e10vq
Table of Contents

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

     
x
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Quarterly Period Ended March 31, 2004

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   76006

 
 
 
(Address of principal executive offices)   (Zip Code)

(817) 856-8200


(Registrant’s telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x Noo

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $.01 par value — 233,040,711 shares as of May 3, 2004

This report contains 32 pages.

 


Table of Contents

INDEX

D.R. HORTON, INC.

             
        Page
  FINANCIAL INFORMATION.        
  Financial Statements.        
 
  Consolidated Balance Sheets - March 31, 2004 and September 30, 2003.     3  
 
  Consolidated Statements of Income - Three Months and Six Months Ended March 31, 2004 and 2003.     4  
 
  Consolidated Statements of Cash Flows - Six months Ended March 31, 2004 and 2003.     5  
 
  Notes to Consolidated Financial Statements.     6-18  
  Management's Discussion and Analysis of Results of Operations and Financial Condition.     19-26  
  Quantitative and Qualitative Disclosures about Market Risk.     27  
  Controls and Procedures     28  
  OTHER INFORMATION.        
  Changes in Securities and Use of Proceeds     29  
  Submission of Matters to a Vote of Security Holders     29  
  Other Information     30  
  Exhibits and Reports on Form 8-K     30-31  
        32  
 Amended and Restated Credit Agreement
 Certification of CEO Pursuant to Section 302
 Certification of CFO Pursuant to Section 302
 Certification of CEO Pursuant to Section 906
 Certification of CFO Pursuant to Section 906

 


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
                 
    March 31,   September 30,
    2004
  2003
    (In thousands)
    (Unaudited)
ASSETS
               
Homebuilding:
               
Cash and cash equivalents
  $ 190,362     $ 542,464  
Inventories:
               
Finished homes and construction in progress
    2,770,409       2,464,634  
Residential lots — developed and under development
    3,034,251       2,506,126  
Land held for development
    6,262       6,491  
Consolidated land inventory not owned
    24,674       105,044  
 
   
 
     
 
 
 
    5,835,596       5,082,295  
Property and equipment (net)
    86,383       81,675  
Earnest money deposits and other assets
    464,124       436,700  
Excess of cost over net assets acquired
    578,900       578,900  
 
   
 
     
 
 
 
    7,155,365       6,722,034  
 
   
 
     
 
 
Financial Services:
               
Cash and cash equivalents
    28,331       40,441  
Mortgage loans held for sale
    432,494       485,485  
Other assets
    27,507       31,417  
 
   
 
     
 
 
 
    488,332       557,343  
 
   
 
     
 
 
 
  $ 7,643,697     $ 7,279,377  
 
   
 
     
 
 
LIABILITIES
               
Homebuilding:
               
Accounts payable and other liabilities
  $ 1,045,023     $ 1,131,919  
Notes payable
    2,780,861       2,565,145  
 
   
 
     
 
 
 
    3,825,884       3,697,064  
 
   
 
     
 
 
Financial Services:
               
Accounts payable and other liabilities
    12,577       17,174  
Notes payable to financial institutions
    366,864       397,978  
 
   
 
     
 
 
 
    379,441       415,152  
 
   
 
     
 
 
 
    4,205,325       4,112,216  
 
   
 
     
 
 
Minority interests
    48,169       135,901  
 
   
 
     
 
 
STOCKHOLDERS’ EQUITY
               
Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued
           
Common stock, $.01 par value, 400,000,000 shares authorized, 235,688,413 shares issued and 233,035,613 shares outstanding at March 31, 2004 and 157,419,220 shares issued and 154,766,420 shares outstanding at September 30, 2003
    2,357       1,574  
Additional capital
    1,594,114       1,581,629  
Unearned compensation
    (1,079 )     (2,163 )
Retained earnings
    1,853,670       1,509,079  
Treasury stock, 2,652,800 shares at March 31, 2004 and September 30, 2003, at cost
    (58,859 )     (58,859 )
 
   
 
     
 
 
 
    3,390,203       3,031,260  
 
   
 
     
 
 
 
  $ 7,643,697     $ 7,279,377  
 
   
 
     
 
 

See accompanying notes to consolidated financial statements.

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Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

                                 
    Three Months Ended   Six Months Ended
    March 31,
  March 31,
    2004
  2003
  2004
  2003
            (In thousands, except per share data)
       
            (Unaudited)        
Homebuilding:
                               
Revenues:
                               
Home sales
  $ 2,250,531     $ 1,777,829     $ 4,385,157     $ 3,444,278  
Land/lot sales
    42,692       90,952       71,674       131,196  
 
   
 
     
 
     
 
     
 
 
 
    2,293,223       1,868,781       4,456,831       3,575,474  
 
   
 
     
 
     
 
     
 
 
Cost of sales:
                               
Home sales
    1,748,798       1,419,537       3,403,123       2,753,295  
Land/lot sales
    27,373       76,868       43,372       111,650  
 
   
 
     
 
     
 
     
 
 
 
    1,776,171       1,496,405       3,446,495       2,864,945  
 
   
 
     
 
     
 
     
 
 
Gross profit:
                               
Home sales
    501,733       358,292       982,034       690,983  
Land/lot sales
    15,319       14,084       28,302       19,546  
 
   
 
     
 
     
 
     
 
 
 
    517,052       372,376       1,010,336       710,529  
Selling, general and administrative expense
    222,679       187,285       435,199       366,466  
Interest expense
    3,064       7       3,329       354  
Other (income)expense
    2,834       ( 71 )     222       (276 )
 
   
 
     
 
     
 
     
 
 
 
    288,475       185,155       571,586       343,985  
 
   
 
     
 
     
 
     
 
 
Financial Services:
                               
Revenues
    42,040       39,766       82,962       78,007  
General and administrative expense
    26,211       22,235       51,700       44,242  
Interest expense
    1,152       1,482       2,397       3,549  
Other (income)
    (3,444 )     (4,982 )     (7,957 )     (10,910 )
 
   
 
     
 
     
 
     
 
 
 
    18,121       21,031       36,822       41,126  
 
   
 
     
 
     
 
     
 
 
INCOME BEFORE INCOME TAXES
    306,596       206,186       608,408       385,111  
Provision for income taxes
    118,039       78,351       234,237       145,448  
 
   
 
     
 
     
 
     
 
 
NET INCOME
  $ 188,557     $ 127,835     $ 374,171     $ 239,663  
 
   
 
     
 
     
 
     
 
 
Earnings per share:
                               
Basic
  $ 0.81     $ 0.58     $ 1.61     $ 1.09  
Diluted
  $ 0.80     $ 0.57     $ 1.58     $ 1.08  
 
   
 
     
 
     
 
     
 
 
Weighted average number of shares of stock outstanding:
                               
Basic
    232,813       219,490       232,548       219,639  
Diluted
    237,096       222,327       236,904       222,543  
 
   
 
     
 
     
 
     
 
 
Cash dividends per share
  $ 0.08     $ 0.07     $ 0.15     $ 0.13  
 
   
 
     
 
     
 
     
 
 

See accompanying notes to consolidated financial statements.

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Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
    Six Months Ended
    March 31,
    2004
  2003
    (In thousands)
    (Unaudited)
OPERATING ACTIVITIES
               
Net income
  $ 374,171     $ 239,663  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation and amortization
    21,878       18,784  
Amortization of debt premiums, discounts and fees
    4,057       3,559  
Changes in operating assets and liabilities:
               
Increase in inventories
    (835,264 )     (358,234 )
(Increase) decrease in earnest money deposits and other assets
    (28,255 )     62,164  
Decrease in mortgage loans held for sale
    52,991       39,414  
Decrease in accounts payable and other liabilities
    (49,177 )     (25,045 )
 
   
 
     
 
 
NET CASH USED IN OPERATING ACTIVITIES
    (459,599 )     (19,695 )
 
   
 
     
 
 
INVESTING ACTIVITIES
               
Net purchases of property and equipment
    (24,615 )     (22,199 )
 
   
 
     
 
 
NET CASH USED IN INVESTING ACTIVITIES
    (24,615 )     (22,199 )
 
   
 
     
 
 
FINANCING ACTIVITIES
               
Proceeds from notes payable
    1,206,661       1,066,160  
Issuance of senior notes payable
    199,440       214,206  
Repayment of notes payable
    (1,266,911 )     (1,110,417 )
Proceeds from stock associated with certain employee benefit plans
    10,392       3,660  
Purchase of treasury stock
          (29,522 )
Payment of cash dividends
    (29,580 )     (19,059 )
 
   
 
     
 
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
    120,002       125,028  
 
   
 
     
 
 
INCREASE (DECREASE) IN CASH
    (364,212 )     83,134  
Cash at beginning of period
    582,905       104,344  
 
   
 
     
 
 
Cash at end of period
  $ 218,693     $ 187,478  
 
   
 
     
 
 
Supplemental disclosures of non-cash activities:
               
Notes payable issued for inventory
  $ 45,209     $ 36,876  
 
   
 
     
 
 
Decrease in consolidated land inventory not owned
  $ (80,370 )   $  
 
   
 
     
 
 

See accompanying notes to consolidated financial statements.

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Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2004

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited, consolidated financial statements include the accounts of D.R. Horton, Inc. and all of its wholly-owned and majority-owned or controlled subsidiaries (the “Company”). All significant intercompany accounts, transactions and balances have been eliminated in consolidation. We have also consolidated certain variable interest entities from which we are purchasing lots under option purchase contracts, under the requirements of Interpretation No. 46 issued by the Financial Accounting Standards Board (“FASB”). The statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending September 30, 2004.

