13 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: April 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934 Commission file number: 1-7643 WASHINGTON HOMES, INC. (Exact name of registrant as specified in its charter) MARYLAND 52-0818872 (State or other jurisdiction of (IRS Employer Incorporation or organization) Identification No.) 1802 Brightseat Road, Landover, MD 20785-4235 (Address of principal executive offices) (Zip Code) (301) 772-8900 (Registrant's telephone number including area code) 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 ___ Number of shares of each of the registrant's classes of common stock outstanding at April 30, 1998: Class Number of Shares Common Stock (voting), $.01 par 7,914,433 value Common Stock (non-voting), $.01 28,330 par value WASHINGTON HOMES, INC. FORM 10-Q TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets - - April 30, 1998 and July 31, 1997 (Unaudited) 3 Condensed Consolidated Statements of Operations - - Three Months and Nine Months Ended April 30, 1998 4 and 1997 (Unaudited) Condensed Consolidated Statement of Shareholder's Equity 5 - - Nine Months Ended April 30, 1998 (Unaudited) Condensed Consolidated Statements of Cash Flows - - Nine Months Ended April 30, 1998 and 1997 6 (Unaudited) Notes to Condensed Consolidated Financial Statements 7 (Unaudited) ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION ITEM 5. Other Information 12 ITEM 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13 PART 1. ITEM 1. Financial Statements WASHINGTON HOMES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS April 30, July 31, 1998 1997 (in thousands) Cash and cash equivalents $ 10,943 $ 10,313 Residential inventories 121,205 111,520 Excess of cost over net assets 6,065 6,216 acquired, net Investment in joint ventures 3,068 3,058 Other 12,241 11,735 Total Assets $153,522 $142,842 LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Notes and loans payable $76,664 $65,569 Trade accounts payable 15,277 16,231 Income taxes 1,962 2,056 Other 3,775 4,506 Total Liabilities 97,678 88,362 Shareholders' Equity Common Stock 15,000,000 shares voting common stock authorized, 79 70 7,914,433 and 7,015,025 shares issued and outstanding; 1,100,000 shares non-voting common stock authorized, 0 9 28,330 and 927,738 shares issued and outstanding; Additional paid - in capital 35,147 35,147 Retained earnings 20,618 19,254 Total Shareholders' Equity 55,844 54,480 Total Liabilities and Shareholders' $153,522 $142,842 Equity See accompanying Notes. WASHINGTON HOMES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended April 30, April 30, 1998 1997 1998 1997 (in thousands except per share amounts) Revenues Homebuilding $52,262 $41,431 $139,215 $131,787 Land sales 1,506 914 4,242 4,320 Other income 676 456 1,828 2,036 Total revenues 54,444 42,801 145,285 138,143 Expenses Cost of sales-homebuilding 43,018 34,465 114,199 108,445 Cost of sales - land 1,031 821 3,457 3,785 Cost of sales - impairment loss 0 9,200 0 9,200 Selling, general and 8,049 7,498 21,238 20,186 administrative Write-down in carrying value of 0 9,981 0 9,981 goodwill Interest 1,202 979 3,195 2,955 Financing fees 197 197 529 575 Amortization and depreciation 134 115 331 497 expense Total expenses 53,631 63,256 142,949 155,624 Earnings (loss) before income taxes and extraordinary item 813 (20,455) 2,336 (17,481) Income tax expense (benefit) 249 (4,011) 970 (2,622) Earnings (loss) before 564 (16,444) 1,366 (14,859) extraordinary item Extraordinary item 0 (390) 0 (390) Net earnings (loss) $ 564 $(16,834) $1,366 $(15,249) Earnings (loss) per common share, before extraordinary item $ 0.07 $(2.07) $ 0.17 $ (1.87) Earnings (loss) per common share, 7,942,763 weighted average $ 0.07 $(2.12) $ 0.17 $ (1.92) shares outstanding See accompanying Notes. WASHINGTON HOMES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Nine Months Ended April 30, 1998 (Unaudited) (in thousands) Additional Total Common Stock Paid -in Retained Shareholders' Voting Non Capital Earnings Equity voting Balance, August 1, 1997 $70 $9 $35,147 $19,254 $54,480 Convert non-voting to 9 (9) -- -- -- voting Net earnings -- -- -- 1,366 1,366 Balance, April 30, 1998 $79 $0 $35,147 $20,620 $55,846 See accompanying Notes. WASHINGTON HOMES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended April 30, 1998 1997 (in thousands) Cash flows from operating activities: Net earnings (loss) $1,366 $(15,249) Adjustments to reconcile net earnings(loss) to net cash used in operating activities: Amortization and depreciation 331 497 Write-down of goodwill 0 9,981 Impairment loss 0 9,200 Deferred income taxes (116) (3,373) Changes in assets and liabilities: Residential inventories (9,685) (5,764) Other assets (621) (515) Trade accounts payable (956) (3,229) Income taxes 21 (1,321) Other liabilities (731) (1,616) Net cash used in operating activities (10,391) (11,389) Cash flows from investing activities: Purchases of property and equipment, net of (64) (31) disposals Advances to joint ventures (10) (247) Net cash used in investing activities (74) (278) Cash flows from financing activities: Proceeds from notes and loans payable 75,981 80,803 Repayments of notes and loans payable (64,886) (74,687) Net cash provided by financing 11,095 6,116 activities Net increase (decrease) in cash and cash 630 (5,551) equivalents Cash and cash equivalents, beginning of 10,313 15,384 period Cash and cash equivalents, end of period $10,943 $9,833 See accompanying Notes. WASHINGTON HOMES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Basis of Presentation The unaudited condensed consolidated financial statements include the accounts of Washington Homes, Inc. and its wholly-owned subsidiaries (the "Company"). The Company is principally engaged in the business of the construction and sale of residential housing. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and SEC regulations. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto in the Company's Annual Report to Shareholders for the year ended July 31, 1997. Operating results for the three and nine months ended April 30, 1998 are not necessarily indicative of the results that may be expected for the year ending July 31, 1998. 2. Shareholders' Equity Common Stock. The Company has 7,942,763 shares of Common Stock outstanding at April 30, 1998 of which 7,914,433 are voting and 28,330 are non- voting. Except for voting rights, the non-voting common stock is substantially the same as the Company's voting common stock. The non-voting common stock can be converted into voting common stock on a share-for-share basis at anytime at the option of the holder in connection with certain sale transaction. During the first quarter of fiscal 1998, 899,408 shares of non-voting common stock were converted to voting common stock. 3. Earnings Per Share Earnings per common share are based on the weighted average number of shares of common stock outstanding during each period. Basic and fully diluted earnings per share are the same for all periods presented. 4. Notes and Loans Payable Notes and loans payable consist of the following: April 30, July 31, 1998 1997 (in thousands) Senior Notes $43,000 $43,000 Revolving Credit Facilities 30,478 19,455 Land Acquisition and Other 3,186 3,114 $76,664 $65,569 Senior Notes. In April 1994, the Company issued $43,000,000 principal amount of Senior Notes. Two series of Senior Notes were issued: $30,000,000 with a fixed rate of 8.61% per annum, with interest payable semi-annually beginning in October 1994 and $13,000,000 with a floating rate of LIBOR plus 2.4% (7.96% at April 30, 1998), with interest payable July 1994 and either quarterly or semi-annually thereafter at the option of the Company. Beginning April 1998 interest became payable on a quarterly basis for both series of Senior Notes. Principal repayments are due in three equal annual installments commencing in October 1998 and continuing to October 2000. Revolving Credit Facility. At April 30, 1998, the Company had a $70 million facility to fund land acquisition and home construction, letters of credit, and the initial principal repayment on its Senior Notes. The facility has a maturity date (which may be extended) of October 30, 1999. At April 30, 1998, $30.5 million was outstanding. Borrowings under the facility bear interest at 30 day LIBOR (5.66% at April 30, 1998) plus either 1.55% or 1.75%, depending upon the mix of collateral and are secured by the related inventory. Land Acquisition Loans. The Company has loans with various land sellers and lenders for the acquisition of land which bear interest at fixed rates ranging from 8.0% to 10% or variable rates of prime to prime plus 1% and are collateralized by the related land under development. 5. Income Taxes The Internal Revenue Service has examined the Company's tax returns for the years ended July 31, 1992, 1993 and 1994. The IRS raised issues primarily related to matters having to do with the Company's recapitalization in 1992 and 1993 including a $20.0 million gain on debt forgiveness which the Company treated as non-taxable under the provisions of Section 108 of the Internal Revenue Code and the timing of taxable income related to discontinued subsidiaries which were distributed out of the consolidated group in December 1992. In March 1997, the Company reached a settlement with the IRS for all items in question. As a result, the Company recognized an extraordinary loss of $390,000 or $0.05 per share which relates to the extraordinary gain on debt forgiveness associated with the exchange of subordinated debt during the 1992 tax year. 6. Write-down of Assets In the quarter ended April 30, 1997, the Company wrote down to fair value the carrying value of goodwill by $10.0 million and