-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I5GesIivBXglC+0D9s9n1ul9H8yXHb31JqvF3MY7EPk8//bdIpIWpTRmUns7XO6B mfGedG8SgrSj2QqFZ/0efw== 0000882184-97-000027.txt : 19971209 0000882184-97-000027.hdr.sgml : 19971209 ACCESSION NUMBER: 0000882184-97-000027 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971208 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORTON D R INC /DE/ CENTRAL INDEX KEY: 0000882184 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 752386963 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14122 FILM NUMBER: 97734022 BUSINESS ADDRESS: STREET 1: 1901 ASCENSION BLVD STREET 2: STE 100 CITY: ARLINGTON STATE: TX ZIP: 76006 BUSINESS PHONE: 8178568200 10-K 1 FORM 10-K ANNUAL REPORT FOR D.R. HORTON, INC. TWENTY YEARS OF GROWTH AND PROFITABILITY Dear Stockholders: 1997 was another exceptional year for D.R. Horton, Inc. New records in revenues and earnings allowed the Company to achieve its 20th consecutive year of growth and profitability. Based on Builder Magazine's May 1997 ranking, D.R. Horton, Inc. was the 18th largest homebuilder in the United States. Today, we believe D.R. Horton is among the 10 largest homebuilders. More important than our past, we have set the stage for continued success in 1998 and beyond. SINCE OUR JUNE 1992 INITIAL PUBLIC OFFERING, D.R. HORTON, INC. HAS: o Expanded from 8 to 28 markets o Grown revenues from $153 million to over $837 million o Increased net income from $8.1 million to $36.2 million o Increased stockholders' equity from $50.2 million to $262.8 million o Provided stockholders with an annual return on average stockholders' equity of 18.5% o Acquired and successfully integrated six homebuilding companies o Improved liquidity in our stock by increasing public float from 4.4 million shares to 22.5 million shares 1997 WAS AN EXCEPTIONAL YEAR IN WHICH WE: o Acquired three companies: "Trimark" Communities in Denver (October 1996) "SGS" Communities in New Jersey (December 1996) "Torrey" Group with operations in Atlanta, Charlotte, Raleigh, and Greenville, S.C. (February 1997) o Commenced startup operations in Nashville and Tucson o Raised $40 million of additional equity through the sale of common stock o Placed $150 million in public debt for a 7 year term. This issue was rated Ba2 by Moody's and BB by Standard & Poors o Restructured our bank facilities to aggregate $650 million with terms up to 5 years at reduced borrowing rates o Initiated a quarterly cash dividend of $.02 per common share o Expanded our mortgage operations to provide mortgage services to our homebuyers in Texas, Arizona, North Carolina, Nevada, Colorado and Florida ADDITIONALLY, IN 1997 WE INCREASED: o Pretax income 35% to $59.9 million o Revenues 53% to $837.3 million (5,018 homes) o New sales orders 47% to $863.2 million (5,177 homes) o Year end sales backlog 49% to $312.2 million (1,793 homes) ANNUAL AWARDS Each year, D.R. Horton formally recognizes outstanding achievements through its individual and division awards. We congratulate our 1997 recipients of these awards who were: o The Dallas/Fort Worth East Division managed by Leon Horton, was named "Division of The Year" by his peer group within the Company. o Judy Dougherty, of our Atlanta-Torrey Division, led the Company by selling the highest dollar volume of homes and is our "Sales Person of the Year". o Tom Lombardi, of our San Diego Division, is our "Construction Person of the Year" for supervising construction of the most homes in 1997. Tom also won this award last year. 1998 AND BEYOND We look forward to a highly successful year ahead and anticipate D.R. Horton will enjoy its 21st year of growth and profitability. Some of our goals for 1998 are to exceed $1 billion in revenues and be one of the largest and most profitable companies in the homebuilding industry. We invite you to follow our progress and become more familiar with our Company by accessing our website at http://www.DRHORTON.com. Our rapid growth requires that we attract, develop, and retain very talented personnel. We commend all of our employees for their assistance in making 1997 an exceptional year and ask their help in making 1998 even better. Our history demonstrates not only our ability to grow by starting operations in new markets, but also our success in acquiring homebuilding companies that make immediate contributions to our earnings. We continuously explore acquisition candidates and new markets and plan to enter three to four markets annually. The continuous growth of our Company through geographic expansion is unmatched by anyone in the industry. /s/ DONALD R. HORTON Donald R. Horton Chairman of the Board and President - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File number 1-4112 ---------- D.R. HORTON, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2386963 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1901 ASCENSION BLVD, SUITE 100 76006 ARLINGTON, TEXAS (Zip Code) (Address of principal executive offices) (817) 856-8200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, par value $.01 per share The New York Stock Exchange 8 3/8% Senior Notes due 2004 The New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ------ As of November 30, 1997, there were 37,346,343 shares of Common Stock, par value $.01 per share, issued and outstanding, and the aggregate market value of these shares held by non-affiliates of the registrant was approximately $406,607,000. Solely for purposes of this calculation, all directors and executive officers were excluded as affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 22, 1998, are incorporated herein by reference in Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS The Company is engaged primarily in the construction and sale of single-family homes in metropolitan areas of the Mid-Atlantic, Midwest, Southeast, Southwest, and West regions of the United States. The Company offers high-quality homes with custom features, designed principally for the entry-level and move-up market segments. The Company's homes generally range in size from 1,000 to 5,000 square feet and range in price from $80,000 to $600,000. For the year ended September 30, 1997, the Company closed homes with an average sales price approximating $166,700. The Company is one of the most geographically diversified homebuilders in the United States, with operating divisions in 21 states and 28 markets. These markets include Albuquerque, Atlanta, Austin, Birmingham, Charlotte, Chicago, Cincinnati, Dallas/Fort Worth, Denver, Greensboro, Greenville S.C., Houston, Kansas City, Las Vegas, Los Angeles, Minneapolis/St. Paul, Nashville, New Jersey, Orlando, Pensacola, Phoenix, Raleigh/Durham, Salt Lake City, San Diego, South Florida, St. Louis, Tucson and Suburban Washington, D.C. The Company was incorporated in Delaware on July 1, 1991, to acquire all of the assets and businesses of 25 predecessor companies, which were residential home construction and development companies owned or controlled by Donald R. Horton. The Company's principal executive offices are located at 1901 Ascension Blvd., Suite 100, Arlington, Texas 76006, and its telephone number is (817) 856-8200. Operating Strategy The Company believes that there are several important elements to its operating strategy which have enabled it to achieve consistent growth and profitability. The following are important elements of this strategy: Geographic Diversification. From 1978 to late 1987, the Company's homebuilding activities were conducted exclusively in the Dallas/Fort Worth area. The Company then instituted a policy of diversifying geographically, entering the following markets in the years indicated:
Year Entered Markets ------------ ------- 1987................. Phoenix 1988................. Atlanta, Orlando 1989................. Charlotte 1990................. Houston 1991................. Suburban Washington D.C. 1992................. Chicago, Cincinnati, Raleigh/Durham, South Florida 1993................. Austin, Los Angeles, Salt Lake City, San Diego 1994................. Minneapolis/St. Paul, Kansas City, Las Vegas 1995................. Birmingham, Denver, Greensboro, St. Louis 1996................. Albuquerque, Pensacola 1997................. Greenville S.C., Nashville, New Jersey, Tucson
The Company continually monitors the sales and margins achieved in each of the subdivisions in which it operates as part of an overall evaluation of the employment of its capital. While the Company believes there are significant growth opportunities in its existing markets, it intends to continue its policy of diversification by seeking to enter new markets. The Company believes that its diversification strategy mitigates the effects of local and regional economic cycles and enhances its growth potential. Typically, the Company will 1 not invest material amounts in real estate, including raw land, developed lots, models and speculative homes, or overhead in start-up operations in new markets until such markets demonstrate significant growth potential and acceptance of the Company and its products. Acquisitions. As an integral component of the Company's operational strategy of continued expansion, the Company continually evaluates opportunities for strategic acquisitions. The Company believes that expansion of its operations through the acquisition of existing homebuilding companies affords it several benefits not found in start-up operations. Such benefits include established land positions and inventories; existing relationships with land owners, developers, subcontractors and suppliers; brand name recognition; and proven product acceptance by homebuyers in the market. In evaluating potential acquisition candidates, the Company seeks homebuilding companies that have an excellent reputation, a track record of profitability and a strong management team with an entrepreneurial orientation. The Company has limited the risks associated with acquiring a going concern by conducting extensive operational, financial and legal due diligence on each acquisition and by only acquiring homebuilding companies that the Company believes should have an immediate positive impact on the Company's earnings. The Company has acquired six homebuilding companies since March 1994:
Acquired Entities Acquired Markets -------- ----------------- ------- April 1994 Joe Miller Homes, Inc. and Minneapolis/St. Paul Argus Development, Inc. July 1995 Arappco, Inc. Greensboro September 1995 Regency Development, Inc. Birmingham October 1996 "Trimark" Communities, L.L.C. Denver December 1996 "SGS" Communities, Inc. New Jersey February 1997 The "Torrey" Group Atlanta, Charlotte, Greenville S.C., and Raleigh/Durham
In both existing and new markets, the Company anticipates that it will continue to evaluate potential future acquisition opportunities that satisfy its acquisition criteria. The Company made three acquisitions during fiscal 1997. In October, 1996, the Company completed the acquisition of the principal assets (approximately $7.6 million, primarily inventories) of Trimark for $7.0 million in cash and the assumption of approximately $1.0 million in trade accounts and notes payable associated with the acquired assets. In December, 1996, the Company purchased the principal assets (approximately $19.5 million, primarily inventories) of SGS for $10.6 million in cash and the assumption of $10.1 million in accounts and notes payable associated with the acquired assets. In February, 1997, the Company completed the acquisition of all the outstanding capital stock of the entities comprising Torrey and purchased assets from affiliated entities. The Company paid consideration consisting of $37.6 million in cash, 844,444 newly issued, restricted shares of the Company's common stock, valued at $9.2 million, and assumed $90.0 million in accounts and notes payable. Torrey, the largest acquisition the Company has made, has been the leading builder of single-family homes in the large and growing Atlanta, Georgia market for the past three years as reported in Builder Magazine. Atlanta has been the largest housing market in the United States for the past three years based on single-family building permits. Torrey targets both entry-level and first time move-up buyers. In addition to building homes in the Atlanta market, Torrey has homebuilding operations in Charlotte and Raleigh/Durham, North Carolina, and Greenville, South Carolina. Market Focus--Custom Features. The Company typically positions itself between large volume homebuilders and local custom homebuilders by offering a broader selection of homes that have more amenities and greater design flexibility than homes offered by volume builders, at prices that are generally 2 more affordable than those charged by local custom builders. The Company generally offers between five and ten home designs that it believes will appeal to local homebuyers at each of its subdivisions, but is prepared to offer additional building plans and options that may be more suitable or desirable to homebuyers. The Company also is prepared to customize such designs to the individual tastes and specifications of its homebuyers. While most design modifications are significant to homebuyers, such changes typically involve relatively minor adjustments including, among other things, modifying the interior or exterior dimensions of the home and changing exterior materials. Such changes generally improve the Company's gross margins. Consequently, the Company believes that it is able to maintain the efficiencies of a volume builder while delivering high-quality, personalized homes to its customers. The Company believes that its ability to cater to the design tastes and desires of the prospective homebuyer at competitive prices, even at the entry-level, distinguishes it from many of its competitors. Decentralized Operations. The Company's homebuilding activities are decentralized to give more operating flexibility to its local division managers. The Company's homebuilding activities are conducted through 34 operating divisions, some of which are in the same general market area. Generally, each operating division consists of a vice president, an office manager and staff, a sales manager, one to eleven sales people and one construction manager, who oversees one to nine construction supervisors. The Company believes that division managers, who are intimately familiar with local conditions, make better decisions regarding local operations than do the centralized, corporate management teams who make such decisions for many of its competitors. Each operating division is responsible for preliminary site selection, negotiation of option or similar contracts, and overseeing land development activities. Site selection and lot acquisition typically involve a feasibility study by the operating division, including soil and environmental reviews, a review of existing zoning and other governmental requirements, and a review of the need for and extent of offsite work and additional lot preparation required to meet local building codes. Each operating division also plans its homebuilding schedule, selects the building plans and architectural scheme for its subdivisions, obtains all necessary building approvals, and develops a marketing plan for its homes. Division managers receive performance bonuses based upon achieving targeted operating levels in their operating divisions. The Company's corporate office controls key risk elements by retaining oversight and responsibility for final approval of all land and lot acquisitions, inventory levels, financing arrangements, accounting and management reporting, payment of subcontractor invoices, payroll and employee benefits. Cost Management. The Company strives to control its overhead costs by centralizing its administrative and accounting functions and by limiting the number of field administrative personnel and middle level management positions. The Company also attempts to minimize advertising costs by participating in promotional activities, publications and newsletters sponsored by local real estate brokers, mortgage companies, utility companies and trade associations, and, in certain instances, by positioning its subdivisions in conspicuous locations that permit it to take advantage of local traffic patterns. The Company attempts to control construction costs through the efficient design of its homes and by obtaining favorable pricing from certain subcontractors based on the high volume of work they perform for the Company. The Company's management information systems, including the purchase order system, also assist in controlling construction costs by allowing corporate and division management to monitor expenditures on a home-by-home basis. In addition, the Company's management information systems allow the Company to monitor its inventory composition and levels, thereby controlling capital and overhead costs. Limited Real Estate Exposure. The Company frequently acquires developed building lots pursuant to lot option and similar contracts after all zoning and other governmental entitlements and approvals are obtained. By utilizing lot option contracts, the Company purchases the right, but not the obligation, to buy building lots at predetermined prices on a takedown schedule commensurate with anticipated home closings. The lot option contracts generally are on a nonrecourse basis, thereby limiting the Company's financial exposure to earnest money deposits given to property sellers. This practice enables the Company to control significant lot positions with minimal up front capital and substantially reduces the risks associated with land ownership and development. The Company attempts to control a two to four year supply of building lots within each market based on current and expected absorption rates. At September 30, 1997, the Company held lot option and similar contracts for 12,569 lots with 3 an estimated aggregate purchase price approximating $408.5 million. These options are secured by cash deposits of approximately $8.0 million, standby letters of credit approximating $2.5 million and promissory notes of approximately $1.7 million. Markets The Company's homebuilding activities are conducted in five geographic regions, comprised of the following markets:
Geographic Region Markets ----------------- ------- Mid-Atlantic.................... Charlotte, Greensboro, Greenville S.C., New Jersey, Raleigh/Durham, Suburban Washington, D.C. Midwest......................... Chicago, Cincinnati, Kansas City, Minneapolis/St. Paul, St. Louis Southeast....................... Atlanta, Birmingham, Nashville, Orlando, Pensacola, South Florida Southwest....................... Albuquerque, Austin, Dallas/Fort Worth, Houston, Phoenix, Tucson West............................ Denver, Las Vegas, Los Angeles, Salt Lake City, San Diego
The Company's operations in each of its markets differ based on a number of market-specific factors. These factors include regional economic conditions and job growth, land availability and the local land development process, consumer tastes, competition from other builders of new homes and secondary home sales activity. The Company considers each of these factors when entering new markets or conducting operations in existing markets. Revenues for the Company by geographic region are:
Year Ended September 30, ---------------------------------------- 1995 1996 1997 ----------- ----------- ---------- (In millions) Mid-Atlantic.......................... $ 113.3 $ 116.4 $ 180.5 Midwest............................... 69.9 88.5 95.9 Southeast............................. 49.3 87.2 193.0 Southwest............................. 153.1 173.8 206.1 West.................................. 51.8 81.4 161.8 -------- -------- -------- Total............................... $ 437.4 $ 547.3 $ 837.3 ======== ======== ========
Land Policies While the Company expects to continue to use lot option and similar contracts to secure developed lots, it will pursue land acquisition and development opportunities to augment its inventory of low-cost, quality building lots and to maximize profit opportunities. Substantially all of the land acquired by the Company is purchased only after necessary entitlements have been obtained so that the Company has the right to begin development or construction. The Company generally limits its acquisitions to smaller tracts of entitled land that will yield under 200 lots when developed and, where possible, obtains options to acquire adjacent parcels for later development. By limiting its acquisition and development activities to smaller parcels of land, the Company reduces the financial and market risks associated with holding land during the development period. Before it acquires tracts of land, the Company will, among other things, complete a feasibility study, which includes soil tests, independent environmental studies and other engineering work, and determine that all necessary zoning and other governmental entitlements required to develop and use the property for home construction have been acquired. At September 30, 1997, about 48.3% of the Company's total lot position of 24,300 lots was being or had been developed by the Company. Although the Company purchases land and engages in land development activities primarily to support its own homebuilding activities, lots and land are occasionally sold to other developers and homebuilders. 4 A summary of the Company's land/lot positions at September 30, 1997 is: Finished lots owned by the Company................................... 2,051 Lots under development owned by the Company.......................... 9,680 ------ Total lots owned..................................................... 11,731 Lots available under lot option and similar contracts................ 12,569 ------ Total land/lot position.............................................. 24,300 ======
The Company also seeks to limit its exposure to real estate inventory risks by (i) generally commencing construction of homes under contract only after receipt of a satisfactory down payment and, where applicable, the buyer's receipt of mortgage approval; (ii) limiting the number of speculative homes (homes started without an executed sales contract) built in each subdivision; and, (iii) closely monitoring local market and demographic trends, housing preferences and related economic developments, such as new job opportunities, local growth initiatives and personal income trends. Construction The Company's home designs are prepared by architects in each of the Company's markets to appeal to local tastes and preferences of the community. Optional interior and exterior features also are offered by the Company to enhance the basic home design and to promote the custom aspect of the Company's sales efforts. Substantially all of the Company's construction work is performed by subcontractors. The Company's construction supervisors monitor the construction of each home, participate in material design and building decisions, coordinate the activities of subcontractors and suppliers, subject the work of subcontractors to quality and cost controls and monitor compliance with zoning and building codes. Subcontractors typically are retained for a specific subdivision pursuant to a contract that obligates the subcontractor to complete construction at a fixed price. Agreements with the Company's subcontractors and suppliers generally are negotiated for each subdivision. The Company competes with other homebuilders for qualified subcontractors, raw materials and lots in the markets where it operates. Construction time for the Company's homes depends on the weather, availability of labor, materials and supplies, and other factors. The Company typically completes the construction of a home within four months. The Company does not maintain significant inventories of construction materials, except for work in process materials for homes under construction. Typically, the construction materials used in the Company's operations are readily available from numerous sources. The Company does not have any long-term contracts with suppliers of its building materials. In recent years, the Company has not experienced any significant delays in construction due to shortages of materials or labor. Marketing and Sales The Company markets and sells its homes through commissioned employees and independent real estate brokers. Home sales are typically conducted from sales offices located in furnished model homes used in each subdivision. At September 30, 1997, the Company owned 282 model homes. These models homes generally are not offered for sale until the completion of the respective subdivision. The Company's sales personnel assist prospective homebuyers by providing them with floor plans, price information, tours of model homes and the selection of options and other custom features. Such personnel are trained by the Company and kept informed as to the availability of financing, construction schedules and marketing and advertising plans. In addition to using model homes, the Company typically builds a limited number of speculative homes in each subdivision to enhance its marketing and sales activities. Construction of these speculative homes also is necessary to satisfy the requirement of relocated personnel and independent brokers, who 5 often represent homebuyers requiring a completed home within 60 days. A majority of these speculative homes are sold while under construction or immediately following completion. The number of speculative homes is influenced by local market factors, such as new employment opportunities, significant job relocations, growing housing demand and the length of time the Company has built in the market. Depending upon the seasonality of each of its markets, the Company seeks to limit its speculative homes in each subdivision. At September 30, 1997, the Company was operating in 362 subdivisions and averaged 4.2 speculative homes in each subdivision. The Company advertises on a limited basis in newspapers and in real estate broker, mortgage company and utility publications, brochures, newsletters and billboards. To minimize advertising costs, the Company attempts to operate in subdivisions in conspicuous locations that permit it to take advantage of local traffic patterns. The Company also believes that model homes play a significant role in its marketing efforts. Consequently, the Company expends significant efforts in creating an attractive atmosphere in its model homes. Sales of the Company's homes generally are made pursuant to a standard sales contract which requires a down payment approximating 5% of the sales price. The contract includes a financing contingency which permits the customer to cancel in the event mortgage financing at prevailing interest rates is unobtainable within a specified period, typically four to six weeks, and may include other contingencies, such as the sale of an existing home. The Company includes a home sale in its sales backlog upon execution of the sales contract and receipt of the initial down payment. The Company does not recognize revenue upon the sale of a home until it is closed and title passes. The Company estimates that the average period between the execution of a sales contract for a home and closing is approximately three to five months. Customer Service and Quality Control The Company's operating divisions are responsible for pre-closing, quality control inspections and responding to customer's post-closing needs. The Company believes that prompt and courteous response to homebuyer's needs during and after construction reduces post-closing repair costs, enhances the Company's reputation for quality and service, and ultimately leads to significant repeat and referral business from the real estate community and homebuyers. The Company provides its homebuyers with a limited one-year warranty on workmanship and building materials. The subcontractors who perform most of the actual construction also provide warranties of workmanship to the Company, and generally are prepared to respond to the Company and homeowner promptly upon request. In most cases, the Company supplements its one-year warranty by purchasing a ten-year limited warranty from a third party. To cover its potential warranty obligations, the Company accrues an estimated amount for future warranty costs. Customer Financing In 1996, the Company formed D.R. Horton Mortgage Company, Ltd., a joint venture with a third party, to provide mortgage financing services, principally to purchasers of homes built and sold by the Company. D.R. Horton Mortgage presently provides services in Texas, Arizona, North Carolina, South Carolina, Nevada, Colorado and Florida. In its other markets, the Company does not provide mortgage financing, but works with a variety of mortgage lenders that make available to homebuyers a range of conventional mortgage financing programs. By making information about these programs available to prospective homebuyers and maintaining a relationship with such mortgage lenders, the Company is able to coordinate and expedite the entire sales transaction by ensuring that mortgage commitments are received and that closings take place on a timely and efficient basis. Title Services Through its wholly-owned subsidiaries, DRH Title Company of Texas, Ltd. and DRH Title Company of Florida, Inc., the Company serves as a title insurance agent by providing title insurance policies and closing services to purchasers of homes built and sold by the Company in the Dallas/Fort Worth, Austin and Orlando markets. The Company assumes no underwriting risk associated with these title policies. 6 Employees At September 30, 1997, the Company employed 1,160 persons, of whom 357 were sales and marketing personnel, 382 were executive, administrative and clerical personnel, 405 were involved in construction, and 16 worked in title operations. Fewer than 10 of the Company's employees are covered by collective bargaining agreements. Some of the subcontractors which the Company uses are represented by labor unions or are subject to collective bargaining agreements. The Company believes that its relations with its employees and subcontractors are good. Competition The single family residential housing industry is highly competitive, and the Company competes in each of its markets with numerous other national, regional and local homebuilders, some of which have greater resources than the Company. The Company's homes compete on the basis of quality, price, design, mortgage financing terms and location. Regulation and Environmental Matters The housing, mortgage and title insurance industries are subject to extensive and complex regulations. The Company and its subcontractors must comply with various federal, state and local laws and regulations including zoning and density requirements, building, environmental, advertising and consumer credit rules and regulations, as well as other rules and regulations in connection with its homebuilding and sales activities. These include requirements as to building materials to be used, building designs and minimum elevation of properties. The Company's homes are inspected by local authorities where required, and homes eligible for insurance or guarantees provided by the FHA and VA, respectively, are subject to inspection by the FHA or VA. The Company is also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment ("environmental laws"). The particular environmental laws which apply to any given homebuilding site vary greatly according to the site's location, environmental condition and present and former uses. These environmental laws may result in delays, may cause the Company to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. The Company's mortgage joint venture and title insurance agencies must also comply with various federal and state laws, consumer credit rules and regulations, and rules and regulations unique to such activities. Additionally, mortgage loans and title activities originated under the FHA, VA, FNMA and GNMA are subject to rules and regulations imposed by those agencies. ITEM 2. PROPERTIES The Company owns a 52,000 square foot office complex, consisting of three single-story buildings of steel and brick construction, located in Arlington, Texas, that serves as the Company's principal executive offices and houses two of the Company's Dallas/Fort Worth divisions. The Company also leases approximately 87,000 square feet of space for its operating divisions under leases expiring between December, 1997 and July, 2001. ITEM 3. LEGAL PROCEEDINGS The Company is a party to routine litigation incidental to its business. Management does not believe such matters could have a material adverse effect upon the financial condition of the Company, if the litigation were decided adversely to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock (the "Common Stock") is listed on the New York Stock Exchange under the symbol "DHI". The following table sets forth the high and low sales prices for the Common Stock for the periods indicated, as reported on the NASDAQ National Market (through December 13, 1995) and on the New York Stock Exchange on and after December 14, 1995, adjusted for the 8% stock dividend of May 1996.