Business - The Company is a national builder that is engaged primarily in the construction and sale of single-family housing in 51 markets and 21 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 land and lots it has developed or bought. The Company also provides title agency and mortgage brokerage services to its home buyers. The Company does not retain or service the mortgages that it originates but, rather, sells the mortgages and related servicing rights to investors.

Stock Split — In December 2003, the Company’s Board of Directors declared a three-for-two stock split (effected as a 50% stock dividend), paid on January 12, 2004 to common stockholders of record on December 22, 2003. The earnings per share amounts for the three months and six months ended March 31, 2004 and 2003 reflect the effects of the stock split.

NOTE B — SEGMENT INFORMATION

The Company’s reportable business segments consist of homebuilding and financial services. The Company’s homebuilding operations comprise the most substantial part of its business, with approximately 98% of consolidated revenues during the six months ended March 31, 2004 and 2003, and approximately 94% and 89% of consolidated income before income taxes for the six months ended March 31, 2004 and 2003, respectively. The homebuilding reporting segment is comprised of the aggregate of the Company’s regional homebuilding operating segments and generates most of its revenues from the sale of completed homes, with a lesser amount from the sale of land and lots. Approximately 85% and 92% of home sales revenues were generated from the sale of detached homes for the six months ended March 31, 2004, and 2003, respectively. The financial services segment generates its revenues from originating and selling mortgages and collecting fees for title insurance agency and closing services.

NOTE C — CONSOLIDATION OF VARIABLE INTEREST ENTITIES

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which provides guidance for the financial accounting and reporting of interests in certain variable interest entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain business entities that either have equity investors with no voting rights or have equity investors that do not provide sufficient financial resources for the entities to support their activities. FIN 46 requires consolidation of such entities by any company that is subject to a majority of the risk of loss from the entities’ activities or is entitled to receive a majority of the entities’ residual returns or both. The Company fully adopted the provisions of FIN 46 for all variable interest entities as of September 30, 2003.

In the ordinary course of its business, the Company enters into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Under such option purchase contracts, the Company will fund a stated deposit in consideration for the right to purchase land or lots at a future point in time with predetermined terms. Under the terms of the option purchase contracts, many of the Company’s option deposits are non-refundable. Certain non-refundable deposits are deemed to create a variable interest in a variable interest entity under the

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Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2004

requirements of FIN 46. As such, certain of the Company’s option purchase contracts result in the acquisition of a variable interest in the entity holding the land parcel under option.

The Company has evaluated all of its interests in variable interest entities at March 31, 2004 and has consolidated certain variable interest entities from which the Company is purchasing land or lots under option contracts. The land sellers are not required to provide the Company the financial information of the variable interest entities. Therefore, when the Company’s requests for financial information are denied by the land sellers, certain assumptions about the assets and liabilities of such entities are required. In most cases, the fair value of the assets of the consolidated entities have been assumed to be the contractual purchase price of the land or lots the Company is purchasing. In these cases, the only asset recorded is the land or lots the Company has the option to buy with a related offset to minority interest for the assumed third party investment in the variable interest entity. The consolidation of these entities added $24.7 million in land inventory not owned and minority interests to the Company’s balance sheet at March 31, 2004. The Company’s obligations related to these land or lot option contracts are guaranteed by cash deposits totaling $4.7 million and promissory notes totaling $0.1 million. Creditors, if any, of these variable interest entities have no recourse against the Company.

Including the deposits with the variable interest entities above, the Company has deposits amounting to $184.4 million to purchase land and lots with a total purchase price of $3.5 billion at March 31, 2004. For the variable interest entities which are unconsolidated because the Company is not subject to a majority of the risk of loss or entitled to receive a majority of the entities’ residual returns, the maximum exposure to loss is limited to the funded amounts of the Company’s option deposits, which totaled $171.8 million at March 31, 2004.

NOTE D — EARNINGS PER SHARE

Basic earnings per share for the three months and six months ended March 31, 2004 and 2003 is based on the weighted average number of shares of common stock outstanding. Diluted earnings per share is based on 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):

                                 
    Three Months Ended   Six Months Ended
    March 31,
  March 31,
    2004
  2003
  2004
  2003
Denominator for basic earnings per share— weighted average shares
    232,813       219,490       232,548       219,639  
Effect of dilutive securities:
                               
Employee stock options
    4,283       2,837       4,356       2,904  
 
   
 
     
 
     
 
     
 
 
Denominator for diluted earnings per share— adjusted weighted average shares
    237,096       222,327       236,904       222,543  
 
   
 
     
 
     
 
     
 
 

In December 2003, the Company’s Board of Directors declared a three-for-two stock split (effected as a 50% stock dividend), paid on January 12, 2004 to common stockholders of record on December 22, 2003. The share amounts for the three months and six months ended March 31, 2004 and 2003 reflect the effects of the three-for-two stock split.

All options outstanding during the three months and six months ended March 31, 2004 were included in the computation of diluted earnings per share. Options to purchase approximately 4,084,000 and 4,063,000 shares of common stock (as adjusted for the January 2004 three-for-two stock split) at various prices were outstanding during the three months and six months ended March 31, 2003, respectively, 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.

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Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2004

NOTE E — DEBT

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

                 
    March 31,   September 30,
    2004
  2003
Homebuilding:
               
Unsecured:
               
Revolving credit facility due 2008
  $ 50,000     $  
8⅜% Senior notes due 2004, net
    149,934       149,736  
10½% Senior notes due 2005, net
    199,763       199,691  
7½% Senior notes due 2007, net
    215,000       215,000  
5% Senior notes due 2009, net
    199,457        
8% Senior notes due 2009, net
    383,739       383,635  
9⅜% Senior notes due 2009, net
    243,117       243,927  
9¾% Senior subordinated notes due 2010, net.
    149,129       149,082  
7⅞% Senior notes due 2011, net
    198,632       198,564  
9⅜% Senior subordinated notes due 2011, net
    199,746       199,733  
10½% Senior subordinated notes due 2011, net
    151,277       151,798  
8½% Senior notes due 2012, net
    248,214       248,138  
6⅞% Senior notes due 2013, net
    200,000       200,000  
5⅞% Senior notes due 2013, net
    100,000       100,000  
Other secured
    92,853       125,841  
 
   
 
     
 
 
 
  $ 2,780,861     $ 2,565,145  
 
   
 
     
 
 
Financial Services:
               
Mortgage warehouse facility due 2005
  $ 216,864     $ 147,978  
Commercial paper conduit facility due 2006
    150,000       250,000  
 
   
 
     
 
 
 
  $ 366,864     $ 397,978  
 
   
 
     
 
 

Homebuilding:

In March 2004, the Company restructured and amended its existing unsecured revolving credit facility, increasing it to $1 billion and extending its maturity to March 25, 2008. The new facility includes a $350 million letter of credit sub-facility and an uncommitted $250 million accordion feature, under which the facility may be increased to $1.25 billion. The facility is guaranteed by substantially all of the Company’s wholly-owned subsidiaries other than its financial services subsidiaries. Borrowings bear daily interest at rates based upon the London Interbank Offered Rate (LIBOR) plus a spread based upon the Company’s ratio of debt to tangible net worth. The interest rate applicable to the revolving credit facility at March 31, 2004 was 2.2%. In addition to the stated interest rates, the revolving credit facility requires the Company to pay certain fees.

In January 2004, the Company issued $200 million principal amount of 5% Senior Notes. The notes, which are due January 15, 2009, with interest payable semi-annually, represent unsecured obligations of the Company. The Company may redeem up to 35% of the amount originally issued with the proceeds of public offerings at a redemption price equal to 105% of the principal amount through January 15, 2007, plus accrued interest. The Company issued the notes for the purpose of providing capital to repay at maturity the $150 million aggregate principal amount outstanding of its 8⅜% Senior Notes due June 15, 2004. The annual effective interest rate of the notes, after giving effect to the amortization of deferred financing costs and discounts, is 5.3%.

The bank credit facilities and the indentures for 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 March 31, 2004, under the most restrictive covenants, the additional debt the Company could incur would be limited to $2,049.9 million, which included $863.3 million available under the revolving credit facility. At that date, under the most restrictive covenants, $549.1 million was available for restricted payments.

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Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2004

Financial Services:

In April 2004, the Company’s mortgage subsidiary restructured and amended its mortgage warehouse loan facility payable to financial institutions, increasing it to $300 million and extending its maturity to April 8, 2005, at the 30-day LIBOR rate plus a fixed premium. The mortgage warehouse facility is secured by certain mortgage loans held for sale and is not guaranteed by D.R. Horton, Inc. or any of the guarantors of the Senior and Senior Subordinated Notes. The interest rate of the mortgage warehouse facility at March 31, 2004 was 2.2%.

The Company’s mortgage subsidiary also has a $300 million commercial paper conduit facility (the “CP conduit facility”), that expires on June 29, 2006. The CP conduit facility’s terms are renewable annually by the sponsoring banks. The CP conduit facility is secured by certain mortgage loans held for sale and is not guaranteed by D.R. Horton, Inc. or any of the guarantors of the Senior and Senior Subordinated Notes. The mortgage loans pledged to secure the CP conduit facility are used as collateral for asset backed commercial paper issued by multi-seller conduits in the commercial paper market. The interest rate of the CP conduit facility at March 31, 2004 was 1.6%.

The Company’s wholly-owned mortgage subsidiary is required by Statement of Position 01-6 (SOP 01-6), of the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants, to disclose the minimum net worth requirements by regulatory agencies, secondary market investors and states in which it conducts business. Currently, the largest of these minimum net worth requirements is $1 million, which is insignificant compared to the $45 million minimum tangible net worth required by the mortgage subsidiary’s warehouse credit line. At March 31, 2004, the mortgage subsidiary’s total equity was $112.9 million.

