16
10q0199 prepared by: LAB
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: January 31, 1999
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 January 31, 1999:
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
- - January 31, 1999 and July 31, 1998 (Unaudited) 3
Condensed Consolidated Statements of Net Earnings
- - Three Months and Six Months Ended January 31, 1999 4
and 1998 (Unaudited)
Condensed Consolidated Statement of Shareholder's
Equity 5
- - Six Months Ended January 31, 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows
- - Six Months Ended January 31, 1999 and 1998 6
(Unaudited)
Notes to Condensed Consolidated Financial Statements 7
(Unaudited)
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of 13
Security Holders
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
PART 1. ITEM 1. Financial Statements
WASHINGTON HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS January 31, July 31,
1999 1998
(in thousands)
Cash and cash equivalents $ 7,824 $ 10,321
Residential inventories 120,844 113,198
Excess of cost over net assets 5,915 6,015
acquired, net
Investment in joint ventures 4,348 2,848
Other 13,485 13,590
Total Assets $152,416 $145,972
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes and loans payable $64,527 $58,255
Trade accounts payable 17,515 21,647
Income taxes 3,796 3,217
Other 5,200 4,583
Total Liabilities 91,038 87,702
Shareholders' Equity
Common Stock
15,000,000 shares voting common
stock authorized, 7,914,433 shares 79 79
issued and outstanding;
1,100,000 shares non-voting common
stock authorized, 28,330 shares issued 0 0
and outstanding;
Additional paid - in capital 35,147 35,147
Retained earnings 26,152 23,044
Total Shareholders' Equity 61,378 58,270
Total Liabilities and Shareholders' $152,416 $145,972
Equity
See accompanying Notes.
WASHINGTON HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF NET EARNINGS
(Unaudited)
Three Months Ended Six Months Ended
January 31, January 31,
1999 1998 1999 1998
(in thousands except per share
amounts)
Revenues
Homebuilding $70,723 $45,916 $138,468 $86,953
Land sales 2,598 1,545 3,073 2,737
Other income 941 574 1,849 1,151
Total revenues 74,262 48,035 143,390 90,841
Expenses
Cost of sales - homebuilding 57,329 37,906 112,755 71,182
Cost of sales - land 2,468 1,585 2,909 2,426
Selling, general and 9,626 7,055 18,997 13,191
administrative
Interest 1,556 1,056 3,070 1,993
Financing fees 196 197 398 331
Amortization and 106 99 203 197
depreciation expense
Total expenses 71,281 47,898 138,332 89,320
Earnings before income taxes 2,981 137 5,058 1,521
Income tax expense 1,142 73 1,950 721
Net earnings $1,839 $ 64 $3,108 $800
Basic and Diluted Earnings per
common share, $ 0.23 $ 0.01 $ 0.39 $ 0.10
7,942,763 weighted average
shares outstanding
See accompanying Notes.
WASHINGTON HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six Months Ended January 31, 1999
(Unaudited)
(in thousands)
Additional Total
Common Stock Paid -in Retained Shareholders'
Voting Non Capital Earnings Equity
voting
Balance, August 1, 1998 $79 $0 $35,147 $23,044 $58,270
Net earnings -- -- -- 3,108 3,108
Balance, January 31, $79 $0 $35,147 $26,152 $61,378
1999
See accompanying Notes.
WASHINGTON HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended January 31,
1999 1998
(in thousands)
Cash flows from operating activities:
Net earnings $3,108 $ 800
Adjustments to reconcile net earnings to
net cash used in operating activities:
Amortization and depreciation 203 197
Changes in assets and liabilities:
Residential inventories (7,646) (1,134)
Other assets 151 231
Trade accounts payable (4,132) (4,059)
Income taxes 579 (28)
Other liabilities 617 (958)
Net cash used in operating activities (7,120) (4,951)
Cash flows from investing activities:
Purchases of property and equipment, net (149) (48)
of disposals
Investment in and advances to joint (1,500) (10)
ventures
Net cash used in investing activities (1,649) (58)
Cash flows from financing activities:
Proceeds from notes and loans payable 101,967 43,421
Repayments of notes and loans payable (95,695) (39,805)
Net cash provided by financing activities 6,272 3,616
Net decrease in cash and cash equivalents (2,497) (1,393)
Cash and cash equivalents, beginning of 10,321 10,313
period
Cash and cash equivalents, end of period $ 7,824 $ 8,920
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, 1998. Operating results for the three
and six months ended January 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending July 31, 1999.
