supplemental Indenture, dated as of May 21, 2001, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (22)
  4.2 0   Indenture, dated as of April 15, 1996, between Continental and First Union National Bank, as Trustee (23)
  4.2 1   First Supplemental Indenture, dated as of April 20, 1998, among the Registrant, the guarantors named therein and First Union National Bank, as Trustee (24)
  4.2 2   Second Supplemental Indenture, dated as of August 31, 1998, among the Registrant, the guarantors named therein and First Union National Bank, as Trustee (25)
  4.2 3   Third Supplemental Indenture, dated as of August 31, 1999, among the Registrant, the guarantors named therein and First Union National Bank, as Trustee (26)
  4.2 4   Fourth Supplemental Indenture, dated as of May 21, 2001, among the Registrant, the guarantors named therein and First Union National Bank, as Trustee (27)
  10.1     Form of Indemnification Agreement between the Registrant and each of its directors and executive officers and schedules of substantially identical documents (28)
  10.2     D.R. Horton, Inc. 1991 Stock Incentive Plan, as amended and restated (29)(30)
  10.2 a   Amendment No. 1 to 1991 Stock Incentive Plan, as amended and restated (30)(31)
  10.3     Form of Non-Qualified Stock Option Agreement (Term Vesting)(30)(32)
  10.4     Form of Non-Qualified Stock Option Agreement (Performance Vesting)(30) (33)
  10.5     Form of Incentive Stock Option Agreement (Term Vesting)(30)(33)
  10.6     Form of Incentive Stock Option Agreement (Performance Vesting)(30)(33)
  10.7     Form of Restricted Stock Agreement (Term Vesting)(30)(33)
  10.8     Form of Restricted Stock Agreement (Performance Vesting)(30)(33)
  10.9     Form of Stock Appreciation Right Agreement (Term Vesting)(30)(33)
  10.1 0   Form of Stock Appreciation Right Agreement (Performance Vesting)(30)(33)
  10.1 1   Form of Stock Appreciation Right Notification (Tandem)(30)(33)
  10.1 2   Form of Performance Share Notification (30)(33)
  10.1 3   Form of Performance Unit Notification (30)(33)
  10.1 4   D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 1 (30)(34)
  10.1 5   D.R. Horton, Inc. Supplemental Executive Retirement Trust No. 1 (30)(34)
  10.1 6   D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 2 (30)(34)

51


Table of Contents

         
Exhibit
Number Exhibit


  10.1 7   Continental Homes Holding Corp. 1988 Stock Incentive Plan (as amended and restated June 20, 1997)(30)(35)
  10.1 8   Restated Continental Homes Holding Corp. 1986 Stock Incentive Plan, and the First Amendment thereto dated June 17, 1987(30)(36)
  10.1 9   Form of Stock Option Agreement pursuant to Continental’s 1986 and 1988 Stock Incentive Plans (30)(37)
  10.2 0   The D.R. Horton, Inc. 2000 Incentive Bonus Plan (30)(38)
  10.2 1   First Amendment to Non-Qualified Stock Option Agreements, dated as of March 15, 2000, between the Registrant and Richard Beckwitt (30)(39)
  10.2 2   Letter Agreement concerning partial bonus under Incentive Bonus Plan, dated March 15, 2000, between the Registrant and Richard Beckwitt (30)(40)
  10.2 3   Limited Partnership Agreement of Encore Venture Partners II (Texas), L.P., dated as of March 21, 2000, among GP-Encore, Inc. (formerly, Encore I, Inc.), Encore II, Inc., EVP Capital, L.P. (formerly, Encore Capital (Texas), L.P.) and Richard Beckwitt (30)(41)
  10.2 4   Agreement for Termination of, and Withdrawal from, Partnership, dated as of June 30, 2001, among Encore Venture Partners II (Texas), L.P., EVP Capital, L.P., Encore Management, LLC, Richard Beckwitt, GP-Encore, Inc. and Encore II, Inc. (30)(42)
  10.2 5   Summary of Advisory Arrangement for Richard Beckwitt (30)(42)
  10.2 6   Amended and Restated Master Loan and Inter-Creditor Agreement dated as of July 1, 1999, among D.R. Horton, Inc., as Borrower; NationsBank, N.A., Fleet National Bank, Bank United, Comerica Bank, Credit Lyonnais New York Branch, Société Générale, 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, Wachovia Mortgage Company and Summit Bank, as Banks; and NationsBank, N.A., as Administrative Agent (43)
  10.2 7   Credit Agreement dated as of August 13, 1999, among CH Mortgage Company I, Ltd., as Borrower; U.S. Bank National Association, Residential Funding Corporation, Hibernia Bank, First Union National Bank, and National City Bank of Kentucky, as Lenders and U.S. Bank National Association, as Agent (44)
  21.1