NOTE F – HOMEBUILDING INTEREST

The Company’s homebuilding segment capitalizes interest during development and construction. Capitalized interest is charged to cost of sales as the related inventory is delivered to the home buyer. The following table summarizes the Company’s homebuilding interest costs (in thousands):

                                 
    Three Months Ended   Six Months Ended
    March 31,
  March 31,
    2004
  2003
  2004
  2003
Capitalized interest, beginning of period
  $ 170,302     $ 170,405     $ 168,400     $ 153,536  
Interest incurred – homebuilding
    63,091       60,265       117,999       117,000  
Interest expensed:
                               
Directly – homebuilding
    (3,064 )     (7 )     (3,329 )     (354 )
Amortized to cost of sales
    (54,922 )     (49,709 )     (107,663 )     (89,228 )
 
   
 
     
 
     
 
     
 
 
Capitalized interest, end of period
  $ 175,407     $ 180,954     $ 175,407     $ 180,954  
 
   
 
     
 
     
 
     
 
 

NOTE G — WARRANTY

The Company provides its home buyers a one-year comprehensive limited warranty for all parts and labor and a ten-year limited warranty for major construction defects. The Company’s warranty liability is based upon historical warranty cost experience in each market in which it operates and is adjusted as appropriate to reflect qualitative risks associated with the types of homes built and the geographic areas in which they are built.

Changes in the Company’s warranty liability are as follows (in thousands):

                                 
    Three Months Ended   Six Months Ended
    March 31,
  March 31,
    2004
  2003
  2004
  2003
Warranty liability, beginning of period
  $ 78,037     $ 42,349     $ 73,147     $ 39,471  
Warranties issued
    11,642       8,970       22,981       17,167  
Changes in liabilities for pre-existing warranties
    (3,382 )           (3,382 )      
Settlements made
    (6,560 )     (5,197 )     (13,009 )     (10,516 )
 
   
 
     
 
     
 
     
 
 
Warranty liability, end of period
  $ 79,737     $ 46,122     $ 79,737     $ 46,122  
 
   
 
     
 
     
 
     
 
 

-9-


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
  (Continued)
March 31, 2004

NOTE H - STOCK-BASED COMPENSATION

The Company may, with the approval of the Compensation Committee of its Board of Directors, grant to its employees options to purchase a fixed number of shares of its common stock. The Company accounts for stock option grants in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. The exercise price of the Company’s employee stock options generally equals the market price of the underlying stock on the date of grant; therefore, no compensation expense is recognized for the initial grant. The Company adopted the disclosure provisions specified by Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”. SFAS No. 123 and SFAS No. 148 require disclosure of pro forma net income and pro forma net income per share as if the fair value based method had been applied in measuring compensation expense.

In March 2004, the FASB issued a Proposed Statement of Financial Accounting Standard which would amend SFAS No. 123 and require companies that issue share-based payments to record compensation expense based on the fair value of the share-based payment. The Company will adopt the final rules related to the proposed statement when they become effective.

The following table sets forth the effect on net income and earnings per share for the three months and six months ended March 31, 2004 and 2003 as if the fair value based method had been applied (in thousands, except per share data):

                                 
    Three Months Ended   Six Months Ended
    March 31,
  March 31,
    2004
  2003
  2004
  2003
Net income as reported
  $ 188,557     $ 127,835     $ 374,171     $ 239,663  
Add: Stock-based employee compensation expense included in reported net income, net of tax
    333       356       667       735  
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of tax
    (1,397 )     (1,424 )     (2,795 )     (2,872 )
 
   
 
     
 
     
 
     
 
 
Pro forma net income
  $ 187,493     $ 126,767     $ 372,043     $ 237,526  
 
   
 
     
 
     
 
     
 
 
Reported basic earnings per share
  $ 0.81     $ 0.58     $ 1.61     $ 1.09  
 
   
 
     
 
     
 
     
 
 
Pro forma basic earnings per share
  $ 0.81     $ 0.58     $ 1.60     $ 1.08  
 
   
 
     
 
     
 
     
 
 
Reported diluted earnings per share
  $ 0.80     $ 0.57     $ 1.58     $ 1.08  
 
   
 
     
 
     
 
     
 
 
Pro forma diluted earnings per share
  $ 0.79     $ 0.57     $ 1.57     $ 1.07  
 
   
 
     
 
     
 
     
 
 

The earnings per share amounts for the three months and six months ended March 31, 2004 and 2003 presented above reflect the effect of the three-for-two stock split (effected as a 50% stock dividend), paid on January 12, 2004 to common stockholders of record on December 22, 2003.

In April 2004, the Compensation Committee of the Company’s Board of Directors granted stock options to the Company’s employees to purchase 3.6 million shares of its common stock. The exercise price of these employee stock options equals the market price of the Company’s common stock on the date of grant.

-10-


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 - (Continued)
March 31, 2004

NOTE I - SUMMARIZED FINANCIAL INFORMATION

The 5%, 5⅞%, 6⅞%, 7½%, 7⅞%, 8%, 8⅜%, 8½%, 9⅜% and 10½% Senior Notes, and the 9⅜%, 9¾% and 10½% Senior Subordinated 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
March 31, 2004

                                                 
                    Non-Guarantor        
                    Subsidiaries
       
    D.R.   Guarantor   Financial           Intercompany    
    Horton, Inc.
  Subsidiaries
  Services
  Other
  Eliminations
  Total
                    (In thousands)                
ASSETS
                                               
Homebuilding:
                                               
Cash and cash equivalents
  $ 51,081     $ 124,323     $     $ 14,958     $     $ 190,362  
Advances to and investments in subsidiaries
    5,108,692       502,704                   (5,611,396 )      
Inventories
    1,132,538       4,628,306             74,752             5,835,596  
Property and equipment (net)
    15,724       54,003             16,656             86,383  
Earnest money deposits and other assets
    187,797       261,866             14,461             464,124  
Excess of cost over net assets acquired
          578,900                         578,900  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    6,495,832       6,150,102             120,827       (5,611,396 )     7,155,365  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Financial services:
                                               
Cash and cash equivalents
                28,331                   28,331  
Mortgage loans held for sale
                432,494                   432,494  
Advances to parent/subsidiaries
                10,377             (10,377 )      
Other assets
                27,507                   27,507  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
                498,709             (10,377 )     488,332  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total Assets
  $ 6,495,832     $ 6,150,102     $ 498,709     $ 120,827     $ (5,621,773 )   $ 7,643,697  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
LIABILITIES & EQUITY
                                               
Homebuilding:
                                               
Accounts payable and other liabilities
  $ 347,603     $ 681,022     $     $ 16,398     $     $ 1,045,023  
Advances from parent/subsidiaries
          3,470,251             62,785       (3,533,036 )      
Notes payable
    2,758,026       18,311             4,524             2,780,861  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    3,105,629       4,169,584             83,707       (3,533,036 )     3,825,884  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Financial services:
                                               
Accounts payable and other liabilities
                12,577                   12,577  
Notes payable to financial institutions
                366,864                   366,864  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
                379,441                   379,441  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total Liabilities
    3,105,629       4,169,584       379,441       83,707       (3,533,036 )     4,205,325  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Minority interests
                1       48,168             48,169  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total Equity
    3,390,203       1,980,518       119,267       (11,048 )     (2,088,737 )     3,390,203  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total Liabilities & Equity
  $ 6,495,832     $ 6,150,102     $ 498,709     $ 120,827     $ (5,621,773 )   $ 7,643,697  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

-11-


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 - (Continued)
March 31, 2004

NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)

Consolidating Balance Sheet
September 30, 2003

                                                 
                    Non-Guarantor        
                    Subsidiaries
       
    D.R.   Guarantor   Financial           Intercompany    
    Horton, Inc.
  Subsidiaries
  Services
  Other
  Eliminations
  Total
                    (In thousands)                
ASSETS
                                               
Homebuilding:
                                               
Cash and cash equivalents
  $ 196,104     $ 318,994     $     $ 27,366     $     $ 542,464  
Advances to and investments in subsidiaries
    4,634,619       219,927                   (4,854,546 )      
Inventories
    957,816       3,921,285             203,194             5,082,295  
Property and equipment (net)
    13,231       51,438             17,006             81,675  
Earnest money deposits and other assets
    191,799       232,563             12,338             436,700  
Excess of cost over net assets acquired
          578,900                         578,900  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    5,993,569       5,323,107             259,904       (4,854,546 )     6,722,034  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Financial services:
                                               
Cash and cash equivalents
                40,441                   40,441  
Mortgage loans held for sale
                485,485                   485,485  
Other assets
                31,417                   31,417  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
                557,343                   557,343  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total Assets
  $ 5,993,569     $ 5,323,107     $ 557,343     $ 259,904     $ (4,854,546 )   $ 7,279,377  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
LIABILITIES & EQUITY
                                               
Homebuilding:
                                               
Accounts payable and other liabilities
  $ 450,757     $ 613,435     $     $ 67,727     $     $ 1,131,919  
Advances from parent/subsidiaries
          2,999,897             48,944       (3,048,841 )      
Notes payable
    2,511,552       44,458             9,135             2,565,145  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    2,962,309       3,657,790             125,806       (3,048,841 )     3,697,064  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Financial services:
                                               
Accounts payable and other liabilities
                17,174                   17,174  
Advances from parent/subsidiaries
                42,177             (42,177 )      
Notes payable to financial institutions
                397,978                   397,978  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
                457,329             (42,177 )     415,152  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total Liabilities
    2,962,309       3,657,790       457,329       125,806       (3,091,018 )     4,112,216  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Minority interests
                56       135,845             135,901  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total Equity
    3,031,260       1,665,317       99,958       (1,747 )     (1,763,528 )     3,031,260  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total Liabilities & Equity
  $ 5,993,569     $ 5,323,107     $ 557,343     $ 259,904     $ (4,854,546 )   $ 7,279,377  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