2. Shareholders' Equity
Common Stock. The Company has 7,942,763 shares of Common Stock outstanding
at January 31, 1999 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 transactions.
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:
January 31, July 31,
1999 1998
(in thousands)
Senior Notes $28,667 $43,000
Revolving Credit 33,038 12,197
Facilities
Land Acquisition and 2,822 3,058
Other
$64,527 $58,255
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% (7.37% at January 31, 1999), 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. The first principal
repayment of $14,333,333 was made in October 1998.
Revolving Credit Facility. At January 31, 1999, 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, 2000. At January 31,
1999, $33.0 million was outstanding. Borrowings under the facility bear
interest at 30 day LIBOR (4.94% at January 31, 1999) 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.
Interest Rate Swap. In January 1998, the Company entered into an interest
rate swap agreement to manage interest rate exposure on the Company's variable
rate debt. Amounts to be paid or received under the swap agreement are accrued
as interest rates change and are recognized over the life of the swap agreement
as an adjustment to interest expense. The fair value of the swap agreement was
not recognized in the consolidated financial statements, since it is accounted
for as a hedge. This swap agreement expires in January 2002 and effectively
converts $15 million of variable LIBOR based borrowings to a fixed LIBOR of
5.67% at January 31, 1999.
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 were 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
January April 30, July 31, October January 31,
31, 1998 1998 1998 31, 1998 1999
(dollars in thousands)
Selected
Operating Data
Revenues $45,916 $52,262 $93,896 $67,745 $70,723
- -homebuilding
Number of homes 290 340 584 407 427
delivered
Number of net new 382 640 398 430 432
orders
Number of homes 707 1,007 821 844 849
in backlog
Sales value of $118,464 $168,726 $141,619 $147,100 $153,947
backlog
Geographic Breakdown of Operations
Set forth below is information for the Company's operations by geographic
markets:
Three Months Six Months
Ended Ended
January 31, January 31,
Net New Orders 1999 1998 1999 1998
Maryland 116 79 261 166
Virginia 129 94 231 163
North Carolina 150 170 288 270
Nashville 29 23 61 43
Pittsburgh 8 16 21 29
432 382 862 671
Three Months Six Months
Ended Ended
January 31, January 31,
Homes Delivered 1999 1998 1999 1998
Maryland 126 94 241 172
Virginia 90 60 173 119
North Carolina 153 116 334 216
Nashville 42 8 56 26
Pittsburgh 16 12 30 22
427 290 834 555
January 31,
Backlog of Sold Homes 1999 1998
Maryland 260 222
Virginia 234 182
North Carolina 282 239
Nashville 47 33
Pittsburgh 26 31
849 707
Results of Operations
Three Months Ended January 31, 1999 Compared to Three Months Ended January 31,
1998
Total revenues increased 55% to $74.3 million during the three months ended
January 31, 1999 compared to $48.0 million during the three month period ended
January 31, 1998 as the number of homes delivered increased to 427 in the second
quarter of fiscal 1999 from 290 homes in the second quarter of fiscal 1998. The
increased level of revenues reflects strong housing markets resulting from
generally strong economy and low interest rates for home mortgages. In
particular, the Maryland and Virginia markets have shown significant increases
as each market gains momentum in its recovery. The average sales price of
homes delivered increased to $165,500 for the second quarter of fiscal 1999 from
$158,200 for the second quarter of fiscal 1999. The change in average selling
price is due to a larger single family mix as opposed to townhouses and the
opportunity to raise selling prices due to a stronger level of demand. 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 $2.6 million for the three months ended
January 31, 1999 as compared to $1.5 million during the same three month period
in fiscal 1998. Gross profit from land sales increased $170,000 from a gain of
$129,000 in the three months ended January 31, 1999 compared to a loss of
$41,000 in the same three month period in fiscal 1998.
Other income increased $367,000 to $941,000 during the three months ended
January 31, 1999 compared to $574,000 in the same three month period in fiscal
1998. The increase is mainly attributable to the profits from the Company's
fully owned mortgage subsidiary, which acts as a broker for originating loans.