Year Ended September 30, ---------------------------------------------------- 1996 1997 ------------------------- ----------------------- HIGH LOW HIGH LOW ----------- ----------- ---------- ---------- Quarter Ended December 31... $ 11 $ 8 15/16 $ 11 3/8 $ 8 5/8 Quarter Ended March 31...... 11 15/16 8 15/16 13 10 1/8 Quarter Ended June 30....... 10 5/8 8 5/8 12 1/2 9 Quarter Ended September 30.. 10 3/8 7 1/2 17 1/4 10 3/16
As of November 30, 1997, there were approximately 223 holders of record. The Company has declared cash dividends of two cents per share for the last three quarters of fiscal 1997. Prior thereto, no cash dividend had been declared. The declaration of cash dividends is at the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, cash flows, capital requirements, the general financial condition of the Company and general business conditions. The Company is required to comply with certain covenants contained in its bank agreements and the Senior Notes indenture. The most restrictive of these requirements allows the Company to pay cash dividends on its common stock in an amount, on a cumulative basis, not to exceed 50% of consolidated net income, as defined, after June 4, 1997, subject to certain other adjustments. Pursuant to the most restrictive of these requirements, the Company had approximately $31.3 million available for the payment of dividends at September 30, 1997. On February 26, 1997, the Company acquired the equity interests of a group of corporations known as the "Torrey" Group. As consideration, the Company paid $37.6 million in cash, assumed $90.0 million in accounts and notes payable and issued 844,444 shares of its Common Stock, par value $ .01 per share (the "Torrey Shares"), valued at $9.2 million. The consideration was paid to the five owners of the interests acquired (the "Sellers"). The Sellers were four executive officers of Torrey who were active in the business acquired and a trust, the trustee and grantor of which was one of the four executive officers. Exemption from registration under the Securities Act of 1933 was claimed pursuant to Section 4(2) thereof in reliance upon (i) representations of the Sellers as to their investment intent, sophistication, knowledge and experience; (ii) disclosure by the Company of its Securities Exchange Act of 1934 reports and access of the Sellers to the Company's executives to ask questions, receive answers and obtain additional information from the Company; and (iii) resale restrictions on the Torrey Shares, including restrictive legends on the certificates representing the Torrey Shares and stop transfer orders placed with the Company's transfer agent as to the Torrey Shares. 8 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data of the Company are qualified by reference to and should be read in conjunction with the consolidated financial statements, related notes thereto and other financial data elsewhere herein. These historical results are not necessarily indicative of the results to be expected in the future. In 1993, the Company changed its fiscal year end to September 30, thus operating information for the nine months then ended represents the Company's fiscal period.
Periods Ended September 30, ----------------------------------------------------- Nine Months Years ------- ------------------------------------------- 1993 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- ------- (In millions, except per share amounts) Income Statement Data:(2) Revenues ................ $ 190.1 $ 248.2 $ 393.3 $ 437.4 $ 547.3 $ 837.3 Net income .............. 8.9 12.2 17.7 20.5 27.4 36.2 Net income per share(1).. .32 .44 .63 .74 .87 1.01 Cash dividends declared per common share ....... -- -- -- -- -- .06 As of September 30, ------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (In millions) Balance Sheet Data:(2) Inventories.............. $ 129.0 $ 204.1 $ 282.9 $ 345.3 $ 604.6 Total assets............. 158.7 230.9 318.8 402.9 719.8 Notes payable............ 62.2 108.6 169.9 169.9 355.3 Stockholders' equity..... 65.9 84.6 106.1 177.6 262.8
- ---------- (1) Adjusted for stock dividends of 6% in 1994, 9% and 40% in 1995, and 8% in 1996. (2) See Note C to the audited financial statements for details concerning acquisitions by the Company. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations The following tables set forth certain information regarding the Company's operations.
Percentages of Revenue Year Ended September 30, ------------------------- 1995 1996 1997 ------- ------- ------- Costs and Expenses: Cost of sales.................................... 82.2% 82.0% 81.9% Selling, general and administrative expenses..... 10.2 9.8 10.7 Interest expense................................. 0.3 0.3 0.6 ---- ---- ---- Total costs and expenses............................ 92.7 92.1 93.2 Other (income)...................................... (0.1) (0.2) (0.3) ---- ---- ---- Income before income taxes.......................... 7.4 8.1 7.1 Income taxes........................................ 2.7 3.1 2.8 ---- ---- ---- Net income.......................................... 4.7% 5.0% 4.3% ==== ==== ====
9
Year Ended September 30, ---------------------------------------------- 1995 1996 1997 -------------- -------------- -------------- Homes Homes Homes Homes Closed Closed Percent Closed Percent Closed Percent ------ ------- ------ ------- ------ ------- Mid-Atlantic (Charlotte, Greensboro, Greenville S.C., New Jersey, Raleigh/Durham, Suburban Washington D.C.)...... 436 17.6% 547 16.7% 843 16.8% Midwest (Chicago, Cincinnati, Kansas City, Minneapolis/- St. Paul, St. Louis)........... 348 14.1 457 13.9 500 10.0 Southeast (Atlanta, Birmingham, Nashville, Orlando, Pensacola, South Florida)...... 303 12.2 519 15.8 1,259 25.1 Southwest (Albuquerque, Austin, Dallas/Fort Worth, Houston, Phoenix, Tucson)...... 1,131 45.7 1,239 37.7 1,387 27.6 West (Denver, Las Vegas, Los Angeles, Salt Lake City, San Diego................ 256 10.4 522 15.9 1,029 20.5 ----- ----- ----- ----- ----- ----- 2,474 100.0% 3,284 100.0% 5,018 100.0% ===== ===== ===== ===== ===== ===== Year Ended September 30, --------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- Homes Homes Homes New Sales Contracts Sold $ Sold $ Sold $ ----- ------- ----- ------- ----- ------- ($ in millions) Mid-Atlantic (Charlotte, Greensboro, Greenville S.C., New Jersey, Raleigh/Durham, Suburban Washington D.C.)...... 403 $103.9 495 $106.9 849 $173.0 Midwest (Chicago, Cincinnati, Kansas City, Minneapolis/- St. Paul, St. Louis) .......... 339 68.7 527 101.0 496 96.6 Southeast (Atlanta, Birmingham, Nashville, Orlando, Pensacola, South Florida) ..... 371 64.7 493 80.1 1,293 197.5 Southwest (Albuquerque, Austin, Dallas/Fort Worth, Houston, Phoenix, Tucson) ..... 1,148 155.2 1,311 190.0 1,343 201.2 West (Denver, Las Vegas, Los Angeles, Salt Lake City, San Diego................ 292 56.8 662 107.5 1,196 194.9 ----- ----- ----- ----- ----- ----- 2,553 $449.3 3,488 $585.5 5,177 $863.2 ===== ===== ===== ===== ===== ===== Year Ended September 30, --------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- Year End Sales Backlog Homes $ Homes $ Homes $ ----- ------- ----- ------- ----- ------- ($ in millions) Mid-Atlantic (Charlotte, Greensboro, Greenville S.C., New Jersey, Raleigh/Durham, Suburban Washington D.C.)...... 198 $ 43.9 146 $ 34.4 334 $ 68.9 Midwest (Chicago, Cincinnati, Kansas City, Minneapolis/- St. Paul, St. Louis)........... 114 22.3 184 34.9 180 35.5 Southeast (Atlanta, Birmingham, Nashville, Orlando, Pensacola, South Florida)...... 190 33.6 164 26.5 414 62.9 Southwest (Albuquerque, Austin, Dallas/Fort Worth, Houston, Phoenix, Tucson)...... 417 58.1 489 74.3 445 69.4 West (Denver, Las Vegas, Los Angeles, Salt Lake City, San Diego)............... 81 12.8 221 38.8 420 75.5 ----- ----- ----- ----- ----- ----- 1,000 $170.7 1,204 $208.9 1,793 $312.2 ===== ===== ===== ===== ===== =====
10 Year Ended September 30, 1997 Compared to Year Ended September 30, 1996 Revenues increased by 53.0% to $837.3 million in 1997 from $547.3 million in 1996. The number of homes closed by the Company increased by 52.8% to 5,018 homes in 1997 from 3,284 homes in 1996. Home closings increased in all of the Company's market regions, with percentage increases ranging from 142.6% in the Southeast region to 9.4% in the Midwest region. The increases in both revenues and homes closed were due in part to the February 1997 acquisition of Torrey. Since the date of the acquisition, Torrey closed 962 homes, with revenues totaling $140.8 million. For the year, Torrey comprised 19.2% of homes closed and 16.8% of the revenues generated. Excluding Torrey, revenues increased by 27.2% to $696.5 million. The average price of homes closed in 1997 was $166,700, relatively unchanged from 1996. New net sales contracts increased 48.4% to 5,177 homes in 1997 from 3,488 in 1996. Percentage increases in the dollar value of new net sales contracts ranging from 146.5% to 5.9% were achieved in four of the Company's five market regions, with a 4.4% decline experienced in the Midwest region. Since the date of its acquisition, Torrey's new net sales contracts amounted to $153.8 million (1,049 homes). Excluding Torrey, the Company's new net sales contracts were $709.4 million (4,128 homes), a 21.2% increase over 1996. The average selling price of new sales contracts in 1997 was $166,700, down 0.7% from the 1996 average selling price of $167,900, mainly due to a lower average sales price for homes sold by Torrey. The Company was operating in 362 subdivisions at September 30, 1997, compared to 184 at September 30, 1996. At September 30, 1997, the Company's backlog of sales contracts was $312.2 million (1,793 homes), a 49.5% increase over the comparable figure at September 30, 1996. At September 30, 1997, Torrey held a sales contract backlog of $61.8 million (413 homes). Excluding Torrey, the Company's sales contract backlog at September 30, 1997, was $250.4 million (1,380 homes), up 19.9% from the prior year. The average sales price of homes in backlog increased to $174,100 at September 30, 1997, from $173,500 at September 30, 1996. Cost of sales increased by 52.6% to $685.3 million in 1997 from $449.1 million in 1996. The increase in cost of sales accompanied the increase in revenues. Cost of sales as a percentage of revenues decreased by 0.1% to 81.9% in 1997 from 82.0% in 1996, as slightly better gross margins were realized for the year, despite the effects of purchase accounting adjustments requiring the Company to increase its basis in inventory acquired with Trimark, SGS and Torrey. Selling, general and administrative (SG&A) expenses increased by 66.1% to $89.5 million in 1997 from $53.9 million in 1996. As a percentage of revenues, SG&A expenses increased to 10.7% in 1997 from 9.8% in 1996. Absent the SG&A costs associated with integrating the three acquisitions in 1997, SG&A costs would have increased by 0.2% of revenues. Interest expense increased to $5.2 million in 1997 from $1.5 million in 1996, since average interest-bearing debt grew at a faster pace than average amounts of inventory under construction and development. This is partially due to the three acquisitions during the year. The increased interest expense occurred despite a 49 basis point decline in the effective interest rate during the year. The Company follows a policy of capitalizing interest only on inventory under construction or development. During both 1997 and 1996, the Company expensed the portion of incurred interest and other financing costs which could not be charged to inventory. Capitalized interest and other financing costs are included in costs of sales at the time of home closings. Other income, which consists mainly of interest income and the pretax earnings of the DRH Title Companies and DRH Mortgage Company, Ltd., increased to $2.6 million in 1997 from $1.5 million in 1996. The increase was partially due to 1997 comprising a full year of operations for DRH Mortgage Company, Ltd., compared to only six months in 1996. The provision for income taxes increased 38.9% to $23.7 million in 1997 from $17.1 million in 1996, due in part to the corresponding increase in income before income taxes. The effective tax rate increased to 39.6% in 1997 from 38.4% in 1996 due to greater earnings in states with higher tax structures. As a percentage of revenues, the income tax provision decreased by 0.3% to 2.8% in 1997. 11 Year Ended September 30, 1996 Compared to Year Ended September 30, 1995 Revenues increased by 25.1% to $547.3 million in 1996 from $437.4 million in 1995. The number of homes closed by the Company increased by 32.7% to 3,284 homes in 1996 from 2,474 homes in 1995. Home closings increased in all of the Company's market regions, with percentage increases ranging from 9.5% in the Southwest region to 103.9% in the West region. Of the 32.7% increase in 1996 home closings, 13.4% was the result of acquisitions made in Greensboro and Birmingham in the last quarter of 1995. The 1996 increase in revenues was achieved in spite of a 4.1% decrease in the average price of homes closed, to $166,600 in 1996 from $173,700 in 1995. The decrease was due to changes in the geographic mix of homes closed within the Company and different price points in certain markets. New net sales contracts increased 36.6% to 3,488 homes in 1996 from 2,553 in 1995. Percentage increases in new net sales contracts ranging from 126.7% to 14.2% were achieved in the Company's market regions. The 1996 average sales price was $167,900 compared to $176,000 in 1995. The Company was operating in 184 subdivisions at September 30, 1996, compared to 162 at September 30, 1995. At September 30, 1996, the Company's backlog of sales contracts was 1,204 homes, a 20.4% increase over the comparable figure at September 30, 1995. The average sales price of homes in backlog increased to $173,500 at September 30, 1996, from $170,700 at September 30, 1995. Cost of sales increased by 24.8% to $449.1 million in 1996 from $359.7 million in 1995. As a percentage of revenues, cost of sales decreased by 0.2% to 82.0% in 1996 from 82.2% in 1995. This improvement resulted from good market conditions during the year, proactive efforts to maintain sales prices and control costs, and higher margins on homes closed on internally developed lots. The Company does not capitalize pre-opening costs for new subdivisions. Selling, general and administrative (SG&A) expense increased by 20.9% to $53.9 million in 1996 from $44.5 million in 1995. The increase in SG&A expense was due largely to the increases in sales and construction activity required to sustain the higher levels of revenues. SG&A expense as a percentage of revenues decreased by 0.4% to 9.8% in 1996 from 10.2% in 1995, as the Company was successful in controlling its variable overhead costs while the revenue increase offset more fixed costs. Interest expense increased to $1.5 million in 1996, from $1.2 million in 1995, caused by average interest-bearing debt growing at a slightly faster pace than the average amount of inventory under construction and development. The Company follows a policy of capitalizing interest only on inventory under construction or development. During both 1996 and 1995, a portion of incurred interest and other financing costs could not be charged to inventory and was expensed. Capitalized interest and other financing costs are included in cost of sales at the time of home closings. Other income, which consists mainly of interest income, pretax earnings from the Company's title operations and, in 1996, pretax earnings from the Company's mortgage operations, increased to $1.5 million in 1996, from $0.6 million in 1995. The increase was due primarily to the fact that 1996 comprised a full year of operations for DRH Title Company of Texas, Ltd., compared to only six months in 1995. Additionally, DRH Title Company of Florida, Inc. and DRH Mortgage Company, Ltd. commenced operation in 1996 and provided pretax earnings. The provision for income taxes increased 41.9% to $17.1 million in 1996 from $12.0 million in 1995, due in part to the corresponding increase in income before income taxes. The effective tax rate increased to 38.4% in 1996 from 36.9% in 1995. As a percentage of revenues, the income tax provision increased 0.4% to 3.1% in 1996. The increases in the effective tax rate and in the tax provision as a percentage of revenues were due primarily to higher expected rates of state and local income taxes. 12 Financial Condition, Liquidity and Capital Resources At September 30, 1997, the Company had available cash and cash equivalents of $44.0 million. Inventories (including finished homes and construction in progress, developed residential lots and other land) at September 30, 1997, increased by $259.3 million from September 30, 1996, due to the acquisitions of selected assets (including inventories) of Trimark, SGS and Torrey. Inventories also increased due to a general increase in business activity and the expansion of operations, including new markets in Tucson and Nashville. Because the inventory increase and the acquisitions were financed largely by borrowings, the Company's ratio of notes payable to total capital increased to 57.5% at September 30, 1997 from 48.9% at September 30, 1996. The equity to total assets ratio decreased to 36.5% at September 30, 1997, from 44.1% at September 30, 1996. The Company's financing needs depend upon the results of its operations, sales volume, inventory levels, inventory turnover, and acquisitions. The Company has financed its operations through borrowings from financial institutions, through funds from earnings and from the public sale of Common Stock in 1992, 1996 and 1997. In June 1997, the Company sold to the public under its shelf registration statement $150,000,000 of 8 3/8% Senior Notes due 2004, realizing net proceeds of $147.2 million. The Company made three acquisitions during fiscal 1997. In October, 1996, the Company completed the acquisition of the principal assets (approximately $7.6 million, primarily inventories) of Trimark for $7.0 million in cash and the assumption of approximately $1.0 million in trade accounts and notes payable associated with the acquired assets. In December, 1996, the Company purchased the principal assets (approximately $19.5 million, primarily inventories) of SGS for $10.6 million in cash and the assumption of $10.1 million in accounts and notes payable associated with the acquired assets. In February, 1997, the Company completed the acquisition of all the outstanding capital stock of the entities comprising Torrey and purchased assets from affiliated entities. Consideration was $37.6 million in cash, 844,444 newly issued, restricted shares of the Company's common stock, valued at $9.2 million, and the assumption of $90.0 million in accounts and notes payable. In June 1997, the Company increased and restructured its major unsecured bank credit facility to $625 million. The restructured facility consists of a $200 million five year term loan, a $400 million four year term revolving loan, and a $25 million four year letter of credit facility. The restructured facility, along with another $25 million unsecured bank credit facility, brings the Company's total borrowing capacity from banks to $625 million. At September 30, 1997, the Company had outstanding debt under the unsecured bank facilities, senior notes, and other credit agreements of $355.3 million, of which $201.0 million represented advances under existing bank credit facilities. Based upon the most restrictive of existing debt covenants, at September 30, 1997, the Company had additional borrowing capacity of $135.5 million. The Company is required to comply with certain covenants contained in its bank agreements and its Senior Notes indenture. The most restrictive of these requirements allows the Company to pay cash dividends on its common stock in an amount, not to exceed, on a cumulative basis 50% of consolidated net income subject to certain other adjustments. Pursuant to the most restrictive of these requirements, at September 30, 1997, the Company had approximately $31.3 million available for the payment of dividends and for the acquisition by the Company of its common stock. The Company's rapid growth requires significant amounts of cash. It is anticipated that future home construction, lot and land purchases and acquisitions will be funded through internally generated funds and borrowings. The Company continuously evaluates its capital structure and in the future may seek to further increase unsecured debt and obtain additional equity to fund ongoing operations and to pursue additional growth opportunities. Except for ordinary expenditures for the construction of homes and, to a limited extent, the acquisition of land and lots for development and sale of homes, at September 30, 1997, the Company had no material commitments for capital expenditures. 13 Inflation The Company, as well as the homebuilding industry in general, may be adversely affected during periods of high inflation, primarily because of higher land and construction costs. Inflation also increases the Company's financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. The Company attempts to pass through to its customers any increases in its costs through increased sales prices and, to date, inflation has not had a material adverse effect on the Company's results of operations. However, there is no assurance that inflation will not have a material adverse impact on the Company's future results of operations. Safe Harbor Statement Certain statements in this Annual Report to Shareholders, which includes the Company's Form 10-K, as well as statements made by the Company in periodic press releases, and oral statements made by the Company's officials to analysts and stockholders in the course of presentations about the Company, may be construed as "Forward-Looking Statements" as defined in the Private Securities Litigation Reform Act of 1995. Such statements may involve unstated risks, uncertainties and other factors that may cause actual results to differ materially from those initially anticipated. Such risks, uncertainties and other factors include, but are not limited to, changes in general economic condition, fluctuations in interest rates, increases in costs of material, supplies and labor and general competitive conditions. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors............................................. 16 Consolidated Balance Sheets, September 30, 1996, and 1997.................. 17 Consolidated Statements of Income for the three years ended September 30, 1997...................................................................... 18 Consolidated Statements of Stockholders' Equity for the three years ended September 30, 1997.................................................. 19 Consolidated Statements of Cash Flows for the three years ended September 30, 1997........................................................ 20 Notes to Consolidated Financial Statements................................. 21
15 REPORT OF INDEPENDENT AUDITORS The Board of Directors D.R. Horton, Inc. We have audited the accompanying consolidated balance sheets of D. R. Horton, Inc. and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of D. R. Horton, Inc. and subsidiaries at September 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Fort Worth, Texas November 7, 1997 16 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, ------------------- 1996 1997 --------- -------- (In thousands) ASSETS Cash...................................................... $ 32,467 $ 43,984 Inventories: Finished homes and construction in progress........... 216,264 342,911 Residential lots - developed and under development.... 127,707 260,198 Land held for development............................. 1,312 1,482 ------- ------- 345,283 604,591 Property and equipment (net).............................. 5,631 13,124 Earnest money deposits and other assets................... 15,247 29,502 Excess of cost over net assets acquired (net)............. 4,285 28,593 -------- ------- $402,913 $719,794 ======= ======= LIABILITIES Accounts payable.......................................... $ 34,391 $ 55,499 Accrued expenses and customer deposits.................... 21,011 46,200 Notes payable............................................. 169,873 355,315 ------- ------- 225,275 457,014 STOCKHOLDERS' EQUITY Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued.......................... -- -- Common stock, $.01 par value, 100,000,000 shares authorized, 32,362,036 shares in 1996 and 37,319,184 in 1997, issued and outstanding............ 324 373 Additional capital........................................ 159,714 210,742 Retained earnings......................................... 17,600 51,665 ------- ------- 177,638 262,780 ------- ------- $402,913 $719,794 ======= =======
See accompanying notes to consolidated financial statements. 17 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30, ------------------------------------------- 1995 1996 1997 ---------- ---------- ---------- (In thousands, except net income per share) Revenues.......................... $437,388 $547,336 $837,280 Cost of sales..................... 359,742 449,054 685,341 ------- ------- ------- 77,646 98,282 151,939 Selling, general and administrative expense........... 44,549 53,860 89,457 ------- ------- ------- Operating income.................. 33,097 44,422 62,482 Other: Interest expense................ (1,161) (1,474) (5,150) Other income.................... 621 1,484 2,562 ------- ------- ------- (540) 10 (2,588) ------- ------- ------- INCOME BEFORE INCOME TAXES..... 32,557 44,432 59,894 Provision for income taxes........ 12,018 17,053 23,690 ------- ------- ------- NET INCOME..................... $ 20,539 $ 27,379 $ 36,204 ======= ======= ======= Net income per share.............. $ 0.74 $ 0.87 $ 1.01 ======= ======= ======= Weighted average number of shares of common stock outstanding, including common stock equivalents................ 27,849 31,420 35,871 ======= ======= =======
See accompanying notes to consolidated financial statements. 18 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Total Common Additional Retained Stockholders' Stock Capital Earnings Equity ------ ---------- -------- ------------- (In thousands) Balances at October 1, 1994.......... $165 $ 73,547 $ 10,841 $ 84,553 Net income......................... -- -- 20,539 20,539 Exercise of stock options (116,400 shares)................. 1 772 -- 773 Issuances under D.R. Horton, Inc. employee benefit plans (20,549 shares).................. -- 208 -- 208 Nine percent stock dividend........ 15 17,181 (17,196) -- Seven for five stock split......... 73 (73) -- -- --- ------- ------- ------- Balances at September 30, 1995....... 254 91,635 14,184 106,073 Net income......................... -- -- 27,379 27,379 Stock sold through public offering (4,375,000 shares)...... 44 43,149 -- 43,193 Exercise of stock options (124,619 shares)................. 1 696 -- 697 Issuances under D.R. Horton, Inc. employee benefit plans (29,300 shares).................. 1 296 -- 297 Eight percent stock dividend....... 24 23,938 (23,963) (1) --- ------- ------- ------- Balances at September 30, 1996....... 324 159,714 17,600 177,638 Net income......................... -- -- 36,204 36,204 Stock sold through public offering (3,838,800 shares)...... 38 39,908 -- 39,946 Stock issued as partial consideration for acquisition (844,444 shares)................. 8 9,142 -- 9,150 Exercise of stock options (240,554 shares)................. 3 1,668 -- 1,671 Issuances under D.R. Horton, Inc. employee benefit plans (33,350 shares).................. -- 310 -- 310 Cash dividends paid at $.02 quarterly................... -- -- (2,139) (2,139) --- ------- ------- ------- Balances at September 30, 1997....... $373 $210,742 $ 51,665 $262,780 === ======= ======= =======