-12-


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 - (Continued)
March 31, 2004

NOTE I — SUMMARIZED FINANCIAL INFORMATION - (Continued)

Consolidating Statement of Income
Three Months Ended March 31, 2004

                                                 
                    Non-Guarantor        
                    Subsidiaries
       
    D.R.   Guarantor   Financial           Intercompany    
    Horton, Inc.
  Subsidiaries
  Services
  Other
  Eliminations
  Total
                    (In thousands)                
Homebuilding:
                                               
Revenues:
                                               
Home sales
  $ 407,405     $ 1,823,343     $     $ 19,783     $     $ 2,250,531  
Land/lot sales
    8,579       34,113                         42,692  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    415,984       1,857,456             19,783             2,293,223  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Cost of sales:
                                               
Home sales
    282,855       1,450,327             15,616             1,748,798  
Land/lot sales
    4,378       22,995                         27,373  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    287,233       1,473,322             15,616             1,776,171  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Gross profit:
                                               
Home sales
    124,550       373,016             4,167             501,733  
Land/lot sales
    4,201       11,118                         15,319  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    128,751       384,134             4,167             517,052  
Selling, general and administrative expense
    77,673       140,630             1,632       2,744       222,679  
Interest expense
    2,998       (105 )           171             3,064  
Other (income) expense
    (258,516 )     (1,664 )           1,748       261,266       2,834  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    306,596       245,273             616       (264,010 )     288,475  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Financial services:
                                               
Revenues
                42,040                   42,040  
General and administrative expense
                28,955             (2,744 )     26,211  
Interest expense
                1,152                   1,152  
Other (income)
                (3,444 )                 (3,444 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
                15,377             2,744       18,121  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Income before income taxes
    306,596       245,273       15,377       616       (261,266 )     306,596  
Provision for income taxes
    118,039       94,430       5,920       237       (100,587 )     118,039  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net income
  $ 188,557     $ 150,843     $ 9,457     $ 379     $ (160,679 )   $ 188,557  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

-13-


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 - (Continued)
March 31, 2004

NOTE I - SUMMARIZED FINANCIAL INFORMATION - (Continued)

Consolidating Statement of Income
Six Months Ended March 31, 2004

                                                 
                    Non-Guarantor        
                    Subsidiaries
       
    D.R.   Guarantor   Financial           Intercompany    
    Horton, Inc.
  Subsidiaries
  Services
  Other
  Eliminations
  Total
    (In thousands)
Homebuilding:
                                               
Revenues:
                                               
Home sales
  $ 745,653     $ 3,588,168     $     $ 51,336     $     $ 4,385,157  
Land/lot sales
    8,624       63,050                         71,674  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    754,277       3,651,218             51,336             4,456,831  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Cost of sales:
                                               
Home sales
    540,764       2,824,104             38,255             3,403,123  
Land/lot sales
    4,676       38,696                         43,372  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    545,440       2,862,800             38,255             3,446,495  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Gross profit:
                                               
Home sales
    204,889       764,064             13,081             982,034  
Land/lot sales
    3,948       24,354                         28,302  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    208,837       788,418             13,081             1,010,336  
Selling, general and administrative expense
    145,610       279,605             4,559       5,425       435,199  
Interest expense
    2,998       102             229             3,329  
Other (income) expense
    (548,179 )     (3,683 )           4,226       547,858       222  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    608,408       512,394             4,067       (553,283 )     571,586  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Financial services:
                                               
Revenues
                82,962                   82,962  
General and administrative expense
                57,125             (5,425 )     51,700  
Interest expense
                2,397                   2,397  
Other (income)
                (7,957 )                 (7,957 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
                31,397             5,425       36,822  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Income before income taxes
    608,408       512,394       31,397       4,067       (547,858 )     608,408  
Provision for income taxes
    234,237       197,271       12,088       1,566       (210,925 )     234,237  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net income
  $ 374,171     $ 315,123     $ 19,309     $ 2,501     $ (336,933 )   $ 374,171  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

-14-


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2004

NOTE I — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Income
Three Months Ended March 31, 2003

                                                 
                    Non-Guarantor        
                    Subsidiaries
       
    D.R.   Guarantor   Financial           Intercompany    
    Horton, Inc.
  Subsidiaries
  Services
  Other
  Eliminations
  Total
                    (In thousands)                
Homebuilding:
                                               
Revenues:
                                               
Home sales
  $ 256,090     $ 1,469,744     $     $ 51,995     $     $ 1,777,829  
Land/lot sales
    2,519       88,433                         90,952  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    258,609       1,558,177             51,995             1,868,781  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Cost of sales:
                                               
Home sales
    200,810       1,179,041             39,773       (87 )     1,419,537  
Land/lot sales
    6,912       69,956                         76,868  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    207,722       1,248,997             39,773       (87 )     1,496,405  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Gross profit:
                                               
Home sales
    55,280       290,703             12,222       87       358,292  
Land/lot sales
    (4,393 )     18,477                         14,084  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    50,887       309,180             12,222       87       372,376  
Selling, general and administrative expense
    54,118       127,491             3,060       2,616       187,285  
Interest expense
          (480 )           487             7  
Other (income) expense
    (209,417 )     (1,426 )           894       209,878       (71 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    206,186       183,595             7,781       (212,407 )     185,155  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Financial services:
                                               
Revenues
                39,766                   39,766  
General and administrative expense
                24,851             (2,616 )     22,235  
Interest expense
                1,482                   1,482  
Other (income)
                (4,982 )                 (4,982 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
                18,415             2,616       21,031  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Income before income taxes
    206,186       183,595       18,415       7,781       (209,791 )     206,186  
Provision for income taxes
    78,351       69,758       7,002       2,945       (79,705 )     78,351  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net income
  $ 127,835     $ 113,837     $ 11,413     $ 4,836     $ (130,086 )   $ 127,835  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

-15-


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2004

NOTE I — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Income
Six Months Ended March 31, 2003

                                                 
                    Non-Guarantor        
                    Subsidiaries
       
    D.R.   Guarantor   Financial           Intercompany    
    Horton, Inc.
  Subsidiaries
  Services
  Other
  Eliminations
  Total
                    (In thousands)                
Homebuilding:
                                               
Revenues:
                                               
Home sales
  $ 452,975     $ 2,916,732     $     $ 74,571     $     $ 3,444,278  
Land/lot sales
    5,784       125,412                         131,196  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    458,759       3,042,144             74,571             3,575,474  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Cost of sales:
                                               
Home sales
    349,126       2,347,750             56,609       (190 )     2,753,295  
Land/lot sales
    10,261       101,389                         111,650  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    359,387       2,449,139             56,609       (190 )     2,864,945  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Gross profit:
                                               
Home sales
    103,849       568,982             17,962       190       690,983  
Land/lot sales
    (4,477 )     24,023                         19,546  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    99,372       593,005             17,962       190       710,529  
Selling, general and administrative expense
    98,601       256,779             5,904       5,182       366,466  
Interest expense
          (463 )           817             354  
Other (income) expense
    (384,340 )     (3,239 )           1,398       385,905       (276 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    385,111       339,928             9,843       (390,897 )     343,985  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Financial services:
                                               
Revenues
                78,007                   78,007  
General and administrative expense
                49,424             (5,182 )     44,242  
Interest expense
                3,549                   3,549  
Other (income)
                (10,910 )                 (10,910 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
                35,944             5,182       41,126  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Income before income taxes
    385,111       339,928       35,944       9,843       (385,715 )     385,111  
Provision for income taxes
    145,448       128,383       13,575       3,718       (145,676 )     145,448  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net income
  $ 239,663     $ 211,545     $ 22,369     $ 6,125     $ (240,039 )   $ 239,663  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

-16-


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2004

NOTE I — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Cash Flows
Six Months Ended March 31, 2004

                                                 
                    Non-Guarantor        
                    Subsidiaries
       
    D.R.   Guarantor   Financial           Intercompany    
    Horton, Inc.
  Subsidiaries
  Services
  Other
  Eliminations
  Total
                    (In thousands)                
OPERATING ACTIVITIES
                                               
Net income
  $ 374,171     $ 315,123     $ 19,309     $ 2,501     $ (336,933 )   $ 374,171  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
Depreciation and amortization
    3,583       16,668       992       635             21,878  
Amortization of debt premiums, discounts and fees
    4,057                               4,057  
Changes in operating assets and liabilities:
                                               
(Increase) decrease in inventories
    (131,529 )     (705,005 )           1,270             (835,264 )
(Increase) decrease in earnest money deposits and other assets
    (716 )     (29,739 )     4,323       (2,123 )           (28,255 )
Decrease in mortgage loans held for sale
                52,991                   52,991  
(Decrease) increase in accounts payable and other liabilities
    (100,278 )     67,587       (4,652 )     (11,834 )           (49,177 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net cash provided by (used in) operating activities
    149,288       (335,366 )     72,963       (9,551 )     (336,933 )     (459,599 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
INVESTING ACTIVITIES
                                               
Net purchases of property and equipment
    (4,992 )     (17,933 )     (1,405 )     (285 )           (24,615 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net cash used in investing activities
    (4,992 )     (17,933 )     (1,405 )     (285 )           (24,615 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
FINANCING ACTIVITIES
                                               