Gross profit as a percentage of revenues from homes delivered increased to
18.9% during the three months ended January 31, 1999 compared to 17.4% during
the same three month period in fiscal 1998. The increase in gross profit
margins is due to a combination of favorable market conditions and cost
reduction initiatives implemented during fiscal 1998.
Selling, general and administrative expenses increased to $9.6 million
during the three month period ended January 31, 1999, compared to $7.1 million
in the same three month period in fiscal 1998. The increase is principally due
to an increase of 47% in deliveries. Selling, general and administrative
expenses decreased as a percentage of homebuilding revenue to 13.6% in the three
months ended January 31, 1999, compared to 15.4% for the same period in fiscal
1998 as a result of the increase in revenues.
Operating income (earnings before interest, financing fees and taxes)
increased to $4.7 million in the three months ended January 31, 1999 compared to
$1.4 million for the same period in fiscal 1998 and increased as a percentage of
homebuilding revenues to 6.7% from 3.0% for the same period in fiscal 1998.
Interest and financing fees increased to $1.8 million during the three
months ended January 31, 1999 compared to $1.3 million in the same three month
period in fiscal 1998 as the Company has higher inventory levels associated with
the higher backlog.
Six Months Ended January 31, 1999 Compared to Six Months Ended January 31, 1998
Total revenues increased $52.6 million (58%) to $143.4 million during the
six months ended January 31, 1999 compared to $90.8 million during the six month
period ended January 31, 1998. The number of homes delivered increased 50% to
834 homes in the first half of fiscal 1999 from 555 homes in the first half of
fiscal 1998. During this period the average sale price of homes delivered
increased to $166,000 in the first half of fiscal 1999 from $156,600 in the
first half of fiscal 1998. Changes in average selling price of homes delivered
may vary from period to period based on product mix and pricing of specific
communities.
Revenues and gross profit from land sales were $3.1 million and $164,000,
respectively, for the six month period ended January 31, 1999 compared to $2.7
million and $311,000 during the six month period in fiscal 1998.
Gross profit as a percentage of revenues from homes delivered increased to
18.6% during the six month period ended January 31, 1999 compared to 18.1% for
the six month period ended January 31, 1998. The increase is primarily due to
the cost reduction initiatives previously mentioned.
Selling, general and administrative expenses increased $5.8 million to
$19.0 million during the six month period ended January 31, 1999 compared to
$13.2 million for the six month period in fiscal 1998. The increase is related
to the revenue increases, however, the selling, general and administrative
expenses as a percentage of homebuilding revenue have decreased from 15.2% for
the six months ended January 31, 1998 to 13.7% for the same six month period
this year. Although a portion of the Company's selling, general and
administrative expenses are variable with revenue fluctuations, a more
significant portion of these expenses are fixed components which causes a
favorable impact as revenue increases.
Operating income (earnings before interest, financing fees and taxes)
increased to $8.5 million in the six months ended January 31, 1999 compared to
$3.8 million for the same period in fiscal 1998. In addition, operating income
as a percentage of homebuilding revenues increased to 6.2% during the first
half of fiscal 1999 compared to 4.4% during the first half of fiscal 1998.
Interest and financing fees increased to $3.5 million in the six months
ended January 31, 1999 as compared to $2.3 million for the same period in fiscal
1998 but decreased as a percentage of homebuilding revenues to 2.5% from 2.7%.
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 January 31, 1999, the Company had cash and cash equivalents of $7.8
million of which $566,700 was restricted to collateralize customer deposits and
other escrows. The remaining $7.2 million was available to the Company.
The Company had $101 million in borrowing availability from various lending
institutions and land sellers of which $64.5 million was outstanding at January
31, 1999.
The Company believes that it will be able to fund its activities through
fiscal 1999 with 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.
Year 2000 Issues
The Year 2000 (Y2K) issue is the result of computer programs being written
using two digits rather than four to define the applicable year. If not
corrected, computer software programs that have time-sensitive software may not
recognize dates beginning in the year 2000. This could result in system
failures or miscalculations which could cause personal injury, property damage,
disruption of operations, and/or delays in payment from the Company's customers
all of which could materially adversely effect the Company's business, financial
condition or results of operations.