See accompanying notes to consolidated financial statements. 19 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, ---------------------------- 1995 1996 1997 -------- -------- -------- (In thousands) OPERATING ACTIVITIES Net income....................................... $ 20,539 $ 27,379 $ 36,204 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.................. 2,025 2,583 4,411 Expense associated with issuance of stock under employee benefit plans.............. 208 229 306 Changes in operating assets and liabilities: Increase in inventories...................... (56,401) (62,375) (145,148) Increase in earnest money deposits and other assets.............................. (910) (4,271) (10,670) Increase in accounts payable, accrued expenses and customer deposits............ 2,197 12,567 31,763 ------- ------- ------- NET CASH USED IN OPERATING ACTIVITIES............ (32,342) (23,888) (83,134) ------- ------- ------- INVESTING ACTIVITIES Net purchase of property and equipment......... (2,414) (2,667) (5,342) Net cash paid for acquisitions................. (4,577) (1,370) (55,650) ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES (6,991) (4,037) (60,992) ------- ------- ------- FINANCING ACTIVITIES Proceeds from notes payable.................... 232,964 238,987 200,309 Repayment of notes payable..................... (188,857) (239,289) (231,389) Issuance of Senior Notes payable............... -- -- 147,241 Proceeds from common stock offerings and stock associated with certain employee benefit plans....................... -- 43,260 39,950 Proceeds from exercise of stock options........ 773 697 1,671 Cash dividends paid............................ -- -- (2,139) ------- ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 44,880 43,655 155,643 ------- ------- ------- INCREASE IN CASH 5,547 15,730 11,517 Cash at beginning of year...................... 11,190 16,737 32,467 ------- ------- ------- Cash at end of year............................ $ 16,737 $ 32,467 $ 43,984 ======= ======= ======= Supplemental cash flow information: Interest paid.................................. $ 11,689 $ 14,628 $ 19,414 ======= ======= ======= Income taxes paid.............................. $ 11,336 $ 16,143 $ 24,759 ======= ======= =======
See accompanying notes to consolidated financial statements. 20 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business: The Company is engaged primarily in the construction and sale of single-family housing in 21 states in the United States. The Company designs, builds and sells single-family houses on finished lots which it purchases ready for home construction. The Company also purchases undeveloped land to develop into finished lots for future construction of single-family houses and for sale to others. The Company also provides title agency and mortgage services in selected markets; however, such activities are not material to the consolidated operating results of the Company. Principles of Consolidation: The consolidated financial statements include the accounts of D.R. Horton, Inc. (the Company) and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Accounting Principles: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Statements of Financial Accounting Standards: Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"), issued in October 1995, establishes financial accounting and reporting standards for stock-based employee compensation plans. The Company adopted this Standard in fiscal 1996. As permitted by FAS 123, the Company has elected to continue to use Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations, in accounting for its Stock Incentive Plan. Refer to Note F. FAS 128 "Earnings Per Share", issued in March 1997, supersedes previous authoritative guidance in this area. FAS 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997, and requires restatement of all prior-period earnings per share ("EPS") data presented. The new Statement modifies the calculations of primary and fully diluted EPS and replaces them with basic and diluted EPS. The adoption of FAS 128 is not expected to have a material impact on the Company's previously or currently reported EPS data. FAS 131 "Disclosure about Segments of an Enterprise and Related Information", issued in June 1997, establishes annual and interim reporting requirements for an enterprise's operating segments and related disclosures about its products and services, geographical areas in which it operates and major customers. FAS 131 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. Adoption of FAS 131 is not expected to materially impact the Company. Cash: The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents. Amounts in transit from title companies for home closings are included in cash. Cost of Sales: Cost of sales includes home warranty costs, purchased discounts for customer financing, and sales commissions paid to third parties. Excess of Cost Over Net Assets Acquired: The excess of amounts paid for business acquisitions over the net fair value of the assets acquired and liabilities assumed is amortized using the straight-line method over twenty years. Additional consideration paid in subsequent periods under the terms of purchase agreements are included as acquisition costs. Amortization expense was $114,000, $188,000 and $977,000 in 1995, 1996 and 1997, respectively. Accumulated amortization was $344,000 and $1,321,000 at September 30, 1996 and 1997, respectively. 21 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Estimated Fair Value of Financial Instruments: The estimated fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. The carrying amounts of cash and cash equivalents and trade payables approximate fair value because of the short maturity of these financial instruments. At September 30, 1997 the estimated fair value of the Company's debt approximated $359.4 million and the fair market value of the net obligation under the interest rate swap agreement approximated $1.9 million. Fair value estimates are made at specific points in time based on relevant market information and information about the financial instrument. These estimates are subjective in nature, involve matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect estimates. Interest: The Company capitalizes interest during development and construction. Capitalized interest is charged to cost of sales as the related inventory is delivered to the home buyer. Interest costs are (in thousands):
Year Ended September 30, ------------------------------ 1995 1996 1997 -------- -------- -------- Capitalized interest, beginning of year...... $ 4,325 $ 7,118 $ 11,042 Interest incurred............................ 12,002 14,835 23,992 Interest expensed: Directly................................... (1,161) (1,474) (5,150) Amortized to cost of sales................. (8,048) (9,437) (11,889) ------- ------- ------- Capitalized interest, end of year............ $ 7,118 $ 11,042 $ 17,995 ======= ======= =======
Inventories: Inventories are stated at the lower of cost (specific identification method) or net realizable value. In addition to direct land acquisition, land development and direct housing construction costs, inventory costs include interest and real estate taxes, which are capitalized in inventory during the development and construction periods. Residential lots are transferred to construction in progress when building permits are requested. Land and development costs, capitalized interest and real estate taxes incurred during land development are allocated to individual lots on a prorata basis. Net Income Per Share: Net income per share is based upon the average number of shares of common stock outstanding during each year and the effect of common stock equivalents related to dilutive stock options. Property and Equipment: Property and equipment, including model home furniture, are stated on the basis of cost. Major renewals and improvements are capitalized. Repairs and maintenance are expensed as incurred. Depreciation generally is provided using the straight-line method over the estimated useful life of the asset. Accumulated depreciation was $5,000,000 and $8,213,000 as of September 30, 1996 and 1997, respectively. Revenue Recognition: Revenue generally is recognized at the time of the closing of a sale, when title to and possession of the property transfer to the buyer. 22 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE B - NOTES PAYABLE
September 30, -------------------- 1996 1997 -------- -------- (In thousands) Banks (unsecured): $200 million syndicated term credit facility, maturing June, 2002, variable interest rates...... $100,000 $200,000 $400 million syndicated revolving credit facility, maturing June, 2001, variable interest rates...... 58,600 -- $25 million revolving line of credit, payable on demand with six months notice, variable interest rates.................................... 4,000 1,000 Other.................................................... 7,273 6,945 8 3/8% Senior Notes (unsecured), due 2004, net........... -- 147,370 ------- ------- $169,873 $355,315 ======= =======
On May 21, 1997, the Company filed a universal shelf registration statement with the Securities and Exchange Commission for up to $250 million of the Company's debt and equity securities. The universal shelf registration provides that securities may be offered from time to time in one or more series and in the form of senior, senior subordinated or subordinated debt, preferred stock, common stock, and/or warrants to purchase such securities. On June 9, 1997, the Company utilized this universal shelf registration to issue $150 million of 8 3/8% senior unsecured notes at 98.419%. The Senior Notes, which are due June 15, 2004, with interest payable semi-annually, represent unsecured obligations of the Company. The Senior Notes are not redeemable except that 35% of the amount originally issued can be redeemed with proceeds of a public equity offering by the Company at a redemption price of 108.375% through June 15, 2000. Maturities of notes payable, assuming the revolving lines of credit are not extended, are $5.2 million in 1998, $2.0 million in 1999, $0.7 million in 2000, $200.0 million in 2002 and $147.4 million in 2004. The weighted average interest rates of the unsecured bank debt at September 30, 1996 and 1997 were 7.5% and 7.1%, respectively. The Senior Notes are senior obligations of the Company and rank pari passu in right of payment to all existing and future unsecured indebtedness of the Company. These Notes are guaranteed by essentially all of the Company's subsidiaries. The bank credit facilities and the Senior Notes indenture contain covenants which, taken together, limit investments in inventory, stock repurchases, cash dividends and other restricted payments, incurrence of indebtedness, asset dispositions and creation of liens, and require certain levels of tangible net worth. At September 30, 1997, these covenants limit the additional debt the Company could incur to $135.5 million. The Company is required to comply with certain covenants contained in its bank agreements and its Senior Notes indenture. The most restrictive of these requirements allows the Company to pay cash dividends on its common stock in an amount not to exceed, on a cumulative basis, 50% of consolidated net income, as defined, after June 4, 1997, subject to certain other adjustments. Pursuant to the most restrictive of these requirements, the Company had approximately $31.3 million available for the payment of dividends and for the acquisition by the Company of its common stock at September 30, 1997. Upon a change of control of the Company, holders of the Senior Notes have the right to require the Company to redeem the Senior Notes at a price of 101% of the par amount, along with accrued and unpaid interest. 23 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) In addition to the stated interest rates, various bank credit facilities require the Company to pay certain fees. The syndicated revolving credit facility also provides $25 million for use as standby letters of credit. The Company uses an interest rate swap agreement to help manage a portion of its interest rate exposure. The agreement converts from a variable rate to a fixed rate on a notional amount of $100 million. The agreement expires April 2001. The Company does not expect non-performance by the counterparty, a major U.S. bank, and any losses incurred in the event of non-performance would not be material. Net payments or receipts under the Company's interest rate swap agreement are recorded as adjustments to interest incurred. As a result of this agreement, the Company incurred net interest expense of $0.4 million and $0.7 million during 1996 and 1997, respectively. NOTE C - ACQUISITIONS In 1995 and 1997, the Company made the following acquisitions:
Company Acquired Date Acquired Consideration - ---------------- ------------- ------------- Arappco, Inc. (Greensboro)........................... July 1995 $ 12.2 million Regency Development, Inc. (Birmingham)........................... September 1995 $ 12.3 million Trimark Communities, L.L.C. (Denver)............................... October 1996 $ 8.1 million SGS Communities, Inc. (New Jersey)........................... December 1996 $ 20.7 million Torrey Group (Atlanta, Raleigh, Charlotte, Greenville S.C.)....................... February 1997 $136.7 million
Consideration includes cash paid, Company stock issued, and assumption of certain accounts payable and notes payable which were repaid subsequent to the acquisitions. Except for the Torrey Group, where stock was a component of the acquisition price, the above acquisitions contain provisions for additional consideration to be paid annually for up to four years subsequent to the acquisition date. The additional consideration is based upon subsequent pretax income, adjusted for a preferential return to the Company. Such additional consideration will be recorded when paid as excess cost over net assets acquired, which is amortized using the straight line method over 20 years. All of the acquired companies are involved in homebuilding and land development. The Company has accounted for these acquisitions under the purchase method and has included the operations of the acquired businesses in its Consolidated Statements of Income since their acquisition. The following unaudited pro forma summaries of combined operations were prepared to illustrate the estimated effects of the 1997 acquisitions of Trimark, SGS and Torrey as if such acquisitions had occurred on the first day of the respective periods presented. 24 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The pro forma information should be read in conjunction with the historical financial statements and notes thereto. The pro forma financial information is provided for comparative purposes only and is not necessarily indicative of the results which would have been obtained if the acquisitions had been affected throughout the period. The pro forma financial information is based upon the purchase method of accounting.
Year ended September 30, ------------------------------- 1996 1997 --------------- ------------- (In thousands, except net income per share) Revenues..................................... $780,438 $ 926,355 Net income................................... 38,447 37,108 Net income per share......................... 1.19 1.02
NOTE D - STOCKHOLDERS' EQUITY On April 20, 1995 and April 22, 1996, the Board of Directors declared common stock dividends of 9% and 8%, respectively. On August 15, 1995, the Board of Directors declared a seven-for-five stock split effected in the form of a 40% stock dividend on its common stock. Accordingly, the $.01 par value for the additional shares issued, in respect of the seven-for-five stock split, was transferred from additional paid-in-capital to common stock. Net income per share and weighted average shares outstanding for all periods presented have been restated to reflect the stock dividends and the stock split. NOTE E - PROVISION FOR INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These differences primarily relate to the capitalization of inventory costs, the accrual of warranty costs, and depreciation. The Company's deferred tax assets and liabilities are not significant. The difference between income tax expense and tax computed by applying the federal statutory income tax rate to income before taxes is due primarily to the effect of applicable state income taxes. Income tax expense consists of:
Year ended September 30, -------------------------------- 1995 1996 1997 -------- -------- -------- (In thousands) Current: Federal................................. $ 11,767 $ 17,650 $ 26,126 State................................... 1,274 1,829 2,338 ------- ------- ------- 13,041 19,479 28,464 ------- ------- ------- Deferred: Federal................................. (923) (2,198) (4,385) State................................... (100) (228) (389) ------- ------- ------- (1,023) (2,426) (4,774) ------- ------- ------- $ 12,018 $ 17,053 $ 23,690 ======= ======= =======
25 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE F - EMPLOYEE BENEFIT PLANS The D.R. Horton, Inc. Profit Sharing Plus plan is a 401(k) plan for Company employees. The Company matches 50% of employees' voluntary contributions up to a maximum of 3% of each participant's earnings. Additional employer contributions in the form of profit sharing are at the discretion of the Company. Expenses for this Plan were $233,000, $327,000 and $569,000 for 1995, 1996 and 1997, respectively. The Company's Supplemental Executive Retirement Plans (SERP's) are non-qualified deferred compensation programs that provide benefits payable to certain management employees upon retirement, death, or termination of employment with the Company. SERP No. 1 provides for voluntary deferral of compensation which is invested under a trust agreement. All salary deferrals under this Plan have been accrued and the investments are recorded as an other asset. Under SERP No. 2, the Company accrues an unfunded benefit, as well as an interest factor based upon a predetermined formula. The Company recorded $347,000, $313,000 and $543,000 of expense for SERP No. 2 in 1995, 1996 and 1997, respectively. Effective January 1, 1994, the Company adopted the D.R. Horton, Inc. Stock Tenure Plan (an Employee Stock Ownership Plan), covering those employees generally not participating in certain other D.R. Horton benefit plans. Contributions are made at the discretion of the Company. Expenses related to Company contributions of common stock to the plan of $106,000, $229,000 and $309,000 were recognized for 1995, 1996 and 1997, respectively. In 1996, the Company adopted the D.R. Horton, Inc. Employee Stock Purchase Plan, which allows employees to purchase stock directly from the Company at market value. At September 30, 1997, 219,150 shares of common stock have been reserved for future issuance under the stock tenure and stock purchase plans. The D.R. Horton, Inc. 1991 Stock Incentive Plan provides for the granting of stock options to certain key employees of the Company to purchase shares of common stock. Options have been granted at exercise prices which approximate the market value of the Company's common stock at the date of the grant. Options generally expire 10 years after the dates on which they were granted and vest evenly over the life of the option. At September 30, 1997, 3,145,060 shares of common stock have been authorized for future issuance under this plan. Activity under the plan is:
1995 1996 1997 ------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Prices Options Prices Options Prices --------- -------- --------- -------- --------- -------- Stock Options Outstanding at be- ginning of year.. 992,713 $ 8.60 1,782,517 $ 6.56 2,240,784 $ 7.11 Granted........... 313,000 12.15 559,000 10.15 976,000 10.44 Exercised......... (116,400) 3.84 (124,619) 3.24 (240,554) 4.14 Cancelled......... (19,940) 9.80 (122,022) 8.54 (95,177) 8.71 Effects of stock dividends........ 613,144 6.87 145,908 6.69 -- -- ------- ----- --------- ----- --------- ----- Outstanding at end of year...... 1,782,517 $ 6.56 2,240,784 $ 7.11 2,881,053 $ 8.41 ========= ===== ========= ===== ========= ===== Exercisable at end of year...... 565,551 $ 4.44 659,615 $ 4.74 648,353 $ 5.76 ========= ===== ========= ===== ========= =====
Exercise prices for options outstanding at September 30, 1997, ranged from $1.804 to $10.6875. 26 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) For stock options outstanding at September 30, 1997:
Outstanding Exercisable ------------------------------ ----------------------------- Weighted Weighted Weighted Weighted Average Average Average Average Exercise Price Exercise Maturity Exercise Maturity Range Options Price (Years) Options Price (Years) - --------------- --------- -------- -------- --------- -------- -------- Less than $4... 85,987 $ 1.90 4.0 85,987 $ 1.90 4.0 $4 - $8........ 1,070,486 6.14 6.0 463,672 5.66 5.6 More than $8... 1,724,580 10.13 9.0 98,694 9.62 7.8 --------- ----- ---- ------- ----- ---- Total........ 2,881,053 $ 8.41 7.7 648,353 $ 5.76 5.7 ========= ===== ==== ======= ===== ====
The Company has elected to follow Accounting Principles Board Opinion No. 25 in accounting for its employee stock options. The exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, and therefore no compensation expense is recognized. FAS No. 123 requires disclosure of pro forma income and pro forma income per share as if the fair value based method had been applied in measuring compensation expense for option awards granted in fiscal 1996 and 1997. Management believes the fiscal 1996 and 1997 pro forma amounts may not be representative of the effects of option awards on future pro forma net income and pro forma net income per share because options granted before 1996 are not considered in these calculations. Application of the fair value method, as specified by FAS 123, would decrease net income by $78,000 and $250,000 in 1996 and 1997, respectively. The weighted average fair values of grants made in 1996 and 1997 were $5.13 and $4.77, respectively. The fair values of the options granted were estimated on the date of their grant using the Black-Scholes option pricing model based on the following weighted average assumptions:
1996 1997 ------------- ------------- Risk free interest rate...................... 6.33% 6.12% Expected life (in years)..................... 7.0 7.0 Expected volatility.......................... 36.21% 34.69% Expected dividend yield...................... -- .59%
27 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE G - COMMITMENTS AND CONTINGENCIES The Company is involved in lawsuits and other contingencies in the ordinary course of business. Management believes that, while the ultimate outcome of the contingencies cannot be predicted with certainty, the ultimate liability, if any, will not have a material adverse effect on the Company's financial position. In the ordinary course of business, the Company enters into option agreements to purchase land and developed lots. Cash deposits of approximately $8.0 million, standby letters of credit approximating $2.5 million and promissory notes approximating $1.7 million at September 30, 1997, secure the Company's performance under these agreements. The Company leases office space under noncancelable operating leases. Minimum annual lease payments under these leases at September 30, 1997, are approximately:
(In thousands) 1998..................................... $ 758 1999..................................... 489 2000..................................... 285 2001..................................... 40 ----- $ 1,572 =====
Rent expense approximated $989,000, $1,140,000, and $1,883,000 for 1995, 1996 and 1997, respectively. In the normal course of its business activities, the Company provides standby letters of credit and performance bonds, issued by third parties, to secure performance under various contracts. At September 30, 1997, outstanding standby letters of credit were $7.1 million and performance bonds were $46.8 million. 28 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE H - SUMMARIZED FINANCIAL INFORMATION The 8 3/8% Senior Notes due June, 2004, in the aggregate principal amount of $150,000,000, are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company's direct and indirect subsidiaries other than certain inconsequential subsidiaries. Each of the guarantors is a wholly-owned subsidiary of the Company. Summarized financial information of the Company and its subsidiaries is presented below. Separate financial statements and other disclosures concerning the guarantor subsidiaries are not presented because management has determined that they are not material to investors. As of and for the periods ended: (In thousands)
September 30, 1997 D.R. Horton, Guarantor Nonguarantor Intercompany Inc. Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------ ------------ --------- Total assets....... $ 619,586 $ 456,323 $ 2,065 $(358,180) $ 719,794 Total liabilities.. 395,803 417,284 1,272 (357,345) 457,014 Revenues........... 286,568 550,712 1,513 (1,513) 837,280 Gross profit....... 51,485 100,454 1,226 (1,226) 151,939 Net income......... 34,521 70,942 909 (70,168) 36,204 September 30, 1996 D.R. Horton, Guarantor Nonguarantor Intercompany Inc. Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------ ------------ --------- Total assets....... $ 353,563 $ 181,586 $ 1,117 $(133,353) $ 402,913 Total liabilities.. 197,255 160,019 279 (132,278) 225,275 Revenues........... 269,853 277,483 1,210 (1,210) 547,336 Gross profit....... 47,346 50,936 901 (901) 98,282 Net income......... 30,771 54,368 553 (58,313) 27,379 September 30, 1995 D.R. Horton, Guarantor Nonguarantor Intercompany Inc. Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------ ------------ --------- Total assets....... $ 277,131 $ 151,761 $ 380 $(110,485) $ 318,787 Total liabilities.. 185,028 137,013 29 (109,356) 212,714 Revenues........... 259,165 178,223 576 (576) 437,388 Gross profit....... 44,274 33,372 444 (444) 77,646 Net income......... 18,281 35,336 205 (33,283) 20,539
29 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE I - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly results of operations are: (In thousands, except for per share amounts)
1997 -------------------------------------------------- Three Months Ended -------------------------------------------------- September 30 June 30 March 31 December 31 ------------- --------- ---------- ------------ Revenues.................... $283,207 $250,096 $159,596 $144,381 Gross margin................ 51,595 44,195 29,804 26,345 Net income.................. 12,953 9,753 6,691 6,807 Net income per share........ .34 .26 .20 .21 1996 -------------------------------------------------- Three Months Ended -------------------------------------------------- September 30 June 30 March 31 December 31 ------------- --------- ---------- ------------ Revenues.................... $168,943 $143,283 $114,042 $121,068 Gross margin................ 30,677 25,897 20,175 21,533 Net income.................. 9,408 7,434 5,122 5,415 Net income per share........ .29 .23 .16 .19 1995 -------------------------------------------------- Three Months Ended -------------------------------------------------- September 30 June 30 March 31 December 31 ------------- --------- ---------- ------------ Revenues.................... $132,827 $120,529 $ 87,076 $ 96,956 Gross margin................ 23,992 21,647 15,359 16,648 Net income.................. 6,681 6,090 3,948 3,820 Net income per share........ .24 .22 .14 .14
30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is set forth under the caption "Election of Directors" at pages 3 through 5 and the caption "Section 16(a) Beneficial Ownership Reporting Compliance" at page 12, of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 22, 1998 and incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth under the caption "Executive Compensation" at pages 6 through 11 of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 22, 1998 and incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth under the caption "Beneficial Ownership of Common Stock" at pages 2 and 3 of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 22, 1998 and incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth under the caption "Executive Compensation Transactions with Management" at page 11 of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 22, 1998 and incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)The following documents are filed as part of this report: 1. Financial Statements: See Item 8 above. 2. Financial Statement Schedules: Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission (the "Commission") are not required under the related instructions or are not applicable, and therefore have been omitted. 31 3. Exhibits:
Exhibit Number Exhibit ------- ------- 3.1 -- Amended and Restated Certificate of Incorporation, as amended(1) 3.2 -- Amended and Restated Bylaws (2) 4.1 -- See Exhibits 3.1 and 3.2 4.2 -- Indenture, dated as of June 9, 1997, among the Company, the Guarantors named therein and American Stock Transfer & Trust Company, as Trustee(3) 4.3 -- First Supplemental Indenture, dated as of June 9, 1997, among the Company, the Guarantors named therein and American Stock Transfer & Trust Company, as Trustee(4) 4.4 -- Second Supplemental Indenture, dated as of September 30, 1997, among the Company, the Guarantors named therein and American Stock Transfer & Trust Company, as Trustee(5) 10.1 -- Form of Indemnification Agreement between the Company and each of its directors and executive officers and schedule of substantially identical documents(6) 10.2 -- D.R. Horton, Inc. 1991 Stock Incentive Plan(7)(8) 10.2a -- Amendment No. 1 to 1991 Stock Incentive Plan(7)(8) 10.2b -- Amendment No. 2 to 1991 Stock Incentive Plan(7)(8) 10.2c -- Amendment No. 3 to 1991 Stock Incentive Plan(8)(9) 10.2d -- Amendment No. 4 to 1991 Stock Incentive Plan(8)(9) 10.2e -- Amendment No. 5 to 1991 Stock Incentive Plan (8)(10) 10.2f -- Amendment No. 6 to 1991 Stock Incentive Plan(5)(8) 10.3 -- Form of Non-Qualified Stock Option Agreement (Term Vesting)(11) 10.4 -- Form of Non-Qualified Stock Option Agreement (Performance Vesting)(12) 10.5 -- Form of Incentive Stock Option (Term Vesting)(12) 10.6 -- Form of Incentive Stock Option (Performance Vesting)(12) 10.7 -- Form of Restricted Stock Agreement (Term Vesting)(12) 10.8 -- Form of Restricted Stock Agreement (Performance Vesting)(12) 10.9 -- Form of Stock Appreciation Right Agreement (Term Vesting)(12) 10.10 -- Form of Stock Appreciation Right Agreement (Performance Vesting)(12) 10.11 -- Form of Stock Appreciation Right Notification (Tandem)(12) 10.12 -- Form of Performance Share Notification(12) 10.13 -- Form of Performance Unit Notification(12) 10.14 -- D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 1(8)(13) 10.15 -- D.R. Horton, Inc. Supplemental Executive Retirement Trust No. 1(8)(13) 10.16 -- D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 2(8)(13)
32
Exhibit Number Exhibit ------- ------- 10.17 -- Master Loan and Inter-Creditor Agreement, dated as of June 12, 1997, among D.R. Horton, Inc., as Borrower, NationsBank, N.A., Bank of America National Trust and Savings Association, Fleet National Bank, Bank United, Comerica Bank, The First National Bank of Chicago, Credit Lyonnais New York Branch, PNC Bank, National Association, Amsouth Bank of Alabama, Bank One, Arizona, NA, Societe Generale, Southwest Agency, First American Bank Texas, SSB, Harris Trust and Savings Bank, and Sanwa Bank California as Banks; Bank United, Comerica Bank, Credit Lyonnais New York Branch, The First National Bank of Chicago, and PNC Bank, National Association, as Co-Agents; Fleet National Bank, as Documentation Agent; Bank of America National Trust and Savings Association, as Syndication Agent; and NationsBank, N.A., as Administrative Agent(14) 10.18 -- Restated Working Capital Line of Credit Agreement dated as of July 15, 1997, by and between D.R. Horton, Inc., as Borrower, and Barnett Bank, N.A., as Lender(5) 21.1 -- Subsidiaries of D.R. Horton, Inc. (5) 23.1 -- Consent of Ernst & Young LLP, Fort Worth, Texas(5) 27 -- Financial Data Schedule for year ended September 30, 1997 (5)
- ---------- (1)Incorporated by reference from Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, filed with the Commission on November 22, 1995. (2)Incorporated by reference from Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, filed with the Commission on May 14, 1997. (3)Incorporated by reference from Exhibit 4.1(a) to the Registrant's Registration Statement on Form S-3 (No. 333-27521), filed with the Commission on May 21, 1997. (4)Incorporated by reference from Exhibit 4.1 to the Registrant's Form 8-K/A dated April 1, 1997, filed with the Commission on June 6, 1997. (5)Filed herewith. (6)Incorporated by reference from Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, filed with the Commission on November 22, 1995. (7)Incorporated by reference from the Registrant's Registration Statement on Form S-1 (No. 33-46554) declared effective by the Commission on June 4, 1992. (8)Management contract or compensatory plan or arrangement. (9)Incorporated by reference from the Registrant's Annual Report Form 10-K for the fiscal year ended September 30, 1994, filed with the Commission on December 9, 1994. (10)Incorporated by reference from Exhibit 10.2e to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, filed with the Commission on November 22, 1995. (11)Incorporated by reference from Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-81856), filed with the Commission on July 22, 1994. (12)Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, filed with the Commission on March 29, 1993. (13)Incorporated by reference from the Registrant's Transitional Report on Form 10-K for the period from January 1, 1993 to September 30, 1993, filed with the Commission on December 28, 1993. (14)Incorporated herein by reference from Exhibit 10.1 to the Registrant's Form 8-K dated June 12, 1997, filed with the Commission on June 19, 1997. (b)There have been no reports filed on Form 8-K by the Registrant during the quarter ended September 30, 1997. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: December 8, 1997 D.R. HORTON, INC. By /s/ DONALD R. HORTON --------------------------------- Donald R. Horton, Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ DONALD R. HORTON Chairman of the Board and December 8, 1997 - -------------------------- President (Principal Donald R. Horton Executive Officer) /s/ RICHARD BECKWITT Director December 8, 1997 - -------------------------- Richard Beckwitt /s/ RICHARD I. GALLAND Director December 8, 1997 - -------------------------- Richard I. Galland /s/ RICHARD L. HORTON Director December 8, 1997 - -------------------------- Richard L. Horton /s/ TERRILL J. HORTON Director December 8, 1997 - -------------------------- Terrill J. Horton /s/ DAVID J. KELLER Treasurer, Chief Financial December 8, 1997 - -------------------------- Officer and Director David J. Keller (Principal Financial Officer and Principal Accounting Officer) /s/ FRANCINE I. NEFF Director December 8, 1997 - -------------------------- Francine I. Neff /s/ SCOTT J. STONE Director December 8, 1997 - -------------------------- Scott J. Stone /s/ DONALD J. TOMNITZ Director December 8, 1997 - -------------------------- Donald J. Tomnitz
34 CORPORATE INFORMATION D.R. Horton, Inc. (the "Company") is engaged primarily in the construction and sale of single-family homes. The Company offers high-quality homes with custom features, designed principally for the entry-level and move-up segments. The Company has established a unique marketing niche, offering a broader selection of homes that typically have more amenities and greater design flexibility than homes offered by volume builders, at prices that are generally more affordable than those charged by local custom builders. D.R. Horton homes range in size from 1,000 to 5,000 square feet and are priced from $80,000 to $600,000. For the year ended September 30, 1997, the Company closed 5,018 homes with an average sales price of approximately $166,700. The Company is geographically diversified, operating in 21 states and 28 markets. Plans call for continued expansion in current markets, as well as entry into new markets that have significant entry-level and move-up market segments consistent with the Company's product and pricing strategy. THE BOARD OF DIRECTORS Transfer Agent and Registrar Donald R. Horton American Stock Transfer & Trust Co. Chairman and President (2)(3) New York, NY Richard Beckwitt Executive Vice President and Investor Relations President -Investments Division (2)(3) David J. Keller Richard I. Galland D.R. Horton, Inc. Former Chief Executive Officer and 1901 Ascension Blvd., Suite 100 Chairman of Fina, Inc. (1) (2) Arlington, Texas 76006 (817)856-8200 Richard L. Horton Former Vice President - Dallas/Fort Worth East Division Annual Meeting Terrill J. Horton January 22, 1998, 9:30 a.m. C.S.T. Former Vice President - Dallas/Fort Worth North Division At the Corporate Offices of D.R. Horton, Inc. David J. Keller 1901 Ascension Blvd., Suite 100 Executive Vice President, Treasurer Arlington, Texas 76006 & Chief Financial Officer (2)(3) Francine I. Neff Former Treasurer of the United States (1) Scott J. Stone Former Vice President - Eastern Region Donald J. Tomnitz President - Homebuilding Division - ---------- (1) Audit Committee Member (2) Compensation Committee Member (3) Executive Committee Member 35 EX-4.4 2 SECOND SUPPLEMENTAL INDENTURE DTD 09/30/97 Exhibit 4.4 ================================================================================ D.R. HORTON, INC. AND THE GUARANTORS PARTY HERETO 8 3/8% Senior Notes due 2004 ------------------------ Second Supplemental Indenture Dated as of September 30, 1997 ------------------------ AMERICAN STOCK TRANSFER & TRUST COMPANY, Trustee ================================================================================ SECOND SUPPLEMENTAL INDENTURE dated as of September 30, 1997, and effective as of the dates set forth in Article Two below (this "Supplemental Indenture"), to the Indenture dated as of June 9, 1997 (as amended, modified or supplemented from time to time in accordance therewith, the "Indenture"), by and among D.R. Horton, Inc., a Delaware corporation (the "Company"), each of the Guarantors and AMERICAN STOCK TRANSFER AND TRUST COMPANY, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the holders of Notes (as defined herein): WHEREAS, the Company, the Guarantors and the Trustee have duly authorized the execution and delivery of the Indenture to provide that from time to time newly organized Subsidiaries of the Company may become Restricted Subsidiaries and Guarantors, and that the Company may redesignate an Unrestricted Subsidiary to be a Restricted Subsidiary; WHEREAS, the Company and the Guarantors desire and have requested the Trustee to join them in the execution and delivery of this Supplemental Indenture in order to designate additional Restricted Subsidiaries and Guarantors of the Company's 8 3/8% Senior Notes due 2004 in the aggregate principal amount of up to $250,000,000 (the "Notes"); WHEREAS, Sections 4.05 and 10.01(6) of the Indenture, and the definition of "Unrestricted Subsidiary" in Article Two of the First Supplemental Indenture dated as of June 9, 1997, provide that a supplemental indenture may be entered into by the Company, the Guarantors and the Trustee for such purpose provided certain conditions are met; WHEREAS, the conditions set forth in the Indenture for the execution and delivery of this Supplemental Indenture have been complied with; and WHEREAS, all things necessary to make this Supplemental Indenture a valid agreement of the Company, the Guarantors and the Trustee, in accordance with its terms, and a valid amendment of, and supplement to, the Indenture have been done; NOW, THEREFORE: In consideration of the premises and the purchase and acceptance of the Notes by the holders thereof, the Company and the Guarantors mutually covenant and agree with the Trustee, for the equal and ratable benefit of the holders, that the Indenture is supplemented and amended, to the extent expressed herein, as follows: ARTICLE ONE Scope of Supplemental Indenture; General The changes, modifications and supplements to the Indenture effected by this Supplemental Indenture shall be applicable only with respect to, and govern the terms of, the Notes, and shall not apply to any other Securities that may be issued under the Indenture unless a supplemental indenture with respect to such other Securities specifically incorporates such changes, modifications and supplements. Except as amended hereby, the Indenture and the Notes are in all respects ratified and confirmed and all of their terms shall remain in full force and effect. The recitals of fact contained herein shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of them. The Trustee makes no representations as to the validity or adequacy of this Supplemental Indenture or to its due execution by the Company. Capitalized terms used but not defined herein have the meanings ascribed to such terms in the Indenture. The laws of the State of New York shall govern this Supplemental Indenture, the Notes and the Guarantees. ARTICLE TWO Addition and Removal of Guarantors Section 2.01 Additional Guarantors. Effective as of July 1, 1997, SGS Communities at West Windsor, LLC, a New Jersey limited liability company, and, effective as of September 30, 1997, D.R. Horton San Diego No. 22, Inc., a California corporation, D.R. Horton San Diego No. 23, Inc., a California corporation, D.R. Horton San Diego No. 24, Inc., a California corporation, D.R. Horton San Diego No. 25, Inc., a California corporation, D.R. Horton San Diego No. 26, Inc., a California corporation, D.R. Horton Denver No. 19, Inc., a Colorado corporation, D.R. Horton Denver No. 20, Inc., a Colorado corporation, D.R. Horton Denver No. 21, Inc., a Colorado corporation, D.R. Horton Denver No. 22, Inc., a Colorado corporation, D.R. Horton Denver No. 23, Inc., a Colorado corporation, D.R. Horton Denver No. 24, Inc., a Colorado corporation, D.R. Horton Denver No. 25, Inc., a Colorado corporation, D.R. Horton Denver No. 26, Inc., a Colorado corporation, D.R. Horton Los Angeles No. 18, Inc., a California corporation, D.R. Horton Los Angeles No. 19, Inc., a California corporation, and DRH Tucson Construction, Inc., a Delaware corporation (collectively, the "Additional Guarantors"), shall become parties to the Indenture as Guarantors, guarantee the Notes and become Restricted Subsidiaries. Accordingly, each of the Additional Guarantors hereby agrees to be bound by, and expressly assumes as a Guarantor, the Indenture, particularly Article Nine thereof, and the Guarantee noted on the Notes. In furtherance of Section 4.05 of the Indenture, but not in limitation thereof, each of the Additional Guarantors unconditionally guarantees, on a joint and several basis with all other Guarantors, all of the Company's obligations under the Notes and the Indenture (as it relates to the Notes), all in accordance with the terms set forth in Article Nine of the Indenture and the Guarantee noted on the Notes. Each of the Additional Guarantors hereby authorizes endorsement of such guarantee on the Notes ordered to be authenticated and delivered by Trustee, as contemplated by Exhibit A to the Indenture. The Company, the Trustee and the other Guarantors acknowledge the addition of the Additional Guarantors as Guarantors and Restricted Subsidiaries. Section 2.02 Removal of Guarantors. The Company, the Trustee and the other Guarantors acknowledge that, effective as of July 31, 1997, Meadows III, Ltd. and D.R. Horton - Royalty, Ltd. are no longer parties to the Indenture and therefore are no longer Restricted Subsidiaries or Guarantors, by reason of the (i) liquidation of D.R. Horton - Royalty, Ltd. and distribution of its assets to other Restricted Subsidiaries and Guarantors and (ii) the merger of Meadows III, Ltd. into Meadows II, Ltd., which is a Restricted Subsidiary and Guarantor. SIGNATURES IN WITNESS WHEREOF, the parties have caused this Second Supplemental Indenture to be duly executed, as of the effective dates above written. D.R. Horton, Inc. By: /s/ DAVID J. KELLER ---------------------------------- Name: David J. Keller Title: Executive Vice President GUARANTORS: DRHI, Inc. DRH Construction, Inc. DRH New Mexico Construction, Inc. DRH Tucson Construction, Inc. D.R. Horton Denver Management Company, Inc. D.R. Horton Denver No. 10, Inc. D.R. Horton Denver No. 11, Inc. D.R. Horton Denver No. 12, Inc. D.R. Horton Denver No. 13, Inc. D.R. Horton Denver No. 14, Inc. D.R. Horton Denver No. 15, Inc. D.R. Horton Denver No. 16, Inc. D.R. Horton Denver No. 17, Inc. D.R. Horton Denver No. 18, Inc. D.R. Horton Denver No. 19, Inc. D.R. Horton Denver No. 20, Inc. D.R. Horton Denver No. 21, Inc. D.R. Horton Denver No. 22, Inc. D.R. Horton Denver No. 23, Inc. D.R. Horton Denver No. 24, Inc. D.R. Horton Denver No. 25, Inc. D.R. Horton Denver No. 26, Inc. D.R. Horton, Inc. - Albuquerque D.R. Horton, Inc. - Denver D.R. Horton, Inc. - Minnesota D.R. Horton, Inc. - New Jersey Meadows I, Ltd. Meadows II, Ltd. Meadows III, Ltd. Meadows IX, Inc. Meadows X, Inc. D.R. Horton Los Angeles Holding Company, Inc. D.R. Horton Los Angeles Management Company, Inc. D.R. Horton Los Angeles No. 9, Inc. D.R. Horton Los Angeles No. 10, Inc. D.R. Horton Los Angeles No. 11, Inc. D.R. Horton Los Angeles No. 12, Inc. D.R. Horton Los Angeles No. 13, Inc. D.R. Horton Los Angeles No. 14, Inc. D.R. Horton Los Angeles No. 16, Inc. D.R. Horton Los Angeles No. 17, Inc. D.R. Horton Los Angeles No. 18, Inc. D.R. Horton Los Angeles No. 19, Inc. D.R. Horton, Inc. - Birmingham D.R. Horton, Inc. - Greensboro D.R. Horton San Diego Holding Company, Inc. D.R. Horton San Diego Management Company, Inc. D.R. Horton San Diego No. 9, Inc. D.R. Horton San Diego No. 10, Inc. D.R. Horton San Diego No. 11, Inc. D.R. Horton San Diego No. 12, Inc. D.R. Horton San Diego No. 13, Inc. D.R. Horton San Diego No. 14, Inc. D.R. Horton San Diego No. 15, Inc. D.R. Horton San Diego No. 16, Inc. D.R. Horton San Diego No. 17, Inc. D.R. Horton San Diego No. 18, Inc. D.R. Horton San Diego No. 19, Inc. D.R. Horton San Diego No. 20, Inc. D.R. Horton San Diego No. 21, Inc. D.R. Horton San Diego No. 22, Inc. D.R. Horton San Diego No. 23, Inc. D.R. Horton San Diego No. 24, Inc. D.R. Horton San Diego No. 25, Inc. D.R. Horton San Diego No. 26, Inc. D.R. Horton, Inc. - Torrey S.G. Torrey Atlanta, Ltd. By: /s/ DAVID J. KELLER ---------------------------------- Name: David J. Keller Title: Treasurer SGS COMMUNITIES AT GRANDE QUAY, LLC By: Meadows IX, Inc., a member By: /s/ DAVID J. KELLER ---------------------------------- Name: David J. Keller Title: Treasurer and By: Meadows X, Inc., a member By: /s/ DAVID J. KELLER ---------------------------------- Name: David J. Keller Title: Treasurer SGS COMMUNITIES AT WEST WINDSOR, LLC By: Meadows IX, Inc., a member By: /s/ DAVID J. KELLER ---------------------------------- Name: David J. Keller Title: Treasurer and By: D.R. Horton, Inc.- New Jersey, a member By: /s/ DAVID J. KELLER ---------------------------------- Name: David J. Keller Title: Treasurer D.R. HORTON MANAGEMENT COMPANY, LTD. D.R. HORTON - TEXAS, LTD. D.R. HORTON - ROYALTY, LTD. By: Meadows I, Ltd., its general partner By: /s/ DAVID J. KELLER ---------------------------------- Name: David J. Keller Title: Treasurer AMERICAN STOCK TRANSFER & TRUST COMPANY, as Trustee By: /s/ HERBERT J. LEMMER ---------------------------------- Name: Herbert J. Lemmer Title: Vice President EX-10.2 3 AMENDMENT NO. 6 TO 1991 STOCK INCENTIVE PLAN Exhibit 10.2f D.R. HORTON, INC. 1991 STOCK INCENTIVE PLAN Amendment No. 6 The D.R. Horton, Inc. 1991 Stock Incentive Plan, as amended (the "Plan"), was amended by the Board of Directors of the Company on November 18, 1997, in the following respects: 1. The first sentence of Paragraph 3 of the Plan is hereby amended to read in its entirety as follows: The shares of Common Stock and any other Company Security which may be (a) sold upon the exercise of Option Rights, (b) delivered upon the exercise of Appreciation Rights, (c) granted or sold as Restricted Stock and released from substantial risks of forfeiture and restrictions on transfer thereof or (d) delivered in payment of any Performance Units or as Performance Shares (or in lieu thereof), shall not exceed in the aggregate 6,000,000 shares, subject to adjustment as provided in Paragraph 10 of this Plan. 2. In all other respects, the Plan as previously approved is hereby ratified and confirmed. November 18, 1997 EX-10.18 4 RESTATED WORKING CAPITAL LINE OF CREDIT AGMT Exhibit 10.18 RESTATED WORKING CAPITAL LINE OF CREDIT AGREEMENT among D.R. HORTON, INC., as Borrower and BARNETT BANK, N.A., as Lender RESTATED WORKING CAPITAL LINE OF CREDIT AGREEMENT THIS RESTATED WORKING CAPITAL LINE OF CREDIT AGREEMENT dated as of the 15th day of July, 1997, by and between D. R. HORTON, INC., a Delaware corporation, whose address is 1901 Ascension Boulevard, Suite 100, Arlington, Texas 76006, and BARNETT BANK, N.A., a national banking association, whose address is P.O. Box 678267, Orlando, Florida 32867-8267, Attention: Closing Department Manager restates that certain Working Capital Line of Credit Agreement dated March 1, 1997, between the Borrower and the Lender. R E C I T A L S A. The Borrower has requested the Lender to lend to the Borrower up to the sum of TWENTY FIVE MILLION DOLLARS ($25,000,000.00) under a revolving line of credit; and B. The Lender is willing to make such loan upon the terms and conditions set forth in the Loan Documents (as that term is hereinafter defined). NOW, THEREFORE, in consideration of the mutual promises, conditions, represen tations and warranties hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency whereof is hereby acknowledged, the parties covenant and agree as follows: ARTICLE I DEFINITIONS In addition to the terms as may be defined throughout this Agreement, or in any Loan Document, the following terms shall be defined for use throughout this Agreement as follows: Section 1.1. Acquisition. Whether by purchase, lease, exchange, issuance of stock or other equity or debt securities, merger, reorganization or any other method, (a) any acquisition by the Borrower or any of its Restricted Subsidiaries of Inventory, (b) any acquisition by the Borrower or any of its Restricted Subsidiaries of any other Person, which Person shall then become a Subsidiary of the Borrower or any such Restricted Subsidiary or (c) any acquisition by the Borrower or any of its Restricted Subsidiaries of all or any substantial part of the assets of any other Person. Section 1.2. Acquisition Carve Out Notice. The written notice by the Borrower delivered to the Lender not later than the end of the fiscal quarter following the fiscal quarter in which an Acquisition is consummated notifying such Persons of the election by the Borrower to initiate a Financial Covenant Carve Out as a result of such Acquisition. Contemporaneously with the delivery of an Acquisition Carve Out Notice, the Borrower shall deliver to the Lender a plan of action reflecting that the Borrower will be in compliance with the covenants set forth in Sections 6.9(1), 6.10(1), 6.10(2) and 6.10(3) hereof on or prior to the last day of the applicable Financial Covenant Carve Out and failure to deliver such plan of action shall render such Acquisition Carve Out Notice ineffective. Section 1.3. Acquisition Cost. 1.3(1) Developed Lots. If the subject is a Developed Lot(s), costs shall include the purchase price plus the amount paid for any impact fees paid by the Borrower and its Restricted Subsidiaries with respect to such Developed Lot(s). If the Developed Lot(s) was developed by the Borrower or its Restricted Subsidiaries, costs shall also include land costs, site development and soft costs (engineering, interest, etc.) paid by Borrower and its Restricted Subsidiaries, associated with the development of such lots. 1.3(2) Lots Under Development. Costs in connection with Lots Under Development shall include land costs, site development and soft costs (engineering, interest, etc.) paid by Borrower and its Restricted Subsidiaries, associated with the development of such lots. Administrative Costs shall be excluded from Acquisition Costs of both Developed Lots or Lots Under Development. Section 1.4. Acquisition Suspension Period. An Acquisition Suspension Period shall occur upon delivery by the Borrower to the Lender of an Acquisition Carve Out Notice and shall continue until the earlier to occur of (a) the last day of the third fiscal quarter immediately following the fiscal quarter in which the Acquisition giving rise to such Acquisition Carve Out Notice was consummated, or (b) the last day of the Borrower's fiscal quarter in which the Leverage Ratio (determined in accordance with Section 6.9(1) hereof) exceeds 2.6 to 1.0. Notwithstanding the foregoing, the maximum Leverage Ratio as of the last day of each fiscal quarter during an Acquisition Suspension Period shall be 2.6 to 1.0, and failure to comply with such Leverage Ratio shall be an Event of Default. Section 1.5. Adjusted LIBOR Rate. The interest rate established on the Interest Rate Adjustment Date for any Interest Period. Section 1.6. Administrative Costs. Costs and expenses incurred by the Borrower or its Restricted Subsidiaries in connection with (a) the marketing and selling of Inventory which is part of the Loan Inventory and (b) the administration, management and operation of the Borrower's and its Restricted Subsidiaries' businesses (excluding, without limitation, Interest Expense and fees payable hereunder). Section 1.7. Advance or Advances. Amounts advanced by the Lender to the Borrower pursuant to this Agreement. Section 1.8. Agreement. This Restated Working Capital Line of Credit Agreement. Section 1.9. Agreement Date. The date as of which the Borrower and the Lender execute this Agreement. Section 1.10. Applicable Law. In respect of any Person, all provisions of constitutions, statutes, rules, regulations, and orders of governmental bodies or regulatory agencies applicable to such Persons including, without limitation, all orders and decrees of all courts and arbitrators in proceedings or actions to which the Person in question is a party or by which it is bound. Section 1.11. Applicable Margin. The interest rate margins set forth on Exhibit E attached hereto applicable to the Note Rate determined based upon the Leverage Ratio for the fiscal quarter end being tested or the most recently completed fiscal quarter for which financial statements have been delivered or the Borrower's S&P/Moody's Rating, as applicable. The Applicable Margin shall be adjusted on the Interest Rate Adjustment Date. At all times during an Event of Default hereunder, the Applicable Margin shall be the Applicable Margin set forth at Level VI of Exhibit E. In the event that the Borrower qualifies for more than one level of pricing, the Applicable Margin shall be based upon the lowest level (with Level I being the lowest level) for which the Borrower is qualified. The Applicable Margin from the Agreement Date until the first adjustment date as provided above will be based upon the Leverage Ratio for the most recently completed fiscal quarter of the Borrower prior to the Agreement Date. Section 1.12. Authorized Signatory. With respect to the Borrower, such personnel of the Borrower as set forth in an incumbency certificate of the Borrower delivered to the Lender on the Agreement Date (or any duly executed incumbency certificate delivered after the Agreement Date) and certified therein as being duly authorized by the Borrower to execute documents, agreements, and instruments on behalf of the Borrower. Section 1.13. Bank Group Line. The credit accommodations described in and evidenced by that certain Master Loan and Inter-Creditor Agreement among D. R. Horton, Inc., as "Borrower", NationsBank, N.A., Bank of America National Trust and Savings Association; Fleet National Bank, Bank United, Comerica Bank, The First National Bank of Chicago, Credit Lyonnais New York Branch, PNC Bank, National Association, AmSouth Bank of Alabama, Bank One, Arizona, NA, Societe Generale, Southwest Agency, First American Bank Texas, SSB, Harris Trust and Savings Bank and Sanwa Bank California, as "Banks"; and Bank United, Comerica Bank, Credit Lyonnais New York Branch, The First National Bank of Chicago, and PNC Bank, National Association, as "Co-Agents"; and Fleet National Bank, as "Documentation Agent; and Bank of America National Trust and Savings Association, as "Syndication Agent"; and NationsBank, N.A., as "Administrative Agent dated as of June 12, 1997. Section 1.14. Borrower. D.R. HORTON, INC., a Delaware corporation Section 1.15. Borrowing Base Report. Consists of the Summary Borrowing Base Report and Detailed Borrowing Base Report which reflect inventory that the Borrower desires to have designated as Loan Inventory. Section 1.16. Business Banking Day. Each day other than a Saturday, a Sunday or any holiday on which commercial banks in Jacksonville, Florida are closed for business. Section 1.17. Change of Control. Either (i) any sale, lease or other transfer (in one transaction or a series of transactions) of all or substantially all of the consolidated assets of the Borrower and its Restricted Subsidiaries to any Person (other than a Restricted