Net change in notes payable
    196,975       (24,689 )     (31,114 )     (1,982 )           139,190  
(Decrease) increase in intercompany payables
    (467,106 )     183,317       (52,554 )     (590 )     336,933        
Proceeds from stock associated with certain employee benefit plans
    10,392                               10,392  
Cash dividends/distributions paid
    (29,580 )                             (29,580 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net cash (used in) provided by financing activities
    (289,319 )     158,628       (83,668 )     (2,572 )     336,933       120,002  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Decrease in cash
    (145,023 )     (194,671 )     (12,110 )     (12,408 )           (364,212 )
Cash at beginning of period
    196,104       318,994       40,441       27,366             582,905  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Cash at end of period
  $ 51,081     $ 124,323     $ 28,331     $ 14,958     $     $ 218,693  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

-17-


Table of Contents

D.R. HORTON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
March 31, 2004

NOTE I — SUMMARIZED FINANCIAL INFORMATION — (Continued)

Consolidating Statement of Cash Flows
Six Months Ended March 31, 2003

                                                 
                    Non-Guarantor        
                    Subsidiaries
       
    D.R.   Guarantor   Financial           Intercompany    
    Horton, Inc.
  Subsidiaries
  Services
  Other
  Eliminations
  Total
                    (In thousands)                
OPERATING ACTIVITIES
                                               
Net income
  $ 239,663     $ 211,545     $ 22,369     $ 6,125     $ (240,039 )   $ 239,663  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
Depreciation and amortization
    2,592       14,625       854       713             18,784  
Amortization of debt premiums, discounts and fees
    3,559                               3,559  
Changes in operating assets and liabilities:
                                               
Increase in inventories
    (106,422 )     (250,482 )           (1,206 )     (124 )     (358,234 )
Decrease (increase) in earnest money deposits and other assets
    54,223       5,003       4,087       3,519       (4,668 )     62,164  
Decrease in mortgage loans held for sale
                39,414                   39,414  
(Decrease) increase in accounts payable and other liabilities
    (52,829 )     17,999       104       9,657       24       (25,045 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net cash provided by (used in) operating activities
    140,786       (1,310 )     66,828       18,808       (244,807 )     (19,695 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
INVESTING ACTIVITIES
                                               
Net purchases of property and equipment
    (2,773 )     (17,286 )     (917 )     (1,223 )           (22,199 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net cash used in investing activities
    (2,773 )     (17,286 )     (917 )     (1,223 )           (22,199 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
FINANCING ACTIVITIES
                                               
Net change in notes payable
    252,105       (6,516 )     (65,742 )     (9,898 )           169,949  
(Decrease) increase in intercompany payables
    (345,197 )     94,675       13,932       (8,217 )     244,807        
Proceeds from stock associated with certain employee benefit plans
    3,660                               3,660  
Purchase of treasury stock
    (29,522 )                             (29,522 )
Cash dividends/distributions paid
    (19,059 )                             (19,059 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net cash (used in) provided by financing activities
    (138,013 )     88,159       (51,810 )     (18,115 )     244,807       125,028  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Increase (decrease) in cash
          69,563       14,101       (530 )           83,134  
Cash at beginning of period
          80,273       12,238       11,833             104,344  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Cash at end of period
  $     $ 149,836     $ 26,339     $ 11,303     $     $ 187,478  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

-18-


Table of Contents

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES

There have been no significant changes to our critical accounting policies during the six months ended March 31, 2004, as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Annual Report on Form 10-K for the year ended September 30, 2003.

RESULTS OF OPERATIONS - CONSOLIDATED

We provide homebuilding services in 21 states and 51 markets through our 41 homebuilding divisions. Through our financial services operations, we also provide mortgage banking and title agency services in many of these same markets.

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

Consolidated revenues for the three months ended March 31, 2004, increased 22.4%, to $2,335.3 million, from $1,908.5 million for the comparable period of 2003, due to increases in both homebuilding and financial services revenues.

Income before income taxes for the three months ended March 31, 2004, increased 48.7%, to $306.6 million, from $206.2 million for the comparable period of 2003. As a percentage of revenues, income before income taxes for the three months ended March 31, 2004, increased 2.3 percentage points, to 13.1% from 10.8% for the comparable period of 2003. The primary factor contributing to this improvement was a 2.7 percentage point increase in the homebuilding segment’s pre-tax operating margin, which was partially offset by a decrease in the pre-tax operating margin in our financial services segment.

The consolidated provision for income taxes increased 50.7%, to $118.0 million for the three months ended March 31, 2004, from $78.4 million for the same period of 2003, due primarily to the corresponding increase in income before income taxes. The effective income tax rate for the three months ended March 31, 2004 increased to 38.5%, from 38.0% for the comparable period of 2003, due primarily to increases in pre-tax income in states with higher tax rates.

Six Months Ended March 31, 2004 Compared to Six Months Ended March 31, 2003

Consolidated revenues for the six months ended March 31, 2004, increased 24.3%, to $4,539.8 million, from $3,653.5 million for the comparable period of 2003, due to increases in both homebuilding and financial services revenues.

Income before income taxes for the six months ended March 31, 2004, increased 58.0%, to $608.4 million, from $385.1 million for the comparable period of 2003. As a percentage of revenues, income before income taxes for the six months ended March 31, 2004, increased 2.9 percentage points, to 13.4% from 10.5% for the comparable period of 2003. The primary factor contributing to this improvement was a 3.2 percentage point increase in the homebuilding segment’s pre-tax operating margin, which was partially offset by a decrease in the pre-tax operating margin in our financial services segment.

The consolidated provision for income taxes increased 61.0%, to $234.2 million for the six months ended March 31, 2004, from $145.4 million for the same period of 2003, due primarily to the corresponding increase in income before income taxes. The effective income tax rate for the six months ended March 31, 2004 increased to 38.5%, from 37.8% for the comparable period of 2003, due primarily to increases in pre-tax income in states with higher tax rates.

-19-


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS - HOMEBUILDING

The following tables set forth certain operating and financial data for our homebuilding activities ($ in millions):

                                                                 
    Three Months Ended March 31,
  Six Months Ended March 31,
    2004
  2003
  2004
  2003
    Homes           Homes           Homes           Homes    
Homes Closed   Closed
  Revenues
  Closed
  Revenues
  Closed
  Revenues
  Closed
  Revenues
Mid-Atlantic
    801     $ 180.5       743     $ 154.5       1,643     $ 362.0       1,408     $ 288.7  
Midwest
    443       119.2       441       107.6       887       238.5       867       217.1  
Southeast
    1,282       251.5       979       167.7       2,403       469.0       1,926       325.0  
Southwest
    4,432       729.5       3,277       552.3       8,373       1,370.9       6,357       1,070.2  
West
    2,865       969.8       2,448       795.7       5,759       1,944.8       4,844       1,543.3  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
    9,823     $ 2,250.5       7,888     $ 1,777.8       19,065     $ 4,385.2       15,402     $ 3,444.3  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
                                                                 
    Three Months Ended March 31,
  Six Months Ended March 31,
    2004
  2003
  2004
  2003
    Homes           Homes           Homes           Homes    
Net New Sales Orders   Sold
  $
  Sold
  $
  Sold
  $
  Sold
  $
Mid-Atlantic
    1,034     $ 277.3       993     $ 215.1       1,749     $ 444.0       1,714     $ 361.0  
Midwest
    620       175.1       522       140.7       1,031       300.3       951       247.6  
Southeast
    1,758       365.0       1,152       215.5       2,931       616.6       2,101       385.4  
Southwest
    5,435       906.1       4,473       740.2       8,715       1,460.9       7,244       1,209.1  
West
    4,633       1,610.3       3,408       1,128.0       7,288       2,545.7       5,790       1,934.9  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
 
    13,480     $ 3,333.8       10,548     $ 2,439.5       21,714     $ 5,367.5       17,800     $ 4,138.0  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
                                 
    March 31, 2004
  March 31, 2003
Sales Backlog   Homes
  $
  Homes
  $
Mid-Atlantic
    1,708     $ 452.8       1,559     $ 337.2  
Midwest
    1,125       340.7       1,000       269.0  
Southeast
    2,351       511.8       1,844       335.1  
Southwest
    7,018       1,210.9       6,073       1,026.6  
West
    5,935       2,119.5       4,619       1,551.0  
 
   
 
     
 
     
 
     
 
 
 
    18,137     $ 4,635.7       15,095     $ 3,518.9  
 
   
 
     
 
     
 
     
 
 

Our market regions consist of the following markets:

     
Mid-Atlantic
  Baltimore, Charleston, Charlotte, Columbia, Greensboro, Greenville, Hilton Head, Maryland-D.C., Myrtle Beach, New Jersey, Philadelphia, Raleigh/Durham, Savannah and Virginia-D.C.
 
   
Midwest
  Chicago and Minneapolis/St. Paul
 
   
Southeast
  Atlanta, Birmingham, Fort Myers/Naples, Jacksonville, Miami/West Palm Beach, Orlando and Tampa
 
   
Southwest
  Albuquerque, Austin, Dallas, Fort Worth, Houston, Killeen (Texas), Laredo (Texas), Phoenix, Rio Grande Valley (Texas), San Antonio and Tucson
 
   
West
  Bend (Oregon), Colorado Springs, Denver, Fort Collins, Hawaii, Inland Empire (Southern California), Las Vegas, Los Angeles, Oakland, Orange County, Portland, Sacramento, Salt Lake City, San Diego, San Francisco, Seattle/Tacoma and Ventura County

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                 
    Percentages of Total Homebuilding Revenues
    Three Months Ended   Six Months Ended
    March 31,
  March 31,
Homebuilding Operating Margin Analysis   2004
  2003
  2004
  2003
Gross profit
    22.5 %     19.9 %     22.7 %     19.9 %
Selling, general and administrative expense
    (9.7 )     (10.0 )     (9.8 )     (10.3 )
Interest expense
    (0.1 )           (0.1 )      
Other expense
    (0.1 )                  
 
   
 
     
 
     
 
     
 
 
Income before income taxes
    12.6 %     9.9 %     12.8 %     9.6 %
 
   
 
     
 
     
 
     
 
 

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

Revenues from homebuilding activities increased 22.7%, to $2,293.2 million (9,823 homes closed) for the three months ended March 31, 2004, from $1,868.8 million (7,888 homes closed) for the comparable period of 2003. Revenues from home sales increased in all of our five market regions, with percentage increases ranging from 10.8% in the Midwest region to 50.0% in the Southeast. The increases in both revenues and homes closed were due to strong housing demand throughout the majority of our markets. The average selling price of homes closed during the three months ended March 31, 2004 was $229,100, up 1.6% from $225,400 for the same period in 2003.