The problem also extends to many "non-IT" systems; that is, operating and
control systems that rely on embedded chip systems. In addition, like every
other business enterprise, the Company is at risk from Y2K failures on the part
of its major business counterparts, including third party vendors, as well as
potential failures in public and private infrastructure services, including
electricity, water, gas, transportation and communications.
System failures resulting from the Y2K problem could adversely affect
operations and financial results in all of the Company's operating businesses.
Failures may affect important operations as accounts payable, loan origination
and payroll operations, as well as other routine business operations.
The Company has completed an assessment of its computer systems, to
identify computer hardware, software and process control systems that are not
Y2K compliant. The Company presently believes that its business-critical
computer systems, which are not presently Y2K compliant, will be replaced,
upgraded or modified prior to December 31, 1999. The costs of the Company's Y2K
compliance efforts are being funded with cash flows from operations and are
estimated to be approximately $250,000. The Company has a draft contingency
plan that is expected to be finalized by June 30, 1999.
The Company is in the process of surveying its significant vendors,
subcontractors, suppliers and financial institutions to assess the status of
their Y2K issues. Responses and non-responses will be evaluated over the next
quarter as part of the Company's Y2K plan. The Company cannot determine to what
extent the Y2K issue will affect its vendors, subcontractors, suppliers and
financial institutions and, consequently, the Company.
Based upon its efforts to date, the Company believes that the vast majority
of both its IT and its non-IT systems, including all critical and important
systems, will remain up and running after January 1, 2000. Accordingly, the
Company does not currently anticipate that internal systems failures will result
in any material adverse effect to its operations or financial condition. During
1999, the Company will also continue and expand its efforts to ensure that major
third-party vendors and providers of infrastructure services, such as utilities
and communications services, will also be prepared for the year 2000, and to
develop contingency plans if considered necessary to address any failures on
their part to become Y2K compliant. At this time, the Company believes that the
most likely "worst case" scenario involves potential disruptions in the areas in
which the Company's operations must rely on such third parties whose systems may
not work properly after January 1, 2000. While such failures could affect
important operations of the Company and its subsidiaries, either directly or
indirectly, in a significant manner, the Company cannot at present estimate
either the likelihood or the potential cost of such failures.
The foregoing assessment of the impact of the Y2K problem is based on
management's best estimate at the present time, and could change substantially.
There can be no guarantee that these estimates will prove accurate, and actual
results could differ from those estimated if these assumptions prove inaccurate.
Forward Looking Statements
Certain statements in this Form 10-Q report, as well as statements made by
the Company in periodic press releases, oral statements made by the Company's
officials to analysts and shareholders in the course of presentations about the
Company and conference calls following quarterly earnings releases, may be
construed as Forward-Looking Statements, as defined in the Private Securities
Litigation Reform Act of 1995 (the Reform Act). Such statements may involve
unstated risks, uncertainties and other factors that may cause actual results to
differ materially. Such risks, uncertainties and other factors include, but are
not limited to, changes in general economic conditions; fluctuations in interest
rates; increases in costs and materials, supplies and labor; and general
competitive conditions.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The registrant's annual meeting of shareholders was held on November 20,
1998.
(b) Shareholders elected the following persons as members of the Board of
Directors to serve until the next annual meeting and until their successors
are elected and qualified:
Votes For:
Geaton A. DeCesaris, Sr. 6,913,609
Geaton A. DeCesaris, Jr. 6,915,609
Thomas Connelly 6,915,709
Paul C. Sukalo 6,915,609
Ronald M. Shapiro 6,913,709
Richard B. Talkin 6,915,709
Richard S. Frary 6,915,709
Thomas J. Pellerito 6,913,009
(c) The following additional matter was approved at the Annual Meeting:
Appointment of Deloitte & Touche LLP as independent public accountants
for the registrant and its subsidiaries for the year ending July
31,1999 which appointment was approved by a vote of 7,002,189 for,
3,181 against and 7,535 abstentions.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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 January 31, 1999.
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: March 17, 1999 By: /s/ Geaton A. DeCesaris, Jr.
Geaton A. DeCesaris, Jr.
President and Chief Executive Officer
Date: March 17, 1999 By: /s/ Clayton W. Miller _____
Clayton W. Miller
Principal Accounting Officer