Subsidiary of the Borrower), provided that a transaction where the holders of all classes of Common Equity of the Borrower immediately prior to such transaction own, directly or indirectly, 50% or more of all classes of Common Equity of such Person immediately after such transaction shall not be a Change of Control; (ii) a "person" or "group" within the meaning of Section 13(d) of the Exchange Act (other than the Borrower or Donald R. Horton, his wife, children or grandchildren, or Terrill J. Horton, or any trust or other entity formed or controlled by Donald R. Horton, his wife, children or grandchildren, or Terrill J. Horton)) becomes the "beneficial owner" (as defined in Rule 13d-8 under the Exchange Act) of Common Equity of the Borrower representing more than 50% of the voting power of the Common Equity of the Borrower; (iii) Continuing Directors cease to constitute at least a majority of the Board of Directors of the Borrower; or (iv) the stockholders of the Borrower approve any plan or proposal for the liquidation or dissolution of the Borrower, provided that a liquidation or dissolution of the Borrower which is part of a transaction that does not constitute a Change of Control under the proviso contained in clause (i) above shall not constitute a Change of Control. Section 1.18. Closing Date. The date contained in the first paragraph of this Agreement. Section 1.19. Closed Sales. For any calculation period, sales of Developed Lots containing Dwellings which have been closed by the Borrower and all Restricted Subsidiaries. Closed Sales shall include Developed Lots containing Dwellings owned by any Person which became a Restricted Subsidiary after February 14, 1997 for which sales have closed during the applicable calculation period. Closed Sales shall include closings attributable to acquisitions by the Borrower and/or by its Restricted Subsidiaries or when substantially all assets owned by any Person were acquired by the Borrower and/or Restricted Subsidiaries after February 14, 1997. Section 1.20. Code. The Internal Revenue Code of 1986, as amended. Section 1.21. Common Equity. With respect to any Person, capital stock of such Person that is generally entitled to (i) vote in the election of directors of such Person, or (ii) if such Person is not a corporation, vote or otherwise participate in the selection of the governing body, partners, managers or others that will control the management or policies of such Person. Section 1.22. Construction Costs. All costs accepted by the Lender actually incurred by the Borrower or its Restricted Subsidiaries with respect to the construction of a Dwelling as of the date of determination by the Lender, which shall include direct costs associated with a given Dwelling's construction (including Lot) plus indirect costs such as real estate taxes and interest costs allocated to the Dwelling during the construction phase. Direct cost is defined as costs for which a "hard" charge has been allocated (to the Dwelling being constructed) without consideration for any allocable soft costs (promotional materials, sales effort costs, overhead, supervision, etc.). Excluded from Construction Costs are (a) projected costs and costs for materials or labor not yet delivered to, provided to or incorporated into such Dwelling and (b) Administrative Costs. Section 1.23. Continuing Director. A director who either was a member of the board of directors of the Borrower on the Agreement Date or who became a director of the Borrower subsequent to such date and whose election, or nomination for election by the Borrower's stockholders, was duly approved by a majority of the Continuing Directors on the board of directors of the Borrower at the time of such approval, either by a specific vote or by approval of the proxy statement issued by the Borrower on behalf of the entire board of directors of the Borrower in which such individual is named as nominee for a director. Section 1.24. Default. Any of the events specified in Article VII hereof, provided that any requirement for notice or lapse of time, or both, has been satisfied. Section 1.25. Default Rate. The Default Rate as defined in the Note. Section 1.26. Detailed Borrowing Base Report. A unit-by-unit inventory summary of the Loan Inventory in form acceptable to Lender and certified as true and correct by an Executive Officer of the Borrower containing, at a minimum, the cost funded to date for each Dwelling Lot, each Development Lot and each Lot Under Development including, but not limited to those elements of cost set forth in Sections 1.1, 1.6 and 1.22 hereof. Section 1.27. Developed Lots. Subdivision lots owned by the Borrower or its Restricted Subsidiaries , subject to a recorded plat, which the Borrower has designated and Lender has accepted to be included and are included as "Developed Lots" in the calculation of the Loan Funding Availability (exclusive of any Dwelling Lot). An individual Developed Lot is sometimes referred to herein as a "Developed Lot." Section 1.28. Dwelling. A house which the Borrower or any Restricted Subsidiary has constructed or is constructing on a Developed Lot which has been designated as a Dwelling Lot. Section 1.29. Dwelling Lots. Lots with Dwellings which the Borrower or any Restricted Subsidiary has designated and Lender has accepted to be included and are included as "Dwelling Lots" in the calculation of the Loan Funding Availability. The term "Dwelling Lot" includes the Dwelling located thereon. An individual Dwelling Lot is sometimes referred to herein as a "Dwelling Lot." Section 1.30. EBITDA. With respect to the Borrower and all Restricted Subsidiaries, earnings for the preceding twelve (12) months (including, without limitation, dividends from Unrestricted Subsidiaries including, without limitation, net income (or loss) of any Person that accrued prior to the date that such Person becomes a Restricted Subsidiary or is merged with or into or consolidated with the Borrower or any of its Restricted Subsidiaries) before interest incurred, state and federal income taxes paid, franchise taxes paid and depreciation and amortization, all in accordance with GAAP. Section 1.31. ERISA. The Employee Retirement Income Security Act of 1974, as in effect on the Agreement Date and as such Act may be amended thereafter from time to time. Section 1.32. ERISA Affiliate. (a) Any corporation which is a member of the same controlled group of corporations (within the meaning of Code Section 414(b)) as is the Borrower, (b) any other trade or business (whether or not incorporated) under common control (within the meaning of Code Section 414(c)) with the Borrower, (c) any other corporation, partnership or other organization which is a member of an affiliated service group (within the meaning of Code Section 414(m)) with the Borrower, or (d) any other entity required to be aggregated with the Borrower pursuant to regulations under Code Section 414(o). Section 1.33. Event of Default. Any event specified in Article VI hereof and any other event which with any passage of time or giving of notice (or both) would constitute such event a Default. Section 1.34. Exchange Act. The Securities Exchange Act of 1934, as amended. Section 1.35. Executive Officer. The President, any Executive Vice President, Vice President, Assistant Vice President, Secretary, Assistant Secretary or Treasurer of the Borrower. Section 1.36. Financial Covenant Carve Out. The Borrower's compliance with either Sections 6.9(1), 6.10(1), 6.10(2) and 6.10(3) hereof during any Acquisition Suspension Period or with Section 6.9(1) hereof during any Operational Suspension Period shall be suspended; provided, however, that there shall be no more than one Financial Covenant Carve Out in any period of twelve (12) consecutive calendar months beginning with the month in which the Financial Covenant Carve Out was elected, and provided, further, however, that no Financial Covenant Carve Out shall commence unless the Borrower was in compliance with all covenants for not less than one full fiscal quarter immediately preceding any such Financial Covenant Carve Out Notice. Section 1.37. Fixed Charges. The aggregate consolidated interest incurred of the Borrower and its Restricted Subsidiaries for the most recently completed four (4) fiscal quarters for which results have been reported to Lender. Section 1.38. Force Majeure. An occurrence outside the control of the Borrower which cannot be avoided by the exercise of due care by the Borrower which delays performance by the Borrower in the nature of and including but not limited to strikes, lockouts, unavailability of materials, power failure, riots, war or destructive natural causes. The phrase "subject to Force Majeure" as used herein shall mean that the time period for the Borrower's performance shall be extended by a length of time equivalent to the period during which the occurrence constituting Force Majeure shall exist. Notwithstanding the foregoing, in no event shall the Borrower's obligations to make payments under the Note be delayed or extended. Section 1.39. Funding Period. A period commencing on the day immediately following the date that the Loan Funding Availability is established pursuant to Section 5.1(c) hereof by the Lender and ending on the date that the Loan Funding Availability next is established pursuant to Section 5.1(c) hereof by the Lender. Section 1.40. GAAP. As in effect as of the Agreement Date, generally accepted accounting principles consistently applied. Section 1.41. Governmental Authority. Any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. Section 1.42. Guaranty or Guaranteed. As applied to an obligation (each a "primary obligation"), shall mean and include (a) any guaranty, direct or indirect, in any manner, of any part or all of such primary obligation, and (b) any agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of any part or all of such primary obligation, including, without limiting the foregoing, and any obligation of such Person (the Primary obligor"), whether or not contingent, (i) to purchase any such primary obligation or any property or asset constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or-payment of such primary obligation or (2) to maintain working capital, equity capital or the net worth, cash flow, solvency or other balance sheet or income statement condition of any other Person, (iii) to purchase property, assets, securities or services primarily for the purpose of assuring the owner or holder of any primary obligation of the ability of the primary obligor with respect to such primary obligation to make payment thereof or (iv) otherwise to assure or hold harmless the owner or holder of such primary obligation against loss in respect thereof. Section 1.43. Guarantors. DRH CONSTRUCTION, INC., a Delaware corporation DRH NEW MEXICO CONSTRUCTION, INC., a Delaware corporation DRHI, INC., a Delaware corporation D.R. HORTON, INC. - ALBUQUERQUE, a Delaware corporation D.R. HORTON, INC. - MINNESOTA, a Delaware corporation D.R. HORTON LOS ANGELES HOLDING COMPANY, INC., a California corporation D.R. HORTON LOS ANGELES MANAGEMENT COMPANY, INC., a California corporation D.R. HORTON LOS ANGELES NO. 9, INC., a California corporation D.R. HORTON LOS ANGELES NO. 10, INC., a California corporation D.R. HORTON LOS ANGELES NO. 11, INC., a California corporation D.R. HORTON LOS ANGELES NO. 12, INC., a California corporation D.R. HORTON LOS ANGELES NO. 13, INC., a California corporation D.R. HORTON LOS ANGELES NO. 14, INC., a California corporation D.R. HORTON LOS ANGELES NO. 16, INC., a California corporation D.R. HORTON LOS ANGELES NO. 17, INC., a California corporation D.R. HORTON MANAGEMENT COMPANY, LTD., a Texas limited partnership D.R. HORTON - ROYALTY, LTD., a Texas limited partnership D.R. HORTON, INC. - BIRMINGHAM, an Alabama corporation D.R. HORTON, INC. - GREENSBORO, a Delaware corporation D.R. HORTON SAN DIEGO HOLDING COMPANY, INC., a California corporation D.R. HORTON SAN DIEGO MANAGEMENT COMPANY, INC., a California corporation D.R. HORTON SAN DIEGO NO. 9, INC., a California corporation D.R. HORTON SAN DIEGO NO. 10, INC., a California corporation D.R. HORTON SAN DIEGO NO. 11, INC., a California corporation D.R. HORTON SAN DIEGO NO. 12, INC., a California corporation D.R. HORTON SAN DIEGO NO. 13, INC., a California corporation D.R. HORTON SAN DIEGO NO. 14, INC., a California corporation D.R. HORTON SAN DIEGO NO. 15, INC., a California corporation D.R. HORTON SAN DIEGO NO. 16, INC., a California corporation D.R. HORTON SAN DIEGO NO. 17, INC., a California corporation D.R. HORTON SAN DIEGO NO. 18, INC., a California corporation D.R. HORTON SAN DIEGO NO. 19, INC., a California corporation D.R. HORTON SAN DIEGO NO. 20, INC., a California corporation D.R. HORTON SAN DIEGO NO. 21, INC., a California corporation D.R. HORTON - TEXAS, LTD., a Texas limited partnership, by D.R. Horton, Inc., its authorized agent D.R. HORTON, INC. - NEW JERSEY, a Delaware corporation D.R. HORTON, INC. - DENVER, a Delaware corporation D.R. HORTON DENVER MANAGEMENT COMPANY, INC., a Colorado corporation D.R. HORTON DENVER NO. 10, INC., a Colorado corporation D.R. HORTON DENVER NO. 11, INC., a Colorado corporation D.R. HORTON DENVER NO. 12, INC., a Colorado corporation D.R. HORTON DENVER NO. 13, INC., a Colorado corporation D.R. HORTON DENVER NO. 14, INC., a Colorado corporation D.R. HORTON DENVER NO. 15, INC., a Colorado corporation D.R. HORTON DENVER NO. 16, INC., a Colorado corporation D.R. HORTON DENVER NO. 17, INC., a Colorado corporation D.R. HORTON DENVER NO. 18, INC., a Colorado corporation MEADOWS I, LTD., a Delaware corporation MEADOWS II, LTD., a Delaware corporation MEADOWS III, LTD., a Delaware corporation MEADOWS IX, INC., a New Jersey corporation MEADOWS X, INC., a New Jersey corporation SGS COMMUNITIES AT GRANDE QUAY, L.L.C., a New Jersey limited liability company, by Meadows IX and Meadows X, New Jersey corporations, as members D.R. HORTON, INC. - TORREY, a Delaware corporation S.G. TORREY ATLANTA, LTD., a Georgia corporation Together with each additional Restricted Subsidiary of Borrower as may from time to time deliver a Guaranty of the Loan which Guaranty is accepted by Lender. Section 1.44. Indebtedness. With respect to any specified Person, (a) all items, except items of (i) shareholders' and partners' equity, (ii) capital stock, (iii) surplus, (iv) general contingency or deferred tax reserves, (v) liabilities for deposits and (vi) deferred income, which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person, (b) all direct or indirect obligations secured by any Lien to which any property or asset owned by such Person is subject, whether or not the obligation secured thereby shall have been assumed, and (c) all reimbursement obligations with respect to outstanding letters of credit. Section 1.45. Indebtedness for Money Borrowed. With respect to any specified Person, all money borrowed by such Person and Indebtedness represented by notes payable by such Person and drafts accepted representing extensions of credit to such Person, all obligations of such Person evidenced by bonds, debentures, notes, or other similar instruments, all Indebtedness of such Person upon which interest charges are customarily paid, and all Indebtedness of such Person issued or assumed as full or partial payment for property or services, whether or not any such notes, drafts, obligations, or Indebtedness represent Indebtedness for money borrowed. For purposes of this definition, interest which is accrued but not paid on the original due date or within any applicable cure or grace period as provided by the underlying contract for such interest shall be deemed Indebtedness for Money Borrowed. Section 1.46. Interest Expense. In respect of any period, an amount equal to the sum of the interest incurred during such period based on a stated interest rate with respect to Indebtedness for Money Borrowed of the Borrower and its Restricted Subsidiaries on a consolidated basis. Section 1.47. Interest Period. Each period commencing on each Interest Rate Adjustment Date and ending on the next Interest Rate Adjustment Date. Section 1.48. Interest Rate Adjustment Date. The 1st day of January, April, July and October of each year commencing July 1, 1997. Section 1.49. Inventory. All real and personal property, improvements and fixtures owned by the Borrower or the Restricted Subsidiaries, including but not limited to all Land Parcels, Lots Under Development, Developed Lots and Dwelling Lots. Section 1.50. Land Parcels. Parcels of land owned by the Borrower or any of its Restricted Subsidiaries which are, as of the date of determination, not scheduled for commencement of development into Developed Lots during the twelve (12) calendar months immediately following such date of determination and which the Borrower has designated as "Land Parcels." An individual Land Parcel is sometimes referred to as a "Land Parcel." Section 1.51. Lender. Barnett Bank, N.A. Section 1.52. Letters of Credit. Letters of credit issued for the account of the Borrower to support obligations of the Borrower or any of its Affiliates, including but not limited to earnest money payments under option contracts, project completion performance or project maintenance (but not credit enhancement). An individual Letter of Credit is sometimes referred to as a "Letter of Credit". Section 1.53. Leverage Ratio. As of the last day of each fiscal quarter of the Borrower, the ratio of (a) the Net Total Liabilities of the Borrower and its Restricted Subsidiaries on a consolidated basis on such date to (b) Tangible Net Worth of the Borrower and its Restricted Subsidiaries on a consolidated basis for the fiscal quarter end being tested. Section 1.54. LIBOR Rate. The offered rate for deposits in United States dollars in the London Interbank market for a three month period which appears on the Reuters Screen LIBO Page as of 11:00 a.m. (London time) on the day that is two London Banking Days (as defined herein) preceding the first Business Banking Day (as defined herein) of the Interest Period. If at least two such offered rates appear on the Reuters Screen LIBO Page, the rate will be the arithmetic mean of such offered rates. The Lender may, in its discretion, use any other publicly available index or reference rate showing rates offered for United States dollar deposits in the London Interbank market as of the applicable date. In addition, the Lender may, in its discretion, use rate quotation for a ninety (90) day period in lieu of a quotation for a three (3) month period. Section 1.55. Lien. With respect to any property, any mortgage, lien, pledge, assignment, charge, security interest, title retention agreement, levy, execution, seizure, attachment, garnishment, or other encumbrance of any kind in the nature of any of the foregoing in respect of such property, whether or not choate, vested, or perfected. Section 1.56. Loan Amount. TWENTY FIVE MILLION DOLLARS ($25,000,000.00). Section 1.57. Loan Documents. This Agreement, the Note and any and all other documents evidencing the Note as the same may be amended, substituted, replaced, extended or renewed from time to time. Section 1.58. Loan Funding Availability. The amount of Unsecured Indebtedness and unreimbursed draws under Letters of Credit which the Borrower may incur as established pursuant to Section 5.1 hereof, at any applicable time, by the Lender based on the Loan Inventory. Section 1.59. Loan Inventory. Shall consist of Lots Under Development, Developed Lots, and Dwelling Lots which are not encumbered by a Lien or Liens (other than any Permitted Encumbrance) and which have been designated as Loan Inventory to be utilized for the purpose of calculating Funding Availability under this Agreement. Section 1.60. Loan. Collectively, amounts advanced by the Lender to the Borrower under the Loan Documents evidenced by the Note. Section 1.61. London Banking Day. Each day other than a Saturday, a Sunday or any holiday on which commercial banks in London, England are closed for business. Section 1.62. Lots Under Development. Land Parcels which are, as of the date of determination, being developed into Developed Lots or which are scheduled for the commencement of development into Developed Lots within twelve (12) calendar months after the date of determination, and which the Borrower has designated and the Lender has accepted to be included and are included as "Lots Under Development" in the calculation of the Funding Availability. An individual Lot Under Development is sometimes referred to as a "Lot Under Development." Section 1.63. Maturity Date. The date when the Loan is due and payable as defined in the Note. Section 1.64. Models. A Dwelling Lot containing a dwelling unit which is designated by the Borrower as a model unit for use in marketing and promoting the sale of Dwelling Lots. Section 1.65. Moody's Rating. At any time, with respect to any Person, the rating in effect at such time assigned by Moody's Investors Service, Inc. for the long term senior unsecured debt of such Person. Section 1.66. Net Total Liabilities. At any time, Total Liabilities of the Borrower and its Restricted Subsidiaries less cash and cash equivalents of the Borrower and its Restricted Subsidiaries. Section 1.67. Note. Consolidated Promissory Note in the principal amount of TWENTY FIVE MILLION DOLLARS ($25,000,000.00) of even date herewith. Section 1.68. Note Rate. The LIBOR Rate plus the Applicable Margin. Section 1.69. Obligations. (a) All payment and performance obligations of the Borrower and all other obligors to the Lender under the Loan Documents, as they may be amended from time to time, or as a result of making the Loan, and (b) the obligation to pay an amount equal to the amount of any and all damages which the Borrower is obligated to pay pursuant to the Loan Documents to, or on behalf of, the Lender, which they may suffer by reason of a breach by any of the Borrower or any other obligor of any obligation, covenant, or undertaking with respect to this Agreement or any other Loan Document. Section 1.70. Operational Carve Out Notice. The written notice by the Borrower delivered to the Lender within sixty (60) days from the end of the fiscal quarter for which this election is made notifying such Persons of the election by the Borrower to initiate a Financial Covenant Carve Out as a result of normal operational performance. Contemporaneously with the delivery of an Operational Carve Out Notice, the Borrower shall provide to the Lender a plan of action reflecting that the Borrower will be in compliance with Section 6.9(1) hereof on or prior to the last day of the applicable Financial Covenant Carve Out, and the failure to deliver such plan of action shall render such Operational Carve Out Notice ineffective. Section 1.71. Operational Suspension Period. An Operational Suspension Period shall occur upon delivery by the Borrower to the Lender of an Operational Carve Out Notice and shall continue until the earlier to occur of (a) the last day of the second fiscal quarter immediately following the fiscal quarter for which such Operational Carve Out Notice was delivered, or (b) the last day of the Borrower's fiscal quarter on which the Leverage Ratio is to be determined in accordance with Section 6.9(1) hereof, if on such date the Leverage Ratio (determined in accordance with Section 6.9(1) hereof exceeds 2.5 to 1.0. Notwithstanding the foregoing, the maximum Leverage Ratio for the Borrower during an Operational Suspension Period shall be 2.5. to 1.0 at the end of each fiscal quarter of the Borrower, and failure to comply with such Leverage Ratio shall be an Event of Default. Section 1.72. Permitted Encumbrances. Liens, encumbrances, easements and other matters which (a) are in favor of Lender to secure the subject facility, (b) are on real estate for real estate taxes not yet delinquent, (c) are for taxes, assessments, judgments, governmental charges or levies or claims the non-payment of which is being diligently contested in good faith by appropriate proceedings and for which adequate reserves have been set aside on the Borrower's books (but only so long as no foreclosure, distraint sale or similar proceedings have been commenced with respect thereto and remain unstayed for a period for thirty (30) days after their commencement), (d) are in favor of carriers, warehousemen, mechanics, laborers and materialmen incurred in the ordinary course of business for sums not yet past due or being diligently contested in good faith (if adequate reserves are being maintained by the Borrower with respect thereto), (e) are incurred in the ordinary course of business in connection with worker's compensation and unemployment insurance, or (f) are easements, rights-of-way, restrictions or similar encumbrances on the use of real property which does not interfere with the ordinary conduct of business of the Borrower or materially detract from the value of such real property. Section 1.73. Person. An individual, corporation, partnership, limited liability company, trust, or unincorporated organization, or a government or any agency or political subdivision thereof. Section 1.74. Plan. An employee benefit plan within the meaning of Section 3(3) of ERISA maintained by or contributed to by the Borrower or any ERISA Affiliate. Section 1.75. Reconciliation Date. Two (2) Business Days after the Borrower's receipt of notice from the Lender pursuant to Section 5.1(4) hereof that the outstanding principal balance of the Unsecured Indebtedness plus unreimbursed draws under Letters of Credit issued for the account of Borrower exceeds the Loan Funding Availability. Section 1.76. Reportable Event. Shall have the meaning set forth in Section 4043(b) of ERISA. Section 1.77. Request for Advance. Any certificate signed by an Authorized Signatory of the Borrower requesting an Advance hereunder which will increase the aggregate amount of the Loan outstanding, which certificate shall be denominated a "Request for Advance," and shall be in substantially the form of Exhibit A attached hereto. Each Request for Advance shall, among other things, (a) specify the date of the Advance, which shall be a Business Day, (b) specify the amount of the Advance, (c) state that there shall not exist, on the date of the requested Advance and after giving effect thereto, a Default or an Event of Default, and (d) state that all conditions precedent to the making of the Advance have been satisfied. Section 1.78. Restricted Subsidiaries. Any Subsidiary of the Borrower which has been designated as a Restricted Subsidiary by the Borrower and from which the Lender is to receive a Subsidiary Guaranty, including, without limitation, the Guarantors. Section 1.79. Speculative Lot. Any Dwelling Lots having a fully or partially constructed dwelling unit thereon which Dwelling Lot is not subject to a bona fide contract for the sale of such Dwelling Lot to a third party, excluding Developed Lots containing Dwellings used as Models. Section 1.80. S&P Rating. At any time, with respect to any Person, the rating in effect at such time assigned by Standard and Poor's Ratings Group, a division of McGraw Hill, Inc., for the long term senior unsecured debt of such Person. Section 1.81. S&P/Moody's Rating. At any time, with respect to any Person, the ratings in effect at such time assigned by Standard and Poor's Ratings Group, a division of McGraw Hill, and Moody's Investors Service, Inc. for the long term senior unsecured debt of such Person. Section 1.82. Subsidiary. As applied to any Person, (a) any corporation of which fifty percent (50%) or more of the outstanding stock (other than directors' qualifying shares) having ordinary voting power to elect a majority of its board of directors, regardless of the existence at the time of a right of the holders of any class or classes of securities of such corporation to exercise such voting power by reason of the happening of any contingency, or any partnership of which fifty percent (50%) or more of the outstanding partnership interests, is at the time owned by such Persons or by one or more Subsidiaries of such Person, or by such Person and one or more Subsidiaries of such Person, and (b) any other entity which is controlled or susceptible to being controlled by such Person, or by one or more Subsidiaries of such Person, or by such Person and one or more Subsidiaries of such Person; provided, however, that for purposes of this Agreement and the other Loan Documents the term "Subsidiary" shall not include DRH Mortgage Company, Ltd., a