The value of net new sales orders increased 36.7% to $3,333.8 million (13,480 homes) for the three months ended March 31, 2004, from $2,439.5 million (10,548 homes) for the same period of 2003. The value of net new sales orders increased in all of our five market regions, with percentage increases ranging from 22.4% in the Southwest region to 69.3% in the Southeast region. The increases in both the value and number of new sales orders were due to strong housing demand throughout the majority of our markets. The average price of a net new sales order in the three months ended March 31, 2004 was $247,300, up 6.9% from the $231,300 average in the comparable period of 2003. Increases in the average prices of net new sales orders occurred in all of our five market regions, ranging from 0.7% in the Southwest region to 23.8% in the Mid-Atlantic region.

At March 31, 2004, the value of our backlog of sales orders was $4,635.7 million (18,137 homes), up 31.7% from $3,518.9 million (15,095 homes) at March 31, 2003. The value of our backlog of sales orders was up in all of our five market regions, with percentage increases ranging from 18.0% in the Southwest to 52.7% in the Southeast. The average sales price of homes in sales backlog was $255,600 at March 31, 2004, up 9.7% from the average price of $233,100 at March 31, 2003. The average sales price of homes in our sales backlog increased in all of our five market regions, with percentage increases ranging from 2.1% in the Southwest to 22.6% in the Mid-Atlantic.

Gross profit increased by 38.9%, to $517.1 million for the three months ended March 31, 2004, from $372.4 million for the comparable period of 2003. The increase in gross profit was primarily attributable to the increase in revenues. Gross profit from home sales as a percentage of home sales revenues increased 2.1 percentage points, to 22.3% for the three months ended March 31, 2004, from 20.2% for the comparable period of 2003. The improvement in gross profit from home sales as a percentage of revenue is attributable to our ability to increase home prices due to the strong housing demand in many of our markets and lower construction costs resulting from our ongoing efforts to reduce costs as we achieve greater economies of scale. For these same reasons, and due to an increase in the gross profit from land/lot sales as a percentage of land/lot sales revenue, total homebuilding gross profit as a percentage of total homebuilding revenues increased 2.6 percentage points, to 22.5% in the three months ended March 31, 2004, from 19.9% in the comparable period of 2003.

Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 18.9%, to $222.7 million in the three months ended March 31, 2004, from $187.3 million in the comparable period of 2003. As a percentage of homebuilding revenues, SG&A expenses decreased 0.3 percentage points, to 9.7% for the three months ended March 31, 2004, from 10.0% in the comparable period of 2003. The improvement in SG&A expenses as a percent of revenue was attributable to our ongoing cost control efforts and our ability to generate higher revenue levels while leveraging existing fixed SG&A costs.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Interest expense associated with homebuilding activities was $3.1 million for the three months ended March 31, 2004 compared to a negligible amount in the comparable period of 2003. During the three months ended March 31, 2004 and 2003, inventory under construction or development was larger than our interest-bearing debt; therefore, virtually all of the total homebuilding interest incurred was capitalized to inventory in both periods, except for $3.1 million in unamortized issuance costs associated with our restructured and amended revolving credit facility which were expensed during the three months ended March 31, 2004. Capitalized interest and other financing costs are included in cost of sales at the time homes are closed.

Other expense associated with homebuilding activities was $2.8 million in the three months ended March 31, 2004, compared to $0.1 million of other income in the comparable period of 2003. The expense in the three months ended March 31, 2004 was due primarily to a decrease in the fair value of our interest rate swap agreements.

Six Months Ended March 31, 2004 Compared to Six Months Ended March 31, 2003

Revenues from homebuilding activities increased 24.7%, to $4,456.8 million (19,065 homes closed) for the six months ended March 31, 2004, from $3,575.5 million (15,402 homes closed) for the comparable period of 2003. Revenues from home sales increased in all of our five market regions, with percentage increases ranging from 9.9% in the Midwest region to 44.3% in the Southeast. The increases in both revenues and homes closed were due to strong housing demand throughout the majority of our markets. The average selling price of homes closed during the six months ended March 31, 2004 was $230,000, up 2.9% from $223,600 for the same period in 2003.

The value of net new sales orders increased 29.7% to $5,367.5 million (21,714 homes) for the six months ended March 31, 2004, from $4,138.0 million (17,800 homes) for the same period of 2003. The value of net new sales orders increased in all of our five market regions, with percentage increases ranging from 20.8% in the Southwest region to 60.0% in the Southeast region. The increases in both the value and number of new sales orders were due to strong housing demand throughout the majority of our markets. The average price of a net new sales order in the six months ended March 31, 2004 was $247,200, up 6.3% from the $232,500 average in the comparable period of 2003. Increases in the average prices of net new sales orders occurred in all of our five market regions, ranging from 0.4% in the Southwest region to 20.5% in the Mid-Atlantic region.

Gross profit increased by 42.2%, to $1,010.3 million for the six months ended March 31, 2004, from $710.5 million for the comparable period of 2003. The increase in gross profit was primarily attributable to the increase in revenues. Gross profit from home sales as a percentage of home sales revenues increased 2.3 percentage points, to 22.4% for the six months ended March 31, 2004, from 20.1% for the comparable period of 2003. The improvement in gross profit from home sales as a percentage of revenue is attributable to our ability to increase home prices due to the strong housing demand in many of our markets and lower construction costs resulting from our ongoing efforts to reduce costs as we achieve greater economies of scale. For these same reasons, and due to an increase in the gross profit from land/lot sales as a percentage of land/lot sales revenue, total homebuilding gross profit as a percentage of total homebuilding revenues increased 2.8 percentage points, to 22.7% in the six months ended March 31, 2004, from 19.9% in the comparable period of 2003.

Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 18.8%, to $435.2 million in the six months ended March 31, 2004, from $366.5 million in the comparable period of 2003. As a percentage of homebuilding revenues, SG&A expenses decreased 0.5 percentage points, to 9.8% for the six months ended March 31, 2004, from 10.3% in the comparable period of 2003. The improvement in SG&A expenses as a percent of revenue was attributable to our ongoing cost control efforts and our ability to generate higher revenue levels while leveraging existing fixed SG&A costs.

Interest expense associated with homebuilding activities was $3.3 million for the six months ended March 31, 2004 compared to $0.4 million in the comparable period of 2003. During the six months ended March 31, 2004 and 2003, inventory under construction or development was larger than our interest-bearing debt; therefore, virtually all of the total homebuilding interest incurred was capitalized to inventory, except for $3.1 million in unamortized issuance costs associated with our restructured and amended revolving credit facility which were expensed during the six

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

months ended March 31, 2004. During both periods, we expensed the portion of incurred interest and other financing costs which could not be capitalized to inventory. Capitalized interest and other financing costs are included in cost of sales at the time homes are closed.

RESULTS OF OPERATIONS - FINANCIAL SERVICES

Financial services include mortgage financing and title insurance agency and closing services, primarily related to purchases of homes we build and sell. Mortgage services are provided in Arizona, California, Colorado, Florida, Georgia, Hawaii, Illinois, Maryland, Minnesota, Nevada, New Mexico, North Carolina, Oregon, South Carolina, Texas, Virginia and Washington. Title agency and closing services are provided in Arizona, Florida, Georgia, Maryland, Minnesota, New Jersey, Texas and Virginia. The following table summarizes financial and other information for our financial services operations:

                                 
    Three Months Ended   Six Months Ended
    March 31,
  March 31,
    2004
  2003
  2004
  2003
            ($ in thousands)        
Number of loans originated
    7,410       6,374       14,157       12,602  
 
   
 
     
 
     
 
     
 
 
Loan origination fees
  $ 8,106     $ 7,200     $ 15,221     $ 13,932  
Sale of servicing rights and gains from sale of mortgages
    19,449       21,046       41,063       41,180  
Other revenues
    5,235       3,873       9,264       7,508  
 
   
 
     
 
     
 
     
 
 
Total mortgage banking revenues
    32,790       32,119       65,548       62,620  
Title policy premiums, net
    9,250       7,647       17,414       15,387  
 
   
 
     
 
     
 
     
 
 
Total revenues
    42,040       39,766       82,962       78,007  
General and administrative expense
    26,211       22,235       51,700       44,242  
Interest expense
    1,152       1,482       2,397       3,549  
Interest/other (income)
    (3,444 )     (4,982 )     (7,957 )     (10,910 )
 
   
 
     
 
     
 
     
 
 
Income before income taxes
  $ 18,121     $ 21,031     $ 36,822     $ 41,126  
 
   
 
     
 
     
 
     
 
 

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

Revenues from the financial services segment increased 5.7%, to $42.0 million in the three months ended March 31, 2004, from $39.8 million in the comparable period of 2003. The increase in financial services revenues was primarily due to increases in loan originations and title services provided to customers of our homebuilding segment. General and administrative expenses associated with financial services increased 17.9%, to $26.2 million in the three months ended March 31, 2004, from $22.2 million in the comparable period of 2003. As a percentage of financial services revenues, general and administrative expenses increased 6.4 percentage points, to 62.3% in the three months ended March 31, 2004, from 55.9% in the comparable period in 2003. The increase in general and administrative expenses as a percentage of financial services revenue and the 13.8% decrease in income before income taxes were due primarily to changes in the product mix of mortgage loans originated and sold and decreased competition in the mortgage industry, which resulted in a decline in the amount of mortgage revenue earned per loan, as well as increased costs associated with expanding our mortgage operations into California.