certain land inventory by $9.2 million which resulted in an after-tax charge of $15.8 million, or $1.99 per share. The goodwill resulted from the acquisition of the Company in 1988. The properties affected by the write-down were principally development land, certain close out communities and certain condominium properties in the Maryland suburban areas of Washington, D.C.. The Company reviewed its long-lived assets, including goodwill, for possible impairment. The circumstances which indicated impairment included a decline in margins in the Washington market, increased governmental regulations and fees, along with the continued competitiveness of the Washington market. A significant portion of the land inventory write-down was attributable to two long term development properties, which the Company has owned for more than twenty years. The remainder of the write-down related to six close-out and three condominium communities. The Company has made a decision to phase out its condominium operations which have had results well below management's expectations. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Annual Operating Cycle The homebuilding industry in general and the operations of the Company are seasonal in nature. The number of new orders signed is generally higher in the period from February through May compared to the balance of the year. Deliveries peak in the fiscal quarter ending July 31 as a substantial portion of homes for which contracts are written during the fiscal quarter ending April 30 are delivered. Delivery volume is relatively constant during the remainder of the year. Backlog is the number of homes under contract but not delivered at the end of the period. Revenue is recognized upon the delivery of finished homes. The following table, which sets forth the quarterly operating results for the Company during the last five fiscal quarters illustrates this cycle: Three Months Ended April July 31, October January April 30, 1997 1997 31, 1997 31, 1998 30, 1998 (dollars in thousands) Selected Operating Data Revenues -homebuilding $41,431 $74,789 $41,037 $45,916 $52,262 Number of homes 258 478 265 290 340 delivered Number of net new 438 228 289 382 640 orders Number of homes in 841 591 615 707 1,007 backlog Sales value of backlog $135,042 $96,343 $101,227 $118,464 $168,726 Geographic Breakdown of Operations Set forth below is information for the Company's operations by geographic markets: Three Months Nine Months Ended Ended April 30, April 30, Net New Orders 1998 1997 1998 1997 Maryland 213 155 379 398 Virginia 111 64 274 191 North Carolina 261 180 531 389 Nashville 37 23 80 58 Pittsburgh 18 16 47 41 640 438 1,311 1,077 Three Months Nine Months Ended Ended April 30, April 30, Homes Delivered 1998 1997 1998 1997 Maryland 114 95 286 309 Virginia 75 57 194 181 North Carolina 115 79 331 273 Nashville 28 16 54 43 Pittsburgh 8 11 30 31 340 258 895 837 April 30, Backlog of Sold Homes 1998 1997 Maryland 321 316 Virginia 218 194 North Carolina 385 267 Nashville 42 32 Pittsburgh 41 32 1,007 841 Results of Operations Three Months Ended April 30, 1998 Compared to Three Months Ended April 30, 1997 Total revenues increased 27.2% to $54.4 million during the three months ended April 30, 1998 as compared to $42.8 million during the three month period ended April 30, 1997 as the number of homes delivered increased to 340 in the third quarter of fiscal 1998 from 258 homes in the third quarter of fiscal 1997. The increased deliveries were attributable to successful sales promotions and generally improved market conditions. The average sales price of homes delivered decreased to $153,700 for the third quarter of fiscal 1998 from $160,600 for the third quarter of fiscal 1997. Changes in the average selling price of homes delivered may vary from period to period based on product mix and pricing of specific communities. Revenues from land sales were $1.5 million for the three months ended April 30, 1998 as compared to $914,000 during the same three month period in fiscal 1997. Gross profit from land sales increased $382,000 during the three months ended April 30, 1998 compared to the same three month period in fiscal 1997. The increase reflects individual lot sales to close out several communities. Other income increased $220,000 to $676,000 during the three months ended April 30, 1998 as compared to $456,000 in the same three month period in fiscal 1997. Gross profit as a percentage of revenues from homes delivered, excluding the effect of the write-down of land inventory, increased to 17.7% during the three months ended April 30, 1998 compared to 16.8% during the same three month period in fiscal 1997. The increase in gross profit margins is attributable to an improved mix of deliveries within the Company's geographic markets and the effect of cost reduction initiatives, especially in North Carolina. Selling, general