Texas limited partnership, SGS Communities at West Windsor, L.L.C., a New Jersey limited liability company, or SGS Communities at Battleground, L.L.C., a New Jersey limited liability company. Unless the context otherwise requires, "Subsidiaries as used herein shall mean the Subsidiaries of the Borrower. The Subsidiaries of the Borrower as of the Closing Date are the named Guarantors as set forth in Section 1.41 of this Agreement. Section 1.83. Subsidiary Guaranty. A guaranty agreement in form and substance satisfactory to the Lender whereunder a Restricted Subsidiary guarantees the full and faithful payment and performance of all of the Obligations of the Borrower hereunder and under the other Loan Documents. Section 1.84. Summary Borrowing Base Report. An aggregate inventory summary of the Loan Inventory in form acceptable to Lender and certified as true and correct by an Executive Officer of the Borrower containing, at a minimum, the cost funded to date for all Dwelling Lots, Developed Lots and Lots Under Development including those elements of cost set forth in Sections 1.3, 1.6 and 1.22 hereof. Section 1.85. Tangible Assets. The difference between total assets of the Borrower and its Restricted Subsidiaries and all intangible assets of the Borrower and its Restricted Subsidiaries, all as determined in accordance with GAAP. Section 1.86. Tangible Net Worth. With respect to the Borrower and its Restricted Subsidiaries, stockholder's equity on a consolidated basis less all "intangible assets" as defined under GAAP and amounts invested in Unrestricted Subsidiaries of such Person. Section 1.87. Third Party Notes Payable. With respect to the Borrower and its Restricted Subsidiaries, all Indebtedness for Money Borrowed other than (a) publicly issued Indebtedness for Money Borrowed which is pari passu with the Obligations, (b) non-recourse Indebtedness, (c) Indebtedness owed to the seller of any Inventory acquired by the Borrower of its Restricted Subsidiaries, (d) Indebtedness which is structurally subordinate to the Obligations or which is convertible into equity at the option of the Borrower, (e) Indebtedness for earnest money and (f) notes payable for insurance premiums and capitalized lease obligations. Section 1.88. Total Liabilities. All items required by GAAP to be set forth as "liabilities" on the Borrower's and its Restricted Subsidiaries' consolidated balance sheet. Section 1.89. Unrestricted Subsidiaries. Affiliated or wholly owned companies of D.R. Horton, Inc. not providing guarantees. Section 1.90. Unsecured Indebtedness. Indebtedness for Money Borrowed of the Borrower and its Restricted Subsidiaries which is not secured in whole or in part by any Lien except Permitted Encumbrances (excluding capitalized lease obligations, notes payable for insurance premiums, non-recourse promissory notes for seller financing and promissory notes issued as earnest money for contracts). Each definition of an agreement in this Article I shall include such agreement as modified, amended, or supplemented from time to time with the prior written consent of the Lender, and except where the context otherwise requires, definitions imparting the singular shall include the plural and vice versa. Except where otherwise specifically restricted, reference to a party to a Loan Document includes that party and its successors and assigns. All terms used herein which are defined in Article 9 of the Uniform Commercial Code in effect in the State of Florida on the date hereof and which are not otherwise defined herein shall have the same meanings herein as set forth therein. All accounting terms used herein without definition shall be used as defined under GAAP as of the Agreement Date. ARTICLE II AMOUNT AND TERMS OF LOAN Section 2.1. Line of Credit. The Lender hereby grants to the Borrower a revolving line of credit not to exceed the sum of TWENTY FIVE MILLION DOLLARS ($25,000,000.00) to be funded and disbursed only in accordance with the terms and conditions contained herein. Subject to the terms, conditions and collateral requirements hereinafter set forth in this Agreement, at any time and from time to time, the Borrower may borrow from and repay to and reborrow from the Lender at such time and in such amounts not exceeding the maximum amount of TWENTY FIVE MILLION DOLLARS ($25,000,000.00) in effect under this Agreement. Section 2.2. Promissory Note. 2.2(1) Execution of Note. Under the terms of this Agreement, the Borrower shall execute and deliver to the Lender the Note. 2.2(2) Due Date of Note. The Note is due on demand. ---------- 2.2(3) Grace Period for Payment. Notwithstanding the foregoing, in the event Lender shall demand repayment of the amounts disbursed pursuant to the Note, for reasons other than the monetary and/or non-monetary default by the Borrower, Borrower shall have six (6) months from the date demand is made by the Lender in which to repay such amounts and any amounts thereafter disbursed. During the first ninety (90) days of such six (6) month period, the Lender shall continue to disburse funds pursuant to this Agreement. Section 2.3. Application of Funds. The Lender and the Borrower agree that all funds received from the Lender under this Agreement are to be used as working capital. Nothing herein shall impose upon the Lender any obligation to see to the proper application of any Advance. Section 2.4. Taxes and Assessments on Note. The Borrower shall promptly pay all taxes and assessments assessed or levied, under and by virtue of any State, Federal or Municipal law or regulation now in existence or hereinafter passed, to Lender as a result of its ownership of the Note. Section 2.5. Extension of Credit. Subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties made in this Agreement and the other Loan Documents, and provided that there is no Default or Event of Default, the Lender agrees to lend and relend to the Borrower amounts which in the aggregate at any one time outstanding do not exceed the Loan Amount. Section 2.6. Manner of Borrowing and Disbursement Under Loan. 2.6(1) Request for Advance. The Borrower shall give the Lender irrevocable written notice for Advances under the Loan not later than 12:00 noon (Eastern time) on the day immediately preceding the date of the requested Advance in the form of a Request for Advance, or notice by telephone or telecopy followed immediately by a Request for Advance; provided, however, that the failure by the Borrower to confirm any notice by telephone or telecopy with a Request for Advance shall not invalidate any notice so given. Subsequent to the initial Advance(s) of the Loan made on the Agreement Date, the Borrower may not request, in the aggregate, more than two (2) Advances in any calendar month. No disbursements shall be made more than thirty (30) days after the submission of a Summary Borrowing Base Report or Detailed Borrowing Base Report, whichever is applicable. 2.6(2) Disbursement. Prior to 2:00 p.m. (Eastern time) on the date of an Advance hereunder, the Lender shall, subject to the satisfaction of the conditions set forth in this Agreement, disburse the amount requested by (i) transferring the amounts by wire transfer pursuant to the instructions of the Borrower, or (ii) in the absence of such instructions, crediting the amounts so made available to the account of the Borrower maintained with the Lender. 2.6(3) No Default. Prior to making any advance under the Loan Documents, the Lender, in its sole discretion, may verify that the Borrower is not in default under the Loan Documents and the Lender shall not be obligated to make any advance unless and until it is reasonably satisfied as to the accuracy of such information. The Lender shall not be obligated to make any Advances hereunder: (a) upon this Agreement being deemed to expire as a result of any law, regulation or regulatory action now or hereafter enacted or adopted; or (b) upon the making of any such Advance becoming prohibited by any law, regulation or regulatory action now or hereafter enacted or adopted. Section 2.7. Interest on Loan. 2.7(1) Loan. Interest shall be computed on the basis of a hypothetical year of 360 days for the actual number of days elapsed during each calendar month and shall be payable at a simple interest rate equal to the Note Rate times the principal balance outstanding from time to time under the Note for the number of days such principal amounts are outstanding during such calendar month. 2.7(2) Upon Default. Upon the occurrence and during the continuance of a Default, the Lender shall have the option (but shall not be required to give prior notice thereof to the Borrower to accelerate the maturity of the Loan or to exercise any other rights or remedies hereunder in connection with the exercise of this right) to charge interest on the outstanding principal balance of the Loan at the Default Rate from the date of such Default. Such interest shall be payable on the earliest of demand or the next interest payment date established in the Note, as applicable, and shall accrue until the earlier of (i) waiver or cure (to the satisfaction of the Lender) of the applicable Default, (ii) agreement by the Lender to rescind the charging of interest at the Default Rate, or (iii) payment in full of the Obligations. Section 2.8. Fees on Loan. The Borrower agrees to pay to the Lender an unused fee for each calendar year on the difference between (i) the Loan Amount and (ii) the average daily outstanding balance of the Loan during the applicable period, at the rate of 20 basis points (.20 %). Such unused fee shall be computed on the basis of a hypothetical year of 360 days for the actual number of days elapsed, shall be due and payable quarterly in arrears on the twenty-fifth (25th) day of each January, April, July, and October for the immediately preceding calendar quarter and on the Maturity Date, and shall be fully earned when due and non-refundable when paid. Section 2.9. Repayment of Loan. 2.9(1) Interest. The Borrower shall pay interest on the Loan as set forth in the Note. 2.9(2) Reconciliation of Loan Inventory. The Borrower shall repay certain portions of the outstanding principal of the Loan and accrued and unpaid interest thereon upon the reconciliation of the Loan Funding Availability against the outstanding principal balance under the Note as provided in Section 5.1 hereof. 2.9(3) Maturity. In addition to the foregoing, a final payment of all Obligations then outstanding shall be due and payable by the Borrower on Maturity Date. Section 2.10. Manner of Payment. 2.10(1) Time. Each payment (including any prepayment) by the Borrower on account of the principal of or interest on the Loan, fees, and any other amount owed to the Lender under this Agreement, the Note, or the other Loan Documents shall be made not later than 1:00 p.m. (Eastern time) on the date specified for payment under this Agreement or such other Loan Document in lawful money of the United States of America in immediately available funds. Any payment received by the Lender after 1:00 p.m. (Eastern time) shall be deemed received on the next Business Day for purposes of interest accrual. 2.10(2) Date. If any payment under this Agreement or any of the Note shall be specified to be made upon a day which is not a Business Day, it shall be made on the next succeeding day which is a Business Day, and such extension of time shall in such case be included in computing interest and fees, if any, in connection with such payment. 2.10(3) Amount. The Borrower may not make payments, in the aggregate, under this Agreement (excluding any payments specifically required pursuant to the terms of this Agreement) more than two (2) times in any calendar month. 2.10(4) No Set Off. The Borrower agrees to pay principal, interest, fees, and all other amounts due hereunder or under the Note without set-off or counterclaim or any deduction whatsoever. ARTICLE III BORROWER'S REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Agreement, the Borrower makes the following representations and warranties which shall be deemed to be continuous representations and warranties so long as any credit hereunder remains available or any indebtedness of the Borrower to the Lender remains unpaid: Section 3.1. Organization and Standing. The Borrower is a corporation duly organized and existing under the laws of the State of Delaware and is duly qualified to do business in each jurisdiction in which the conduct of its business requires such qualification, including the State of Florida. To the best of the Borrower's knowledge and belief, the Borrower is in compliance with all applicable laws and regulations governing the conduct of its business and governing consummation of the transactions. Section 3.2. Power and Authority. The execution, delivery and performance hereof by the Borrower are within its corporate powers and have been duly authorized by all necessary corporate and shareholder action, are not in contravention of law or the terms of its Articles of Incorporation or By-Laws or any amend ment thereto, or any indenture, agreement or undertaking to which it is a party or by which it is bound. Section 3.3. Valid and Binding Obligations. The Loan Documents constitute the legal, valid and binding respective obligations of the Borrower subject to applicable bankruptcy and insolvency laws and laws affecting creditors' rights and the enforcement thereof generally. Section 3.4. Title to Collateral. The Borrower has, or will have, good and marketable title to all property from time to time listed in the Summary Borrowing Base Report free and clear of all mortgages, pledges, liens, security interests or other encumbrances other than Permitted Encumbrances. The Borrower will warrant and defend the Collateral against the claims and demands of all persons except for claims and demands arising from the title exceptions referenced in the preceding sentence. Section 3.5. Financial Statements and Other Information. Subject to any limitation stated therein or in connection therewith by the Borrower in writing, all balance sheets, earnings statements and other financial data which have been or shall hereafter be furnished to the Lender to induce it to enter into this Agreement or otherwise in connection herewith do or will fairly represent the financial condition of the Borrower as of the dates and the results of its operations for the period for which the same are furnished to the Lender and have been or will be prepared in accordance with GAAP and all other information, reports and other papers and data furnished to the Lender are and or will be, at the time the same are so furnished, accurate and correct in all material respects and complete insofar as completeness may be necessary to give the Lender a true and accurate knowledge of the subject matter. There are no material liabilities of any kind of the Borrower as of the date of the most recent financial statements which are not reflected therein. There have been no materially adverse changes in the financial condition or operation of the Borrower since the date of such financial statements. Section 3.6. Litigation. The Borrower warrants and represents to the Lender that as of the Agreement Date, none of the Borrower nor any Restricted Subsidiary is a party to any litigation having a reasonable probability of being adversely determined to the Borrower or any Restricted Subsidiary which, if adversely determined, would impair the ability of the Borrower to carry on its business substantially as now conducted or contemplated or would materially adversely affect the financial condition, business or operations of the Borrower. Section 3.7. Consent or Filing. No consent, approval or authorization of, or registration, declaration or filing with any court, any governmental body or authority or other person or entity is required in connection with the valid execution, delivery or performance of this Agreement or any document required by this Agreement or in connection with any of the transactions contemplated thereby, except the filing of any financing statements contemplated hereunder. ARTICLE IV CONDITIONS PRECEDENT The effectiveness of this Agreement and the obligations of the Lender to consummate any of the transactions contemplated hereby shall be subject to the satisfaction of the following conditions precedent, at or prior to the Closing Date: Section 4.1. Opinion of Counsel. Borrower shall cause to be delivered to Lender an opinion from counsel to the Borrower addressed to and in form satisfactory to the Lender regarding the legal matters set forth in Sections 3.1, 3.2, 3.3, 3.6 and 3.7 hereof. Section 4.2. Documents and Instruments. The Lender shall have received all the instruments and documents contemplated to be delivered by the Borrower hereunder, and the same shall be in full force and effect. This Agreement and all of the instruments and documents executed in connection therewith are hereinafter referred to as the "Loan Documents". Section 4.3. Correctness of Warranties. All representations and warranties contained herein or otherwise made to the Lender in connection herewith shall be true and correct. Section 4.4. Certificate of Resolution. The Board of Directors, or the Executive Committee thereof, and, if stockholder approval is necessary, the stockholders of Borrower shall have passed specific resolutions authorizing the execution and delivery of all documents and the taking of all actions called for by this Agreement, and the Borrower shall have furnished to the Lender copies of such resolutions, certified by the Secretary. Section 4.5. Borrowing Base Report. The Borrower shall have delivered to the Lender the appropriate Borrowing Base Report as required by Section 5.1(2) of this Agreement. Both the Summary Borrowing Base Report and the Detailed Borrowing Base Report shall contain a sworn certificate attesting to the accuracy of the representations contained in said reports. Section 4.6. Insurance Certificate. Certificate(s) of insurance required pursuant to Section 6.16 hereof. Section 4.7. Guarantors. 4.7(1) Authorization. The Board of Directors and, if stockholder approval is necessary, the stockholders of each of the Guarantors shall have passed specific resolutions authorizing execution and delivery of the Guarantys and the Borrower shall have furnished to the Lender copies of such resolutions, certified by the Secretary of the respective corporations. With respect to the Guaranty by the limited partnership, the Borrower shall provide the Lender with a certificate of limited partnership evidencing the approval of the execution of the Guaranty by the general partner. 4.7(2) Withdrawal/Adding of Guarantors. Provided there is no Default under any Loan Document, the Guaranty of any Restricted Subsidiary may be released by the Lender upon the written request of the Borrower. The withdrawal of any Restricted Subsidiary shall be effective upon the written consent of the Lender. A Guaranty of any Restricted Subsidiary may be added at any time by the Borrower delivering to the Lender a continuing and unconditional guaranty in the form and content of the Guaranty executed by Restricted Subsidiaries simultaneous with the execution of this Agreement. Section 4.8. Other Documents. Such other documents as the Lender may reasonably from time to time require in order to verify compliance with the Loan Documents. Section 4.9. Subsequent Disbursements. Prior to requesting subsequent disbursements under the Loan, (subsequent to the first disbursement) the Borrower shall execute and deliver to the Lender all of the following items, in form and substance satisfactory to the Lender. The Lender shall have no further obligation to make further disbursements until all such items have been properly executed and delivered to the Lender. (a) The Summary Borrowing Base Report or the Detailed Borrowing Base Report as required pursuant to this Agreement for all previous periods of time. (b) The Request for Advance that the Borrower is required to deliver in connection with the request of an Advance. (c) Such other documents as the Lender may reasonably require to insure compliance with the Loan Documents. ARTICLE V DISBURSEMENT AMOUNT AND PROCEDURE 5.1 Loan Funding Availability. At the designated times set forth herein, the Lender shall establish a Loan Funding Availability for the Loan Inventory. 5.1(1) Calculation of Loan Funding Availability. The Loan Funding Availability shall be equal to the sum of "A" plus "B" plus "C"; provided, that at no time may the sum of "A" and "B" exceed thirty percent (30%) of Loan Funding Availability. A = seventy-five percent (75%) of the sum of all Acquisition Costs for all Lots Under Development which are included in the Loan Inventory. If, after a parcel of land is designated a Lot Under Development, development of such parcel ceases for thirty (30) calendar days or more (other than by reason of a Force Majeure), at the discretion of the Lender, the Loan Funding Availability for such parcel may be reduced to an amount determined by the Lender (which amount can be zero) until development of such Lot Under Development is resumed to the satisfaction of the Lender. B = seventy-five percent (75%) of the sum of all Acquisition Costs for all Developed Lots included in the Loan Inventory. C = one hundred percent (100%) of the sum of all Acquisition Costs and Construction Costs for all Dwelling Lots included in the Loan Inventory. 5.1(2) Designation of Land Parcels. Lots Under Development. Developed Lots and Dwelling Lots. On or before the fifteenth (15th) calendar day of each calendar month (other than a month following the end of a calendar quarter), the Borrower shall deliver to the Lender a Summary Borrowing Base Report in the form attached hereto as Exhibit B and incorporated herein. On or before the fifteenth (15th) calendar day of each month following the end of a calendar quarter, the Borrower shall deliver to the Lender a Detailed Borrowing Base Report in the form attached hereto as Exhibit C and incorporated herein which form shall have been completed and signed by the Borrower. The Summary Borrowing Base Report and Detailed Borrowing Base Report shall reflect Inventory that the Borrower desires to have designated as Loan Inventory. Upon the Lender's receipt of the Summary Borrowing Base Report or Detailed Borrowing Base Report, as the case may be, the Lender may conduct inspections or reviews of the subject Inventory that the Lender deems appropriate, at the expense of the Lender except as hereinafter expressly provided. Based upon the information in the Summary Borrowing Base Report or Detailed Borrowing Base Report, as the case may be, and the other information compiled by the Lender, the Lender shall determine, in its discretion, whether a Lot Under Development, Developed Lot or Dwelling Lot not previously designated as part of the Loan Inventory shall be designated part of the Loan Inventory and, if so, whether such Lot Under Development, Developed Lot or Dwelling Lot shall be designated a Lot Under Development, Developed Lot or Dwelling Lot. 5.1(3) Periodic Establishment of Loan Funding Availability. Within two (2) Business Days of the Lender's receipt of an Summary Borrowing Base Report or Detailed Borrowing Base Report, as the case may be, the Lender shall establish the Loan Funding Availability based on the Report delivered to the Lender and information compiled by the Lender. In the event the Borrower does not submit the Summary Borrowing Base Report or Detailed Borrowing Base Report in the time and manner set forth above or furnish sufficient information to the Lender to enable the Lender to establish a new Loan Funding Availability, the Lender will establish a Loan Funding Availability based on some or all of the previous information submitted to the Lender by the Borrower in the immediately preceding Summary Borrowing Base Report or Detailed Borrowing Base Report and the information compiled by the Lender, as required hereunder, in connection therewith, as the case may be, or other information available to the Lender. 5.1(4) Reconciliation. In the event that the Loan Funding Availability for a particular Funding Period is less than the then outstanding principal amount of all Unsecured Indebtedness and unpaid draws under the Letters of Credit, the Lender shall notify the Borrower thereof. On or before the Reconciliation Date, the Borrower shall (i) (A) pay to the Lender a principal payment to be applied to the Loan; and/or (B) provide to the Lender evidence that the principal amount of Unsecured Indebtedness has been reduced in an aggregate amount sufficient to eliminate the excess of the outstanding principal amount of the Unsecured Indebtedness and unpaid draws under the Letters of Credit over the Loan Funding Availability, together with any accrued and unpaid interest on such excess; or (ii) provide a revised Summary Borrowing Base Report or Detailed Borrowing Base Report designating sufficient additional Inventory (which shall be acceptable to the Lender, in its discretion) as Loan Inventory to cause the Loan Funding Availability to equal or exceed the outstanding principal of the Loan. 5.1(5) Removal/Disapproval of Inventory for Loan Funding Availability. If, at any time, the Lender determines, in its reasonable discretion, that any part of the Loan Inventory is not acceptable for inclusion in the calculation of the Loan Funding Availability as a result of an unforeseen material adverse change in the condition of such portion of the Loan Inventory or as a result of the existence of hazardous wastes or materials in or on any Inventory which are in violation of any warranty, representation or covenant of the Loan Documents regarding such hazardous wastes or materials, the Lender may exclude such portion of the Loan Inventory from the calculation of the Loan Funding Availability. If, after such exclusion, the then outstanding principal amount under the Note would exceed the Loan Funding Availability, the Borrower shall pay to the Lender on the Reconciliation Date immediately following the exclusion of such Loan Inventory, a principal payment on the Loan in an amount sufficient to eliminate such excess of the aggregate outstanding principal balance of the Loan over the Loan Funding Availability, together with accrued and unpaid interest on such excess. Section 5.2. Inspections/Valuations. The Lender and/or any inspection agent employed by the Lender shall have the right, during the term of this Agreement to inspect the Property at any reasonable time to confirm the accuracy of the Borrowing Base Report and to independently evaluate the units, lots and projects comprising the Loan Inventory. In the event that the Borrowing Base Report is deemed inaccurate or in the event that the value of the Loan Inventory in the reasonable determination of the Lender exceeds the outstanding principal balance of the Loan, the Loan Funding Availability may be adjusted by the Lender or the affected portions of the Loan Inventory may be excluded from the Loan Inventory. In addition, the Lender shall have the right, with reasonable notice to Borrower, to examine the books of account and other records and files of the Borrower, and to discuss the affairs, business, finances and accounts of the Borrower with their respective officers and employees, all at such reasonable time and as often as the Lender may request provided that Lender shall not unreasonably interfere or disrupt the conduct of the Borrower's business. It is agreed that all inspection and valuation services rendered by or for Lender's officers or agents shall be rendered solely for the protection and benefit of the Lender and at the Lender's expense. Section 5.3. Lender Counsel Approval. At the option and request of the Lender, the Lender may require that counsel for the Lender review any of the documents or instruments required, executed or provided in connection with this Agreement to confirm compliance with the terms and conditions of this Agreement; or to otherwise advise the Lender in its duties and responsibilities hereunder. The Borrower hereby agrees to reimburse the Lender for the reasonable fees (based on time spent) and costs associated therewith. Section 5.4. Liability of Lender. 