Six Months Ended March 31, 2004 Compared to Six Months Ended March 31, 2003

Revenues from the financial services segment increased 6.4%, to $83.0 million in the six months ended March 31, 2004, from $78.0 million in the comparable period of 2003. The increase in financial services revenues was primarily due to increases in loan originations and title services provided to customers of our homebuilding segment. General and administrative expenses associated with financial services increased 16.9%, to $51.7 million in the six months ended March 31, 2004, from $44.2 million in the comparable period of 2003. As a percentage of financial services revenues, general and administrative expenses increased 5.6 percentage points, to 62.3% in the six months ended March 31, 2004, from 56.7% in the comparable period in 2003. The increase in general and administrative expenses as a percentage of financial services revenue and the 10.5% decrease in income before income taxes were

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

due primarily to changes in the product mix of mortgage loans originated and sold and increased competition in the mortgage industry, which resulted in a decline in the amount of mortgage revenue earned per loan, as well as increased costs associated with expanding our mortgage operations into California.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2004, we had available cash and cash equivalents of $218.7 million. Inventories (including finished homes, construction in progress, developed residential lots and other land and consolidated land inventory not owned) at March 31, 2004, had increased by $753.3 million since September 30, 2003 to support our seasonally higher closings which normally occur during our third and fourth fiscal quarters. The inventory increase was financed by using available cash, retaining earnings and borrowing under our revolving credit facility. Our ratio of homebuilding notes payable (net of cash) to total capital at March 31, 2004, increased 3.3 percentage points, to 43.3% from 40.0% at September 30, 2003, due to our use of available cash to fund the inventory increase. The stockholders’ equity to total assets ratio increased 2.8 percentage points, to 44.4% at March 31, 2004, from 41.6% at September 30, 2003.

In March 2004, we restructured and amended our existing unsecured revolving credit facility, increasing it to $1 billion and extending its maturity to March 25, 2008. The new facility includes a $350 million letter of credit sub-facility and an uncommitted $250 million accordion feature, under which the facility may be increased to $1.25 billion. The facility is guaranteed by substantially all of our wholly-owned subsidiaries other than our financial services subsidiaries. At March 31, 2004, we had outstanding homebuilding debt of $2,780.9 million. Under our revolving credit facility, we had $50 million cash borrowings outstanding at March 31, 2004 and no outstanding cash borrowings at September 30, 2003. Under the debt covenants associated with the revolving credit facility, our additional homebuilding borrowing capacity under the facility is limited to the lesser of the unused portion of the facility, $863.3 million at March 31, 2004, or an amount determined under a borrowing base arrangement. Under the borrowing base limitation, the sum of our senior debt and the amount drawn on our revolving credit facility may not exceed certain percentages of the various categories of our unencumbered inventory. At March 31, 2004, the borrowing base arrangement would have limited our additional borrowing capacity from any source to $2,049.9 million. At March 31, 2004, we were in compliance with all of the covenants, limitations and restrictions that form a part of our public debt obligations and our bank revolving credit facility. We have entered into multi-year interest rate swap agreements, maturing in 2008 and aggregating a notional amount of $200 million, that have the effect of fixing the interest rate on a portion of the variable rate revolving credit facility at 5.1%.

At March 31, 2004, our financial services segment had mortgage loans held for sale of $432.5 million and loan commitments for $446.8 million. We hedge the interest rate risk on these mortgage loans and mortgage loan commitments through the use of best-efforts whole loan delivery commitments, forward sales of mortgage-backed securities and the infrequent purchase of options on financial instruments. Changes in the value of these derivative instruments are recognized in current earnings as are the changes in the value of the funded loans. Such gains and losses have not significantly affected our financial services results of operations.

In April 2004, our wholly-owned mortgage company restructured and amended its mortgage warehouse loan facility, increasing the facility to $300 million and extending its maturity to April 8, 2005. The mortgage warehouse facility is secured by certain mortgage loans held for sale. The mortgage warehouse facility is not guaranteed by either the parent company or any of the subsidiaries that guarantee our homebuilding debt. At March 31, 2004, $216.9 million had been drawn under the mortgage warehouse facility.

Our wholly-owned mortgage company also has a $300 million commercial paper conduit facility (the “CP conduit facility”), which expires on June 29, 2006, the terms of which are renewable annually by the sponsoring banks. The CP conduit facility is also secured by certain mortgage loans held for sale and is not guaranteed by either the parent company or any of the subsidiaries that guarantee our homebuilding debt. As of March 31, 2004, $150 million had been drawn under the CP conduit facility. The mortgage loans pledged to secure the CP conduit facility are used as collateral for asset backed commercial paper issued by multi-seller conduits in the commercial paper market at rates that are more attractive than those applicable to the mortgage warehouse facility. All mortgage company activities

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

are financed with the mortgage warehouse facility, the CP conduit facility or internally generated funds. Both of the financial services’ credit facilities contain financial covenants with which we are in compliance.

In January 2004, we issued $200 million of 5% Senior notes due 2009. The primary purpose of this offering was to provide capital to repay at maturity the approximately $150 million aggregate principal amount outstanding of our 8⅜% Senior notes, due June 15, 2004. These notes are guaranteed by substantially all of our wholly-owned subsidiaries other than our financial services subsidiaries.

We have historically funded our home construction, lot and land purchases and acquisitions with internally generated funds, borrowings under our credit facilities and the issuance of new debt or equity securities. At March 31, 2004, under currently effective shelf registration statements, we had approximately 22.5 million shares of common stock available to effect, in whole or in part, possible future acquisitions and the capacity to issue new debt or equity securities amounting to $285 million. In the future, we intend to continue to maintain effective shelf registration statements that will facilitate access to the capital markets. We believe that our current cash position, our cash generation capabilities, the amounts available under our revolving line of credit agreements and our ability to access the capital markets in a timely manner with our existing shelf registration statements are adequate to meet our cash needs for the foreseeable future.

On December 1, 2003, our Board of Directors declared a three-for-two common stock split (effected as a 50% stock dividend), which was paid on January 12, 2004 to stockholders of record on December 22, 2003.

During the three months ended March 31, 2004, our Board of Directors declared a quarterly cash dividend of $0.08 per common share, which was paid on February 13, 2004 to stockholders of record on January 30, 2004. In April 2004, our Board of Directors declared a cash dividend of $0.08 per common share, payable on May 21, 2004 to stockholders of record on May 7, 2004.

Except for ordinary expenditures for the construction of homes and the acquisition of land and lots for development and sale of homes, at March 31, 2004, we had no material commitments for capital expenditures.

OFF-BALANCE SHEET ARRANGEMENTS

In the ordinary course of business, we enter into land and lot option purchase contracts in order to procure land or lots for the construction of homes. Lot option contracts enable us to control significant lot positions with a minimal capital investment and substantially reduces the risks associated with land ownership and development. At March 31, 2004, we had $184.4 million in deposits to purchase land and lots with a total purchase price of $3.5 billion.

In the normal course of business, we provide standby letters of credit and performance bonds, issued by third parties, to secure performance under various contracts. At March 31, 2004, outstanding standby letters of credit and performance bonds, the majority of which mature in less than one year, were $107.4 million and $1,220.4 million, respectively.

LAND AND LOT POSITION

At March 31, 2004, about 52% of our total lot position of 200,471 lots was controlled under option or similar contracts. A summary of our land/lot position at March 31, 2004 is:

         
Finished lots owned
    23,865  
Lots under development owned
    72,013  
 
   
 
 
Total lots owned
    95,878  
Lots controlled under lot option and similar contracts
    104,593  
 
   
 
 
Total land/lot position
    200,471  
 
   
 
 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEASONALITY

We have historically experienced variability in our results of operations from quarter to quarter due to the seasonal nature of the homebuilding business. Historically, we have closed a greater number of homes in our third and fourth fiscal quarters than in our first and second fiscal quarters. As a result, our revenues and net income have been higher in the third and fourth quarters of our fiscal year. In fiscal 2003, 58% of our consolidated revenues and 62% of our net income were attributable to our operations in the third and fourth fiscal quarters.

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 we make to analysts, stockholders and the press in the course of presentations about us, may be construed as “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements typically include the words “anticipate”, “believe”, “expect”, “estimate”, “project”, and “future”. Any or all of the forward-looking statements included in this report and in any other of our reports or public statements 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 risks and uncertainties relevant to our business include factors we believe could adversely affect us. Other factors beyond those listed below could also adversely affect us. They include, but are not limited to:

  changes in general economic, real estate and other conditions;
 
  changes in interest rates and the availability of mortgage financing;
 
  governmental regulations and environmental matters;
 
  our substantial leverage;
 
  competitive conditions within our industry;
 
  the availability of capital;
 
  our ability to effect our growth strategies successfully.

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. Additional information about issues that could lead to material changes in performance is contained in our annual report on Form 10-K, which is filed with the Securities and Exchange Commission.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risks related to fluctuations in interest rates on our debt obligations, mortgage loans held for sale and interest rate lock commitments. We utilize derivative instruments, including interest rate swaps, to mitigate our exposure to changes in interest rates on our debt. We also utilize best-efforts whole loan delivery commitments, forward sales of mortgage-backed securities and the infrequent purchase of options on financial instruments to mitigate the interest rate risk associated with our financial services segment.