and administrative expenses increased $551,000 to $8.0 million during the three month period ended April 30, 1998, compared to $7.5 million in the same three month period in fiscal 1997. The increase is principally due to increased marketing and advertising expenses intended to increase new orders and backlog; to costs associated with opening new communities; and to the expansion of the Company's mortgage brokerage operations. In addition, selling, general and administrative expenses decreased as a percentage of homebuilding revenue to 15.4% in the three months ended April 30, 1998, compared to 18.1% for the same period in fiscal 1997 as a result of increased deliveries. Interest and financing fees increased to $1.4 million during the three months ended April 30, 1998 as compared to $1.2 million in the same three month period in fiscal 1997. Nine Months Ended April 30, 1998 Compared to Nine Months Ended April 30, 1997 Total revenues increased $7.0 million (5.2%) to $145.3 million during the nine months ended April 30, 1998 compared to $138.1 million during the nine month period ended April 30, 1997. The number of homes delivered increased 7.0% to 895 homes in the first nine months of fiscal 1998 from 837 homes in the first nine months of fiscal 1997. During this period the average sale price of homes delivered decreased to $155,500 in the first nine months of fiscal 1998 from $157,500 in the first nine months of fiscal 1997. Changes in average selling price of homes delivered may vary from period to period based on product mix and pricing of specific communities . Revenues from land sales of $4.2 million for the nine month period ended April 30, 1998 were relatively flat in comparison to the same nine month period in fiscal 1997. Gross profit from land sales increased 47% to $785,000 for the nine month period ended April 30, 1998 from $535,000 for the same nine month period in fiscal 1997. Gross profit as a percentage of revenues from homes delivered, excluding the effect of the write-down of land inventories increased to 18.0% during the nine month period ended April 30, 1998 compared to 17.7% during the nine month period ended April 30, 1997. Selling, general and administrative expenses increased $1.0 million to $21.2 million during the nine month period ended April 30, 1998 as compared to $20.2 million for the same nine month period in fiscal 1997. The increase is due primarily to increased marketing and advertising costs directed at increasing new orders and backlog; the additional costs associated with opening new communities; and the expansion of the mortgage brokerage operations. In addition, selling, general and administrative expenses as a percentage of homebuilding revenues remained flat at 15.3% for the nine months ended April 30, 1998 and April 30, 1997. Interest and financing fees increased to $3.7 million in the nine months ended April 30, 1998 as compared to $3.5 million for the same period in fiscal 1997. Capital Resources and Liquidity Funding for the Company's residential building and land development activities is provided principally by cash flows from operations and borrowings from banks and other financial institutions. The Company's capital needs depend upon its sales volume, asset turnover, land purchases and inventory levels. At April 30, 1998, the Company had cash and cash equivalents of $10.9 million of which $200,000 was restricted to collateralize customer deposits and other escrows. The remaining $10.7million was available to the Company. The Company had $106 million in borrowing availability from various lending institutions and land sellers of which $76.7 million was outstanding at April 30, 1998. The Company believes that it will be able to fund its activities through fiscal 1998 through a combination of operating cash flow, existing cash balances and borrowings from banks and other lending institutions. Except for ordinary expenditures for the construction of homes and acquisition and development of land, the Company does not have any material commitments for capital expenditures at the present time. PART II. OTHER INFORMATION ITEM 5. Other Information As of April 30, 1998 the Registrant amended its revolving credit facility to change the interest coverage covenant. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 10. Letter Agreement dated as of April 30, 1998 to Consolidated, Amended and Restated Loan Agreement made as of July 31, 1997. 27. Financial Data Schedule (b) Reports on Form 8-K The registrant did not file any reports on Form 8-K during the quarter ended April 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WASHINGTON HOMES, INC. (Registrant) Date: June 15, 1998 By: /s/ Geaton A.. DeCesaris Geaton A. DeCesaris, Jr. President and Chief Executive Officer Date: June 15, 1998 By: /s/ Clayton W. Miller Clayton W. Miller Principal Accounting Officer