5.4(1) To Third Parties. The Lender shall in no event be responsible or liable to any person other than the Borrower for its disbursement of or failure to disburse the funds or any part thereof, and neither the contractor nor any subcontractor nor materialmen or craftsmen nor laborers nor others shall have any claim or right against the Lender under this Agreement or the Lender's administration thereof. The Lender shall not be liable to any materialmen, contractors, craftsmen, laborers or others for goods or services delivered by them in or upon the Property, nor for debts or claims accruing to any such parties against the Borrower. Nor shall the Lender be liable for the manner in which any disbursements under this Agreement may be applied by the Borrower and the contractor or either of them or for any compliance with the Florida Construction Lien Law. The Borrower is not and shall not be an agent for Lender for any purpose. 5.4(2) To the Borrower. The Borrower has accepted and does accept, the full responsibility for the selection of its own contractor and subcontractors and all materials, supplies and equipment to be used in the construction of the improvements contemplated by this Agreement, and the Lender assumes no responsibility for the completion of the improvements contemplated herein. Further, the Borrower has accepted and does accept full responsibility for compliance with the Florida Construction Lien Law and relieves the Lender of any and all liability with respect to that law and agrees to indemnify and hold the Lender harmless from any and all liability under it of any nature whatsoever. Section 5.5. Release of Guaranties. Contemporaneously with the delivery of a Summary Borrowing Base Report (or a Detailed Borrowing Base Report), the Borrower may request the release of any Restricted Subsidiary from the Subsidiary Guaranty. In the event that the Loan Funding Availability established by the Lender pursuant to Section 5.1(5) hereof, without consideration of any Inventory owned by such Restricted Subsidiary, is equal to or greater than the amount otherwise required pursuant to Section 5.1(4) hereof, then the Lender shall, upon receipt of a certificate from the Borrower that no Defaults exists before and after giving effect to such release, release such Restricted Subsidiary from the Subsidiary Guaranty. ARTICLE VI BORROWER'S AFFIRMATIVE COVENANTS The Borrower covenants and agrees that until the Note, together with interest and all other indebtedness to the Lender under the terms of this Agreement, are paid in full, unless specifically waived by the Lender in writing: Section 6.1. Corporate Existence and Qualification. The Borrower will do, or cause to be done, all things necessary to preserve, renew and keep in full force and effect its corporate existence, rights, licenses and permits and comply with all laws applicable to it, operate its business in a proper and efficient manner and substantially as presently operated or proposed to be operated; and at all times maintain, preserve and protect all franchises and trade names and preserve all property used or useful in the conduct of its business, and keep the same in good repair, working order and condition, and from time to time make, or cause to be made, all needful and proper repairs, renewals, replacements, betterments and improvements thereto, so that the business carried on in connection therewith may be properly and advantageously conducted at all times. Section 6.2. Financial Statements/Status Reports. The Borrower will keep its books of accounts in accordance with GAAP and will furnish to the Lender: 6.2(1) 10-K. Within one hundred twenty (120) days after the close of Borrower's fiscal year the Form 10-K of the Borrower filed with the Securities and Exchange Commission, together with the audited, consolidated financial statements of the Borrower prepared by an independent accounting firm of recognized standing. 6.2(2) 10-Q. Within sixty (60) days after the last day of each quarter in each fiscal year of the Borrower, except the last quarter of such fiscal year of the Borrower, the Form 10-Q of the Borrower filed with the Securities and Exchange Commission containing financial statements of the Borrower and all entities related to and divisions of the Borrower, on a consolidated basis. 6.2(3) Sales Report. Within sixty (60) days of the end of each fiscal year commencing with fiscal year end 1997, annual sales and inventory status reports showing units closed, units in backlog and income summary for all operations in the State of Florida of the Borrower and its Restricted Subsidiaries. 6.2(4) Other Financial Documentation. The Borrower shall provide to the Lender such other financial information as the Lender may reasonably request from time to time to clarify or amplify the information required to be furnished to the Lender under this Agreement. Section 6.3. Taxes and Claims. The Borrower shall properly pay and discharge: (a) all taxes, assessments and govern mental charges upon or against the Borrower or its assets prior to the date on which penalties attach thereto, unless and to the extent that such taxes are being diligently contested in good faith and by appropriate proceedings and appropriate reserves therefor have been established; and (b) all lawful claims, whether for labor, materials, supplies, services or anything else which might or could, if unpaid, become a lien or charge upon the properties or assets of the Borrower, unless and to the extent only that the same are being diligently contested in good faith and by appropriate proceedings and appropriate reserves therefor have been established. Section 6.4. Pay Indebtedness to Lender and Perform Other Covenants. The Borrower shall: (a) make full and timely payments of the principal of and interest, and premium, if any, on the Note and all other indebtedness of the Borrower to the Lender, whether now existing or hereafter arising and (b) duly comply with all the terms and covenants contained in each of the instruments and documents given to the Lender pursuant to this Agree ment at the times and places and in the manner set forth herein. Section 6.5. Litigation. The Borrower will promptly notify the Lender upon the commencement of any action, suit, claim, counterclaim or proceeding against or investigation of the Borrower (except when the alleged liability is fully covered by insurance): (a) which has the reasonable possibility of being concluded adversely to the Borrower the result of which, in the reasonable opinion of the Borrower, could materially adversely affect the business of the Borrower; or (b) which questions the validity of this Agreement or any other document executed in connection herewith or any action taken or to be taken pursuant to any of the foregoing. Section 6.6. Defaults. The Borrower will promptly notify the Lender in writing of: (a) any material assessment by any taxing authority for unpaid taxes as soon as the Borrower has knowledge thereof; (b) the existence of any declared default in the payment or performance of any indebtedness (excluding non recourse indebtedness and excluding indebtedness incurred in lieu of contract deposits pursuant to contracts for the acquisition of buildable lots or land) owed by the Borrower to any other lender within ten (10) days of the declaration of such default which would materially and adversely affect the Borrower's assets or business. Section 6.7. Further Assurances. The Borrower shall, at its sole cost and expense, upon the request of the Lender, duly execute and deliver or cause to be duly executed and delivered to the Lender such further instruments and do and cause to be done such further acts that may be necessary or proper in the opinion of the Lender to carry out more effectively the intent and purpose of this Agreement. Section 6.8. Funds Not Assignable. The proceeds of the Loan shall not be assigned by the Borrower nor subject to the process of any court upon legal action by or against the Borrower or by or against anyone claiming under or through Borrower, and for the purpose of this Agreement, the funds shall remain and be considered the money and property of the Lender until the Borrower is entitled to have them disbursed as provided herein. Nothing herein contained shall be considered as in anywise modifying, or subordinating the Obligations previously given or to be given by the Borrower as security for the Loan and such Obligations shall be and remain in full force and effect, this Agreement being intended only as additional security for the Loan and to insure its use for the purposes intended by the Lender and Borrower. Section 6.9. Financial Covenants. Until the Obligations are repaid in full, the Borrower shall adhere to and certify quarterly as correct, the following financial covenants (after giving effect to any Financial Covenant Carve Out), all on a consolidated basis with the Restricted Subsidiaries and determined as of the last day of each fiscal quarter of the Borrower: 6.9(1) Leverage Ratio. The Borrower shall maintain at all times a Leverage Ratio of not more than 2.35 to 1. 6.9(2) Ratio of EBITDA. The Borrower shall maintain at all times a ratio of (i) EBITDA to (ii) Fixed Charges of not less than 2.75 to 1.0. 6.9(3) Minimum Tangible Net Worth. The Borrower shall maintain at all times a minimum Tangible Net Worth of one hundred sixty million and no/100 dollars ($160,000,000.00), plus fifty percent (50%) of annual net profits for the preceding fiscal year, plus fifty percent (50%) of any capital paid into the Borrower (other than stock issued in connection with an employee stock ownership plan, an employee stock option plan, an employee stock purchase plan or for an acquisition), plus one hundred percent (100%) of net losses with absolute minimum Tangible Net Worth of not less than one hundred sixty million and no/100 dollars ($160,000,000.00). 6.9(4) Third Party Notes Payable. The Borrower shall not at any time permit Third Party Notes Payable to be greater than thirteen percent (13%) of Tangible Assets on a consolidated basis. Section 6.10. Inventory Covenants. During the term of this Agreement, the Borrower shall adhere to the following Inventory covenants which will be tested by the Lender as of the last day of each fiscal quarter of the Borrower: 6.10(1) Speculative Lots. The total number of Speculative Lots owned by the Borrower and its Restricted Subsidiaries at any given time shall not exceed fifty percent (50%) of all Closed Sales during the immediately preceding twelve (12) calendar months. Models shall not be considered "Speculative Lots" for purposes of this Section 6.10(1). 6.10(2) Developed Lots/Lots Under Development. The Borrower shall not permit the total number of Developed Lots and Lots Under Development, in each case, then owned by the Borrower and all Restricted Subsidiaries, at any given time to exceed two and one-half (2 1/2) times the number of Closed Sales during the immediately preceding twelve (12) calendar months. The Borrower shall not permit the aggregate cost of all Developed Lots and Lots Under Development, in each case, then owned by the Borrower and all Restricted Subsidiaries, at any given time to exceed forty percent (40%) of all Tangible Assets of the Borrower on a consolidated basis. 6.10(3) Land Cost. The cost of the land owned by Borrower and all Restricted Subsidiaries at any given time which has not been developed into Developed Lots and is not scheduled for commencement of development into Developed Lots within twelve (12) calendar months from the date of determination shall not exceed ten percent (10%) of all Tangible Assets of the Borrower and its Restricted Subsidiaries on a consolidated basis. In the event that the Borrower or any Restricted Subsidiary classifies certain undeveloped land as being scheduled for development within twelve (12) calendar months for the purpose of this provision and, as of the last day of such twelve (12) calendar month period, development of such land has not commenced, such land shall not be classified as scheduled for development within twelve (12) calendar months until such development is commenced. For purposes of Section 6.10(1), 6.10(2) and 6.10(3) only, the terms "Speculative Lots", "Dwelling Lot", "Models", "Developed Lots", "Lots Under Development" and "Dwellings" will include all properties of Borrower and Restricted Subsidiaries that are situated either within or without the State of Florida. Section 6.11. Additional Information. Upon the request of the Lender, the Borrower shall deliver to Lender any documents or information with respect to the Inventory that the Lender may reasonably require including, without limitation, and acquisition closing documentation. Section 6.12. Compliance Certificates. Within forty-five (45) days from the end of each fiscal quarter of the Borrower, the Borrower shall provide to the Lender a certificate signed by an Authorized Signatory of the Borrower in the form attached hereto as Exhibit D setting forth such calculations required to establish whether the Borrower was in compliance with Sections 6.9 and 6.10 hereof. Section 6.13. Payment of Contractors. The Borrower shall pay in a timely manner, and shall cause its Restricted Subsidiaries to pay in a timely manner, any and all contractors and subcontractors who conduct work in or on the Inventory, subject to the right of the Borrower to contest any amount in dispute, so long as the contesting of such amount is pursued diligently and in good faith. The Borrower will advise the Lender in writing immediately if the Borrower or any of its Restricted Subsidiaries receives any written notice from any contractor(s), subcontractor(s) or material furnisher(s) to the effect that said contractor(s) or material furnisher(s) have not been paid for any labor or materials furnished to or in the Inventory and such outstanding payment or payments are individually or collectively equal to or greater than five hundred thousand and no/ 100 dollars ($500,000.00) per subdivision or seven million and no/100 dollars ($7,000,000.00) in the aggregate. The Borrower will further make available to the Lender, for inspection and copying, on demand, any contracts, bills of sale, statements, receipted vouchers or agreements, under which the Borrower claims title to any materials, fixtures or articles used in the development of the Loan Inventory or construction of improvements on the Loan Inventory including, without limitation, the Dwellings. Section 6.14. Bank Group Line. 6.14(1) Default. Borrower shall provide immediate notice to Lender of any declared default under the Bank Group Line or under any other loan agreement or creditor agreement with any financial institution. 6.14(2) Notice of Change. Should the Borrower agree to any change or amendment to the Bank Group Line, it shall give notice to the Lender of such change prior to making the change, if time permits, and if not within two (2) Business Days after the making of such change. Section 6.15. Hazardous Substances. The Borrower warrants and represents to the Lender that to the best of their knowledge and belief and based on environmental assessments of the Inventory commissioned by the Borrower, except to the extent disclosed to the Lender in environmental assessments or other writings or to the extent that it would not materially and adversely affect the use and marketability of any Inventory, the Inventory has not been and is not now being used as a storage facility for any "Hazardous Substances", nor has it been used in violation of any federal, state or local environmental law, ordinance or regulation, that no proceedings have been commenced, or notice(s) received, concerning any alleged violation of any such environmental law, ordinance or regulation, and that the Inventory is free of hazardous or toxic substances and wastes, contaminants, oil, radioactive or other materials the removal of which is required or the maintenance of which is restricted, prohibited or penalized by any federal, state or local agency, authority or governmental unit except as set forth in the Site Assessments. The Borrower covenants that it shall neither permit any such materials to be brought on to the Inventory, nor shall it acquire real property to be added to the Loan Inventory upon which any such materials exist, except to the extent disclosed to the Lender in environmental assessments or other writings or to the extent that it would not materially and adversely affect the use and marketability of any Inventory; and if such materials are so brought or found located thereon, such materials shall be immediately removed, with proper disposal, to the extent required by applicable environmental laws, ordinances and regulations, and all required environmental cleanup procedures shall be diligently undertaken pursuant to all such laws, ordinances and regulations. The Borrower further represents and warrants that the Borrower will promptly transmit to the Lender copies of any citations, orders, notices or other material governmental or other communications received with respect to any hazardous materials, substances, wastes or other environmentally regulated substances affecting the Inventory. Notwithstanding the foregoing, there shall not be a default of this provision should the Borrower store or use minimal quantities of the aforesaid materials, provided that: such substances are of a type and are held only in a quantity normally used in connection with the construction, occupancy or operation of comparable buildings or residential developments (such as cleaning fluids and supplies normally used in the day to day operation of residential developments), such substances are being held, stored and used in complete and strict compliance with all applicable laws, regulations, ordinances and requirements, and the indemnity set forth below shall always apply to such substances, and it shall continue to be the responsibility of the Borrower to take all remedial actions required under and in accordance with this Agreement in the event of any unlawful release of any such substance. Borrower hereby agrees to indemnify Lender and hold Lender harmless from and against any and all losses, liabilities, including strict liability, damages, injuries, expenses, including reasonable attorneys' fees, costs of any settlement or judgment and claims of any and every kind whatsoever paid incurred or suffered by, or asserted against, Lender by any person or entity or governmental agency for, with respect to, or as a direct or indirect result of, the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or release from the Inventory of any Hazardous Substance (including, without limitation, any losses, liabili ties, including strict liability, damages, injuries, expenses, including reasonable attorneys' fees, costs of any settlement or judgment or claims asserted or arising under the Comprehensive Environmental Response, Compensation and Liability Act, any so called federal, state or local "Superfund" "Superlien" laws, statutes, law ordinance, code, rule, regulation, order or decree regulating, with respect to or imposing liability, including strict liability, substances or standards of conduct concerning any Hazardous Substance), regardless of whether within the control of Lender. For purposes of this Agreement, "Hazardous Substances" shall mean and include those elements or compounds which are contained in the list of hazardous substances adopted by the United States Environmental Protection Agency ("EPA") and the list of toxic pollutants designated by Congress or the EPA or defined by any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material as now or at any time hereafter in effect. If Borrower receives any notice of (i) the happening of any material event involving the spill, release, leak, seepage, discharge or clean-up of any Hazardous Substance on any of the Inventory or in connection with Borrower's operations thereon or (ii) any complaint, order, citation or material notice with regard to air emissions, water discharges, or any other environ mental, health or safety matter affecting Borrower (an "Environmental Complaint") from any person or entity (including without limitation the EPA) then Borrower shall immediately notify Lender orally and in writing of said notice. Lender shall have the right but not the obligation, and without limitation of Lender's rights under this Agreement, to enter onto the Inventory or to take such other actions as it deems necessary or advisable to clean up, remove, resolve or minimize the impact of, or otherwise deal with, any such Hazardous Substance or Environmental Complaint following receipt of any notice from any person or entity (including, without limitation, the EPA) asserting the existence of any Hazardous Substance or an Environmental Complaint pertaining to the Inventory or any part thereof which, if true, could result in an order, suit or other action against Borrower, which would have a material adverse effect on the Borrower, and/or which, in the sole opinion of Lender, could jeopardize its security under this Agreement. All reasonable costs and expenses incurred by Lender in the exercise of any such rights shall be secured by this Agreement and shall be payable by Borrower upon demand. Section 6.16. Insurance. The Borrower shall keep the Inventory comprising the Loan Inventory insured by responsible insurance companies in such amounts and against such risks as is customary for owners of similar businesses and properties in the same general areas in which the Borrower and its Restricted Subsidiaries operate or, to the customary extent (and in a manner approved by the Lender) the Borrower may be self insured. All insurance herein provided for shall be in form and with companies reasonably approved by the Lender. The Borrower shall also maintain general liability insurance, workman's compensation insurance, automobile insurance for all vehicles owned by them and any other insurance reasonably required by the Lender, to the extent commercially available at a reasonable cost. On the Agreement Date, the Borrower shall deliver to the Lender a copy of a certificate of insurance evidencing the insurance required hereunder. In addition, on the date of delivery of each report required by Section 4.6 hereof, the Borrower shall certify to the Lender that all insurance policies required to be maintained hereunder remain in full force and effect. Section 6.17. Reportable Event. Promptly after Borrower receives notice or otherwise becomes aware thereof, the Borrower shall notify the Lender of the occurrence of any Reportable Event with respect to any Plan as to which the Pension Benefit Guaranty Corporation has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within thirty (30) days of the occurrence of such event (provided that the Borrower shall give the Lender notice of any failure to meet the minimum funding standards of Section 412 of the Code or Section 302 of ERISA, regardless of the issuance of any waivers in accordance with Section 412(d) of the Code. Section 6.18. Secured Indebtedness. The Borrower shall not, and shall not permit any of its Restricted Subsidiaries to, incur or permit to exist any Indebtedness which is (a) secured in whole or in part by any of the Inventory (other than Permitted Encumbrances); or (b) contains any provision requiring the Borrower or any Restricted Subsidiary to grant to the lender thereunder any Lien at a future date or upon the occurrence of any subsequent event; except that the Borrower and its Restricted Subsidiaries may incur (i) Indebtedness in favor of a seller of Inventory to the Borrower which is secured solely by the Inventory contemporaneously acquired from such seller; (ii) Indebtedness secured solely by the Borrower's headquarters building located in Arlington, Texas or any other office building owned by the Borrower or any Restricted Subsidiary, and (iii) Indebtedness secured by any clubhouse located in any development of the Borrower or any Restricted Subsidiary. ARTICLE VII DEFAULT AND REMEDIES Section 7.1. Defaults. Subsequent to any applicable notice and/or cure rights afforded by the Loan Documents, each of the following shall constitute a Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule, or regulation of any governmental or non-governmental body: 7.1(1) Payment. Default by the Borrower in the payment of any principal, interest or payment due to the Lender under the Note or under any of the Loan Documents; 7.1(2) Performance. Default in the payment or performance of any other liability, obligation or covenant of the Borrower to the Lender under the Loan Documents, for a period of ten (10) days after written notice; provided (i) if Borrower reasonably cannot perform within such (10) day period and, in Lender's reasonable judgment, Lender's security will not be impaired, Borrower may have such additional time to perform as Borrower reasonably may require, provided and for so long as Borrower proceeds with due diligence to cure said default; and (ii) if Lender's security reasonably will be materially impaired if Borrower does not perform in less than ten (10) days, Borrower will have only such period following written notice in which to perform as Lender may reasonably specify. 