Our interest rate swaps were not designated as hedges under SFAS No. 133 when it was adopted on October 1, 2000. We are exposed to market risk associated with changes in the fair values of the swaps, and such changes must be reflected in our income statements.

Our mortgage company is exposed to interest rate risk associated with its mortgage loan origination services. 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. Typically, the IRLC’s will have a duration of less than six months. Some IRLC’s are committed immediately to a specific investor through the use of best-efforts whole loan delivery commitments, while the majority of IRLC’s are funded prior to being committed to third-party investors. Forward sales of mortgage backed securities (“FMBS”) are used to protect uncommitted IRLC’s against the risk of changes in interest rates. FMBS related to IRLC’s are classified and accounted for as non-designated derivative instruments, with gains and losses recorded in current earnings. FMBS related to funded, uncommitted loans are designated as fair value hedges, with changes in the value of the derivative instruments recognized in current earnings, along with changes in the value of the funded, uncommitted loans. The effectiveness of the fair value hedges is continuously monitored and any ineffectiveness, which for the three months and six months ended March 31, 2004 and 2003 was not significant, is recognized in current earnings.

The following table sets forth, as of March 31, 2004, for our 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 our interest rate swaps.

                                                                 
    Six Months                                                   Fair
    Ended   Year Ended September 30,   market
    September 30,  
  value @
    2004
  2005
  2006
  2007
  2008
  Thereafter
  Total
  3/31/04
                            ($ in millions)                
Debt:
                                                               
Fixed rate
  $ 172.4     $ 220.1     $ 17.6     $ 4.4     $ 235.6     $ 2,068.0     $ 2,718.1     $ 3,038.9  
Average interest rate
    8.59 %     10.52 %     6.86 %     6.10 %     7.55 %     7.62 %     7.90 %      
Variable rate
  $ 421.5     $     $     $     $     $     $ 421.5     $ 421.5  
Average interest rate
    1.78 %                                   1.78 %      
Interest rate swaps:
                                                               
Variable to fixed
  $ 200.0     $ 200.0     $ 200.0     $ 200.0     $ 200.0     $     $     $ (19.9 )
Average pay rate
    5.10 %     5.10 %     5.10 %     5.10 %     5.02 %                  
Average receive rate
  90-day LIBOR                                                        

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ITEM 4. CONTROLS AND PROCEDURES.

The Company’s management has long recognized its responsibilities for developing, implementing and monitoring effective and efficient controls and procedures. As part of those responsibilities, as of March 31, 2004, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a - 14(c) and Rule 15d - 14(c) under the Securities Exchange Act of 1934. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective in timely alerting them to material information relating to the Company, including its consolidated subsidiaries, required to be included in the Company’s periodic filings with the Securities and Exchange Commission. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to March 31, 2004. Accordingly, there have been no corrective actions taken as no significant deficiencies or material weaknesses were detected in these controls.

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PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

On January 13, 2004, the Company issued $200,000,000 in principal amount of its 5.0% Senior Notes due 2009 (the “Notes”). The Notes bear interest from January 13, 2004 at 5.0 % per annum, payable semi-annually on January 15 and July 15 of each year commencing on July 15, 2004. As part of that issuance, the Company executed the Eighteenth Supplemental Indenture, dated January 13, 2004, among the Company, the Guarantors named therein and American Stock Transfer & Trust Company, as Trustee, authorizing the Notes.

The Supplemental Indenture, and the Indenture to which it relates (dated June 9, 1997, as supplemented), impose limitations on the ability of the Company and its subsidiaries guaranteeing the Notes to, among other things, incur indebtedness, make “Restricted Payments” (as defined, which includes payments of dividends or other distributions on the Common Stock of the Company), effect certain “Asset Dispositions” (as defined therein), enter into certain transactions with affiliates, merge or consolidate with any person, or transfer all or substantially all of their properties and assets. These limitations are substantially similar to the limitations already existing with respect to the Company’s other senior notes, and related indentures and supplemental indentures.

Other information concerning the offering and issuance of the Notes has previously been reported in, and is described in the Company’s Prospectus Supplement, dated January 6, 2004 and filed with the Securities and Exchange Commission on January 8, 2004 pursuant to Rule 424(b)(5), and the Company’s current report, on Form 8-K, dated January 6, 2004 and filed with the Commission on January 12, 2004.

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

     (a) At the Company’s Annual Meeting, the stockholders re-elected each of the seven members of the Board of Directors of the Company to serve until the Company’s next annual meeting of stockholders and until their respective successors are elected and qualified. The names of the seven directors, the votes cast for and the number of votes withheld were as follows:

                 
Name
  Votes For
  Votes Withheld
Donald R. Horton
    137,967,369       852,792  
Bradley S. Anderson
    136,184,445       2,635,716  
Michael R. Buchanan
    138,567,339       252,822  
Richard I. Galland
    136,173,786       2,646,375  
Francine I. Neff
    136,184,430       2,635,731  
Donald J. Tomnitz
    138,392,248       427,913  
Bill W. Wheat
    135,856,007       2,964,154  

     (b) At the Company’s Annual Meeting, a vote was taken for the approval and adoption of a proposal to amend the Company’s 2000 Incentive Bonus Plan to increase the limit on awards under the plan. The votes cast for this proposal were as follows:

         
For:
    129,716,260  
Against:
    8,874,780  
Abstain:
    229,117  

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ITEM 5. OTHER INFORMATION

On April 29, 2004, the Compensation Committee of the Company’s Board of Directors granted stock options to the Company’s employees to purchase 3.6 million shares of its common stock. The options have a 10 year term and were granted at an exercise price equal to the closing price of the Company’s common stock on the date of grant.

In April 2004, the Company’s mortgage subsidiary restructured and amended its mortgage warehouse credit facility payable to financial institutions, increasing it to $300 million and extending its maturity to April 8, 2005, at the 30-day LIBOR rate plus a fixed premium. The mortgage warehouse facility is secured by certain mortgage loans held for sale and is not guaranteed by D.R. Horton, Inc. or any of the guarantors of the Company’s Senior and Senior Subordinated Notes.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits.

3.1   Amended and Restated Certificate of Incorporation, as amended, of the Company is incorporated by reference from Exhibit 4.2 to the Company’s registration statement (No. 333-76175) on Form S-3, filed with the Commission on April 13, 1999.
 
3.1(a)   Amendment to Amended and Restated Certificate of Incorporation, as amended, of the Company, effective February 6, 2003, is incorporated by reference from Exhibit 3.1(a) to the Company’s Quarterly Report on Form 10-Q/A, filed with the Commission on February 18, 2003.
 
3.2   Amended and Restated Bylaws of the Company are incorporated by reference from Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 1998, filed with the Commission on February 16, 1999.
 
4.1   Indenture, dated June 9, 1997, among the Company, the Guarantors named therein and American Stock Transfer & Trust Company, as trustee, is incorporated by reference from Exhibit 4.1(a) to the Company’s Registration Statement on Form S-3 (No. 333-27521) and filed with the Commission on May 21, 1997.
 
4.2   Eighteenth Supplemental Indenture by and among the Company, the Guarantors named therein and American Stock Transfer & Trust Company, as trustee, relating to the 5.0% Senior Notes due 2009 issued by the Company is incorporated by reference from Exhibit 4.1 to the Company’s Form 8-K dated January 6, 2004 and filed with the Commission on January 12, 2004.
 
10.1   Amended and Restated Revolving Credit Agreement dated March 25, 2004, entered into by and among D.R. Horton, Inc., Lenders (as defined in such Credit Agreement) and Bank of America, N.A., as Administrative Agent and a Letter of Credit Issuer (as defined in such Credit Agreement), incorporated by reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K dated March 29, 2004 and filed with the Commission on March 30, 2004.
 
10.2*   Amended and Restated Credit Agreement dated April 9, 2004 by and between DHI Mortgage Company, Ltd. (f/k/a CH Mortgage Company, Ltd.) and U.S. Bank National Association and the Lenders thereto.
 
31.1*   Certificate of Chief Executive Officer provided pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, is filed herewith.
 
31.2*   Certificate of Chief Financial Officer provided pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002, is filed herewith.
 
32.1*   Certificate provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Company’s Chief Executive Officer, is filed herewith.
 
32.2*   Certificate provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by the Company’s Chief Financial Officer, is filed herewith.

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*Filed herewith
                   

(b)   Reports on Form 8-K.

1.   On January 8, 2004, the Company filed a Current Report on Form 8-K (Item 7 and Item 12), dated, January 8, 2004 whereby it filed with the Commission its press release related to the Company’s Net Sales Orders for the three-month period ended December 31, 2003.
 
2.   On January 12, 2004, the Company filed a Current Report on Form 8-K (Item 5 and Item 7), dated January 6, 2004, whereby the Company filed with the Commission (i) an Underwriting Agreement, (ii) the form of Eighteenth Supplemental Indenture, (iii) legal opinion, and (iv) statement of computation of ratios of earnings to fixed charges, all relating to the offering and issuance of $200 million of the Company’s 5.0% Senior Notes due 2009.
 
3.   On January 22, 2004, the Company filed a Current Report on Form 8-K (Item 7 and Item 12), dated January 21, 2004, whereby the Company announced its earnings and financial results for the three-month period ended December 31, 2003.
 
4.   On March 30, 2004, the Company filed a Current Report on Form 8-K (Item 5 and Item 7), dated March 29, 2004, whereby it filed with the Commission its press release dated March 29, 2004 and the Amended and Restated Revolving Credit Agreement dated March 25, 2004 (see Exhibit 10.1 hereto).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

         
  D.R. HORTON, INC.
 
 
Date: May 7, 2004  By:   /s/ Bill W. Wheat    
    Bill W. Wheat, on behalf of D.R. Horton, Inc.,   
    as Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)   
 

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