7.1(3) Representation. Any representation, warranty, statement, certificate, schedule or report made or furnished by the Borrower that proves to have been false or erroneous in any material respect at the time of the making thereof, or to have omitted any substantial liability or claim against the Borrower, or if on the date of execution of this Agreement there shall have been any materially adverse change in any of the facts disclosed therein, which change shall not have been disclosed to the Lender at or prior to the time of such execution; 7.1(4) Litigation. Any litigation or any proceedings which are pending against the Borrower or Restricted Subsidiaries, the outcome of which would in Lender's reasonable determination materially adversely affect the continued operation of the Borrower, and the Borrower failing to take corrective measures reasonably satisfactory to the Lender within ten (10) days; 7.1(5) Obligations to Others. The failure of the Borrower to pay, when due, any other indebtedness for borrowed money owed by the Borrower to the Lender, or default by the Borrower in the performance of the terms of any loan agreement or indenture relating to such indebtedness, which failure or default would materially adversely affect the business, operations or financial condition of the Borrower, and any such default shall not have been remedied within thirty (30) days thereafter; 7.1(6) Obligations to Lender. Any default by Borrower on any other direct obligation that Borrower may have to the Lender which continues uncured for thirty (30) days after notice from Lender; 7.1(7) Other Default. There shall occur any Event of Default in the performance or observance of any agreement or covenant or breach of any representation or warranty contained in any of the Loan Documents (other than this Agreement or as otherwise provided in this Section 7.1 of this Agreement) or any Subsidiary Guaranty, which shall not be cured to the Lender's satisfaction within the applicable cure period, if any, provided for in such Loan Document or ninety (90) days from the date the Borrower receives notice from the Lender with respect thereto if no cure period is provided in such Loan Document; 7.1(8) Title 11 Relief. There shall be entered a decree or order for relief in respect of the Borrower or any of its Restricted Subsidiaries under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy law or other similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator, or similar official of the Borrower or any of its Restricted Subsidiaries, or of any substantial part of their respective properties, or ordering the winding-up or liquidation of the affairs of the Borrower or any of its Restricted Subsidiaries, or an involuntary petition shall be filed against the Borrower or any of its Restricted Subsidiaries, and a temporary stay entered, and (i) such petition and stay shall not be diligently contested, or (ii) any such petition and stay shall continue undismissed for a period of thirty (30) consecutive days; 7.1(9) Title 11 Petition. The Borrower or any of its Restricted Subsidiaries shall file a petition, answer, or consent seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy law or other similar law, or the Borrower or any of its Restricted Subsidiaries shall consent to the institution of proceedings thereunder or to the filing of any such petition or to the appointment or taking of possession of a receiver, liquidator, assignee, trustee, custodian, sequestrator, or other similar official of the Borrower or any of its Restricted Subsidiaries, or of any substantial part of their respective properties, or the Borrower or any of its Restricted Subsidiaries shall fail generally to pay their respective debts as they become due, or the Borrower or any of its Restricted Subsidiaries shall take any corporate or partnership action to authorize any such action; 7.1(10) Judgment. A final judgment shall be entered by any court against the Borrower or any of its Restricted Subsidiaries for the payment of money which exceeds $500,000.00, which judgment is not covered by insurance or a warrant of attachment or execution or similar process shall be issued or levied against property of the Borrower or any of its Restricted Subsidiaries which, together with all other such property of the Borrower or any of its Restricted Subsidiaries subject to other such process, exceeds in value $500,000.00 in the aggregate, and if, within thirty (30) days after the entry, issue, or levy thereof, such judgment, warrant, or process shall not have been paid or discharged or bonded or stayed pending appeal, or if, after the expiration of any such stay, such judgment, warrant, or process shall not have been paid or discharged; 7.1(11) ERISA Funding. (1) There shall be at any time any "accumulated funding deficiency," as defined in ERISA or in Section 412 of the Code, with respect to any Plan; or (2) a trustee shall be appointed by a United States District Court to administer any Plan; or the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any Plan; or (3) any of the Borrower and its ERISA Affiliates shall incur any liability to the Pension Benefit Guaranty Corporation in connection with the termination of any Plan; or (4) any Plan or trust created under any Plan of any of the Borrower and its ERISA Affiliates shall engage in a non-exempt "prohibited transactions (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) which would subject the Borrower or any ERISA Affiliate to the tax or penalty on "prohibited transactions" imposed by Section 502 of ERISA or Section 4975 of the Code; and by reason of any or all of the events described in clauses (1) through (4), as applicable, the Borrower shall have incurred (and/or is likely to incur) and/or incurred liability in excess of $1,000,000.00 in the aggregate; 7.1(12) Invalidity of Documents. All or any portion of any Loan Document shall at any time and for any reason be declared by a court of competent jurisdiction in a suit with respect to such Loan Document to be null and void, or a proceeding shall be commenced by any Governmental Authority involving a legitimate dispute or by the Borrower or any of its Restricted Subsidiaries, having jurisdiction over the Borrower or any of its Restricted Subsidiaries, seeking to establish the invalidity or unenforceability thereof (exclusive of questions of interpretation of any provision thereof), or the Borrower or any of its Restricted Subsidiaries shall deny that it has any liability or obligation for the payment of principal or interest purported to be created under any Loan Document; 7.1(13) Change of Control. There shall occur any Change of Control; 7.1(14) Transfer of Property. Except for conveyances of all or any part of the Loan Inventory between the Borrower and the Guarantors there occurs any sale, lease, conveyance, assignment, pledge, encumbrance, or transfer of all or any part of the Loan Inventory or any interest therein, voluntarily or involuntarily, whether by operation of law or otherwise, except (i) in accordance with the terms of this Agreement, (ii) for execution of contracts with prospective purchasers, (iii) for Permitted Encumbrances, and (iv) in the ordinary course of business; 7.1(15) Property Change. Except in the normal course of Borrower's development of inventory into Developed Lots and construction of Dwellings thereon, without the prior written consent of Lender, Borrower grants any easement or dedication, files any plat, condominium declaration, or restriction or otherwise encumbers all or any portion of the Loan Inventory, or seeks or permits any zoning reclassification or variance, unless such action is expressly permitted by the Loan Documents or does not affect any Inventory which is part of the Loan Inventory; or Notwithstanding anything contained herein to the contrary, the occurrence of any of the foregoing shall not be a Default or an Event of Default hereunder if: (i) the occurrence pertains only to specific parcel(s) within the Loan Inventory; and (ii) the affected parcel(s) is (are) removed from the Loan Inventory on or before ten (10) days in the case of a monetary occurrence and thirty (30) days in the case of a non-monetary occurrence after the occurrence or, if the Borrower is entitled to notice and cure, within the applicable notice and cure period. In the event that any such parcel is a Lot Under Development, Developed Lot or Dwelling Lot, then the Loan Funding Availability shall be immediately calculated excluding such parcel. If, as the result of such removal, the outstanding principal balance under the Loan would exceed the Loan Funding Availability, the Borrower shall pay (X) to the Lender on the Reconciliation Date immediately following the removal of such Inventory from the Loan Inventory, a principal payment on the Loan in an amount sufficient to eliminate such excess of the aggregate outstanding principal balance of the Loan over the Loan Funding Availability, together with any due and unpaid interest on such excess or (Y) add additional Inventory to the Loan Inventory (which is acceptable to the Lender) in an amount sufficient to cause the Loan Funding Availability to equal or exceed the Loan. Section 7.2. Remedies. If a Default shall have occurred and shall be continuing: 7.2(1) Optional Acceleration. With the exception of a Default specified in Sections 7.1(8), 7.1(9) and 7.1(10), Lender may, by notice to the Borrower (i) declare the Note, all interest thereon and all other amounts payable under this Agreement and the other Loan Documents to be forthwith due and payable, whereupon the Note, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower, and (ii) terminate this Agreement. 7.2(2) Immediate Acceleration. Upon the occurrence of a Default under Sections 7. l(8), 7.1(9) or 7.1(10) hereof, this Agreement shall automatically terminate and such principal, interest (including without limitation, interest which would have accrued but for the commencement of a case or proceeding under the federal bankruptcy laws), and other amounts payable under this Agreement or the Note shall thereupon and concurrently therewith become due and payable, all without any action by the Lender, all without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or in the Note to the contrary notwithstanding. 7.2(3) Loan Document Rights. The Lender shall exercise all of the post-default rights granted to it and to them under the Loan Documents or under Applicable Law. 7.2(4) Cumulative Rights. The rights and remedies of the Lender hereunder shall be cumulative, and not exclusive. Section 7.3. Cross Default. All of the Note and other Loan Documents are "cross defaulted such that (a) the occurrence of an Event of Default under any one of the Loan Documents shall constitute an Event of Default under this Agreement and all of the Loan Documents and (b) the occurrence of a Default under any one of the Loan Documents shall constitute a Default under this Agreement and all of the other Loan Documents. Section 7.4. Waiver of Default. The Lender at any time may waive any Default or any Event of Default which shall have occurred and any of its consequences, in which case the parties hereto shall be restored to their former positions and rights and obligations hereunder, respectively; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon, and no such waiver shall be effective unless it is in a written document executed by a duly authorized officer. Section 7.5. Rights and Remedies Not Waived. No course of dealing between the Borrower and the Lender or any failure or delay on the part of the Lender in exercising any rights or remedies hereunder shall operate as a waiver of any rights or remedies of the Lender and no single or partial exercise of any rights or remedies hereunder shall operate as a waiver or preclude the exercise of any other rights or remedies hereunder. ARTICLE VIII MISCELLANEOUS Section 8.1. Lien; Setoff By Lender. The Borrower hereby grants to the Lender a continuing lien for all indebtedness and other liabilities of the Borrower to the Lender upon any and all moneys, securities, and other property of the Borrower and the proceeds thereof, now or hereafter held or received by or in transit to, the Lender from or to the Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise, and also upon any and all deposits (general or special) and credits of the Borrower with, and any and all claims of the Borrower against the Lender at any time existing. Upon the occurrence of any Default, the Lender is hereby authorized at any time and from time to time, without notice to the Borrower setoff, appropriate, and apply any or all items hereinabove referred to against all indebtedness and other liabilities of the Borrower to the Lender, whether under this Agreement, the Loan Documents or otherwise, and whether now existing or hereafter arising. Section 8.2. Waivers. The Borrower waives presentment, demand, protest, notice of default, nonpayment, partial payments and all other notices and formalities relating to this Agreement other than notices specifically required hereunder. The Borrower consents to and waives notice of the granting of indulgences or extensions of time of payment, the taking or releasing of security, the addition or release of persons primarily or secondarily liable on or with respect to liabilities of the Borrower to the Lender, all in such manner and at such time or times as the Lender may deem advisable. No act or omission of the Lender shall in any way impair or affect any of the indebtedness or liabilities of the Borrower to the Lender or rights of the Lender in any security. No delay by the Lender to exercise any right, power or remedy hereunder or under any security agreement, and no indulgence given to the Borrower in case of any Default, shall impair any such right, power or remedy or be construed as having created a course of dealing or performance contrary to the specific provisions of this Agreement or as a waiver of any Default by the Borrower or any acquiescence therein or as a violation of any of the terms or provisions of this Agreement. The Lender shall have the right at all times to enforce the provisions of this Agreement and all other documents executed in connection herewith in strict accordance with their terms, notwithstanding any course of dealing or performance by the Lender in refraining from so doing at any time and notwithstanding any custom in the banking trade. No course of dealing between the Borrower and the Lender shall operate as a waiver of any of the Lender's rights. Section 8.3. Benefit. This Agreement is made and entered into for the sole protection and benefit of the Lender and the Borrower, their successors and assigns, and no other person or persons other than the Borrower shall have any right of action hereon or rights to the Loan proceeds at any time. Lender shall not (a) owe any duty whatsoever to any claimant for labor performed or material furnished in connection with the construction of any Dwelling or improvement on any Inventory, or (b) owe any duty to apply any undisbursed portion of the Loan to the payment of any claim, or (c) owe any duty to exercise any right or power of the Lender hereunder or arising from any Default by the Borrower. Section 8.4. Assignment. The terms hereof shall be binding upon and inure to the benefit of the heirs, successors, assigns, and personal representatives of the parties hereto; provided, however, that the Borrower shall not assign this Agreement or any of its rights, interests, duties or obligations hereunder or any Loan proceeds or other monies to be advanced hereunder in whole or in part without the prior written consent of the Lender and any such assignment (whether voluntary or by operation law) without said consent shall be void and render automatically terminated any obligation of Lender to advance any further monies pursuant to this Agreement or any other Loan Document. Section 8.5. Amendment and Waiver. This Agreement and the other Loan Documents represent the final agreement between the Lender and the Borrower and may not be contradicted by evidence of prior, contemporaneous or subsequent oral or written agreements of the Borrower and the Lender. Neither this Agreement nor any of the Loan Documents may be amended orally, nor may any provision hereof be waived orally but only by an instrument in writing signed by the Lender and the Borrower. Section 8.6. Terms. Whenever the context and construction require, all words used in the singular number herein shall be deemed to have been used in the plural, and vice versa, and the masculine gender shall include the feminine and neuter and the neuter shall include the masculine and feminine. Section 8.7. Governing Law and Jurisdiction. This Agreement shall be construed in accordance with the laws of the State of Florida, and such laws shall govern the interpretation, construction and enforcement hereof. Section 8.8. Publicity. Subject-to the Borrower's approval, the Lender shall have the right to incorporate its name into signage placed upon the Loan Inventory situated in Florida. Lender shall have the right to secure printed publicity through newspaper and other media concerning the Inventory and source of financing. Section 8.9. Expenses of Lender. The Borrower promises to reimburse the Lender promptly for all reasonable out-of-pocket expenses of every nature which the Lender may incur in connection with the Loan Documents, the making of any Loans provided for herein or the collection of the Borrower's indebtedness, including, but not limited to, reasonable attorneys' fees of Lender's counsel relating to the preparation of the Loan Documents, all recording fees, and documentary stamps. Such expenses shall be paid at closing or in a reasonable time thereafter upon receipt of written invoices. The Borrower shall also pay reasonable post-closing expenses incurred by the Lender on behalf of the Borrower. Furthermore, the Borrower shall be liable for post-closing collection expenses, including, but not limited to the collection of Obligations of the Borrower hereunder, including reasonable attorneys' fees, including appellate proceedings, post-judgment proceedings and bankruptcy proceedings. In the event the Borrower fails to pay such expenses within a reasonable time, the Lender may either (a) disburse to itself under the terms of the Note any sums payable to Lender and such disbursement shall be considered with like effect as if same had been made to Borrower, or (b) pay such expenses on the Borrower's behalf and charge the Borrower's account. Section 8.10. Invalidation of Provisions. In the event that any one or more of the provisions of this Agreement is deemed invalid by a court having jurisdiction over this Agreement or other similar authority, Lender may, in its sole discretion, terminate this Agreement in whole or in part. Section 8.11. Notices. All notices, requests, consents, demands and other communications required or which any party desires to give hereunder or under any other Loan Document shall, unless other specifically provided in such other Loan Document, be deemed sufficiently given or furnished if (a) in writing and delivered by personal delivery, by courier, or by registered or certified United States mail, postage prepaid, addressed to the party to whom directed at the addresses specified below (unless changed by similar notice in writing given by the particular party whose address is to be changed), (b) by telex with confirmation thereof in writing by sender pursuant to subsection (a) above, (c) facsimile to the facsimile number specified below with confirmation thereof in writing by sender pursuant to subsection (a) above, or (d) by oral communication with confirmation thereof in writing by the notifying party pursuant to subsection (a) above within three (3) Business Days after such oral communication. Any such notice or communication shall be deemed to have been given and to be effective either at the time of personal delivery or, in the case of courier or mail, as of the date of first attempted delivery at the address and in the manner provided herein, or, in the case of telex, when transmitted (answer back confirmed), or, in the case of facsimile, upon receipt or, in the case of oral communication, upon the effectiveness of written confirmation as hereinabove provided. Notwithstanding the foregoing, no notice of change of address shall be effective except upon receipt. This Section shall not be construed in any way to affect or impair any waiver of notice or demand provided in any Loan Document or to require giving of notice or demand to or upon any person in any situation or for any reason. BORROWER: D. R. Horton, Inc. 1901 Ascension Boulevard Suite 100 Arlington, Texas 76006 Attn: David J. Keller and Ted I. Harbour Facsimile No.: (817) 856-8249 Telephone No.: (817) 856-8200 LENDER: Barnett Bank, N.A. 707 Mendham Boulevard Post Office Box 678267 Orlando, Florida 32867-8267 Attn: Closing Department Manager Facsimile No.: (407) 658-3826 Telephone No.: (407) 658-3815 With a copy to: Winderweedle, Haines, Ward & Woodman, P.A. 250 Park Avenue South, 5th Floor Post Office Box 880 Winter Park, Florida 32790-0880 Attn: Victor E. Woodman, Esquire Facsimile No.: (407) 645-3728 Telephone No.: (407) 246-8412 Section 8.12. Termination by the Borrower. The Borrower may terminate this Agreement in its entirety by giving at least ten (10) days prior written notice of its intention to terminate and by payment in full of all Obligations. Upon the date of termination, the Borrower's obligation for the payment of the fee provided for in Section 2.8 hereof shall terminate. Section 8.13. Controlling Agreement. In the event any provision of this Agreement is inconsistent with any provision of any other document, whether heretofore executed, required or executed pursuant to this Agreement or otherwise, the provisions of this Agreement shall be controlling. Section 8.14. Titles. Titles to the sections of this Agreement are solely for the convenience of the parties hereto and are not an aid in the interpretation of this Agreement or any part thereof. Section 8.15. Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same Agreement. Section 8.16. Time is of the Essence. The parties agree that time shall be of the essence in interpreting each and every term and condition contained herein. Section 8.17. Waiver of Trial by Jury. The Borrower and the Lender knowingly, voluntarily and intentionally waive the right either may have to a trial by jury in respect of any litigation based hereon, or arising out of, under or in connection with the Loan Documents and any agreement contemplated to be executed in conjunction therewith, or any course of conduct, course of dealing, statements (whether verbal or written) or actions of either party. This provision is a material inducement for the Lender entering into the Loan evidenced by the Loan Documents. IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. Signed, sealed and delivered in the presence of: D. R. HORTON, INC., a Delaware corporation /s/ TED I. HARBOUR - ------------------------------------ By:/s/ DAVID J. KELLER ------------------------------ /s/ STEPHAN P. PERISON David J. Keller, - ------------------------------------ Executive Vice President "Borrower" BARNETT BANK, N.A., a national banking association /s/ DOROTHY MARIN - ------------------------------------ By:/s/ FAYE CHANDRINOS ------------------------------ /s/ BRYAN CORLEY Faye Chandrinos - ------------------------------------ As Its: Closing Officer "Lender" REQUEST FOR ADVANCE On ____________________, D.R. HORTON, INC. (Borrower) requests of BARNETT BANK, N.A. (Lender) an advance of $_____________________; to be deposited into account number #____________________ maintained with Lender or wire transferred to the Borrower as follows: ---------------------------------------------------------. Since the date of the last disbursement, and as of the date of this disbursement, the Borrower certifies to the Lender and attests that to the best of its knowledge and belief, a) there has not been nor does there exist an adverse material change in their financial condition, on a consolidated basis; b) there exists no Event of Default or Default as defined in that Restated Working Capital Line of Credit Agreement dated ____________ prior to or subsequent to this disbursement; c) the Borrower, on a consolidated basis, is in compliance with those financial covenants, representations and warranties contained in that Restated Working Capital Line of Credit Agreement dated _______________; d) Construction of the site work for Parcels Under Development and construction of improvements on the Dwelling Lots is progressing in a satisfactory manner, pursuant to that Restated Working Capital Line of Credit Agreement dated ____________________; and e) all conditions precedent to the Borrower's right to receive the requested disbursement have been met in accordance with the terms and conditions of that Restated Working Capital Line of Credit Agreement dated __________________. D.R. HORTON, INC., a Delaware corporation By:______________________________________ ============================================================= ================== S&P/Moody's Rating or Leverage Ratio as of the Applicable quarter end or most recently completed quarter Margin - ------------------------------------------------------------- ------------------ LIBOR + Level I BBB - Baa3, or better 65 Level II less than 1.25 72.5 Level III between 1.25 and 1.50 80 Level IV between 1.50 and 1.80 85 Level V between 1.80 and 2.35 95 Level VI between 2.35 and 2.60 110 ============================================================= ================== EX-21.1 5 SUBSIDIARIES OF D.R. HORTON, INC. Exhibit 21.1 SUBSIDIARIES OF D.R. HORTON, INC. As of September 30, 1997 STATE OF INCORPORATION DOING NAME OR ORGANIZATION BUSINESS AS ---- --------------- ----------- DRHI, Inc. Delaware Meadows I, Ltd. Delaware Meadows II, Ltd. Delaware Meadows IV, Inc. Texas Meadows V, Ltd. Delaware Meadows VII, Ltd. Delaware Meadows IX, Inc. New Jersey Meadows X, Inc. New Jersey D.R. Horton Management Company, Ltd. Texas D.R. Horton - Texas, Ltd Texas D.R. Horton Custom Homes DRH Title Company of Colorado, Inc. Colorado DRH Title Company of Florida, Inc. Florida DRH Title Company of Texas, Ltd. Texas DRH Construction, Inc. Delaware DRH Land Company, Inc. California DRH Mortgage Company, Ltd. Texas DRH New Mexico Construction, Inc. Delaware DRH Properties, Inc. Arizona DRH Tucson Construction Delaware D.R. Horton, Inc. - Albuquerque Delaware D.R. Horton, Inc. - Birmingham Alabama Regency Homes D.R. Horton, Inc. - Denver Delaware Trimark Communities D.R. Horton Denver Management Company, Inc. Colorado D.R. Horton Denver No. 10, Inc. Colorado Trimark Communities D.R. Horton Denver No. 11, Inc. Colorado Trimark Communities D.R. Horton Denver No. 12, Inc. Colorado Trimark Communities D.R. Horton Denver No. 13, Inc. Colorado Trimark Communities D.R. Horton Denver No. 14, Inc. Colorado Trimark Communities D.R. Horton Denver No. 15, Inc. Colorado Trimark Communities D.R. Horton Denver No. 16, Inc. Colorado Trimark Communities D.R. Horton Denver No. 17, Inc. Colorado Trimark Communities D.R. Horton Denver No. 18, Inc. Colorado Trimark Communities D.R. Horton Denver No. 19, Inc. Colorado Trimark Communities STATE OF INCORPORATION DOING NAME OR ORGANIZATION BUSINESS AS ---- --------------- ----------- D.R. Horton Denver No. 20, Inc. Colorado Trimark Communities D.R. Horton Denver No. 21, Inc. Colorado Trimark Communities D.R. Horton Denver No. 22, Inc. Colorado Trimark Communities D.R. Horton Denver No. 23, Inc. Colorado Trimark Communities D.R. Horton Denver No. 24, Inc. Colorado Trimark Communities D.R. Horton Denver No. 25, Inc. Colorado Trimark Communities D.R. Horton Denver No. 26, Inc. Colorado Trimark Communities D.R. Horton, Inc. - Greensboro Delaware Arappco Homes D.R. Horton, Inc. - Los Angeles Delaware D.R. Horton Custom Homes D.R. Horton Los Angeles Holding Company, Inc. California D.R. Horton Los Angeles Management Company, Inc. California D.R. Horton Los Angeles No. 9, Inc. California D.R. Horton Custom Homes D.R. Horton Los Angeles No. 10, Inc. California D.R. Horton Custom Homes D.R. Horton Los Angeles No. 11, Inc. California D.R. Horton Custom Homes D.R. Horton Los Angeles No. 12, Inc. California D.R. Horton Custom Homes D.R. Horton Los Angeles No. 13, Inc. California D.R. Horton Custom Homes D.R. Horton Los Angeles No. 14, Inc. California D.R. Horton Custom Homes D.R. Horton Los Angeles No. 16, Inc. California D.R. Horton Custom Homes D.R. Horton Los Angeles No. 17, Inc. California D.R. Horton Custom Homes D.R. Horton Los Angeles No. 18, Inc. California D.R. Horton Custom Homes D.R. Horton Los Angeles No. 19, Inc. California D.R. Horton Custom Homes D.R. Horton, Inc. - Minnesota Delaware Joe Miller Homes D.R. Horton, Inc. - New Jersey Delaware SGS Communities D.R. Horton, Inc. - Sacramento California D.R. Horton Sacramento Management Company, Inc. California D.R. Horton, Inc. - San Diego Delaware D.R. Horton Custom Homes D.R. Horton San Diego Holding Company, Inc. California D.R. Horton San Diego Management Company, Inc. California D.R. Horton San Diego No. 9, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 10, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 11, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 12, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 13, Inc. California D.R. Horton Custom Homes STATE OF INCORPORATION DOING NAME OR ORGANIZATION BUSINESS AS ---- --------------- ----------- D.R. Horton San Diego No. 14, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 15, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 16, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 17, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 18, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 19, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 20, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 21, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 22, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 23, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 24, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 25, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 26, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 27, Inc. California D.R. Horton Custom Homes D.R. Horton San Diego No. 28, Inc. California D.R. Horton Custom Homes D.R. Horton, Inc. - Torrey Delaware Torrey Homes D.R. Horton - Torrey No. 1, Inc. Delaware Grand Realty Incorporated New Jersey S. G. Torrey Atlanta, Ltd. Georgia SGS Communities at Battleground, LLC New Jersey SGS Comminuties SGS Communities at Grande Quay, LLC New Jersey SGS Communities SGS Communities at West Windsor, LLC New Jersey SGS Communities EX-23.1 6 CONSENT OF ERNST & YOUNG LLP, FORT WORTH, TX Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-48874) pertaining to the D.R. Horton, Inc. 1991 Stock Incentive Plan; Form S-8 (No. 33-83162) pertaining to the D.R. Horton, Inc. Stock Tenure Plan; Form S-8 (No. 333-3570) pertaining to the D.R. Horton, Inc. Employee Stock Purchase Plan; and Form S-3 (No. 333-27521) and the related Prospectus for the registration of $250,000,000 of its debt securities, preferred stock and common stock of our report dated November 7, 1997, with respect to the consolidated financial statements of D.R. Horton, Inc. included in the Annual Report (Form 10-K) for the year ended September 30, 1997. /s/ERNST & YOUNG LLP Fort Worth, Texas December 5, 1997 EX-27 7 FDS FOR 1997 10-K
5 This Schedule Contains Summary Financial Information Extracted From The Consolidated Balance Sheet and Consolidated Statement of Income found on pages 17 and 18 of the Company's Form 10-K for the year ended September 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 43,984 0 0 0 604,591 648,575 13,124 0 719,794 101,699 355,315 0 0 373 262,407 719,794 837,280 837,280 685,341 685,341 0 0 5,150 59,894 23,690 36,204 0 0 0 36,204 1.01 0
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